UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2015.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-35224
Xunlei Limited
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
7/F Block 11, Shenzhen Software Park, Ke Ji Zhong 2nd Road, Nanshan District
Shenzhen, 518057
People’s Republic of China
(Address of principal executive offices)
Tao Thomas Wu, Chief Financial Officer
Telephone: +86-755-3391-2900
Email: tom.wu@xunlei.com
7/F Block 11, Shenzhen Software Park, Ke Ji Zhong 2nd Road,
Nanshan District
Shenzhen, 518057
People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
American depositary shares, each
representing five common shares
Common shares, par value US$0.00025
per share*
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)
* Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
339,319,115 common shares as of December 31, 2015.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP
International Financial Reporting Standards as issued
by the International Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No
Table of Contents
INTRODUCTION
FORWARD-LOOKING INFORMATION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
PART II
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
SIGNATURES
Financial Statements
Financial Statements
Exhibits
i
1
1
2
2
2
2
43
71
71
108
117
122
123
124
130
131
133
133
133
133
135
135
135
136
136
136
137
138
138
138
138
138
142
In this annual report, except where the context otherwise requires and for purposes of this annual report only:
INTRODUCTION
“we,” “us,” “our company,” “our,” or “Xunlei” refers to Xunlei Limited, a Cayman Islands company, its subsidiaries, its variable interest entity, or
VIE, and the VIE’s subsidiaries;
“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Hong Kong, Macau and Taiwan;
“digital media content” refers to videos, music, games, software and documents transmitted in digital form;
“monthly active users” refers to the number of internet users who activated and used a Xunlei acceleration product for at least 60 minutes within a
month; under this method, a user that activated and used multiple Xunlei acceleration products with the same user information would count only
once no matter how many times such user activated and used the acceleration products;
“monthly unique visitors,” in relation to our platform, refers to the number of different individual visitors who accessed Xunlei products (including
websites and software) on our platform from the same computer at least once within a month; under this method, a user who accessed Xunlei
products from two different computers would count as two unique visitors;
“shares” or “common shares” refers to our common shares, par value US$0.00025 per share;
“ADSs” refers to our American depositary shares, each representing five common shares, and “ADRs” refers to any American depositary receipts
that evidence our ADSs;
“RMB” or “Renminbi” refers to the legal currency of China; and
“US$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States.
We use U.S. dollar as reporting currency in our financial statements and in this annual report. Transactions in Renminbi are recorded at the rates of
exchange prevailing when the transactions occur. On December 31, 2015, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve
Board was RMB6.4778 to US$1.00.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. These statements
are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by
words or phrases such as “may,” “could,” “should,” “would,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to,”
“project,” “continue,” “potential,” or other similar expressions. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements include, but are not limited to, statements about:
our business strategies, including the strategies to streamline our business and continue moving toward mobile internet;
our future business development, results of operations and financial condition;
our ability to maintain and strengthen our market position in China;
our ability to retain subscribers for our premium acceleration and other services;
1
our ability to develop new products and services and attract, maintain and monetize user traffic;
trends and competition in the internet industry in China;
rules and regulations governing the internet industry in China;
our ability to handle intellectual property rights-related matters; and
general economic and business conditions in China.
You should not place undue reliance on these forward-looking statements and you should read these statements in conjunction other sections of this
annual report, in particular the risk factors disclosed in “Item 3. Key Information—D. Risk Factors.” These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the
forward-looking statements. Moreover, we operate in a rapidly evolving environment. New risks emerge from time to time and it is impossible for our
management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ from those contained in any forward-looking statement. The forward-looking statements made in this annual report relate only
to events or information as of the date on which the statements are made in this annual report. We do not undertake any obligation to update or revise the
forward-looking statements except as required under applicable law.
Item 1.
Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
PART I
Not applicable.
Item 3.
Key Information
A. Selected Financial Data
The following table presents the selected consolidated financial information of our company. The selected consolidated statements of comprehensive
income/(loss) from continuing operations for the years ended December 31, 2013, 2014 and 2015 and the selected consolidated balance sheets data as of
December 31, 2014 and 2015 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page
F-1. The selected consolidated statements of comprehensive income/(loss) from continuing operations for the years ended December 31, 2011 and 2012 and the
selected consolidated balance sheets data as of December 31, 2012 and 2013, reflect the impact of retrospective adjustments for our divestiture of Xunlei
Kankan, which has been classified as discontinued operations. We have not included the consolidated balance sheet data as of December 31, 2011 as such
information is not available on a basis that is consistent with the consolidated financial information available for the years ended December 31, 2011, 2012,
2013, 2014 and 2015 and cannot be obtained without unreasonable effort or expense. Our audited consolidated financial statements are prepared and presented
in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results do not necessarily indicate results
expected for any future period. You should read the following selected financial data in conjunction with the consolidated financial statements and related notes
and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
2
(in thousands of US$, except for share, per
share and per ADS data)
Revenues, net of rebates and discounts
Business tax and surcharges
Net Revenues
Cost of revenues
Gross profit
Operating expenses(1)
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Operating (loss)/income
Interest income
Interest expense
Other income, net
Shares of (loss)/income from equity investees
(Loss)/income from continuing operations before income tax
Income tax benefit/(expense)
Net (loss)/income from continuing operations
Discontinued operations
Income/(Loss) from discontinued operations
Income tax (expense)/benefit
Net income/(loss) from discontinued operations
Net (loss)/income
Less: net loss attributable to the non-controlling interest
Net (loss)/income attributable to Xunlei Limited
Beneficial conversion feature of series C convertible preferred shares
from their modification
Deemed contribution from series C preferred shareholders
Contingent beneficial conversion feature of series C to a series C
shareholder
Deemed dividend to series D shareholder from its modification
Accretion of series D to convertible redeemable preferred shares
redemption value
Accretion of series E to convertible redeemable preferred shares
redemption value
Amortization of beneficial conversion feature of series E
Acceleration of amortization of beneficial conversion feature of Series
E upon initial public offering
Deemed dividend to certain shareholders from repurchase of shares
Deemed dividend to preferred shareholders upon initial public offering
Allocation of net income to participating preferred shareholders
Net (loss)/income attributable to Xunlei Limited’s common
shareholders
Weighted average number of common shares outstanding
Basic
Diluted
Net (loss)/income per share attributable to Xunlei Limited from
continuing operations
Basic
Diluted
Net income/(loss) per share attributable to Xunlei Limited from
discontinued operations
Basic
Diluted
Net loss attributable to holders of common shares of Xunlei Limited per
ADS(2)
Basic
Diluted
3
For the Year Ended December 31,
2011
2012
2013
2014
2015
35,648
(4,014)
31,634
(14,662)
16,972
(10,974)
(9,266)
(11,732)
(31,972)
(15,000)
270
(339)
1,415
(7)
(13,661)
2,816
(10,845)
11,867
(1,033)
10,834
(11)
(1)
(10)
—
—
—
—
—
—
—
—
—
—
—
(10)
71,545
(5,379)
66,166
(31,875)
34,291
(18,340)
(15,933)
(2,675)
(36,948)
(2,657)
1,377
(1,400)
564
(45)
(2,161)
(2,111)
(4,272)
4,782
(128)
4,654
382
(121)
503
(286)
2,979
—
—
122,031
(3,904)
118,127
(50,258)
67,869
(21,740)
(9,848)
(18,663)
(50,251)
17,618
1,189
—
4,679
25
23,511
(560)
22,951
(13,779)
1,207
(12,572)
10,379
(283)
10,662
—
—
—
—
135,812
(1,878)
133,934
(55,755)
78,179
(29,252)
(13,527)
(26,945)
(69,724)
8,455
6,733
(163)
13,966
(259)
28,732
(463)
28,269
(20,330)
1,923
(18,407)
9,862
(950)
10,812
—
—
(57)
(279)
(3,509)
(4,300)
(1,870)
—
—
—
—
—
—
—
—
—
—
—
(4,094)
(12,754)
(4,139)
(49,346)
(14,926)
(32,807)
—
129,996
(361)
129,635
(60,034)
69,601
(38,250)
(15,042)
(28,774)
(82,066)
(12,465)
5,833
(239)
3,627
(12)
(3,256)
886
(2,370)
(10,048)
(2,048)
(12,096)
(14,466)
1,299
(13,167)
—
—
—
—
—
—
—
—
—
—
—
(313)
2,268
(105,366)
(13,167)
59,143,208
59,143,208
61,447,372
61,447,372
61,447,372 194,711,227
76,065,898 194,711,227
335,987,595
335,987,595
(0.45)
(0.45)
0.45
0.45
(0.13)
(0.13)
0.14
0.14
0.24
0.18
(0.20)
(0.17)
(0.45)
(0.45)
(0.09)
(0.09)
(2.70)
(2.70)
(0.00)
(0.00)
(0.04)
(0.04)
(0.20)
(0.20)
* We sold our Xunlei Kankan business in July 2015. As a result, Xunlei Kankan is accounted for as discontinued operations and our consolidated statements of
comprehensive income/(loss) in this annual report separates the discontinued operations from our remaining business operations for all years presented.
Note:
(1) Share-based compensation expenses were allocated in operating expenses as follows:
(in thousands of US$)
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total share-based compensation expenses
2011
898
73
1,128
2,099
For the Year Ended December 31,
2013
2012
2014
1,085
46
1,102
2,233
973
43
1,080
2,096
1,171
66
6,407
7,644
2015
2,896
131
6,701
9,728
(2) Each ADS represents five common shares. Net income/(loss) attributable to holders of common shares of Xunlei Limited per ADS is calculated based on
net income/(loss)/ per share attributable to Xunlei Limited and multiplied by five.
(in thousands of US$)
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Total current assets
Total assets
2012
2013
2014
2015
81,906
6,523
163,830
202,204
93,906
40,993
193,781
244,403
404,275
29,427
501,930
580,362
361,777
70,328
457,653
538,361
Accounts payables (including accounts payable of the consolidated variable
interest entities and VIE’s subsidiaries without recourse to the Company
of USD 24,504 and USD 33,262 as of December 31, 2014 and 2015,
respectively)
Total current liabilities
Total liabilities
Mezzanine equity
Total Xunlei Limited’s shareholders’ equity
Non-controlling interest
Total liabilities, mezzanine equity and shareholders’ equity
31,834
79,544
97,886
35,990
67,968
360
202,204
39,820
105,385
124,835
40,290
79,194
84
244,403
14,937
103,020
123,341
—
457,891
(870)
580,362
For the Year Ended December 31,
2013
2012
2014
59,914
(49,490)
17,692
28,116
441
53,349
81,906
85,533
(78,352)
2,487
9,668
2,332
81,906
93,906
48,202
(70,546)
333,268
310,924
(555)
93,906
404,275
2011
18,277
(36,875)
50,032
31,434
562
21,353
53,349
(in thousands of US$)
Selected Cash Flow Statement Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
4
21,736
76,736
93,680
—
446,749
(2,068)
538,361
2015
13,764
(54,982)
5,030
(36,188)
(6,310)
404,275
361,777
D. Risk Factors
An investment in our ADSs involves significant risks. You should carefully consider all of the information in this annual report, including the risks and
uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business,
financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.
Risks related to our business
We have a relatively limited operating history; our business model is currently undergoing significant innovation and transition, and our historical growth
rate may not be indicative of our future performance.
We have a relatively limited operating history. We launched our core product, Xunlei Accelerator, in 2004 and cloud acceleration subscription services
in 2009 to enable users to quickly access and consume digital media content. These cloud acceleration products have rapidly achieved nationwide popularity in
the past few years. Coupled with our core products and services, we provide a range of internet value-added services. Revenues from our cloud acceleration
subscription services have significantly increased since 2009 while revenues from our online advertising and other internet value-added services have increased
steadily over the years. However, our business model is currently undergoing significant innovation and transition, including the streamlining of our businesses
and more importantly, our continued transition to mobile internet, and our efforts to launch and expand the offering of new services and projects. For example,
although our mobile acceleration plug-in has been officially adopted by Xiaomi’s operating systems and installed on Xiaomi phones, and we intend to explore
relationships with more smartphone makers to achieve broader acceptance of the Xunlei mobile products, we have not yet formed significant business
partnerships with major smartphone makers other than Xiaomi, and cannot assure you that our mobile strategy will succeed.
We are also devoting significant energy and resources to continue to develop our ongoing innovation in crowdsourcing for idle uplink capacity and
potentially storage from our users, which we refer to as Project Crystal or our cloud computing project. Our cloud computing project targets to utilize our users’
computing power for capacity and storage in the same way our traditional acceleration products utilize users’ idle uplink establishing and indexing files. The
project is still in its early stages. We are still making significant financial and managerial investments in this project and have not generated significant revenues
from it, and cannot assure you as to its future prospects. Furthermore, the technology supporting our cloud computing project is relatively new and is still under
improvement. Any failure in our development of this technology could lead to unsatisfactory project outcomes and could significantly and adversely impact our
results.
In addition, as part of our initiative to streamline existing businesses, we have sold our entire stake in our online video streaming platform, Xunlei
Kankan, in July 2015 for a consideration of RMB130 million. Although we expect benefits such as a more streamlined, efficient business model and reduced
content costs as a result of the sale of Xunlei Kankan, Xunlei Kankan contributed to a significant portion of our revenues in the past, and the sale of the business
has resulted in reduced revenue although at the same time it also reduces our need to make further investment in this line of business.
Furthermore, our PC-based download acceleration subscriptions have declined recently, partly due to the ongoing and increased government scrutiny
of internet content in China. Although we continue to enhance and update our products in order to make them attractive to our subscribers, our efforts may not
be successful. Our subscriber base declined from 5.1 million as of December 31, 2013 to 4.9 million as of December 31, 2014. Although our subscriber base
increased again to 5.0 million as of December 31, 2015, such an upward trend may not sustain. See “—We may not be able to retain our large user base, convert
our users into subscribers of our premium services or maintain our existing subscribers.” and “—Risks Related to Doing Business in China—Regulation and
censorship of information disseminated over the internet in China, recently strengthened, may adversely affect our business, and we may be liable for the digital
media content on our platform.”
Due to the abovementioned factors, our historical growth rate may not be indicative of our future performance, and we cannot assure you that we will
grow at the same rate as we did in the past, if at all.
5
We may not be able to retain our large user base, convert our users into subscribers of our premium services or maintain our existing subscribers.
Our platform had approximately 196 million monthly unique visitors in December 2015, excluding the monthly unique visitors to Xunlei Kankan,
according to our internal record. If we are unable to consistently provide our users with quality services and experience, if users do not perceive our service
offerings to be of value, or if we introduce new or adjust existing features or change the mix of digital media content in a manner that is not favorably received
by our users, we may not be able to retain our existing user base.
Our number of subscribers has recently experienced a decline partly due to the increasing scrutiny over internet content from the Chinese government,
and may experience further downward pressure in the future. With a government campaign against inappropriate internet content launched in April 2014, we
have had to increase the monitoring of content on our platform. All the measures we adopt in response to increasing regulatory scrutiny may materially and
adversely affect user experience on our platform and make our services less attractive to our subscribers, leading to a decline in the number of subscribers. We
saw a reduction in the number of total subscribers from 5.1 million as of December 31, 2013 to 4.9 million as of December 31, 2014, and permitted temporary
suspension of services by about 350,000 existing subscribers as of December 31, 2014. Although the number of total subscribers increased again to 5.0 million
as of December 31, 2015 and the permitted temporary suspension of services reduced to 281,000 existing subscribers as of December 31, 2015, such favorable
trends may not sustain, and any increase in the number of subscribers may not necessarily lead to a corresponding increase in revenue. Similar government
action or other forces may make it challenging for us to retain our user base, or may contribute to a further decline in our user base, in the future. See “—Risks
Related to Doing Business in China—Regulation and censorship of information disseminated over the internet in China, recently strengthened, may adversely
affect our business, and we may be liable for the digital media content on our platform.”
In the long term, even without taking into account the abovementioned government restrictions, we cannot assure you that we would be able to retain
our large user or subscriber base. For example, our efforts to provide greater incentives for our users to subscribe, including marketing activities to highlight the
value of differentiated subscriber-only services, such as Green Channel and Offline Accelerator, may not continue to succeed. Our subscribers may stop their
subscriptions or other spending on our products or services because we no longer serve their needs or if we are unable to offer a satisfying user experience or
successfully compete with current and new competitors in both retaining our existing subscribers and attracting new subscribers, which would adversely impact
our business, results of operations and prospects.
If we are unable to successfully capture and retain the growing number of mobile internet users or if we are unable to successfully monetize our mobile
products, our business, financial condition and results of operations may be materially and adversely affected.
An increasing number of users access our products and services through mobile devices, and the transition to mobile internet is a key part of our
current business strategies. Products such as Xunlei Accelerator are now available to users from PCs as well as mobile devices, and we intend to continue
expanding the number of mobile products we offer. An important element of our strategy to transition to mobile internet is to continue to further develop
features for our mobile products and to develop new mobile products to capture a greater share of the growing number of users that access internet services such
as ours through mobile devices. As new laptops, mobile devices and operating systems are continually being released, it is difficult to predict the problems we
may encounter in developing our products for use on these devices and operating systems, and we may need to devote significant resources to create, support
and maintain these services. Devices providing access to our products and services are not manufactured and sold by us, and we cannot assure you that the
companies manufacturing or selling these devices would always ensure that their devices perform reliably and are maximally compatible with our systems. Any
faulty connection between these devices and our products may result in user dissatisfaction with our products, which could damage our brand and have a
material and adverse effect on our financial results. In addition, the lower resolution, functionality and memory associated with some mobile devices may make
the use of our products and services through such devices more difficult and the versions of our products and services we develop for these devices may fail to
attract users. Manufacturers or distributors may establish unique technical standards for their devices and, as a result, our products may not work or work
properly or be viewable on all devices on which they are installed. Furthermore, new, comparable products which are specifically created to function on mobile
operating systems, as compared to some of our products that were originally designed to be accessed from PCs, and such new entrants may operate more
effectively on mobile devices than our mobile products do.
6
Although we have not begun monetizing our mobile products other than mobile advertising in 2015, if we are unable to attract and retain the increasing
number of users who access our products through mobile devices, or if we are slower than our competitors in developing attractive services adaptable for mobile
devices, we may fail to capture a significant share of an increasingly important portion of the market or may lose existing users. In addition, even if we are able
to retain the increasing number of users who access our services through mobile devices, we may not be able to successfully monetize them in the future. For
example, because of the inherent limitations of mobile devices, we may not be able to provide as many kinds of products on mobile devices as we do on PC,
which may limit the monetization potential of our mobile products and services.
If we fail to keep up with the technological development in the internet industry and users’ changing demand, our business, financial condition and results
of operations may be materially and adversely affected.
The internet industry is rapidly evolving and subject to continual technological changes. As the internet infrastructure continues to develop, the internet
may become more easily accessible through alternative technological innovations in the future, which may make our existing products and services less
attractive to our users, and we may lose our existing users and fail to attract new users, which may further adversely impact our business, financial condition and
results of operations.
In addition, user demand for internet content may also shift over time. Currently, internet users appear to have significant demand for multimedia
acceleration, online games and online streaming services, and we expect such demand to continue. However, we cannot assure you that the behavior of internet
users will not change in the future. If we do not upgrade our services in response to changes in user demand in an effective and timely manner, the number of
our users and advertisers may decrease. Furthermore, changes in technologies and user demand may require substantial capital expenditures in product
development and infrastructure. To further expand our user base and offer our users a wider range of access points, we are expanding our business to mobile
devices in part through potentially pre-installed acceleration products in mobile phones. In addition, we are continually developing and upgrading products and
services, including our cloud computing project, which is expected to utilize the idle capacity of our users, and seeking strategic cooperation with hardware
manufacturers such as smartphone makers, which may require significant resources from us. However, if we are not able to perfect our new technologies or to
achieve the intended results or if our innovations cannot respond to the needs of our users or if our users are not attracted to our upgraded or new products and
services, we may not be able to maintain or expand our user base, and our business, results of operations and prospects may be materially and adversely
affected.
We face and expect to continue to face copyright infringement claims and other related claims, including claims based on content available through our
services, which could be time-consuming and costly to defend and may result in damage awards, injunctive relief and/or court orders, divert our
management’s attention and financial resources and adversely impact our business.
Our success depends, in large part, on our ability to operate our business without infringing, misappropriating or otherwise violating third-party rights,
including third-party intellectual property rights. Internet, technology and media companies are frequently involved in litigation based on allegations of
infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights.
In May 2014, we entered into a content protection agreement with the Motion Picture Association of America, Inc., or MPAA, and six major U.S.
entertainment content providers, which are the members of MPAA. Under this agreement, we agreed to implement a comprehensive system of measures
designed to prevent unauthorized downloading of and access to such content providers’ works. Among these content protection measures, we agreed to (1)
implement a filtering system that will be applied to these content providers’ video content, (2) filter these content providers’ video content prior to making any
such content available to our users through our websites or client applications, (3) adopt state-of-the-art fingerprinting-based filtering technologies, (4)
cooperate with these content providers going forward to ensure the effectiveness of our content protection measures, and (5) incorporate additional content
protection measures to the extent that they are necessary to effectively protect against copyright infringement. We may not be able to fulfill all of our obligations
under such agreement in a timely manner, due to a variety of factors which may be outside of our control. In addition, even if we comply with all of our
obligations under the content protection agreement, the implementation of content protection measures may affect our users’ experience or otherwise make our
services and products less competitive than those of our competitors, which could in turn materially and adversely affect our business, financial condition and
results of operations. In January 2015, a number of MPAA member studios filed copyright infringement lawsuits against us in the Shenzhen Nanshan District
Court in China, and, as of the date of this annual report, those cases are awaiting decisions of first instance. Although we expect that the outcome of these
lawsuits would not have a substantial negative impact on our financials, we cannot provide you with any estimate as to such outcome or assure you that it would
not have material adverse impact upon our business. Even if we won the court ruling for these current proceedings or ultimately reached settlement with MPAA
and the relevant members, we cannot assure you that any of these parties would not initiate other proceedings against us. Also see “Item 8. Financial
Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
7
In the ordinary course of our business, we receive, from time to time, written notices from third parties claiming that certain content and games in our
network or on one or more of our websites infringe their copyrights or the copyrights of third parties. These notices may threaten to take legal actions against us
or request us to cease distribution, marketing or displaying such content or games on our network or websites. Claims alleging copyright infringement or other
claims arising from the content accessible through our distributed computing network, or on our websites or through our other services, such as the legal
proceeding initiated by MPAA members or any potential legal proceedings that may be initiated by, for example, the Motion Picture Association Inc., with or
without merit, may lead to damage awards and/or court orders, diversion of our management’s attention and financial resources and negative publicity affecting
our brand and reputation, and therefore may adversely affect our results of operations and business prospects. In addition, a significant number of these claims
relate to content on Xunlei Kankan. We have completed our sale of Xunlei Kankan to a third party buyer in July 2015. As a result, our exposure to claims in
relation to intellectual property have significantly decreased, although we still expect to face a number of copyright infringement claims and other related claims
in the future in relation to our other products and services.
We were subject to a number of lawsuits in China for alleged copyright infringements over the years, a number of which are still outstanding as of the
date of this annual report. Although we have not been, nor are we currently a party to or aware of, any legal proceeding, investigation or claim that, in the view
of our management, is likely to materially and adversely affect our business, financial position or results of operations, these existing and future claims may
divert our management’s attention and financial resources and adversely impact our business.
The premium acceleration services and other value-added services we provide to our subscribers may expose us to additional copyright infringement claims,
which could materially and adversely affect our existing business model.
We provide subscribers with limited space to temporarily store content downloaded on our servers for optimal acceleration performance. Subscribers
may also request our cloud servers to transmit a file on their behalf and upload it to their properties. See “Item 4. Information on the Company—B. Business
Overview—Our Platform—Cloud accelerator—Subscription services.” In addition, certain of our services allow users to upload files after they create accounts
with us, converting the files into links and sharing such links with designated persons. We may be liable for transmitting or temporarily storing content or
creating links representing content on behalf of our subscribers if such content infringes third-party intellectual property rights, and any such potential legal
liabilities could materially and adversely affect our business.
Our technologies, business methods and services, including those relating to our resource discovery network, may be subject to third-party patent claims or
rights, such as issued patents or pending patent applications, that limit or prevent their use.
We cannot assure you that our technologies, business methods and services, including those relating to our resource discovery network, will be free
from claims of patent infringements, and that holders of patents would not seek to enforce such patents against us in China, the United States or any other
jurisdictions. Based on our own analysis, we do not believe that we are currently infringing any third-party patents of which we are aware. However, our
analysis may have failed to identify all relevant patents and patent applications. For example, there may be currently pending applications, unknown to us, that
may later result in issued patents that are infringed by our products, services or other aspects of our business. There could also be existing patents of which we
are not aware that our products may inadvertently infringe. Third parties may attempt to enforce such patents against us. Further, the application and
interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and are uncertain, and we cannot assure
you that PRC courts or regulatory authorities would agree with our analysis. Any patent infringement claims, regardless of their merits, could be time-
consuming and costly to us. If we were found to infringe third-party patents and were not able to adopt non-infringing technologies, we may be severely limited
in our ability to operate our business, and our results of operations could be materially and adversely affected.
8
The intellectual property protection mechanism we have implemented may not be effective or sufficient and may subject us to future litigation or result in
our inability to continue providing certain of our existing services in China.
We may not have obtained licenses for all digital media content available via our services and the scope of the licenses we obtained for certain content
may not be broad enough to cover all the methods we currently employ to distribute, market or display such content. For digital media content we have lawfully
obtained from an authorized licensor, we may not be able to timely detect the expiration of the licensing period of certain of the content available via our
services and disable access to such content via our services in a timely manner. We have been involved in litigations based on allegations from rights owners
that we have infringed their copyright interests in such content. Assisted by our intellectual property team dedicated to copyright protection, for example, we
have implemented internal procedures to meet the requirements under relevant PRC laws and regulations to monitor and review the content we license before it
is released and remove any infringing content promptly after we receive notice of infringement from the legitimate rights holder. See also “Item 4. Information
on the Company—B. Business—Intellectual Property—Digital media data monitoring and copyright protection” for more details. However, due to the
significant amount of digital media content accessible through our resource discovery network and other services, we generally do not seek to identify infringing
content absent receiving any notice of infringement. We have successfully completed our sale of Xunlei Kankan to a third party buyer in July 2015. As a result,
our exposure to claims in relation to intellectual property have significantly decreased, and we expect to adjust our monitoring procedures in relation to
intellectual property and devote more resources to the monitoring of content accessible via our core services. For details of our sale of Xunlei Kankan, see “Item
4. Information on the Company — A. History and Development of the Company.”
In addition, we organize and recommend to our users digital media content accessible through our services and provided on certain reputable audio-
visual websites that have cooperation relationships with us. As such, we may be exposed to the risk of copyright infringement liability in the event that such
content has not been duly licensed to us or to the operators of those websites. Moreover, some rights owners may not send us a notice before bringing lawsuits
against us. Thus, our inability to identify unauthorized content hosted on our website or servers or accessible through our network subjects us to claims of
infringement of third-party intellectual property rights or other rights. In addition, we may be subject to administrative actions brought by the National
Copyright Administration of the PRC or its local branches for alleged copyright infringement.
The validity, enforceability and scope of protection of intellectual property in internet-related industries, particularly in China, are uncertain and still
evolving. As we face increasing competition and as litigation becomes more common in China in resolving commercial disputes, we face a higher risk of
intellectual property infringement claims. The Supreme People’s Court of China promulgated a judicial interpretation on infringement of the right of internet
dissemination in December 2012. This judicial interpretation provides that the courts will require service providers to remove not only links or content that have
been specifically mentioned in the notices of infringement from rights holders, but also links or content they “should have known” to contain infringing content.
The interpretation further provides that where an internet service provider has directly obtained economic benefits from any content made available by an
internet user, it has a higher duty of care with respect to internet users’ infringement of third-party copyrights. This interpretation may subject us and other
internet service providers to significant administrative burdens and litigation risks. See “Item 4. Key Information on the Company—B. Business Overview—
Regulation—Regulation on Intellectual Property Rights.” Interested parties may lobby for more robust intellectual property protection in jurisdictions in which
we conduct business or may conduct business, and intellectual property laws in China and other such jurisdictions may become less favorable to our business.
Intellectual property litigation may be expensive and time-consuming and could divert management attention and resources. If there is a successful claim of
infringement, we may be required to discontinue the infringing activities, pay substantial fines and damages and/or seek royalty or license agreements that may
not be available on commercially acceptable terms, if at all. Our failure to obtain the required licenses on a timely basis could harm our business. Any
intellectual property litigation and/or any negative publicity by third parties alleging our intellectual property infringement could have a material adverse effect
on our business, reputation, financial condition or results of operations. To address the risks relating to intellectual property infringement, we may have to
substantially modify, limit or, in extreme cases, terminate some of our services. Any of such changes could materially affect our users’ experience and in turn
have a material adverse impact on our business.
9
We may be subject to claims or lawsuits outside of China, which could increase our risk of direct or indirect liabilities for our existing or future service
offerings.
Although we have not been subject to claims or lawsuits outside China, we cannot assure you that we will not become subject to copyright laws in
other jurisdictions, such as the United States, by virtue of our listing in the United States, the ownership of our ADSs by investors, the extraterritorial application
of foreign law by foreign courts or for other reasons. We have attracted and expect to continue to attract attention from intellectual property owners outside of
China, despite our efforts to control access to our products and services by users outside China. For example, the Recording Industry Association of America
filed a letter with the Office of the United States Trade Representative in November 2010 accusing certain of our divested or discontinued products of
facilitating intellectual property infringement. Although we take steps to block users logging in from IP addresses that are located in certain jurisdictions,
including the United States, from accessing certain of our services, due to technological limitations, such efforts may not be 100% successful, and any
unintended access to our services may increase our risk of becoming subject to copyright laws in such jurisdictions. Even if our efforts to block IP addresses
located in the United States or other jurisdictions are successful, recent efforts to amend the laws in such jurisdictions, such as bills recently advocated in the
U.S. aimed at online service providers, may increase our risk of becoming impacted by copyright laws in such jurisdictions. In addition, as a publicly listed
company, we may be exposed to increased risk of litigation.
If we are ever held to be subject to United States copyright law, that could increase our risk of direct or indirect copyright liability for our resource
discovery, acceleration or other services. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be
required to (i) pay substantial statutory or other damages and fines, (ii) remove relevant content from our website, (iii) discontinue products or services, (iv)
disable access through our service to certain sites or content; (v) terminate users; and/or (vi) seek royalty or license agreements that may not be available on
commercially reasonable terms or at all.
We may not be able to prevent unauthorized use of our intellectual property or disclosure of our trade secrets and other proprietary information, which
could reduce demand for our services and have material and adverse impact on our business, financial condition and results of operations.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. Events that are outside of our control
may pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in China and some other
jurisdictions in which our services are distributed or made available through the internet. Also, the efforts we have made to protect our proprietary rights may
not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our competitiveness. Also, protecting our
intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to
conduct our business and harm our results of operations.
We seek to obtain patent protection for our innovations. However, it is possible that patent protection may not be available for some of these
innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.
Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be
deemed invalid or unenforceable.
10
We also seek to maintain certain intellectual property as trade secrets. We require our employees, consultants, advisors and collaborators to enter into
confidentiality agreements in order to protect our trade secrets and other proprietary information. These agreements might not effectively prevent disclosure of
our trade secrets, know-how or other proprietary information and might not provide an adequate remedy in the event of unauthorized disclosure of such
confidential information. In addition, others may independently discover our trade secrets and proprietary information, in which case we could not assert such
trade secret rights against such parties. Any unauthorized disclosure or independent discovery of our trade secrets would deprive us of the associated
competitive advantages. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our competitive position.
The success of our business depends on our ability to maintain and enhance a strong brand. If we fail to sustain or improve the strength of our brand, we
may subsequently experience difficulty in maintaining market share.
We believe that maintaining and enhancing our Xunlei brand is of significant importance to the success of our business. A well-recognized brand is
critical to increasing our user base and, in turn, enhancing our attractiveness to advertisers, subscribers and paying users. Since the Chinese internet market is
highly competitive, maintaining and enhancing our brand depends largely on our ability to retain a significant market share in China, which may be difficult and
expensive.
We have developed our reputation and established a leading position by providing our users with a superior acceleration and video viewing experience.
We will continue to conduct various marketing and brand promotion activities. We cannot assure you, however, that these activities will be successful and
achieve the brand promotion effects we expect. In addition, any negative publicity in relation to our services or our marketing or promotion practices, regardless
of its veracity, could harm our brand image and, in turn, result in a reduced number of users and advertisers. Historically, there has been negative publicity about
our company, our products and services and certain key members of our management team, which has adversely affected our brand, public image and
reputation. If we fail to maintain and enhance our brand, or if we incur excessive expenses in this effort, our business, financial condition and results of
operations may be materially and adversely affected.
System failure, interruptions and downtime, including those caused by cyber attacks or network issues, can result in user dissatisfaction and adverse
publicity, and our business, financial condition and results of operations may be materially and adversely affected.
Our operations rely on our networks and servers, which can suffer system failures, interruptions and downtime. Our network systems are vulnerable to
damage from computer viruses, fires, floods, earthquakes, power losses, telecommunication failures, computer hacking and similar events despite our
implementation of security measures, which may cause interruptions to the services we provide, degrade the user experience, or cause users to lose confidence
in our products. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical
malfunctions, employee error or malfeasance, government surveillance, or other factors.
The satisfactory performance, stability, security and availability of our websites and our network infrastructure are critical to our reputation and our
ability to attract and retain users and advertisers. Our network contains information regarding file index, advertising records, premium licensed digital media
content and various other facets of the business to assist management and help ensure effective communication among various departments and offices of our
company. Any failure to maintain the satisfactory performance, stability, security and availability of our network, website or technology platform, whether such
failure results from intentional cyber attacks by hackers, from issues with our own technology and team or from other factors beyond our control, may cause
significant harm to our reputation and impact our ability to attract and maintain users and business partners.
From time to time, our users in certain locations may not be able to gain access to our network or our websites for a period of time lasting from several
minutes to several hours, due to server interruptions, power shutdowns, internet connection problems or other reasons. Although we have not experienced
extended periods of such server interruptions, power shutdowns or internet connection problems across our entire network, we cannot assure you that such
instances will not occur in the future. Any server interruptions, break-downs or system failures, including failures which may be attributable to events within or
outside our control that could result in a sustained shutdown of all or a material portion of our network or website, could reduce the attractiveness of our service
offerings. In addition, any substantial increase in the volume of traffic on our network or website will require us to increase our investment in bandwidth,
expand and further upgrade our technology platform. We do not maintain insurance policies covering losses relating to our network systems. As a result, any
system failure, interruptions or network downtime for an extended period may have a material adverse impact on our revenues and results of operations.
11
If we fail to retain existing advertisers or attract new advertisers, our revenues may be materially and adversely affected.
Historically, we generate a substantial portion of our revenues from online advertising. The revenues generated from online advertising decreased by
20.1% from US$48.0 million in the year ended December 31, 2013 to US$38.4 million in the year ended December 31, 2014 primarily due to our discontinuing
the delivery of advertisements on Xunlei Accelerator to further improve our user experience and to enhance user engagement on Xunlei Accelerator. The
revenues generated from online advertising further decreased to US$15.2 million in 2015 due to our sale in July 2015 of Xunlei Kankan, which historically
contributed a significant portion of our advertising revenues and a majority of our advertisers. We cannot assure you that we can continue to retain our
advertising agencies and advertisers or attract new advertising agencies and advertisers. The number of advertisers that use our online advertising services
decreased from 485 in 2011 through the years to 252 and 119 in 2014 and 2015, respectively, not including advertisers on the Guangdiantong third party
platform. If we cannot retain our existing advertisers or develop new advertisers in the future, our revenues generated from online advertising will be materially
and negatively affected. Since our arrangements with third-party advertising agencies are typically one-year framework agreements, such advertising
arrangements may be easily amended or terminated without incurring liabilities.
A number of our advertisers are e-commerce companies and online game operators. The online game and e-commerce industries in China are rapidly
evolving, and the growth of these industries and their demand for online advertising services is uncertain and may be affected by factors out of our control. We
also have significant brand advertising and are seeking to further expand this portion of advertising. However, we cannot assure you that we will be able to
retain existing advertising agencies and advertisers or attract more advertising agencies and advertisers for brand advertising, and if we fail to do so, our
business, results of operations and prospects may be materially and adversely affected.
We are strictly regulated in China. Any lack of requisite licenses or permits applicable to our business and any changes in government policies or
regulations may have a material and adverse impact on our business, financial condition and results of operations.
Our business is subject to governmental supervision and regulations by the relevant PRC governmental authorities including the State Council, the
Ministry of Industry and Information Technology (formerly the Ministry of Information Industry), or MIIT, the General Administration of Press and
Publication, Radio, Film and Television (established in March 2013 as a result of institutional reform integrating the State Administration of Radio, Film and
Television, and the General Administration of Press and Publication), or GAPPRFT, Ministry of Culture, or MOC and other relevant government authorities.
Together these government authorities promulgate and enforce regulations that cover many aspects of operation of telecommunications and internet information
services, including entry into the telecommunications industry, the scope of permissible business activities, licenses and permits for various business activities
and foreign investment.
A license for online transmission of audio-visual programs is required for the display of video content on our platform. See “Item 4. Information on the
Company—B. Business Overview—Regulation—Regulation on online transmission of audio-visual programs.” The license for online transmission of audio-
visual programs previously granted to Shenzhen Xunlei Networking Technologies, Co., Ltd., or Shenzhen Xunlei, our VIE, is now due for update but we have
not been able to update such license. We cannot assure you that we will be able to obtain such updated license in a timely manner or at all. Although we have
sold our video streaming service under Xunlei Kankan, our platform gathers internet audio-video programs and contains user generated video clips and other
media files and the PRC regulator may find that the license for online transmission of audio-visual programs is required for our gathering and transmission of
such internet audio-video programs, video clips and media files. Due to our failure to update our license for online transmission of audio-visual programs, we
may be given a warning, ordered to rectify our violations and/or fined up to RMB30,000.
12
If the PRC government considers that we were operating without the proper licenses or approvals or promulgates new laws and regulations that require
additional licenses or imposes additional restrictions on the operation of any part of our business, it has the power to, among other things, levy fines, confiscate
our income, revoke our business licenses, and require us to discontinue our business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material and adverse effect on our results of operations. In addition, the PRC government may promulgate
regulations restricting the types and content of advertisements that may be transmitted online, which could have a direct adverse impact on our business.
Concerns about collection and use of personal data could damage our reputation, deter current and potential users from using our services and
substantially harm our business and results of operations.
Pursuant to the applicable PRC laws and regulations concerning the collection, use and sharing of personal data, our PRC subsidiaries, VIE and its
subsidiaries are required to keep our users’ personal information confidential and are prohibited from disclosing such information to any third parties without
such users’ consent. In December 2012 and July 2013, new laws and regulations were issued by the standing committee of the PRC National People’s Congress
and MIIT to enhance the legal protection of information security and privacy on the internet. The laws and regulations also require internet operators to take
measures to ensure confidentiality of information of users. Concerns about our practices with regard to the collection, use or disclosure of personal information
or other privacy-related matters, even if unfounded, could damage our reputation and operating results.
We apply strict management and protection to any information provided by users, and under our privacy policy, without our users’ prior consent, we
will not provide any of our users’ personal information to any unrelated third party. While we strive to comply with our privacy guidelines as well as all
applicable data protection laws and regulations, any failure or perceived failure to comply may result in proceedings or actions against us by government entities
or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving and concerns about the security of personal data could
also lead to a decline in general usage of our products and services, which could lead to lower user numbers. For example, if the PRC government authorities
require real-name registration by our users, our user numbers may decrease and our business, financial condition and results of operations may be adversely
affected. See “—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulations of
internet-related business and companies.” In addition, we may become subject to the data protection or personal privacy laws of jurisdictions outside of China,
where more stringent requirements may be imposed on us and we may have to allocate more resources to comply with the legal requirements, and our user
numbers may further decrease. A significant reduction in user numbers could have a material adverse effect on our business, financial condition and results of
operations.
If we are unable to collect accounts receivable in a timely manner or at all, our financial condition, results of operations and prospects may be materially
and adversely affected.
A large portion of our advertising revenues are generated from a limited number of advertising agencies. We typically enter into advertising
agreements with third-party advertising agencies that represent the advertisers, and under these agreements, the advertising fees are paid to us by the advertising
agencies after we deliver our services. In consideration for the third-party advertising agencies’ services, we pay them rebates based on the value of business
they bring to us. Thus, the financial soundness of our advertisers and advertising agencies with whom we sign these advertising contracts may affect our
collection of accounts receivable. We make a credit assessment of our advertisers and advertising agencies to evaluate the collectability of the advertising
service fees before entering into any advertising contract. However, we cannot assure you that we are or will be able to accurately assess the creditworthiness of
each advertising agency or advertiser, as applicable, and any inability of advertisers or advertising agencies, especially those that accounted for a significant
percentage of our amounts receivables in the past, to pay us in a timely manner may adversely affect our liquidity and cash flows. In addition, the online
advertising market in China is dominated by a small number of large advertising agencies. If the large advertising agencies that we have business relationships
with demand higher rebates for their agency services, our results of operations will be materially and adversely affected.
13
We may not be able to generate sufficient cash from operations or to obtain sufficient capital to meet the additional capital requirements of our changing
business.
In order to implement our development strategies, including our strategies to transition to mobile internet and continue working on our cloud
computing project, we will make continual capital investments in terms of devoting more research and development efforts into investigating user needs and
develop new mobile products and update existing ones, continue enhancing the technologies involved in our cloud computing project and provide more frequent
updates to our existing products. Thus, we will continue to incur substantial capital expenditures on an ongoing basis, and it may become difficult for us to meet
such capital requirements.
To date, we have financed our operations primarily through cash flow from operations and, to a lesser degree, proceeds from private placements of
preferred shares and our initial public offering However, if we fail to retain a sufficient number of users and continue to convert such users into paying users or
subscribers, we may not be able to generate sufficient revenues to cover our business development strategies, including our continued transition to mobile
internet and the continued expansion of our cloud computing project, and our business may be materially and adversely affected.
We may obtain additional financing, including from equity offerings and debt financings in capital markets, to fund the operation and planned
expansion of our business. Our ability to obtain additional financing in the future, however, is subject to a number of uncertainties, including:
our future business development, financial condition and results of operations;
general market conditions for financing activities by companies in our industry; and
macroeconomic, political and other conditions in China and elsewhere.
If we cannot obtain sufficient capital to meet our capital expenditure needs, we may not be able to execute our growth strategies and our business,
results of operations and prospects may be materially and adversely affected.
Our costs and expenses, such as research and development expenses, may increase and our results of operations may be adversely affected.
The operation of our extensive resource discovery network and our online game business require significant upfront capital expenditures as well as
continual, substantial investment in content, technology and infrastructure. Since inception, we have invested substantially in research and development to
maintain our technology leadership, and in equipment to increase our network capacity. We expect our research and development expenses to increase in the
near term as we continue to expand our research and development team to develop new products and update existing products, particularly as we plan to
continue devoting resources in the development of our cloud computing project and the development and updating of our mobile products. Most of our capital
expenditures, such as expenditures on servers and other equipment, are based upon our estimation of potential future demand and we are generally required to
pay the entire purchase price and license fees up front. As a result, our cash flow may be negatively affected in the periods in which such payments are made.
We may not be able to quickly generate sufficient revenue from such expenditures, which may negatively affect our results of operations within certain periods
thereafter; and if we over-estimate future demand for our services, we may not be able to achieve expected rates of return on our capital expenditures, or at all.
In addition, bandwidth and other costs are subject to change and are determined by market supply and demand. For example, the market prices for
professionally produced digital media content have increased significantly in China during the past few years, and there have been increases in the relevant
license fees. In addition, if bandwidth and other providers cease their business with us or raise the prices of their products and services, we will incur additional
costs to find alternative service providers or to accept the increased costs in order to provide our services, although we expect that crowdsourced capacity
obtained through our cloud computing project may offset some of our bandwidth costs. If we cannot pass on our costs and expenses to our users, or if our costs
to deliver our services do not decline commensurate with any future declines in the prices we charge our users, our results of operations may be adversely
affected and we may fail to achieve profitability.
14
We may not be able to successfully address the challenges and risks we face in the online games market, such as a failure to successfully implement our
plan to acquire exclusive rights to operate and sub-license games or to obtain all the licenses required to operate online games, which may subject us to
penalties from relevant authorities, including the discontinuance of our online game business.
Since 2010, we have entered into exclusive operating agreements with online game developers so that we can gain exclusive rights to certain online
games and, in addition to offering these games on our own websites, also have the option of sub-licensing these games to other websites to diversify our game
revenue stream. Exclusive arrangements of this type require more initial capital investment in acquiring operating rights for the games, and involve more
business risks, such as risks associated with the potential failure to find appropriate sub-licensees for the games or failure to engage a sufficient number of game
players to make these games profitable for us. We expect that we will continue to make investments to acquire operating rights under such exclusive operating
arrangements. If we are unable to generate sufficient revenues in these markets to obtain sufficient return for our investments, our future results of operations
and financial condition could be materially and adversely affected.
In addition, to operate online games in China, a variety of permits and approvals are required. For example, publication of online games, music works
and other internet publishing activities are subject to the regulation of the GAPPRFT, which requires operators of online games and other internet publishing
services to obtain an internet publication license prior to providing any such services. See “Item 4. Information on the Company—B. Business Overview—
Regulation—Regulation on internet publication.” Shenzhen Xunlei has obtained an internet publication license for the publication of internet games. However,
Shenzhen Xunlei’s internet publication license does not include the publication of music works and other internet publishing activities. Applicable regulations
also specify that each online game must be screened and approved in advance by GAPPRFT before it is allowed to be launched online. Also, an imported online
game should be approved in advance by MOC before its initial operation while a domestically developed online game should be filed with MOC within 30 days
of commencing operations. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on online games.” We license from
online game developers and operate MMOGs, and we share profits with these developers. We require developers of certain online games to obtain the requisite
approvals from GAPPRFT, and make the filings with MOC, for relevant online games. As of the date of this annual report, most of our online games currently
in operation exclusively by us have obtained GAPPRFT’s approval and completed filing with MOC. However, we cannot assure you that we or such online
game developers can obtain GAPPRFT’s approvals or complete the filings with MOC for all the games in a timely manner or at all. If we or such online game
developers fail to obtain these licenses, approvals or filings in a timely manner or at all, the relevant authority may challenge the commercial operation of our
online games and determine that we are in violation of the relevant laws and regulations regarding online games, it would have the power to, among other
things, levy fines against us, confiscate our income generated from operation of our online games and require us to discontinue our online game business.
We operate in a competitive market and may not be able to compete effectively.
We face significant competition in different areas of our business. For example, although we currently have a leading presence in the China market for
cloud acceleration products and services, we cannot guarantee that we will be able to maintain our leading position in the future. We may face competition from
leading Chinese internet companies, such as Tencent and Baidu, if they start to allocate resources and focus on the development in this business sector. With
more entrants into the cloud acceleration business, aggressive price cutting by competitors may result in the loss of our existing subscribers. We may have to
take actions to retain our user base and attract more subscribers at significant cost, including upgrading and developing existing and new products and services
in order to meet users’ changing demand, but we cannot assure you that such efforts will succeed, especially given the tightening control over internet content
by the Chinese government. See “—If we fail to keep up with the technological development in the internet industry and users’ changing demand, our business,
financial condition and results of operations may be materially and adversely affected.” and “—Regulation and censorship of information disseminated over the
internet in China, recently strengthened, may adversely affect our business, and we may be liable for digital media content on our platform.”
Some of our existing or potential competitors have a longer operating history and significantly greater financial resources than we do, and in turn may
be able to attract and retain more users and advertisers. Our competitors may compete with us in a variety of ways, including by conducting brand promotions
and other marketing activities and making acquisitions. If we are not able to effectively compete in any aspect of our business, which would have a material and
adverse effect on our business, financial condition and results of operations.
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Undetected programming errors or flaws or failure to maintain effective customer service could harm our reputation or decrease market acceptance of our
services, particularly our resource discovery network, which would materially and adversely affect our results of operations.
Our programs may contain programming errors that may only become apparent after their release, especially in terms of upgrades to, for example,
Xunlei Accelerator or cloud acceleration subscription services. We receive user feedback in connection with programming errors affecting their user experience
from time to time, and such errors may also come to our attention during our monitoring process. However, we cannot assure you that we will be able to detect
and resolve all these programming errors effectively or in a timely manner. Undetected programming errors or defects may adversely affect user experience and
cause our users to stop using our services and our advertisers to reduce their use of our services, any of which could materially and adversely affect our business
and results of operations.
Advertisements we display may subject us to penalties and other administrative actions.
Under PRC advertising laws and regulations, advertisement channels such as us are obligated to monitor the advertising content they display to ensure
that such content is true, accurate and in full compliance with applicable laws and regulations. PRC advertising laws and regulations set forth certain content
requirements for advertisements in the PRC including, among other things, prohibitions on false or misleading content, superlative wording, socially
destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. In April 2015, the Standing
Committee of the National People’s Congress issued the amended Advertisement Law, which took effect on September 1, 2015, to further strengthen the
supervision and management of advertisement services. Pursuant to the Advertisement Law, any advertisement that contains false or misleading information to
deceive or mislead consumers shall be deemed false advertising. Furthermore, the Advertisement Law explicitly stipulates detailed requirements for the content
of several different kinds of advertisement, including advertisements for medical treatment, pharmaceuticals, medical instruments, health food, alcoholic drinks,
education or training, products or services having an expected return on investment, real estate, pesticides, feed and feed additives, and some other agriculture-
related advertisement. In providing advertising services, we are required to review the supporting documents provided to us by advertising agencies or
advertisers for the relevant advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. Prior to
distributing advertisements that are subject to government censorship and approval, we are obligated to verify that such censorship has been performed and
approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to eliminate the
effect of illegal advertisement. In circumstances involving serious violations, the State Administration for Industry and Commerce, or the SAIC, or its local
branches may revoke violators’ licenses or permits for their advertising business operations.
To fulfill these monitoring functions specified by the PRC laws and regulations set forth above, we employ several measures. Almost all of our
advertising contracts require that advertising agencies or advertisers that contract with us: (i) ensure the advertising content provided to us is true, accurate and
in full compliance with PRC laws and regulations; (ii) ensure such content does not infringe any third-party’s rights and interests; and (iii) indemnify us for any
liabilities arising from such advertising content. In addition, a team of our employees reviews all advertising materials to ensure the content does not violate
relevant laws and regulations before displaying such advertisements. However, we cannot assure you that all the content contained in such advertisements is true
and accurate as required by the advertising laws and regulations, especially given the uncertainty in the application of these laws and regulations. Prior to our
sale of Xunlei Kankan in July 2015, we had occasionally received fines for certain inappropriate advertisements posted on Xunlei Kankan. Although we expect
our liabilities with respect to advertising to decrease after our sale of Xunlei Kankan, if we are found to be in violation of applicable PRC advertising laws and
regulations in the future, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on our business,
financial condition and results of operations.
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We face risks relating to third parties’ billing and payment systems.
The billing and payment systems of third parties such as online third-party payment processors help us maintain accurate records of payments of sales
proceeds by certain subscribers and other paying users and collect such payments. Our business and results of operations could be adversely affected if these
third parties fail to accurately account for or calculate the revenues generated from the sales of our products and services. Moreover, if there are security
breaches or failure or errors in the payment process of these third parties, user experience may be affected and our business results may be negatively impacted.
The channels for the payment of our services and products typically comprise third-party online system, fixed phone line and mobile phone payment.
Although we have been able to control our payment handling fees by encouraging our subscribers to use the third-party online system which charges relatively
lower levels of handling fees compared with other payment channels, the subscribers may change their habits to make payments through mobile phones or other
channels with higher costs. Approximately 18%, 13% and 4% of the payments were made by our subscribers via distribution channels such as mobile service
operators in 2013, 2014 and 2015, respectively. If a majority of subscribers use the mobile phone as their payment channels and the cost remains unchanged or
even increases in the future, our cost of operations may significant increase. If we fail to minimize the associated payment handling fees and further diversify
the payment channels, our business, prospects and results of operations may be adversely affected.
We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online payment
systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things,
damage our reputation and the perceived security of all of the online payment systems we use. In addition, there may be billing software errors that would
damage customer confidence in these payment systems. If any of the above were to occur, we may lose paying users and users may be discouraged from
purchasing our products, which may have an adverse effect on our business and results of operations.
We have granted, and may continue to grant, share awards under our share incentive plans, which may result in increased share-based compensation
expenses.
We have granted share-based compensation awards, including share options and restricted shares, to various employees, key personnel and other non-
employees to incentivize performance and align their interests with ours. We adopted a share incentive plan on December 30, 2010, or the 2010 Plan, a second
share incentive plan on November 18, 2013, as supplemented, or the 2013 Plan, and a third share incentive plan on April 24, 2014, as supplemented, or the 2014
plan. Under the 2010 Plan, we are authorized to issue a maximum number of 26,822,828 common shares of our company upon exercise of the options or other
types of awards (excluding an aggregate of 8,410,200 shares already issued to the directors who are our founders upon exercise of founder options, which were
not granted pursuant to the 2010 Plan). As of March 31, 2016, options to purchase a total of 2,097,410 common shares of our company were outstanding under
the 2010 Plan. Under the 2013 Plan, we are authorized to issue a maximum number of 9,073,732 restricted shares to members of our senior management,
counsel or consultant to our company. Under the 2014 Plan, we are authorized to issue a maximum number of 14,195,412 restricted shares to our directors,
officers, employees and advisors or consultants to our company. As of March 31, 2016, 7,820,985restricted shares (excluding those forfeited) have been granted
to certain executive officers and other employees under the 2013 Plan, and 7,587,000 restricted shares (excluding those forfeited) have been granted to certain
executive officers and other employees under the 2014 Plan. Our unrecognized share-based compensation expenses relating to the restricted shares granted
under each of the 2013 Plan and the 2014 Plan amounted to US$10.9 million and US$8.4 million, respectively, as of March 31, 2016. See “Item 6. Directors,
Senior Management and Employees—B. Compensation—Share incentive plans” for details.
We will issue the equivalent number of common shares upon the vesting and exercise of these options. The amount of these expenses is based on the
fair value of the share-based compensation award we granted. The expenses associated with share-based compensation have affected our net income and may
reduce our net income in the future, and any additional securities issued under share-based compensation schemes will dilute the ownership interests of our
shareholders, including holders of our ADSs. We believe the granting of incentive awards is of significant importance to our ability to attract and retain key
personnel and employees, and we will continue to grant stock options, restricted shares and other share awards to employees in the future. As a result, our
expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
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The continuing and collaborative efforts of our senior management and key employees are crucial to our success, and our business may be harmed if we
were to lose their services.
Our success depends on the continual efforts and services of Mr. Sean Shenglong Zou, our co-founder, chairman and chief executive officer, and other
members of our senior management team. If however, one or more of our executives or other key personnel are unable or unwilling to continue to provide
services to us, we may not be able to find suitable replacements easily or at all. Competition for management and key personnel in our industry is intense and
the pool of qualified candidates is limited. We may not be able to retain the services of our executives or key personnel, or attract and retain experienced
executives or key personnel in the future. If any of our executive officers or key employees joins a competitor or forms a competing company, we may lose
advertisers, know-how and key professionals and staff members. Each of our executive officers has entered into an employment agreement (including a non-
compete provision) with us. However, if any dispute arises between us and our executives or key employees, these agreements may not be enforceable in China,
where these executives and key employees reside, in light of uncertainties with China’s legal system.
In addition, while we often grant additional incentive shares to management personnel and other key employees after their hire dates, the initial grants
are usually much larger than subsequent grants. Employees may be more likely to leave us after their initial incentive share grant fully vests, especially if the
value of the incentive shares have significantly appreciated in value relative to the exercise price. If any member of our senior management team or other key
personnel leaves our company, our ability to successfully operate our business and execute our business strategy could be impaired.
We may not be able to effectively identify or pursue targets for acquisitions or investment, even if we complete such transactions, we may be unable to
successfully integrate the acquired businesses into, or realize anticipated benefits to, our business, and our equity investments may suffer impairment loss as
a result of unsatisfactory target company performance, each of which may adversely affect our growth and results of operations.
We have in the past and may in the future selectively acquire or invest in other businesses, including those that complement our existing business. We
may not, however, be able to identify suitable targets for acquisitions or investments in the future. Even if we are able to identify suitable candidates, we may be
unable to complete a transaction on terms commercially acceptable to us. If we fail to identify appropriate candidates or complete the desired transactions, our
growth may be impeded. If the target companies we invest in produce unsatisfactory results, we may suffer impairment loss in our equity investment.
Even if we complete the desired acquisitions or investment, such acquisitions and investment may expose us to new operational, regulatory, market and
geographic risks and challenges, including:
diversion of our management’s attention and other resources from our existing business;
our inability to maintain the key business relationships and the reputation of the businesses we acquire or invest in;
our inability to retain key personnel of the acquired or invested company;
uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
failure to comply with laws and regulations as well as industry or technical standards of the markets into which we expand;
our dependence on unfamiliar affiliates and partners of the companies we acquire or invest in;
unsatisfactory performance of the businesses we acquire or invest in;
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our responsibility for the liabilities associated with the businesses we acquire, including those that we may not anticipate;
goodwill impairment risks associated with the businesses that we acquire;
our inability to integrate acquired technology into our business and operations;
our inability to develop and maintain a successful business model and to monetize and generate revenues from the businesses we acquire; and
our inability to maintain internal standards, controls, procedures and policies.
Any of these events could disrupt our ability to manage our business. These risks could also result in our failure to derive the intended benefits of the
acquisitions or investments, and we may be unable to recover our investment in such initiatives or may have to recognize impairment charges as a result.
Furthermore, the financing and payment arrangements we use in any acquisition could have a negative impact on you as an investor, because if we
issue shares in connection with an acquisition, your holdings could be diluted. Moreover, if we take on significant debt to finance such acquisitions, we would
incur additional interest expenses, which would divert resources from our working capital and potentially have a material adverse impact on our results of
operations.
Our business, financial condition and results of operations, as well as our ability to obtain financing, may be adversely affected by the downturn in the
global or Chinese economy.
The industries in which we operate, including the mobile internet industry, may be affected by economic downturns. For example, a prolonged
slowdown in the world economy, including in the Chinese economy, may lead to a reduced amount of mobile internet advertising, which could materially and
adversely affect our business, financial condition and results of operations. In addition, certain of our products and services may be viewed as discretionary by
our users, who may choose to discontinue or reduce spending on such products and services during an economic downturn. In such an event, our ability to retain
existing users and increase new users will be adversely affected, which would in turn negatively impact our business and results of operations.
Moreover, a slowdown or disruption in the global or Chinese economy may have a material and adverse impact on financings available to us. The
weakness in the economy could erode investor confidence, which constitutes the basis of the credit market. The unstable economy affecting the financial
markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially
reasonable terms, or at all. Although we are uncertain about the extent to which the global financial and economic fluctuations and slowdown of Chinese
economy may impact our business in the short-term and long-term, there is a risk that our business, results of operations and prospects would be materially and
adversely affected by any global economic downturn or disruption or slowdown of Chinese economy.
Our operations depend on the performance of the internet infrastructure in China.
The successful operation of our business depends on the performance of the internet infrastructure and telecommunications networks in China. In
China, almost all access to the internet is maintained through state-owned telecommunications operators under the administrative control and regulatory
supervision of the MIIT. Moreover, we have entered into contracts with various subsidiaries of a limited number of telecommunications service providers in
each province for network-related services. On the one hand, if the internet industry in China does not grow as quickly as expected, our business and operations
will be negatively affected. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s
internet infrastructure or the telecommunications networks provided by telecommunications service providers. Our network and website regularly serve a large
number of users and advertisers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the
increasing traffic on our website. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we
pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. If internet access fees or
other charges to internet users increase, our user traffic may decline and our business may be harmed. On the other hand, if the internet industry grows faster
than expected and we cannot react to the market demand in a timely manner in terms of our research and development effort, the user experience and the
attractiveness of our services may be harmed, which will negatively impact our business and results of operations.
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If we fail to implement and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial
results or prevent fraud or fail to meet our reporting obligations, and investor confidence in our company and the market price of our ADSs may be
adversely affected.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002,
adopted rules requiring every public company to include a management report on the company’s internal control over financial reporting in its annual report,
which contains management’s assessment of the effectiveness of our internal control over financial reporting. However, we were not subject to the requirement
to provide attestation by our independent registered public accounting firm on our management’s assessment of our internal control over financial reporting for
the year ended December 31, 2015 as we qualified as an “emerging growth company,” as defined in the JOBS Act, as of December 31, 2015. Once we cease to
be an “emerging growth company,” our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over
financial reporting, unless we qualify for other exemptions.
Our management has concluded that our internal control over financial reporting was ineffective as of December 31, 2015 due to one material
weakness, one significant deficiency and other control deficiencies in internal control over financial reporting that were identified as of December 31, 2014,
which were not remediated as of December 31, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or
detected on a timely basis. The material weakness is related to a lack of accounting resources in U.S. GAAP and SEC reporting requirements, and the significant
deficiency identified related to a lack of documented comprehensive U.S. GAAP accounting manuals and financial reporting procedures and the lack of related
implementation controls. See “Item 15. Controls and Procedures.” Any failure to achieve and maintain effective internal control over financial reporting could
result in the loss of investor confidence in the reliability of our consolidated financial statements, which in turn could harm our business and negatively impact
the market price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other
resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
We have limited business insurance coverage and any uninsured business disruption may have an adverse effect on our results of operations and financial
condition.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed
economies. We have limited business liability or disruption insurance to cover our operations. Any uninsured occurrence of business disruption may result in
our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
We face risks related to natural disasters such as earthquakes and health epidemics and other outbreaks, which could significantly disrupt our operations.
Our operations may be vulnerable to interruption and damage from natural and other types of catastrophes, including earthquakes, fire, floods, hail,
windstorms, severe winter weather (including snow, freezing water, ice storms and blizzards), environmental accidents, power loss, communications failures,
explosions, man-made events such as terrorist attacks and similar events. Due to their nature, we cannot predict the incidence, timing and severity of
catastrophes. If any such catastrophe or extraordinary event occurs in the future, our ability to operate our business could be seriously impaired. Such events
could make it difficult or impossible for us to deliver our services and products to our users and could decrease demand for our products. As we do not carry
property insurance and significant time could be required to resume our operations, our financial position and results of operations could be materially and
adversely affected in the event of any major catastrophic event.
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In addition, our business could be adversely affected by the outbreak of pandemics such as influenza A (H1N1), avian influenza, H7N9 or severe acute
respiratory syndrome (SARS). Any occurrence of these pandemic diseases or other adverse public health developments in China or elsewhere could severely
disrupt our staffing or the staffing of our business partners, including our advertisers, and otherwise reduce the activity levels of our work force and the work
force of our business partners, causing a material and adverse effect on our business operations.
Risks related to our corporate structure
If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental
restrictions on foreign investment in internet-related business and foreign investors’ mergers and acquisition activities in China, or if these regulations or
the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those
operations.
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in internet businesses, including the
provision of online game and online advertising services. For example, foreign investors’ equity interests in value-added telecommunication service providers
may not exceed 50%. In addition, foreign investors are prohibited from investing in or operating entities engaged in, among others, internet cultural operating
service (including online game operation services), internet news service, and online transmission of audio-visual programs service. We are a Cayman Islands
company and Giganology Shenzhen and Xunlei Computer, our PRC subsidiaries, are considered foreign-invested enterprises. Accordingly, neither of these two
PRC subsidiaries is eligible to provide value-added telecommunication services and the aforementioned internet related services in China. As a result, we
conduct our operations in China principally through contractual arrangements among Giganology Shenzhen and Shenzhen Xunlei and its shareholders.
Shenzhen Xunlei holds the licenses and permits necessary to conduct our resource discovery network, online advertising, online games and related businesses in
China and hold various operating subsidiaries that conduct a majority of our operations in China. Our contractual arrangements with Shenzhen Xunlei and its
shareholders enable us to exercise effective control over Shenzhen Xunlei and Shenzhen Xunlei’s operating subsidiaries and hence treat them as our
consolidated entities and consolidate their results. For a detailed discussion of these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure.”
We cannot assure you, however, that we will be able to enforce these contracts. Although we have been advised by Zhong Lun Law Firm, our PRC
legal counsel, that each contract under these contractual arrangements with Shenzhen Xunlei and its shareholders is valid, binding and enforceable under current
PRC laws and regulations, we cannot assure you that the PRC government would agree that these contractual arrangements comply with PRC licensing,
registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations
governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws
and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could revoke our business and operating
licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations,
impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be
harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.
We rely on contractual arrangements with our variable interest entity in China and its shareholders for our operations, which may not be as effective as
direct ownership in providing operational control the variable interest entity and its subsidiaries.
Since PRC laws restrict foreign equity ownership in companies engaged in internet business in China, we rely on contractual arrangements with
Shenzhen Xunlei, our VIE, and the shareholders of Shenzhen Xunlei to operate our business in China. If we had direct ownership of Shenzhen Xunlei, we
would be able to exercise our rights as a shareholder to effect changes in the board of directors of Shenzhen Xunlei, which in turn could effect changes at the
management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, we rely on Shenzhen Xunlei and its
shareholders’ performance of their contractual obligations to exercise effective control. In addition, our operating contract with Shenzhen Xunlei has a term of
ten years, which is subject to Giganology Shenzhen’s unilateral termination right and may be extended as requested by Giganology Shenzhen. In general, none
of Shenzhen Xunlei or its shareholders may terminate the contracts prior to the expiration date. However, the shareholders of Shenzhen Xunlei may not act in
the best interests of our company or may not perform their obligations under these contracts, including the obligation to renew these contracts when their initial
contract term expires. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Shenzhen
Xunlei. We may replace the shareholders of Shenzhen Xunlei at any time pursuant to our contractual arrangements with Shenzhen Xunlei and its shareholders.
However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC
law and courts and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by Shenzhen Xunlei or its shareholders to perform
their obligations under our contractual arrangements with them may have a material adverse effect on our business” and “Item 4. Information on the
Company—C. Organizational Structure.” Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control
over Shenzhen Xunlei.
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Any failure by Shenzhen Xunlei or its shareholders to perform their obligations under our contractual arrangements with them may have a material
adverse effect on our business.
Shenzhen Xunlei or its shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual
obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law,
including seeking specific performance or injunctive relief, which may not be effective. As of the date of this annual report, Mr. Sean Shenglong Zou, our co-
founder, chairman and chief executive officer, owned 76% of the equity interest in Shenzhen Xunlei, our variable interest entity. Under the equity pledge
agreement among Giganology Shenzhen and the shareholders of Shenzhen Xunlei, as amended, the shareholders of Shenzhen Xunlei have pledged all of their
equity interests in Shenzhen Xunlei to Giganology Shenzhen to guarantee Shenzhen Xunlei and its shareholders’ performance of their respective obligations
under the related contractual arrangements. In addition, the shareholders of Shenzhen Xunlei have completed the registration of equity pledge under the equity
pledge agreement with the competent governmental authority. If any of the shareholders of Shenzhen Xunlei, especially Mr. Sean Shenglong Zou due to his
significant equity interest in Shenzhen Xunlei, fails to perform his or her obligations under the contractual arrangements, we may have to enforce these
agreements to transfer his or her equity interests to another appointee of Giganology Shenzhen.
Moreover, the exercise of call options under the equity interests disposal agreement, the intellectual properties purchase option agreement and certain
other contractual arrangements will be subject to the review and approval of competent governmental authorities and incur additional expenses.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could
limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our variable interest entity and its
subsidiaries, and our ability to conduct our business may be adversely affected.
Contractual arrangements with our variable interest entity may result in adverse tax consequences to us.
Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC
tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulation on tax—PRC enterprise income tax.” We could face material and adverse tax consequences if the PRC tax
authorities were to determine that the contractual arrangements among Giganology Shenzhen, our wholly-owned subsidiary in China, and Shenzhen Xunlei, our
variable interest entity in China and its shareholders, as well as the intellectual property framework agreement between Xunlei Computer and Shenzhen Xunlei
were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements
could, among other things, result in an upward adjustment on taxation, and the PRC tax authorities may impose interest on late payments on Shenzhen Xunlei,
for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if Shenzhen Xunlei’s tax liabilities increase significantly or
if it is required to pay interest on late payments.
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The shareholders of Shenzhen Xunlei may have potential conflicts of interest with us, which may materially and adversely affect our business.
Sean Shenglong Zou, Hao Cheng, Fang Wang, Jianming Shi and Guangzhou Shulian Information Investment Co., Ltd. are shareholders of Shenzhen
Xunlei. We provide no incentives to the shareholders of Shenzhen Xunlei for the purpose of encouraging them to act in our best interests in their capacity as the
shareholders of Shenzhen Xunlei. We may replace the shareholders of Shenzhen Xunlei at any time pursuant to the currently effective equity option agreements
between us and these shareholders.
As a director and executive officer of our company, Mr. Zou and Mr. Cheng each has a duty of loyalty and care to us under Cayman Islands law. We
are not aware that other publicly listed companies in China with a similar corporate and ownership structure as ours have brought conflicts of interest claims
against the shareholders of their respective variable interest entities. However, we cannot assure you that when conflicts arise, the shareholders of Shenzhen
Xunlei will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes
between us and the shareholders of Shenzhen Xunlei, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to
our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.
We may rely principally on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may
have. Any limitation on the ability of Giganology Shenzhen and Xunlei Computer to pay dividends to us could have a material adverse effect on our ability
to conduct our business.
We are a holding company and we may rely principally on dividends and other distributions on equity paid by our wholly-owned PRC subsidiaries
including Giganology Shenzhen and Xunlei Computer, for our cash and financing requirements, including the funds necessary to pay dividends and other cash
distributions to our shareholders and service any debt we may incur. If Giganology Shenzhen incurs debt on its own behalf in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our
taxable income under the contractual arrangements Giganology Shenzhen currently has in place with Shenzhen Xunlei, our variable interest entity, as well as the
intellectual property framework agreement between Xunlei Computer and Shenzhen Xunlei, in a manner that would materially and adversely affect its ability to
pay dividends and other distributions to us. As of December 31, 2015, we had cash or cash equivalents of approximately RMB385.7 million (US$594.0 million)
and US$6.5 million located within the PRC, of which RMB190.9 million (US$29.4 million) is held by Shenzhen Xunlei and its subsidiaries. The transfer of all
the cash or cash equivalents is subject to PRC government’s restrictions on currency conversion.
Under PRC laws and regulations, Giganology Shenzhen and Xunlei Computer, as wholly foreign-owned enterprises in the PRC, may pay dividends
only out of its accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned
enterprises such as Giganology Shenzhen and Xunlei Computer are required to set aside at least 10% of their accumulated after-tax profits each year, if any, to
fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of their respective registered capital. At their discretion, wholly
foreign-owned enterprises may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve
funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of Giganology Shenzhen and Xunlei Computer to
pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—Risks related to doing business in China—Our global income
may be subject to PRC taxes under the PRC EIT Law, which may have a material adverse effect on our results of operations.”
23
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may
restrict or prevent us from making loans to our PRC subsidiaries and variable interest entity and its subsidiaries or making additional capital contributions
to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.
We may (i) make additional capital contributions to our PRC subsidiaries, (ii) establish new PRC subsidiaries and make capital contributions to these
new PRC subsidiaries, (iii) make loans to our PRC subsidiaries or variable interest entity and its subsidiaries, or (iv) acquire offshore entities with business
operations in China in an offshore transaction. However, most of these uses are subject to PRC regulations and approvals. For example:
capital contributions to our PRC subsidiaries, whether existing ones or newly established ones, must be approved by the PRC Ministry of
Commerce or its local counterparts;
loans by us to our PRC subsidiaries, which are foreign-invested enterprises, to finance their respective activities cannot exceed statutory limits and
must be registered with the PRC State Administration of Foreign Exchange, or SAFE, or its local branches; and
loans by us to our variable interest entity, which is a domestic PRC entity, must be approved by the National Development and Reform
Commission and must also be registered with SAFE or its local branches.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-
invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular No. 142
provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the
business scope approved by the applicable governmental authority and unless otherwise provided by law, such Renminbi capital may not be used for equity
investments within the PRC. SAFE also strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered
capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any
case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of SAFE Circular No. 142 could result in severe monetary or
other penalties. On March 30, 2015, SAFE issued SAFE Circular No. 19, which took effect and replaced SAFE Circular No. 142 as of June 1, 2015. Although
SAFE Circular No. 19 allows for the use of RMB converted from the foreign currency denominated capital for equity investments in the PRC, the restrictions
will continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, for the entrusted loans or for the
inter-company RMB loans. We expect that if we convert the net proceeds we received from our initial public offering into Renminbi pursuant to SAFE Circular
No. 142 and SAFE Circular No. 19, our use of Renminbi funds will be for purposes within the approved business scope of our PRC subsidiaries. The business
scopes of Giganology Shenzhen and Xunlei Computer include “technical services,” which we believe permits Giganology Shenzhen to purchase or lease servers
and other equipment for its own technical data and research and to provide operational support to our variable interest entity and its subsidiaries.
However, we may not be able to use such Renminbi funds to make equity investments in certain entities in the PRC through our PRC subsidiaries.
We may lose the ability to use and enjoy assets held by our variable interest entity and its subsidiaries that are important to the operation of our business if
any of such entities goes bankrupt or becomes subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with our variable interest entity, our variable interest entity and its subsidiaries hold certain assets that are
important to the operation of our business, including patents for the proprietary technology and related domain names and trademarks. If any of our variable
interest entity or its subsidiaries goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue
some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the
contractual arrangements, our variable interest entity and its subsidiaries may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or
beneficial interests in the business without our prior consent. If our variable interest entity undergoes a voluntary or involuntary liquidation proceeding, the
unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and
adversely affect our business, financial condition and results of operations.
24
Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it
may impact the viability of our current corporate structure, corporate governance and business operations.
The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of
existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign
Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice
and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM is currently soliciting comments
on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if
enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.
Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in
determining whether the investment in China is made by a foreign investor or a PRC domestic investor. The draft Foreign Investment Law specifically provides
that an entity established in China but “controlled” by foreign investors will be treated as a foreign investor, whereas an entity set up in a foreign jurisdiction
would nonetheless be, upon market entry clearance by the MOFCOM or its local branches, treated as a PRC domestic investor provided that the entity is
“controlled” by PRC entities and/or citizens. In this connection, “control” is broadly defined in the draft law to cover, among others, having the power to exert
decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. If the
foreign investment falls within a “negative list”, to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local
branches would be required. Otherwise, all foreign investors may make investments on the same terms as Chinese investors without being subject to additional
approval from the government authorities as mandated by the existing foreign investment legal regime.
The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses
and permits in the industries that are currently subject to foreign investment restrictions in China. See “—Risks Related to Our Corporate Structure—If the PRC
government finds that the structure we have adopted for our business operations does not comply with PRC governmental restrictions on foreign investment in
internet businesses, or if these laws or regulations or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties,
including the shutting down of our platform and our business operations.” and “Item 4. Information on the Company—C. Organizational Structure.” Under the
draft Foreign Investment Law, if a variable interest entity is ultimate controlled by a foreign investor via contractual arrangement, it would be deemed as a
foreign investment. Accordingly, for the companies with a VIE structure in an industry category that is on the “negative list”, the VIE structure may be deemed
legitimate only if the ultimate controlling person(s) is/ are of PRC nationality (either PRC individual, or PRC government and its branches or agencies)
Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as foreign invested enterprises and
any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
As of the date of this annual report, over 50% of the voting power of our issued and outstanding share capital is controlled by PRC nationals. However,
the draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with a VIE structure, whether or
not these companies are controlled by Chinese parties, although a few possible options were proffered to solicit comments from the public on this point. Under
these options, a company with VIE structure that is engaged in a business set forth in a “negative list” to be published at the time of the enactment of the new
Foreign Investment Law has either the option or obligation to disclose its corporate structure to the authorities, while the authorities, after reviewing the ultimate
control structure of the company, may either permit the company to continue its business by maintaining the VIE structure (when the company is deemed
ultimately controlled by PRC citizens), or require the company to dispose of its businesses and/or VIE structure based on consideration of the particular
circumstances involved. Moreover, it is uncertain whether the value-added telecommunication services and other internet related services, which our VIE
provides, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign
Investment Law and the final “negative list” mandate further actions, such as MOFCOM market entry clearance or certain restructuring of our corporate
structure and operations, to be completed by companies with existing VIE structure like us, we will face substantial uncertainties as to whether these actions can
be timely completed, or at all, and our business and financial condition may be materially and adversely affected.
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The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance
costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the
applicable foreign invested entities. Aside from investment implementation report and investment amendment report that are required at each investment and
alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis.
Any company found to be non-compliant with the information reporting obligations may potentially be subject to fines and/or administrative or criminal
liabilities, and the persons directly responsible may be subject to criminal liabilities.
Risks related to doing business in China
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects
may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a
whole.
The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved
corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese
government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises
significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting
monetary policy, and providing preferential treatment to particular industries or companies, such as those qualified to operate in free trade zones designated in
certain major cities in China.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among
various sectors of the economy and the rate of growth has been slowing. The Chinese government has implemented various measures to encourage economic
growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For
example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax
regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic
growth.
These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.
26
Regulation and censorship of information disseminated over the internet in China, recently strengthened, have adversely affected our business and may
continue to adversely affect our business, and we may be liable for the digital media content on our platform.
China has strict regulations governing telecommunication service providers, internet and wireless access and the distribution of news and other
information. Under these regulations, internet content providers, or ICPs, like us are prohibited from posting or displaying over the internet or wireless networks
content that, among other things, violates PRC laws and regulations. If an ICP finds that prohibited content is transmitted on its website or stored in its system, it
must terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. Failure to
comply with these requirements could lead to the revocation of the ICP License and other required licenses and the closure of the offending websites, and cloud
network operators or website operators may also be held liable for prohibited content displayed on, retrieved from or linked to such network or website.
However, efforts to constantly self-monitor in order to comply with these requirements could negatively impact user experience and lead to a decline in user
numbers.
The Chinese government has recently intensified its efforts to remove inappropriate content disseminated over the internet and wireless networks, and
our efforts to monitor content on our platform and website led to a decline in subscriber numbers. In April 2014, the Chinese government initiated a campaign to
enhance and enforce its scrutiny on internet content in China, particularly for pornographic content, and various websites were subject to penalties and in some
cases outright suspension of website operations. We conducted an internal compliance investigation to ensure that the content transmitted by our products is in
compliance with the standards set out by the authorities. As a result, to date, we have deleted millions of cached files, blocked over one million digital files and
added thousands of key words to our automatic keyword filtration system. As we continued our compliance efforts in response to the government’s internet
content campaign, we saw a recovery trend in the number of total subscribers in the second, third and fourth quarters of 2015 and the first quarter of 2016. In
addition, we permitted temporary suspension of services by about 281,000 existing subscribers as of the end of 2015. We may experience still further decline in
user and subscriber numbers as we continue in our efforts to comply with the rules and regulations of the Chinese government.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our PRC subsidiaries and variable interest entity and its subsidiaries in China. Our operations in China are
governed by PRC laws and regulations. Giganology Shenzhen is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.
Over the past three decades, the PRC government has enacted legislation that has significantly enhanced the protections afforded to various forms of
foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since
PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to
evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the
relevance of legal requirements and our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through
unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at
all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In
addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management
attention.
We believe that our patents, trademarks, trade secrets, copyrights, and other intellectual property are important to our business. We rely on a
combination of patent, trademark, copyright and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our intellectual property and our brand. Protection of intellectual property rights in China may not be as effective as in the
United States or other jurisdictions, and as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our
revenues and competitive position.
27
We may be adversely affected by the complexity, uncertainties and changes in PRC regulations of internet-related business and companies.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining
to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement
involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in
violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the internet business include, but are not limited to, the
following:
We only have contractual control over our resource discovery network. We do not own the resource discovery network due to the restriction of
foreign investment in businesses providing value-added telecommunication services in China, including internet content provision services. This
may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other
harmful effects on us.
There are uncertainties relating to the regulation of the internet business in China, including evolving licensing practices and the requirement for
real-name registrations. This means that permits, licenses or operations at some of our companies may be subject to challenge, or we may fail to
obtain permits or licenses that may be deemed necessary for our operations or we may not be able to obtain or renew certain permits or licenses. If
we fail to maintain any of these required licenses or approvals, we may be subject to various penalties, including fines and discontinuation of or
restriction on our operations. Any such disruption in our business operations may have a material and adverse effect on our results of operations.
For example, we are providing mobile applications to mobile device users free of charge and we do not believe we, as an internet content provider,
or ICP, need to obtain a separate operating license in addition to the operating licenses for the value added telecommunications service, or the ICP
Licenses, which we have already obtained. Although we believe this is in line with the current market practice, there can be no assurance that we
will not be required to apply for an operating license for our mobile applications in the future and if so, we may not qualify or succeed in obtaining
such license.
New laws and regulations may be promulgated that will regulate internet activities, including online video, online games and online advertising
businesses. If these new laws and regulations are promulgated, additional licenses may be required for our operations. If our operations do not
comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations,
we could be subject to penalties.
In June 2010, MOC promulgated the Provisional Measures on the Administration of Online Games, or the Online Game Measures, which became
effective on August 1, 2010. The Online Game Measures provide that any entity engaging in online game operation activities should obtain an
Online Culture Operating Permit and must meet certain requirements such as a minimum amount of the registered capital. Online game developers
are generally involved in the purchase of servers and bandwidth, the control and management of game data, the maintenance of game systems and
certain other maintenance tasks in our operation of online games. There exist uncertainties on MOC’s interpretation and implementation of these
measures. If MOC determines in the future that such Online Culture Operating Permit or relevant requirement apply to the online game developers
for their involvement in the online game operations, we may have to terminate our revenue sharing arrangements with certain unqualified online
game developers and may even be subject to various penalties, which may negatively impact our results of operations and financial condition.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet
industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet
businesses in China, including our business. For example, in September 2009, GAPPRFT and the National Office of Combating Pornography and Illegal
Publications jointly published a notice, or Circular 13, which expressly prohibits foreign investors from participating in online game operating business via
wholly owned, equity joint venture or cooperative joint venture investments in China, and from controlling and participating in such businesses directly or
indirectly through contractual or technical support arrangements. Other government agencies with substantial regulatory authority over online game operations
and foreign investment entities in China, such as MIIT and MOC, did not join GAPPRFT in issuing Circular 13. While Circular 13 is applicable to us and our
online game business on an overall basis, to date, GAPPRFT has not issued any interpretation of Circular 13 and, to our knowledge, has not taken any
enforcement action under Circular 13 against any company that relies on contractual arrangements with affiliated entities to operate online games in China. We
cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing
licenses or obtain any new licenses required under any new laws or regulations. There are also risks that we may be found to violate the existing or future laws
and regulations given the uncertainty and complexity of China’s regulation of internet business.
28
Subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in
liability for us, especially if the Chinese government continues to maintain or strengthen its heightened scrutiny on internet content in China. We may not be
able to control or restrict all of the digital media content generated or placed on our network by our users, despite our attempt to monitor and filter such content.
To the extent that regulatory authorities find any portion of our content on our network or website objectionable or requiring any license or permit that we have
not obtained, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content, and keep records
and report to relevant authorities, which may reduce our user traffic. In addition, we may be subject to significant penalties for violations of those regulations
arising from prohibited content displayed on, retrieved from or uploaded to our network or website, including a suspension or shutdown of our operations. The
enforcement activities may be intensified in connection with any ongoing government campaigns. In addition, while we maintain a regular internal monitoring
and compliance protocol, we cannot ascertain that we would not fall foul of any changing or new government regulations or standards in the future. If we
receive a public warning from the relevant government authorities or our licenses for acceleration services are revoked, our reputation would be harmed and if
the operation of our acceleration services or other products is suspended or shut down entirely or in part, our revenues and results of operation may be materially
and adversely affected. Furthermore, the internal compliance investigation and the removal of content may have a material impact on our cloud acceleration
services, which in turn may lead to a decrease in users and have an adverse effect on our revenues and results of operations. Currently, we are unable to quantify
the magnitude and extent of such impact.
We may be sued by our game players and held liable for losses of virtual assets by such players, which may negatively affect our reputation and business,
financial condition and results of operations.
While playing online games or participating in other online activities, players acquire and accumulate some virtual assets, such as special equipment
and other accessories. Such virtual assets may be important to online game players and have monetary value and, in some cases, are sold for actual money. In
practice, virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other users and occasionally through
data loss caused by a delay of network service, a network crash or hacking activities.
Currently, there is no PRC law or regulation specifically governing virtual asset property rights. As a result, there is uncertainty as to who the legal
owner of virtual assets is, whether and how the ownership of virtual assets is protected by law, and whether an operator of online games such as us would have
any liability to game players or other interested parties (whether in contract, tort or otherwise) for loss of such virtual assets. Based on recent PRC court
judgments, the courts have typically held online game operators liable for losses of virtual assets by game players, and ordered online game operators to return
the lost virtual items to game players or pay damages and losses. In case of a loss of virtual assets, we may be sued by our game players or users and held liable
for damages, which may negatively affect our reputation and business, financial condition and results of operations.
Non-compliance with the laws or regulations governing virtual currency may result in penalties that could have a material adverse effect on our online
games business and results of operations.
The issuance and use of “virtual currency” in the PRC has been regulated since 2007 in response to the growth of the online games industry in China.
In January 2007, the Ministry of Public Security, MOC, MIIT and GAPPRFT jointly issued a circular regarding online gambling which has implications for the
use of virtual currency. To curtail online games that involve online gambling, as well as address concerns that virtual currency could be used for money
laundering or illicit trade, the circular (a) prohibits online game operators from charging commissions in the form of virtual currency in relation to winning or
losing of games; (b) requires online game operators to impose limits on use of virtual currency in guessing and betting games; (c) bans the conversion of virtual
currency into real currency or property; and (d) prohibits services that enable game players to transfer virtual currency to other players. On June 4, 2009, MOC
and the Ministry of Commerce jointly issued a notice regarding strengthening the administration of online game virtual currency, or the Virtual Currency
Notice. Furthermore, MOC issued the Online Game Measures in June 2010, which provides, among other things, that virtual currency issued by online game
operators may only be used to exchange its own online game products and services and may not be used to pay for the products and services of other entities.
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We issue virtual currency to our clients for them to purchase various items to be used in online games and premium services. Although we believe we
do not offer online game virtual currency transaction services, we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours.
For example, certain virtual items we issue to users based on in-game milestones they achieve or time spent playing games are transferable and exchangeable
for our virtual currency or the other virtual items we issue to users. If the PRC regulatory authorities deem such transfer or exchange a virtual currency
transaction, then we may be deemed to be engaging in the issuance of virtual currency and we may also be deemed to be providing transaction platform services
that enable the trading of such virtual currency. Simultaneously engaging in both of these activities is prohibited under the Virtual Currency Notice. In that
event, we may be required to cease either our virtual currency issuance activities or such deemed “transaction service” activities and may be subject to certain
penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoing could have a material adverse effect on our online games
business and results of operations.
In addition, the Virtual Currency Notice prohibits online game operators from setting game features that involve the direct payment of cash or virtual
currency by players for the chance to win virtual items or virtual currency based on random selection through a lucky draw, wager or lottery. The notice also
prohibits game operators from issuing currency to game players through means other than purchases with legal currency. Although we believe that we are
generally in compliance with such requirements and have taken adequate measures to prevent any of the above-mentioned prohibited activities, we cannot
assure you that the PRC regulatory authorities will not take a view contrary to ours and deem such feature as prohibited by the Virtual Currency Notice, thereby
subjecting us to penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoing could materially and adversely affect our
online games business and results of operations.
Intensified government regulation of the internet industry in China could restrict our ability to maintain or increase our user base.
The PRC government has, in recent years, intensified regulation on various aspects of the internet industry in China. For example, in January 2011,
MIIT and seven other PRC central government authorities jointly issued a circular entitled Implementation Scheme regarding Parental Guardianship Project for
Minors Playing Online Games, under which online game operators are required to adopt various measures to maintain a system to communicate with the parents
or other guardians of minors playing their online games and are required to monitor the online game activities of minors and suspend the accounts of minors if
so required by their parents or guardians. These restrictions could limit our ability to increase our online game business among minors. See “Item 4. Information
on the Company—B. Business Overview—Regulation—Regulation on anti-fatigue system, real-name registration system and parental guardianship project.”
Failure to implement these restrictions, if detected by the relevant government agencies, may result in fines and other penalties for us, including the shutting
down of our online games operations and license revocation. Furthermore, if these restrictions were expanded to apply to adult game players in the future, our
online games business could be materially and adversely affected.
Further, the PRC government has tightened its regulation of internet cafes in recent years. In particular, a large number of unlicensed internet cafes
have been closed. The PRC government has imposed higher capital and facility requirements for the establishment of internet cafes. Furthermore, the PRC
government’s policy, which encourages the development of a limited number of national and regional internet cafe chains and discourages the establishment of
independent internet cafes, may slow down the growth of internet cafes in China. In June 2002, the Ministry of Culture, together with other government
authorities, issued a joint notice, and in February 2004, the State Administration for Industry and Commerce issued another notice, suspending the issuance of
new internet cafe licenses. In May 2007, the State Administration for Industry and Commerce reiterated its position not to register any new internet cafes in
2007. In 2008, 2009 and 2010, the Ministry of Culture, the State Administration for Industry and Commerce and other relevant government authorities,
individually or jointly, issued several notices that provide various ways to strengthen the regulation of internet cafes, including investigating and punishing
internet cafes that accept minors, cracking down on internet cafes without sufficient and valid licenses, limiting the total number of internet cafes and approving
internet cafes within the planning made by relevant authorities, screening unlawful and adverse games and websites, and improving the coordination of
regulation over internet cafes and online games. Although currently most of our users access and consume our products and services from their own devices, if
internet cafes become one of the main venues for our users to access our website or online games, any reduction in the number, or any slowdown in the growth,
of internet cafes in China could limit our ability to maintain or increase our user base.
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In addition, the Chinese government has recently intensified its efforts to remove inappropriate content disseminated over the internet and wireless
networks. In April 2014, the Chinese government initiated a campaign to enhance and enforce its scrutiny over internet content in China, particularly for
pornographic content, and various websites were subject to penalties and in some cases outright suspension of website operations. As we implemented programs
to comply with these regulations, we saw our subscriber numbers decline and may see more subscriber or user decline in the future. See “—Regulation and
censorship of information disseminated over the internet in China, recently strengthened, have adversely affected our business and may continue to adversely
affect our business, and we may be liable for the digital media content on our platform.”
Fluctuations in exchange rates may have a material adverse effect on your investment.
Fluctuation in the value of the Renminbi may have a material adverse effect on the value of your investment. The value of the Renminbi against the
U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. In July 2005, the PRC
government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the RMB appreciated more than 20% against the U.S.
dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar
remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably , and in recent months
the RMB has depreciated significantly against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy may impact the
exchange rate between the RMB and the U.S. dollar in the future.
Our financial statements are expressed in U.S. dollars, and most of our assets, costs and expenses are denominated in Renminbi. Substantially all of our
revenues were denominated in Renminbi. We principally rely on dividends and other distributions paid by our subsidiaries in China which are denominated in
Renminbi. Our results of operations and the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and
Renminbi. To the extent we hold assets denominated in Renminbi, any depreciation of the Renminbi against the U.S. dollar could result in a reduction in the
value of our Renminbi denominated assets. Similarly, should we repatriate any portion of the net proceeds to us from our initial public offering or cash from
other offshore financing activities into China, such amount would also be affected by shifts in the exchange rate between the Renminbi and the U.S. dollar. On
the other hand, a decline in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of
your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our ADSs.
Limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. We did not enter into any forward contracts
to hedge our exposure to Renminbi-U.S. dollar exchange risk. While we may decide to enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may
be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency
out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily
relies on dividend payments from our wholly-owned PRC subsidiaries, to fund any cash and financing requirements we may have. Under existing PRC foreign
exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. However, approval from or
registration with appropriate government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay
capital expenses such as the repayment of loans denominated in foreign currencies. Specifically, under the existing exchange restrictions, without prior approval
of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends by our PRC subsidiaries to our company and pay
employees of our PRC subsidiaries who are located outside China in a currency other than the Renminbi. With prior approval from SAFE, cash generated from
the operations of our PRC subsidiaries and affiliated entity may be used to pay off debt in a currency other than the Renminbi owed by our PRC subsidiaries and
variable interest entity and its subsidiaries to entities outside China, and make other capital expenditures outside China in a currency other than the Renminbi. If
any of our variable interest entity or its subsidiaries liquidates, the proceeds from the liquidation of its assets may be used outside of the PRC or be given to
investors who are not PRC nationals. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the
future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demand, we may not be
able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Certain regulations in the PRC may make it more difficult for us to pursue growth through acquisitions.
Among other things, the M&A Rules and certain regulations and rules concerning mergers and acquisitions established additional procedures and
requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. For example, the M&A Rules require
that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of
Concentrations of Undertakings, issued by the State Council on August 3, 2008, are triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing
Committee of the National People’s Congress on August 30, 2007 and took effect on August 1, 2008 requires that transactions which are deemed concentrations
and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the
transaction exceeds RMB10 billion and at least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover
within China of all the operators participating in the concentration exceeded RMB2 billion, and at least two of these operators each had a turnover of more than
RMB400 million within China) must be cleared by the Ministry of Commerce before they can be completed. In addition, according to the Implementing Rules
Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises issued by the Ministry of Commerce in August
2011, mergers and acquisitions by foreign investors involved in an industry related to national security are subject to strict review by the Ministry of Commerce.
These rules also prohibit any transactions attempting to bypass such security review, including by controlling entities through contractual arrangements. We
believe that our business is not in an industry related to national security. However, we cannot preclude the possibility that the Ministry of Commerce or other
government agencies may publish interpretations contrary to our understanding or broaden the scope of such security review in the future. Although we have no
current definitive plans to make any acquisitions, we may elect to grow our business in the future in part by directly acquiring complementary businesses in
China. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes,
including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions.
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PRC regulations relating to the establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries
to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or
distribute profits to us, or may otherwise adversely affect us.
SAFE has promulgated several regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection
with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore
acquisitions that we make in the future. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE No. Circular No. 37, on July 4, 2014. SAFE Circular
No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or
interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” The term “control” under SAFE Circular No. 37 is broadly defined as the operation
rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as
acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE Circular No. 37 further requires amendment to the
registration in the event of any changes with respect to the basic information of the special purpose vehicle, such as changes in a PRC resident individual
shareholder, name or operation period; or any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed
by PRC individuals, share transfer or exchange, merger, division or other material event. If the shareholders of an offshore holding company who are PRC
residents do not complete their registration with the local SAFE branches, the PRC subsidiaries of the offshore holding company may be prohibited from
distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be
restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements
described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. In addition, on February 13, 2015, SAFE issued
SAFE Circular No. 13, which is scheduled to take effect on June 1, 2015. SAFE Circular No. 13 delegates to the qualified banks the authority to register all
PRC residents’ investment in “special purpose vehicle” pursuant to SAFE Circular No. 37, except that those PRC residents who have failed to comply with
SAFE Circular No. 37 will continue to fall within the jurisdiction of the relevant local SAFE branches and must continue to make their supplementary
registration applications with the such local SAFE branches.
We have requested PRC residents holding direct or indirect interest in our company to our knowledge to make the necessary applications, filings and
amendments as required under SAFE regulations. Mr. Sean Shenglong Zou, Mr. Hao Cheng and Ms. Fang Wang have completed the registration and
amendment registration with the local SAFE branch in relation to all our previous private financings and their subsequent ownership changes by April 2012 as
required under the SAFE regulations and Ms. Fang Wang is in the process of applying for the relevant amendment registrations with the local SAFE branch in
relation to the ownership changes in her holding vehicle of our company. However, we may not be informed of the identities of all the PRC residents holding
direct or indirect interest in our company, and we cannot provide any assurances that these PRC residents will comply with our request to make or obtain any
applicable registrations or comply with other requirements required by SAFE regulations. The failure or inability of our PRC resident shareholders to make any
required registrations or comply with other requirements under SAFE regulations may subject such PRC residents or our PRC subsidiaries to fines and legal
sanctions and may also limit our ability to raise additional financing and contribute additional capital into or provide loans to (including using the proceeds from
our initial public offering) our PRC subsidiaries, limit our PRC subsidiaries’ ability to pay dividends or otherwise distribute profits to us, or otherwise adversely
affect us.
Furthermore, because of the uncertainty over how the SAFE regulations will be interpreted and implemented, and how SAFE will apply them to us, we
cannot predict how these regulations will affect our business operations or future strategies. For example, we may be subject to a more stringent review and
approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may
adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or
the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by
the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
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Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the
PRC plan participants or us to fines and other legal or administrative sanctions.
In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth
the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital
account. On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed
Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock
incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures.
Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly
listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock
incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their
exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the
SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted
institution or other material changes. We and our PRC employees who have been granted stock options are subject to these regulations. Failure of our PRC
stock option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to
contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially adversely affect
our business.
We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
The State Administration of Taxation, or the SAT, has issued several rules and notices to tighten its scrutiny over acquisition transactions in recent
years, including the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued in
December 2009, or SAT Circular 698, the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises issued in March 2011, or SAT
Circular 24, and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises issued in February
2015, or SAT Circular 7. Pursuant to these rules and notices, if a non-PRC resident enterprise indirectly transfers PRC taxable properties, which refer to
properties of an establishment or a place in the PRC, real estate properties in the PRC or equity investments in a PRC tax resident enterprise, by disposing of
equity interest in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income
tax, such indirect transfer should be deemed a direct transfer of PRC taxable properties, and gains derived from such indirect transfer may be subject to the PRC
withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to be taken into consideration by tax authorities in determining whether an
indirect transfer has a reasonable commercial purpose. An indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial
purpose and be taxable under PRC law: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from
the PRC taxable properties; (ii) at any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise
(excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii)
the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties
are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC
taxable properties is lower than the potential PRC enterprise income tax on the direct transfer of such assets. Nevertheless, the indirect transfer falling into the
safe harbor available under SAT Circular 7 may not be subject to PRC tax and the scope of the safe harbor includes qualified group restructuring, public market
trading and tax treaty exemptions.
Under SAT Circular 7, the entities or individuals obligated to pay the transfer price to the transferor are the withholding agents and must withhold the
PRC enterprise income tax from the transfer price. If the withholding agent fails to do so, the transferor should report to and pay the PRC enterprise income tax
to the PRC tax authorities. In the event that neither the withholding agent nor the transferor fulfills their obligations under SAT Circular 7, apart from imposing
penalties such as late payment interest on the transferor, the tax authority may also hold the withholding agent liable and impose a penalty of 50% to 300% of
the unpaid tax on the withholding agent. The penalty imposed on the withholding agent may be reduced or waived if the withholding agent has submitted the
relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.
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However, as these rules and notices are relatively new and there is a lack of clear statutory interpretation, we face uncertainties on the reporting and
consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors
that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident companies or other taxable assets by us. Our Cayman Islands
holding company and other non-resident enterprises in our company may be subject to filing obligations or may be taxed if our Cayman Islands holding
company and other non-resident enterprises in our company are transferors in such transactions, and may be subject to withholding obligations if our Cayman
Islands holding company and other non-resident enterprises in our company are transferees in such transactions. For the transfer of shares in our Cayman
Islands holding company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under the rules and
notices. As a result, we may be required to expend valuable resources to comply with these rules and notices or to request the relevant transferors from whom
we purchase taxable assets to comply, or to establish that our Cayman Islands holding company and other non-resident enterprises in our company should not be
taxed under these rules and notices, which may have a material adverse effect on our financial condition and results of operations. There is no assurance that the
tax authorities will not apply the rules and notices to our offshore restructuring transactions where non-PRC resident investors were involved if any of such
transactions were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our non-PRC resident investors may be at risk of
being taxed under these rules and notices and may be required to comply with or to establish that we should not be taxed under such rules and notices, which
may have a material adverse effect on our financial condition and results of operations or such non-PRC resident investors’ investments in us. We have
conducted acquisition transactions in the past and may conduct additional acquisition transactions in the future. We cannot assure you that the PRC tax
authorities will not, at their discretion, adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the
investigation of PRC tax authorities with respect thereto. Heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative
impact on potential acquisitions we may pursue in the future.
Discontinuation or reduction of any of the preferential tax treatments or other government incentives available to us in the PRC, or imposition of any
additional PRC taxes could adversely affect our financial condition and results of operations.
The Chinese government has provided various tax incentives to our subsidiaries in China. These incentives include reduced enterprise income tax rates.
For example, under the PRC Enterprise Income Tax Law which became effective in January 2008, or the EIT Law, the statutory enterprise income tax rate is
25%. The EIT Law permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional
phase-out rules set forth in the Circular to Implementation of the Transitional Preferential Policies for the Enterprise Income Tax promulgated by the State
Council on December 26, 2007, and provides tax incentives, subject to various qualification criteria. Pursuant to the circular, the income tax rates for us and our
wholly-owned subsidiary established in the Shenzhen Special Economic Zone before March 16, 2007 were 24% for 2011 and are 25% starting from 2012. The
EIT Law and its implementation rules also permit qualified “high and new technology enterprises,” or HNTEs, to enjoy a preferential enterprise income tax rate
of 15% upon filing with relevant tax authorities. The qualification as a HNTE generally has a valid term of three years and the renewal of such qualification is
subject to review by the relevant authorities in China. Shenzhen Xunlei, our variable interest entity, holds a HNTE certificate that is valid for three years from
September 2014. In addition, the PRC government has provided various incentives to accredited “software enterprise” incorporated in the PRC in order to
encourage development of the software industry. In December 2013, Shenzhen Xunlei obtained the certificate of the Key Software Enterprise for the years
ended December 31, 2013 and 2014, which enabled Shenzhen Xunlei to enjoy the preferential tax rate of 10% for the years of 2013 and 2014. In 2015,
Shenzhen Xunlei obtained the certificate of the Hi-Tech Enterprise for the years ended December 31, 2015, 2016 and 2017, which enables Shenzhen Xunlei to
enjoy the preferential tax rate of 15% for the years of 2015, 2016 and 2017. Xunlei Computer has been accredited as a “software enterprise” and become
profitable since 2013 and thus enjoys a two-year income tax exemption for 2013 and 2014 and a 50% income tax reduction for 2015, 2016 and 2017. Moreover,
local governments have adopted incentives to encourage the development of technology companies. As approved by the relevant local tax authority, our wholly-
owned subsidiary, Giganology Shenzhen, and our variable interest entity, Shenzhen Xunlei, were further exempt from enterprise income tax from the first year
of profitable operation and are subject to phase-out tax reduction thereafter. Xunlei Computer and Shenzhen Xunlei currently benefit from the tax incentives.
See “Item 5. Operating and Financial Overview and Prospects—A. Operating Results—Taxation.”
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Preferential tax treatment and other government incentives granted to Xunlei Computer and Shenzhen Xunlei by the local governmental authorities are
subject to review and may be adjusted or revoked at any time. The discontinuation or reduction of any preferential tax treatment currently available to us and
our wholly-owned PRC subsidiaries will cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and
results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.
Our global income may be subject to PRC taxes under the PRC EIT Law, which may have a material adverse effect on our results of operations.
Under the EIT Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is
considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the
term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business
operations, personnel, accounting, properties, etc. of an enterprise.” On April 22, 2009, the SAT issued a circular, or SAT Circular 82, which provides certain
specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. See
“Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Tax—PRC enterprise income tax.” Although SAT Circular 82
applies only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups and not to those controlled by PRC individuals or foreigners, the
determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” test should be applied in
determining the tax resident status of all offshore enterprises.
According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC
tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all
of the following conditions set forth in the SAT Circular 82 are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii)
decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the
enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv)
at least 50% of voting board members or senior executives habitually reside in the PRC.
Xunlei Limited is not controlled by a PRC enterprise or PRC enterprise group and we do not believe that Xunlei Limited meets all of the conditions
above. Xunlei Limited is a company incorporated outside the PRC. As a holding company, certain of Xunlei Limited’s key assets are located, and records
(including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. Therefore, we do not believe Xunlei
Limited should be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in the relevant SAT
Circular 82 were deemed applicable to us. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities and
uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to Xunlei Limited, we may be considered a resident
enterprise and may therefore be subject to the enterprise income tax at 25% on our global income. If we are considered a resident enterprise and earn income
other than dividends from our PRC subsidiaries, a 25% enterprise income tax on our global income could increase our tax burden and adversely affect our cash
flow and profitability. In addition to the uncertainty regarding how the new “resident enterprise” classification may apply, it is also possible that the rules may
change in the future, possibly with retroactive effect.
Dividends paid by us to our foreign investors and gains on the sale of our ADSs or common shares by our foreign investors may be subject to taxes under
PRC tax laws.
Under the EIT Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid to
investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC or which have such establishment or place of
business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources
within the PRC. Any gain realized on the transfer of ADSs or common shares by such investors is subject to PRC tax, at a rate of 10% unless otherwise reduced
or exempted by relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If we are deemed a “PRC resident enterprise,”
dividends paid on our common shares or ADSs, and any gain realized from the transfer of our common shares or ADSs, may be treated as income derived from
sources within the PRC and may as a result be subject to PRC taxation (which in the case of dividends would be withheld at source). It is unclear whether our
non-PRC individual investors would be subject to any PRC tax in the event we are deemed a “PRC resident enterprise.” If any PRC tax were to apply to such
dividends or gains of non-PRC individual investors, it would generally apply at a rate of 20% (unless a reduced rate is available under an applicable tax treaty).
It is also unclear whether, if we are considered a PRC “resident enterprise,” holders of our ADSs or common shares would be able to claim the benefit of
income tax treaties or agreements entered into between China and other countries or areas (and we do not expect to withhold at treaty rates if any withholding is
required). If dividends payable to our non-PRC investors, or gains from the transfer of our common shares or ADSs by such investors are subject to PRC tax,
the value of your investment in our common shares or ADSs may be adversely affected.
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Increases in labor costs and enforcement of stricter labor laws and regulations in the PRC may adversely affect our business and our profitability.
China’s overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level
for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless
we are able to pass on these increased labor costs to our users by increasing prices for our products or services, our profitability and results of operations may be
materially and adversely affected.
In addition, we have been subject to stricter regulatory requirements in terms of entering labor contracts with our employees and paying various
statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing
insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract law, that became
effective in January 2008, as amended on December 28, 2012 and effective as of July 1, 2013, and its implementation rules that became effective in September
2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of
employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our
employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective
manner, which could adversely affect our business and results of operations. On October 28, 2010, the Standing Committee of the National People’s Congress
promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011. According to the Social Insurance Law,
employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the
employers must, together with their employees or separately, pay the social insurance premiums for such employees.
As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice do
not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to
have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial
condition and results of operations could be materially and adversely affected.
The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as
such, you are deprived of the benefits of such inspection.
Auditors of companies that are registered with the Securities and Exchange Commission, or the SEC, and traded publicly in the United States,
including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board, or the PCAOB, and are
required by the laws of the United States to undergo regular inspections by PCAOB to assess their compliance with the laws of the United States and
professional standards. Because we have substantiated operations within the Peoples’ Republic of China and the PCAOB is currently unable to conduct
inspections of the work of our auditors as it relates to those operations without the approval of the Chinese authorities, our auditor’s work related to our
operations in China is not currently inspected by the PCAOB.
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This lack of PCAOB inspections of audit work performed in China prevents the PCAOB from regularly evaluating audit work of any auditors that was
performed in China including that performed by our independent registered public accounting firm. As a result, investors may be deprived of the full benefits of
PCAOB inspections.
The inability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections on all of their work. Investors may lose
confidence in our reported financial information and procedures and the quality of our financial statements.
If additional remedial measures are imposed on certain PRC-based accounting firms in administrative proceedings brought by the SEC, we could be unable
to file future financial statements on a timely basis in compliance with the requirements of the Exchange Act.
In December 2012, the SEC instituted administrative proceedings against certain PRC-based accounting firms, including our independent registered
public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the
SEC the firms’ work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. On January 22, 2014, an initial
administrative law decision was issued, sanctioning these accounting firms and suspending them from practicing before the SEC for a period of six months. On
February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this sanction. In February 2015, each of the four PRC-based
accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The
settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms
do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions, or it
could restart the administrative proceedings.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major
PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the
proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs
may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely
find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be
in compliance with the requirements for financial statements of public companies registered under the Exchange Act, as amended, or the Exchange Act. Such a
determination could ultimately lead to the delisting of our common stock from the NASDAQ Global Select Market or deregistration from the SEC, which
would substantially reduce or effectively terminate the trading of our common stock in the United States.
Risks related to our ADSs
The market price for our ADSs may be volatile.
The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of
broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other
similarly situated companies in China that have listed their securities in the United States in recent years. The securities of some of these companies have
experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities.
The trading performances of these Chinese companies’ securities after their offerings, including companies in the internet businesses, may affect the attitudes of
investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual
operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other
practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of
whether we have engaged in such practices. In addition, securities markets may from time to time experience significant price and volume fluctuations that are
not related to our operating performance, which may have a material adverse effect on the market price of our ADSs.
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The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
regulatory developments affecting us, our advertisers or our industry;
announcements of studies and reports relating to our services or those of our competitors;
changes in the economic performance or market valuations of other internet companies in China;
actual or anticipated fluctuations in our quarterly results of operations and changes of our expected results;
changes in financial estimates by securities research analysts;
conditions in the internet or online advertising industry in China;
announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;
additions to or departures of our senior management;
fluctuations of exchange rates between the Renminbi and the U.S. dollar;
release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and
sales or perceived potential sales of additional shares or ADSs.
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating
performance of any particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding our
ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more
analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to
regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to
decline.
As we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.
Subject to our ongoing financial performance, cash position, budget and business plan and market conditions, we may consider paying special dividends.
However, we do not plan to pay dividends in the foreseeable future and you should not rely on an investment in our ADSs as a source for any future dividend
income.
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Our shareholders may by ordinary resolution
declare dividends, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to declare and pay
dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our
capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and
other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future
price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You
may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
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Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of
March 31, 2016, we had 337,997,790 common shares outstanding, but excluding (i) 16,519,144 common shares issued to Leading Advice Holdings Limited for
grants under our 2013 Plan and 2014 Plan that remained then unexercised or unvested, and (ii) 14,360,275 common shares, consisting of shares issued to our
depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our share incentive plans and
shares repurchased by the company under its 2015 and 2016 repurchase programs but not yet cancelled. All our outstanding common shares represented by
ADSs were freely transferable by persons other than our “affiliates” without restriction or additional registration under the Securities Act of 1933, as amended,
or Securities Act. The remaining common shares will be available for sale subject to volume and other restrictions as applicable under Rules 144 and 701 under
the Securities Act.
Certain holders of our common shares have the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares
under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon
the effectiveness of the registration. Sales of these registered shares in the form of ADSs, in the public market could cause the price of our ADSs to decline.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if
it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to
you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the
registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the
underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are
under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be
declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to
participate in our rights offerings and may experience dilution in your holdings.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our common shares or
other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of common shares your ADSs
represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For
example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be
less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when
it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any
requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are
incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of our directors and officers reside
outside the United States.
We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries and variable interest
entity and its subsidiaries. Substantially all of our directors and officers reside outside the United States and a substantial portion of their assets are located
outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands
or in the United States in the event that you believe that your rights have been infringed under the U.S. securities laws or otherwise. Even if you are successful
in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of
our directors and officers.
There are uncertainties as to whether Cayman Islands courts would:
recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws
that are penal in nature.
There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in
certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies
Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority
shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands.
The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English
common law, which provides persuasive, but not binding, authority in a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of
our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular,
the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition,
shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or
our controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements
applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor
attestation requirements of Section 404 for so long as we are an emerging growth company. We have elected not to voluntarily comply with such auditor
attestation requirements. Therefore, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until
such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this
provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to
opt out of the extended transition period under the JOBS Act is irrevocable.
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Our memorandum and articles of association contains anti-takeover provisions that could adversely affect the rights of holders of our common shares and
ADSs.
Our currently effective memorandum and articles of association contains certain provisions that could limit the ability of others to acquire control of
our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without
action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the
effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from
seeking to obtain control of our company in a tender offer or similar transactions.
Our corporate actions are substantially controlled by our directors, executive officers and other principal shareholders, who can exert significant influence
over important corporate matters, which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.
As of March 31, 2016, our directors, executive officers and existing principal shareholders beneficially owned approximately 60.49% of our
outstanding common shares. These shareholders, if acting together, could exert substantial influence over matters such as electing directors and approving
material mergers, acquisitions or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in
control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale
of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders. In addition, these persons
could divert business opportunities away from us to themselves or others.
We incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
As a public company in the United States, we incur significant accounting, legal and other expenses that we did not incur as a private company. The
Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission and the NASDAQ Global Select Market, require
significantly heightened corporate governance practices of public companies, including Section 404 relating to internal control over financial reporting. We
qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and
other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement
under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and
permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to
“opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies.
This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We expect these and other rules and regulations applicable to public companies will increase our accounting, legal and financial compliance costs and
will make certain corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant
expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and
the other rules and regulations of the SEC. Compliance with these rules and requirements may be especially difficult and costly for us because we may have
difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and U.S. public company reporting requirements, and such
personnel may command high salaries relative to similarly experienced personnel in the United States. If we cannot employ sufficient personnel to ensure
compliance with these rules and regulations, we may need to rely more on outside legal, accounting and financial experts, which may be costly. If we fail to
comply with these rules and requirements, or are perceived to have weaknesses with respect to our compliance, we could become the subject of a governmental
enforcement action and investor confidence could be negatively impacted and the market price of our ADSs could decline. In addition, we will incur additional
costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these rules and
regulations, and we cannot predict or estimate with reasonable certainty the amount of additional costs we may incur or the timing of such costs.
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We believe we were a passive foreign investment company for our taxable year ended December 31, 2015, which could subject United States investors in the
ADSs or common shares to significant adverse United States income tax consequences.
Based on the market price of our ADSs and the composition of our assets (in particular the retention of a substantial amount of cash), we believe that
we were a “passive foreign investment company,” (or a “PFIC”), for United States federal income tax purposes for our taxable year ended December 31, 2015,
and we will very likely be a PFIC for our current taxable year ending December 31, 2016 unless the market price of our ADSs increases and/or we invest a
substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active income. In addition, it is possible
that one or more of our subsidiaries may be or become classified as a PFIC for United States federal income tax purposes. A non-U.S. corporation will be
classified as a PFIC for any taxable year if either (1) 75% or more of its gross income consists of certain types of passive income or (2) 50% or more of the
average quarterly value of its assets (as generally determined on that basis of fair market value) during such year produce or are held for the production of
passive income.
If we are classified as a PFIC for any taxable year during which a U.S. Holder (as defined in Item 10. Additional Information—E. Taxation—United
States Federal Income Tax Considerations) holds our ADSs or common shares, such U.S. Holder may incur significantly increased United States income tax on
gain recognized on the sale or other disposition of the ADSs or common shares and on the receipt of distributions on the ADSs or common shares to the extent
such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Further, if we are classified as a PFIC for any
year during which a U.S. Holder holds our ADSs or common shares, we generally will continue to be treated as a PFIC for all succeeding years during which
such U.S. Holder holds our ADSs or common shares (“PFIC Tainted Shares”) even if, we, in fact, cease to be a PFIC in subsequent taxable years. Accordingly,
a U.S. Holder of our ADSs or common shares is urged to consult its tax advisor concerning the United States federal income tax considerations related to
holding and disposing of ADSs or common shares (including, to the extent an election is available, making a “mark-to-market” election to avoid owning PFIC-
Tainted Shares and the unavailability of an election to treat us as a qualified electing fund). For more information see the section titled “Item 10. Additional
Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
Item 4.
Information on the Company
A. History and Development of the Company
We commenced operations in January 2003 through the establishment of Shenzhen Xunlei Networking Technologies Co., Ltd., or Shenzhen Xunlei.
Shenzhen Xunlei, together with its various subsidiaries in the PRC, currently operate our Xunlei internet platform.
In February 2005, we established Xunlei Limited as our holding company in the Cayman Islands. Xunlei Limited directly owns Giganology
(Shenzhen) Ltd., or Giganology Shenzhen, our wholly owned subsidiary in China established in June 2005. Giganology Shenzhen primarily engages in the
research and development of new technologies.
Giganology Shenzhen has entered into a series of contractual arrangements with Shenzhen Xunlei and its shareholders. These contractual arrangements
enable us to exercise effective control over Shenzhen Xunlei and receive substantially all of the economic benefits of Shenzhen Xunlei. As a result, Shenzhen
Xunlei is our variable interest entity, or VIE, and we have consolidated the financial results of Shenzhen Xunlei and its subsidiaries in our consolidated financial
statements in accordance with U.S. GAAP. The existing principal subsidiaries of Shenzhen Xunlei include the following:
Shenzhen Fengdong Networking Technologies Co., Ltd., which was established in December 2005, and it primarily engages in software
development.
Xunlei Networking Technologies (Beijing) Co., Ltd., which was established in June 2009, and it primarily engages in the operating of our cloud
computing project as well as software development.
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Xunlei Software (Shenzhen) Co., Ltd., which was established in January 2010, and it primarily engages in the development of software technology
and the development of computer software.
Xunlei Games Development (Shenzhen) Co., Ltd., which was established in February 2010, and it primarily engages in the development of online
game and computer software and advertising services; and
Shenzhen Onething Technologies Co., Ltd.(formally known as Shenzhen Wangxin Technologies Co., Ltd) , which was established in September
2013, and it primarily engages in cloud computing technology development and related services.
Wangxin Century Technologies (Beijing) Co., Ltd. (“Beijing Wangxin”), which was established in October 2015. Beijing Wangxin is expected to
engage in technology development and related services.
In February 2011, we established a direct wholly owned subsidiary, Xunlei Network Technologies Limited, or Xunlei Network BVI, in the British
Virgin Islands. In March 2011, we established Xunlei Network Technologies Limited, or Xunlei Network HK, in Hong Kong, which is the direct wholly owned
subsidiary of Xunlei Network BVI. Xunlei Network HK primarily engages in the development of computer software and advertising services.
In November 2011, we established Xunlei Computer (Shenzhen) Co., Ltd., or Xunlei Computer, in China, which is the direct wholly owned subsidiary
of Xunlei Network HK. Xunlei Computer primarily engages in the development of computer software and information technology services.
In June 2014, we completed the initial public offering of our ADSs, which are listed on the NASDAQ Global Select Market under the symbol
“XNET.”
In September 2014, we, through Shenzhen Xunlei Network Technology Co., Ltd., acquired from subsidiaries of Kingsoft Corporation Limited Kuaipan
Personal and Kansunzi, both software services in support of cloud-sourced storage and sharing, and their related business and assets, for an aggregate cash
consideration of US$33 million.
In July 2015, we completed the sale of our entire stake in Xunlei Kankan to Beijing Nesound International Media Corp., Ltd., an independent third
party, for a consideration of RMB130 million, of which RMB26.0 million (US$ 4.0 million) remains unpaid as of the date of this annual report and is agreed to
be paid to us by July 2016. This sale is part of our strategy to streamline our business and continue our transition into mobile internet.
Our principal executive offices are located at: 7/F Block 11, Shenzhen Software Park, Ke Ji Zhong 2nd Road, Nanshan District, Shenzhen, People’s
Republic of China Our telephone number at this address is +86 755-3391-2900. Our registered office in the Cayman Islands is located at the offices of Maples
Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is
Law Debenture Corporate Services Inc.
See “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital
expenditures.
B. Business Overview
Overview
We are a leading cloud-based acceleration technology company in China. Digital media content is one of the most popular usages for internet users in
China. We operate a powerful internet platform in China based on cloud technology to enable users to quickly access, manage, and consume digital media
content. We are increasingly expanding to mobile devices in part through potentially pre-installed acceleration products in mobile phones to further expand our
user base and offer our users a wider range of access points. We target to deliver superior user experience in terms of ease of access, management and
consumption of digital media content anywhere, anytime, and on any device.
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To address deficiencies of digital media transmission over the internet in China, such as low speed and high delivery failure rates, we provide users
with quick and easy access to online digital media content through two core products and services:
Xunlei Accelerator, which enables users to accelerate digital transmission over the internet, is our most popular and free product, with
approximately 192 million monthly unique visitors in December 2015, according to our internal record; and
Our cloud acceleration subscription services, delivered through products such as Green Channel, Offline Accelerator and Yunbo, offer users
premium services for speed and reliability, and have attracted approximately 5.0 million subscribers as of December 31, 2015.
Benefitting from the large user base for our core product, Xunlei Accelerator, we have further developed various value-added services to meet a fuller
spectrum of our users’ digital media content access and consumption needs including (i) online game services, including web games and MMOGs, offered on
our gaming platform; and (ii) fast bird services, providing internet acceleration services for a fee.
We are increasingly extending our services to mobile devices, as part of our cloud-based mobile strategies. Mobile Xunlei is becoming a popular
mobile application, while bigger screen phones with enhanced storage capacity have influenced user behavior in how they access and consume content on their
mobile phones. This mobile application allows users to search, download and consume content on their mobile devices, in a user friendly way. Based on our
own record, daily active user (“DAU”) of this application has exceeded nine million as of the date of this annual report. Mobile Xunlei is also one of the most
downloaded applications in its category. In the fourth quarter of 2015, we started to monetize our mobile traffic through advertising sales and generated our first
mobile advertising revenues. Moreover, this mobile application supplements our existing subscriptions business, enabling us to reach a wider set of user base
and to expand our services additional devices of a user who has multiple devices.
Our mobile initiatives also benefits from our relationship with Xiaomi, one of our strategic shareholders. Since 2014, we have entered into a pre-
installing service agreement with a Xiaomi group company which manufactures Xiaomi phones, a well-recognized brand of smart phones in China. Pursuant to
the agreement, we agree to provide our Xunlei mobile acceleration plug-in, and the mobile phone manufacturer agrees to install such plug-in on its phones, free
of charge. Such pre-installment arrangement provides mobile phone users with access to our acceleration services, which we believe enhances our ability to
generate more user traffic. Our mobile acceleration software has been officially adopted by Xiaomi’s operating systems MIUI6 and MIUI7, since the end of
2014, and as of February 2015, the software has been installed on Xiaomi phones, including both new phones shipments and system upgrades from existing
Xiaomi phones.
An important part of our strategies is to continue our innovation in crowdsourcing for idle capacity and potentially storage from users of our cloud
computing project, which targets to utilize our users’ idle uplink capacity and storage by using our hardware devices. We plan for crowdsourced capacity to
supply an increasing percentage of the bandwidth that we use for our own acceleration services. In the third quarter of 2015, we reached an agreement to sell
crowdsourced uplink capacity to third parties. We intend to sell crowdsourced uplink capacity to more third party internet content providers with bandwidth
demand.
The technological backbone of our products and services is our cloud acceleration technology, comprised of a proprietary file locating system and
massive file index database. Our technology enables us to support greater user expansion with incremental increases in server and bandwidth costs. This
technology, based on distributed computing architecture, along with our indexing technology, enables users to access content in an efficient manner.
We generated revenues by monetizing our large user base, primarily through the following services:
Cloud acceleration subscription services. We provide premium acceleration services to subscribers to enable faster and more reliable access to
digital media content;
Online advertising services (including mobile advertising). We offer advertising services by providing marketing opportunities on our websites,
mobile Xunlei application and platform to our advertisers; and
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Other internet value-added services. We offer multiple other value-added services to our users including online games, fast bird services and our
cloud computing project.
Our revenues from continuing operations, excluding Xunlei Kankan, which we disposed of in July, 2015, increased from US$122.0 million in 2013 to
US$135.8 million in 2014 and decreased to US$130.0 million in 2015 after the disposal of Xunlei Kankan. We had net income attributable to Xunlei Limited of
US$10.7 million, US$10.8 million in 2013 and 2014 respectively. In 2015 we had a net loss attributable to Xunlei Limited of US$13.2 million.
Our platform
On our platform, users can accelerate digital media transmission and play a broad range of the latest online games, among other things.
Cloud based acceleration
We provide data transmission acceleration services based on cloud computing technology to internet users. Our cloud computing technology utilizes a
network of computers hosted on the internet to store, manage, and process data, thus providing our users with acceleration in internet data transmission and
improves their download success rates. We provide our acceleration services to internet users with the following products and services.
Accelerator
We launched our core product, Xunlei Accelerator, in 2004 to address deficiencies of digital media content transmission over internet in China, such as
low speed and high delivery failure rates. Xunlei Accelerator allows users to accelerate digital transmission over the internet for free. Xunlei Accelerator also
bridges users with diverse needs to other services we offer, such as: Xunlei Media Player, which supports both online and offline video watching, and our
various online games, including web games and MMOGs, by recommending and providing links to these services on its user interface.
Xunlei Accelerator is designed to provide an effective digital media content transmission solution to our users. In addition to our featured transmission
acceleration function, we have integrated certain features into the interface of Xunlei Accelerator to enhance the overall user experience while helping users
transmit their desired content efficiently. For example, Xunlei Accelerator provides a platform to integrate other third-party plug-in applications. Users can add
application tabs to create shortcuts to various services that are provided by us, third-party application developers and application venders who have business
relationships with us. Xunlei Accelerator also has a task management console to allow users to track and manage their transmissions in progress, to manage and
prioritize cloud-based data transmission tasks, or manage and synchronize transmitted content across multiple internet-enabled devices.
In September 2014, we acquired Kuaipan Personal and Kansunzi, two software services in support of cloud-sourced storage and sharing.
Mobile acceleration plug-in
We offer a mobile acceleration plug-in, which provides mobile device users with benefits of download speed acceleration and download success rate
improvements similar to those offered by the PC-based Xunlei Accelerator. Our mobile acceleration plug-in was adopted in 2014 by Xiaomi, a Chinese
smartphone maker, on its operating systems, MIUI6 and MIUI7. Since then, Xiaomi installs our mobile acceleration plug-in on all of its new phones free of
charge and adds such plug-in to the existing ones via system upgrade. Xiaomi phone users thus have access to our acceleration services. In addition to Xiaomi,
we also have similar cooperation agreements with other smaller Chinese smartphone makers.
Subscription services
We charge monthly or annual fees for our premium cloud acceleration subscription services and other exclusive services at different VIP levels. The
benefits and services within the subscription package, which typically include incrementally larger bandwidth and faster acceleration speed, are upgraded
according to the VIP levels. The subscription fees generally remain unchanged for subscribers at higher VIP levels. Our cloud acceleration subscription services
are delivered through the following major premium acceleration products:
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Type of Service
Description of Services
Green Channel
This product allows our subscribers to transmit digital media files from the internet with the facilitation of our servers, which
significantly improves speed and reliability of such transmission. This is particularly helpful when subscribers need to transmit
files that are only available from slow or unreliable data transmission sources, or to transmit a group of files while having only
limited internet connectivity time.
Offline Accelerator
This product allows our subscribers to engage us to transmit digital media files from the internet on their behalf. The transmitted
files are temporarily cached on our servers, which the subscribers have easy access to and can consume and manage when they
want within a limited period of time.
Yunbo
This product allows our subscribers to watch digital media content without transmitting the files to their own devices. The
subscribers can enjoy the content without incurring burden to recourses on their devices.
We adopted different strategies and various promotion programs for each VIP level. For example, when we discovered that some of our users were not
aware of our subscription services, we provided users with greater exposure to our subscription services in different parts of our platform and promoted products
with significant potential interests to specific users. We use our powerful digital data analysis capabilities to explore different areas of user needs previously
unmet by existing functions and research and develop relevant functions based on such analysis. We offer users promotional measures, such as providing 120
seconds of free trials of premium acceleration services, to show the differences in the data transmission speeds to demonstrate how our premium services
tremendously enhance data delivery speed and overall subscriber experience.
Xunlei Mobile
Xunlei Mobile is a mobile application that allows users to search download and consume content on their mobile devices. The daily active user of this
product has exceeded nine million as of the end of February 2016. We started to monetize our mobile traffic through advertising sales and generated our first
mobile advertising revenues in late 2015.
Moreover, this mobile application also supplements our existing subscriptions business. Many of our mobile application users also became users of our
PC-based Xunlei Accelerator.
Cloud computing
We launched our cloud computing project in 2014, which crowd-sources idle uplink capacity from internet users who have bought and connected our
proprietary hardware, Zhuanqianbao (“ZQB”), to their network router. Our ZQB devices can allocate those users’ idle uplink capacity to us for our further
allocation to internet content providers. We pay users of our ZQB devices for the use of their idle uplink capacity.
The crowd-sourced uplink capacity is valuable resources that we target to commercialize with potential customers such as streaming websites and app
stores. Depending on our own needs, we also utilize those crowd-sourced uplink capacity for our subscription business from time to time, reducing our purchase
of bandwidth from traditional third party carriers.
Xunlei Media Player
Xunlei Media Player, which we launched in 2008, is a supplementary tool that helps to deliver a more comprehensive viewing experience of digital
media content to the users of Xunlei Accelerator. Xunlei Media Player is our proprietary product that supports both online and offline play of digital media
content as well as simultaneous play of digital media content while it is being transmitted by Xunlei Accelerator.
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Online game services
To better serve our users, we offer online games through our online game website and purchase licenses from, or enter into revenue sharing
arrangements with, game developers. Such game play platform helps raise the average spending of our subscribers. Online game players can play the games free
of charge, but are offered the opportunity to purchase in-game virtual items for a fee to enhance their game-playing experience.
We also provide other ancillary services catering to users’ needs and adjust our ancillary service offerings from time to time to supplement the major
services we provide.
Technology
We provide accelerated data transmission services, available on PC and mobile devices, based on our distributed file locating system, designed to
utilize our proprietary file indexing technology.
Indexing technology
Key elements of our file indexing technology include:
File indexing. We have created, and continue to maintain, a proprietary file index database that stores a massive index of unique file signatures
representing all digital media content file that Xunlei Accelerator has found across the internet. Each file signature uniquely identifies the index of a given file.
We store a list of each unique file’s available data transmission locations from across the internet, which may include both peer and server computers, along
with the estimated speed and reliability of each location.
Data mining. We also employ data mining algorithms, studying user habits in order to maximize the speed of our data delivery by ranking the keyword
indexes that users search for and placing digital media content more likely to be searched by users in the more easily accessible locations in our network for
optimal delivery speed.
Distributed internet crawling techniques. Our Xunlei Accelerator network acts as a system of distributed spiders to crawl the internet to search for
digital media content files. Whenever the user initiates data transmission by using our Xunlei Accelerator, the URL of the data transmission location is uploaded
to our server. We then use that URL to traverse and locate any other digital media content files that may also be available from the URL’s internet page
repositories. We then update our file index according to each traversal result.
Distributed file locating system
Our distributed file locating system is based on distributed computing architecture, which consists of all Xunlei Accelerator clients that are running and
connected to the internet at a given time, along with the server addresses stored in our file index database. When users launch Xunlei Accelerator on a network-
connected device, they are automatically connected to our distributed file locating system and contribute their bandwidth and computing power to our
distributed file locating system, which enables users to locate and connect efficiently.
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Key technologies include:
Multi-protocol file transfer technology. Our multi-protocol file transfer technology allows our product client to transmit, in parallel, from multiple
sources that may use different file transfer protocols. Our multi-protocol file transfer technology significantly increases the number of data transmission sources
available to further enhance data transmission performance.
Distributed file locating system. Our distributed file locating system helps users discover the best data transmission locations from across the internet,
where a particular file may be transmitted or streamed for optimal performance. When a user requests data transmission using our Xunlei Accelerator,
distributed file locating system will algorithmically prioritize and select from among the file’s available data transmission locations an optimized subset of
URLs based on their respective transmit speed and reliability, which is estimated through real-time collaborative interactions between our file index server and
our massive network of active Xunlei Accelerator clients across the internet.
Network transport and traversal optimization. Our proprietary software algorithms perform dynamic internet bandwidth and throughput assessments
across the Xunlei network and optimization of traffic routing to identify the most efficient path for data transport. These algorithms are designed to maximize
delivery speed, reliability and efficiency, and support significant growth in network usage.
Cloud-based implementation
We provide cloud acceleration subscription services powered by our indexing technology and distributed file locating system. Our platform is
compatible with different operating systems and hardware devices. As part of the infrastructure for the subscription services, except for proprietary load
balancing and resource optimization algorithms, we maintain a virtual private network consisting of 89 co-location centers and over one million third party
servers and over 9,000 servers that we own located throughout China.
We maintain proprietary load balancing and resource optimization algorithms, both of which help enhance our mass data mining on user habits to
compile and maintain information on users’ data transmission acceleration needs and requirements. As a cloud service provider, we use data mining for user
habit prediction and co-location purposes. In user habit prediction, we analyze, sample and index user behavior data to help predict user acceleration needs and
requirements. For co-location purposes, our program finds the most efficient and stable connection in our network for each transmission task. We also cooperate
with telecom operators, maintaining logics and algorithms for our co-location centers in each telecom operator’s network to enable real-time dynamic allocation
of our servers and bandwidth to support user acceleration requirements. Our system automatically optimizes user connections based on key factors such as
provincial network, firewall penetration and interconnection among various telecom operators.
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Advertising services
We provide advertising services primarily through various forms of advertisements placed on our websites and mobile platform. We had 399, 252 and
119 advertisers in 2013, 2014 and 2015, respectively, and achieved mobile advertising revenue in the fourth quarter of 2015. The above number of advertisers
do not include those on the Guangdiantong third party platform. Our brand advertisers include international and domestic companies that operate in a variety of
industries. A significant majority of our advertisers purchase our advertising services through third-party advertising agencies. We focus on providing
advertisers with creative and cost-effective advertising solutions. We strive to creatively utilize our integrated service interface in designing a particular
advertising campaign for advertisers.
Marketing
Our user base has grown primarily through word-of-mouth. We believe satisfied users and customers are more likely to recommend our services to
others. Thus, we continue to focus on improving our services and enhancing our user experience. We invest in a variety of marketing activities to further
promote our brand awareness among existing and potential users as well as other customers. For example, we host or attend various public relations events, such
as seminars, conferences and trade shows, in the advertising, online video and online game industries to attract users and advertisers. To retain and drive the
growth of our subscribers, we market our premium paid services and place subscription advertisements at prominent locations throughout our integrated service
offerings.
Intellectual property
Protection of our intellectual property
Our patents, copyrights, trademarks, trade secrets and other intellectual property rights are critical to our business. We rely on a combination of patent,
copyright, trademark, trade secret and other intellectual property-related laws in the PRC and contractual restrictions to establish and protect our intellectual
property rights. In addition, we require all of our employees to enter into agreements requiring them to keep confidential all information they obtain during the
course of their employment relating to our technology, methods, business practices, customers and trade secrets. As of December 31, 2015, we had 44 patents
granted in the PRC and four granted in the United States, while another 19 patent applications are being examined by the State Intellectual Property Office of
the PRC. We also seek to vigorously protect our Xunlei brand and the brands of our other services. As of December 31, 2015, we have applied to register 174
trademarks, of which we have received 153 registered trademarks in different applicable trademark categories including one trademark registered with the
United States Patent and Trademark Office and one trademark registered with World Intellectual Property Organization.
Digital media data monitoring and copyright protection
We take initiatives to protect third-party copyrights. The internet industry in China suffers from copyright infringement issues and online digital media
content providers are frequently involved in litigation based on allegations of infringement or other violations of copyrights. Assisted by an intellectual property
team dedicated to copyright protection, we have implemented internal procedures pursuant to the legal requirements under relevant PRC laws and regulations to
promptly disenable the download URL of contents for which we receive notice of infringement from the legitimate rights holder, and we work closely with the
relevant regulatory authorities in China to ensure compliance with all relevant rules and regulations. We seek assurances in our contracts with digital media
content providers that (i) they have the legal right to license the digital media data for the uses we require; (ii) the digital media content itself as well as the
authorization or rights granted to us neither breach any applicable law, regulations or public morals, nor impair any third-party rights; and (iii) they will
indemnify us for losses resulting from both the non-compliance of such digital media content with the laws and claims from third parties.
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As of the date of this annual report, we have implemented several initiatives to further commit to copyright protection. In May 2014, we entered into a
content protection agreement with the MPAA and its members, which are six major U.S. entertainment content providers. We have agreed to implement a
comprehensive system of measures designed to prevent unauthorized downloading of and access to such content providers’ works. Among these content
protection measures, we have agreed to (1) implement a filtering system that will be applied to these content providers’ video content, (2) filter these content
providers’ video content prior to making any such content available to our users through our websites or client applications, (3) adopt state-of-the-art
fingerprinting-based filtering technologies, (4) cooperate with these content providers going forward to ensure the effectiveness of our content protection
measures, and (5) incorporate additional content protection measures to the extent that they are necessary to effectively protect against copyright infringement.
However, our copyright protection measures would not be able to fully protect us against copyright infringement suits. For example, in January 2015, a number
of MPAA member studios filed copyright infringement lawsuits against us in the Shenzhen Nanshan District Court in China, and, as of the date of this annual
report, the cases are awaiting decisions of first instance. For details, see “Item 3. Key Information—D. Risk Factors—Risks related to our business—We face
and expect to continue to face copyright infringement claims and other related claims, including claims based on content available through our services, which
could be time-consuming and costly to defend and may result in damage awards, injunctive relief and/or court orders, divert our management’s attention and
financial resources and adversely impact our business” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—
Legal Proceedings.”
User data safety
User data safety is a significant advantage we offer to our users. We try to improve user experience by usually maintaining two to four copies of one
specific user file for data recovery in extreme circumstances such as system shutdown, private transmission backbone network problems and other contingencies
beyond our control. The read and write characteristics of our distributed file locating system is identical to those of hard disks, and our unique user file
decomposition and encryption algorithm enables us to maintain high standards for user data safety.
Competition
Due to our multiple service offerings, we face competition in several aspects of the internet services market in China. We believe that the key
competitive factors in the overall internet services market in China include brand recognition, user traffic, technology platform and monetization abilities. For
example, Xunlei Mobile primarily competes with Tencent (QQ Cyclone) and other cloud service providers. We also face competition for the advertisement
budgets of our advertisers from other internet companies and other forms of media.
Regulation
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
Regulation on catalogue relating to foreign investment
Investment activities in the PRC by foreign investors are subject to the Catalogue for the Guidance of Foreign Investment Industry, or the Catalogue,
which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission, or the NDRC.
The Catalogue divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally open to foreign
investment unless specifically restricted by other PRC regulations.
Pursuant to the latest Catalogue amended in March 2015, which took effect on April 10, 2015, the provision of value-added telecommunications
services falls in the restricted category and the percentage of foreign ownership cannot exceed 50% (excluding e-commerce). The provision of internet cultural
operating service (including online game operation services), internet publication service and online transmission of audio-visual programs service fall in the
prohibited category and the foreign investors are prohibited to engage in such services. We conduct our operations in China principally through contractual
arrangements among Giganology Shenzhen, our wholly-owned PRC subsidiary, and Shenzhen Xunlei, our VIE, and its shareholders. Shenzhen Xunlei holds the
licenses and permits necessary to conduct our resource discovery network, online advertising, online games and related businesses in China and holds various
operating subsidiaries that conduct a majority of our operations in China. Both of Giganology Shenzhen and Xunlei Computer, another wholly-owned PRC
subsidiary of ours, engage in the development of computer software, technical consulting and other related technical services and businesses, none of which
falls into any of encouraged, restricted or prohibited categories under the Catalogue. Hence, these activities are deemed as permitted and open to foreign
investment.
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Regulation on telecommunications and internet information services
The telecommunications industry, including the internet sector, is highly regulated in the PRC. Regulations issued or implemented by the State
Council, MIIT, and other relevant government authorities cover many aspects of operation of telecommunications and internet information services, including
entry into the telecommunications industry, the scope of permissible business activities, licenses and permits for various business activities and foreign
investment.
The principal regulations governing the telecommunications and internet information services we provide in the PRC include:
Telecommunications regulations (2014, revised), or the Telecom Regulations. The Telecom Regulations categorize all telecommunications
businesses in the PRC as either basic or value-added. Value-added telecommunications services are defined as telecommunications and
information services provided through public network infrastructures. The “Catalog of Telecommunications Business,” an attachment to the
Telecom Regulations and updated by MIIT’s Notice on Adjusting the Catalog of Telecommunications Business effective from April 1, 2003 and
amended on March 1, 2016, categorizes various types of telecommunications and telecommunications-related activities into basic or value-added
telecommunications services, according to which, internet information services, or ICP services, are classified as value-added telecommunications
businesses. Under the Telecom Regulations, commercial operators of value-added telecommunications services must first obtain an ICP License
from MIIT or its provincial level counterparts.
Administrative measures on internet information services (2011, revised), or the Internet Measures. According to the Internet Measures, a
commercial ICP service operator must obtain an ICP License from the relevant government authorities before engaging in any commercial ICP
service within the PRC. When the ICP service involves areas of news, publication, education, medical treatment, health, pharmaceuticals, medical
equipment and other industry and if required by law or relevant regulations, prior approval from the respective regulating authorities must be
obtained prior to applying for the ICP License from MIIT or its local branch at the provincial level. Moreover, an ICP service operator must
display its ICP License number in a conspicuous location on its website and must monitor its website to remove categories of harmful content that
are broadly defined.
Administrative measures for telecommunications business operating license (2009, revised), or the Telecom License Measures. The Telecom
License Measures set forth more specific provisions regarding the types of licenses required to operate value-added telecommunications services,
the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. For example, an ICP service
operator conducting business within a single province must apply for the ICP License from MIIT’s applicable provincial level counterpart, while
an ICP service operator providing ICP services across provinces must apply for a Trans-regional ICP License directly from MIIT. An ICP service
operator that has been granted a Trans-regional ICP License must file a record with the local branch of MIIT at the provincial level prior to
conducting any value added telecommunications business in such provinces. The appendix to the ICP License must detail the permitted activities
to be conducted by the ICP service operator. An approved ICP service operator must conduct its business in accordance with the specifications
recorded on its ICP License. The ICP License is subject to annual review and the annual review result will be recorded as an appendix to the ICP
License, published to the public and notified to the applicable administrative authority for industry and commerce.
Detailed rules on the administration of internet websites (2005), which set forth that the website operator is required to apply for the ICP filing
from MIIT or its local branches at the provincial level on its own or through the access service provider.
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Regulations for administration of foreign-invested telecommunications enterprises (2008, revised), or the FITE Regulations. The FITE
Regulations set forth detailed requirements with respect to, among others, capitalization, investor qualifications and application procedures in
connection with the establishment of a foreign-invested telecommunications enterprise. Under the FITE Regulations, a foreign entity is prohibited
from owning more than 50% of the total equity interest in any value-added telecommunications service business in the PRC and the major foreign
investor in any value-added telecommunications service business in the PRC shall have good and profitable records and operating experiences in
such industry.
Circular on strengthening the administration of foreign investment in and operation of value-added telecommunications business (2006). Under
this circular, a domestic PRC company that holds an ICP License is prohibited from leasing, transferring or selling the ICP License to foreign
investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-
added telecommunications business illegally in the PRC. Further, the domain names and registered trademarks used by an operating company
providing value-added telecommunications service shall be legally owned by such company and/or its shareholders. In addition, such company’s
operation premises and equipment should comply with the approved covering region on its ICP License, and such company should establish and
improve its internal internet and information security policies and standards and emergency management procedures.
To comply with these PRC laws and regulations, we operate our websites through Shenzhen Xunlei, our PRC variable interest entity. Shenzhen Xunlei
currently holds an ICP License expiring on April 30, 2020 for the provision of internet information services and also a value-added telecommunication license
for the provision of internet data center services and internet access services expiring on March 10, 2020, and owns the essential trademarks and domain names
in relation to our value-added telecommunications business.
Under various laws and regulations governing ICP services, ICP services operators are required to monitor their websites. They may not produce,
duplicate, post or disseminate any content that falls within the prohibited categories and must remove any such content from their websites, including any
content that:
opposes the fundamental principles determined in the PRC’s Constitution;
compromises state security, divulges state secrets, subverts state power or damages national unity;
harms the dignity or interests of the State;
incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
sabotages the PRC’s religious policy or propagates heretical teachings or feudal superstitions;
disseminates rumors, disturbs social order or disrupts social stability;
propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes;
insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or
includes other content prohibited by laws or administrative regulations.
The PRC government may shut down the websites of ICP License holders that violate any of such content restrictions and requirement, revoke their
ICP Licenses or impose other penalties pursuant to applicable law. To comply with these PRC laws and regulations, we have adopted internal procedures to
monitor content displayed on our website.
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Regulation on online transmission of audio-visual programs
On July 6, 2004, GAPPRFT promulgated the Measures for the Administration of Publication of Audio-visual Programs through Internet or Other
Information Network, or the 2004 Internet A/V Measures, which was revised on August 28, 2015. The 2004 Internet A/V Measures apply to the activities
relating to the opening, broadcasting, integration, transmission or download of audio-visual programs via internet or other information network. An applicant
who engages in the business of transmitting audio-visual programs must apply for a license issued by GAPPRFT in accordance with the categories of business,
receiving terminals, transmission networks and other items. Foreign invested enterprises are not allowed to engage in the above business. On April 13, 2005, the
State Council promulgated the Certain Decisions on the Entry of the Non-State-owned Capital into the Cultural Industry. On July 6, 2005, MOC, GAPPRFT,
the NDRC and the Ministry of Commerce, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these
regulations, non-State-owned capital and foreign investors are not allowed to conduct the business of transmitting audio-visual programs via information
network.
On December 20, 2007, GAPPRFT and MIIT jointly promulgated the Administrative Provisions on Internet Audio-visual Program Service, or the
Audio-visual Program Provisions, which came into effect on January 31, 2008 and was revised on August 28, 2015. The Audio-visual Program Provisions apply
to the provision of audio-visual program services to the public via internet (including mobile network) within the territory of the PRC. Providers of internet
audio-visual program services are required to obtain a License for Online Transmission of Audio-visual Programs issued by GAPPRFT or complete certain
registration procedures with GAPPRFT. Providers of internet audio-visual program services are generally required to be either State-owned or State-controlled
by the PRC government, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual
program services determined by GAPPRFT. In a press conference jointly held by GAPPRFT and MIIT to answer questions with respect to the Audio-visual
Program Provisions in February 2008, GAPPRFT and MIIT clarified that providers of internet audio-visual program services who engaged in such services
prior to the promulgation of the Audio-visual Program Provisions shall be eligible to register their business and continue their operation of internet audio-visual
program services so long as those providers had not been in violation of the laws and regulations.
On May 21, 2008, GAPPRFT issued a Notice on Relevant Issues Concerning Application and Approval of License for Online Transmission of Audio-
visual Programs, which further sets forth detailed provisions concerning the application and approval process regarding the License for Online Transmission of
Audio-visual Programs. The notice also provides that providers of internet audio-visual program services who engaged in such services prior to the
promulgation of the Audio-visual Program Provisions shall also be eligible to apply for the license so long as their violation of the laws and regulations is minor
and can be rectified timely and they have no records of violation during the latest three months prior to the promulgation of the Audio-visual Program
Provisions.
On December 28, 2007, GAPPRFT issued the Notice on Strengthening the Administration of TV Dramas and Films Transmitted via the Internet, or the
Notice on Dramas and Films. According to this notice, if audio-visual programs published to the public through an information network fall under the film and
drama category, the requirements of the Permit for Issuance of TV Dramas, Permit for Public Projection of Films, Permit for Issuance of Cartoons or academic
literature movies and Permit for Public Projection of Academic Literature Movies and TV Plays will apply accordingly. In addition, providers of such services
should obtain prior consents from copyright owners of all such audio-visual programs.
Further, on March 31, 2009, GAPPRFT issued the Notice on Strengthening the Administration of the Content of Internet Audio-visual Programs, or the
Notice on Content of A/V Programs which reiterates the requirement of obtaining the relevant permit of audio-visual programs to be published to the public
through information network, where applicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling,
terrorism, superstition or other hazardous factors. In addition, on August 14, 2009, GAPPRFT issued the Notice on Relevant Issues Regarding Strengthening of
the Administration of Internet Audio/visual Program Services Received by Television Terminals, which specifies that prior to providing audio-visual program
services for television terminals, an ICP service operator shall obtain the License for Online Transmission of Audio-visual Programs containing the scope of
“Integration and Operation Services of Audio-visual Programs Received by Television Terminals.” On April 1, 2010, GAPPRFT issued the Internet
Audio/Visual Program Services Categories (Provisional), or the Provisional Categories, which classified internet audio-visual programs into four categories.
However, at this stage, the Provisional Categories do not include internet television or mobile television, and it is unclear as to how the categorization system
under the newly adopted Provisional Categories will be enforced or how will it evolve. Shenzhen Xunlei’s License for Online Transmission of Audio-visual
Programs is due for update but we have not been able to obtain such update. See “Risk factors—Risks related to our business—We are strictly regulated in
China. Any lack of requisite licenses or permits applicable to our business and any changes in government policies or regulations may have a material and
adverse impact on our business, financial condition and results of operations.”
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Regulation on online cultural activities
On February 17, 2011, MOC promulgated the new Provisional Measures on Administration of Internet Culture, or the Internet Culture Measures,
which became effective as of April 1, 2011, and the Notice on Issues Relating to Implementing the Newly Amended Provisional Measures on Administration of
Internet Culture on Mar 18, 2011. MOC also abolished the Provisional Measures on Administration of Internet Culture promulgated on May 10, 2003 and
amended on July 1, 2004 as well as the Notice on Issues Relating to Implementing the Provisional Measures on Administration of Internet Culture issued on
July 4, 2003. The Internet Culture Measures apply to entities that engage in activities related to “online cultural products.” “Online cultural products” are
classified as cultural products produced, disseminated and circulated via internet which mainly include: (i) online cultural products particularly produced for the
internet, such as online music entertainment, network games, network performance programs, online performing arts, online artworks and online animation
features and cartoons; and (ii) online cultural products converted from music entertainment, games, performance programs, performing arts, artworks and
animation features and cartoons, and disseminated via the internet. Pursuant to these measures, entities are required to obtain relevant Online Culture Operating
Permits from the applicable provincial level culture administrative authority if they intend to commercially engage in any of the following types of activities:
production, duplication, importation, distribution or broadcasting of online cultural products;
publication of online cultural products on the internet or transmission thereof via information networks such as the internet and the mobile
networks to computers, fixed-line or mobile phones, television sets or gaming consoles for the purpose of browsing, reviewing, using or
downloading such products by online users; or
exhibitions or contests related to online cultural products.
To comply with these then- and currently effective laws and regulations, Shenzhen Xunlei holds an Online Culture Operating Permit which was last
renewed in March 2016 with an effective period from March 16, 2016 to March 15, 2019 for the operating of online games (including issuance of virtual
currency), music entertainment products and animation and comic. Xunlei Games obtained an Online Culture Operating Permit in July 2013 with an effective
period from July 30, 2013 to July 30, 2016 for the operating of online games (including issuance of virtual currency). We plan to renew this permit before its
expiration date.
Regulation on online games
MOC is the government agency primarily responsible for regulating online games in the PRC. On June 3, 2010, MOC promulgated the Provisional
Measures on the Administration of Online Games, pursuant to which the content of the online games are subject to the review of MOC. These measures set
forth a series of prohibitions regarding the content of the online games, including but without limitation the prohibition on content that oppose the fundamental
principles stated in the PRC Constitution, compromise state security, divulge state secrets, subvert state power or damage national unity, and content that is
otherwise prohibited by laws or administrative regulations. Moreover, in accordance with these measures, ICP service operators engaging in any activities
involving the operation of online games, issuance or trading of virtual currency must obtain the Online Culture Operating Permit and handle the censorship
procedures for imported online games and the filing procedures for domestically developed online games with MOC and its provincial counterparts. The
procedures for the censorship of imported online games must be conducted with MOC prior to the commencement date of the online operation and the filing
procedures for domestic online games must be conducted with MOC within 30 days after the commencement date of the online operation or the occurrence date
of any material alteration of such online games. Regarding virtual currency trading, ICP service operators can only issue virtual currency in exchange of the
service provided by itself rather than trading for service or products provided by third parties. ICP service operators cannot appropriate the advance payment by
the players and are not allowed to provide trading service of virtual currency to minors. All the transactions in the accounts shall be kept in records for a
minimum of 180 days. To comply with these laws and regulations, Shenzhen Xunlei and Xunlei Games have obtained the Online Culture Operating Permit
respectively for operating online games.
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Further, the online publication of online games is subject to the regulation of GAPPRFT under the Administrative Measures on Network Publication
and ICP service operators must obtain the Network Publication Service License prior to provision of any online game services. On September 28, 2009,
GAPPRFT, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications jointly published the Notice
Regarding the Consistent Implementation of the “Stipulations on ‘Three Provisions’ of the State Council and the Relevant Interpretations of the State
Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Internet Games and the
Examination and Approval of Imported Internet Games”, or the Notice of Three Provisions and Internet Games, which expressly requires that all online games
need to be screened by GAPPRFT through the advanced approvals before they are operated online, and any updated online game versions or any change to the
online games shall be subject to further advanced approvals before they can be operated online. In addition, foreign investors are prohibited from operating
online games by the forms of Sino-foreign joint ventures, Sino-foreign cooperatives and wholly foreign-owned enterprises. The indirect functions such as
contractual control and technology supply are also prohibited.
Our online games services are currently provided by Shenzhen Xunlei. Shenzhen Xunlei holds an Internet Publication License for its publication of
online games. We also require the developers of certain online games to obtain the requisite approvals of relevant online games from GAPPRFT, and make the
filings with MOC, for relevant online games. See “Risk factors—Risks related to our business—We may not be able to successfully address the challenges and
risks we face in the online games market, such as a failure to successfully implement our plan to acquire exclusive rights to operate and sub-license games or to
obtain all the licenses required to operate online games, which may subject us to penalties from relevant authorities, including the discontinuance of our online
game business.”
Regulation on anti-fatigue system, real-name registration system and parental guardianship project
In April 2007, GAPPRFT and several other government agencies issued a circular requiring the implementation of an anti-fatigue system and a real-
name registration system by all PRC online game operators to curb addictive online game playing by minors. Under the anti-fatigue system, three hours or less
of continuous playing by minors, defined as game players under 18 years of age, is considered to be “healthy,” three to five hours to be “fatiguing,” and five
hours or more to be “unhealthy.” Game operators are required to reduce the value of in-game benefits to a minor player by half if the minor has reached the
“fatiguing” level, and to zero once reaching the “unhealthy” level.
To identify whether a game player is a minor and thus subject to the anti-fatigue system, a real-name registration system must be adopted to require
online game players to register their real identity information before playing online games. The online game operators are also required to submit the identity
information of game players to the public security authority for verification. In July 2011, GAPPRFT, together with several other government agencies, jointly
issued the Notice on Initializing the Verification of Real-name Registration for the Anti-Fatigue System on Online Games, or the Real-name Registration Notice,
to strengthen the implementation of the anti-fatigue and real-name registration system. The main purpose of the Real-name Registration Notice is to curb
addictive online game playing by minors and protect their physical and mental health. This notice indicates that the National Citizen Identity Information Center
of the Ministry of Public Security will verify identity information of game players submitted by online game operators. The Real-name Registration Notice also
imposes stringent penalties on online game operators that do not implement the required anti-fatigue and real-name registration systems properly and
effectively, including terminating their online game operations.
In January 2011, MOC, together with several other government agencies, jointly issued a Circular on Printing and Distributing Implementation
Scheme regarding Parental Guardianship Project for Minors Playing Online Games to strengthen the administration of online games and protect the legitimate
rights and interests of minors. This circular indicates that online game operators must have person in charge, set up specific service webpages and publicize
specific hotlines to provide parents with necessary assistance to prevent or restrict minors’ improper game playing behavior. Online game operators must also
submit a report regarding its performance under the Parental Guardianship Project to the local MOC office each quarter.
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We have developed and implemented an anti-fatigue and compulsory real-name registration system in our online games, and will cooperate with the
National Citizen Identity Information Center to launch the identity verification system upon the issuance of relevant implementing rules. For game players who
do not provide verified identity information, we assume that they are minors under 18 years of age. In order to comply with the anti-fatigue rules, we set up our
system so that after three hours of playing our online games, minors only receive half of the virtual items or other in-game benefits they would otherwise earn,
and after playing for more than five hours, minors would receive no in-game benefits.
Regulation on online game virtual currency
On February 15, 2007, MOC, the People’s Bank of China and other relevant government authorities jointly issued the Notice on Further Strengthening
Administrative Work on the Internet Cafes and Online Games, or the Internet Cafes Notice, pursuant to which the People’s Bank of China is directed to
strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. This notice provides that
the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a
strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. It also provides that virtual currency shall
only be used to purchase virtual items. On June 4, 2009, MOC and Ministry of Commerce jointly issued the Notice on Strengthening the Administrative Work
on Virtual Currency of Online Games, pursuant to which no enterprise may concurrently provide both virtual currency issuance service and virtual currency
transaction service. In addition, the Provisional Measures on the Administration of Online Games require companies that (i) issue online game virtual currency
(including prepaid cards and/or pre-payment or prepaid card points) or (ii) offer online game virtual currency transaction services to apply for the Online
Culture Operating Permit from provincial branches of MOC. The regulations prohibit companies that issue online game virtual currency from providing services
that would enable the trading of such virtual currency. Any company that fails to submit the requisite application will be subject to sanctions, including but not
limited to termination of operation, confiscation of incomes and fines. The regulations also prohibit online game operators from allocating virtual items or
virtual currency to players based on random selection through lucky draw, wager or lottery that involves cash or virtual currency directly paid by the players. In
addition, companies that issue online game virtual currency must comply with certain specific requirements, for example, online game virtual currency can only
be used for products and services related to the issuance company’s own online games.
To comply with these regulations, Shenzhen Xunlei and Xunlei Games have obtained the Online Culture Operating Permit for issuing online game
virtual currency, and have filed their issuance of virtual currency with the local branch of MOC in Guangdong.
Regulation on internet publication
GAPPRFT is the government agency responsible for regulating publication activities in the PRC. On June 27, 2002, MIIT and GAPPRFT jointly
promulgated the Tentative Administration Measures on Internet Publication, or the Internet Publication Measures, which took effect on August 1, 2002. The
Internet Publication Measures require internet publishers to secure approval, or the Internet Publication License, from GAPPRFT to conduct internet publication
activities. In February 2016, the GAPPRFT and the MIIT jointly issued the Administrative Measures on Network Publication, which took effect in March 2016
and replaced the Internet Publication Measures. Pursuant to the Administrative Measures on Network Publication, Internet publishers shall be approved by and
obtain a Network Publication Service License from GAPPRFT to engage in network publication service. The network publication services refer to the activities
of providing network publications to the public through information networks; and the network publications refer to the digitalized works with the publishing
features such as editing, producing and processing. The Administrative Measures on Network Publication also provide the detailed qualifications and
application procedures for obtaining the Network Publication Service License. The Notice of Three Provisions and Internet Games issued jointly by GAPPRFT
and other relevant administrations confirmed that the entities operating internet games must obtain the Internet Publication License. On February 21, 2008, the
GAPPRFT promulgated the Rules for the Administration of Electronic Publication, or the Electronic Publication Rules, which took effect on April 15, 2008.
Under the Electronic Publication Rules and other regulations issued by the GAPPRFT, online games are classified as a kind of electronic publication, and
publishing of online games is required to be conducted by licensed electronic publishing entities that have been issued standard publication codes. Pursuant to
the Electronic Publication Rules, if a PRC company is contractually authorized to publish foreign electronic publications, it must obtain the approval of, and
register the copyright license contract with, the GAPPRFT.
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Shenzhen Xunlei holds an Internet Publication License for the publication of internet games with an expiry date of September 17, 2017 and is in the
process of applying for expansion of the business scope therein to include the publication of music works and other internet publishing activities. See “Risk
factors—We may not be able to successfully address the challenges and risks we face in the online games market, such as a failure to successfully implement
our plan to acquire exclusive rights to operate and sub-license games or to obtain all the licenses required to operate online games, which may subject us to
penalties from relevant authorities, including the discontinuance of our online game business.”
Regulation on internet privacy
The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of such rights. In
recent years, PRC government authorities have enacted legislation on internet use to protect personal information from any unauthorized disclosure. The
Internet Measures prohibit ICP service operators from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party.
Pursuant to the BBS Measures, ICP service operators that provide electronic messaging services must keep users’ personal information confidential and must
not disclose such personal information to any third party without the users’ consent, unless such disclosure is required by law. The regulations further authorize
the relevant telecommunications authorities to order ICP service operators to rectify unauthorized disclosure. ICP service operators are subject to legal liability
if the unauthorized disclosure results in damages or losses to users. The PRC government, however, has the power and authority to order ICP service operators
to turn over personal information if an internet user posts any prohibited content or engages in illegal activities on the internet. Under the Several Provisions on
Regulating the Market Order of Internet Information Services issued by MIIT on December 29, 2011, without the consent of a user, an ICP operator may not
collect any user personal information or provide any such information to third parties. An ICP service operator shall expressly inform the users of the method,
content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its
services. An ICP service operator is also required to properly keep the user personal information, and in case of any leak or likely leak of the user personal
information, the ICP service operator shall take immediate remedial measures and in severe consequences, to make an immediate report to the
telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing
Committee of the National People’s Congress of the PRC on December 28, 2012, or the Decision, and the Order for the Protection of Telecommunication and
Internet User Personal Information issued by MIIT on July 16, 2013, or the Order, any collection and use of user personal information shall be subject to the
consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service
operator shall also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or
selling or proving such information to other parties. Any violation of the Decision or the Order may subject the ICP service operator to warnings, fines,
confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.
To comply with these laws and regulations, we have required our users to consent to our collecting and using their personal information, established
information security systems to protect user’s privacy.
Regulation on internet medicine information service
The State Food and Drug Administration, or the SFDA, promulgated the Administration Measures on Internet Medicine Information Service on July 8,
2004 and certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content,
qualifications and requirements for internet medicine information services. An ICP service operator that provides information regarding medicine or medical
equipment must obtain an Internet Medicine Information Service Qualification Certificate from the applicable provincial level counterpart of SFDA. Although
we currently offer certain information regarding medicine or medical equipment on our platform, Shenzhen Xunlei obtained a Medicine Information Service
Qualification Certificate from Guangdong Food and Drug Administration for the provision of internet medical information services with an expiry date of
November 26, 2018.
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Regulation on advertising business
The State Administration for Industry and Commerce, or the SAIC, is the government agency responsible for regulating advertising activities in the
PRC.
According to the PRC laws and regulations, companies that engage in advertising activities must obtain from SAIC or its local branches a business
license which specifically includes operating an advertising business within its business scope. The business license of an advertising company is valid for the
duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. PRC advertising laws and regulations
set forth certain content requirements for advertisements in the PRC including, among other things, prohibitions on false or misleading content, superlative
wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisers,
advertising agencies, and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they
prepare or distribute is true and in full compliance with applicable law. In providing advertising services, advertising operators and advertising distributors must
review the supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with applicable PRC
laws and regulations. Prior to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify
that such censorship has been performed and approval has been obtained. The release or delivery of advertisements through the Internet shall not impair the
normal use of the network by users. The advertisements released in pop-up form on the webpage of the Internet and other forms shall indicate the close flag in
prominent manner and ensure one-key close. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to
cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious
violations, SAIC or its local branches may revoke violators’ licenses or permits for their advertising business operations.
To comply with these laws and regulations, we have obtained a business license, which allows us to operate advertising businesses, and adopted
several measures. Our advertising contracts require that substantially all advertising agencies or advertisers that contract with us must examine the advertising
content provided to us to ensure that such content are truthful, accurate and in full compliance with PRC laws and regulations. In addition, we have established a
task force to review all advertising materials to ensure the content does not violate the relevant laws and regulations before displaying such advertisements, and
we also request relevant advertisers to provide proof of governmental approval if an advertisement is subject to special government review. See “Risk factors—
Risks related to our business—Advertisements we display may subject us to penalties and other administrative actions.”
Regulation on information security and censorship
The applicable PRC laws and regulations specifically prohibit the use of internet infrastructure where it may breach public security, provide content
harmful to the stability of society or disclose state secrets. According to these regulations, it is mandatory for internet companies in the PRC to complete
security filing procedures and regularly update information security and censorship systems for their websites with the local public security bureau. In addition,
the newly amended Law on Preservation of State Secrets which became effective on October 1, 2010 provides that whenever an internet service provider detects
any leakage of state secrets in the distribution of online information, it should stop the distribution of such information and report to the authorities of state
security and public security. As per request of the authorities of state security, public security or state secrecy, the internet service provider should delete any
content on its website that may lead to disclosure of state secrets. Failure to do so on a timely and adequate basis may subject the internet service provider to
liability and certain penalties given by the State Security Bureau, the Ministry of Public Security and/or MIIT or their respective local counterparts. As
Shenzhen Xunlei is an ICP operator, it is subject to the laws and regulations relating to information security and censorship. To comply with these laws and
regulations, it has completed the mandatory security filing procedures with the local public security authorities, and regularly updates its information security
and content-filtering systems with newly issued content restrictions as required by the relevant laws and regulations.
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Regulation on torts
The Tort Law was promulgated by the Standing Committee of the National People’s Congress on December 26, 2009 and became effective on July 1,
2010. Under this law, internet users and internet service providers shall bear tortious liability in the event they infringe upon other people’s civil rights and
interests through the internet. Where an internet user is infringing upon the civil rights or interests of another person via internet, the injured party shall have the
right to demand the relevant internet service provider to take necessary measures such as deleting the infringing content, etc. by serving the internet service
provider a notice. Where the internet service provider fails to take any necessary measures, it shall be jointly and severally liable with the internet user for any
additional injury or damage incurred thereafter. Under the circumstance that the internet service provider is aware that an internet user is infringing upon the
civil rights or interests of another person and fails to take necessary measures, the internet service provider shall be jointly liable for such infringement with such
internet user.
Regulation on intellectual property rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.
Copyright law
Under the Copyright Law (1990), as revised in 2001 and 2010, and its related Implementing Regulations (2002), as revised in 2013, creators of
protected works enjoy personal and property rights, including, among others, the right of dissemination via information network of the works. The term of a
copyright, other than the rights of authorship, alteration and integrity of an author which shall be unlimited in time, is life plus 50 years for individual authors
and 50 years for corporations.
To address the problem of copyright infringement related to content posted or transmitted on the internet, the PRC National Copyright Administration
and MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These measures, which became
effective on May 30, 2005, apply to acts of automatically providing services such as uploading, storing, linking or searching works, audio or video products, or
other contents through the internet based on the instructions of internet users who publish contents on the internet, without editing, amending or selecting any
transmitted content. When imposing administrative penalties upon the act which infringes upon any users’ right of communication through information
networks, the Measures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied.
Pursuant to the Regulation on Protection of the Right of Communication through Information Network (2006), as amended in 2013, an ICP service
provider may be exempted from indemnification liabilities under certain circumstances:
any ICP service provider, who provides automatic internet access service upon instructions of its users or provides automatic transmission service
of works, performance and audio-visual products provided by its users, will not be required to assume the indemnification liabilities if (i) it has not
chosen or altered the transmitted works, performance and audio-visual products; and (ii) it provides such works, performance and audio-visual
products to the designated user and prevents any person other than such designated user from obtaining the access.
any ICP service provider who, for the sake of improving network transmission efficiency, automatically provides to its own users, based on the
technical arrangement, the relevant works, performances and audio-visual products obtained from any other ICP service providers will not be
required to assume the indemnification liabilities if (i) it has not altered any of the works, performance or audio-visual products that are
automatically stored; (ii) it has not affected such original ICP service provider in grasping the circumstances where the users obtain the relevant
works, performance and audio-visual products; and (iii) when the original ICP service provider revises, deletes or shields the works, performance
and audio-visual products, it will automatically revise, delete or shield the same based on the technical arrangement.
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any ICP service provider, who provides its users with information memory space for such users to provide the works, performance and audio-
visual products to the general public via the information network, will not be required to assume the indemnification liabilities if (i) it clearly
indicates that the information memory space is provided to the users and publicizes its own name, contact person and web address; (ii) it has not
altered the works, performance and audio-visual products that are provided by the users; (iii) it is not aware of or has no reason to know the
infringement of the works, performance and audio-visual products provided by the users; (iv) it has not directly derived any economic benefit from
the provision of the works, performance and audio-visual products by its users; and (v) after receiving a notice from the right holder, it has deleted
such works, performance and audio-visual products as alleged for infringement pursuant to such regulation.
any ICP service provider, who provides its users with search services or links, will not be required to assume the indemnification liabilities if, after
receiving a notice from the rights holder, it has deleted the works, performance and audio-visual products as alleged for copyright infringement
pursuant to this regulation. However, the ICP service provider shall be subject to joint liabilities for copyright infringement if it is aware of or has
reason to know the infringement of the works, performance and audio-visual products to which it provides links.
In December 2012, the Supreme People’s Court of China promulgated the Provisions on Certain Issues Related to the Application of Law in the Trial
of Civil Cases Involving Disputes over Infringement of the Right of Dissemination through Information Networks, which provides that the courts will require
ICP service providers to remove not only links or content that have been specifically mentioned in the notices of infringement from rights holders, but also links
or content they “should have known” to contain infringing content. The provisions further provide that where an ICP service provider has directly obtained
economic benefits from any content made available by an internet user, it has a higher duty of care with respect to internet users’ infringement of third-party
copyrights.
To comply with these laws and regulations, we have implemented internal procedures to monitor and review the content we have licensed from content
providers before they are released on our websites and platforms and remove any infringing content promptly after we receive notice of infringement from the
legitimate rights holder.
Patent law
The National People’s Congress adopted the Patent Law in 1984, and amended it in 1992, 2000 and 2008, respectively. A patentable invention, utility
model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and
methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear
transformation or designs that are mainly used for marking the pattern, color or combination of these two of prints. The State Intellectual Property Office under
the State Council is responsible for receiving, examining and approving patent applications. A patent is valid for a twenty-year term in the case of an invention
and a ten-year term in the case of a utility model or design, starting from the application date. A third-party user must obtain consent or a proper license from the
patent owner to use the patent except for certain specific circumstances provided by law. Otherwise, the use will constitute an infringement of the patent rights.
Among the patent applications we have filed as of December 31, 2015, 44 were granted in the PRC, while another seven applications are being examined by the
State Intellectual Property Office of the PRC.
Trademark law
Registered trademarks are protected under the Trademark Law adopted in 1982 and amended in 1993, 2001 and 2013 and its implementation rules. The
PRC Trademark Office of SAIC is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a
“first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another
trademark that has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or
services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark shall not prejudice the
existing right of others obtained by priority, nor shall any person register in advance a trademark that has already been used by another person and has already
gained “sufficient degree of reputation” through that person’s use. After receiving an application, the PRC Trademark Office will make a public announcement
if the relevant trademark passes the preliminary examination. Within three months after such public announcement, any person may file an opposition against a
trademark that has passed a preliminary examination. The PRC Trademark Office’s decisions on rejection, opposition or cancellation of an application may be
appealed to the PRC Trademark Review and Adjudication Board, whose decision may be further appealed through judicial proceedings. If no opposition is filed
within three months after the public announcement period or if the opposition has been overruled, the PRC Trademark Office will approve the registration and
issue a registration certificate, upon which the trademark is registered and will be effective for a renewable ten-year period, unless otherwise revoked. As of
December 31, 2015, we had applied for registration of 174 trademarks, of which we had received 153 registered trademarks in different applicable trademark
categories, including one trademark registered with the United States Patent and Trademark Office and one trademark registered with World Intellectual
Property Organization.
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Regulation on domain name
The domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by MIIT on November 5, 2004 and
effective on December 20, 2004. MIIT is the major regulatory body responsible for the administration of the PRC internet domain names, under supervision of
which China Internet Network Information Center, or CNNIC, is responsible for the daily administration of CN domain names and Chinese domain names. On
September 25, 2002, CNNIC promulgated the Implementation Rules of Registration of Domain Name, or the CNNIC Rules, which was renewed on June 5,
2009 and May 29, 2012, respectively. Pursuant to the Administrative Measures on the Internet Domain Names and the CNNIC Rules, the registration of domain
names adopts the “first to file” principle and the registrant shall complete the registration via the domain name registration service institutions. In the event of a
domain name dispute, the disputed parties may lodge a complaint to the designated domain name dispute resolution institution to trigger the domain name
dispute resolution procedure in accordance with the CNNIC Measures on Resolution of the Top Level Domains Disputes, file a suit to the People’s Court or
initiate an arbitration procedure. We have registered www.xunlei.com and other domain names.
Regulation on tax
PRC enterprise income tax
The PRC enterprise income tax is calculated based on the taxable income determined under the PRC laws and accounting standards. On March 16,
2007, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008.
On December 6, 2007, the State Council promulgated the Implementation Rules to the PRC Enterprise Income Tax Law, or the Implementation Rules, which
also became effective on January 1, 2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition
Preferential Policy under the PRC Enterprise Income Tax Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the
EIT Law. The EIT Law imposes a uniform enterprise income tax rate of 25% on all domestic enterprises, including foreign-invested enterprises unless they
qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential treatments available under previous tax laws and
regulations. Under the EIT Law and the Transition Preferential Policy Circular, enterprises that were established before March 16, 2007 and already enjoyed
preferential tax treatments will continue to enjoy them (i) in the case of preferential tax rates, for a period of five years from January 1, 2008; during the five-
year period, the tax rate will gradually increase from 15% to 25%, or (ii) in the case of preferential tax exemption or reduction for a specified term, until the
expiration of such term. In addition, the EIT Law and its implementation rules permit qualified high and new technology enterprises, or HNTEs, to enjoy a
reduced enterprise income tax rate of 15%.
Moreover, under the EIT Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located
within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The
Implementation Rules define the term “de facto management body” as the management body that exercises full and substantial control and overall management
over the business, productions, personnel, accounts and properties of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a
Chinese holding Company Incorporated Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies issued by the SAT on April
22, 2009 provides that a foreign enterprise controlled by a PRC enterprise or a PRC enterprise group will be classified as a “resident enterprise” with its “de
facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in
charge of its daily operations function mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or
bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in
the PRC; and (iv) at least half of the enterprise’s directors or senior management with voting rights reside in the PRC. Although the circular only applies to
offshore enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determining criteria
set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident
status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
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Although we are not controlled by a PRC enterprise or PRC enterprise group and we do not believe that we meet all of the above-mentioned
conditions, substantial uncertainty exists as to whether we will be deemed a PRC resident enterprise for enterprise income tax purpose. In the event that we are
considered a PRC resident enterprise, we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income, but the dividends that
we receive from our PRC subsidiaries would be exempt from the PRC withholding tax since such income is exempted under the PRC Enterprise Income Tax
Law for a PRC resident enterprise recipient. See “Risk factors—Risks related to doing business in China—Our global income may be subject to PRC taxes
under the PRC EIT Law, which may have a material adverse effect on our results of operations.”
Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC
tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face material and adverse tax
consequences if the PRC tax authorities were to determine that the contractual arrangements among Giganology Shenzhen, our wholly-owned subsidiary in
China and Shenzhen Xunlei, our variable interest entity in China and its shareholders were not entered into on an arm’s-length basis and therefore constituted
unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment to the tax
liability of Shenzhen Xunlei, and the PRC tax authorities may impose interest on late payments on Shenzhen Xunlei for the adjusted but unpaid taxes. Our
results of operations may be materially and adversely affected if Shenzhen Xunlei’s tax liabilities increase significantly or if it is required to pay interest on late
payments.
PRC business tax
Pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay a business
tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related to technology development and
transfer, such business tax may be exempted subject to the approval of relevant tax authorities.
PRC value added tax
On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax reform program, or the Pilot Program, applicable to
businesses in selected industries. Businesses in the Pilot Program would pay value added tax, or VAT, instead of business tax. The Pilot Program initially
applied only to transportation industry and “modern service industries” in Shanghai and would be expanded to eight trial regions (including Beijing and
Guangdong province) and nationwide if conditions permit. The pilot industries in Shanghai included industries involving the leasing of tangible movable
property, transportation services, research and development and technical services, information technology services, cultural and creative services, logistics and
ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural and creative services”, are subject to the
VAT tax rate of 6%. According to official announcements made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot
Program on September 1, 2012, and Guangdong province launched it on November 1, 2012.
The business tax has been imposed primarily on our revenues from the provision of taxable services, assignments of intangible assets and transfers of
real estate. Prior to the implementation of the pilot program, our business tax generally ranged from 3% to 5%, subject to the nature of the revenues being taxed.
Before the implementation of the pilot program, we were mainly subject to a small amount of VAT mainly for revenues of the sale of software. VAT has been
imposed on those revenues at a rate of 17%. With the implementation of the Pilot Program, in addition to the revenues currently subject to VAT, our advertising
and content sub-licensing revenues are in the scope of the pilot program and are now subject to VAT at a rate of 6%.
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On May 24, 2013, the Ministry of Finance, or the MOF, and the SAT issued the Circular on Tax Policies in the Nationwide Pilot Collection of Value
Added Tax in Lieu of Business Tax in the Transportation Industry and Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain
modern services industries under the Pilot Collection Circular extends to the inclusion of radio and television services. On March 23, 2016, the MOF and the
SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added Tax Instead of Business Tax, or Circular 36,
which will take effect on May 1, 2016. Pursuant to the Circular 36, all of the companies operating in construction, real estate, finance, modern service or other
sectors which were required to pay business tax are required to pay VAT, in lieu of business tax. The VAT rate is 6%, except for rate of 11% for real estate sale,
land use right transferring and providing service of transportation, postal sector, basic telecommunications, construction, real estate lease; rate of 17% for
providing lease service of tangible property; and rate of zero for specific cross-bond activities.
PRC dividend withholding tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises were exempt from PRC
withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise
in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty
with China that provides for a different withholding arrangement. Under the China-HK Taxation Arrangement, income tax on dividends payable to a company
resident in Hong Kong that holds more than a 25% equity interest in a PRC resident enterprise may be reduced to a rate of 5%. According to the SAT Circular
601, the 5% tax rate does not automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy the relevant tax
treatments relating to dividends under the relevant taxation treaties. In addition, according to a tax circular issued by SAT in February 2009, if the main purpose
of an offshore arrangement is to obtain a preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed by the
relevant offshore entity. Although Xunlei Computer is currently wholly owned by Xunlei Network HK, we cannot assure you that we will be able to enjoy the
preferential withholding tax rate of 5% under the China-HK Taxation Arrangement.
Regulation on labor laws and social insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All
employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system
for labor safety and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. Violations of the PRC Labor
Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise for serious
violations.
In addition, employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance,
maternity insurance, work-related injury insurance, medical insurance and housing funds.
To comply with these laws and regulations, we have caused all of our full-time employees to enter into labor contracts and provide our employees with
the proper welfare and employment benefits.
Regulation on foreign exchange control and administration
Foreign exchange regulation in the PRC is primarily governed by the following regulations:
Foreign Exchange Administration Rules, or the Exchange Rules, promulgated by the State Council on January 29, 1996, which was amended on
January 14, 1997 and on August 5, 2008 respectively; and
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange, or the Administration Rules promulgated by the People’s Bank of
The PRC on June 20, 1996.
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Under the Exchange Rules, Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. As for capital account items, such as direct investments, loans, security investments and the repatriation of
investment returns, however, the conversion of foreign currency is still subject to the approval of, or registration with, SAFE or its competent local branches;
while for the foreign currency payments for current account items, the SAFE approval is not necessary for the conversion of Renminbi except as otherwise
explicitly provided by laws and regulations. Under the Administration Rules, enterprises may only buy, sell or remit foreign currencies at banks that are
authorized to conduct foreign exchange business after the enterprise provides valid commercial documents and relevant supporting documents and, in the case
of certain capital account transactions, after obtaining approval from SAFE or its competent local branches. Capital investments by enterprises outside of the
PRC are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the National Development and Reform Commission, or
their respective competent local branches. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar.
Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain foreign currencies.
On August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular No. 142. Pursuant to Circular No. 142, the Renminbi capital from the
settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the applicable government
authority and unless it is otherwise provided by law, such Renminbi capital cannot be used for domestic equity investment. Documents certifying the purposes
of the settlement of foreign currency capital into Renminbi, including a business contract, must also be submitted for the settlement of the foreign currency. In
addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested
company. The use of such Renminbi capital may not be altered without the SAFE’s approval, and such Renminbi capital may not be used to repay Renminbi
loans if such loans have not been used. Violations of the Circular No. 142 could result in severe monetary fines or penalties.
On November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, or Circular 59, which became effective on December 17, 2012. Circular 59 substantially amends and simplifies the current foreign exchange
procedure. The major developments under Circular 59 are that the opening of various special purpose foreign exchange accounts (e.g. pre-establishment
expenses account, foreign exchange capital account, guarantee account) no longer requires the approval of SAFE. Furthermore, multiple capital accounts for the
same entity may be opened in different provinces, which was not possible before the issuance of Circular 59. Reinvestment of RMB proceeds by foreign
investors in the PRC no longer requires SAFE approval or verification, and remittance of foreign exchange profits and dividends by a foreign-invested
enterprise to its foreign shareholders no longer requires SAFE approval.
On May 10, 2013, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic
Direct Investment by Foreign Investors and the Supporting Documents, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration. Institutions and individuals shall register with SAFE and/or its branches
for their direct investment in the PRC. Banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration
information provided by SAFE and its branches.
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Regulation on foreign exchange registration of offshore investment by PRC residents
On October 21, 2005, SAFE issued the Circular on Several Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in
Financing and in Return Investments via Overseas Special Purpose Companies, or Circular No. 75, which went into effect on November 1, 2005. Circular No.
75 and related rules provide that if PRC residents establish or acquire direct or indirect interests of offshore special purpose companies, or offshore SPVs, for
the purpose of financing these offshore SPVs with assets of, or equity interests in, an enterprise in the PRC, or inject assets or equity interests of PRC entities
into offshore SPVs, they must register with local SAFE branches with respect to their investments in offshore SPVs. Circular No. 75 also requires PRC residents
to file changes to their registration if their offshore SPVs undergo material events such as capital increase or decrease, share transfer or exchange, merger or
division, long-term equity or debt investments, and provision of guaranty to a foreign party. SAFE promulgated the Circular on Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE
Circular No. 37, on July 4, 2014, which replaced the SAFE Circular No. 75. SAFE Circular No. 37 requires PRC residents to register with local branches of
SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such
PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special
purpose vehicle.” The term “control” under SAFE Circular No. 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights
acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase,
convertible bonds or other arrangements. SAFE Circular No. 37 further requires amendment to the registration in the event of any changes with respect to the
basic information of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period, or any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division
or other material event. If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE
branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the
offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply
with SAFE registration and the amendment requirements described above could result in liability under PRC law for the evasion of applicable foreign exchange
restrictions. On February 13, 2015, SAFE issued SAFE Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 has delegated to the qualified
banks the authority to register all PRC residents’ investment in “special purpose vehicle” pursuant to the SAFE Circular No. 37, except that those PRC residents
who have failed to comply with the SAFE Circular No. 37 will continue to fall within the jurisdiction of the relevant local SAFE branches and must make their
supplementary registration application with such local SAFE branches.
We have requested PRC residents holding direct or indirect interest in our company to our knowledge to make the necessary applications, filings and
amendments as required under Circular No. 37 and other related rules. However, we may not be informed of the identities of all the PRC residents holding
direct or indirect interest in our company, and we cannot provide any assurances that these PRC residents will comply with our request to make or obtain any
applicable registrations or comply with other requirements required by Circular No. 37 or other related rules. The failure or inability of our PRC resident
shareholders to make any required registrations or comply with other requirements under Circular No. 37 and other related rules may subject such PRC
residents or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to raise additional financing and contribute additional capital into or
provide loans to (including using the proceeds from our initial public offering) our PRC subsidiaries, limit our PRC subsidiaries’ ability to pay dividends or
otherwise distribute profits to us, or otherwise adversely affect us.
Regulation on employee share options
On December 25, 2006, the People’s Bank of China promulgated the Administrative Measures for Individual Foreign Exchange. On February 15,
2012, SAFE issued the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of
Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28,
2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options by companies listed on overseas stock exchanges according to
the stock incentive plans are required to register with SAFE or its local branches, and PRC residents participating in the stock incentive plans of overseas listed
companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution
selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plans on behalf of these participants.
Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, purchase and sale of
corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required to amend the SAFE registration with respect to the stock incentive
plan if there is any material change to the stock incentive plan, the PRC agents or the overseas entrusted institution or other material changes. The PRC agents
shall, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the
payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the
PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into
the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, the PRC agents shall file each quarter the form
for record-filing of information of the Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies with SAFE or its local
branches.
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Our PRC citizen employees who have been granted share options, or PRC optionees, will be subject to the Stock Option Rules when our company
becomes an overseas listed company upon the completion of our initial public offering. If we or our PRC optionees fail to comply with the Individual Foreign
Exchange Rule and the Stock Option Rules, we and/or our PRC optionees may be subject to fines and other legal sanctions. We may also face regulatory
uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law. In addition, the State Administration
for Taxation has issued certain circulars concerning employee share options. Under these circulars, our employees working in the PRC who exercise share
options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant
tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold
their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.
Regulation on dividend distributions
The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include:
Company Law (2005);
Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000; and
Wholly Foreign-Owned Enterprise Law Implementation Regulations (1990), as amended in 2001.
Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in
accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in the PRC is required to set aside at least 10% of its
after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital.
The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after tax profits to its employee welfare and bonus
funds. These reserve funds, however, may not be distributed as cash dividends.
Regulation on overseas listings
On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission,
the State Administration for Taxation, SAIC, CSRC and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules purport, among
other things, to require that offshore special purpose vehicles, or SPVs, that are controlled by PRC companies or individuals and that have been formed for
overseas listing purposes through acquisitions of PRC domestic interest held by such PRC companies or individuals, to obtain the approval of the CSRC prior to
publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying
documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. While the application of the M&A Rules
remains unclear, our PRC legal counsel has advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rules, prior
approval from the CSRC is not required under the M&A Rules for the listing and trading of our ADSs on the NASDAQ Global Select Market given that (i) our
PRC subsidiaries were directly established by us as wholly foreign-owned enterprises, and we have not acquired any equity interest or assets of a PRC domestic
company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners after the effective date of the M&A Rules,
and (ii) no provision in the M&A Rules clearly classifies the contractual arrangements as a type of transaction subject to the M&A Rules.
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However, our PRC legal counsel has further advised us uncertainties still exist as to how the M&A Rules will be interpreted and implemented and its
opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A
Rules. If CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval was required for our initial public offering, we may face
regulatory actions or other sanctions from CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our
operations, limit our operating privileges, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC or payment or
distribution of dividends by our PRC subsidiaries, or take other actions that could materially adversely affect our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our ADSs. In addition, if CSRC later requires that we obtain its approval for our initial
public offering, we may be unable to obtain a waiver of CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any
uncertainties or negative publicity regarding CSRC approval requirements could have a material adverse effect on the trading price of our ADSs.
C. Organizational Structure
The following diagram illustrates our corporate structure, including our subsidiaries and variable interest entity and the subsidiaries of our variable
interest entity, as of the date of this annual report on Form 20-F:
Note:
(1) Shenzhen Xunlei is our variable interest entity. Mr. Sean Shenglong Zou, our co-founder, chairman and chief executive officer, Mr. Hao Cheng, our co-
founder and director, Mr. Jianming Shi, Guangzhou Shulian Information Investment Co., Ltd. and Ms. Fang Wang respectively own 76.0%, 8.3%, 8.3%,
6.7% and 0.7% of Shenzhen Xunlei’s equity interests.
(2) The remaining 30% of the equity interest is owned by Mr. Hao Cheng.
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Contractual arrangements with Shenzhen Xunlei
Agreements that provide us effective control over Shenzhen Xunlei
Business operation agreement
Pursuant to the business operation agreement among Giganology Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen Xunlei, as amended,
Shenzhen Xunlei’s shareholders must appoint the candidates nominated by Giganology Shenzhen to be the directors on its board of directors in accordance with
applicable laws and the articles of association of Shenzhen Xunlei, and must cause the persons recommended by Giganology Shenzhen to be appointed as its
general manager, chief financial officer and other senior executives. Shenzhen Xunlei and its shareholders also agree to accept and strictly follow the guidance
provided by Giganology Shenzhen from time to time relating to employment, termination of employment, daily operations and financial management.
Moreover, Shenzhen Xunlei and its shareholders agree that Shenzhen Xunlei will not engage in any transactions that could materially affect its assets, business,
personnel, liabilities, rights or operations, including but not limited to the amendment of Shenzhen Xunlei’s articles of association, without the prior consent of
Giganology Shenzhen and Xunlei Limited or their respective designees. For instance, in May 2011, Shenzhen Xunlei sought and obtained consent from
Giganology Shenzhen and Xunlei Limited to increase its registered capital by RMB20 million and to revise its articles of association accordingly. This
agreement will expire in 2016 and may be extended at Giganology Shenzhen’s request prior to the expiration date.
Equity pledge agreement
Pursuant to the equity pledge agreement between Giganology Shenzhen and the shareholders of Shenzhen Xunlei, as amended, the shareholders of
Shenzhen Xunlei have pledged all of their equity interests in Shenzhen Xunlei to Giganology Shenzhen to guarantee Shenzhen Xunlei and its shareholders’
performance of their respective obligations and any ensuing liabilities under the exclusive technology support and service agreement, as amended, the exclusive
technology consulting and training agreement, as amended, the proprietary technology license agreement, the business operation agreement, as amended, the
equity interests disposal agreement, as amended, the loan agreements, as amended, and the intellectual properties purchase option agreement, as amended. In
addition, the shareholders of Shenzhen Xunlei have completed the registration of equity pledge under the equity pledge agreement with the competent
governmental authority. If Shenzhen Xunlei and/or its shareholders breach their contractual obligations under those agreements, Giganology Shenzhen, as
pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
Powers of attorney
Pursuant to the irrevocable powers of attorney executed by each shareholder of Shenzhen Xunlei, each such shareholder appointed Giganology
Shenzhen as its attorney-in-fact to exercise such shareholders’ rights in Shenzhen Xunlei, including, without limitation, the power to vote on its behalf on all
matters of Shenzhen Xunlei requiring shareholder approval in accordance with PRC laws and regulations and the articles of association of Shenzhen Xunlei.
Each power of attorney will remain in force for 10 years from the date of execution unless the business operation agreement, as amended, among Giganology
Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen Xunlei is terminated at an earlier date. The term may be extended at Giganology Shenzhen’s
discretion.
Agreements that transfer economic benefits to us
Exclusive technology support and services agreement
Pursuant to the exclusive technology support and services agreement between Giganology Shenzhen and Shenzhen Xunlei, as amended, Giganology
Shenzhen has the exclusive right to provide to Shenzhen Xunlei technology support and technology services related to all technologies needed for its business.
Giganology Shenzhen exclusively owns any intellectual property rights resulting from the performance of this agreement. The service fee payable by Shenzhen
Xunlei to Giganology Shenzhen is a certain percentage of its earnings. This agreement will expire in 2025 and may be extended with Giganology Shenzhen’s
written confirmation prior to the expiration date. Giganology Shenzhen is entitled to terminate the agreement at any time by providing 30 days’ prior written
notice to Shenzhen Xunlei.
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Exclusive technology consulting and training agreement
Pursuant to the exclusive technology consulting and training agreement between Giganology Shenzhen and Shenzhen Xunlei, as amended, Giganology
Shenzhen has the exclusive right to provide to Shenzhen Xunlei technology consulting and training services related to its business. Giganology Shenzhen
exclusively owns any intellectual property rights resulting from the performance of this agreement. The service fee payable by Shenzhen Xunlei to Giganology
Shenzhen is a certain percentage of its earnings. This agreement will expire in 2025 and may be extended with Giganology Shenzhen’s written confirmation
prior to the expiration date. Giganology Shenzhen is entitled to terminate the agreement at any time by providing 30 days’ prior written notice to Shenzhen
Xunlei.
Proprietary technology license contract
Pursuant to the proprietary technology license contract between Giganology Shenzhen and Shenzhen Xunlei, Giganology Shenzhen grants Shenzhen
Xunlei a non-exclusive and non-transferable right to use Giganology Shenzhen’s proprietary technology. Shenzhen Xunlei can only use the proprietary
technology to conduct its business within China. Giganology Shenzhen or its designated representative(s) owns the rights to any improvements developed based
on the proprietary technology licensed pursuant to this contract. This agreement will expire in 2022 and, at Giganology Shenzhen’s discretion, may be extended
for an additional 10 years or for other time period as agreed by both Giganology Shenzhen and Shenzhen Xunlei.
Intellectual properties purchase option agreement
Pursuant to the intellectual properties purchase option agreement between Giganology Shenzhen and Shenzhen Xunlei, as amended, Shenzhen Xunlei
irrevocably grants Giganology Shenzhen (or its designated representative(s)) an exclusive option to purchase certain specified intellectual properties that it owns
for RMB1.0 or the minimum amount of consideration permitted under the PRC law. This agreement will expire in 2022 and may be automatically extended for
an additional 10 years at each expiration date as long as these intellectual properties have not been transferred to Giganology Shenzhen and/or its designee and
Shenzhen Xunlei then still exist.
Agreements that provide us the option to purchase the equity interest in Shenzhen Xunlei
Equity interests disposal agreement
Pursuant to the equity interests disposal agreement among Giganology Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen Xunlei, as
amended, Shenzhen Xunlei’s shareholders irrevocably grant Giganology Shenzhen (or its designated representative(s)) an exclusive option to purchase all or
part of their equity interests in Shenzhen Xunlei for RMB1.0 or the minimum amount of consideration permitted under PRC law. This agreement will expire in
2016 and may be extended at Giganology Shenzhen’s discretion.
Loan agreements
Under the loan agreement between Giganology Shenzhen and Guangzhou Shulian Information Investment Co., Ltd., Sean Shenglong Zou, Hao Cheng,
Fang Wang and Jianming Shi, as amended, Giganology Shenzhen made interest-free loans of approximately RMB1.8 million, RMB2.5 million, RMB2.3
million, RMB0.2 million and RMB2.3 million, respectively, to each of the above shareholders of Shenzhen Xunlei and all of these shareholders have used the
full amount of loans to make capital contribution to Shenzhen Xunlei. The term of this agreement is two years from the date it was signed, and will be
automatically extended afterwards on a yearly basis until each shareholder of Shenzhen Xunlei has repaid the loan in its entirety in accordance with the loan
agreement. The loan for each shareholder will be deemed to be repaid under this agreement only when all equity interest held by the relevant shareholder in
Shenzhen Xunlei has been transferred to Giganology Shenzhen or its designated parties. As of the date of this annual report, all the loans under the loan
agreements remain outstanding. At any time during the term of the loan agreement, Giganology Shenzhen may, at its sole discretion, require any of the
shareholders of Shenzhen Xunlei to repay all or any portion of his outstanding loan under the agreement.
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In addition, following the loan agreement mentioned above, under a separate loan agreement between Giganology Shenzhen and Mr. Sean Shenglong
Zou as a shareholder of Shenzhen Xunlei, as amended, Giganology Shenzhen made an additional interest-free loan of RMB20 million to Mr. Zou, the entire
amount of which was used to contribute to the registered capital of Shenzhen Xunlei, increasing the registered capital of Shenzhen Xunlei to RMB30 million.
The term of this agreement is two years from the date it was signed, and will be automatically extended afterwards on a yearly basis until Mr. Zou has repaid the
loan in its entirety in accordance with the loan agreement. This loan will be deemed to be repaid under this agreement only when all equity interest held by the
relevant shareholder in Shenzhen Xunlei has been transferred to Giganology Shenzhen or its designated parties. At any time during the term of the loan
agreement, Giganology Shenzhen may, at its sole discretion, require all or any portion of the outstanding loan under the agreement to be repaid.
In the opinion of Zhong Lun Law Firm, our PRC legal counsel:
the ownership structures of our variable interest entity and our subsidiaries in China comply with all existing PRC laws and regulations; and
the contractual arrangements among Giganology Shenzhen, our PRC subsidiary, Shenzhen Xunlei and its shareholders governed by PRC law are
valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.
We have been advised by Zhong Lun Law Firm, our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation
and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the above
opinion of our PRC legal counsel. We have been further advised by our PRC legal counsel that if the PRC government finds that the agreements that establish
the structure for operating our business to provide digital media data transmission and streaming services, online games and other value-added
telecommunication services do not comply with PRC government restrictions on foreign investment in the aforesaid business we engage in, we could be subject
to severe penalties including being prohibited from continuing operations. See “Item 3. Key Information—Risk factors—Risks related to our corporate
structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC
governmental restrictions on foreign investment in internet-related business and foreign investors’ mergers and acquisition activities in China, or if these
regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in
those operations.”
D. Property, Plant and Equipment
Our principal executive offices are located at 7/F Block 11, Shenzhen Software Park, Ke Ji Zhong 2nd Road, Nanshan District, Shenzhen, People’s
Republic of China, which comprises approximately 7,024 square meters of office space. In addition to other offices in Shenzhen, we also have offices in
Beijing, Shanghai and Hong Kong and representative offices in Xiamen and Guangzhou, respectively, totaling approximately 9,800 square meters. Our leased
premises are leased from unrelated third parties who have valid title to the relevant properties. The lease for our principal executive offices will expire in
December 2016, and the other leases typically have terms of one to three years. Our servers are primarily hosted at internet data centers owned by major
domestic internet data center providers. The hosting services agreements typically have one-year terms and are renewed automatically upon expiration. We
believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
Item 4A.
Unresolved Staff Comments
None.
Item 5.
Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with, our audited
consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See
“Forward-Looking Information.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key
Information—D. Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks
and uncertainties. Unless otherwise specified, the results presented in this annual report does not include Xunlei Kankan, a discontinued operation.
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A. Operating Results
Overview
We operate a powerful internet platform in China based on cloud computing to enable users to quickly access, manage and consume digital media
content. We are increasingly extending into mobile devices with our mobile application and in part pre-installed acceleration plug-ins on mobile phones to
further expand our user base and offer our users a wider range of access points.
We provide users with quick and easy access to digital media content on the internet through two core products and services, available to users for free
and for a subscription fee, respectively. Our acceleration products and services include Xunlei Accelerator and our cloud acceleration subscription services
(delivered through products such as Green Channel, Offline Accelerator and Yunbo). Benefitting from the large user base accumulated by our core product,
Xunlei Accelerator, we have further developed various value-added services to meet a fuller spectrum of our users’ digital media content access and
consumption needs. These value-added products and services include our cloud computing project and online game. In July 2015, we completed the divesture of
our entire stake in our online video streaming platform, Xunlei Kankan to Beijing Nesound International Media Corp., Ltd., an independent third party.
We generate revenues primarily through the following services:
Subscription services. We provide cloud acceleration subscription services for subscribers to enable faster and more reliable access to digital
media content. Revenues from subscription services contributed to 72.3% of our revenues in 2014 and 63.4% in 2015. Subscription fees are time-
based and are primarily collected up-front from subscribers on a monthly or yearly basis.
Online advertising services (including mobile advertising). We provide marketing opportunities on our websites and mobile platform to
advertisers. Online advertising revenues contributed to 4.3% of our revenues in 2014 and 3.7% in 2015 and we achieved mobile advertising
revenue in the fourth quarter of 2015. The revenues are derived principally from various forms of advertisements that we place on our websites
and mobile platform.
Other internet value-added services. We offer multiple other value-added services to our users. Revenues from other internet value-added services
contributed to 23.4% of our revenues in 2014 and 32.9% in 2015.
Our revenues increased from US$122.0 million in 2013 to US$135.8 million in 2014 and decreased to US$130.0 million in 2015. We had net income
attributable to Xunlei Limited of US$10.7 million and US$10.8 million in 2013 and 2014 respectively, but a net loss attributable to Xunlei Limited of US$13.2
million in 2015. We had net income attributable to Xunlei Limited’s common shareholders of US$2.3 million in 2013, but net loss in the amount of US$105.4
million and US$13.2 million in 2014 and 2015, respectively. The net loss of US$105.4 million in 2014 was primarily due to the acceleration of amortization of
beneficial conversion feature of series E preferred shares upon the initial public offering of US$49.3 million, the deemed dividend to preferred shareholders
upon the initial public offering of US$32.8 million and the deemed dividend to certain shareholders from the repurchase of shares of US$14.9 million. The net
loss of US$13.2 million in 2015 was primarily due to an increase of US$4 million in cost of revenue and increase of US$ 9 million in research and development
expenses.
Due to our sale of the Xunlei Kankan business, that business is accounted for as a discontinued operation and our consolidated statements of
comprehensive income/(loss) in this annual report separately classifies the discontinued operations from our remaining business operations for all years
presented.
Major factors affecting our results of operations
Our business and operating results are subject to general factors affecting the internet industry in China, including overall economic growth, which has
resulted in increases in disposable income and consumer spending, government and industry initiatives accelerating the technological advancement and growth
of internet industry, the growth of internet usage and penetration rate in China, strong preference of Chinese consumers for accessing digital media content
through the internet, the greater availability of digital media content on the internet, and the increasing acceptance of online advertising as part of advertisers’
overall marketing strategy and spending. Our results of operations will continue to be affected by such general factors.
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Our results of operations are also directly affected by a number of company-specific factors, including:
Our ability to continue to enhance and innovate our service offerings, including our mobile products and our cloud computing project.
As our industry evolves rapidly and user preference for our services may change quickly, our revenues and results of operations significantly depend
on our ability to continue enhancing and expanding our service offerings to meet evolving user preference and market demand, and to broaden our user base.
We have a proven track record of developing our service offerings to successfully address the preferences of China’s internet users. To address deficiencies of
digital media content transmission over the internet in China, we provide users with quick and easy access to digital media content on the internet through two
core products and services, Xunlei Accelerator and our cloud acceleration subscription services, available to users for free and for a subscription fee,
respectively. To meet our users’ digital media content access and consumption needs, we have further developed various value-added services, including online
game services. Furthermore, we focus more on user behaviors and study users’ life cycles on our platform, so that we can offer relevant services at the right time
and encourage users to continue using our services.
An important part of our business plan is to continue transitioning to mobile internet. As an increasing number of users are accessing online services
through mobile devices, we are increasingly expanding our services to mobile devices, particularly through cooperation with smartphone makers, including
Xiaomi, which currently offers our mobile acceleration plug-in pre-installed on its new phones and as updates on its existing phones. We intend to further work
with more smartphone makers in China so that a larger number of mobile users can benefit from our mobile products, including acceleration and higher
downloading success rates.
We have also launched our cloud computing project to allocate idle uplink capacity to internet content providers and other internet users in need. We
gather idle uplink capacity from internet users who have bought and connected our proprietary ZQB devices to their network router. Our ZQB devices can
allocate those users’ idle uplink capacity to us for our further allocation to internet content providers and other internet users. We pay users of our ZQB devices
for the use of their idle capacity. The uplink capacity gathered from ZQB devices are valuable resources that we target to commercialize with potential
customers such as streaming websites and app stores. Depending on our own needs, we also utilize those crowd-sourced capacity for our own subscription
business from time to time, reducing our purchase of bandwidth from traditional third party carriers.
Our ability to further monetize our user base.
Our revenues and results of operations depend on our ability to further monetize our user base, to convert more users to subscribers and to increase the
spending of our subscribers. With enhanced knowledge of user behavior and preferences, we offer a diverse range of premium services tailored to their
individual needs. For example, our cloud acceleration subscription services offer users value-added services for speed. We intend to further monetize our user
base and aim to convert users to subscribers by expanding our offering of value-added services, such as cloud-based storage and mobile access. We plan to
provide one-stop services for our users, in terms of accessing content and storage and synchronization of content across devices, including mobile devices and
PC.
Our ability to maintain our technology leadership and cost-efficient infrastructure.
Our results of operations depend on our ability to maintain our technology leadership, with innovations such as our mobile technology, our uplink
capacity crowdsourcing technology and our cloud acceleration technology. Our mobile technology allows users to access content from anywhere, our uplink
capacity crowdsourcing technology enables us to utilize the idle capacity available from our large user base, and our cloud acceleration technology enables users
to access content in an efficient manner. Our proprietary technology and highly scalable massive distributed computing network form our core competitive
advantage, enabling us to deliver superior transmission acceleration services and enhanced user experience anywhere and with an efficient sort of acceleration.
Our resource discovery network leverages our distributed computing power, computing and storage capacity and significantly reduces our reliance on servers
operated by us, which in turn provides us with a clear cost advantage over our competitors. As part of our expansion strategy, we plan to devote substantial
resources to research and development in order to better serve our users, particularly to our cloud computing project and mobile products and services.
Therefore, the expenses associated with our research and development are expected to increase in the near future. However, we plan to continue to increase the
uplink capacity we crowdsource through our cloud computing project, which is expected to continue to reduce our bandwidth cost, contribute to the cost
efficiency of our overall infrastructure and generate additional revenue when we sell those capacity to third parties.
73
Our ability to control our costs and operating expenses.
Our results of operations depend on our ability to control our costs and operating expenses. We expect our bandwidth costs to continue to increase as
we grow our business and raise the number of subscribers, although we expect such costs would be partly offset by the fact that we expect to source an
increasing amount of bandwidth from our cloud computing project. In addition, our operating expenses are expected to increase in the future, since we expect
increased headcount to reflect the growth of our business. We plan to continue to invest in research and development to maintain our technology leadership,
especially to increase our research and development expenses and sales and marketing expenses in relation to our cloud computing project.
Description of certain statement of operations items
Revenues
We derive our revenues primarily from cloud acceleration subscription services, online advertising and other internet value-added services including
online games and cloud computing services. The following table sets forth the principal components of our revenues by amounts and percentages of our
revenues for the periods presented.
Continuing operations
2013
(in thousands of US$, except for percentages)
Subscriptions
Online advertising
Other internet value-added services
Total
Amount
86,733
2,951
32,347
122,031
For the Year Ended December 31,
2014
% of
Revenues
71.1
2.4
26.5
100.0
Amount
98,189
5,834
31,789
135,812
% of
Revenues
72.3
4.3
23.4
100.0
2015
Amount
82,435
4,802
42,759
129,996
% of
Revenues
63.4
3.7
32.9
100.0
Subscriptions. We introduced our cloud acceleration subscription services in March 2009 and we generate revenues from providing our users with
exclusive services, such as access to high-speed online transmission, premium acceleration or access privileges, for a time-based subscription fee. The standard
subscription fee is RMB10 (US$1.6) per month or RMB99 (US$15.9) per year, and we also offer premium subscription packages with prices at RMB15
(US$2.4) per month or RMB149 (US$23.9) per year or RMB30 (US$4.8) per month or RMB 288 (US$46.2) per year to cater to subscribers’ different demand
for acceleration speed and user experience, which are becoming increasingly popular among our subscribers. Our subscription revenues, as a percentage of our
revenues, increased from 71.1 % in 2013 to 72.3% in 2014, and decreased to 63.4% in 2015.
The most significant factor that directly affects our subscription revenues is the number of subscribers. We may maintain our subscriber base in the
future by expanding our offering of fee-based services, but important factors outside of our control, such as the PRC government’s regulation and censorship of
information disseminated over the internet, may have a material adverse impact on our cloud acceleration services, which in turn may have an adverse effect on
the number of our subscribers and on our revenues and results of operations. For example, in April 2014, the Chinese government initiated a campaign to
enhance and enforce its scrutiny on internet content in China, particularly for pornographic content, and various websites were subject to penalties and in some
cases outright suspension of website operations. We conducted an internal compliance investigation to ensure that the content transmitted by our products is in
compliance with the strict standards set out by the authorities, and as a result, deleted millions of cached files, added thousands of keywords to our automatic
keyword filtration system and permitted temporary suspension of services by approximately 281,000 existing subscribers as of the end of 2015. Also see “Item
3. Key Information—D. Risk Factors—Risks related to our business—Regulation and censorship of information disseminated over the internet in China,
recently strengthened, may adversely affect our business, and we may be liable for digital media content on our platform.” In the future, there may be other laws
and regulations that lead to further voluntary or forced removal of content or other measures to ensure compliance with standards set out by relevant regulatory
authorities, which may further reduce our subscriber base. Currently, we are unable to quantify the magnitude and extent of such impact.
74
Online advertising. Our online advertising revenues are derived principally from various forms of advertisements that we place on our websites and
mobile platform. A significant majority of our advertisers purchase our online advertising services through third-party advertising agencies. As is customary in
the advertising industry in China, we pay rebates to third-party advertising agencies and recognize revenues net of these rebates.
In the first half of 2013, we discontinued delivering advertisements on Xunlei Accelerator to further improve user experience and enhance user
engagement, and do not expect to generate significant advertising revenues from Xunlei Accelerator after 2014. We also do not expect to generate significant
advertising revenues in the future on our PC platform, if at all, since we have sold Xunlei Kankan in July 2015. For details of our sale of Xunlei Kankan, see
“Item 4. Information on the Company — A. History and Development of the Company.” In the fourth quarter of 2015, we achieved mobile advertising revenue
for the first time.
Other internet value-added services. We actively seek new business opportunities that complement our existing core acceleration business to further
improve our users’ overall experience. Revenues from other internet value-added services decreased from US$32.3 million in 2013 to US$31.8 million in 2014
and increased to US$42.8 million in 2015.
A significant portion of revenues of other internet value-added services were generated from our online games. For web games, we had approximately
210,000, 283,000 and 397,000 paying users for the years ended December 31, 2013, 2014 and 2015, respectively. For the MMOGs, we had approximately
181,000, 156,000 and 81,000 paying users for the years ended December 31, 2013, 2014 and 2015, respectively. We calculate the number of paying users
during a given period as the cumulative number of users that have purchased virtual items or other products and services for our web games or MMOGs at least
once during the relevant period. The amount of revenue attributable to our new games with an operating history of less than 12 months is approximately US$1.9
million in 2013, US$13.5 million in 2014 and US$7.3 million in 2015, representing 6.2%, 45.7%, 23.6% of our total revenues from online games in 2013, 2014,
2015, respectively. The amount of revenue attributable to our old games with an operating history of more than 12 months is approximately US$28.8 million in
2013, US$16.1 million in 2014 and US$23.6 million in 2015. In addition, our top five games accounted for approximately 23.6%, 11.9% and 15.0% of our total
revenues in 2013, 2014, 2015, respectively.
Cost of revenues
Our cost of revenues consists primarily of (i) bandwidth costs, (ii) content costs, (iii) payment handling fees, (iv) depreciation of servers and other
equipment and (v) games revenue sharing costs and others. The following table sets forth the components of our cost of revenues by amounts and percentages of
our revenues for the periods presented:
Continuing operations
(in thousands of US$, except
for percentages)
Bandwidth costs
Content costs, including amortization
Payment handling fees
Depreciation of servers and other equipment
Games revenue sharing costs and others
Total
2013
For the Year Ended December 31,
2014
2015
Amount
% of
Revenues
Amount
% of
Revenues
Amount
% of
Revenues
28,174
1,061
12,097
3,801
5,125
50,258
23.1
0.9
9.9
3.1
4.2
41.2
33,545
—
11,305
5,102
5,803
55,755
24.7
—
8.3
3.8
4.3
41.1
37,218
338
9,087
4,873
8,518
60,034
28.6
0.3
7.0
3.8
6.5
46.2
Bandwidth costs. Bandwidth costs are the fees we pay to telecommunications carriers and other service providers for telecommunications services and
for hosting our servers at their internet data centers. Bandwidth is a significant component of our cost of revenues. We expect our bandwidth costs to increase on
an absolute basis primarily due to an increased need for bandwidth to support the growth of our business. In 2015, a portion of the bandwidth we use for our
acceleration services was supplied by uplink capacity crowdsourced through our cloud computing project, instead of buying such bandwidth from third parties.
In addition, we expect to increase our bandwidth costs as we continue to scale in magnitude the capacity we crowdsource through our cloud computing project.
For details on our cloud computing project, see “Item 4. Information on the Company — B. Business Overview.”
75
Payment handling fees. Payment handling fees are the fees we pay to payment channels for cloud acceleration subscription services, online games and
other paid services. Users can make payments for such services through third-party online, fixed phone line and mobile phone payment channels. These third-
party payment channels typically charge a handling fee for their services. Our subscribers used to make subscription payments through mobile phones.
However, as mobile carriers generally charge higher handling fees than other channels, we have modified our subscription fee structure to encourage our
subscribers to use other available payment channels. We expect such payment handling fees to increase as we continue to grow our subscription-based and other
paid service offerings.
Depreciation of servers and other equipment. Depreciation expenses for servers and other equipment that are directly related to our business operations
and technical support are included in our cost of revenues. We expect our depreciation expenses to increase on an absolute basis as we continue to invest in
additional servers and other equipment to accommodate the growth of our user and subscriber base, but to decrease as a percentage of our revenues over time.
Games revenue sharing costs and others. These costs mainly represent the share of online game revenue remitted to developers of exclusive licensed
games.
Operating expenses
Our operating expenses consist of (i) research and development expenses, (ii) sales and marketing expenses and (iii) general and administrative
expenses. The following table sets forth the components of our operating expenses by amounts and percentages of our revenues for the periods presented:
(in thousands of US$, except for percentages)
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total
2013
For the Year Ended December 31,
2014
2015
Amount
% of
Revenues
Amount
% of
Revenues
Amount
% of
Revenues
21,740
9,848
18,663
50,251
17.8
8.1
15.3
41.2
29,252
13,527
26,945
69,724
21.5
10.0
19.8
51.3
38,250
15,042
28,774
82,066
29.4
11.6
22.1
63.1
Research and development expenses. Research and development expenses consist primarily of salaries and benefits for our research and development
personnel. Expenditures incurred during the research phase are expensed as incurred. Expenditures incurred for the development of the acceleration products
prior to the establishment of technological feasibility are expensed when incurred. We expect our research and development expenses to increase in the near
term as we continue toexpand our research and development team to develop new products and update existing products, particularly as we plan to continue
devoting resources in the development of our cloud computing project and the development and updating of our mobile products.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, sales commissions and benefits for our sales and marketing
personnel and marketing and promotional expenses. We expect our sales and marketing expenses to increase in the near term as we expect to hire additional
sales personnel and invest in brand enhancement efforts and the promotion of our products, particularly as we plan to increase our efforts in promoting our
cloud computing project, Xunlei Mobile and online games.
General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits, professional service fees and
other administrative expenses. We expect our general and administrative expenses to slightly increase in the near term as our business continues to grow.
76
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gains.
Additionally, there is no withholding tax on dividends paid by us to our shareholders.
China
On March 16, 2007, the PRC National People’s Congress promulgated the EIT Law, adopting a unified EIT rate of 25%. In addition, the EIT Law also
provides a five-year transitional period starting from its effective date for those enterprises that were established before the date of promulgation of the EIT Law
and that were entitled to preferential income tax rates under the then effective tax laws or regulations. On December 26, 2007, the State Council issued the
“Circular for Implementation of the Transitional Preferential Policies for the Enterprise Income Tax.” Pursuant to this Circular, the transitional income tax rates
for enterprises established in the Shenzhen Special Economic Zone before March 16, 2007 were 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and
2012, respectively. Thus, the applicable EIT rate for Giganology Shenzhen, the VIE and its subsidiaries, which were established in the Shenzhen Special
Economic Zone before March 16, 2007, was 25% for each of the years 2013, 2014 and 2015.
As approved by the relevant tax authority, Giganology Shenzhen was further exempt from EIT for two years commencing from the first year of
profitable operation after offsetting prior years’ tax losses, followed by a 50% reduction for the next three years, or 2-year Exemption and 3-year 50%
Reduction, as a software enterprise. The first year of profit operation of Giganology Shenzhen was 2006. According to the EIT Law, Giganology Shenzhen
could still enjoy the tax holidays which were grandfathered by the EIT Law in 2011. Accordingly, the applicable EIT rates for Giganology Shenzhen were 25%
for each of the years ended December 31, 2013, 2014 and 2015.
On April 14, 2008, relevant PRC governmental regulatory authorities released further qualification criteria, application procedures and assessment
processes for meeting the High and New Technology Enterprise, or HNTE status under the EIT Law which would entitle qualified and approved entities to a
favorable statutory tax rate of 15%. In April 2009, the State Administration for Taxation, or SAT, issued Circular Guoshuihan [2009] No. 203 stipulating that
entities qualified for the HNTE status should apply with the relevant tax authorities to enjoy the reduced EIT rate of 15% provided under the EIT Law starting
from the year when the HNTE certificate becomes effective. In addition, an entity qualified for the HNTE status can continue to enjoy its remaining tax holiday
from January 1, 2008 provided that it has obtained the HNTE certificate according to the new recognition criteria set by the EIT Law and the relevant
regulations. In February 2011, Shenzhen Xunlei obtained the HNTE certificate and has renewed the HNTE certificate in September 2014 for the years ended
December 31, 2015, 2016 and 2017, which enables Shenzhen Xunlei to enjoy the preferential tax rate of 15% for the years of 2015, 2016 and 2017.
According to a policy of the PRC State tax bureau, enterprises that engage in research and development activities are entitled to claim 150% of the
research and development expenses incurred in a year as tax deductible expenses in determining their tax assessable profits for that year, or Super Deduction.
Shenzhen Xunlei has been claiming this Super Deduction in ascertaining its tax assessable profits and brought forward tax losses from 2009 onwards. In
addition, following the approval by the relevant tax authority in July 2010, Shenzhen Xunlei was recognized as an enterprise engaged in software development
activities. Accordingly, it is entitled to a tax holiday of 2-year Exemption and 3-year 50% Reduction from 2010 onwards. In December 2013, Shenzhen Xunlei
obtained the certificate of the Key Software Enterprise for the years ended December 31, 2013 and 2014, which enables Shenzhen Xunlei to enjoy the
preferential tax rate of 10% for the year of 2013 and 2014. As a result, the applicable tax rate of Shenzhen Xunlei for the years ended December 31, 2013, 2014
and 2015 were 10%, 10% and 15%, respectively.
Pursuant to the relevant PRC regulations, Xunlei Computer is entitled to the 2-year Exemption and 3-year 50% Reduction treatment. The first year of
profitable operation of Xunlei Computer is 2013. Our other subsidiaries and VIE’s subsidiaries, which were established after January 1, 2008, are subject to EIT
at a rate of 25%.
77
In addition, according to the EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derive
dividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC are subject to PRC withholding tax, or WHT, at 10% (a
further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is generally applicable to any
dividends to be distributed from Giganology Shenzhen and Xunlei Computer to us out of any profits of Giganology Shenzhen and Xunlei Computer derived
after January 1, 2008. Although Xunlei Computer and Giganology Shenzhen had retained earnings as of December 31, 2015, the directors of the company
decided to reinvest the retained earnings permanently in China and therefore no such WHT is required.
Results of operations
The following table sets forth a summary of our consolidated results of continuing operations by amounts and percentages of our revenues for the years
indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The
results of operations in any period are not necessarily indicative of the results that may be expected for any future period.
(in thousands of US$ except for percentage)
Amount
2013
For the Year Ended December 31,
2014
2015
% of
Revenues
Amount
% of
Revenues
Amount
% of
Revenues
Revenues, net of rebates and discounts
Business taxes and surcharge
Net revenues
Cost of revenues
Gross profit
Operating expenses
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Operating income/(loss)
Interest income
Interest expense
Other income, net
Share of income/(loss) from equity investees
Income/(loss) from continuing operations before
income tax
Income tax (expense)/benefit
Net income/(loss) from continuing operations
Discontinued operations
Loss from discontinued operations before income
taxes
Income tax benefit/(expense)
Net loss from discontinued operations
Net income/(loss)
Less: Net loss attributable to the non-controlling
interest
Net income/(loss) attributable to Xunlei Limited
122,031
(3,904)
118,127
(50,258)
67,869
(21,740)
(9,848)
(18,663)
(50,251)
17,618
1,189
—
4,679
25
23,511
(560)
22,951
(13,779)
1,207
(12,572)
10,379
(283)
10,662
100.0
(3.2)
96.8
(41.2)
55.6
(17.8)
(8.1)
(15.3)
(41.2)
14.4
1.0
—
3.9
0.0
19.3
(0.5)
18.8
—
—
(10.3)
8.5
(0.2)
8.7
135,812
(1,878)
133,934
(55,755)
78,179
(29,252)
(13,527)
(26,945)
(69,724)
8,455
6,733
(163)
13,966
(259)
28,732
(463)
28,269
(20,330)
1,923
(18,407)
9,862
(950)
10,812
100.0
(1.4)
98.6
(41.0)
57.6
(21.5)
(10.0)
(19.8)
(51.3)
6.3
5.0
(0.1)
10.2
(0.2)
21.2
0.4
20.8
—
—
(13.5)
7.3
(0.7)
8.0
129,996
(361)
129,635
(60,034)
69,601
(38,250)
(15,042)
(28,774)
(82,066)
(12,465)
5,833
(239)
3,627
(12)
(3,256)
886
(2,370)
(10,048)
(2,048)
(12,096)
(14,466)
(1,299)
(13,167)
100.0
(0.3)
99.7
46.2
53.5
(29.4)
(11.6)
(22.1)
(63.1)
(9.6)
4.5
(0.2)
2.8
(0.0)
(2.5)
0.7
(1.8)
—
—
(9.3)
(11.1)
(1.0)
(10.1)
Year ended December 31, 2015 compared with year ended December 31, 2014.
Revenues. Our revenues decreased by 4.3% from US$135.8 million in 2014 to US$130.0 million in 2015. The decrease was primarily due to a
decrease in subscription revenues.
Our revenues from subscription services decreased by 16.0% from US$98.2 million in 2014 to US$82.4 million in 2015. The decrease was mainly
attributable to lower average revenue per subscriber due to the suspension of certain accounts in 2015. Our number of subscribers as of December 31, 2015 was
5.0 million, compared with 4.9 million as of December 31, 2014.
78
Our online advertising revenues decreased by 17.5% from US$5.8 million in 2014 to US$4.8 million in 2015, primarily because we stopped placing
advertisements on Xunlei Kankan after its divestiture.
Revenues derived from other internet value-added services increased by 34.5% from US$31.8 million in 2014 to US$42.8 million in 2015, primarily
because we achieved revenue from our cloud computing project in 2015.
Cost of revenues. Our cost of revenues increased by 7.7% from US$55.8 million in 2014 to US$60.0 million in 2015. The increase in our cost of
revenues was primarily due to the increase in bandwidth costs associated with our cloud computing project.
Bandwidth costs. Our bandwidth costs increased by 10.9% from US$33.5 million in 2014 to US$37.2 million in 2015, primarily due to the increased
bandwidth costs associated with our cloud computing project.
Payment handling fees. Our payment handling fees decreased by 19.6% from US$11.3 million in 2014 to US$9.1 million in 2015, driven primarily by
a change in the combination of payment channels used by our subscribers.
Depreciation of servers and other equipment. Depreciation of servers and other equipment decreased by 4.5% from US$5.1 million in 2014 to US$4.9
million in 2015, primarily due to the shift of strategy to our cloud computing project.
Games revenue sharing costs and others. These costs increased by 4.8% from US$5.8 million in 2014 to US$8.5 million in 2015, primarily related to
the cost of hardware sold this year.
Gross profit. As a result of the above, our gross profit decreased by 11.0% from US$78.2 million in 2014 to US$69.6 million in 2015. Gross profit
margin decreased from 57.6% in 2014 to 53.5% in 2015, primarily due to an increase in bandwidth cost.
Operating expenses. Our operating expenses increased by 17.7% from US$69.7 million in 2014 to US$82.1 million in 2015, primarily due to expenses
associated with the development and promotion of cloud computing and an increase of staff compensation expenses, including share-based compensation.
Research and development expenses. Our research and development expenses increased by 30.8% from US$29.3 million in 2014 to US$38.3 million in
2015. The increase in our research and development expenses was primarily due to the rise in staff compensation expenses, both due to the continued
investments (including more headcounts and increased bonuses) and growth in our cloud computing project.
Sales and marketing expenses. Our sales and marketing expenses increased by 11.2% from US$13.5 million in 2014 to US$15.0 million in 2015. The
increase in our sales and marketing expenses was primarily due to our increased spending on marketing and promotion associated with our cloud computing
project.
General and administrative expenses. Our general and administrative expenses increased by 6.8% from US$26.9 million in 2014 to US$28.8 million in
2015. The increase in our general and administrative expenses was primarily due to an increase in staff compensation expenses, including share-based
compensation, both due to an increase in headcount and an increase in average salary and bonus levels.
Interest income. Our interest income decreased by 13.4% from US$6.7 million in 2014 to US$5.8 million in 2015. The increase was primarily due to
the decrease of our cash and cash equivalents.
Interest expense. We had an interest expense of US$0.2 million in 2014 and US$0.2 million in 2015, which represented interest expenses accrued for
long-term payables to certain shareholders resulting from repurchase of shares in 2014.
Other income, net. Our other income decreased by 74.0% from US$14.0 million in 2014 to US$3.6 million in 2015, primarily due to an decrease of
US$8.1 million in fair value changes of warrants liabilities resulting from expiration of series E warrants upon our initial public offering in 2014, an increase of
US$ 2.6 million in exchange losses and an increase of US$1.0 million in investment income from short-term investments.
79
Income tax (expense)/benefit. We had an income tax expense of US$0.5 million in 2014 but an income tax benefit of US$0.9 million in 2015. The
income tax benefit for 2015 was mainly attributable to the deferred tax asset related to our operating loss, which was carried forward to offset taxable income.
There is no valuation allowance recognized for deferred tax assets generated from tax loss of disposal of Xunlei Kankan since we believe it can achieve enough
profit in the next five years to realize all of the deferred tax assets.
Net income/(loss) from continuing operations. As a result of the above, we generated a net income of US$28.3 million in 2014 but incurred a net loss
of US$2.4 million in 2015.
Net loss from discontinued operations. Loss from discontinued operations was US$18.4 million in 2014 and US$12.1 million in 2015.
Net income/(loss) attributable to Xunlei Limited. As a result of the above, we generated a net income attributable to Xunlei Limited of US$10.8
million in 2014 but a net loss attributable to Xunlei Limited of US$13.2 million in 2015.
Year ended December 31, 2014 compared with year ended December 31, 2013.
Revenues. Our revenues increased by 11.3% from US$122.0 million in 2013 to US$135.8 million in 2014. The increase was primarily due to a 13.2%
increase in our revenues from subscription services.
Our revenues from subscription services increased by 13.2% from US$86.7 million in 2013 to US$98.2 million in 2014. The increase was mainly
attributable to the increase in our subscriber numbers in the first three quarters of 2014, partially offset by a decline in subscriber numbers in the fourth quarter.
The number of subscribers declined to 4.9 million as of December 31, 2014 due to the fact that our increased efforts in complying with stricter government
regulation of internet content in China negatively affected user experience—part of our efforts included permitting a temporary suspension of our subscription
services to approximately 350,000 existing subscribers in the fourth quarter of 2014.
Revenues derived from other internet value-added services decreased by 2.0% from US$32.3 million in 2013 to US$31.8 million in 2014, primarily
due to the increase in pay per view revenues from US$2.0 million in 2013 to US$3.9 million in 2014.
Cost of revenues. Our cost of revenues increased by 11.0% from US$50.3 million in 2013 to US$55.8 million in 2014. The increase in our cost of
revenues was primarily due to the increase in bandwidth costs associated with the expansion of our subscription and other services and an increase in
depreciation of servers and other equipment.
Bandwidth costs. Our bandwidth costs increased by 19.1% from US$28.2 million in 2013 to US$33.5 million in 2014, primarily due to the increased
bandwidth needs to support our subscription services. Bandwidth costs associated with subscription services have grown in line with the expansion of our
subscription services.
Payment handling fees. Our payment handling fees decreased by 6.6% from US$12.1 million in 2013 to US$11.3 million in 2014, driven primarily by
a change in the combination of payment channels used by our subscribers.
Depreciation of servers and other equipment. Depreciation of servers and other equipment increased by 34.2% from US$3.8 million in 2013 to US$5.1
million in 2014, as we acquired more servers and other equipment to accommodate the increased needs for our acceleration and other product services.
Games revenue sharing costs and others. These costs increased by 13.3% from US$5.1 million in 2013 to US$5.8 million in 2014, mainly because we
generated more revenues from exclusive licensed games in 2014.
Gross profit. As a result of the above, our gross profit increased by 15.2% from US$67.9 million in 2013 to US$78.2 million in 2014. Gross profit
margin increased from 55.6% in 2013 to 57.6% in 2014, primarily due to an decrease in payment handing fee.
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Operating expenses. Our operating expenses increased by 38.8% from US$50.3 million in 2013 to US$69.7 million in 2014, primarily due to an
increase of staff compensation expenses, including share-based compensation.
Research and development expenses. Our research and development expenses increased by 34.6% from US$21.7 million in 2013 to US$29.3 million in
2014. The increase in our research and development expenses was primarily due to the rise in staff compensation expenses, both due to an increase in headcount
and an increase in average salary and bonus levels.
Sales and marketing expenses. Our sales and marketing expenses increased by 37.4% from US$9.8 million in 2013 to US$13.5 million in 2014. The
increase in our sales and marketing expenses was primarily due to our increased spending on marketing and promotion.
General and administrative expenses. Our general and administrative expenses increased by 44.4% from US$18.7 million in 2013 to US$26.9 million
in 2014. The increase in our general and administrative expenses was primarily due to an increase in staff compensation expenses, including share-based
compensation, both due to an increase in headcount and an increase in average salary and bonus levels.
Interest income. Our interest income increased by 466.3% from US$1.2 million in 2013 to US$6.7 million in 2014. The increase was primarily due to
an increase in cash held in the form of interest-bearing bank deposits representing net proceeds received from series E financing and our initial public offering in
June 2014.
Interest expense. We did not have any interest expense 2013 but had an interest expense of US$0.2 million in 2014, which represented interest
expenses accrued for long-term payables to certain shareholders resulting from repurchase of shares in 2014.
Other income, net. Our other income increased by 198.5% from US$4.7 million in 2013 to US$14.0 million in 2014, primarily due to an increase of
US$6.5 million in fair value changes of warrants liabilities resulting from expiration of series E warrants upon our initial public offering, and an increase of
US$1.6 million in investment income from short-term investments and an increase of US$0.8 million in subsidy income.
Income tax expense. We had income tax expense of US$0.6 million and US$0.5 million in 2013 and 2014, respectively.
Net income/(loss) from continuing operations. As a result of the above, we generated a net income of US$23.0 million in 2013 but incurred a net loss
of US$28.3 million in 2014.
Net loss from discontinued operations. Loss from discontinued operations was US$12.6 million in 2013 and US$18.4 million in 2014.
Net income attributable to Xunlei Limited. As a result of the above, we generated net income attributable to Xunlei Limited of US$10.7 million in
2013 and US$10.8 million in 2014.
Inflation
Inflation in China has not affected our results of operations in recent years. According to the National Bureau of Statistics of China, the year-over-year
percent changes in the consumer price index for December 2013, 2014 and 2015 were increases of 2.5%, 1.5% and 1.6%, respectively. Although we have not
been affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.
Critical accounting policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of,
among other things, assets and liabilities, contingent assets and liabilities and revenues and expenses. We regularly evaluate these estimates and assumptions
based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since
our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect. This is especially
true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be
critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.
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Revenue recognition
1. Subscription revenues
We operate a VIP subscription program where subscribers can have access to acceleration services and other access privileges. The subscription fee is
time-based and is collected up-front from subscribers except in the cases when they elect to pay via their mobile operators. The subscription fee is collected
when the subscribers pay for their monthly phone bills. The terms of time-based subscriptions range from one to twelve months, with the subscribers having the
option to renew the contracts. The receipt of subscription fees is initially recorded as deferred revenue and revenues are recognized ratably over the period of
subscription as services are rendered. Unrecognized portion of the subscription fee beyond 12 months from balance sheet date is classified as non-current
liability. We evaluated the principal versus agent criteria and determined that we are the principal in the transaction and accordingly record revenues on a gross
basis. In determining whether to report revenues gross for the amount of subscription revenues, we assesses whether it maintains the principal relationship with
the VIP subscribers, whether it bears the credit risk and whether it establishes prices for the end users. Payment handling fees levied by online system, fixed
phone line and mobile payment channels are recorded as the cost of revenues in the same period as the revenues for the subscription fee are recognized.
2. Advertising revenues
Advertising revenues are derived principally from advertising arrangements where the advertisers pay to place their advertisements on our platform in
different formats over a particular period of time. Such formats include but are not limited to videos, banners, links, logos and buttons.
Advertisements on our platform are charged on the basis of duration, and advertising contracts are signed to establish the fixed price and the
advertising services to be provided. We enter into advertising contracts with third-party advertising agencies that represent advertisers, as well as directly with
advertisers. A typical contract term would range from a few days to three months. Both third party advertising agencies and direct advertisers are billed at the
end of the display period and payments are due usually within three months.
Where our customers purchase multiple advertising spaces with different display periods in the same contract, we allocate the total consideration to the
various advertising elements based on their relative fair values and recognize revenues for the different elements over their respective display periods. We
determine the fair values of different advertising elements based on the prices charged when these elements were sold on a standalone basis. We recognize
revenues on the elements delivered and defer the recognition of revenues for the fair value of the undelivered elements until the remaining obligations have been
satisfied. Where all of the elements within an arrangement are delivered uniformly over the contract period, revenues are recognized on a straight line basis over
the contract period.
a) Transactions with third-party advertising agencies
For contracts entered into with third-party advertising agencies, the third-party advertising agencies will in turn sell the advertising services to
advertisers. Revenues are recognized ratably over the contract period of display based on the following criteria:
There is a persuasive evidence that an arrangement exists: we will enter into framework and execution contracts with the advertising agencies,
specifying price, advertising content, format and timing;
Price is fixed and determinable: price charged to the advertising agencies is specified in the contracts, including relevant discount and rebate rates;
Services are rendered: we recognize revenues ratably over the contract period of display; and
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Collectability is reasonably assured: we assess credit history of each advertising agency before entering into any framework and execution
contracts. If the collectability from the agencies is assessed as not reasonably assured, we recognize revenues only when the cash is received and
all the other revenues criteria are met.
We provide sales incentives in the forms of discounts and rebates to third party advertising agencies based on purchase amount. As the advertising
agencies are viewed as the customers in these transactions, revenues are recognized based on the price charged to the agencies, net of sales rebates provided to
the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted rebate rates and estimated sales amount
based on historical experience.
We regularly monitor sales amount from each customer and adjust our estimated rebate at the end of each reporting period. Annual sales rebates are
assessed on a quarterly basis based on the contracted rebate rates and the estimated sales amount for the full year, and actual sales to date and estimated sales for
the rest of the year. Such rebates are adjusted at the year end based on actual sales amount achieved.
b) Transactions with advertisers
We also enter into advertisement contracts directly with advertisers. Under these contracts, similar to transactions with third-party advertising agencies,
we recognize revenues ratably over the contract period of display. The terms and conditions, including price, are fixed according the contracts between us and
the advertisers. We also perform credit assessment of all advertisers prior to entering into contracts. Revenues are recognized based on the amount charged to
the advertisers, net of discounts.
3. Other internet value-added services
(1) Online game revenues
Users play games through our platform free of charge and are charged for purchases of virtual items including consumable and perpetual items, which
can be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specific user
within a specified period of time. Perpetual items represent virtual items that are accessible to the users’ account over the life of the online game. Pursuant to
contracts signed between us and the game developers, revenues from the sale of virtual items are shared based on a pre-agreed ratio for each game. We enter
into both non-exclusive and exclusive licensing contracts with game developers.
a) Non-exclusive game licensed contracts
The games under non-exclusive licensed contracts are maintained, hosted and updated by the game developers. We mainly provide access to our
platform and limited after-sale services to the game players. The determination of whether to record these revenues using the gross or net method is based on an
assessment of various factors; the primary factors are whether we act as the principal in offering services to the game players or as agent in the transactions, and
the specific requirements of each contract. We have determined that for non-exclusive game licensed arrangements, the third party game developers are the
principal given that the game developers design and develop the game services offered, have reasonable latitude to establish prices of virtual items, and are
responsible for maintaining and upgrading the game content and virtual items. Accordingly, we record online game revenues, net of the portion remitted to the
game developers.
Given that online games are managed and administered by the game developers for non-exclusive licensed games, we do not have access to the data on
the consumption details and the types of virtual items purchased by the game players. However, we have data of when a particular user makes a purchase and
logs into the game. We have adopted a policy to recognize revenues relating to both consumable and perpetual items, over the shorter of (1) estimated lives of
the games and (2) the estimated lives of the user relationship with us, which were approximately two to six months for the periods presented.
Adjustments arising from the change of estimated lives of virtual items are applied prospectively as such change results from new information
indicating a change in the game player behavioral patterns.
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b) Exclusive game licensed contracts
For exclusive licensed contracts with game developers, the games are maintained and hosted by us. Accordingly, where we are determined to be the
principal, we record online game revenues on a gross basis, with the amount remitted to the game developers reported as cost of revenues. Payment handling
fees are recognized as cost of revenues when the related revenues are recognized.
For exclusive licensed games which are maintained on our servers, we have access to the data on the consumption details and types of virtual items
purchased by the game players. We do not maintain information on consumption details of virtual items, and only have limited information related to the
frequency of log-ons. Given that a substantial portion of the virtual items purchased by the game players in exclusive licensed games are perpetual items, our
management has determined that it would be most appropriate to recognize the related revenues over the shorter of (1) estimated lives of the games and (2)
estimated life of the user relationship with us, which is approximately one to three months. Revenues relating to consumable items are recognized immediately
upon consumption. Any changes in our estimates of lives of virtual items may result in our revenues being recognized on a basis different from prior periods
and may cause our operating results to fluctuate.
For both non-exclusive and exclusive licensed games, we estimate the life of virtual items to be the shorter of the estimated lives of the games and the
estimated lives of the user relationship.
The estimated user relationship period is based on data collected from those users who have purchased virtual items. To estimate the life of the user
relationship, we maintain a software system that captures the following information for each user: the date of first log-in, the date of first purchase for a virtual
item, the date of last purchase for a virtual item and the date the user ceases to play the game. We estimate the life of the user relationship to be the average
period from the first purchase of a virtual item to the date the user ceases to play the game. The estimate of the life of the user relationship is based only on the
data of those users who have purchased virtual items and is made on a game-by-game basis.
To estimate the date the user plays the game for the last time, we selected all paying users that logged on during a particular month and continue to
track these users’ log-on behaviors over at least a six-month period to determine if each user is “active” or “inactive,” which is determined based on a review of
the period of inactivity or idle period from the user’s last log-on. We observe the behaviors of these users to see whether they subsequently return to a game
based on different inactive periods (e.g. not logging on) of one month, two months, three months and so forth. The percentage of users calculated that do not log
back on is estimated to be the probability that users will not return to the game after a certain period of inactivity.
We consider a paying player to be inactive once he or she has reached a period of inactivity for which it is probable (defined as at least 80%) that a
player will not return to a specific game. We believe that using an 80% threshold for the likelihood that a player will not return to a game is a reasonable
estimate that achieves the magnitude of “probable” under the threshold described in ASC 450 Contingencies. We have consistently applied this threshold to our
analysis. Based on our assessment, the inactive period ranges generally from one to three months depending on the games.
To estimate the life of the games, we consider both games that we operate as well as games in the market that are of a similar nature. We group these
games by their nature, in categories such as simulation games, role playing games and others, which appeal to players belonging to different demographics. We
estimate that the life of each group of the games to be the average period from the date of launch for such games to the date the games are expected to be
removed from the website or terminated altogether. When we launch a new game, we estimate the life of the game and user relationship based on lives of other
similar games in the market until the new game establishes its own history. We also consider the game’s profile, attributes, target audience, and its appeal to
players of different demographic groups in estimating the user relationship period.
The consideration of user relationship with each online game is based on our best estimate that takes into account all known and relevant information at
the time of assessment. Adjustments arising from the changes of estimated lives of virtual items are applied prospectively as such changes are resulted from new
information indicating a change in the game player behavioral patterns. Any changes in our estimates of lives of virtual items may result in our revenues being
recognized on a basis different from prior periods and may cause our operating results to fluctuate. We periodically assess the estimated lives of the virtual items
and any changes from prior estimates are accounted for prospectively. Any adjustments arising from changes in user relationship as a result of new information
will be accounted as a change in accounting estimate in accordance with ASC 250 Accounting Changes and Error Corrections.
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Game players can purchase virtual currency via an online payment channel. We incur service fees levied by these payment channels, and such payment
expenses are recorded as the cost of revenues when the related revenues are recognized.
(2) Content sub-licensing revenues
With copyright content that has been exclusively licensed to us, we have the right to sub-license the broadcasting rights on a recurring basis to third
parties. We generate revenues from sub-licensing these broadcasting rights to third party customers, mainly video streaming internet platforms for cash, at a
fixed rate for a fixed period of time that falls within the original exclusive license period. Revenues are recognized in full at the later of the delivery of the copy
of the content with acceptance acknowledged by the customers and the commencement of the license period, as we are not obliged to provide any other
services. We perform credit assessment of our customers prior to entering into contracts to ensure that collection of the arrangement fee is reasonably assured.
We have no on-going obligation after delivery of the copy of the content.
(3) Pay per view revenues
We operate a pay per view program in which subscribers pay a monthly fee to watch and access a collection of movie contents. The subscription fee is
time-based and is collected up-front from subscribers except in the cases where they elect to pay via their mobile operators. The subscription fee is collected
when the subscribers pay for their monthly phone fees. The terms of time-based subscriptions range from one month to twelve months, with the subscribers
having the option to renew the contracts. The receipt of payment is initially recorded as deferred revenue and revenue is recognized ratably over the period of
subscription as services are rendered.
Viewers can also pay to watch each individual movie for an unlimited number of times. Revenues are recognized when the movie is broadcasted to the
viewers.
(4) Revenues from Cloud Computing
We launched Project Crystal, our cloud computing uplink capacity crowdsourcing project in 2014. This is an ongoing technology innovation in crowd-
sourcing of idle uplink capacity and potentially storage from our user base, by providing crowd-sourced uplink capacity either for our own use or by third
parties. These services are mainly used in online game, online video and mobile application.
The core principle is to collect idle uplink capacity from individuals with compensation, and we target to commercialize to online video streamers, app
stores and other third parties. On a monthly basis, we record the capacity that we deliver and recognize revenue from these online video streamers under
contractual rates applied.
(5) Revenues from ZQB
As part of our cloud computing services, since the second quarter of 2015, we began to sell ZQB, a hardware which could work as a micro-computer
based on Linux system. Revenue from the sale of ZQB is recognized when the item is dispatched to customers.
Barter transactions
We also enter into agreements with third parties (mainly video streaming internet platform) to exchange content. The exchanged content provides
rights for each respective party only to broadcast the content received on its own website; though, each party retains the right to continue broadcasting and or
sub-license the rights to the content it surrendered in the exchange. These transactions are non-monetary transactions similar to barter transactions, and we
follow ASC 845, Non-Monetary Transactions and ASC 360-10, Property, Plant, and Equipment.
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Such barter transactions should be recorded at fair value of the surrendered assets in the transaction unless such fair value is not determinable within
reasonable limits. We estimated the fair value of the content by gathering “price reference” of cash sub-licensing transaction of each exclusive content right and
categorizing it into two buckets (1) cash transaction prices with established counterparties and (2) cash transaction prices with less established counterparties.
With this information, we calculate an “average cash transaction price” for each category to be used as a reference for the non-monetary transaction. The
attributable cost of the related exclusive Content Copyright surrendered is released and recorded as the cost of the barter transaction in accordance with ASC
926 Entertainment—Films in which the cost is computed using the individual-film-forecast-computation method. This method calculates such cost based on the
ratio of the estimated fair value of the exchanged content over the aggregate estimated fair value to be generated by the exclusive Content Copyrights for their
whole license period or estimated useful lives. We revisit the forecast at each quarter or year end and make adjustment, when appropriate.
Share-based compensation
We awarded a number of share-based compensation options to our employees, officers and directors. The details of these share-based awards and the
respective terms and conditions are described in “Share-based compensation” in note 19 to our audited consolidated financial statements for the years ended
December 31, 2013, 2014 and 2015.
Options are accounted for as equity-classified awards because there are no explicit repurchase rights specified in the award documents and the number
of shares of our common shares issued under these awards are fixed and determined at the time of grants. All options are measured based on the fair value of the
award on the grant date and recognized as compensation expenses based on the straight-line vesting method, net of estimated forfeitures, over the requisite
service period, which is generally the vesting period.
The following table sets forth the options granted that were outstanding as of December 31, 2015:
Date of Option Grant
prior to 2012
March 1, 2012
August 1, 2012
March 1, 2013
August 1, 2013
November 18, 2013
March 5, 2014
June 24, 2014
September 5, 2014
January 1, 2015
Total
Options
outstanding
Exercise price
(US$)
Fair value of
options
(US$)
Fair value of
common shares
(US$)
8,618,325
75,615
7,917
7,292
267,500
366,761
52,000
512,642
32,233
473,500
2,130,820
—
0.01-3.97
3.97
3.97
3.97
2.11–3.97
3.97
2.11
3.97
—
1.01-2.82
1.10
1.17
1.13
0.99–1.60
0.89
1.43
0.62-0.66
0.08-3.30
0.76-1.38
—
2.83
3.01
3.20
3.23
3.15
3.06
2.98
2.67
1.46
We estimate the fair value of share options granted using the Black-Scholes option pricing model. The key assumptions used to determine the fair value
of the options at the relevant grant dates were as follows:
Risk-free interest rate (1)
Dividend yield (2)
Volatility rate (3)
Expected term (in years) (4)
Notes:
2013
0.77% to 1.76%
—
43.8% to 51.3%
4.58
For the Year Ended December 31,
2014
0.77% to 1.76%
—
40.07% to 43.3%
4.13 to 4.58
2015
0.77% to 1.76%
—
40.07% to 43.3%
4.07 to 5.57
(1) The risk-free interest rates of periods within the contractual life of the share options is based on the U.S. dollar Chinese government bond yield data from
Bloomberg as of the valuation dates;
(2) We have no history or expectation of paying dividends on our common stock;
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(3) Expected volatility is estimated based on the average historical volatilities of shares of the comparable publicly listed companies from Bloomberg as of the
valuation dates; and
(4) The expected term is estimated by assuming the share options will be exercised in the middle point between the vesting dates and maturity dates.
We also awarded a number of restricted shares to our executive officers and employees. On November 19, 2013, December 31, 2013, March 5, 2014,
March 31, 2014, June 9, 2014, June 24, 2014, August 1, 2014, November 3, 2014, December 1, 2014, March 1, 2015, June 23, 2015, August 1, 2015, September
1, 2015, November 1, 2015 and November 19, 2015, we granted 7,605,238, 490,000, 1,830,000, 270,000, 689,700, 60,000, 1,205,058, 1,800,000, 3,781,087,
1,769,000, 100,000, 1,215,000, 520,000, 230,000 and 6,500 restricted shares to our executive officers and employees, respectively. In 2015, 2,706,075 restricted
shares were forfeited, and these are available for future grants to executive officers and employees. The details of these share-based restricted shares and the
respective terms and conditions are described in “Share-based compensation” in note 19 to our audited consolidated financial statements for the years ended
December 31, 2013, 2014 and 2015.
The restricted shares are accounted for as equity-classified awards because there are no explicit repurchase rights specified in the relevant documents
and the number of shares of our common shares issued under these awards is fixed and determined at the time of grants. All restricted shares are measured based
on the fair value of the awards on the grant date and recognized as compensation expenses based on the straight-line vesting method net of estimated forfeitures
over the requisite service period.
In 2015, we granted 3,890,500 restricted shares to our executive officers and employees. The compensation costs that we expect to record for these
grants will be approximately US$5.95 million.
Total compensation costs recognized for the years ended December 31, 2013, 2014 and 2015, respectively, are as follows:
(In thousands of US$)
Sales and marketing expenses
General and administrative expenses
Research and development expenses
Total
For the Year Ended December 31,
2014
2015
2013
43
1,080
973
2,096
66
6,407
1,171
7,644
131
6,701
2,896
9,728
Determining the value of our share-based compensation expenses requires the input of highly subjective assumptions, including the expected life of the
share-based awards, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share-based
awards represent our best estimates, but these estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we
use different assumptions, our share-based compensation expenses could be materially different in the future.
Fair value of our common shares
Prior to the completion of our initial public offering, we were a private company with no quoted market prices for our common shares. We have
therefore estimated, with assistance from an independent valuation firm, the fair value of our common shares at certain dates in 2013 and 2014.
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The following table sets forth the fair values of our common shares estimated from 2013 through the date of this annual report:
Date
March 1, 2013
August 1, 2013
November 18, 2013
December 31, 2013
March 5, 2014
March 31, 2014
June 9, 2014
Fair Value
of common shares
(per share)
3.20
3.23
3.15
3.14
3.06
3.06
3.30
Type of
methodology
Income approach
Income approach
Income approach
Income approach
Income approach
Income approach
Income approach
Type of valuation
Contemporaneous Valuation of ESOP
Contemporaneous Valuation of ESOP
Contemporaneous Valuation of ESOP (including restricted shares)
Contemporaneous Valuation of ESOP (including restricted shares)
Purpose of valuation
Series E valuation and valuation of ESOP (including restricted
shares)
Contemporaneous
Contemporaneous Valuation of ESOP (including restricted shares)
Contemporaneous Valuation of ESOP (including restricted shares)
We estimated the fair value of our common shares based on valuations performed by our management with the assistance of an independent valuer for
options granted after January 1, 2008 and through June 9, 2014. Determining the fair values of our common shares requires our management to make complex
and subjective judgments regarding our projected financial and operating results, the unique business risks, the liquidity of our common shares and operating
history and prospects at the time of each grant. Therefore, these fair values are inherently uncertain and highly subjective.
In determining the fair values of our common shares as of each award grant date, we consider a number of objective and subjective factors that we
believe market participants would consider, including (a) our business, financial condition, and results of operations, including related industry trends affecting
our operations; (b) our forecasted operating performance and projected future cash flows; (c) the illiquid nature of our common shares; (d) liquidation
preferences and other rights and privileges of our common shares; (e) market multiples of our most comparable public peers; (f) recent sales of our securities;
and (g) market conditions affecting our industry. Therefore, we considered three generally accepted approaches to value our common shares: market approach,
cost approach and income approach. We believe that the market approach and cost approach are inappropriate for the valuation. Firstly, the market approach
requires market transactions of comparable assets as an indication of value, and we have not identified any current market transactions which are comparable.
Secondly, the cost approach does not directly incorporate information about the economic benefits contributed by the underlying business. We decided to rely
upon the income approach as the sole means of valuation since we believe we are a later-stage enterprise as opposed to an early-stage enterprise. We believe we
have enough financial data on which to base a forecast of future results. In applying the income approach to determine the value of our common shares, a
discount was applied to reach the final valuation of our common shares based on the fact that, inasmuch as we are a private company, there are impediments to
liquidity, including lack of publicly available information and the lack of a trading market. The discounted cash flow method is a method within the income
approach whereby the present value of future expected net cash flows is calculated using a discount rate.
The major assumptions used in calculating the fair values of our common shares include:
Weighted average cost of capital, or WACC: WACCs of 17.2%, 20.5%, 20.5%, 18.2%, 18.2%, 18.5%, 18.5%, 18.2%, 18.2% and 18.4% were
used for dates as of January 31, 2012, March 1, 2012, August 1, 2012, March 1, 2013, August 1, 2013, November 18, 2013, December 31, 2013,
March 5, 2014, March 31, 2014 and June 9, 2014, respectively. The WACCs were determined based on a consideration of the factors including
risk-free rate, comparative industry risk, equity risk membership, company size and non-systematic risk factors;
Comparable companies: In deriving the WACCs, which are used as the discount rates under the income approach, three China-based online
marketing companies and one U.S.-based online marketing company, all of which are listed in the U.S., were selected for reference as our
guideline companies.
The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenues and
earnings growth rates, as well as major milestones that we have achieved, contributed significantly to the change in the fair value of our common
shares from January 2011 to June 9 2014. However, these fair values are inherently uncertain and highly subjective. The assumptions used in
deriving the fair values are consistent with our business plan. These assumptions include: the projected business performances can be achieved
with the effort of our managements; there will be no material change in the existing political, legal, technological, fiscal or economic conditions,
which might adversely affect our business; the operational and contractual terms stipulated in the relevant contracts and agreements will be
honored; and the facilities and systems proposed are sufficient for future expansion in order to realize the growth potential of the business and
maintain a competitive edge;
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For the income approach, we forecasted our future debt-free net cash flows for five to six years subsequent to the valuation date and applied a H
Model to calculate the terminal debt-free cash flow after five to six years. The net cash flow was then discounted to present value using a risk-
adjusted discount rate, which was based on market inputs using a capital asset pricing model that reflected the risks associated with achieving our
forecasts. The terminal or residual value at the end of the projection period was based on the H Model with the terminal growth rate assumed to be
3% for all the valuation dates. The resulting terminal value and interim debt-free cash flows were then discounted at a rate ranging from 17.2% to
20.5% for the respective valuation date which was based on the weighted average cost of capital of comparable companies, as adjusted for our
specific risk profile.
Our total equity value was then allocated among the preferred shares and common shares. The valuation model allocated the equity value between
the common shares and the preferred shares and calculated the fair value of common shares based on the option-pricing method. Under this
method, common shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the
time of a liquidity event (for example, merger or sale). The common shares are considered to be a call option with claim on the equity above the
exercise price equal to the liquidation preferences of the preferred shares.
Discount for lack of marketability, or DLOM, a discount for lack of marketability was also applied to reflect the fact that there is no ready public
market for our shares as we were a closely held private company. When determining the discount for lack of marketability, the Black-Scholes
option model was used. Under the option pricing method, the fair value of the put option, which can hedge against a price decline before the
privately held shares can be sold, was considered as a basis to determine the discount for lack of marketability. Based on the analysis, a discount
for lack of marketability of 19%, 26%, 26%, 19%, 16%, 14%, 14%, 12%, 12% and 8% was used on January 31, 2012, March 1, 2012, August 1,
2012, March 1, 2013, August 1, 2013, November 18, 2013, December 31, 2013, March 5, 2014, March 31, 2014 and June 9, 2014, respectively,
for the valuation of our common shares, when we conducted valuations on these dates in 2012, 2013, 2014. These assumptions are inherently
uncertain. Different assumptions and judgments would affect our calculation of the fair value of the underlying common shares for the options
granted, and the valuation results and the amount of share-based compensation expenses would also vary accordingly.
89
Fair value of our series C convertible preferred shares
In addition to our common shares, we have determined the fair value of the series C convertible preferred shares. The result of which is used to
determine amortization of the associated beneficial conversion feature. Consistent with common shares discussed above, the determination of the fair value of
our series C convertible preferred shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our
unique business risk, the liquidity of these shares and our operating history and prospects at the time of valuation.
The major assumptions used in calculating the fair values of our series C convertible preferred shares include:
Event scenario—Our best estimation of the occurrence and the timing of (1) a liquidation event or (2) an initial public offering, or IPO, event. The
probability of the occurrence of an IPO is assumed to be 95% and the probability of the occurrence of a liquidation event is assumed to be 5%.
Risk free rate—The risk free rate used in the liquidation and the IPO scenario is assumed to be 0.1%, the 0.67 year US Treasury Bonds & Notes
Yield. The risk free rate used in the redemption scenario is assumed to be 0.47%, the 4 year US Treasury Bonds & Notes Yield.
Volatility—The volatility estimate is based on the average volatility of the stock returns of selected comparable companies listed in the US stock
market which are engaged in the similar line of business. The volatility assumed to be 39.6%. Three China-based online marketing companies and
one U.S.-based online marketing company, all of which are listed in the U.S., were selected for reference as our guideline companies.
The option-pricing method was used to allocate enterprise value to preferred and common shares, taking into account the guidance prescribed by the
AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation”. The method treats common
stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred shares.
Modification of our series C convertible preferred shares
Upon issuance of the series D preferred shares in January 2012, we adjusted the conversion price of the series C preferred shares from US$5.24 per
share to US$4.14 per share; and obtained an exclusive option to purchase at any time within 12 months after January 2012 all of series C preferred shares at the
purchase price of US$4.607 per share. The conversion price of the series C preferred shares could be adjusted for any share dividends, sub-division and
consolidation, and unpaid dividend. As a result of this modification, we will issue a total of 7,248,293 common shares on a fully-converted basis of the original
5,728,264 series C preferred shares. Other terms of the series C preferred shares including the original liquidation rights remained unchanged.
We concluded that the downward conversion price adjustment from US$5.24 per share to US$5.13 per share is in accordance with the anti-dilution
clause in the original financing agreement for the series C preferred shares. The incremental downward price adjustment from US$5.13 per share to US$4.14 per
share and the right to an exclusive purchase option are accounted for as modifications of the terms of series C preferred shares. The incremental value
contributed by the series C preferred shareholder amounts to US$2,905,000 and is deemed to be a wealth transfer between the preferred shareholder and
common shareholders and charged to additional paid-in capital.
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In January 2014, we modified the anti-dilution terms relating to 5,613,699 series C preferred shares held by one investor. The modification effectively
amended the anti-dilution triggering price from US$4.14 to US$2.81 per share. The incremental downward trigger price adjustment from US$4.14 to US$2.81
is accounted for as modifications of the terms of series C preferred shares. The incremental value contributed by the series C preferred shareholder was deemed
to be a transfer of value between the preferred shareholders because the change in the value of the common shares before and after the modification was deemed
to be negligible. We concluded that this can suggest that most of the value was transferred from this series C preferred shareholder to another existing preferred
shareholder. No accounting charge was recorded.
Triggering of the anti-dilution clause of series C convertible preferred shares
Upon issuance of series E preferred shares in March 2014, we adjusted the series C conversion price from USD$4.14 to US$3.64 per share relating to
114,565 Series C preferred shares held by another investor. We concluded that the downward conversion price adjustment is in accordance with the anti-dilution
clause in the series C financing documents. As a result of this anti-dilution, we will issue a total of 164,771 common shares on a fully-converted basis of the
original 114,565 series C preferred shares when the conversion right is exercised by the holder. At the time of this anti-dilution, the series C preferred shares
anti-diluted in 2014 contained a beneficial conversion feature of US$57,000 and the amount was charged to retained earnings in 2014 as a deemed dividend.
Upon the completion of our initial public offering on June 24, 2014, we adjusted the series C conversion price from US$4.14 to US$3.89 and from
US$3.63 to US$3.45 per share relating to 5,613,699 and 114,565 series C preferred shares held by two series C investors, respectively. We concluded that the
downward conversion price adjustment is in accordance with the anti-dilution clause in the latest shareholders agreement. As a result of this anti-dilution, we
issued a total of 7,724,419 common shares on a fully-converted basis when the conversion right is exercised by the series C shareholders. The triggering of the
anti-dilution clause resulted in a beneficial conversion feature amounted to US$ 1,403,000 as a deemed dividend to series C shareholders and charged against
retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
Fair value of our series D convertible redeemable preferred shares
In addition to our common shares, we have determined the fair value of the series D convertible redeemable preferred shares. The result of which is
used to determine the amount of redemption value as well as the valuation of the warrant to acquire additional series D convertible redeemable preferred shares.
Consistent with common shares discussed above, the determination of the fair value of our series D convertible redeemable preferred shares requires complex
and subjective judgments to be made regarding our projected financial and operating results, our unique business risk, the liquidity of these shares and our
operating history and prospects at the time of valuation.
The major assumptions used in calculating the fair values of our series D convertible redeemable preferred shares include:
Event scenario—Our best estimation of the occurrence and the timing of (1) a liquidation event, (2) an initial public offering event or (3) a
redemption event. The probability of the occurrence of a liquidation event is assumed to be 30%, the probability of the occurrence of an IPO is
assumed to be 60%. And the probability of the occurrence of a redemption event is assumed to be 10%.
Risk free rate—The risk free rate is assumed to be 0.1%, the three months U.S. Treasury Bonds and Notes Yield.
Volatility—The volatility estimate is based on the average volatility of the stock returns of selected comparable companies listed in the US stock
market which are engaged in the similar line of business. The volatility is assumed to be 59.9%. Three China-based online marketing companies
and one U.S.-based online marketing company, all of which are listed in the U.S., were selected for reference as our guideline companies.
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Option-pricing method was used to allocate enterprise value to preferred and common shares, taking into account the guidance prescribed by the
AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.” The method treats common
stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock.
Fair value of our series D warrants and series E warrants to Skyline
The holder of the series D warrants has the right to exercise the warrants at the earlier of (i) 24 months from date of our initial public offering or (ii)
immediately prior to the closing of the following transactions: (a) mergers or consolidation of Xunlei Limited, b) initial public offering, c) transaction in which
in excess of 50% of our equity is transferred to any person, d) sale, transfer, lease, assignment conveyance, exchange, mortgage, or other disposition of all or
substantially all of our assets. The warrants are not entitled to dividend rights nor to vote until the warrants are exercised and shares become issuable. Series D
warrants are classified as a liability and initially measured at their fair value at US$3,007,000. As of December 31, 2012 and 2013, the fair value of Series D
warrants was US$3,717,000 and US$2,186,000.
The warrants to purchase 1,952,663 and 266,272 series D preferred shares at US$3.38 per share expired on February 6, 2014 and March 1, 2014,
respectively. On the date of the expiration, the warrants was measured at a fair value of US$2,414,000. Upon issuance of the series E preferred shares on March
5, 2014, we issued to Skyline warrants to purchase 3,406,824 series E preferred shares with an exercise price of US$2.82. These warrants were exercisable at
the option of the holder, at any time, no later than the earlier of (1) the pricing date of our initial public offering or (2) March 1, 2015. Skyline did not exercise
the warrants on the pricing date of our initial public offering and such warrants have expired as of the date of this annual report. As the warrants are exercised
into mezzanine equity, the warrants are classified as a liability and were initially measured at a fair value of US$2,819 thousand.
The exchange of the series D warrants and the issuance of the series E warrants are considered to be a related transaction and are accounted for as a
single transaction because the holder was willing to allow the series D warrants expire in contemplation that they will be issued series E warrants. A loss of
US$405,000 which is the difference in value of the series D warrants on the expiration date and the value of the series E warrants on the issuance date, was
charged to the income statement in the first quarter of 2014.
Upon the completion of our initial public offering on June 24, 2014, the series D investor did not exercise series E warrants, and the fair value of series
E warrants was nil. The fair value gain of US$2,922 thousand was recorded for the year ended December 31, 2014 as other income.
The fair value of the series D warrants and the series E warrants was estimated by us with the assistance of an independent valuation firm base on our
estimates and assumptions. The valuation report provided us with guidelines in determining the fair value, but the ultimate determination was made by us. We
applied the Black-Scholes Option Pricing Model to calculate the fair value of the series D warrants and series E warrants on the valuation date.
The major assumptions used in calculating the fair value of the series D warrants includes:
Spot price (1)
Risk-free interest rate (2)
Volatility rate (3)
Dividend yield (4)
February 6,
2012
December 31,
2012
December 31,
2013
February 6,
2014
March 1,
2014
3.66
0.23%
47.3%
—
4.48
0.15%
41.2%
—
4.36
0.05%
30.33%
—
4.47
0%*
0%*
—
4.47
0%*
0%*
—
* Given that the maturity date of series D warrant was February 6, 2014 and March 1, 2014, the volatility rate and risk-free interest rate did not affect the
valuation of the warrant on February 6, 2014.
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The major assumptions used in calculating the fair value of the series E warrants includes:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5, 2014
3.31 - 4.65
0.04% - 0.12%
38.39% - 38.81%
—
(1) Spot price—based on the fair value of 100 percent equity interest of the Company which is allocated to preferred shares and common shares of the
Company as at the valuation date under different scenarios.
(2) Risk-free interest rate—based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
(3) Volatility—based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
(4) The Company has no history or expectation of paying dividends on its common shares.
Triggering of the anti-dilution clause of series D convertible redeemable preferred shares
Upon issuance of series E preferred shares in March 2014, we adjusted the series D conversion price from US$3.5 to US$2.86 per share for 6,771,454
series D preferred shares held by Skyline. The downward conversion price adjustment was made pursuant to the anti-dilution clause in transaction documents in
our series D financing. As a result of this anti-dilution, we will issue a total of 8,387,806 common shares on a fully-converted basis of the original 6,771,454
series D preferred shares when the conversion right is exercised by Skyline. For the remaining 3,808,943 Series D preferred shares held by Skyline, Skyline
agreed to waive the anti-dilution clause as Skyline planned to sell these shares to us. The waiver of this anti-dilution clause is accounted for as a modification of
the terms of the series D preferred shares. However, it was determined that the incremental value contributed by Skyline was deemed to be a transfer of value
between the preferred shareholders because 1) the change in value of the common shares before and after the modification was deemed to be negligible and 2)
the modification of the series D preferred shares were also made concurrent with the sale of the series E preferred shares. We concluded that this suggests that
most of the value was transferred from Skyline to the other existing preferred shareholders. Therefore, no accounting charge was recorded.
Upon the completion of our initial public offering on June 24, 2014, we adjusted the series D conversion price from US$2.86 to US$2.27 per share
relating to 6,771,454 series D preferred shares held by a series D investor. We concluded that the downward conversion price adjustment is in accordance with
the anti-dilution clause in the latest shareholders agreement. As a result of this anti-dilution, we would issue a total of 10,581,726 common shares on a fully-
converted basis of the original 6,771,454 series D preferred shares when the conversion right is exercised by the holder. At the time of this anti-dilution, the
series D preferred shares anti-diluted contained a beneficial conversion feature of US$4,008 thousand as a deemed dividend to series D investor and charged
against retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
Modification of redemption rights of series D convertible redeemable preferred shares
Upon issuance of the series E preferred shares in March 2014, we amended the redemption rights of 6,771,454 Series D preferred shares. Skyline has
the right to request us to purchase its shares after February 28, 2017 but no later than February 28, 2018. Prior to the modification, the holder had the right to
request us to purchase its shares after February 6, 2016 but no later than February 6, 2017. The amendment of the redemption date is accounted for as
modification of the terms of Series D preferred shares. The incremental value received by the Skyline amounted to US$279,000 and was deemed to be a transfer
of value between the preferred shareholder and common shareholders and the amount was charged to retained earnings.
In determining the accounting for the modification of the series D preferred shares, we estimated the valuation of the series D preferred shares with the
assistance of an independent valuation firm based on our estimates and assumptions. Option-pricing method was used to allocate enterprise value to preferred
and common shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company
Equity Securities Issued as Compensation”. The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices
determined based on the liquidation preference of the preferred stock. The option-pricing method involves making estimates of the anticipated timing of a
potential liquidity event, such as a sale of the Company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated
timing is based on the plans of management. Estimating the volatility of the share price of a privately held company is complex because there is no readily
available market for the shares. We estimated the volatility of its shares to range from 38.39% to 43.40% based on the historical volatility of comparable
publicly traded shares of companies engaged in similar lines of business.
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Modification of liquidation rights
Upon issuance of the series E preferred shares in March 2014, we amended the liquidation rights of Skyline’s common shares, series A preferred
shares, series A-1 preferred shares, and series B preferred shares, or Skyline Shares. As a result of this amendment, Skyline Shares have priority to receive
proceeds from us upon liquidation over the common shares, series A preferred shares, series A-1 preferred shares, series B preferred shares and series C
preferred shares held by other investors. The amendment of the liquidation rights is accounted for as modification of the terms of Skyline Shares. However, the
incremental value received by Skyline is deemed to be negligible. No accounting charge was recorded by us. Similar to the modification of the series D
preferred shares as stated above, the fair value of the series D preferred shares was estimated by us with the assistance of an independent valuation firm based on
the our estimates and assumptions. The option-pricing method as described above, was also used to account for this modification. We estimated the volatility of
its shares to range from 38.39% to 43.40% based on the historical volatility of comparable publicly traded shares of companies engaged in similar lines of
business.
We have determined that there was no beneficial conversion feature attributable to the series D preferred shares because the initial and adjusted
effective conversion prices of these preferred shares were higher than the fair value of our common shares determined by us with the assistance from an
independent valuation firm.
Fair value of our series E convertible redeemable preferred shares
In addition to our common shares, we have determined the fair value of the series E convertible redeemable preferred shares to be per share US$3.56
and US$3.62 on March 5, 2014 and April 24, 2014, respectively. The result is used to determine the amount of redemption value as well as the valuation of the
warrant to acquire additional series E convertible redeemable preferred shares. Consistent with common shares discussed above, the determination of the fair
value of our series E convertible redeemable preferred shares requires complex and subjective judgments to be made regarding our projected financial and
operating results, our unique business risk, the liquidity of these shares and our operating history and prospects at the time of valuation.
The major assumptions used in calculating the fair values of our series E convertible redeemable preferred shares include:
Valuation as of March 5, 2014
Expected Maturity Date
Expected Volatility (1)
Risk-free interest rate (2)
Expected dividend yield
Probability (3)
Valuation as of April 24, 2014
Expected Maturity Date
Expected Volatility (1)
Risk-free interest rate (2)
Expected dividend yield
Probability (3)
Notes:
94
IPO Scenario
Liquidation
Scenario
Redemption
Scenario
Jun 30, 2014
Jun 30, 2014
Feb 28, 2018
38.39%
0.06%
—
80.00%
38.39%
0.06%
—
10.00%
43.40%
1.18%
—
10.00%
IPO Scenario
Liquidation
Scenario
Redemption
Scenario
Jun 30, 2014
Jun 30, 2014
Feb 28, 2018
43.10%
0.02%
—
80.00%
43.10%
0.02%
—
10.00%
44.03%
1.29%
—
10.00%
(1) Volatility—The volatility estimate is based on the average volatility of the stock returns of selected comparable companies listed in the US stock market
which are engaged in the similar line of business.
(2) Risk free rate—The risk free rate is the three months U.S. Treasury Bonds and Notes Yield.
(3) Event scenario—Our best estimation of the occurrence and the timing of (1) an initial public offering event, (2) a liquidation event or (3) a redemption
event.
Option-pricing method was used to allocate enterprise value to preferred and common shares, taking into account the guidance prescribed by the
AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.” The method treats common
stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock. We applied the
Black-Scholes option pricing model to calculate the fair value of the series D warrant on the valuation date.
The fair value per share of the series E preferred shares was determined to be US$ 3.56 on March 5, 2014. The issuance price of the series E
convertible redeemable preferred shares was mutually negotiated at US$2.82. The price was agreed in consideration of 1) Xiaomi brand, which is considered to
be a well-recognized smartphone vendor in the China market, and 2) the potential synergy that could be created from the two parties, strategic cooperation in the
multi device environment.
Exchange of Xiaomi options for transfer restrictions
As part of the issuance of the series E preferred shares, Xiaomi Ventures and our founders and two other employees, or the Grantees, agreed that (i)
Grantees will have the right to purchase certain number of restricted shares of Xiaomi Corporation with a total subscription consideration of not more than
US$20 million at a subscription price per share that reflects the valuation of Xiaomi Corporation being US$10 billion, or Xiaomi Option; and (ii) the Grantees
agreed to impose a transfer restriction on 39,934,162 common shares, 3,394,564 unvested restricted shares, and 360,000 vested and unvested share options
owned by the Grantees, or the Transfer Restriction. The Transfer Restriction prohibits the Grantees from transferring their shares to another person/party until
April 24, 2019 for one of founders or April 24, 2018 for the rest of the Grantees. The Xiaomi Option and the Transfer Restriction are not tied to the Grantees’
future employment with us.
The value of the Transfer Restriction was determined to be significantly greater than the value of Xiaomi Option. In determining the value of the
Transfer Restriction, we were assisted by an independent valuation firm, based on data provided by us. The valuation of the Transfer Restriction is estimated to
be US$43.3 million (refer to the valuation methodology below). For the valuation of the Xiaomi Option, we were only able to obtain limited financial
information from Xiaomi, a private company, to perform a valuation analysis. This information includes high level 2013 revenue data and information of a third
party investment transaction that valued the Xiaomi Corporation at US$10 billion in August 2013. Given the lack of financial information, we are unable to
determine a more precise estimate of the fair value of the Xiaomi Option on the exchange date. If the fair value of the Xiaomi Option were worth USD43.3
million, the estimated value of the Transfer Restriction, Xiaomi Corporation itself would need to be estimated at a valuation in excess of US$30 billion on
March 5, 2014. We do not expect the valuation of the Xiaomi Corporation to increase by 200% from US$10 billion in August 2013 to US$30 billion in March
2014. Hence, no incremental benefit was given to the Grantees and no compensation expense was recognized.
To determine the fair value of the Transfer Restriction, we valued the common shares with the Transfer Restriction and compared this value to the
value of the common shares without the restriction. The difference was determined to be the value of the Transfer Restriction. A put option pricing model was
used to determine the discount to be applied to the common shares to arrive at the value of common shares with the Transfer Restriction. Pursuant to that model,
we used the cost of a put option, which can be used to hedge the price change before a share subject to transfer restriction can be sold, as the basis to determine
the discount for transfer restrictions. A put option was used because it incorporates certain company-specific factors, including timing of the expected initial
public offering or duration of the Transfer Restriction and the volatility of the share price companies engaged in the same industry.
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Fair value of series E warrants to Xiaomi Ventures
The series E warrants granted to Xiaomi Ventures, or Xiaomi Warrants, is exercisable at the option of Xiaomi Ventures, at any time, on or after
January 1, 2015 and no later than March 1, 2015. The warrants are not exercisable if we have completed our initial public offering in the United States by
December 31, 2014. The exercise price should be adjusted from time to time subject to proportionate adjustment for issuance of additional common shares,
share split and combination, dividend and distributions, reclassification, reorganization, merger, and consolidations.
The warrants are not entitled to dividend rights nor to vote until the warrants are exercised and shares become issuable. The Xiaomi warrants are
initially measured at its fair value and the initial carrying value for series E preferred shares is allocated on a residual basis as the warrant is liability classified.
The Xiaomi warrants were initially measured at their fair value of US$6,477,000. As of March 31, 2014, the fair value of series E warrants was US$6,459,000.
The fair value of the Xiaomi warrants were estimated by us with the assistance of an independent valuation firm based on data provided by us. The
valuation report provided by us with guidelines in determining the fair value, but the determination was made by us. We applied the Black-Scholes Option
Pricing Model to calculate the fair value of the series E Warrants on the valuation date.
The major assumptions used in calculating the fair value of the Xiaomi warrants includes:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5, 2014
4.50 - 4.65
0.12%
38.81%
—
(1) Spot price—based on the fair value of 100 percent equity interest of Xunlei Limited which is allocated to our preferred shares and common shares as at the
valuation date under different scenarios. The probability of the occurrence of an initial public offering is assumed to be 80%, the probability of the
occurrence of a liquidation event is assumed to be 10% and the probability of the occurrence of a redemption event is assumed to be 10%.
(2) Risk-free interest rate—based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
(3) Volatility—based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
(4) We have no history or expectation of paying dividends on its common shares.
Fair value of subscription rights to Xiaomi Ventures
Within three months after March 5, 2014, Xiaomi Ventures shall have the right to purchase, or designate any other person/party to subscribe from us an
additional number of 35,487,746 series E preferred shares, at a price equal to the purchase price per share (US$2.82) of the series E issuance. The exercise price
will be adjusted from time to time subject to proportionate adjustment for issuance of additional common shares, share split and combination, dividend and
distributions, reclassification, reorganization, merger, and consolidations. The subscription rights are not entitled to dividend rights nor to vote until the
subscription rights have been exercised and shares are issued.
The fair value of the subscription rights was estimated by us with the assistance of an independent valuation firm based on data provided by us. The
valuation report provided by us with guidelines in determining the fair value, but the determination was made by us. We applied the Black-Scholes Option
Pricing Model to calculate the fair value of the subscription rights on the valuation date.
96
The major assumptions used in calculating the fair value of the subscription rights includes:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5, 2014
3.31 - 4.65
0.04%
38.12%
—
April 24, 2014
3.39 - 4.64
0.02%
42.74%
—
(1) Spot price—based on the fair value of 100 percent equity interest of Xunlei Limited which is allocated to our preferred shares and common shares as at the
valuation date under different scenarios. The probability of the occurrence of an initial public offering is assumed to be 80%, the probability of the
occurrence of a liquidation event is assumed to be 10% and the probability of the occurrence of a redemption event is assumed to be 10%.
(2) Risk-free interest rate—based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
(3) Volatility—based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
(4) We have no history or expectation of paying dividends on its common shares.
Conversion upon IPO
Upon the completion of our initial public offering on June 24, 2014, we adjusted the series E conversion price from US$2.82 to US$2.4 per share
relating to 110,014,440 series E preferred shares held by the series E investors. We concluded that the downward conversion price adjustment is in accordance
with the anti-dilution clause in the latest shareholders agreement. As a result of this anti-dilution, we issued a total of 129,166,667 common shares on a fully-
converted basis when the conversion right is exercised by the series E shareholders. The triggering of the anti-dilution clause resulted in a beneficial conversion
feature amounted to US$27,396 thousand which was charged to retained earnings in 2014 as a deemed dividend to series E shareholders. And the unamortized
beneficial conversion features of series E preferred shares of US$49,346 thousand were recognized upon the completion of our initial public offering as a
deemed dividend to series E investors and charged against retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
Upon the completion of our initial public offering on June 24, 2014, the series E warrants are no longer exercisable in the future. As a result, the fair
value of series E warrants liability of US$6,381 thousand was derecognized and the related fair value gain was recognized as other income.
Repurchase of common and preferred shares
On April 15, 2014, we repurchased from Skyline 469,225 common shares, 27,180 series A preferred shares, 591,451 series A-1 preferred shares,
725,237 series B preferred shares and 3,808,943 series D convertible redeemable preferred shares at a consideration of approximately US$24.3 million. For the
common shares repurchased, we charged the excess of the purchased price over the par value to additional paid in capital. For the preferred shares, we charged
the excess of the purchase price over the carrying value to retain earnings or to additional paid in capital if retain earnings is zero.
On April 24, 2014, we repurchased from a number of our existing shareholders the following common and preferred shares for a total consideration of
US$49.8 million. We repurchased the following common and preferred shares at a per share price of US$2.82, equal to the issuance price of the series E
preferred shares:
10,334,679 common shares from Vantage Point Global Limited for US$29.1 million;
3,860,733 common shares from Aiden & Jasmine Limited for US$10.9 million;
450,000 Series A preferred shares from Bright Access International Limited for US$1.3 million;
2,921,868 series B preferred shares from Fidelity Asia Ventures Fund L.P. for US$8.2 million;
108,960 series B preferred shares from Fidelity Asia Principals Fund L.P. for US$0.3 million.
97
For the common shares repurchased, we charged the excess of the purchased price over the par value to additional paid in capital. For the preferred
shares, we charged the excess of the purchase price over the carrying value to retain earnings or to additional paid in capital if retain earnings is zero. We
determined the per share fair value of the common shares, series A preferred shares, and series B preferred shares to be US$3.13, US$3.13, and US$3.19,
respectively, on the date of repurchase. The repurchase price of US$2.82 was mutually negotiated at the time of the repurchase transactions. There were no other
arrangements with the selling shareholders other than the exchange of Xiaomi Option for the Transfer Restrictions. The selling shareholders were willing to sell
its common and preferred shares at the US$2.82 per share price as it would provide them with as a form of liquidity.
Amortization of capitalized copyrights related to content
Licensed copyrights of movies, TV series and variety shows, or Content Copyrights, are capitalized when (1) the cost of the content is known (2) the
content has been accepted by us in accordance with the conditions of the license agreement and (3) the content is available for its first showing on our website.
Content Copyrights are carried at cost less accumulated amortization and impairment loss, if any.
We have two types of Content Copyrights, 1) non-exclusive Content Copyrights and 2) exclusive Content Copyrights. With non-exclusive Content
Copyrights, we have the right to broadcast the content on our own websites. While, with exclusive Content Copyrights, besides the broadcasting right, we also
have the right to sub-license these exclusive Content Copyrights to third parties.
For non-exclusive Content Copyrights which only generates primarily indirect cash flows, the amortization method is based on the analysis of
historical viewership consumption patterns. We determine consumption patterns the number of viewers who watch the content throughout the estimated useful
life of the content. The information is then aggregated to come up with a viewership trend that can support an appropriate method to amortize non-exclusive
Content Copyrights. We generally categorize our content in the Xunlei Kankan website into three broad categories, namely movies; TV series; and variety
shows and others, which include reality shows, talent shows, talk shows and entertainment news. Prior to April 1, 2011, we concluded that there was insufficient
data to support a historical viewership demonstrative pattern in viewership of our licensed copyrights related to content. Therefore, we have determined that a
straight-line basis of amortization over the shorter of the estimated useful lives of the related Content Copyright provides the right level of expenses attribution.
Effective April 1, 2011, based on an accumulation of data gathered on historical viewing patterns of our non-exclusive Content Copyrights, we revised the
method to amortize non-exclusive Content Copyrights over their respective licensing periods using at an accelerated rate. Estimates of the consumption patterns
for these non-exclusive Content Copyrights are reviewed periodically and revised, if necessary.
Exclusive Content Copyrights generate both direct and indirect cash flows. For the portion of exclusive Content Copyright that generates indirect cash
flows, we use the amortization method based on the analysis of historical viewership consumption patterns, which is the same with that of non-exclusive
Content Copyright as discussed above.
For the portion of exclusive Content Copyrights that generates direct cash flows, we amortize the purchase costs using an individual-film-forecast-
computation method, which amortizes such costs based on the ratio of sub-licensing revenue and barter transaction gain (details described in Note 2(r) to our
audited consolidated financial statements for the years ended December 31, 2013, 2014 and 2015) generated for the current period to the total ultimate direct
revenues estimated to be generated by the exclusive Content Copyrights for their whole license period or estimated useful lives. We revisit the forecast at each
quarter or year end and make adjustment, when appropriate.
Impairment of long-lived assets
We evaluate the program usefulness of licensed copyrights pursuant to the guidance in ASC 920-350 Intangibles—Goodwill and Other: Recognition,
which provides that such rights be reported at the lower of unamortized cost or estimated net realizable value.
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For non-exclusive Content Copyrights which only generate indirect cash flows, we evaluate the net realizable value of our licensed copyrights by three
content categories (i.e. movies, TV series, variety shows and others), which are assessed to be the lowest level of precision for the purpose of performing such
assessment. If our expectations of programming usefulness, which represents the expected revenues and related net cash flows derived from the content, are
revised downward, we then assess whether it is necessary to write down the unamortized cost to the estimated net realizable value. We evaluate programming
usefulness by category on an annual basis by comparing the unamortized cost to our estimated net realizable value. On a quarterly basis, we also monitors
whether there are indicators of changes in our expected usage of program materials.
We estimate net realizable value using expected net cash flows based on expected future levels of advertising revenues. Such estimates consider
historical amounts and anticipated levels of demand. Expected future revenues are reduced by estimated direct costs to provide access to the website and
generate the related revenues, including bandwidth costs and server costs. For purposes of estimating revenues for each category of the content, we consider
both expected future advertising revenues sold based on number of impressions delivered as well as advertising sold based on the period of time that it is
displayed.
For exclusive Content Copyrights that generate both direct and indirect cash flows, we evaluate the net realizable value of our licensed copyright on a
content by content basis. Impairment is assessed on an annual basis by comparing the unamortized cost to our estimated net realizable value. We estimate the
net realizable value using expected net cash flows based on expected future levels of advertising and content sub-licensing revenues. We estimated content sub-
licensing revenue based on management’s expectation of the popularity of the content and we use pricing reference from other similar sub-licensing
arrangements. For expected future levels of advertising revenue, we use the same estimation methodology used for the impairment assessment of non-exclusive
Content Copyrights.
For both exclusive and non-exclusive Content Copyrights, there were no impairments for the years ended December 31, 2013, 2014 and 2015 because
a significant portion of the content was related to movies and TV series, of which approximately 70% to 90% of the purchase costs of the Content Copyrights
had been amortized during the first year of the licensed period. As such, the unamortized carrying amounts were lower than the respective net realizable values
when the impairment assessment was performed.
For other long-lived assets, we evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. We assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets
to the estimated undiscounted future cash flows we expect to receive from the use of the assets and their eventual disposition at the lowest level of identifiable
cash flows. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the assets. If we
identify an impairment, the carrying value of the asset will be reduced to its estimated fair value based on a discounted cash flow approach or, when available
and appropriate, to comparable market values.
In 2013, indicator of possible impairment was triggered by the significant decline in the revenues generated by one online game. In the fourth quarter
of 2013, this online game only generated US$27,000 as compared to US$303,000 generated in the third quarter of 2013, which was significantly lower than our
expectation. The impairment test was performed using a discounted cash flow analysis that requires certain assumptions and estimates regarding economic and
future profitability. In 2013, this online game license had been provided for impairment of US$808,000.
Impairment of goodwill
Impairment of goodwill assessment is performed on at least an annual basis on December 31 or whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable. According to ASC 350-20-35, an entity may assess qualitative factors to determine whether it is
more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. But
we select to proceed directly to perform a two-step goodwill impairment test. The first step compares the fair values of a reporting unit to its carrying amount,
including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s
goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination
with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes
of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess
in the carrying value of goodwill over the implied fair value of goodwill. The judgment in estimating the fair value of a reporting unit includes estimating future
cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the
determination of the fair value of a reporting unit. No goodwill impairment losses were recognized for the year ended December 31, 2015. However, if we
continue to incur losses, we may face an impairment of goodwill.
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Consolidation
The consolidated financial statements include the financial statements of Xunlei Limited, our subsidiaries and our VIE for which Xunlei Limited is the
primary beneficiary. All significant transactions and balances among our subsidiaries, our VIE and us have been eliminated upon consolidation.
A subsidiary is an entity in which we, directly or indirectly, control more than one-half of the voting power, has the power to appoint or remove the
majority of the members of the board of directors to cast a majority of the votes at meetings of the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the shareholders or equity holders.
An entity is considered to be a VIE if the entity’s equity holders do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
We consolidate entities for which we are the primary beneficiary if the entity’s equity holders do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
In determining whether Xunlei Limited or its subsidiary is the primary beneficiary of a VIE, we considered whether we have the power to direct
activities that are significant to the VIE’s economic performance, including the power to appoint senior management, right to direct company strategy, power to
approve capital expenditure budgets, and power to establish and manage ordinary business operation procedures and internal regulations and systems.
Management has evaluated the contractual arrangements among Giganology Shenzhen, Shenzhen Xunlei and its shareholders and concluded that
Giganology Shenzhen receives all of the economic benefits and absorbs all of the expected losses from Shenzhen Xunlei and has the power to direct the
aforementioned activities that are significant to Shenzhen Xunlei’s economic performance, and is the primary beneficiary of Shenzhen Xunlei. Therefore,
Shenzhen Xunlei and its subsidiaries’ results of operation, assets and liabilities have been included in our consolidated financial statements. We monitor the
regulatory risk associated with these contractual arrangements. The details of how we manage the regulatory risk are described in “Certain risk and
concentration” in note 27 to our audited consolidated financial statements for the years ended December 31, 2013, 2014 and 2015.
Business combinations
We account for acquisitions of entities that include inputs and processes and have the ability to generate economic benefit as business combinations.
We allocate the purchase price of the acquisition to the tangible assets and identifiable intangible assets acquired based on their estimated fair values. The excess
of the purchase price over those fair values is recorded as goodwill. Acquisition-related costs are expensed as incurred.
Accounts receivable, net
Accounts receivable are presented net of allowance for doubtful accounts. We evaluate the creditworthiness of each customer at the time when services
are rendered and continuously monitor the recoverability of the accounts receivable. We use specific identification method in providing for bad debts when facts
and circumstances indicate that collection is doubtful and a loss is probable and estimable. If the financial conditions of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance for doubtful accounts is based on the best
facts available and is re-evaluated and adjusted on a regular basis as additional information is received.
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Some of the factors that we consider in determining whether we record a bad debt allowance on an individual customer are:
the customer’s past payment history and whether it fails to comply with its payment schedule;
whether the customer is in financial difficulty due to economic or legal factors;
a significant dispute with the customer has occurred;
other objective evidence which indicates non-collectability of the accounts receivable.
If we determine that an allowance is needed for a customer, we will discontinue business with them unless they start to resume payment. The accounts
receivable is written-off when we cease pursuing collection. Any changes in our estimates may cause our operating results to fluctuate. The accounts receivable
that was fully reserved as of both December 31, 2014 and 2015 was US$0.1 million.
The allowances provided for accounts receivable as of both December 31, 2014 and 2015 was US$0.1 million.
As of December 31, 2015, we had accounts receivable net of allowances aged beyond one year from the date of invoice in the amount of US$0.04
million. Based on our assessment of the customer’s ability to pay, a bad debt allowance was not considered necessary for those amounts. As of the date of this
annual report, a majority of those balances have been collected and we continue to actively pursue collection of the remaining balance.
Although our general credit term for our customers is 90 days, we do not consider our receivables aged less than one year from the invoice date to be
past due given the general practices we have with our customers in the advertising industry. Typically we are willing to accept delayed repayment up to one year
from invoice date if we have assurance that payment will be made as soon as practicable. Accordingly, we did not make significant provisions for balances aged
less than one year as of December 31, 2013, 2014 and 2015.
Taxation and uncertain tax positions
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the difference is expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that
includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that
some portion, or all, of the deferred tax assets will not be realized. We record a valuation allowance against certain of our deferred income tax assets if it is more
likely than not that those assets will not be realized. In evaluating our ability to realize our deferred income tax assets, we consider all available positive and
negative evidence, including our historical operating results, ongoing tax planning, and forecasts of future taxable income on a jurisdiction by jurisdiction basis.
The estimation of future taxable income involves significant judgement and estimates. Based on management's estimated future taxable income and all other
available evidence, for entities where management concluded that it is more likely than not that the net operating losses carried forward can be utilized prior to
their respective expiration dates, no valuation allowance is recorded.
On January 1, 2008, we adopted the guidance regarding uncertain tax positions. Management evaluates our open tax positions that exist in each
jurisdiction for each reporting period. If an uncertain tax position is taken or expected to be taken in a tax return, the tax benefit from that uncertain position is
recognized in our consolidated financial statements if it is more likely than not that the position is sustainable upon examination by the relevant taxing authority.
We did not have any significant uncertain tax position and there was no effect on our financial position or results of operations as a result of
implementing the new guidance. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense, if any.
No interest and penalties were recorded in the years ended December 31, 2013, 2014 and 2015.
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Commitments and contingencies
In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of our business, that cover a wide
range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be
reasonably estimated. In regards to legal cost, we recorded such costs as incurred.
Certain conditions may exist as of the date of this annual report, which may result in a loss to us and such loss will only be resolved when one or more
future events occur or fail to occur. Our management and legal counsel assess such contingent liabilities, and such assessment inherently involve an exercise of
judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we
will consult with our legal counsel and evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount
of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable,
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible
loss, if determinable and material, would be disclosed.
Recent accounting pronouncements
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which
changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that
“represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public
business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the
guidance for new disposals. The adoption of this pronouncement does not have a significant impact on our consolidated financial statements.
On May 28, 2014, the FASB and IASB issued the standard on the recognition of revenue from contracts with customers. The FASB is amending the
FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition
requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the
amendments supersede some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. For a
public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. Early application is not permitted. We are currently evaluating the impact on its consolidated financial statements of adopting this guidance. In August
2015, the FASB proposed to defer the effective date of Update 2014-09 for all entities by one year, which means calendar year-end public companies are
required to apply the new guidance beginning in 2018.
In June 2014, under ASC 718, Compensation—Stock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant
their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the
requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a
performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments
are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption
of this guidance is not expected to have significant impact on our consolidated financial statements.
In August 2014, the FASB issued Presentation of Financial Statements – Going Concern. This standard requires management to evaluate for each
annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year
after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not
the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim
periods within annual periods beginning after December 15, 2016. Early application is permitted. The adoption of this pronouncement is not expected to have
significant impact on our consolidated financial statements.
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In February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation (Topic 810) –Amendments to the Consolidation Analysis.
The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money
market funds. It provide new guidance to companies in determining whether an entity is a variable interest entity (VIE), assessing fees paid to a decision maker
or a service provider, and consideration of related parties in the economics test. The standard is effective for public business entities for annual periods
beginning after December 15, 2015. This new guidance is not expected to have significant impact to our existing structure.
In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330) –Simplifying the Measurement of Inventory. The
amendments apply to inventory that is measured using the first-in, first-out (FIFO) or average cost method. The main change is in the subsequent measurement
guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. Market could be
replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. An entity should measure inventory within the scope
of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The amendments in this Update are effective for public business entities for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The adoption of this ASU is not expected to have significant impact to our
consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the
presentation of deferred income taxes, which require the deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial
position. ASU 2015-17 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. . We believe that this ASU will
have an impact on our consolidated balance sheet and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial
Liabilities. The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and
disclosure requirements for financial instruments. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from
unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial
liabilities not under the fair value option is largely unchanged. The standard is effective for public business entities for annual periods (and interim periods
within those annual periods) beginning after December 15, 2017. . The adoption of this ASU is not expected to have significant impact to our consolidated
financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and
liabilities that arise from leases. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for
such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after
December 15, 2018. Early adoption is permitted. We are currently evaluating the impact ASU2016-02 will have on our consolidated balance sheet, results of
operations, cash flows and related disclosures
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In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. The amendments in ASU 2016-09 affect all entities that issue share-based payment awards to their employees and involve multiple aspects of the
accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be
recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the
reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current
period. Tax benefits should be classified along with other income tax cash flows as an operating activity. An entity can make an entity-wide accounting policy
election to either estimate the number of awards that are expected to vest (consistent with current GAAP) or account for forfeitures when they occur. Under
current GAAP, one of the requirements for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the
employer's minimum statutory withholding requirements. Under ASU 2016-09, the threshold to qualify for equity classification permits withholding up to the
maximum statutory tax rates in the applicable jurisdictions. Cash paid by an employer when directly withholding shares for tax withholding purposes should be
classified as a financing activity. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. We are currently evaluating the impact ASU2016-09 will have on our consolidated balance sheet, results of operations,
cash flows and related disclosures.
B. Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated from operations and, to a lesser extent, proceeds from private placements of
preferred shares to investors, and net proceeds received from our initial public offering. As of December 31, 2015, we had US$432.1 million in cash and cash
equivalents and short-term investments. As of the same date, we did not have any outstanding bank loans.
We historically generated a significant portion of our revenues from customers in the advertising industry. Although our general credit term for our
customers is 90 days, we typically are willing to accept delayed repayment up to one year from the invoice date given the general practices we have with our
customers in the advertising industry. Our practice and collection history may continue to have an impact on our liquidity.
In the future, we may rely on dividends and other distributions on equity paid by our wholly-owned PRC subsidiaries for our cash and financing
requirements. There may be potential restrictions on the dividends and other distributions by our PRC subsidiaries. For instance, if Giganology Shenzhen, our
PRC subsidiary, incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other
distributions to us. The PRC tax authorities may require us to adjust our taxable income under the contractual arrangements Giganology Shenzhen currently has
in place with Shenzhen Xunlei in a way that would materially and adversely affect the latter’s ability to pay dividends and other distributions to us. In addition,
under PRC laws and regulations, Giganology Shenzhen, as a wholly foreign-owned enterprise in the PRC, may pay dividends only out of its accumulated profits
as determined in accordance with PRC accounting standards and regulations. Wholly foreign-owned enterprises such as Giganology Shenzhen are required to
set aside at least 10% of their accumulated after-tax profits each year, if any, to fund a statutory reserve fund, until the aggregate amount of such fund reaches
50% of their respective registered capital. At their discretion, wholly foreign-owned enterprises may allocate a portion of their after-tax profits based on PRC
accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. See “Item
3. Key Information—D. Risk factors—Risk related to our corporate structure—We may rely principally on dividends and other distributions on equity paid by
our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of Giganology Shenzhen and Xunlei Computer to
pay dividends to us could have a material adverse effect on our ability to conduct our business.” In addition, our investment made as registered capital and
additional paid in capital of our subsidiaries, VIE and VIE’s subsidiaries are also subject to restrictions in their distribution and transfer according to the laws
and regulations in China. Owing to the above, our subsidiaries, VIE and VIE’s subsidiaries in China are restricted in their ability to transfer their net assets to us
in terms of cash dividends, loans or advances. As of December 31, 2013 and 2014, and 2015, the amount of the restricted net assets, which represents registered
capital and additional paid-in capital cumulative appropriations made to statutory reserves, was US$49.2 million, US$59.8 million and US$117.7 million,
respectively.
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As an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding from the proceeds of our offshore fund raising
activities to our PRC subsidiaries only through loans or capital contributions, and to our variable interest entity only through loans, subject to the satisfaction of
the applicable government registration and approval requirements. See “Item 3. Key Information—D. Risk factors—Risks related to our corporate structure—
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict
or prevent us from using the proceeds of our initial public offering to make loans to our PRC subsidiaries and variable interest entity or to make additional
capital contributions to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.” As a
result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or variable interest entity when needed. Notwithstanding
the forgoing, Giganology Shenzhen may use its own retained earnings (as opposed to RMB converted from foreign currency denominated capital) to provide
financial support to Shenzhen Xunlei either through extended payment terms on amounts due to Giganology Shenzhen from Shenzhen Xunlei, or via entrusted
loans from Giganology Shenzhen to Shenzhen Xunlei, or direct loans to its nominee shareholders, which would be contributed to the variable interest entity as
capital injection. Such direct loans to the nominee shareholders would be eliminated in the consolidated financial statements against the VIE’s share capital.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs
for the next 12 months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments.
We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar
actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand, we may seek to issue debt or equity
securities or obtain additional credit facilities.
The following table sets forth a summary of our cash flows for the periods indicated:
(in thousands of US$)
Net cash generated from operating activities
Net cash used in investing activities
Net cash generated from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
For the Year Ended December 31,
2014
2015
2013
85,533
(78,352)
2,487
9,668
81,906
2,332
93,906
48,202
(70,546)
333,268
310,924
93,906
(555)
404,275
13,764
(54,982)
5,030
(36,188)
404,275
(6,310)
361,777
As of December 31, 2015, we had cash or cash equivalents of US$361.8 million in total,including RMB385.4 million (US$59.4 million) and US$6.5
million located within the PRC, of which RMB210.5 million (US$32.4 million) was held by our VIE Shenzhen Xunlei and its subsidiaries. We also had cash or
cash equivalents of RMB221.4 million (US$34.1 million), US$261.7 million and 0.9 million Hong Kong dollars (US$0.1 million) located outside of the PRC as
of December 31, 2015.
Operating activities
Net cash generated from operating activities amounted to US$13.8 million in 2015, which was primarily attributable to a net loss of US$14.5 million,
adjusted for certain non-cash expenses consisting principally of depreciation and amortization expenses of US$17.8 million, share-based compensation of
US$9.7 million, a net change in working capital. The net change in working capital was primarily due to a decrease in accounts receivable amounting to US$1.4
million, which was in line with the decrease of our online advertising revenues, a decrease in accrued liabilities and other payable of US$1.1 million mainly
attributable to the decrease in accrued payroll and employees benefit provision, and an decrease in prepayments and other current assets of US$3.2 million.
Net cash generated from operating activities amounted to US$48.2 million in 2014, which was primarily attributable to a net income of US$9.9 million,
adjusted for certain non-cash expenses consisting principally of depreciation and amortization expenses of US$45.2 million, share-based compensation of
US$7.6 million, a gain from warrants’ fair value change of US$8.1 million and a net change in working capital. The net change in working capital was primarily
due to a decrease in accounts receivable amounting to US$4.7 million, which was in line with the decrease of our online advertising revenues, an increase in
accrued liabilities and other payable of US$4.8 million mainly attributable to the increase in accrued payroll and employees benefit provision, which was
partially offset by an increase in prepayments and other current assets of US$9.2 million.
105
Net cash generated from operating activities amounted to US$85.5 million in 2013, which was primarily attributable to a net income of US$10.4
million, adjusted for certain non-cash expenses consisting principally of depreciation and amortization expenses of US$43.4 million, share-based compensation
of US$2.1 million and a net change in working capital. The net change in working capital was primarily due to the decrease in accounts receivable amounting to
US$13.7 million, which was in line with the decrease of our advertising revenues, an increase in deferred revenue of US$12.6 million as a result of increase in
our subscription fees prepaid by our subscribers, and the increase in accounts payable of US$5.9 million primarily attributable to the increased procurement of
bandwidth.
Investing activities
Net cash used in investing activities largely reflects purchases of property and equipment in connection with the expansion and upgrade of our
technology infrastructure, purchases of intangibles assets, and payments to purchase short-term investments such as equity interest in limited partnerships that
make venture capital investments on companies with enterprise technologies, next generation hardware and related technologies.
Net cash used in investing activities amounted to US$55.0 million in 2015, primarily attributable to the purchase of short-term investments, of
US$222.2 million, purchase of intangible assets in the amount of US$11.9 million, partially offset by proceeds from the sales and maturity of short-term
investments, which amounted to US$175.5 million.
Net cash used in investing activities amounted to US$70.5 million in 2014, primarily attributable to the purchase of short-term investments, of
US$330.5 million, purchase of intangible assets in the amount of US$38.1 million and payments for the acquisition of businesses amounting to US$33.0
million, partially offset by proceeds from the sales and maturity of short-term investments, which amounted to US$341.8 million.
Net cash used in investing activities amounted to US$78.4 million in 2013, primarily attributable to the purchase of short-term investment of US$246.2
million, and purchase of intangible assets in the amount of US$36.0 million, partially offset by proceeds from disposal of short-term investments of US$213.5
million.
Financing activities
Net cash generated from financing activities amounted to US$5.0 million in 2015, primarily attributable to government grants received of US$1.1
million and the exercise of vested share options amounted US$ 5.0 million, partially offset by payments for the repurchase of shares in the amount of US$1.3
million.
Net cash generated from financing activities amounted to US$333.3 million in 2014, primarily attributable to proceeds from our initial public offering
in June 2014 of US$93.9 million and our issuance of series E preferred shares prior to the initial public offering in the amount of US$310.0 million, partially
offset by payments for the repurchase of shares in the amount of US$69.3 million.
Net cash generated from financing activities amounted to US$2.5 million in 2013 due to government grants received.
Capital Expenditures
We made capital expenditures of US$7.4 million, US$7.8 million and US$13.8 million in the years ended December 31, 2013, 2014 and 2015,
respectively. In the past, our capital expenditures were primarily used to purchase servers and other equipment for our business. Our capital expenditures may
increase in the near term as our business continues to grow.
C. Research and Development
We believe that our commitment to research and development is an important contributing factor in our success. As of December 31, 2015, we had a
team of 452 engineers. We provide our engineers with various continuing training programs and opportunities. To maintain and enhance our leadership position
in the market, we will continue to compete for engineering talent and invest in research and development in order to provide better services to our users,
subscribers and advertisers.
106
Our research and development team is divided, according to focus areas, into core research and development, application engineering, subscription
services engineering and wireless and embedded system engineering. The table below provides an outline of what each focus area entails:
Core research and development
Application Engineering
Primarily focuses on the development of our basic technologies to ensure that we use the most advanced
transmission techniques to maintain our competitive advantage.
Primarily focuses on continuous development of our resource discovery/distributed file locating and
bandwidth crowd-sourcing technologies to maintain the competitive advantages of our key products such
as Xunlei Accelerator, our cloud computing project as well as the online games platform that we operate.
Subscription Services Engineering
Primarily focuses on diversifying and refining the paid services we provide to our subscribers.
Wireless and Embedded System Engineering
Primarily focuses on expanding our services into other internet-enabled devices, such as tablets and
smartphones.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demand, commitments or events for the year
ended December 31, 2015 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions.
E. Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have
not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or engages in leasing, hedging or research and development services with us.
F. Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2015:
(in thousands of US$)
Operating lease obligations(1)
Bandwidth lease obligations
Capital obligations
Total
Total
925
25,680
5,844
32,449
Less than 1
year
751
15,715
5,844
22,310
Payment due by period
3-5
1-3
years
years
More than
5 years
174
9,965
—
10,139
—
—
—
—
—
—
—
—
(1) Operating lease obligations are primarily related to the lease of office space. These leases expire on different dates.
As of December 31, 2015, we had irrevocable purchase obligations for online game licenses that had not been recognized in the amount of US$ 5.8
million.
G. Safe Harbor
See “Forward-Looking Statements.”
107
Item 6.
Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
Directors and Executive Officers
Sean Shenglong Zou
Hao Cheng
Qin Liu
Quan Zhou
Feng Hong
Chuan Wang
Hongjiang Zhang
Jenny Wenjie Wu
Yongfu Yu
Lei Chen
Peng Huang
Tao Thomas Wu
Age
44
40
43
58
39
46
55
41
39
43
48
50
Position/Title
Co-Founder, Chairman and Chief Executive Officer
Co-Founder and Director
Director
Director
Director
Director
Director
Independent Director
Independent Director
Co-Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
Mr. Sean Shenglong Zou is our co-founder and has been our chief executive officer and chairman since our inception in February 2005. Mr. Zou is an
expert in distributed computing. Mr. Zou pioneered the theory of content-based multimedia indexing technology and resource discovery network that provides
time-saving online experience for internet users and has led our company to revolutionize traditional internet acceleration by the technology and network. Mr.
Zou received a master’s degree in computer science from Duke University in the U.S. in 1998 and a bachelor’s degree in computer science from University of
Wisconsin-Madison in 1997.
Mr. Hao Cheng is our co-founder and has been our director since our inception in February 2005. Mr. Cheng also served as the executive director of
Xunlei Games Development (Shenzhen) Co. Ltd. from February 2010 to January 2016 and as the general manager of the same company from February 2010 to
January 2016. Prior to joining us, Mr. Cheng managed the products, services, marketing and sales of the corporate search team at Baidu, Inc. Mr. Cheng
received a master’s degree in computer science from Duke University in the U.S. in 1999 and a bachelor’s degree in mathematics from Nankai University in
China in 1997. In January 2016, Mr. Hao Cheng resigned from all executive positions at the company. He remains as a member of the board of directors of our
company.
Mr. Qin Liu has been a director of our company since September 2005. Mr. Liu is a director of the controlling general partner of Morningside China
TMT Fund I, L.P., Morningside China TMT Fund II, L.P., Morningside China TMT Fund III, L.P., Morningside China TMT Special Opportunity Fund, L.P.
and Morningside China TMT Fund III Co-investment, L.P., which we refer to collectively as the Morningside Funds, and has been a director of Morningside
Venture Capital Limited, the investment manager of the Morningside Funds. Mr. Liu has served as a director in YY Inc., a Nasdaq-listed company since June
2008, and also serves as director in several non-public portfolio companies of the fund. From 2000 through 2008, Mr. Liu worked at Morningside IT
Management Services (Shanghai) Co., Ltd. and established its print media business and served as publisher of The Bund, an upscale lifestyle weekly
publication. Mr. Liu received a master’s degree in business administration, or MBA, from China Europe International Business School in 1999 and a bachelor’s
degree in electrical engineering from Beijing Science & Technology University in 1993.
Mr. Quan Zhou has served as a director of our company since November 2006. Mr. Zhou has been acting as the president of IDG Technology Venture
Investment, Inc. and a managing member of the general partner of IDG Technology Venture Investments, L.P. and its successor funds. Mr. Zhou is also serving
as a director of the general partner of each of IDG-Accel China Growth Fund I and IDG-Accel China Capital Fund, and their respective successor funds. Mr.
Zhou received a Ph.D degree in fiber optics from Rutgers University in 1989, a master’s degree in chemical physics from the Chinese Academy of Sciences in
1985 and a bachelor’s degree in chemistry from China Science and Technology University in 1982.
108
Mr. Feng Hong has been a director of our company since April 2014. Mr. Hong is a co-founder of Beijing Xiaomi Technology Company Limited, or
Xiaomi Technology, and has been a vice president since its inception. From 2006 to 2010, Mr. Hong held various product and engineering management roles in
Google. Prior to that, from 2001 to 2005, Mr. Hong worked at Siebel as a software engineer. Mr. Hong received his master’s degree in computer science from
Purdue University in 2001 and his bachelor’s degree in computer science and engineering from Shanghai Jiao Tong University in China in 1999.
Mr. Chuan Wang has been a director of our company since March 2014. Mr. Wang is a co-founder of Xiaomi Technology, where he has served as its
vice president since 2012. He is also the founder of Beijing Duokan Technology Co., Ltd., where he has served as its chief executive officer since its inception
of business in 2010. Between 2005 and 2011, Mr. Wang was the general manager of Beijing Thunder Stone Century Technology Co., Ltd. Prior to that, Mr.
Wang was the general manager of Beijing Thunder Stone Digital Technology Co., Ltd. since 1997. Mr. Wang received his bachelor of science degree from
Beijing University of Technology in China in 1993.
Dr. Hongjiang Zhang has been our director since April 2014. Dr. Zhang currently serves as an executive director and the chief executive officer of
Kingsoft Corporation Limited, which is listed on the Hong Kong Stock Exchange (Stock Code: 3888). He also serves as a director and the chief executive
officer of Kingsoft Cloud Holdings Limited. Dr. Zhang is a director of Cheetah Mobile Inc., which is listed on the New York Stock Exchange (NYSE: CMCM),
as well as a director of 21Vianet Group, Inc. which is listed on the NASDAQ (NASDAQ: VNET). Prior to joining Kingsoft Corporation Limited in October
2011, Dr. Zhang was the chief technology officer of Microsoft Asia-Pacific Research and Development Group and the managing director of the Microsoft
Advanced Technology Center and a Distinguished Scientist. In his dual role, Dr. Zhang led Microsoft’s research and development initiatives in China, including
strategy and planning, research and development, as well as incubation of products, services and solutions. Dr. Zhang was also a member of the executive
management committee of Microsoft (China) Limited. Dr. Zhang was the deputy managing director and a founding member of Microsoft Research Asia. Dr.
Zhang has authored four books and over 400 scientific papers and holds approximately 200 US and international patents. Dr. Zhang received a Ph.D. in
electrical engineering from the Technical University of Denmark in 1991, and a bachelor of science degree from Zhengzhou University, China, in 1982.
Ms. Jenny Wenjie Wu has served as our independent director since June 2014. Ms. Wu has been the chief strategy officer of Ctrip.com International,
Ltd. or Ctrip, a Nasdaq-listed company, since November 2013. Prior to that, she served as Ctrip’s chief financial officer between May 2012 and November 2013
and as a deputy chief financial officer between December 2011 and May 2012. Ms. Wu also serves as an independent non-executive director of Kingsoft
Corporation Limited from March 2013. Prior to joining Ctrip, Ms. Wu was an equity research analyst covering China Internet and Media industries in Morgan
Stanley Asia Limited and in Citigroup Global Markets Asia Limited from 2005 to 2011. Prior to that, Ms. Wu worked in the Department of Enterprises
Operations and Management in China Merchants Holdings (International) Company Limited, a company listed on the Hong Kong Stock Exchange, from 2003
to 2005. Ms. Wu holds a Ph.D. degree in finance from the University of Hong Kong, a Master’s degree in philosophy in finance from the Hong Kong University
of Science and Technology, and both a Master’s degree and a Bachelor’s degree in economics from Nan Kai University, China. Ms. Wu is a Chartered Financial
Analyst (CFA).
Mr. Yongfu Yu has served as our independent director since June 2014. Mr. Yu is currently the president of Alibaba Group’s mobile internet division
and Alimama since May 2015. Prior to current position, Mr. Yu was the chief executive officer of UCWeb Inc., a provider of mobile internet software
technology and services in China from the end of 2006 to May 2015. From 2001 to 2006, Mr. Yu worked at Legend Capital, a venture capital investment fund,
focusing on the TMT industry. He served as an investment manager between 2001 to 2004 and as a vice president between 2004 and 2006. Mr. Yu received his
bachelor’s degree in business management from the College of International Business, Nankai University in China in 1999.
Mr. Lei Chen has been our co-chief executive officer since November 2015. Prior to that, Mr. Chen has been our chief technology officer since
November 2014. Prior to joining us, Mr. Chen was the chief executive officer of Tencent Cloud Computing (Beijing) Ltd., a wholly owned subsidiary of
Tencent Holdings Limited, or Tencent, where he spearheaded Tencent’s cloud computing, open platform and social advertisement efforts. He joined Tencent in
2010. Before becoming the chief executive officer of Tencent Cloud Computing (Beijing) Ltd., he served as manager of Tencent’s cloud platform division and
deputy general manager of its open platform and social advertising platform divisions. Mr. Chen also worked at Google and Microsoft before joining Tencent,
creating data storage and e-commerce applications. Mr. Chen holds a bachelor of science degree in computer science and technology from Tsinghua University,
and a master’s degree in computer science from the University of Texas at Austin.
109
Mr. Peng Huang has been our chief operating officer since September 2013, and currently oversees our business operation and strategic cooperation.
Mr. Huang joined us in 2009 as a vice president, and also became the general manager of our member subscription department in 2011. From 2006 to 2009, Mr.
Peng worked as a general vice president for PPTV. From 1996 to 2001, Mr. Peng was the director of the Shanghai office of Shenzhen Huawei Technology Co.,
Ltd. and general manager of Shanghai Huawei Company. Mr. Huang received a master’s degree in communications and electronic system from the University
of Electronic Science and Technology of China in 1992 and a bachelor’s degree in wireless engineering from Northwestern Polytechnical University of China in
1987.
Mr. Tao Thomas Wu has been our chief financial officer since November 2013. Prior to joining our company, Mr. Wu had served as the chief financial
officer of Noah Holdings Limited, a U.S. listed company, since 2010. Prior to that, Mr. Wu spent nearly 20 years working in the financial services sector. Most
recently, Mr. Wu was a senior portfolio manager with AllianceBerstein L.P. in the United States and a senior analyst with Moody’s Investors Services in New
York. Mr. Wu previously also worked in investment banks, primarily with JPMorgan Chase & Co. in New York and Singapore. Mr. Wu received his master’s
degree in public administration from Syracuse University in 1992 and his bachelor’s degree in mathematics from Grinnell College in May 1987.
B. Compensation
For the fiscal year ended December 31, 2015, we paid an aggregate of approximately US$1.9 million in cash to our executive officers, and we paid
approximately US$12,000 in cash compensation to two non-executive directors. In addition, we paid approximately US$94,000 in pension, housing funds,
transportation subsidies and commercial insurance to our executive officers, and we did not set aside or accrued any amount to provide such benefits to our non-
executive directors. For share incentive grants to our officers and directors under our share incentive plan, see “—Share Incentive Plans.” For restricted share
grants outside the share incentive plan, see “—Share Incentive Plans.”
Share Incentive Plans
We have adopted (i) a 2010 share incentive plan in December 2010, or the 2010 Plan, (ii) a 2013 share incentive plan in November 2013, as
supplemented, or the 2013 Plan and (iii) a 2014 share incentive plan in April 2014, as supplemented, or the 2014 Plan. The purpose of the plans is to attract and
retain the best available personnel by linking the personal interests of the members of the board, employees, and consultants to the success of our business and
by providing such individuals with an incentive for outstanding performance to generate superior returns for our shareholders.
2010 Plan
Under the 2010 Plan and the seventh amended and restated shareholders’ agreement dated as of April 24, 2014, the maximum number of shares in
respect of which options, restricted shares, or restricted share units that may be granted is 26,822,828 shares. As of March 31, 2016, options to purchase an
aggregate number of 2,097,410 common shares were outstanding.
The following paragraphs summarize the terms of the 2010 Plan.
Types of awards. The following briefly describe the principal features of the various awards that may be granted under the 2010 Plan.
Options. Options provide for the right to purchase a specified number of our common shares at a specified price and usually will become
exercisable in the discretion of our plan administrator in one or more installments after the grant date. The option exercise price may be paid,
subject to the discretion of the plan administrator, in cash or by check, in our common shares which have been held by the option holder for such
period of time as may be required to avoid adverse accounting treatment, in other property with value equal to the exercise price, through a broker-
assisted cashless exercise, or by any combination of the foregoing.
110
Restricted Shares. A restricted share award is the grant of our common shares which are subject to certain restrictions and may be subject to risk of
forfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by us
upon termination of employment or service during a restricted period. Our plan administrator may also impose other restrictions on the restricted
shares, such as limitations on the right to vote or the right to receive dividends.
Restricted Share Units. Restricted share units represent the right to receive our common shares at a specified date in the future, subject to forfeiture
of such right upon termination of employment or service during the applicable restriction period. If the restricted share units have not been
forfeited, then we shall deliver to the holder unrestricted common shares that will be freely transferable after the last day of the restriction period as
specified in the award agreement.
Plan administration. Before our shares are listed on a stock exchange, the 2010 Plan shall be administered by our board of directors. After our shares
are listed on a stock exchange, the 2010 Plan shall be administered by our board of directors or the compensation committee of the board of directors (or a
similar body) formed in accordance with applicable exchange rules. The plan administrator will determine the provisions and terms and conditions of each
grant.
Award agreement. Options, restricted shares, or restricted share units granted under the 2010 Plan are evidenced by an award agreement that sets forth
the terms, conditions, and limitations for each grant.
Option exercise price. The exercise price subject to an option shall be determined by the plan administrators which may be a fixed or variable price
related to the fair market value of the subject of the grant. The exercise price may be amended or adjusted in the absolute discretion of the plan administrators,
the determination of which shall be final, binding and conclusive. To the extent not prohibited by applicable laws or the rules of any exchange on which our
securities are listed, a downward adjustment of the exercise prices of options shall be effective without the approval of the shareholders or the approval of the
affected participants.
Eligibility. We may grant awards to our employees, consultants and all members of our board of directors, as determined by the board of directors.
Term of the awards. The term of each option grant shall be stated in the award agreement, provided that the term shall not exceed 10 years from the
date of the grant. As for the restricted shares and restricted share units, the plan administrator shall determine and specify the period of restriction in the award
agreement.
Vesting schedule. In general, the plan administrator determines the vesting schedule, which is set forth in the award agreement. The administrator, in
its discretion, may accelerate the vesting schedule of an award.
Transfer restrictions. Except as otherwise provided by the plan administrators, no option award shall be assigned, transferred, or otherwise disposed of
other than by will or the laws of descent and distribution.
Termination. Unless terminated earlier, the 2010 Plan will expire automatically in December 2020. With the approval of our board of directors, the
plan administrators may, at any time and from time to time, terminate, amend or modify the 2010 Plan. Our board of directors has the authority to amend or
terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law.
The following table summarizes, as of March 31, 2016, the outstanding options granted to our executive officers, directors, and other individuals as a
group under our 2010 Plan.
111
Name
Tao Thomas Wu
Other Individuals as a Group(1)
Total
*
Less than one percent of our total outstanding share capital.
Common shares
underlying
options awarded
*
*
1,243,010
2,097,410
Exercise price
(US$/share)
2.11
2.11
Date of grant
November 18, 2013
June 24, 2014
Date of expiration
November 17, 2020
June 24, 2021
(1) As of March 31, 2016, the outstanding options held by other individuals as a group had exercise prices ranging from US$0.016 to US$3.97. These options
were granted on various dates from April 1, 2003 through March 31, 2016. Each option that was granted before January 1, 2007 will expire after ten years
from the date of grant. Each option that was granted after January 1, 2007 will expire after seven years from the date of grant.
2013 Plan
Under the 2013 Plan, the maximum number of share awards that may be granted is 9,073,732 restricted shares, which have been issued to Leading
Advice Holdings Limited, or Leading Advice, for the purposes of administrating the awards according to the 2013 Plan. As of March 31, 2016, 7,820,985
restricted shares (excluding those forfeited) have been granted to certain executive officers and other employees under the 2013 Plan.
The following paragraphs summarize the terms of the 2013 Plan.
Plan administration. Before our shares are listed on a stock exchange, the 2013 Plan shall be administered by Leading Advice Holdings Limited or its
designee. Leading Advice currently acts as an agent on behalf us to administer the 2013 Plan based on the instructions from us. The 2013 Plan is administered
by our board of directors or the compensation committee of the board of directors (or a similar body) formed in accordance with applicable exchange rules. The
administrator determines the grantees under the 2013 Plan.
Award agreement. Each award of restricted shares is evidenced by an award agreement that specifies the number of restricted shares so granted, the
vesting schedule, the applicable provisions in the event the grantee’s employment or service terminates, and such other terms and conditions that the
administrator shall determine in its sole discretion.
Eligibility. The restricted shares may be granted to members of our senior management, consisting of our chief operating officer, chief technical
officer, vice presidents, or their equivalents, and counsel or consultant to our company.
Vesting schedule. Each grant of restricted shares will be subject to a vesting schedule determined solely by the administrator. Once vested, the
restricted shares will no longer be subject to forfeiture and other restrictions contained in the award agreement, unless otherwise specified therein.
Shareholder rights. Grantees of restricted shares will not be entitled to any shareholder rights (including the right to dividends) on unvested portions of
the restricted shares. They will be entitled to dividends on the vested portions of the restricted shares. The administrator will hold all vested portions of share
awards for the benefit of the grantees and exercise the voting rights with respect of those shares. Currently, Leading Advice exercises the voting power on
behalf of the grantees regarding their vested restricted shares and it will solicit voting instruction from each grantee and vote in accordance with such
instruction.
Forfeiture or repurchase of the awards. In the event that the award recipient ceases employment with us or ceases to provide services to us during the
applicable restriction period, restricted shares that are at that time subject to restrictions shall be forfeited or repurchased in accordance with the award
agreement, unless otherwise waived in whole or in part by the administrator.
Acceleration. The administrator may accelerate the time at which any restrictions shall lapse or be removed.
Transfer restrictions. Except as otherwise provided by the plan administrators or the applicable shareholders agreement, no share award shall be
assigned, transferred, or otherwise disposed of other than by will or the laws of descent and distribution.
112
Termination. Unless terminated earlier, the 2013 Plan will expire automatically in November 2023. With the approval of our board of directors, the
plan administrators may, at any time and from time to time, terminate, amend or modify the 2013 Plan. Our board of directors has the authority to amend or
terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law.
2014 Plan
Under the 2014 Plan, the maximum number of share awards that may be granted is 14,195,412 restricted shares, which are currently registered under
the name of Leading Advice Holdings Limited for the purposes of administrating the awards according to the 2014 Plan. As of March 31, 2016, 7,587,000
restricted shares (excluding those forfeited) have been granted to certain executive officers and other employees under the 2014 Plan.
The following paragraphs summarize the terms of the 2014 Plan.
Plan administration. Before our shares are listed on a stock exchange, the 2014 Plan shall be administered by Leading Advice Holdings Limited or its
designee. Leading Advice currently acts as an agent on behalf us to administer the 2014 Plan based on the instructions from us. The 2014 Plan is administered
by our board of directors or the compensation committee of the board of directors (or a similar body) formed in accordance with applicable exchange rules. The
administrator determines the grantees under the 2014 Plan.
Award agreement. Each award of restricted shares is evidenced by an award agreement that specifies the number of restricted shares so granted, the
vesting schedule, the applicable provisions in the event the grantee’s employment or service terminates, and such other terms and conditions that the
administrator shall determine in its sole discretion.
Eligibility. The restricted shares may be granted to members of our directors, senior management, employees, advisors and consultants of our
company.
Vesting schedule. Each grant of restricted shares will be subject to a vesting schedule determined solely by the administrator. Once vested, the
restricted shares will no longer be subject to forfeiture and other restrictions contained in the award agreement, unless otherwise specified therein.
Shareholder rights. Grantees of restricted shares will not be entitled to any shareholder rights (including the right to dividends) on unvested portions of
the restricted shares. They will be entitled to dividends on the vested portions of the restricted shares. The administrator will hold all vested portions of share
awards for the benefit of the grantees and exercise the voting rights with respect of those shares. Currently, Leading Advice exercises the voting power on
behalf of the grantees regarding their vested restricted shares and it will solicit voting instruction from each grantee and vote in accordance with such
instruction.
Forfeiture or repurchase of the awards. In the event that the award recipient ceases employment with us or ceases to provide services to us during the
applicable restriction period, restricted shares that are at that time subject to restrictions shall be forfeited or repurchased in accordance with the award
agreement, unless otherwise waived in whole or in part by the administrator.
Acceleration. The administrator may accelerate the time at which any restrictions shall lapse or be removed.
Transfer restrictions. Except as otherwise provided by the plan administrators or the applicable shareholders agreement, no share award shall be
assigned, transferred, or otherwise disposed of other than by will or the laws of descent and distribution.
Termination. Unless terminated earlier, the 2014 Plan will expire automatically in April 2024. With the approval of our board of directors, the plan
administrators may, at any time and from time to time, terminate, amend or modify the 2014 Plan. Our board of directors has the authority to amend or
terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law.
The following table summarizes, as of March 31, 2016, the number of restricted shares granted to our officers and other individuals as a group pursuant
to our 2013 Plan and 2014 Plan.
113
Name
Lei Chen
Peng Huang
Tao Thomas Wu
Other Individuals as a Group
Total
*
Less than one percent of our total outstanding share capital.
Employment Agreements
Number of restricted
shares granted
Date of grant
*
*
*
*
10,050,365
15,467,985
November 3, 2014
November 18, 2013
September 1, 2015
November 18, 2013
We have entered into employment agreements with each of our senior executive officers. We may terminate a senior executive officer’s employment
for cause at any time by giving written notice for certain acts of the officer, including: (i) conviction of a felony or act of fraud, misappropriation or
embezzlement; (ii) gross negligence or dishonest to the detriment of our company; and (iii) material breach of the employment agreement. We may also
terminate a senior executive officer’s employment upon at least two months’ prior written notice. A senior executive officer may terminate his or her
employment by giving two-months’ or three-months’ prior notice.
Each senior executive officer has agreed that he or she shall not, at any time during the period of employment or after the termination of the period of
employment, except for the benefit of our company, use or disclose any confidential information to any person, corporation or other entity without our written
consent. Upon termination of the employment or at any other time when requested by us, the officer should promptly deliver to our company all documents and
materials of any nature pertaining to his or her work with us and should provide written certification of his or her compliance with the employment agreement.
Under no circumstances can the officer, following his or her termination, in his or her possession any property of our company, or any documents or materials
containing any confidential information. The officer should not, during the employment term, (i) improperly use or disclose any proprietary information or trade
secrets of any former employer or other person or entity with which the officer has a duty to keep in confidence information acquired by such officer, if any, or
(ii) bring into the premises of our company any document or confidential or proprietary information belonging to the former employer unless consented to in
writing by such employer. The officer will indemnify us and hold us harmless from and against all claims, liabilities, damages and expenses.
Each officer also agrees that during the term of employment and within one year of termination of employment, he or she will not approach clients,
customers or contacts of our company or other persons or entities introduced to such officer in the his/her capacity as a representative of our company for the
purposes of doing business with such persons or entities which will harm the business relationship between our company and such persons or entities. Unless
consented to by us, the officer should not assume employment with or provide services as a director or otherwise for any of our competitors, or engage in any
competitor as a principal, partner, licensor or otherwise. The officer will not seek, directly or indirectly, by the offer of alternative employment or other
inducement whatsoever, to solicit the services of any of our employees as at or after the date of the termination of such officer’s employment, or in the year
preceding such termination.
C. Board Practices
Board of Directors
Our board of directors consists of nine directors. A director is not required to hold any shares in our company to qualify to serve as a director. All the
powers of our company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof and to issue debentures,
debenture stock and other securities whenever money is borrowed or as a security for any debt, liability or obligation of our company or any third party, may
only be carried out jointly by our chief executive officer and chief financial officer.
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Committees of the Board of Directors
We have established an audit committee, a compensation committee and a nominating and corporate governance committee under the board of
directors. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee
Our audit committee consists of Ms. Jenny Wenjie Wu and Mr. Yongfu Yu, and is chaired by Ms. Jenny Wenjie Wu. Our board of directors has
determined that each of Ms. Jenny Wenjie Wu and Mr. Yongfu Yu satisfies the “independence” requirements of Rule 10A-3 under the Securities Exchange Act
of 1934, as amended, and Rule 5605(a)(2) of the NASDAQ Listing Rules. The audit committee oversees our accounting and financial reporting processes and
the audits of the financial statements of our company. The audit committee is responsible for, among other things:
selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by
the independent registered public accounting firm;
reviewing with the independent registered public accounting firm any significant matters or difficulties encountered by the external auditors during
the course of their audits and management’s response;
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
discussing the annual audited financial statements with management and the independent registered public accounting firm;
reviewing significant matters as to the adequacy of our internal controls and any special procedures adopted by the external auditors in light of
material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
meeting separately and periodically with management and the independent registered public accounting firm; and
reporting regularly to the board.
Compensation Committee
Our compensation committee consists of Ms. Jenny Wenjie Wu, Mr. Yongfu Yu and Mr. Chuan Wang, and is chaired by Mr. Chuan Wang. Our board
of directors has determined that each of Ms. Jenny Wenjie Wu and Mr. Yongfu Yu satisfies the “independence” requirements of Rule 5605(a)(2) of the
NASDAQ Listing Rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of
compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated upon. The compensation committee is responsible for, among other things:
reviewing the total compensation package for our three most senior executives and making recommendations to the board with respect to it;
approving and overseeing the total compensation package for our executives other than the three most senior executives;
reviewing the compensation of our directors and making recommendations to the board with respect to it; and
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periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
and employee pension and welfare benefit plans.
Corporate governance and nominating committee
Our corporate governance and nominating committee consists of Ms. Jenny Wenjie Wu, Mr. Yongfu Yu and Mr. Feng Hong, and is chaired by Mr.
Feng Hong. Our board of directors has determined that each of Ms. Jenny Wenjie Wu and Mr. Yongfu Yu satisfies the “independence” requirements of Rule
5605(a)(2) of the NASDAQ Listing Rules. The corporate governance and nominating committee assists the board in selecting individuals qualified to become
our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for,
among other things:
recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the board;
reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills,
experience and availability of service to us;
selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as
well as of the corporate governance and nominating committee itself;
advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance
with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action
to be taken; and
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to
ensure proper compliance.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also
have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. Our
company may have the right to seek damages if a duty owed by our directors is breached.
Terms of Directors and Executive Officers
Our directors may be elected by an ordinary resolution of our shareholders, or by the affirmative vote of a simple majority of our directors (which
should include one non-independent director) present and voting at a meeting of our board of directors, and shall hold office until the expiration of his term and
until his successor has been elected and qualified, or until such time as they are removed from office by ordinary resolution or the unanimous written resolution
of all shareholders. A director will be removed from office automatically (1) if a simple majority of all directors determine at a duly called and constituted board
meeting that such director has been guilty of actual fraud or willful neglect in performing his duties as a director, or (2) if a director is notified of, and fails to
attend, an aggregate of three duly called and constituted board meetings within any 365-day period. In addition, the office of a director will be vacated if such
director (a) dies, becomes bankrupt or makes any arrangement or composition with his creditors, (b) is found to be or becomes of unsound mind, or (c) resigns
his office by notice in writing to us.
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D. Employees
We had 1,523, 1,305 and 1,014 employees as of December 31, 2013, 2014 and 2015, respectively. As of December 31, 2015, we had 1,014 employees,
including 139 in general administration, 679 in research and development and 196 in sales and marketing. In 2013, our employees were divided into five
categories, including management, research and development, content procurement, sales and marketing and general administration. Since 2014, however, we
grouped our employees into three redefined categories—research and development, sales and marketing and general administration—and employees who were
formerly in the management or content procurement categories were reassigned to one of the three redefined categories. As required by PRC regulations, we
participate in employee benefit plans organized by government authorities, including pensions, work-related injury benefits, medical benefits, maternity
benefits, unemployment benefit and housing fund plans. We have granted stock options and restricted shares to management and key employees in order to
reward their services and provide them with equity incentives. We maintain good employee relations and have not experienced any material labor disputes since
our inception.
E. Share Ownership
For information regarding the share ownership of our directors and officers, see “Item 7. Major Shareholders and Related Party Transactions — A.
Major Shareholders.” For information as to stock options granted to our directors, executive officers and other employees, see “Item 6. Directors, Senior
Management and Employees—B. Compensation — Share Incentive Plans.”
Item 7.
Major Shareholders and Related Party Transactions
A. Major Shareholders
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2016 held
by:
each of our current directors and executive officers; and
each person known to us to beneficially own more than 5% of our common shares.
Percentage of beneficial ownership is based on 337,997,790 total outstanding common shares as of March 31, 2016, excluding (i) 16,519,144 common
shares issued to Leading Advice Holdings Limited for grants under our 2013 Plan and 2014 Plan that remained then unexercised or unvested, and (ii)
14,360,275 common shares, consisting of shares issued to our depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or
vesting of awards granted under our share incentive plans and shares repurchased by us under our 2015 and 2016 repurchase programs but not yet cancelled.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the power to vote or direct the voting of securities, or to dispose or direct the disposition of securities
or has the right to acquire such powers within 60 days. In computing the number of shares beneficially owned by a person and the percentage ownership of that
person, we have included shares that the person has the right to acquire within 60 days of March 31, 2016, including through the exercise of any option, warrant
or other right or the conversion of any other security, in both the numerator and the denominator. These shares, however, are not included in the computation of
the percentage ownership of any other person.
Directors and executive officers**:
Sean Shenglong Zou(2)
Hao Cheng(3)
Qin Liu(4)
Quan Zhou(5)
Feng Hong(6)
Chuan Wang(7)
Hongjiang Zhang(8)
Jenny Wenjie Wu(9)
Yongfu Yu(10)
Lei Chen
Peng Huang(11)
Tao Thomas Wu
All directors and executive officers as group
Principal Shareholders:
Xiaomi Ventures Limited(12)
King Venture Holdings Limited(13)
Vantage Point Global Limited(14)
IDG Funds(15)
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Common Shares Beneficially Owned
Number
%(1)
32,814,606
13,133,952
4,166,667
22,446,587
—
—
—
*
*
*
*
*
73,324,678
93,653,572
37,500,000
20,814,606
22,446,587
9.71%
3.89%
1.23%
6.64%
—
—
—
*
*
*
*
*
21.69%
27.71%
11.09%
6.16%
6.64%
Notes:
*
Less than 1% of the total outstanding common shares.
** The business address of Messrs. Shenglong Zou, Hao Cheng, Tao Thomas Wu and Lei Chen is 7/F Block 11, Shenzhen Software Park, Ke Ji Zhong 2nd
Road, Nanshan District, Shenzhen, 518057, People’s Republic of China.
(1) For each person and group included in this column, percentage ownership is calculated by dividing the number of common shares beneficially owned by
such person or group, including shares that such person or group has the right to acquire within 60 days of the date of this annual report, by 337,997,790,
being the sum of the total number of common shares, and the number of common shares underlying share options, restricted shares and warrants held by
such person or group that are exercisable within 60 days of the date of this annual report.
(2) Represents (i) 20,814,606 common shares held by Vantage Point Global Limited, a British Virgin Islands company which is 100% beneficially owned by
Mr. Zou through a family trust, and (ii) 12,000,000 common shares held by Eagle Spirit LLC, a Delaware limited liability company, which is wholly owned
by a United States irrevocable trust with Mr. Zou as the settler and Mr. Zou is the sole director of Eagle Spirit LLC.
(3) Represents 13,133,952 common shares held by Aiden & Jasmine Limited, a British Virgin Islands company which is 100% beneficially owned by Mr. Hao
Cheng through a family trust.
(4) Represents (i) 3,796,296 common shares held by Morningside China TMT Special Opportunity Fund, L.P. and (ii) 370,371 common shares held by
Morningside China TMT Fund III Co-Investment, L.P. Morningside China TMT Special Opportunity Fund, L.P. and Morningside China TMT Fund III Co-
Investment, L.P. are controlled by Morningside China TMT GP III, L.P., their general partner. Morningside China TMT GP III, L.P. is in turn controlled by
TMT General Partner Ltd., its general partner. Mr. Liu is one of the directors of TMT General Partner Ltd. The business address of Mr. Liu is No. 380, Wu
Yuan road, Xuhui District, Shanghai, China.
(5) Represents (i) 16,265,416 common shares held by IDG Technology Venture Investment III, L.P., or IDG Investment III, L.P., (ii) 2,014,504 common
shares held by IDG Technology Venture Investment IV, L.P., or IDG Investment IV, L.P., and (iii) 4,166,667 common shares held by IDG Technology
Venture Investment V, L.P., or IDG Investment V, L.P., as reported on the Amendment No. 1 to Schedule 13G filed by the IDG Funds with the SEC on
February 1, 2016. We refer to IDG Investment III, L.P., IDG Investment IV, L.P. and IDG Investment V, L.P. collectively as IDG Funds and each as an
IDG Fund. According to the Schedule 13G/A, each of the IDG Funds is a limited partnership organized under the laws of the State of Delaware. The
general partner of IDG Investment III L.P. is IDG Technology Venture Investment III, LLC, a limited liability partnership organized under the laws of the
State of Delaware. The general partner of IDG Investment IV L.P. is IDG Technology Venture Investment IV, LLC, a limited liability partnership
organized under the laws of the State of Delaware. The general partner of IDG Investment V L.P. is IDG Technology Venture Investment V, LLC, a limited
liability partnership organized under the laws of the State of Delaware. The managing members of the general partner of each of the IDG Funds are Chi
Sing Ho and Quan Zhou. By virtue of acting together with Chi Sing Ho to direct the management and operations of the general partner of each of the IDG
Funds, Quan Zhou may be deemed to share voting and dispositive powers with respect to all the shares held by the IDG Funds. The business address of Mr.
Zhou is c/o IDG Capital Partners, 6/F, COFCO Plaza, No. 8 Jianguomennei Avenue, Beijing 100005, China.
(6) The business address of Mr. Hong is Building E, Shunshijiaye Chuang Ye Yuan, No. 66 Zhufang Road, Qinghe, Haidian District, Beijing, China.
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(7) The business address of Mr. Wang is Building C, Shunshijiaye Chuang Ye Yuan, No. 66 Zhufang Road, Qinghe, Haidian District, Beijing, China.
(8) The business address of Dr. Zhang is Kingsoft Tower, No. 33 Xiaoying West Road, Haidian District, Beijing, China.
(9) The business address of Ms. Wu is No. 99, Fuquan Road, Shanghai, China.
(10) The business address of Mr. Yu is F12, Tower A, U-Center, No. 28 Chengfu Road, Haidian District, Beijing 100083, China.
(11) The business address of Mr. Huang is 7/F, Building 11, Tower 2, Kejizhonger Road, Ruanjiang Yuan, Nanshan District, Shenzhen, China.
(12) Represents 93,653,572 common shares held by Xiaomi Ventures Limited. Xiaomi Ventures Limited is wholly owned by Xiaomi Corporation, a limited
liability company organized under the laws of the Cayman Islands. The business address of Xiaomi Ventures Limited is 68 Qinghe Middle Street
WuCaiCheng Office Building, 12th Floor, Haidian District, Beijing, People’s Republic of China.
(13) Represents 37,500,000 common shares held by King Venture Holdings Limited. King Venture Holdings Limited is an exempted company incorporated
under the laws of the Cayman Islands, and is wholly owned by Kingsoft Corporation Limited, a Cayman Islands company with its shares listed on the Hong
Kong Stock Exchange (Stock Code: 3888). The business address of King Venture Holdings Limited is Kingsoft Tower, No. 33 Xiaoying West Road,
Haidian District, Beijing, China.
(14) Represents 20,814,606 common shares held by Vantage Point Global Limited, a British Virgin Islands company which is 100% beneficially owned by Mr.
Sean Shenglong Zou through a family trust. The registered address of Vantage Point Global Limited is P.O. Box 438, Palm Grove House, Road Town,
Tortola, British Virgin Islands.
(15) Represents (i) 16,265,416 common shares held by IDG Technology Venture Investment III, L.P., (ii) 2,014,504 common shares held by IDG Technology
Venture Investment IV, L.P., and (iii) 4,166,667 common shares held by IDG Technology Venture Investment V, L.P., as reported on the Amendment No.
1 to Schedule 13G filed by the IDG Funds with the SEC on February 1, 2016. According to the Schedule 13G/A, each of the IDG Funds is a limited
partnership organized under the laws of the State of Delaware. The general partner of IDG Investment III L.P. is IDG Technology Venture Investment III,
LLC, a limited liability partnership organized under the laws of the State of Delaware. The general partner of IDG Investment IV L.P. is IDG Technology
Venture Investment IV, LLC, a limited liability partnership organized under the laws of the State of Delaware. The general partner of IDG Investment V
L.P. is IDG Technology Venture Investment V, LLC, a limited liability partnership organized under the laws of the State of Delaware. The managing
members of the general partner of each of the IDG Funds are Chi Sing Ho and Quan Zhou. The business address of the IDG Funds is c/o IDG Capital
Management (HK) Limited, Unit 5505, The Center, 99 Queen’s Road Central, Hong Kong.
To our knowledge, as of March 31, 2016, 169,284,236 of our outstanding common shares are held by four record holders in the United States including
134,837,645 common shares held by The Bank of New York Mellon, the depositary of our ADS program. The number of our common shares held by The Bank
of New York Mellon includes 14,360,275 common shares consisting of shares issued to the depositary bank for bulk issuance of ADSs reserved for future
issuances upon the exercise or vesting of awards granted under our share incentive plans and shares repurchased by the company under its 2015 and 2016
repurchase programs, which represents 36.55% of our total outstanding shares (including the aforementioned 14,360,275 common shares). None of our
shareholders has informed us that he or she is affiliated with a registered broker-dealer or is in the business of underwriting securities. We are not aware of any
arrangement that may, at a subsequent date, result in a change of control of our company.
B. Related Party Transactions
Contractual arrangements with our PRC variable interest entity and its shareholders
Due to current legal restrictions on foreign ownership and investment in value-added telecommunications services in China, we conduct our operations
in China principally through a series of contractual arrangements with our variable interest entity and its shareholders in China. For a description of these
contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.”
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Shareholders agreement
In connection with the issuance of our series E preferred shares, we entered into a seventh amended and restated shareholders agreement in April 2014
with our shareholders and relevant parties therein. Except for the registration rights, all preferred shareholders’ rights automatically terminated upon the
completion of our initial public offering. Additionally, the co-founders have agreed to the transfer restrictions imposed on an aggregate number of 39,934,162
common shares beneficially owned by the co-founders. Accordingly, the co-founders are unable to transfer the relevant shares to any third party until April 24,
2019 or April 24, 2018, as the case may be.
Pursuant to our seventh amended and restated shareholders agreement, we have granted certain registration rights to our shareholders. The registration
rights remain effective as of the date of this annual report. Set forth below is a description of the registration rights granted under the agreement.
Demand registration rights. At any time following the completion of initial public offering, upon a written request from the holders of at least 30% of
the registrable securities then outstanding, we shall file a registration statement covering the offer and sale of the registrable securities. Registrable securities
include our common shares issued or issuable upon conversion of the preferred shares provided that, with respect to demand registration right, registrable
securities exclude common shares issued or issuable upon conversion of the series C preferred shares. However, we are not obligated to proceed with a demand
registration if (i) such registration is in any particular jurisdiction in which we would be required to execute a general consent to service of process in effecting
such registration, qualification or compliance, unless we already are subject to service in such jurisdiction and except as may be required by the Securities Act;
(ii) we have already effected three demand registrations; (iii) such registration is during the period starting with the date 60 days prior to our good faith estimate
of the date of filing of, and ending on a date 180 days after the effective date of a registration initiated by us, provided that we are actively employing in good
faith all reasonable efforts to cause such registration statements to become effective; (iv) the initiating holders (defined in the shareholders agreement) propose
to dispose of registrable securities which may be immediately registered on Form F-3 pursuant to a request from other holders of registrable shares; (v) initiating
holders do not request that such offering be firmly underwritten by underwriters selected by the initiating holders or (vi) if we and the initiating holders are
unable to obtain the commitment of the underwriter described in clause (v) above to firmly underwrite the offer. We have the right to defer filing of a
registration statement for up to 120 days if our board of directors determines in good faith that the filing of a registration statement would be materially
detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period.
Piggyback registration rights. If we propose to file a registration statement for a public offering of our securities other than pursuant to registration
statement relating to any employee benefit plan or a corporate reorganization, then we must offer holders of registrable securities an opportunity to include in
that registration all or any part of their registrable securities. The underwriters of any underwritten offering have the right to limit the number of shares with
registration rights to be included in the registration statement, subject to certain limitations; for example, the number of shares that may be included in the
registration and the underwriting shall be allocated first to us and then to the series E, series D, series C, series B and series A-1 preferred shareholders in turn.
Form F-3 registration rights. When we are eligible for registration on Form F-3, holders of at least 30% of the registrable securities then outstanding
will have the right to request that we file registration statements on Form F-3 covering the offer and sale of their securities. A Form F-3 registration shall not be
deemed to be a demand registration.
We are not obligated to effect a Form F-3 registration, among other things, if (1) we have already effected a registration under the Securities Act
within the six months period preceding the date of such request, other than a registration from which the registrable securities of the holders have been excluded,
or (2) the dollar amount of securities to be sold is of an aggregate price to the public of less than US$1.0 million. We have the right to defer filing of a
registration statement for up to 90 days if our board of directors determines in good faith that the filing of a registration statement would be materially
detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period.
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Expenses of registration. We will pay all expenses relating to any demand, piggyback, or Form F-3 registration, other than underwriting commissions
and discounts.
Termination of obligations. Our obligations with respect to the piggyback registration rights shall terminate on the fifth anniversary of the completion
of our initial public offering in June 2014. Our obligations with respect to the demand registration rights or the Form F-3 registration rights shall terminate on
the fifth anniversary of the completion of our initial public offering. In addition, we shall have no obligation to effect any demand, or Form F-3 registration if, in
the opinion of our counsel, all registrable securities may be sold at that time without registration pursuant to Rule 144 under the Securities Act.
Employment agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment agreements.”
Share incentives
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share incentive plans.”
In relation to our 2013 Plan and 2014 Plan, we have appointed Leading Advice Holdings Limited, or Leading Advice, as the administer of both plans.
On behalf of us, Leading Advice executes actions based on our instruction to select the eligible grantees, to determine the number of awards and the conditions
and provision of such awards, including but not limited to the vesting schedule and acceleration of the awards.
Leading Advice is not entitled to the following rights in relation to the shares registered under its name: (i) dividends, (ii) voting powers prior to
vesting of relevant shares and (ii) transfer of the unvested portion of the awards or awards that have not been granted. In addition, upon the liquidation or the
dissolution of Leading Advice or the expiration of the relevant plan, common shares not granted as awards shall be transferred back to us at no consideration.
For the awards that have been granted and become vested, Leading Advice will solicit voting instructions from each grantee, and vote in accordance
with such instructions. The grantees will be entitled to dividends and have the right to request Leading Advice to transfer vested awards to a transferee
designated by the grantees.
Advances extended to certain directors
We extended advances amounting to RMB60,000 to Mr. Shenglong Zou and RMB7,000 to Mr. Chuan Wang in 2014. These advances were used for
general business purposes, to set up certain companies in the PRC which we plan to use to conduct a part of our business and consolidate into the financial
statements of our company in the future. As of the December 31, 2015, the advances to Mr. Shenglong Zou and Mr. Chuan Wang remain outstanding.
Game sharing arrangement with Zhuhai Qianyou Technology, Co., Ltd.
In November 2011, we obtained an exclusive game operation right from Zhuhai Qianyou Technology, Co., Ltd., or Zhuhai Qianyou, our equity
investee, which is specialized in developing online games. According to the agreement in relation to such game operation right that we entered into with Zhuhai
Qianyou, we need to share revenues derived by the licensed games with Zhuhai Qianyou. For the years ended December 31, 2013, 2014 and 2015, game sharing
cost paid and payable to Zhuhai Qianyou was US$1.8 million, US$0.4 million and US$0.1 million, respectively. As of December 31, 2013, 2014 and 2015,
US$0.2 million,US$0.1 million and less than US$0.1 million, respectively, of the game sharing cost we owe to Zhuhai Qianyou remained unpaid and
outstanding.
Intellectual property framework agreement between Shenzhen Xunlei and Xunlei Computer
On December 24, 2013, Shenzhen Xunlei and Xunlei Computer entered into a technology development and software license framework agreement.
The term of the agreement is two years from the date of its execution.
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Under this framework agreement, Xunlei Computer provides Shenzhen Xunlei with technology development services according to Shenzhen Xunlei’s
business needs. Any new intellectual property resulting from the technology development services is owned by Xunlei Computer, and cannot be substituted or
sub-licensed to any third party by Shenzhen Xunlei without the prior written consent of Xunlei Computer. During the term of the framework agreement, with
respect to each technology development project, Shenzhen Xunlei and Xunlei Computer will separately sign technology development (services) agreements,
which set out the specific terms and amount of consideration, all subject to the terms of the framework agreement.
In addition, under the framework agreement, Xunlei Computer grants Shenzhen Xunlei a non-exclusive and limited right to use certain specified
proprietary software that Xunlei Computer owns. With respect to the licensing of each software, Shenzhen Xunlei and Xunlei Computer will separately sign
software licensing agreements, which will set out the specific terms and the amount of licensing fee, all subject to the terms of the framework agreement.
In relation to cooperation under the framework agreement, Xunlei Computer and Shenzhen Xunlei entered into four agreements in 2013 for Xunlei
Computer’s technology development services and its software license and Giganology Shenzhen has agreed to the execution of these agreements and the
relevant services and licenses between Xunlei Computer and Shenzhen Xunlei.
As of December 31, 2015, the aggregate amount of the fees that have been incurred by Shenzhen Xunlei for the technology development services and
the software license provided by Xunlei Computer under the framework agreement was RMB4.7 million (US$0.8 million).
Pre-installing Services Agreements with Xiaomi
Cooperation Framework Agreement. On August 1, 2013, we entered into a Cooperation Framework Agreement, or the Framework Agreement, with
Xiaomi Technology to arrange for the pre-installation of our Xunlei Accelerator onto Xiaomi’s set-top boxes. The Framework Agreement has a term of three
years and there is no fee charged for such cooperation.
Xunlei Accelerator Mobile Pre-installing Services Agreement. On December 1, 2013, we entered into a Xunlei Accelerator Mobile Pre-installing
Services Agreement, or the Pre-installing Services Agreement, with Beijing Xiaomi Mobile Software Company Limited, or Beijing Xiaomi, a Xiaomi group
company. Through such cooperation, Xiaomi phones will be pre-installed with our mobile acceleration applications and Xiaomi phone users will have access to
our acceleration services. The Pre-installing Services Agreement has a term of one year and there is no fee charged for the pre-installation. We have entered into
other pre-installing agreements with other unrelated parties at no charge. Our mobile acceleration software has been officially adopted by Xiaomi’s operating
systems, MIUI6 and MIUI7, and installed on Xiaomi phones, including both pre-installations on new phone shipments and installations from upgrades on
existing Xiaomi phones. We received technology service revenue of US0.3$ million from Beijing Xiaomi in 2015.
In 2015, we received sales orders from Xiaomi Technology to provide online advertising services on our website. Our total advertising revenue from
those orders was less than US$0.1 million. As of December 31, 2015, we did not have any outstanding receivable from Xiaomi Technology.
C.
Interests of Experts and Counsel
Not applicable.
Item 8.
Financial Information
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
We have been involved in legal proceedings related to our business from time to time and expect to continue to be involved in such proceedings in the
future. Internet services and content providers such as ours are frequently involved in litigation based on intellectual property-related claims. See “Item 3. Key
Information—D. Risk factors—Risks related to our business—We face and expect to continue to face copyright infringement claims and other related claims,
including claims based on content available through our services, which could be time-consuming and costly to defend and may result in damage awards,
injunctive relief and/or court orders, divert our management’s attention and financial resources and adversely impact our business.”
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We were subject to a number of lawsuits in China for alleged copyright infringements over the years, a number of which are still outstanding as of the
date of this annual report. Although legal proceedings are inherently uncertain and their results cannot be predicted, we have not been, nor are we currently a
party to or aware of, any legal proceeding, investigation or claim that, in the view of our management, is likely to materially and adversely affect our business,
financial position or results of operations.
Dividend Policy
We have not previously declared or paid cash dividends. Subject to our ongoing financial performance, cash position, budget and business plan and
market conditions, we may consider paying special dividends. However, we do not plan to pay dividends in the foreseeable future We currently intend to retain
most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our subsidiaries in China for our cash
requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us.
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on dividend distributions.”
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Our shareholders may by ordinary resolution
declare dividends, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the
form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant. Under Cayman Islands law, we may declare and pay dividends on our shares only
out of our profit or our share premium account, provided always that even if our company has sufficient profit or share premium, we may not pay a dividend if
this would result in our company being unable to pay our debts as they fall due in the ordinary course of business. If we pay any dividends, we will pay our
ADS holders to the same extent as holders of our common shares, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder. See “Item 12. Description of Securities Other than Equity Securities—D. American Depositary Shares.” Cash dividends on our common shares, if
any, will be paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
Item 9.
The Offer and Listing
A. Offering and Listing Details
Our ADSs have been listed on The NASDAQ Global Select Market since June 24, 2014. Our ADSs currently trade on The NASDAQ Global Select
Market under the symbol “XNET.” One ADS represented five common shares.
The following table provides the high and low trading prices for our ADSs on NASDAQ for the time periods indicated.
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Annual Highs and Lows
2014
2015
Quarterly Highs and Lows
First Quarter 2015
Second Quarter 2015
Third Quarter 2015
Fourth Quarter 2015
Monthly Highs and Lows
October 2015
November 2015
December 2015
January 2016
February 2016
March 2016
April 2016 (through April 20, 2016)
B. Plan of Distribution
Not applicable.
C. Markets
Trading Price
High
Low
16.18
14.34
8.66
14.34
12.04
8.36
8.36
8.20
8.06
7.66
6.12
6.74
7.49
6.56
5.93
5.93
6.25
6.71
6.58
6.90
6.58
6.80
6.00
5.14
5.68
6.00
Our ADSs have been listed on NASDAQ Global Select Market since June 24, 2014 under the symbol “XNET.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10.
Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our eighth amended and restated memorandum and seventh amended and restated
articles of association contained in our F-1 registration statement (File No. 333-196221), initially filed with the SEC on June 12, 2014. The eighth amended and
restated memorandum and seventh amended and restated articles of association were adopted by our shareholders by special resolutions passed on June 11,
2014, and became effective upon completion of our initial public offering of our common shares represented by ADSs.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on
the Company” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
See “Item 4.B. Information on the Company—Business Overview—Regulation—Regulations Relating to Foreign Exchange.”
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E. Taxation
Cayman Islands Taxation
According to Maples and Calder, our Cayman Islands legal counsel, the Cayman Islands currently levies no taxes on individuals or corporations based
upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to
us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought
within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our
company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the PRC EIT Law, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident
enterprise” of the PRC. A circular issued by the SAT on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be
considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. Under the
implementation regulations to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the
manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the circular mentioned above
specifies that certain offshore enterprises controlled by PRC resident enterprises will be classified as PRC resident enterprises if the following are located or
resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and
personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and half or
more of the senior management or directors having voting rights. We do not believe we would be treated as a “resident enterprise” for PRC tax purposes even if
the criteria for “de facto management body” as set forth in the circular mentioned above were deemed applicable to us. See “Item 3. Key Information—D. Risk
factors—Risks related to doing business in China—Our global income may be subject to PRC taxes under the PRC EIT Law, which may have a material
adverse effect on our results of operations.” However, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax
purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our non-resident enterprise shareholders, including the holders of
our ADSs and non-resident enterprise holders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or common shares. It is
unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains in the event we are
determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% (unless a reduced
rate is available under an applicable tax treaty).
If we are deemed to be a PRC resident enterprise and our non-resident enterprise shareholders (including our ADS holders) are subject to PRC tax as
described above, the withholding agent will be required to withhold enterprise income tax on payments of dividends to such investors. The withholding agent
must obtain a tax withholding registration and withhold the enterprise income tax from each payment made to non-resident enterprise shareholders and file a
report to the competent tax authorities. Where the withholding agent fails or is unable to perform its withholding obligation, the non-resident enterprise
shareholders must pay the tax due to the applicable tax authorities within seven days after the payment is made or due. We, as the withholding agent, will be
required to obtain a tax withholding registration and withhold the applicable enterprise income tax in order to comply with the above requirements. It is not
clear who the withholding agent would be if tax is due on capital gains. In the event that we or our non-resident enterprise shareholders (including our ADS
holders) fail to comply with the above procedures, we or our non-resident enterprise shareholders (including our ADS holders) may be ordered to rectify the
non-compliance or be subject to a fine of no more than RMB10,000. Failure by us to withhold the income tax fully and timely may result in a fine of 50% to
three times of the unpaid tax and failure by our ADS holders to pay the tax fully and timely may result in late payment penalties, or a fine of 50% to three times
of the unpaid tax.
In addition, if we are treated as a PRC resident enterprise for enterprise income tax purposes, we may be eligible for the benefits of the income tax
treaty between the PRC and other jurisdictions in which we may derive income, such as the United States. However, if we are treated as a PRC resident
enterprise, we do not expect to withhold at treaty rates if any withholding is required on dividends we pay to our non-resident shareholders (including our ADS
holders) notwithstanding such holders may be eligible for the income tax treaty between their resident jurisdictions and the PRC. The United States—PRC tax
treaty generally limits PRC withholding on dividends to a rate of 10%. Investors should consult their tax advisors regarding the availability of treaty benefits
and the procedure for claiming a refund, if any.
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If we are not deemed a PRC resident enterprise, no PRC income tax will be withheld from dividends distributed by us and no PRC income tax will be
payable on gains realized from the sale or other disposition of our shares or ADSs by the non-resident holders of our shares or ADSs. SAT Circular 7 further
clarifies that, where a non-resident enterprise derives income by acquiring and selling shares in an offshore listed enterprise in the public market, such income
shall not be subject to PRC tax. However, given the uncertainty concerning the application of SAT Circular 698 and SAT Circular 7, we and our non-PRC
resident investors may be at risk of being required to file a return and being taxed under SAT Circular 698 and SAT Circular 7, and we may be required to
expend valuable resources to comply with SAT Circular 698 and SAT Circular 7 or to establish that we should not be taxed under SAT Circular 698 and SAT
Circular 7 in the future.
United States Federal Income Tax Considerations
The following discussion is a summary of the United States federal income tax considerations relating to the ownership and disposition of our ADSs or
common shares by a U.S. Holder that holds our ADSs as “capital assets” (generally, property held for investment) under the United States Internal Revenue
Code of 1986, as amended, or the Code. This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations
or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal
income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not
address all aspects of United States federal income taxation that may be important to particular investors in light of their individual investment circumstances,
including investors subject to special tax rules (for example, certain financial institutions, banks, insurance companies, regulated investment companies, real
estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, and tax-exempt organizations
(including private foundations), holders who are not U.S. Holders, cooperatives, pension plans, U.S. expatriates, persons who acquired ADSs or common shares
pursuant to the exercise of any employee share option or otherwise as compensation, holders who own (directly, indirectly or constructively) 10% or more of
our voting stock, holders that hold their ADSs or common shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction, or
holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those
summarized below). In addition, except to the extent described below, this discussion does not discuss any state, local, alternative minimum tax, non-United
States tax, non-income tax (such as gift or estate tax), or the Medicare tax considerations. U.S. Holders are urged to consult their tax advisors regarding the
United States federal, state, local, and non-United States income and other tax considerations relating to the ownership and disposition of our ADSs or common
shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ADSs or common shares that is, for United States federal income tax
purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of
which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is
subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial
decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or common
shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships
holding our ADSs or common shares and partners in such partnerships are urged to consult their tax advisors regarding the ownership and disposition of our
ADSs or common shares.
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It is generally expected that a holder of ADSs should be treated, for United States federal income tax purposes, as the beneficial owner of the
underlying shares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly,
deposits or withdrawals of common shares for ADSs will generally not be subject to United States federal income tax.
Passive Foreign Investment Company Considerations
Based on the market price of our ADSs and the composition of assets (in particular, the retention of a large amount of cash), we believe that we were a
passive foreign investment company (“PFIC”) for United States federal income tax purposes for the taxable year ended December 31, 2015, and we will likely
be classified as a PFIC for our current taxable year ending December 31, 2016 unless the market price of our ADSs increases and/or we invest a substantial
amount of the cash and other passive assets we hold in assets that produce or are held for the production of non-passive income. A non-United States
corporation, such as our company, will be classified as a “passive foreign investment company”, or “PFIC”, for United States federal income tax purposes, if, in
the case of any particular taxable year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more
of the average quarterly value of its assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive
income. For this purpose, cash is categorized as a passive asset and the company’s unbooked intangibles associated with active business activities may generally
be classified as non-passive assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of
passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in
which we own, directly or indirectly, more than 25% (by value) of the stock.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or common shares, we generally will continue to be treated as a
PFIC for all succeeding years during which such U.S. Holder holds our ADSs or common shares even if we cease to meet the threshold requirements for PFIC
status, unless a U.S. Holder makes a taxable “deemed sale” election that may allow the U.S. Holder to eliminate the continuing PFIC status under certain
circumstances.
The United States federal income tax rules that apply if we are classified as a PFIC for our current or future taxable years are generally discussed below
under “Passive foreign investment company rules.”
Dividends
Subject to the discussion below under “Passive foreign investment company rules,” any cash distributions (including the amount of any PRC tax
withheld) paid on our ADSs or common shares out of our current or accumulated earnings and profits, as determined under United States federal income tax
principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S.
Holder, in the case of common shares, or by the depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of
United States federal income tax principles, any distribution paid will generally be treated as a “dividend” for United States federal income tax purposes. A non-
corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified foreign corporation” at a lower applicable capital
gains rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United
States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally
will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the
Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or
(ii) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United
States. Our ADSs are currently listed on the NASDAQ Global Select Market. We believe that the ADSs will be readily tradable on an established securities
market in the United States for so long as our ADSs continue to be listed on the NASDAQ Global Select Market. Since we do not expect that our common
shares will be listed on established securities markets, it is unclear whether dividends that we pay on our common shares that are not backed by ADSs currently
meet the conditions required for the reduced tax rate. There can be no assurance that our ADSs will continue to be considered readily tradable on an established
securities market in later years. Furthermore, as mentioned above, we believe that we were a PFIC for the taxable year ended December 31, 2015, and we will
likely be classified as a PFIC for our current taxable year ending December 31, 2016. Each non-corporate U.S. Holder is advised to consult their tax advisors
regarding the availability of the lower capital gains rate applicable to qualified dividend income for any dividends we pay with respect to the common shares
and ADSs. Dividends received on our ADSs or common shares will not be eligible for the dividends received deduction allowed to corporations.
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Dividends will generally be treated as passive income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be
eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on
our ADSs or common shares. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their tax advisors regarding the
availability of the foreign tax credit under their particular circumstances. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld,
may instead claim a deduction, for United States federal income tax purposes, in respect of such withholding, but only for a year in which such holder elects to
do so for all creditable foreign income taxes.
Sale or Other Disposition of ADSs or Common Shares
Subject to the discussion below under “Passive foreign investment company rules,” a U.S. Holder will generally recognize capital gain or loss upon the
sale or other disposition of ADSs or common shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s
adjusted tax basis in such ADSs or common shares. Any capital gain or loss will be long-term if the ADSs or common shares have been held for more than one
year and will generally be United States source gain or loss for United States foreign tax credit purposes. Long-term capital gain of non-corporate U.S. Holders
is generally eligible for a reduced rate of taxation. The deductibility of a capital loss is subject to limitations. In the event that gain from the disposition of the
ADSs or common shares is subject to tax in the PRC, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the
PRC may elect to treat the gain as PRC source income. U.S. Holders are advised to consult its tax advisors regarding the tax consequences if a PRC tax is
imposed on a disposition of our ADSs or common shares, including the availability of the foreign tax credit under their particular circumstances.
Passive Foreign Investment Company Rules
As mentioned above, we believe that we were a PFIC for the taxable year ended December 31, 2015, and we will likely be classified as a PFIC for our
current taxable year ending December 31, 2016. If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or common
shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special United States
federal income tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder
(which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in
the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or common shares), and (ii) any gain realized on the sale or other
disposition, including, under certain circumstance, a pledge, of ADSs or common shares. Under the PFIC rules:
the excess distribution and/or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or common shares;
the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which
we are classified as a PFIC, or a pre-PFIC year, will be taxable as ordinary income;
the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to the
U.S. Holder for that year; and
an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-
PFIC year.
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or common shares and any of our non-United States subsidiaries or
VIE entities is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of
the application of these rules. U.S. Holders are advised to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries or VIE
entities.
128
As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to our ADSs,
provided that the ADSs are regularly traded on the NASDAQ Global Select Market. In addition, we do not expect that holders of common shares that are not
represented by ADSs will be eligible to make a mark-to-market election. Our ADSs may be regularly traded, but no assurances may be given in this regard. If a
mark-to-market election is made, the U.S. Holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the
fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of
the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the net amount
previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any
income or loss resulting from the mark-to-market election. If a U.S. Holder makes an effective mark-to-market election, in each year that we are a PFIC any
gain recognized upon the sale or other disposition of the ADSs will be treated as ordinary income and loss will be treated as ordinary loss, but only to the extent
of the net amount previously included in income as a result of the mark-to-market election.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder that makes a mark-to-market election
with respect to our ADSs may continue to be subject to the general PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us
that are treated as an equity interest in a PFIC for United States federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections, which, if available, would result in tax
treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or common shares during any taxable year that we are a PFIC, the holder generally will be required to file annual
reports with the IRS. U.S. Holders are advised to consult their tax advisors concerning the United States federal income tax consequences of purchasing, holding
and disposing ADSs or common shares if we are or become classified as a PFIC, including the possibility of making a mark-to-market election.
Information Reporting
U.S. Holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our
ADSs or common shares. Each U.S. Holder is advised to consult its tax advisors regarding the application of the United States information reporting rules to its
particular circumstances.
Certain U.S. Holders who hold “specified foreign financial assets”, including stock of a non-U.S. corporation that is not held in an account maintained
by a U.S. “financial institution,” whose aggregate value exceeds US$50,000 during the tax year, may be required to attach to their tax returns for the year certain
specified information. An individual who fails to timely furnish the required information may be subject to a penalty. U.S. Holders who are individuals should
consult their own tax advisors regarding their reporting obligations under this legislation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
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H. Documents on Display
We previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under the Securities Act of 1933, with respect to
our common shares. We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each
fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed
rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that
contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR
system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders
of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the
depositary from us.
In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at http://ir.xunlei.com. In
addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I.
Subsidiary Information
Not applicable.
Item 11.
Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
Our financing activities are denominated mainly in U.S. dollars. The Renminbi, or RMB, is not freely convertible into foreign currencies. Remittances
of foreign currencies into the PRC and conversion of foreign currencies into RMB require approval by foreign exchange administrative authorities and certain
supporting documentation. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB
into other currencies. The revenues and expenses of our subsidiaries, and the consolidated VIE and its subsidiaries are generally denominated in RMB and their
assets and liabilities are denominated in RMB. We do not believe that we currently have any significant direct foreign exchange risk and have not used any
derivative financial instruments to hedge our exposure to such risk. Although in general, our exposure to foreign exchange risks should be limited, the value of
your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively
denominated in RMB, while the ADSs will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On
July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in a more than 20%
appreciation of the RMB against the U.S. dollar in the following three years. Since July 2008, however, the RMB has traded within a narrow range against the
U.S. dollar. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In
June 2010, the PRC government announced that it would increase Renminbi exchange rate flexibility and since that time the Renminbi has gradually
appreciated against the U.S. dollar, although there have been some periods when it has lost value against the U.S. dollar, as it did for example during 2014. It is
difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. To
the extent that we need to convert U.S. dollars we received from our initial public offering into RMB for our operations, appreciation of the RMB against the
U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert the RMB into U.S. dollars
for the purpose of making payments for dividends on our common shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amounts available to us.
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Interest rate risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank
deposits. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have
not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall
short of expectations due to changes in market interest rates.
Item 12.
Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS holders May Have to Pay
The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly from investors
depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary
may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system
accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable to ADS holders that are
obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. The depositary’s
corporate trust office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286. The depositary’s principal
executive office is located at One Wall Street, New York, New York 10286.
Persons depositing or withdrawing shares must pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
$0.05 (or less) per ADS
For:
Issuance of ADSs, including issuances resulting from a distribution of
shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the
deposit agreement terminates
Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities distributed to you
had been shares and the shares had been deposited for issuance of ADSs
Distribution of securities distributed to holders of deposited securities
which are distributed by the depositary to ADS holders
131
$0.05 (or less) per ADSs per calendar year
Depositary services
Registration or transfer fees
Expenses of the depositary
Transfer and registration of shares on our share register to or from the
name of the depositary or its agent when you deposit or withdraw shares
Cable, telex and facsimile transmissions (when expressly provided in the
deposit agreement)
converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the custodian has to
pay on any ADSs or shares underlying ADSs, such as stock transfer taxes,
stamp duty or withholding taxes
As necessary
Any charges incurred by the depositary or its agents for servicing the deposited
securities
As necessary
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us for our expenses incurred in connection with the establishment of our ADS facility including, investor
relations expenses, roadshow expenses, legal fees, stock exchange listing fees or any direct or indirect expenses incurred in connection with the establishment of
the facility. The depositary has also agreed to provide additional reimbursements to us based on the applicable performance indicators relating to our ADS
facility, including ADS issuance and cancellation fees, cash dividend fees and depositary servicing fees. We were not entitled to any such payment from the
depositary in 2015 in connection with the establishment of our ADS facility.
132
Item 13.
Defaults, Dividend Arrearages and Delinquencies
None.
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
PART II
The following “Use of Proceeds” information relates to our initial public offering of 7,315,000 ADSs representing 36,575,000 of our common shares,
and the underwriters’ full exercise of their option to purchase from us an additional 1,097,250 ADSs representing 5,486,250 common shares, at an initial
offering price of US$12.00 per ADS. Our initial public offering closed in June 2014.
The total expenses incurred for our company’s account in connection with our initial public offering, including the over-allotment option, were
approximately US$11.3 million, including underwriting discounts and commissions of approximately US$7.1 million, and other related costs of US$4.2 million.
None of the fees and expenses were directly or indirectly paid to the directors, officers, general partners of our company or their associates, persons owning 10%
or more of our common shares, or our affiliates.
After deducting the total expenses, we received net proceeds of approximately US$90.4 million from our initial public offering. As of December 31,
2015, the net proceeds received from our initial public offering had been used for the following purposes:
Approximately US$ 57.2 million to invest in technology, infrastructure and product development efforts;
Approximately US$ 25.3 million to acquire digital media content and exclusive online game licenses; and
Approximately US$ 7.9 million for other general corporate purposes, including working capital needs and potential acquisitions.
None of the net proceeds from our initial public offering were directly or indirectly paid to the directors, officers, general partners of our company or
their associates, persons owning 10% or more of our common shares, or our affiliates.
Item 15.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer, co-chief executive officer and chief financial officer, has performed an
evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period
covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management, with the participation of our chief executive officer, co-chief executive officer and chief financial officer,
has concluded that, due to the outstanding material weakness described below, as of December 31, 2015, our disclosure controls and procedures were not
effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer, co-chief executive
officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
133
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-
15(f) under the Exchange Act, for our Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles, including
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of a company's assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and that a company's receipts and expenditures are being made only in accordance with
authorizations of a company's management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of a company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to
consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our
management, including our chief executive officer and chief financial officer, assessed the effectiveness of internal control over financial reporting as of
December 31, 2015 using the criteria set forth in the report “Internal Control — Integrated Framework (2013)” published by the Committee of Sponsoring
Organizations of the Treadway Commission (known as COSO).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
The following material weakness in internal control over financial reporting has been identified as of December 31, 2014 and had not been remediated
as of December 31, 2015. The material weakness is related to a lack of accounting resources in U.S. GAAP and SEC reporting requirements.
Because of the material weakness described above, our management has concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of the company’s independent registered public accounting firm because the
company qualified as an “emerging growth company” as defined under the JOBS Act as of December 31, 2015.
Changes in Internal Control over Financial Reporting
In preparing our consolidated financial statements, we and our independent registered public accounting firm identified one material weakness, one
significant deficiency and other control deficiencies in our internal control over financial reporting as of December 31, 2014, which had not yet been remediated
as of December 31, 2015. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis.
The material weakness identified was related to a lack of accounting resources in U.S. GAAP and SEC reporting requirements, and the significant
deficiency identified was related to a lack of documented comprehensive U.S. GAAP accounting manuals and financial reporting procedures and lack of related
implementation controls.
134
To remedy our identified material weakness, significant deficiency and other control deficiencies in connection with preparation of our consolidated
financial statements, we have adopted several measures to improve our internal control over financial reporting. For example, we hired a chief financial officer
and a senior financial officer, each of whom has a solid understanding of and extensive work experience involving U.S. GAAP and SEC financial reporting. We
engaged an external consulting firm to assist us to assess Sarbanes-Oxley compliance readiness and improve overall internal controls. In addition, we plan to
further hire an additional number of employees with knowledge of U.S. GAAP and SEC regulations within our finance and accounting departments, implement
a comprehensive ERP system and continue to provide our accounting and finance staff with U.S. GAAP training regularly. As such remedial measures had not
been fully implemented in the limited time that elapsed since our initial public offering, our management concluded that the material weakness had not been
remediated as of December 31, 2015. We still lacked sufficient financial reporting and accounting personnel to formalize key controls over financial reporting
and to timely and properly prepare and review financial statements and related footnote disclosures based on U.S. GAAP and SEC reporting requirements. We
are fully committed to continue to implement measures to remediate our material weakness, significant deficiency and other control deficiencies in our internal
control over financial reporting. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial
reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve
our internal control over financial reporting. See “Item 3. Key Information—D. Risk factors—Risks related to our business and industry—If we fail to
implement and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent
fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.”
Other than as described above, no changes in our internal controls over financial reporting occurred during the period covered by this annual report that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Ms. Jenny Wenjie Wu, an independent director (under the standards set forth in Rule 5605(a)(2) of the
NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act of 1934) and chairman of our audit committee, is an audit committee financial
expert.
Item 16B. Code of Ethics
Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers and employees, including certain
provisions that specifically apply to our chief executive officer, chief financial officer, other executive officers as defined under Rule 405 under the Securities
Act of 1933, as amended, senior finance officer, controller, senior vice presidents and any other persons who perform similar functions for us. We have filed our
code of business conduct and ethics as Exhibit 99.1 to our registration statement on Form F-1 (File Number 333-196221), as amended, initially filed with the
SEC on May 23, 2014. The code is also available on our official website under the corporate governance section at our investor relations website
http://ir.xunlei.com.
We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we
receive such person’s written request.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers and PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, for the periods indicated.
Audit fees(1)
Audit-related fees(2)
All other fees(3)
2014
2015
US$
US$
US$
800,000 US$
1,046,002 US$
— US$
746,085
—
—
(1) “Audit fees” represents the aggregate fees billed for each of the fiscal years listed for professional services rendered by our principal auditors for the audit
of our annual financial statements or services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
135
(2) “Audit-related fees” represents the aggregate fees billed for professional services rendered by our principal auditors in connection with our initial public
offering in 2014, other than the underlying audit and review of financial statements.
(3) “All other fees” means the aggregate fees for services rendered other than services reported under “Audit fees” and “Audit-related fees” provided by our
principal auditors.
The policy of our audit committee is to preapprove all audit and non-audit services provided by our independent auditors, including audit services,
audit-related services and tax services as described above, other than those for de minimis services which are approved by the audit committee prior to the
completion of the audit. Our audit committee has approved all of our audit fees, audit-related fees and tax fees for the year ended December 31, 2015.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In December 2014, our board of directors authorized a share repurchase program, or the Repurchase Program, whereby our company may repurchase
up to US$20 million of our common shares or ADSs from December 22, 2014 to December 31, 2015. The share repurchases may be made in accordance with
applicable laws and regulations through open market transactions, privately negotiated transactions or other legally permissible means as determined by our
management, including through Rule 10b5-1 share repurchase plans. We publicly announced the Repurchase Program on December 22, 2014.
The following table is a summary of the shares repurchased by us during 2015 under the Repurchase Program. No shares were repurchased during
2015 except during the month indicated and all shares were purchased from our employees pursuant to the Repurchase Program.
Period
March 12 – March 31
April 7 – April 7
September 29 – September 30
December 18 – December 30
Total
Total Number of
ADSs Purchased as
Part of the Publicly
Announced Plan
Approximate Dollar
Value of ADSs that
May Yet Be
Purchased Under
the Plan
Average Price Paid
Per ADS
6.44
6.65
7.13
6.94
—
192,803
1,000
2,940
16,876
213,619
2,814,715
2,813,715
2,810,775
2,793,899
—
Total Number of
ADSs Purchased
192,803
1,000
2,940
16,876
213,619
(1) Due to the expiration of the Repurchase Program, such amount is no longer available for repurchase after December 31, 2015.
In January 2016, our board of directors authorized a second share repurchase program, whereby our company may repurchase up to US$20 million of
our common shares or ADSs from January 26, 2016 to January 26, 2017 through the same means as the Repurchase Program. We publicly announced this
second repurchase program on January 27, 2016.
Item 16F. Change in Registrant’s Certifying Accountant
Effective as of October 30, 2014, we appointed PricewaterhouseCoopers Zhong Tian LLP, or PwC China, as our independent registered public
accounting firm, and dismissed PricewaterhouseCoopers, Hong Kong, or PwC HK. The decision to change our independent registered public accounting firm
from PwC HK to PwC China was made on August 18, 2014, after discussions with PwC HK. The decision was not made due to any disagreements, but solely in
order to further facilitate our audit process, since our core operations are conducted in China, where PwC China is based.
Our Audit Committee participated in and approved the decision to change our independent registered public accounting firm.
136
PwC HK’s reports on our consolidated financial statements as of and for the years ended December 31, 2012 and 2013 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During fiscal years ended December 31, 2012 and 2013 and the subsequent interim period through October 30, 2014, (i) there were no disagreements
with PwC HK on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of PwC HK, would have caused PwC HK to make references thereto in their reports on the financial statements for such periods and
(ii) there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F except for a lack of accounting
resources in U.S. GAAP and SEC reporting requirements, which is a material weakness the details of which can be found in “Item 15. Control and
Procedures—Changes in internal control over financial reporting.”
We provided PwC HK with a copy of the foregoing disclosure, and requested that PwC HK furnish us with a letter addressed to the SEC stating
whether it agrees with the above statements, and if not, stating the respects in which it does not agree. We have received the requested letter from PwC HK, a
copy of which is included as Exhibit 16.1 attached herein.
During the fiscal years ended December 31, 2012 and 2013 and the subsequent interim period through October 30, 2014, we did not consult PwC
China regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that
might be rendered on our financial statements (and no written report was provided to us or oral advice was provided that PwC China concluded was an
important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue); or (ii) any matter that was either the subject
of a disagreement pursuant to Item 16F(a)(1)(iv) of the instructions to Form 20-F, or a reportable event pursuant to Item 16F(a)(1)(v) of the instructions to Form
20-F.
Item 16G. Corporate Governance
As a Cayman Islands company listed on the NASDAQ Global Select Market, we are subject to the corporate governance standards under the
NASDAQ Stock Market Rules. Under Nasdaq Stock Market Rule 5615(a)(3), a foreign private issuer such as us may follow its home-country corporate
governance practices in lieu of certain of the Nasdaq Stock Market Rules corporate governance requirements. We strive to comply with most of the Nasdaq
corporate governance practices to ensure a high standard of corporate governance. However, our current corporate governance practices differ from Nasdaq
corporate governance requirements for U.S. companies in certain respects, as summarized below:
Nasdaq Marketplace Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s
fiscal year-end. The practices of our home country, the Cayman Islands, do not require us to hold annual shareholders meetings every year. We have elected to
adopt this practice and did not hold an annual meeting of shareholders for fiscal year 2014 and do not plan to hold such meeting for fiscal year 2015. We may,
however, hold annual shareholders meeting in the future.
Nasdaq Stock Market Rule 5605(b)(1) requires a Nasdaq-listed company to have a board of directors composed of at least a majority of independent
directors. The practices of our home country, the Cayman Islands, do not require us to have a majority of the board of directors composed of independent
directors at this time. We have elected to adopt this practice and do not have a board of directors composed of at least a majority of independent directors.
Nasdaq Stock Market Rule 5605(c)(2) requires a Nasdaq-listed company to have an audit committee composed of at least three independent members.
The practices of our home country, the Cayman Islands, do not require us to have a three member audit committee at this time. We have elected to adopt this
practice and have an audit committee composed of two independent members.
Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq-listed company to have a nominations committee composed solely of independent directors to
select or recommend for selection director nominees. The practices of our home country, the Cayman Islands, do not require that any of the members of a
company’s nominations committee be independent directors. We have elected to adopt this practice and our corporate governance and nominating committee is
not composed solely of independent directors.
137
Nasdaq Stock Market Rule 5605(d)(2) requires a Nasdaq-listed company to have a compensation committee composed solely of independent directors.
The practices of our home country, the Cayman Islands, do not require that any of the members of a company’s compensation committee be independent
directors. We have elected to adopt this practice in order to utilize the experience of Mr. Chuan Wang and our compensation committee is not composed solely
of independent directors.
Maples and Calder, our Cayman Islands counsel, has provided a letter to the NASDAQ Stock Market certifying that under Cayman Islands law, we are
not required to follow the above corporate governance standards.
Other than the above, there are no significant differences between our corporate governance practices and those followed by U.S. domestic companies
under NASDAQ Stock Market Rules.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17.
Financial Statements
PART III
We have elected to provide financial statements pursuant to Item 18.
Item 18.
Financial Statements
The consolidated financial statements of Xunlei Limited, its subsidiaries and its variable interest entity and its subsidiaries are included at the end of
this annual report.
Item 19.
Exhibits
Exhibit
Number
Description of Document
Eighth amended and restated memorandum and seventh amended and restated articles of association of the Registrant (incorporated by
reference to Exhibit 3.2 of our registration statement on Form F-1, as amended (file no. 333-196221), filed with the SEC on June 12,
2014)
Registrant’s specimen American depositary receipt (included in Exhibit 2.3)
Registrant’s specimen certificate for common shares (incorporated by reference to Exhibit 4.2 of our registration statement on Form F-1,
as amended (file no. 333-196221), filed with the SEC on June 12, 2014)
Deposit agreement among the Registrant, the depositary and holders of American depositary receipts, dated June 23, 2014 (incorporated
by reference to Exhibit 4.3 to the Registrant’s registration statement on Form F-1, as amended (File No. 333-196221), filed with the
Securities and Exchange Commission on June 12, 2014)
Seventh amended and restated shareholders agreement among the Registrant and its subsidiaries, Shenzhen Xunlei Networking
Technologies Co., Ltd. and its subsidiaries, shareholders of the Registrant and other parties thereto, dated April 24, 2014 (incorporated by
reference to Exhibit 4.4 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on June 12, 2014)
Series E preferred share purchase agreement, among the Registrant, Xiaomi Ventures Limited and other parties therein, dated as of
February 13, 2014 (incorporated by reference to Exhibit 4.6 of our registration statement on Form F-1 (file no. 333-196221) filed with the
SEC on May 23, 2014)
1.1
2.1
2.2
2.3
4.1
4.2
138
Exhibit
Number
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Warrant issued by the Registrant to Xiaomi Ventures Limited dated as of March 5, 2014 (incorporated by reference to Exhibit 4.7 of our
registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
Description of Document
Warrant issued by the Registrant to Skyline Global Company Holdings Limited, dated as of March 5, 2014 (incorporated by reference to
Exhibit 4.8 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
Supplemental agreement to Series E preferred share purchase agreement, among the Registrant, Xiaomi Ventures Limited and other
parties therein, dated as of March 20, 2014 (incorporated by reference to Exhibit 4.9 of our registration statement on Form F-1 (file no.
333-196221) filed with the SEC on May 23, 2014)
Series E preferred share purchase agreement, among the Registrant, King Venture Holdings Limited, Morningside China TMT Special
Opportunity Fund, L.P., Morningside China TMT Fund III Co-Investment, L.P. and IDG Technology Venture Investment V, L.P., dated
as of April 3, 2014 (incorporated by reference to Exhibit 4.10 of our registration statement on Form F-1 (file no. 333-196221) filed with
the SEC on May 23, 2014)
2010 share incentive plan (incorporated by reference to Exhibit 10.1 of our registration statement on Form F-1 (file no. 333-196221) filed
with the SEC on May 23, 2014)
2013 share incentive plan (incorporated by reference to Exhibit 10.2 of our registration statement on Form F-1 (file no. 333-196221) filed
with the SEC on May 23, 2014)
2014 share incentive plan (incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (file no. 333-196221) filed
with the SEC on May 23, 2014)
Letter agreement signed by Leading Advice Holdings Limited in relation to 2013 share incentive plan of the Registrant, dated March 20,
2014 (incorporated by reference to Exhibit 10.3 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on
May 23, 2014)
Letter agreement signed by Leading Advice Holdings Limited in relation to 2014 share incentive plan of the Registrant, dated May 5,
2014 (incorporated by reference to Exhibit 10.5 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on
May 23, 2014)
Letter agreement signed by Leading Advice Holdings Limited in relation to 2013 share incentive plan and 2014 share incentive plan of
the Registrant, dated May 19, 2014 (incorporated by reference to Exhibit 10.6 of our registration statement on Form F-1 (file no. 333-
196221) filed with the SEC on May 23, 2014)
Form of indemnification agreement with the Registrant’s directors and officers (incorporated by reference to Exhibit 10.7 of our
registration statement on Form F-1 (file no. 333-196221) filed with the SEC on June 12, 2014)
Form of employment agreement between the Registrant and Executive Officers of the Registrant (incorporated by reference to Exhibit
10.8 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on June 12, 2014)
English translation of business operation agreement among Giganology Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen
Xunlei, dated November 15, 2006, as amended on March 1, 2012, (incorporated by reference to Exhibit 10.9 of our registration statement
on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
4.16
English translation of equity pledge agreement among Giganology Shenzhen and the shareholders of Shenzhen Xunlei dated November
15, 2006, as amended on May 10, 2011, March 1, 2012 and March 10, 2014 (incorporated by reference to Exhibit 10.10 of our
registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
139
4.17
4.18
4.19
4.20
4.21
4.22
Exhibit
Number
English translation of power of attorney between Giganology Shenzhen and Shenglong Zou, dated May 10, 2011 (incorporated by
reference to Exhibit 10.11 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
Description of Document
English translation of power of attorney between Giganology Shenzhen and Hao Cheng, dated May 10, 2011 (incorporated by reference
to Exhibit 10.12 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
English translation of power of attorney between Giganology Shenzhen and Fang Wang, dated May 10, 2011 (incorporated by reference
to Exhibit 10.13 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
English translation of power of attorney between Giganology Shenzhen and Jianming Shi, dated May 10, 2011 (incorporated by reference
to Exhibit 10.14 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
English translation of power of attorney between Giganology Shenzhen and Guangzhou Shulian Information Investment Co., Ltd., dated
May 10, 2011 (incorporated by reference to Exhibit 10.15 of our registration statement on Form F-1 (file no. 333-196221) filed with the
SEC on May 23, 2014)
English translation of exclusive technical support and services agreement between Giganology Shenzhen and Shenzhen Xunlei, dated
September 16, 2005, as amended on November 15, 2006 and March 10, 2014 (incorporated by reference to Exhibit 10.16 of our
registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
4.23
English translation of exclusive technology consulting and training agreement between Giganology Shenzhen and Shenzhen Xunlei,
dated September 16, 2005, as amended on November 15, 2006 and March 10, 2014 (incorporated by reference to Exhibit 10.17 of our
registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May 23, 2014)
4.24
4.25
English translation of proprietary technology license contract between Giganology Shenzhen and Shenzhen Xunlei, dated March 1, 2012
(incorporated by reference to Exhibit 10.18 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May
23, 2014)
English translation of intellectual properties purchase option agreement between Giganology Shenzhen and Shenzhen Xunlei dated March
1, 2012, as amended on March 10, 2014 (incorporated by reference to Exhibit 10.19 of our registration statement on Form F-1 (file no.
333-196221) filed with the SEC on May 23, 2014)
4.26
English translation of loan agreement among Giganology Shenzhen, Guangzhou Shulian Information Investment Co., Ltd., Sean
Shenglong Zou, Hao Cheng, Fang Wang and Jianming Shi, dated December 22, 2010, as amended on March 1, 2012 and March 10, 2014
(incorporated by reference to Exhibit 10.20 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May
23, 2014)
4.27
English translation of loan agreement between Giganology Shenzhen and Sean Shenglong Zou, dated May 10, 2011, as amended on
March 1, 2012 (incorporated by reference to Exhibit 10.21 of our registration statement on Form F-1 (file no. 333-196221) filed with the
SEC on May 23, 2014)
4.28
English translation of equity interests disposal agreement between Giganology Shenzhen, Guangzhou Shulian Information Investment
Co., Ltd., Sean Shenglong Zou, Hao Cheng, Fang Wang and Jianming Shi, dated November 15, 2006, as amended on May 10, 2011
(incorporated by reference to Exhibit 10.22 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC on May
23, 2014)
4.29
English translation of technology development and software license framework agreement between Shenzhen Xunlei and Xunlei
Computer dated December 24, 2013 (incorporated by reference to Exhibit 10.23 of our registration statement on Form F-1 (file no. 333-
196221) filed with the SEC on May 23, 2014)
140
Exhibit
Number
4.30
Content protection agreement by and between Shenzhen Xunlei Networking Technologies Co., Ltd. and other parties thereto dated May
22, 2014 (incorporated by reference to Exhibit 10.24 of our registration statement on Form F-1 (file no. 333-196221) filed with the SEC
on June 12, 2014)
Description of Document
4.31
English summary of Assets and Business Transfer Agreement by and between Shenzhen Xunlei Networking Technologies Co., Ltd.,
Beijing Kingsoft Cloud Network Technology Co., Ltd., Zhuhai Kingsoft Cloud Science and Technology Co., Ltd. and Beijing Kingsoft
Cloud Science and Technology Co., Ltd. dated September 2, 2014 (incorporated by reference to Exhibit 4.31 of our annual report on
Form 20-F (file no. 001-35224) filed with the SEC on April 20, 2015)
4.32*
English translation of the Equity Transfer Agreement dated as of May 13, 2015 by and between Shenzhen Xunlei Networking
Technologies Co., Ltd., Beijing Nesound International Media Corp., Ltd. and Shenzhen Xunlei Kankan Information Technologies Co.,
Ltd.
4.33*
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
15.4*
16.1
English translation of the Business and Assets Transfer Agreement dated as of May 14, 2015 by and among Shenzhen Xunlei Networking
Technologies Co., Ltd., Beijing Nesound International Media Corp., Ltd. and Shenzhen Xunlei Kankan Information Technologies Co.,
Ltd.
List of significant subsidiaries and variable interest entities of the Registrant
Code of business conduct and ethics of the Registrant (incorporated by reference to Exhibit 99.1 of our Registration Statement on Form
F-1 (file no. 333-196221) filed with the Securities and Exchange Commission on June 12, 2014)
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Maples and Calder
Consent of Zhong Lun Law Firm
Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm
Consent of PricewaterhouseCoopers, an independent registered public accounting firm
Letter from PricewaterhouseCoopers to the SEC (incorporated by reference to Exhibit 16.1 of our annual report on Form 20-F (file no.
001-35224) filed with the SEC on April 20, 2015)
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith
** Furnished herewith
141
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
SIGNATURES
Xunlei Limited
By:
/s/ Sean Shenglong Zou
Name: Sean Shenglong Zou
Title: Chairman and Chief Executive Officer
Date: April 21, 2016
142
Index to consolidated financial statements
Report of independent registered public accounting firm
Report of independent registered public accounting firm
Consolidated Balance Sheets as of December 31, 2014 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013 , 2014 and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2013 , 2014 and 2015
Consolidated Statement of Cash Flows for the Years ended December 31, 2013 , 2014 and 2015
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-6
F-8
F-11
F-13
To the Board of Directors and Shareholders of Xunlei Limited:
Report of independent registered public accounting firm
In our opinion, the accompanying consolidated statements of comprehensive income/(loss), of changes in shareholders’ equity and of cash flows present fairly,
in all material respects, the results of operations and cash flows of Xunlei Limited and its subsidiaries (collectively, the “Group”) for the year ended December
31, 2013 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hong Kong
March 21, 2014, except for the effects of discontinued operations discussed in Note 3 to the consolidated financial statements, as to which the date is April 21,
2016
F- 2
To the Board of Directors and Shareholders of Xunlei Limited:
Report of independent registered public accounting firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income/(loss), of changes in
shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Xunlei Limited and its subsidiaries (collectively, the
‘‘Group’’) at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31,
2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Zhong Tian LLP
PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
April 21, 2016
F- 3
Xunlei Limited
Consolidated Balance Sheets
(Amounts expressed in thousands of United States
dollars (“USD”), except for number of shares and per
share data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred tax assets
Due from related parties
Prepayments and other current assets
Held-for-sale assets
Total current assets
Non-current assets:
Long-term investments
Deferred tax assets
Property and equipment, net
Intangible assets, net
Goodwill
Prepayments for content copyrights
Other long-term prepayments and receivables
Total assets
Liabilities
Current liabilities:
Accounts payable (including accounts payable of the consolidated variable interest entities and
VIE’s subsidiaries without recourse to the Company of USD 24,504 and USD 33,262 as of
December 31, 2014 and 2015, respectively)
Due to a related party (including due to a related party of the consolidated variable interest
entities and VIE’s subsidiaries without recourse to the Company of USD 84 and USD 38 as
of December 31, 2014 and 2015, respectively)
Deferred revenue and income, current portion (including deferred revenue and income, current
portion of the consolidated variable interest entities and VIE’s subsidiaries without recourse
to the Company of USD 27,534 and USD 24,902 as of December 31, 2014 and 2015,
respectively
Income tax payable (including income tax payable of the consolidated variable interest entities
and VIE’s subsidiaries without recourse to the Company of USD 2,554 and USD 2,407 as of
December 31, 2014 and 2015, respectively)
Accrued liabilities and other payables (including accrued liabilities and other payables of the
consolidated variable interest entities and VIE’s subsidiaries without recourse to the
Company of USD 85,701 and USD 131,312 as of December 31, 2014 and 2015,
respectively)
Held-for-sale liabilities
F- 4
Note
December 31,
2014
December 31,
2015
4
5
6
10
23
22
7
3
11
23
8
9
2(l), (m)
7
7
404,275
29,427
5,180
—
2,091
22
13,890
47,045
501,930
5,498
10,862
16,408
15,100
23,237
1,532
5,795
580,362
361,777
70,328
11,266
480
689
45
13,068
—
457,653
11,319
8,593
18,036
13,433
21,896
—
7,431
538,361
14,937
21,736
22
84
38
12
27,745
25,113
2,554
2,470
13
3
30,333
27,367
27,379
—
Xunlei Limited
Consolidated Balance Sheets (Continued)
(Amounts expressed in thousands of United States
dollars (“USD”), except for number of shares and per
share data)
Total current liabilities
Note
December 31,
2014
103,020
December 31,
2015
76,736
Non-current liabilities:
Deferred revenue and income, non-current portion (including deferred revenue and income,
non-current portion of the consolidated variable interest entities and VIE’s subsidiaries
without recourse to the Company of USD 6,452 and USD 4,751 as of December 31, 2014
and 2015, respectively)
Deferred tax liability, non-current portion
Due to related parties, non-current portion
Other long-term payable
Total liabilities
Commitments and contingencies
Equity
Common shares ( USD0.00025 par value, 1,000,000,000 shares authorized, 357,886,089 shares
issued and 327,611,487 shares outstanding as at December 31, 2014; 368,877,209 shares
issued and 339,319,115 shares outstanding as at December 31, 2015)
Additional paid-in-capital
Accumulated other comprehensive income/(loss)
Statutory reserves
Treasury shares (30,274,602 shares and 29,558,094 shares as at December 31, 2014 and 2015,
respectively)
Retained earnings/(Accumulated deficits)
Total Xunlei Limited’s shareholders’ equity
Non-controlling interest
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
12
23
22
26
17
17
19
6,825
8,552
4,137
807
123,341
82
446,202
5,894
5,132
7
574
457,891
(870)
580,362
5,383
6,378
4,337
846
93,680
85
458,270
(4,152)
5,132
7
(12,593)
446,749
(2,068)
538,361
Xunlei Limited
Consolidated Statements of Comprehensive Income/(Loss)
(Amounts expressed in thousands of USD,
except for number of shares and per share data)
Revenues, net of rebates and discounts
Business taxes and surcharges
Net revenues
Cost of revenues
Gross profit
Operating expenses
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Operating income / (loss)
Interest income
Interest expense
Other income, net
Share of income/(loss) from an equity investee
Income/(loss) from continuing operations before income tax
Income tax (expense)/benefit
Net income/(loss) from continuing operations
Discontinued operations
Loss from discontinued operations before income taxes
Income tax benefit / (expense)
Net loss from discontinued operations
Net income/(loss)
Less: net loss attributable to the non-controlling interest
Net income/(loss) attributable to Xunlei Limited
Allocation of net income to participating preferred shareholders
Accretion of Series D to convertible redeemable preferred shares redemption
value
Contingent beneficial conversion feature of series C to one Series C
shareholder
Deemed dividend to Series D shareholder from its modification
Accretion of Series E to convertible redeemable preferred shares redemption
value
Amortization of beneficial conversion feature of Series E
Acceleration of amortization of beneficial conversion feature of Series E
upon initial public offering
Deemed dividend to certain shareholders from repurchase of shares
Deemed dividend to preferred shareholders upon initial public offering
Net income/(loss) attributable to Xunlei Limited’s common shareholders
Net income/(loss)
Other comprehensive income / (loss): Foreign currency translation
adjustment, net of tax
Comprehensive income/(loss)
Less: comprehensive loss attributable to non-controlling interest
shareholders
Comprehensive income/(loss) attributable to Xunlei Limited
Basic net income/(loss) per share attributable to Xunlei Limited from
continuing operations
Basic net loss per share attributable to Xunlei Limited from discontinued
operations
Weighted average number of common shares outstanding—basic
Diluted net income/(loss) per share attributable to Xunlei Limited from
continuing operations
Diluted net loss per share attributable to Xunlei Limited from discontinued
operations
Weighted average number of common shares outstanding—diluted
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
Note
2(r)
14
25
23
16
16
15
15
15
15
15
18
15
21
21
21
21
21
21
Years ended December 31,
2013
122,031
(3,904)
118,127
(50,258)
67,869
(21,740)
(9,848)
(18,663)
(50,251)
17,618
1,189
—
4,679
25
23,511
(560)
22,951
(13,779)
1,207
(12,572)
10,379
(283)
10,662
(4,094)
2014
135,812
(1,878)
133,934
(55,755)
78,179
(29,252)
(13,527)
(26,945)
(69,724)
8,455
6,733
(163)
13,966
(259)
28,732
(463)
28,269
(20,330)
1,923
(18,407)
9,862
(950)
10,812
—
(4,300)
(1,870)
—
—
—
—
—
—
—
2,268
10,379
2,775
13,154
(276)
13,430
0.24
(57)
(279)
(12,754)
(4,139)
(49,346)
(14,926)
(32,807)
(105,366)
9,862
(114)
9,748
(955)
10,703
(0.45)
2015
129,996
(361)
129,635
(60,034)
69,601
(38,250)
(15,042)
(28,774)
(82,066)
(12,465)
5,833
(239)
3,627
(12)
(3,256)
886
(2,370)
(10,048)
(2,048)
(12,096)
(14,466)
(1,299)
(13,167)
—
—
—
—
—
—
—
—
—
(13,167)
(14,466)
(9,945)
(24,411)
(1,198)
(23,213)
(0.00)
(0.20)
61,447,372
(0.09)
194,711,227
(0.04)
335,987,595
0.18
(0.45)
(0.00)
(0.17)
76,065,898
(0.09)
194,711,227
(0.04)
335,987,595
Xunlei Limited
Consolidated statements of changes in shareholders’ equity
(Amounts expressed in
thousands of USD,
except for number of
shares and per share
data)
Balance at
Series C convertible
non-redeemable
preferred share
Amount
Shares
Series B convertible
non-redeemable
preferred shares
Amount
Shares
Series A-1
convertible
non-redeemable
preferred shares
Amount
Shares
Series A convertible
non-redeemable
preferred shares
Amount
Shares
Common shares
Amount
Shares
Treasury stock
Amount
Shares
December 31, 2012 5,728,264
1 30,308,284
8
36,400,000
9
26,416,560
7
61,447,372
Share-based
compensation
Issuance of common
shares
Statutory reserves
Series D preferred
shares accretion
Net income / (loss)
Translation adjustments
Balance at
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15
—
—
—
— 9,073,732
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
Additio
paid
cap
59,
2,
December 31, 2013 5,728,264
1 30,308,284
8
36,400,000
9
26,416,560
7
61,447,372
15
9,073,732
2
61,
Accretion of Series D to
convertible
redeemable preferred
shares redemption
value
BCF upon Series E
tranche 1
BCF upon Series E
tranche 2
Accretion of Series E to
convertible
redeemable preferred
shares redemption
value
Amortisation of BCF of
Series E
Contingent beneficial
conversion feature of
series C to one Series
C shareholder
Deemed dividend of
Series D convertible
preferred shares from
their modifications
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(
52,
1,
(10,
(3,
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F- 7
Xunlei Limited
Consolidated statements of changes in shareholders’ equity (Continued)
Series C convertible
non-redeemable
preferred share
Amount
Shares
Series B convertible
non-redeemable
preferred shares
Amount
Shares
Series A-1
convertible
non-redeemable
preferred shares
Amount
Shares
Series A convertible
non-redeemable
preferred shares
Amount
Shares
Common shares
Shares Amount
Treasury stock
Shares Amount
Addition
paid
capi
—
—
(3,756,065)
(1)
(591,451)
—
(477,180)
— (14,664,637)
(4)
—
—
(47,4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(49,3
—
—
—
—
—
(32,8
(5,728,264)
—
(1)
—
(26,552,219)
—
(7)
—
(35,808,549)
—
(9)
—
(25,939,380)
—
(7) 277,834,210
—
—
71
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
470,7
(4,2
2
3
7,6
—
—
5
—
—
—
—
—
—
—
— 1,431,320
— 1,563,222
— 24,195,412
— (1,431,320)
— (1,563,222)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 327,611,487
82 30,274,602
7
446,2
(Amounts expressed in
thousands of USD,
except for number of
shares and per share
data)
Repurchase of preferred
shares and common
shares
Acceleration of
amortisation of BCF
of Series E upon
initial public offering
(“IPO”)
Deemed dividend to
preferred
shareholders upon
IPO
Issuance of common
shares and conversion
of preferred shares
upon IPO
IPO expenses
Issuance of common
shares for share
incentive plans
Exercised share options
Vested restricted shares
Share-based
compensation -
replacement awards
in the acquisition of
Kingsoft Cloud
Storage business
Share-based
compensation - others
Statutory Reserve
Components of
comprehensive
income:
Net income / (loss)
Translation adjustments
Balance at
December 31, 2014
The accompanying notes are an integral part of these consolidated financial statements.
F- 8
Xunlei Limited
Consolidated statements of changes in shareholders’ equity (Continued)
(Amounts expressed in
thousands of USD,
except for number of
shares and per share
data)
Balance at
Series C convertible
non-redeemable
preferred share
Series B convertible
non-redeemable
preferred shares
Series A-1
convertible
non-redeemable
preferred shares
Shares
Amount Shares
Amount Shares
Amount Shares
Series A convertible
non-redeemable
preferred shares
Amount
Common shares
Shares Amount
Treasury stock
Shares Amount
paid-in Retained Statutory
reserves
earnings
capital
Additional
December 31, 2014
—
—
—
— —
—
—
— 327,611,487
82 30,274,602
7
446,202
574
5,132
Issuance of common
shares for the vesting
of restricted shares
and the exercise of
share options
Issuance of common
shares for exercised
share options
Repurchase of common
shares
Share-based
compensation
Restricted shares vested
Net loss
Translation adjustments
Balance at
December 31, 2015
—
—
—
—
—
—
—
—
—
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— —
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F- 9
—
10,991,120
3
(3)
— 9,092,265
2 (9,092,265)
(2)
3,630
— (1,068,095)
1,068,095
(1,287)
9,728
—
— 3,683,458
—
—
1 (3,683,458)
(1)
(13,167)
— 339,319,115
85 29,558,094
7
458,270
(12,593)
5,132
Xunlei Limited
Consolidated Statement of Cash Flows
(Amounts expressed in thousands of USD except for number of
shares and per share data)
Cash flows from operating activities
Net income/(loss)
Adjustments to reconcile net income/(loss) to net cash generated from operating activities (i)
—Depreciation of property and equipment
—Amortization of intangible assets
—Allowance for doubtful accounts
—Loss on disposal of property and equipment
—Gain from barter transactions
—Share-based compensation
—Decrease in fair value of warrants
—Share of loss / (income) from equity investee
—Investment income on short-term investments
—Impairment of intangible assets
—Loss on exchange of warrants
—Deemed disposal gain on long-term investments
—Interest expense accrued on long-term payable
—Deferred taxes
—Deferred government grants
Changes in operating assets and liabilities:
—Accounts receivable
—Prepayments and other assets
—Due from/to related parties
—Accounts payable
—Inventories
—Deferred revenue
—Income tax payable
—Accrued liabilities and other payables
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of property and equipment
Purchase of short-term investments
Proceeds from disposal of short-term investments
Proceeds from disposal of fixed assets
Proceeds from disposal of Kankan
Purchase of intangible assets
Acquisition of long-term investments
Acquisition of Kingsoft Cloud Storage business
Loans (to)/repayment of loan from employees
Advance to or repayment of advance from a shareholder
Net cash used in investing activities
Cash flows from financing activities
Issuance of Series E preferred shares
Issuance of Series E warrants
Payment of Series E financing expenses
Repurchase of shares
Proceeds from initial public offering
Payment of initial public offering expenses
Prepayment for share repurchase plan
Governments grants received
Proceeds from exercise of vested share options
Initial public offering expenses reimbursement received
Net cash generated from financing activities
F- 10
Years ended December 31,
2013
10,379
5,112
38,314
4,921
—
(2,059)
2,096
(1,531)
(25)
(356)
808
—
—
—
(822)
(1,284)
13,655
(333)
(96)
5,924
—
12,630
116
(1,916)
85,533
(7,372)
(246,153)
213,506
—
—
(36,005)
(1,390)
—
(856)
(82)
(78,352)
—
—
—
—
—
—
—
2,487
—
—
2,487
2014
9,862
6,500
38,741
1,767
—
(4,428)
7,644
(8,054)
259
(317)
—
405
(449)
163
(1,856)
(2,059)
4,699
(9,180)
(168)
2,569
—
(2,643)
(5)
4,752
48,202
(7,770)
(330,471)
341,792
—
—
(38,056)
(2,359)
(33,000)
(767)
85
(70,546)
275,314
34,686
(343)
(69,303)
93,881
(3,504)
(1,000)
856
1,523
1,158
333,268
2015
(14,466)
5,646
12,149
4
4
(409)
9,728
—
12
(997)
—
—
(702)
239
873
(1,969)
1,395
3,815
(70)
301
(526)
(294)
153
(1,122)
13,764
(4,931)
(222,157)
175,513
25
16,687
(11,894)
(8,330)
—
105
—
(54,982)
—
—
—
(1,287)
—
—
288
1,055
4,974
—
5,030
Xunlei Limited
Consolidated Statement of Cash Flows
(Amounts expressed in thousands of USD except for number of
shares and per share data)
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Interests paid
Income tax paid
Non cash investing and financing activities
—Acquisition of property and equipment in form of other payables
—Initial public offering expenses in form of other payables
—Purchase of intangible assets in form of accounts payable
—Acquisition of intangible assets in form of barter transactions
—Beneficial Conversion Feature of Series C convertible preferred shares from their
modifications
—Deemed contribution from Series C preferred shareholders
—Accretion to Series D preferred shares redemption value
—Contingent beneficial conversion feature of series C to one Series C shareholder
—Deemed dividend to Series D shareholder from its modification
—Accretion of Series E to convertible redeemable preferred shares redemption value
—Amortization of beneficial conversion feature of Series E
—Deemed dividend to certain shareholders from repurchase of shares
—Acceleration of amortization of beneficial conversion feature of Series E upon initial public
offering
—Deemed dividend to preferred shareholders upon initial public offering
(i) Combines adjustment relating to both continuing and discontinued operations.
The accompanying notes are an integral part of these consolidated financial statements.
F- 11
Years ended December 31,
2013
9,668
81,906
2,332
93,906
—
—
4,157
—
25,695
4,058
—
—
4,300
—
—
—
—
—
—
—
2014
310,924
93,906
(555)
404,275
—
241
240
712
21,860
4,030
—
—
1,870
57
279
12,754
4,139
14,926
49,346
32,807
2015
(36,188)
404,275
(6,310)
361,777
—
82
4,468
—
62
—
—
—
—
—
—
—
—
—
—
—
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
1.
Organization and nature of operations
Xunlei Limited, previously known as Giganology Limited, (the “Company”) was incorporated under the law of the Cayman Islands (“Cayman”) as a limited
liability company on February 3, 2005. The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries,
its variable interest entity (“VIE”) and the VIE’s subsidiaries (collectively referred to as the “Group”) as follows:
Place of
incorporation
China
Date of
incorporation
January 2003
Relationship
VIE
% of direct
or indirect
economic
ownership
100%
China
June 2005
Subsidiary
100%
Name of entities
Shenzhen Xunlei Networking
Technologies, Co., Ltd
(“Shenzhen Xunlei”).
Giganology (Shenzhen)
Co. Ltd (“Giganology
Shenzhen”)..
Shenzhen Fengdong Networking
China
December 2005
VIE’s subsidiary
Technologies, Co., Ltd.
(“Fengdong”)
Shenzhen Xunlei Kankan
Information Technologies Co.,
Ltd (formerly known as
“155 Networking
(Shenzhen) Co., Ltd”).
China
August 2008
VIE’s subsidiary
100%
100%
Principal activities
Development of software,
provision of online and related
advertising, membership
subscription and online game
services; as well as sales of
software licenses
Development of computer
software and provision of
information technology services to
related companies
Development of software for
related companies
Development of software for
related companies(note a)
Xunlei Software (Beijing) Co., Ltd
China
June 2009
VIE’s subsidiary
(“Xunlei Beijing”).
Xunlei Software
(Shenzhen) Co., Ltd(“Xunlei
Software”).
China
January 2010
VIE’s subsidiary
100%
100%
Development of software for
related companies
Provision of software technology
development for related companies
F- 12
1.
Organization and nature of operations (Continued)
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Name of entities
Xunlei Software
(Nanjing) Co., Ltd. (“Xunlei
Nanjing”)
Xunlei Games Development
(Shenzhen) Co., Ltd.
Xunlei Network Technologies
Limited (“Xunlei BVI”)
Xunlei Network Technologies
Limited (“Xunlei HK”)
Xunlei Computer
(Shenzhen) Co., Ltd (“Xunlei
Computer”)
Shenzhen Onething Technologies
Co., Ltd (“One Thing”)
Wangxin Century Technologies
(Beijing) Co., Ltd (“Beijing
Wangxin”)
Place of
incorporation
China
Date of
incorporation
January 2010
Relationship
VIE’s subsidiary
% of direct
or indirect
economic
ownership
100%
China
February 2010
VIE’s subsidiary
70%
British Virgin
Islands
Hong Kong
February 2011
March 2011
Subsidiary
Subsidiary
China
November 2011
Subsidiary
100%
100%
100%
China
September 2013
VIE’s subsidiary
100%
China
October 2015
VIE’s subsidiary
100%
Principal activities
Development of computer
software and online games for
related companies and provision of
advertising services (note b)
Development of online game and
computer software for related
companies and provision of
advertising services
Holding company
Development computer software
of related companies and provision
of advertising services
Development of computer
software and provision of
information technology services to
related companies
Development of computer
software and provision of
information technology services to
related companies
Development of computer
software and provision of
information technology services
Note a: Xunlei Kankan was disposed in 2015, see note 3 for further discussion.
Note b: In January 2011, the equity owners of Xunlei Nanjing resolved to liquidate the entity. In May 2012, Xunlei Nanjing was approved to be de-registered
by the relevant government authorities. There was no significant financial impact to the consolidated financial statements of the Group.
Note c: The English names of the PRC companies represent management’s translation of the Chinese names of these companies as these companies have not
adopted formal English names.
F- 13
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
1.
Organization and nature of operations (Continued)
The Group engages primarily in the provision of online advertising services on its websites, premium downloading services to its members and online game
platforms for game developers and users.
To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide online advertising services, operate online
games, and hold Internet Content Provider (‘‘ICP’’) license, the company conducts its business through Shenzhen Xunlei, its consolidated VIE.
Through the various agreements enacted among the Company, Giganology Shenzhen, a wholly owned subsidiary of the Company, Shenzhen Xunlei and legal
shareholders of Shenzhen Xunlei (the “Restructuring”), the Company received all of the economic benefits and residual interest and absorbed all of the risks and
expected losses from Shenzhen Xunlei.
Details of certain key agreements with the VIE are as follows:
—Loan Agreements between Giganology Shenzhen and the shareholders of Shenzhen Xunlei— Giganology Shenzhen provided interest-free loans of RMB
9 million to the shareholders of Shenzhen Xunlei for them to make contributions as registered capital into Shenzhen Xunlei. The term of these agreements last
for two years from the date it was signed, and will be automatically extended afterwards on a yearly basis until each shareholder of Shenzhen Xunlei has repaid
the loans in its entirety in accordance with the loan agreement. The shareholders would not be allowed to transfer their interests in Shenzhen Xunlei without
prior consent of Giganology Shenzhen. According to the loan agreements, the loans can only be repaid in the form of common shares of Shenzhen Xunlei. At
any time during the term of the loan agreements, Giganology Shenzhen may, at their sole discretion, requires any of the shareholders of Shenzhen Xunlei to
repay all or any portion of their outstanding loan under the agreement.
Under a separate loan agreement between Giganology Shenzhen and Mr. Sean Shenglong Zou as a shareholder of Shenzhen Xunlei, Giganology Shenzhen
made an additional interest-free loan of RMB20 million to Mr. Sean Shenglong Zou, the entire amount of which was contributed to the registered capital of
Shenzhen Xunlei, increasing the registered capital of Shenzhen Xunlei to RMB30 million. The term of this agreement last for two years from the date it was
signed, and will be automatically extended afterwards on a yearly basis until Mr. Zou has repaid the loan in its entirety in accordance with the loan agreement.
This loan will be deemed to be repaid when all equity interest held by the shareholders in Shenzhen Xunlei has been transferred to Giganology Shenzhen or its
designated parties. At any time during the term of this loan agreement, the Company may, at their sole discretion, require all or any portion of the outstanding
loan under the agreement to be repaid.
—Business Operation Agreements between Giganology Shenzhen and Shenzhen Xunlei—Under these agreements, Giganology Shenzhen has the rights to
direct the operating activities of Shenzhen Xunlei, including the appointment of senior management. The shareholders of Shenzhen Xunlei also transferred all
their shareholders’ rights to Giganology Shenzhen. The term of this agreement will expire in 2016 and may be extended with Giganology Shenzhen’s
confirmation prior to the expiration date. For instance, in May 2011, Shenzhen Xunlei sought and obtained consent from Giganology Shenzhen and the
Company to increase its registered capital by RMB20 million and to revise its articles of association accordingly. The term of this agreement will expire on
November 15, 2016, and will be renewed before the expiration according to the requirement of the WFOE (i.e. primary beneficiary of the VIE), as contemplated
in the original terms of the VIE arrangements.
—Equity Pledge Agreement between Giganology Shenzhen and the shareholders of Shenzhen Xunlei—Under this agreement, the shareholders of Shenzhen
Xunlei pledged all of their equity interests in Shenzhen Xunlei to Giganology Shenzhen. If Shenzhen Xunlei and/or its shareholders breach their contractual
obligations under this agreement, Giganology Shenzhen, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests.
F- 14
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
1.
Organization and nature of operations (Continued)
—Power of Attorney—Each shareholder of Shenzhen Xunlei appointed Giganology Shenzhen as its attorney-in-fact to exercise their shareholders’ rights in
Shenzhen Xunlei, including shareholders’ voting rights. Each power of attorney will remain in force for 10 years unless the business operation agreement
among Giganology Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen Xunlei is terminated in advance. This period may be extended at Giganology
Shenzhen’s discretion.
—Service Agreements between Giganology Shenzhen and Shenzhen Xunlei—Under various service agreements, Giganology Shenzhen will provide services
including technical support, training, as well as consulting services to Shenzhen Xunlei in exchange for a service fee. These service agreements include the
Exclusive Technology Support and Services Agreement, the Exclusive Technology Consulting and Training Agreement and the Software and Proprietary
Technology License Contract. Giganology Shenzhen is entitled to service fees equal to 20%, 20% and 40% of the pre-tax operating profit of Shenzhen Xunlei
according to the terms and provisions of these agreements, respectively (in aggregate 80% of pre-tax operating profit of Shenzhen Xunlei). In addition, these
agreements also allow both parties to review and adjust the above mentioned percentage every six months according to the business operation and income of
Shenzhen Xunlei so as to enable Giganology Shenzhen to extract substantially all the after tax operating profit of Shenzhen Xunlei. The amount of service fees
payable from Shenzhen Xunlei to Giganology Shenzhen for the years ended December 31, 2013, 2014 and 2015 was USD nil, USD 1,228 thousand and USD
1,235 thousand, respectively.
For the Exclusive Technology Support and Services Agreement and the Exclusive Technology Consulting and Training Agreement, the term of these
agreements will expire in 2025 and may be extended with Giganology Shenzhen’s written confirmation prior to the expiration date. Giganology Shenzhen is
entitled to terminate the agreement at any time by providing 30 days’ prior written notice to Shenzhen Xunlei.
For the Proprietary Technology License Contract, the term of this contract will expire in 2022 and may be extended with Giganology Shenzhen’s written
confirmation prior to the expiration date. Giganology Shenzhen grants Shenzhen Xunlei a non-exclusive and non-transferable right to use Giganology
Shenzhen’s proprietary technology. Shenzhen Xunlei can only use the proprietary technology to conduct business according to its authorized business scope.
Giganology Shenzhen or its designated representative(s) owns the rights to any new technology developed due to implementation of this contract.
—Intellectual Properties Purchase Option Agreement between Giganology Shenzhen and Shenzhen Xunlei. Giganology Shenzhen has an option to acquire
Shenzhen Xunlei’s intellectual properties at the lowest price permissible by the then-applicable PRC laws and regulation. The term of this contract will expire in
2022 and may be automatically extended for an additional 10 years at Giganology Shenzhen’s discretion.
—Call Option Agreement—Giganology Shenzhen has an option to acquire all of the outstanding shares of Shenzhen Xunlei at a purchase price equal to RMB
1 or the lowest price permissible by the then-applicable PRC laws and regulation. The term of the agreement will expire in 2022 and may be extended at
Giganology Shenzhen’s discretion.
As a result of these agreements (collectively defined as “Structured Service Contracts”), Giganology Shenzhen can exercise effective control over Shenzhen
Xunlei, receives all of the economic benefits and residual interest and absorbs all of the risks and expected losses from Shenzhen Xunlei as if it were the sole
shareholder, and has an exclusive option to purchase all of the equity interest in Shenzhen Xunlei at a minimal price. Therefore, Giganology Shenzhen is
considered the primary beneficiary of Shenzhen Xunlei and accordingly Shenzhen Xunlei’s results of operations, assets and liabilities have been consolidated in
the Company’s financial statements.
On December 24, 2013, for purposes of developing the Group’s computer software and information technology capability, Shenzhen Xunlei and Xunlei
Computer entered into a technology development and software licenses framework agreement. The term of the agreement is two years from the date of its
execution. Under this framework agreement, Xunlei Computer provides Shenzhen Xunlei with technology development services according to Shenzhen
Xunlei’s business needs. Any new intellectual property resulting from the technology development services is owned by Xunlei Computer, and cannot be
substituted or sub-licensed to any third party by Shenzhen Xunlei without the prior written consent of Xunlei Computer. The framework agreement signed
between Shenzhen Xunlei and Xunlei Computers does not have an impact on the Structured Services Contracts with Shenzhen Xunlei.
F- 15
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
1.
Organization and nature of operations (Continued)
VIE-Related Risks
It is possible that the Group’s operation of certain of its operations and businesses through VIEs could be found by PRC authorities to be in violation of PRC
law and regulations prohibiting or restricting foreign ownership of companies that engage in such operations and businesses. While the Group’s management
considers the possibility of such a finding by PRC regulatory authorities under current law and regulations to be remote, on January 19, 2015, the Ministry of
Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment a proposed PRC law (the “Draft FIE Law”) that appears to include
VIEs within the scope of entities that could be considered to be foreign invested enterprises (or “FIEs”) that would be subject to restrictions under existing PRC
law on foreign investment in certain categories of industry. Specifically, the Draft FIE Law introduces the concept of “actual control” for determining whether
an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity, the Draft FIE Law includes control through contractual
arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the PRC and goes into effect in its current
form, these provisions regarding control through contractual arrangements could be construed to reach the Group’s VIE arrangements, and as a result the
Group’s VIEs could become explicitly subject to the current restrictions on foreign investment in certain categories of industry. The Draft FIE Law includes
provisions that would exempt from the definition of foreign invested enterprises entities where the ultimate controlling shareholders are either entities organized
under PRC law or individuals who are PRC citizens. The Draft FIE Law does not make clear how “control” would be determined for such purpose, and is silent
as to what type of enforcement action might be taken against existing VIEs that operate in restricted industries and are not controlled by entities organized under
PRC law or individuals who are PRC citizens. If a finding were made by PRC authorities, under existing law and regulations or under the Draft FIE Law if it
becomes effective, that the Group’s operation of certain of its operations and businesses through VIEs, regulatory authorities with jurisdiction over the licensing
and operation of such operations and businesses would have broad discretion in dealing with such a violation, including levying fines, confiscating the Group’s
income, revoking the business or operating licenses of the affected businesses, requiring the Group to restructure its ownership structure or operations, or
requiring the Group to discontinue all or any portion of its operations. Any of these actions could cause significant disruption to the Group’s business
operations, and have a severe adverse impact on the Group’s cash flows, financial position and operating performance.
In addition, it is possible that the contracts among the Group, the Group’s VIEs and shareholders of its VIEs would not be enforceable in China if PRC
government authorities or courts were to find that such contracts contravene PRC law and regulations or are otherwise not enforceable for public policy reasons.
In the event that the Group was unable to enforce these contractual arrangements, the Group would not be able to exert effective control over the affected VIEs.
Consequently, such VIE’s results of operations, assets and liabilities would not be included in the Group’s consolidated financial statements. If such were the
case, the Group’s cash flows, financial position and operating performance would be severely adversely affected. The Group’s contractual arrangements with
respect to its consolidated VIEs are approved and in place. The Group’s management believes that such contracts are enforceable, and considers the possibility
remote that PRC regulatory authorities with jurisdiction over the Group’s operations and contractual relationships would find the contracts to be unenforceable.
F- 16
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
1.
Organization and nature of operations (Continued)
Initial public offering
The Company completed its initial public offering (“IPO”) on June 24, 2014 on the NASDAQ Global Market and the underwriters subsequently exercised their
over-allotment option on June 27, 2014. The Company issued and sold a total of 8,412,250 American Depositary Shares (“ADSs”) pursuant to these
transactions. Each ADS represents five common shares. The net proceeds received by the Company, after deducting commissions and offering expenses,
amounted to approximately US$ 89,665 thousand. Upon the completion of the IPO, all of the Company’s outstanding preferred shares were converted into
common shares immediately as of the same date.
2.
(a)
Summary of significant accounting policies
Basis of presentation and use of estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (‘‘U.S. GAAP’’). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are
summarized below.
The Restructuring was accounted for at historical costs. The assets and liabilities of Shenzhen Xunlei are consolidated in the Company’s financial statements at
carryover basis.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the accompanying consolidated financial statements and related disclosures. Actual results could differ materially from these estimates. Significant
accounting estimates reflected in the Group’s consolidated financial statements mainly include the useful lives of property and equipment, allowance for
doubtful accounts, valuation allowance of deferred tax assets, sales rebate to advertising agencies, amortization period of online game revenue, amortization of
content copyrights, fair value of content copyrights exchange, impairment assessment of goodwill and impairment assessment of long-lived assets. In addition,
the Group uses assumptions in a valuation model to estimate the fair value of share options granted, warrants issued and underlying common shares.
Management bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the
basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
(b)
Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, VIE for which the Company is the primary beneficiary
and its subsidiaries. All significant transactions and balances among the Company, its subsidiaries, VIE and its subsidiaries have been eliminated upon
consolidation.
A subsidiary is an entity in which the Company, directly or indirectly, controls more than one-half of the voting power, or has the power to appoint or remove
the majority of the members of the board of directors to cast majority of votes at meetings of the board of directors or to govern the financial and operating
policies of the investee under a statute or agreement among the shareholders or equity holders.
An entity is considered to be a VIE if the entity’s equity holders do not have the characteristics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support from other parties.
The Group consolidates entities for which the Company is the primary beneficiary if the entity’s other equity holders do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties.
F- 17
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
Summary of significant accounting policies (Continued)
(b) Consolidation (continued)
In determining whether the Company or its subsidiary is the primary beneficiary of a VIE, the Company considered whether it has the power to direct activities
that are significant to the VIE’s economic performance, including the power to appoint senior management, right to direct company strategy, power to approve
capital expenditure budgets, and power to establish and manage ordinary business operation procedures and internal regulations and systems.
Management has evaluated the contractual arrangements among Giganology Shenzhen, Shenzhen Xunlei and its shareholders and concluded that Giganology
Shenzhen receives all of the economic benefits and absorbs all of the expected losses from Shenzhen Xunlei and has the power to direct the aforementioned
activities that are significant to Shenzhen Xunlei’s economic performance, and is the primary beneficiary of Shenzhen Xunlei. Therefore, Shenzhen Xunlei and
its subsidiaries’ results of operation, assets and liabilities have been included in the Group’s consolidated financial statements. Management monitors the
regulatory risk associated with these contractual arrangements. See Note 25 for further discussion.
Non-controlling interests represent the portion of the net assets of a subsidiary attributable to interests that are not owned by the Company. The non-controlling
interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Non-controlling interests in
the results of the Group is presented on the face of the consolidated statements of comprehensive income as an allocation of the total income or loss for the
year/period between non-controlling shareholders and the shareholders of the Company.
(c)
Discontinued operations
When disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued
operations. Discontinued operations are reported when a component of an entity comprising operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity is classified as held for disposal or has been disposed of, if the component either (1)
represents a strategic shift or (2) have a major impact on an entity’s financial results and operations. Examples include a disposal of a major geographical
location, line of business, or other significant part of the entity, or disposal of a major equity method investment. In the consolidated income statement, result
from discontinued operations is reported separately from the income and expenses from continuing operations and prior periods are presented on a comparative
basis. Cash flows for discontinuing operations are presented separately in note 3. In order to present the financial effects of the continuing operations and
discontinued operations, revenues and expenses arising from intra-group transactions are eliminated except for those revenues and expenses that are considered
to continue after the disposal of the discontinued operations.
Non-current assets or disposal groups are classified as assets held for sale when the carrying amount is to be recovered principally through a sale transaction
rather than through continuing use. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition subject only
to terms that are usual and customary for sales of such assets or disposal groups and the sale must be highly probable. Non-current assets classified as held for
sale and disposal groups are measured at the lower of their carrying or fair value less costs to sell.
F- 18
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
Summary of significant accounting policies (Continued)
(d) Foreign currency translation
The Company’s reporting and functional currency is the United States Dollar (‘‘USD’’). Xunlei BVI and Xunlei HK’s functional currency is the USD. The
functional currency of other subsidiaries, VIE and its subsidiaries located in the PRC is the Renminbi (‘‘RMB’’), which is their respective local currency.
Transactions denominated in foreign currencies are remeasured into the functional currency at the exchange rates prevailing on the transaction dates. Financial
assets and liabilities denominated in foreign currencies are remeasured into the functional currency using the applicable exchange rates prevailing at the balance
sheet date. The resulting exchange gains and losses from foreign currency transactions are included in other income (loss) within the consolidated statements of
comprehensive income.
The Company uses the monthly average exchange rate for the year and the exchange rates at the balance sheet date to translate the operating results and
financial position, respectively, of its subsidiaries whose functional currency is other than the USD. The resulting translation differences are recorded in
cumulated translation adjustments, a component of shareholders’ equity.
The exchange rate used is released by Chinese State Administration of Foreign Exchange.
(e) Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash in bank and time deposits placed with banks or other financial institutions, which have original maturities
of three months or less and are readily convertible to known amounts of cash.
(f) Short-term investments
Short-term investments include deposits placed with banks with original maturities of more than three months but less than one year and investments in
financial instruments with a variable interest rate indexed to the performance of underlying assets. In accordance with ASC 825 Financial Instruments, for
investments in financial instruments with a variable interest rate indexed to performance of underlying assets, the Group elected the fair value method at the date
of initial recognition and carried these investments subsequently at fair value. Changes in the fair value are reflected in the consolidated statements of
comprehensive income. Interest generated from short term investments are recorded when interest payments are received at the maturity date. It is recorded as
“other income” on the statement of comprehensive income and measured based on the actual amount of interest the Group received.
(g) Fair value of financial instruments
The Group’s financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, other receivables, amounts due
from/(to) related parties, accounts payable, other payables and warrants liabilities. The carrying value of these balances, with the exception of short-term
investments (see note 2 (e)), approximates their fair value due to the current and short term nature of these balances.
(h) Accounts receivable, net
Accounts receivable are presented net of allowance for doubtful accounts. The Group evaluates the creditworthiness of each customer at the time when services
are rendered and continuously monitor the recoverability of the accounts receivable.
F- 19
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(h)
Summary of significant accounting policies (Continued)
Accounts receivable, net (Continued)
The Group uses specific identification method in providing for bad debts when facts and circumstances indicate that collection is doubtful and a loss is probable
and estimable. If the financial conditions of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances might be required. The allowance for doubtful accounts is based on the best facts available and is re-evaluated and adjusted on a regular basis as
additional information is received.
Some of the factors that the Group considers in determining whether a bad debt allowance is recorded on an individual customer are:
1) the customer's past payment history and whether it fails to comply with its payment schedule;
2) whether the customer is in financial difficulty due to economic or legal factors;
3) a significant dispute with the customer has occurred;
4) the objective evidence which indicates non-collectability of the accounts receivable.
The allowances provided for Accounts Receivable from continuing operations as of December 31, 2014 and 2015 were USD 0.1 million and USD 0.1 million,
respectively.
If the Group determines that an allowance is needed for a customer, the Group will discontinue business with them unless they start to resume payment. The
accounts receivable is written-off when the Group ceases pursuing collection. Any changes in the estimates may cause the Group's operating results to fluctuate.
(i)
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using actual cost on a weighted average basis. Net realizable value is the
amount that can be realized from the sale of the inventory in the inventory in the normal course of business after allowing for the costs of realization.
An allowance is recorded for excess inventory and obsolescence based on the lower of cost or net realizable value.
(j)
Long-term investments
The Group holds investments in privately held companies. The Group accounts for these investments over which it has significant influence but does not own a
majority equity interest or otherwise control using the equity method of accounting. For investments in an investee over which the Group does not have
significant influence and of which the investee has no readily determinable fair value, the Group carries the investment using the cost method. Under the cost
method, the investment is measured initially at cost. The investment carried at cost should recognize income when dividends are received from the distribution
of the investee’s earnings. The Group assesses its long-term investments for other-than-temporary impairment by considering factors including, but not limited
to, current economic and market conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other
company-specific information. The fair value determination, particularly for investments in privately-held companies, requires significant judgment to
determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investments
and determination of whether any identified impairment is other-than-temporary. During the years ended December 31, 2013 and 2014, the Group did not
impair any of its long-term investments. In 2015, the Group recognised an impairment of USD 0.8 million.
F- 20
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(k)
Summary of significant accounting policies (Continued)
Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line
method over their estimated useful lives. Residual rate is determined based on the economic value of the asset at the end of the estimated useful life as a
percentage of the original cost.
Servers and network equipment
Computer equipment
Furniture, fittings and office equipment
Motor vehicles
Leasehold improvements
Estimated useful lives
5 years
5 years
5 years
5 years
shorter of lease term or 3 years
Residual rate
5%
5%
5%
5%
—
Repair and maintenance costs are expensed as incurred. Expenditures that substantially increase an asset’s useful life are capitalized. Upon sale or disposition,
gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is
recognized in the consolidated statements of operations. The cost and related accumulated depreciation are removed from the financial statements.
(l)
Goodwill
Goodwill represents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of an acquired
business.
(m)
Impairment of goodwill
Impairment of goodwill assessment is performed on at least an annual basis on December 31 or whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. According to ASC 350-20-35, an entity may assess qualitative factors to determine whether it is more likely
than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. But the Group
selects proceed directly to perform a two-step goodwill impairment test. The first step compares the fair values of a reporting unit to its carrying amount,
including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s
goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination
with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes
of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess
in the carrying value of goodwill over the implied fair value of goodwill. The judgment in estimating the fair value of a reporting unit includes estimating future
cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the
determination of the fair value of a reporting unit. No goodwill impairment losses were recognized for the year ended December 31, 2015.
F- 21
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(n)
I)
Summary of significant accounting policies (Continued)
Intangible assets
Content copyrights
Licensed copyrights of movies, TV series and variety shows (collectively “Content Copyrights”) are capitalized when 1) the cost of the content is known 2) the
content has been accepted by the Group in accordance with the conditions of the license agreement and 3) the content is available for its first showing on the
Group’s website. Content Copyrights are carried at cost less accumulated amortization and impairment loss, if any.
The Group has two types of Content Copyrights, 1) non- exclusive Content Copyrights and 2) exclusive Content Copyrights. With non-exclusive Content
Copyrights, the Group has the right to broadcast the contents on its own websites. While, with exclusive Content Copyrights, besides the broadcasting right, the
Group also has the right to sub-license these exclusive Content Copyrights to third parties.
For non-exclusive Content Copyrights, which only generates primarily indirect cash flows, the amortization method is based on the analysis of historical
viewership consumption patterns. The Group determines consumption patterns by tracking the number of viewers watching the content throughout its life cycle.
This information is then aggregated to come up with a viewership trend that can support an appropriate method to amortize non-exclusive Content Copyrights.
The Group generally categorizes its contents in the Xunlei Kankan website into three broad categories, namely movies; TV series; and variety shows and others,
which include reality shows, talent shows, talk shows and entertainment news. Prior to April 1, 2011, the Group concluded there was insufficient historical
viewership data to support a demonstrative pattern in viewership of the Group’s non-exclusive Content Copyrights. Therefore, the Group has determined that a
straight line method of amortization over the estimated useful lives of the related non-exclusive Content Copyright provides the right level of expenses
attribution. Effective April 1, 2011, based on an accumulation of data gathered on historical viewing patterns of the non-exclusive Content Copyrights, the
Group revised the method to amortize new release of non-exclusive Content Copyrights over the shorter of estimated useful lives or their respective licensing
periods using an accelerated method based on consumption patterns. Estimates of the consumption patterns for these non-exclusive Content Copyrights are
reviewed periodically and revised, if necessary.
Exclusive Content Copyrights generate both direct and indirect cash flows. For the portion of exclusive Content Copyrights that generate indirect cash flows,
the Group uses the amortization method based on the analysis of historical viewership consumption patterns, which is the same with that of non-exclusive
Content Copyright as discussed above.
For the portion of exclusive Content Copyrights that generates direct cash flows, the Group amortizes the purchase costs using an individual-film-forecast-
computation method, which amortizes such costs based on the ratio of sub-licensing revenue and barter transaction gain (details described in Note 2(r))
generated for the current period to the total ultimate direct revenue estimated to be generated by the exclusive Content Copyrights for their whole license period
or estimated useful lives. The Group revisits the forecast at each quarter or year end and makes adjustment, when appropriate.
II)
Other intangible assets
Other intangible assets, which include computer software, internal use software development costs, online game licenses, domain names, land use right,
trademarks, technology (including right-to-use) and non-compete agreement, are carried at cost less accumulated amortization and impairment loss, if any.
Exclusive game licenses are amortized using the straight-line method over their licensing period of three years. Computer software, internal use software and
domain name are amortized using the straight-line method over their estimated useful life of five years. Land use right is amortized using the straight-line
method over their estimated useful life of thirty years.
F- 22
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(o)
Summary of significant accounting policies (Continued)
Impairment of long-lived assets
The Group evaluates the program usefulness of non-exclusive Content Copyrights and exclusive Content Copyrights pursuant to the guidance in ASC 920-350
Intangible—Goodwill and Other: Recognition, which provides that such rights be reported at the lower of unamortized cost or estimated net realizable value.
For non-exclusive Content Copyrights which only generate indirect cash flows, the Group evaluates the net realizable value of the content library by its three
content categories (i.e. movies, TV series, variety shows and others). If management’s expectations of programming usefulness, which represents the expected
revenues and related net cash flows derived from the contents, are revised downward, they assess whether it is necessary to write down the unamortized costs to
estimated net realizable value. The Group evaluates programming usefulness by category on an annual basis by comparing the unamortized cost to the estimated
net realizable value. On a quarterly basis, the Group also monitors whether there are indicators of changes in their expected usage of program materials.
The Group estimates net realizable value using expected net cash flows of the content based on expected future levels of advertising revenues. Such estimates
consider historical amounts and anticipated levels of demand. Expected future revenues are reduced by estimated direct costs to provide access to the website
and generate the related revenue, including bandwidth costs and server costs. For purposes of estimating revenues for each category of content, the Group
considers both expected future advertising revenues sold based on number of impressions delivered as well as advertising sold based on the period of time that it
is displayed.
For exclusive Content Copyrights that generate both direct and indirect cash flows, the Group evaluates the net realizable value of the Group’s licensed
copyright on a content by content basis. Impairment is assessed on an annual basis by comparing the unamortized cost to the Group’s estimated net realizable
value. The Group estimates the net realizable value using expected net cash flows based on expected future levels of advertising and content sub-licensing
revenues. For expected future levels of advertising revenue, the Group uses the same estimation methodology used for the impairment assessment of non-
exclusive Content Copyrights.
For both exclusive and non-exclusive Content Copyrights, there were no impairments for the years ended December 31, 2013, 2014 and 2015 because a
significant portion of the contents was related to movies and TV series, of which approximately 70% to 90% of the purchase costs of the Content Copyrights
had already been amortized during the first year of the licensed period. As such, the unamortized carrying amounts were lower than the respective net realizable
values when the impairment assessment was performed.
For other long-lived assets, the Group evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. The Group assesses the recoverability of the long-lived assets by comparing the carrying value of the long-
lived assets to the estimated undiscounted future cash flows expected to be received from use of the assets and their eventual disposition at the lowest level of
identifiable cash flows. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the
assets. If the Group identifies an impairment, the carrying value of the asset will be reduced to its estimated fair value based on a discounted cash flow approach
or, when available and appropriate, to comparable market values. The impairment of online game license were USD 808 thousand, USD 808 thousand and USD
770 thousand as of December 31, 2013, 2014 and 2015, respectively.
F- 23
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(p)
Summary of significant accounting policies (Continued)
Commitments and contingencies
In the normal course of business, the Group is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range
of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be
reasonably estimated. In regards to legal cost, the Group recorded such costs as incurred.
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Group, but which will only be resolved when
one or more future events occur or fail to occur. The Group’s management and its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Group or unasserted claims
that may result in such proceedings, the Group, in consultation with its legal counsel, evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Group’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable,
but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible
loss, if determinable and material, would be disclosed.
(q)
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under
operating lease are charged to the statements of comprehensive income on a straight-line basis over the period of the lease.
(r)
Revenue recognition
The Group generates revenues from various streams. The Group operates a prepaid virtual items system, under which, prepaid virtual items at fixed face value
are sold to third parties. Virtual items purchased can be used to subscribe for membership or purchase of virtual items in online games, as discussed below.
Virtual items sold but not yet consumed by the users are recorded as “Receipts in advance from customers” and upon consumption, they are recognized as
membership subscription and online game revenue according to the respective prescribed revenue recognition policies addressed below.
F- 24
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
I)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
Subscription revenues
The Group operates a VIP membership program where VIP members can have access to high speed online acceleration services, online streaming and other
access privileges. The membership fee is time-based and is collected up-front from subscribers except in the cases when they elect to pay via their mobile
operators. The membership fee is collected when the subscribers pay for the monthly phone bills. The terms of time-based subscriptions range from one month
to twelve months, with the subscribers having the option to renew the contract. The receipt of subscription fee is initially recorded as deferred revenue and
revenue is recognized ratably over the period of subscription as services are rendered. Unrecognized portion beyond 12 months from balance sheet date is
classified as a long-term liability. The Group evaluated the principal versus agent criteria and determined that the Group is the principal in the transaction and
accordingly record revenue on a gross basis. In determining whether to report revenues gross for the amount of subscription revenue, the Group assesses
whether it maintains the principal relationship with the VIP members, whether it bears the credit risk and whether it establishes prices for the end users. Service
fees levied by online system, fixed phone line and mobile payment channels (‘‘Payment Handling Fees’’) are recorded as the cost of revenues in the same
period as the revenue for the membership fee is recognized.
II)
Advertising revenues
Advertising revenues are derived principally from arrangements where the customers pay to place their advertisements on the Group’s platform in different
formats over a particular period of time. Such formats generally includes but not limited to videos, banners, links, logos and buttons. Advertisements on the
Group’s platform are generally charged on the basis of duration, and advertising contracts are signed to establish the fixed price and the advertising services to
be provided. The Group enters into advertising contracts with third party advertising agencies that represents advertisers, as well as directly with advertisers. A
typical contract term would range from a few days to 3 months. Both third party advertising agencies and direct advertisers are generally billed at the end of the
display period and payments are due usually within 3 months.
Where the Group’s customers purchase multiple advertising spaces with different display periods in the same contract, the Group allocates the total
consideration to the various advertising elements based on their relative fair values and recognizes revenue for the different elements over their respective
display periods. The Group determines the fair values of different advertising elements based on the prices charged when these elements were sold on a
standalone basis. The Group recognizes revenue on the elements delivered and defers the recognition of revenue for the fair value of the undelivered elements
until the remaining obligations have been satisfied. Where all of the elements within an arrangement are delivered uniformly over the agreement period, the
revenue is recognized on a straight line basis over the contract period.
F- 25
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
II)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
Advertising revenues (Continued)
Transactions with third party advertising agencies
For contracts entered into with third party advertising agencies, the third party advertising agencies will in turn sell the advertising services to advertisers.
Revenue is recognized ratably over the contract period of display based on the following criteria:
—There is persuasive evidence that an arrangement exists—the Group will enter into framework and execution agreements with the advertising agencies,
specifying price, advertising content, format and timing
—Price is fixed and determinable—prices charged to the advertising agencies are specified in the agreements, including relevant discount and rebate rates
—Services are rendered—the Group recognizes revenue ratably over the contract period of display
—Collectability is reasonably assured—the Group assesses credit history of each advertising agency before entering into any framework and execution
agreements. If the collectability from the agencies is assessed as not reasonably assured, the Group recognizes revenue only when the cash is received and all
the other revenue criteria are met.
The Group provides sales incentives in the forms of discounts and rebates to third party advertising agencies based on purchase volume. As the advertising
agencies are viewed as the customers in these transactions, revenue is recognized based on the price charged to the agencies, net of sales incentives provided to
the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted rebate rates and estimated sales volume
based on historical experience.
Transactions with advertisers
The Group also enters into advertisement contracts directly with advertisers. Under these contracts, similar to transactions with third party advertising agencies,
the Group recognizes revenue ratably over the contract period of display. The terms and conditions, including price, are fixed according to the contract between
the Group and the advertisers. The Group also performs credit assessment of all advertisers prior to entering into contracts. Revenue is recognized based on the
amount charged to the advertisers, net of discounts.
The Group has estimated and recorded sales rebates provided to the agencies and advertisers of USD 7,207 thousand, USD 5,005 thousand and USD 1,179
thousand for the years ended December 31, 2013, 2014 and 2015, respectively.
III) Other internet value-added services
i) Online game revenues
Users play games through the Group’s platform free of charge and are charged for purchases of virtual items including consumable and perpetual items, which
can be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specific user
within a specified period of time. Perpetual items represent virtual items that are accessible to the users’ account over the life of the online game.
F- 26
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
III)
Other internet value-added services (Continued)
i)
Online game revenues (Continued)
Pursuant to contracts signed between the Group and game developers, revenue from the sale of virtual items are shared based on a pre-agreed ratio for each
game. The Group enters into both non-exclusive and exclusive licensing contracts with game developers.
Non-exclusive game licensed contracts
The games under non-exclusive licensed contracts are maintained, hosted and updated by the game developers. The Group mainly provides access to the
platform and limited after-sale services to the game players. The determination of whether to record these revenues using the gross or net method is based on an
assessment of various factors; the primary factors are whether the Group acts as the principal in offering services to the game players or as agent in the
transaction, and the specific requirements of each contract. The Group determined that for non-exclusive game licensed arrangements, the third party game
developers are the principal given that the game developers design and develop the game services offered, have reasonable latitude to establish prices of game
virtual items, and are responsible for maintaining and upgrading the game content and virtual items. Accordingly, the Group records online game revenue, net of
the portion remitted to the game developers.
Given that online games are managed and administered by the game developers for non-exclusive licensed games, the Group does not have access to the data on
the consumption details and the types of virtual items purchased by the game players. The Group has adopted a policy to recognize revenues relating to both
consumable and perpetual items over the shorter of 1) estimated lives of the games and 2) the estimated lives of the user relationship with the Group, which
were approximately two to six months for the periods presented.
Adjustments arising from the changes of estimated lives of virtual items are applied prospectively as such changes are resulted from new information indicating
a change in the game player behavioral patterns.
Exclusive licensing game contracts
For exclusive licensing contracts with game developers, the games are maintained and hosted by the Group. Accordingly, the Group is determined to be the
principal, the Group records online game revenue on a gross basis, with the amount remitted to the game developers reported as cost of revenue. Payment
Handling Fees are recognized as cost of revenues when the related revenues are recognized.
For exclusive licensed games which are maintained on the Group’s server, the Group has access to the data on the consumption details and types of virtual items
purchased by the game players. The Group does not maintain information on consumption details of virtual items, and only have limited information related to
the frequency of log-ons. Given that a substantial portion of the virtual items purchased by the game players in exclusive licensed games are perpetual items,
management determined that it would be most appropriate to recognize revenue over the shorter of 1) estimated lives of the games and 2) the estimated lives of
the user relationship with the Group, which were approximately one to three months for the periods presented. Revenues related to consumable items are
recognized immediately upon consumption.
F- 27
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
III)
Other internet value-added services (Continued)
i)
Online game revenues (Continued)
Exclusive licensing game contracts (Continued)
Game players can purchase prepaid virtual items which can be used to purchase virtual items via online channels. The Group incurs service fees levied by those
payment channels, and such payment expenses are recorded as the cost of revenues when the related revenues are recognized.
For both non-exclusive and exclusive licensed games, the Group estimates the life of virtual items to be the shorter of the estimated lives of the games and the
estimated lives of the user relationship. The estimated user relationship period is based on data collected from those users who have purchased virtual items. To
estimate the life of the user relationship, the Group maintains a software system that captures the following information for each user: the date of first log-in, the
date of first purchase for a virtual item, the date of last purchase for a virtual item and the date the user ceases to play the game. The Group estimates the life of
the user relationship to be the average period from the first purchase of a virtual item to the date the user ceases to play the game. The estimate of the life of the
user relationship is based only on the data of those users who have purchased virtual items and is made on a game-by-game basis.
To estimate the life of the games, the Group considers both games that they operate as well as games in the market that are of a similar nature. The Group
categorizes these games by their nature, such as simulation games, role playing games and others, which appeal to players belonging to different demographics.
The Group estimates that the life of each group of the games to be the average period from the date of launch for such games to the date the games are expected
to be removed from the website or terminated altogether. When the Group launches a new game, they estimate the life of the game and user relationship based
on lives of other similar games in the market until the new game establishes its own history. The Group also considers the game’s profile, attributes, target
audience, and its appeal to players of different demographic groups in estimating the user relationship period.
The consideration of user relationship with each online game is based on the Group’s best estimate that takes into account all known and relevant information at
the time of assessment. Adjustments arising from the changes of estimated lives of virtual items are applied prospectively as such changes are resulted from new
information indicating a change in the game player behavioral patterns. Any changes in the estimates of lives of virtual items may result in the Group’s revenues
being recognized on a basis different from prior periods and may cause the Group’s operating result to fluctuate. The Group periodically assesses the estimated
lives of the virtual items and any changes from prior estimates are accounted for prospectively. Any adjustments arising from changes in user relationship as a
result of new information will be accounted as a change in accounting estimate in accordance with ASC 250 Accounting Changes and Error Corrections.
ii)
Content sub-licensing revenue
With the exclusive Content Copyrights, the Group has the right to sub-license the broadcasting rights to third parties. The Group generates revenue from sub-
licensing these broadcasting rights on a recurring basis to third party customers for cash, mainly video streaming internet platforms, for cash payments at a fixed
rate for a fixed period of time that falls within the original exclusive license period. Revenue is recognized in full at the later of the delivery of the master copy
of the content with acceptance acknowledged by the customers and the commencement of the license period, as the Group is not obliged to provide any other
services. The Group performs credit assessment of its customers prior to entering into contracts to ensure that collection of the arrangement fee is reasonably
assured. There is no ongoing obligation of the Group after delivery of the master copy of the content. The Group recognized content sub-licensing revenue from
discontinued operations of USD 7,369 thousand, USD 9,218 thousand and USD 2,929 thousand for the years ended December 31, 2013, 2014 and 2015,
respectively.
F- 28
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
III)
iii)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
Other internet value-added services (Continued)
Pay per view subscription revenue
The Group operates a pay per view subscription program in which subscribers pay a monthly fee to watch and have access to a collection of movie contents.
The subscription fee is time-based and is collected up-front from subscribers except in the cases where they elect to pay via their mobile operators. The
subscription fee is collected when the subscribers pay for their monthly phone fees. The terms of time-based subscriptions range from one month to twelve
months, with the subscribers having the option to renew the contract. The receipt of revenue is initially recorded as deferred revenue and revenue is recognized
ratably over the period of subscription as services are rendered.
Viewers can also pay to watch individual movies for an unlimited number of times. Revenue is recognized when the movie is broadcasted to the viewer.
iv)
Revenues from traffic referral programs
The Group enters into contracts with certain third party portals/websites to earn revenue by referencing online traffic to these third party portals/websites. On a
monthly basis, the Group receives data on the user traffic and the related monthly revenue from these third party portals/ websites. Under these programs, the
Group recognizes its share of revenues based on contractual rates applied to user traffic referred to the advertisements of the third parties
v)
Revenues from ZQB and cloud computing
The Group launched Project Crystal in 2014. Project Crystal is an ongoing project involving technology innovation in crowd-sourcing idle bandwidth and
potentially storage from the Group's user base, by providing crowd-sourced bandwidth either for internal use by the Group or by other third parties. Project
Crystal, under the trademark Nebula CDN, refers to an ecosystem which allows users to enjoy smooth video viewing experiences in various complex network
environments and enables internet content providers to increase the stability and security of their services and to reduce operating costs. These services are
mainly used in online game downing, online video and mobile application.
As part of Project Crystal, since 2015 Q2, the Group commenced to sell zhuangqianbao (“ZQB”). ZQB is a hardware which could be worked as a micro-
computer based on Linux system, it also contains CPU, RAM, ROM and input/output devices.
In the Group, the consideration, being the crystal points, will only be given to the users when they successfully shared unused bandwidth with the Group in the
future. Therefore, the Group receives an identifiable benefit, being the bandwidth, from the users in exchange for the crystal points. Thus, (a) users purchase
ZQB from the Group and the Group purchase excess bandwidth from the users is sufficiently separable and (b) the company can reasonably estimate the fair
value of this benefit. Therefore, management determined that (i) ZQB sold to users represent identifiable benefit to the users that is separable from the ability to
sell bandwidth back to the Group and (ii) the bandwidth purchased from the users represent identifiable benefit to the Group that is separable from ZQB.
The sales of ZQB and future purchase of excess bandwidth by the Group are considered separate transactions. Therefore, sales of ZQB should be reported as
revenue, while crystal points given for purchase of bandwidth should be reported as bandwidth cost.
The Group sells to online platforms such as JD.com and Taobao.com. The revenue from ZQB is recognized when the item is dispatched to customers.
F- 29
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(r)
v)
Summary of significant accounting policies (Continued)
Revenue recognition (Continued)
Revenues from ZQB and cloud computing (Continued)
The core business principle of cloud computing is to collect idle uplink capacity from individual with compensation, and sells to online video streamers such as
Iqiyi and Kankan (which Xunlei sold to Nesound in 2015 Q2). On a monthly basis, the Group records the bandwidth it delivers and recognize revenue from
these online video streamers under contractual rates applied (price per GB of bandwidth multiplies total GBs of bandwidth per month). The cost of collecting
unused bandwidth is recorded as bandwidth costs within cost of revenue.
(s)
Barter transactions
The Group also enters into agreements with third parties (mainly video streaming internet platform) to exchange content. The exchanged content provides rights
for each respective party only to broadcast the content received on its own website; though, each party retains the right to continue broadcasting and or sub-
license the rights to the content it surrendered in the exchange. These transactions are non-monetary transactions similar to barter transactions, and the Group
follows ASC 845, Non-Monetary Transactions and ASC 360-10, Property, Plant, and Equipment. Such barter transactions should be recorded at fair value of the
surrendered assets in the transaction unless such fair value are not determinable within reasonable limits. The Group estimated the fair value of the content by
gathering ‘‘price reference’’ of cash sub-licensing transactions of each exclusive content right and categorizing it into two buckets (1) cash transaction prices
with established counterparties and (2) cash transaction prices with less established counterparties. With this information, the Group calculates an ‘‘average cash
transaction price’’ for each category to be used as a reference for the non-monetary transaction. The attributable cost of the related exclusive Content Copyright
surrendered is released and recorded as the cost of the barter transaction using the individual-film-forecast computation method. This method calculates such
cost based on the ratio of the estimated fair value of the exchanged content over the aggregated estimated fair value to be generated by the exclusive Content
Copyrights for their whole license period or estimate useful lives. The Group revisits the forecast at each quarter or year end and make adjustment, when
appropriate.
The Group generated net gains amounted to USD 137 thousand (2013:USD1,020 thousand, 2014: USD1,556 thousand) from barter transactions, which is the
net amount of proceeds of USD 409 thousand (2013:USD2,059 thousand, 2014: USD4,428 thousand), after deducting related allocation of cost of USD 247
thousand (2013:USD915 thousand, 2014: USD2,606 thousand) and business tax and surcharge of USD 25 thousand (2013:USD124 thousand, 2014: USD266
thousand).
(t)
Sales and marketing expenses
Sales and marketing expenses comprise primarily of salary, commission and benefits of sales and marketing personnel and external advertising and market
promotion expenses. The external advertising and market promotion expenses from continuing operations amounted to approximately USD 5,056 thousand,
USD 5,978 thousand and USD 8,089 thousand for the years ended December 31, 2013, 2014 and 2015, respectively.
(u)
General and administrative expenses
General and administrative expenses consist primarily of salary and benefits, professional service fees, legal expenses and other administrative expenses.
F- 30
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(v)
Summary of significant accounting policies (Continued)
Research and development costs
The Group incurred research and development costs to develop its downloading software. Costs incurred during the research phase are expensed as incurred.
Costs incurred for the development of the downloading software prior to the establishment of technological feasibility, which is when a working model is
available, are expensed when incurred. The development costs qualified for capitalization have been immaterial for the periods presented.
The Group also incurred development costs in connection with an internal-use ERP software to further enhance management to monitor the business. While
internal and external costs incurred during the preliminary project stage are expensed as incurred, costs relating to activities during the application development
stages have been capitalized. During each of the three years ended December 31, 2015, nil software development costs were capitalized as intangible assets,
respectively.
In addition, the Group incurred other research and development costs in relation to software used to support its operations. Any development costs qualified for
capitalization have been immaterial for the periods presented.
(w)
Taxation and uncertain tax positions
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the difference is expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that
includes the enactment date. A valuation allowance is provided to reduce the carrying amount of deferred tax assets if it is considered more likely than not that
some portion, or all, of the deferred tax assets will not be realized. The estimation of future taxable income involves significant judgement and estimates. Based
on management's estimated future taxable income, management concluded that it is more likely than not that the net operating losses carried forward can be
utilized prior to their respective expiration dates. On January 1, 2007, the Group adopted the guidance regarding uncertain tax positions and evaluated its open
tax positions that exist in each jurisdiction for each reporting period. If an uncertain tax position is taken or expected to be taken in a tax return, the tax benefit
from that uncertain position is recognized in the Group’s consolidated financial statements if it is more likely than not that the position is sustainable upon
examination by the relevant taxing authority. The Group did not have any significant uncertain tax position and there was no effect on its financial condition or
results of operations as a result of implementing the new guidance. The Group recognizes interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense, if any. Nevertheless, no significant interest and penalties were recorded in the years ended December 31, 2013, 2014 and
2015.
Transition from PRC Business Tax to PRC Value Added Tax
Effective September 1, 2012, the Chinese government has begun a pilot program (the “Pilot Program”) for transition from imposing business tax to imposing of
value added tax (“VAT”) for revenues generated in certain industries. The Pilot Program has been expanded from Shanghai to eight other cities and provinces in
China, including Beijing and Shenzhen. The Group’s advertising and content sub-licensing revenues are subject to the Pilot Program since November 1, 2012,
and its subscription revenue, online game revenue and pay per view subscription revenue are subject to the Pilot Program since June 1, 2014. Business Tax has
been imposed primarily on revenues from the provision of taxable services, assignments of intangible assets and transfers of real estate.
F- 31
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
Summary of significant accounting policies (Continued)
(w)
Taxation and uncertain tax positions (Continued)
VAT payable on goods sold or taxable labor services provided by a general VAT taxpayer for a taxable period is the net balance of the output VAT for the
period after crediting the input VAT for the period. Before the implementation of the Pilot Program, the Group was mainly subject to a small amount of VAT
mainly for revenues of the sale of software. VAT has been imposed on those revenues at a rate of 17%. With the implementation of the Pilot Program, in
addition to the revenues currently subject to VAT, the Group’s advertising and content sub-licensing revenues, subscription revenue, online game revenue and
pay per view subscription revenue are in the scope of the Pilot Program and are now subject to VAT at a rate of 6%.
(x)
Retirement benefits
Full-time employees of the Company’s subsidiaries, consolidated VIE and its subsidiaries in the PRC participate in a government mandated multi-employer
defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits
are provided to employees. Chinese labor regulations require that the subsidiaries and VIEs of the Company make contributions to the government for these
benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total
amounts for such employee benefits, which are expensed as incurred, were USD3,243 thousand , USD3,818 thousand and USD 5,481 thousand for the years
ended December 31, 2013 , 2014 and 2015, respectively.
(y)
Share-based compensation
The Group measures share-based compensation at the grant date based on the fair value of the award determined using the Black-Scholes option pricing model.
As the Group has granted share options and restricted shares with service-only condition, the Group elected to recognize compensation costs net of estimated
forfeitures on a straight line basis over the requisite service period, which is generally the same as the vesting period. The amount of compensation cost
recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date.
(z)
Government subsidies
The Group receives subsidies from the local PRC government for general use or purchase of equipment. General-use subsidies which are not subject to any
conditions or specific use requirements are recorded as subsidy income in the consolidated statements of operations. Subsidies for purchase of equipment are
recorded as deferred government grant when received, and are recorded as other income over the expected useful life of the assets after the related equipment
has been purchased.
(aa)
Segment reporting
The Group’s Chief Executive Officer has been identified as the chief operating decision maker (“CODM”), who reviews consolidated operating results of the
Group when making decisions about allocating resources and assessing performance of the Group as a whole. The Group has internal reporting of revenue, cost
and expenses that does not distinguish between segments, and reports costs and expense by nature as a whole. The Group does not distinguish between markets
or segments for the purpose of internal reporting. Management has determined that the Group operates and manages its business as a single segment which is
the operation of its online media platform. All revenues of the Group are derived from mainland China.
F- 32
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
Summary of significant accounting policies (Continued)
(aa)
Segment reporting (Continued)
An analysis of the different types of revenues for the years ended December 31, 2013, 2014 and 2015 are summarized as follows:
Revenue from continuing operations
(In thousands)
Subscription revenue
Advertising revenue
Other internet value-added services (note a)
Total
2013
86,733
2,951
32,347
122,031
Years ended December 31,
2015
2014
82,435
98,189
4,802
5,834
42,759
31,789
129,996
135,812
note a: Other internet value-added services mainly comprise revenue from online game, traffic referral programs, technical services regarding online
acceleration, online sales revenue, sales of software licenses, and revenue from project crystal (including CDN revenue and revenue from ZQB).
(bb)
Net income / (loss) per share
Net basic income / (loss) per share is computed by dividing net income / (loss) attributable to holders of common shares by the weighted-average number of
common shares outstanding during the year using the two class method. Using the two class method, net income / (loss) is allocated between common shares
and other participating securities based on their participating rights.
Net diluted income / (loss) per share is calculated by dividing net income / (loss) attributable to common shareholders as adjusted for the effect of dilutive
common equivalent shares, if any, by the weighted-average number of common and dilutive common equivalents shares outstanding during the year. Dilutive
equivalent shares are excluded from the computation of diluted income / (loss) per share if their effects would be anti-dilutive. Common share equivalents
consist of the common shares issuable in connection with the Group’s convertible non-redeemable and redeemable preferred shares using the if-converted
method, and common shares issuable upon the conversion of the stock options, using the treasury stock method.
(cc)
Comprehensive income
Comprehensive income is defined as the change in equity of a Group during the period from transactions and other events and circumstances excluding
transactions resulting from investments from shareholders and distributions to shareholders. Accumulated other comprehensive income, as presented on the
accompanying consolidated balance sheets, consists of cumulative translation adjustment.
F- 33
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
Summary of significant accounting policies (Continued)
(dd)
Profit appropriation and statutory reserves
The Group’s subsidiaries, consolidated VIE and its subsidiaries incorporated in the PRC are required on an annual basis to make appropriations of retained
earnings set at certain percentage of after-tax profit determined in accordance with PRC accounting standards and regulations (“PRC GAAP”). Appropriation to
the statutory general reserve should be at least 10% of the after-tax net income determined in accordance with the legal requirements in the PRC until the
reserve is equal to 50% of the entities’ registered capital. The Group is not required to make appropriation to other reserve funds and the Group does not have
any intentions to make appropriations to any other reserve funds.
The general reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered
capital. Appropriations to the general reserve funds are classified in the consolidated balance sheets as statutory reserves.
There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Group does not do so.
The following table presents the balances of registered capital, additional paid-in-capital and statutory reserves of entities within the Group incorporated in
China as of December 31, 2014 and 2015 for the Group’s reporting purpose in China as determined under generally accepted accounting principles in China:
(In thousands)
Registered capital
Additional paid-in capital
Statutory reserves
Total
December 31,
2014
54,467
161
5,132
59,760
December 31,
2015
112,435
161
5,132
117,728
Relevant laws and regulations permit payments of dividends by the PRC subsidiaries and affiliated companies only out of their retained earnings, if any, as
determined in accordance with respective accounting standards and regulations. Accordingly, the above balances are not allowed to be transferred to the
Company in terms of cash dividends, loans or advances (See also Note 25).
(ee)
Dividends
Dividends are recognized when declared. No dividends were declared for the years ended December 31, 2013, 2014 and 2015, respectively. The Group does not
have any present plan to pay any dividends on common shares in the foreseeable future. The Group currently intends to retain the available funds and any future
earnings to operate and expand its business.
F- 34
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(ff)
Summary of significant accounting policies (Continued)
Recent accounting pronouncements
In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes
the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a
strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business
entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the guidance for
new disposals. The adoption of this pronouncement does not have a significant impact on our consolidated financial statements.
On May 28, 2014, the FASB and IASB issued the standard on the recognition of revenue from contracts with customers. The FASB is amending the FASB
Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition requirements
in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the amendments
supersede some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. For a public entity, the
amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early
application is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance. In August 2015,
the FASB proposed to defer the effective date of Update 2014-09 for all entities by one year, which means calendar year-end public companies are required to
apply the new guidance beginning in 2018.
In June 2014, under ASC 718, Compensation—Stock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant their
employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite
service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance
target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this
guidance is not expected to have significant impact on its consolidated financial statements.
In August 2014, the FASB issued Presentation of Financial Statements – Going Concern. This standard requires management to evaluate for each annual and
interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date
that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity
will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods
within annual periods beginning after December 15, 2016. Early application is permitted. The adoption of this pronouncement is not expected to have
significant impact on its consolidated financial statements.
On February 18, 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation (Topic 810) –Amendments to the Consolidation Analysis. The
new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money market
funds. It provide new guidance to companies in determining whether an entity is a variable interest entity (VIE), assessing fees paid to a decision maker or a
service provider, and consideration of related parties in the economics test. The standard is effective for public business entities for annual periods beginning
after December 15, 2015. This new guidance is not expected to have significant impact to the Group's existing structure.
F- 35
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(ff)
Summary of significant accounting policies (Continued)
Recent accounting pronouncements (Continued)
In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330) –Simplifying the Measurement of Inventory. The amendments
apply to inventory that is measured using the first-in, first-out (FIFO) or average cost method. The main change is in the subsequent measurement guidance
from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update. Market could be replacement cost,
net realizable value, or net realizable value less an approximately normal profit margin. An entity should measure inventory within the scope of this Update at
the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs
of completion, disposal, and transportation. The amendments in this Update are effective for public business entities for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting period. The adoption of this ASU is not expected to have significant impact to the Group’s consolidated
financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of
deferred income taxes, which require the deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-
17 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. . The Group believes that this ASU will have an
impact on the Group’s consolidated balance sheet and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
The new guidance will impact the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure
requirements for financial instruments. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses
on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities not
under the fair value option is largely unchanged. The standard is effective for public business entities for annual periods (and interim periods within those
annual periods) beginning after December 15, 2017. . The adoption of this ASU is not expected to have significant impact to the Group’s consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognise the assets and liabilities
that arise from leases. A lessee should recognise in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by
class of underlying asset not to recognise lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases
generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December
15, 2018. Early adoption is permitted. The Group is currently evaluating the impact ASU2016-02 will have on the Group consolidated balance sheet, results of
operations, cash flows and related disclosures.
On 30 March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. The amendments in ASU 2016-09 affect all entities that issue share-based payment awards to their employees and involve multiple aspects of the
F- 36
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2.
(ff)
Summary of significant accounting policies (Continued)
Recent accounting pronouncements (Continued)
accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be
recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the
reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current
period. Tax benefits should be classified along with other income tax cash flows as an operating activity. An entity can make an entity-wide accounting policy
election to either estimate the number of awards that are expected to vest (consistent with current GAAP) or account for forfeitures when they occur. Under
current GAAP, one of the requirements for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the
employer's minimum statutory withholding requirements. Under ASU 2016-09, the threshold to qualify for equity classification permits withholding up to the
maximum statutory tax rates in the applicable jurisdictions. Cash paid by an employer when directly withholding shares for tax withholding purposes should be
classified as a financing activity. For public business entities, ASU 2016-09 is effective for annual periods beginning after 15 December 2016, and interim
periods within those annual periods. The Group is currently evaluating the impact ASU2016-09 will have on the Group consolidated balance sheet, results of
operations, cash flows and related disclosures.
F- 37
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
3.
Discontinued operations
In July 2015, the Company completed the divesture of the Company’s entire stake in its online video streaming platform, Xunlei Kankan to Beijing Nesound
International Media Corp., Ltd., an independent third party. The total sales price was RMB 130,000 thousand (USD 21,183 thousand). The disposal is due to a
shift of strategy focusing on the Group’s most competitive operations.
Assets and liabilities related to Xunlei Kankan were reclassified as assets/liabilities held for sale as of December 31, 2014, while results of operations related to
Xunlei Kankan, including comparatives, were reported as loss from discontinued operations.
2013
58,213
(1,746)
56,467
(43,002)
13,465
(7,092)
(16,762)
(4,410)
(28,264)
1,020
(13,779)
—
1,207
(12,572)
2014
47,075
(1,480)
45,595
(42,704)
2,891
(6,035)
(15,726)
(3,016)
(24,777)
1,556
(20,330)
—
1,923
(18,407)
Results of the discontinued operation
USD (In thousands)
Revenues, net of rebates and discounts
Business taxes and surcharges
Net revenues
Cost of revenues
Gross profit
Operating expenses
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Net gain from exchanges of content copyrights
Operating loss
Gain on disposal of Kankan
Income taxes benefits/(expenses)
Loss from discontinued operations
Assets and liabilities of the discontinued operation
USD (In thousands)
Assets
Accounts receivable, net
Prepayments and other current assets
Copyrights related to content-current portion
Property and equipment, net
Intangible assets
Prepayment for content
Other long-term prepayments and receivables
Total assets held for sale
Liabilities
Accounts payables
Deferred revenue, current portion
Accrued liabilities and other payables
Total liabilities held for sale
Cash flows generated from/ (used in) discontinued operations
USD (In thousands)
Net cash generated from/(used in) operating activities
Net cash (used in)/generated from investing activities
Net cash used in financing activities
Net cash flow for the year
2013
10,439
(16,402)
—
(5,963)
2014
2,293
(34,661)
—
(32,368)
F- 38
2015
15,677
(447)
15,230
(13,240)
1,990
(3,245)
(7,384)
(3,051)
(13,680)
137
(11,553)
1,505
(2,048)
(12,096)
December 31,
2014
23,741
670
16,013
1,111
4,997
456
57
47,045
25,267
1,018
1,082
27,367
2015
(1,554)
9,135
—
7,581
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
3.
Discontinued operations (continued)
The disposal of the online video streaming platform was completed on 15 July 2015 and a gain of USD 1,505 thousand was recognized.
4.
Cash and cash equivalents
Cash and cash equivalents represent cash on hand, cash held at bank, and time deposits placed with banks or other financial institutions, which have original
maturities of three months or less. Cash on hand and cash held at bank balance as of December 31, 2014 and 2015 primarily consist of the following currencies:
(In thousands)
RMB
USD
HKD
Total
Amount
674,001
294,036
697
December 31, 2014
USD
equivalent
110,149
294,036
90
404,275
Amount
606,845
268,198
969
December 31, 2015
USD
equivalent
93,454
268,198
125
361,777
Time deposits with original maturities of three months or less as of December 31, 2014 and 2015 primarily consist of the following currencies:
(In thousands)
RMB
USD
Total
5.
Short-term investments
(In thousands)
Investments in financial instruments (note)
Amount
156,749
5,500
December 31, 2014
USD
equivalent
25,617
5,500
31,117
Amount
349,099
260,597
December 31, 2015
USD
equivalent
53,760
260,597
314,357
December 31,
2014
29,427
December 31,
2015
70,328
Note:
the investments were issued by commercial banks in China with a variable interest rate indexed to performance of underlying assets. Since these
investments’ maturity dates are within one year, they are classified as short-term investments.
Time deposits and investments in financial instruments are stated on the balance sheet at the principal amount plus accrued interest. Interest income is recorded
in “other income” in the statement of comprehensive income.
F- 39
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
6.
Accounts receivable, net
Continuing operations (In thousands)
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
December 31,
2014
5,311
(131)
5,180
December 31,
2015
11,392
(126)
11,266
The accounts receivable from continuing operations that was fully reserved as of December 31, 2014 and 2015 was USD 0.1 million and USD 0.1 million,
respectively.
The following table presents movement in the allowance for doubtful accounts:
(In thousands)
Balance at beginning of the year
Additions
Reversals
Write-off
Exchange difference
Balance at end of the year
December 31,
2013
—
—
—
—
—
—
December 31,
2014
—
523
(393)
1
131
December 31,
2015
131
4
—
—
(9)
126
The top 10 customers accounted for about 37% and 39% of accounts receivable as of December 31, 2014 and 2015, respectively.
7.
Prepayments and other assets
(In thousands)
Current portion:
Advance to suppliers
Interest-free loans to employees (note a)
Low-interest loans to employees, current portion (note b)
Advance to employees for business purposes
Interest receivable
Rental and other deposits
Prepayment for share repurchase plan (note c)
Prepaid game sharing costs
Prepaid professional fees
Prepaid management insurance
Receivable from Nesound (note d)
Prepayment for taxation
Others
Total of prepayments and other current assets
Non-current portion:
Prepayments for online game licenses
Long term receivable
Low-interest loans to employees, non-current portion (note b)
Total of long-term prepayments and other assets
F- 40
December 31,
2014
December 31,
2015
520
3,625
64
585
5,380
774
1,000
458
900
179
—
—
405
13,890
5,346
—
449
5,795
882
3,200
—
957
564
224
712
—
—
209
4,004
2,041
275
13,068
4,786
1,812
833
7,431
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
7.
Prepayments and other assets (Continued)
Note a: The Group had entered into loan contracts with certain employees as at December 31, 2014 and 2015, under which the Group provided interest-free
loans to these employees. The loan amounts vary amongst different employees and are repayable on demand.
Note b: The Group had entered into loan contracts with certain employees as at December 31, 2014 and 2015, under which the Group provided low-interest
loans to these employees. The loan amounts vary amongst different employees and are repayable in equal instalments on a monthly basis over the term
of 10 years.
Note c: In December 2014, the Company announced a share repurchase program to purchase up to USD 20 million shares and prepaid USD 1 million to a
security broker for this program. In December 2015, the Company announced a share repurchase program to purchase up to USD 20 million shares and
prepaid USD 0.7 million to a security broker for this program.
Note d: The Group sold Kankan to Nesound in July 2015. There is a balance receivable remaining amounted USD 4,004 thousand which would be paid to the
Group one year after the closing date.
8.
Property and equipment
Property and equipment consist of the following:
(In thousands)
Servers and network equipment
Computer equipment
Furniture, fixtures and office equipment
Motor vehicles
Leasehold improvements
Total original costs
Less: Accumulated depreciation
Construction in progress
Total
December 31,
2014
32,109
1,947
651
339
1,692
36,738
(20,330)
—
16,408
December 31,
2015
37,332
1,544
856
320
2,504
42,556
(24,534)
14
18,036
Depreciation expense recognized for the years ended December 31, 2013, 2014 and 2015 are summarized as follows:
(In thousands)
Cost of revenues
General and administrative expenses
Sales and marketing expenses
Total
December 31,
2013
4,317
690
105
5,112
December 31,
2014
5,652
715
133
6,500
December 31,
2015
5,003
628
15
5,646
No impairment loss had been recognized for the years ended December 31, 2013, 2014 and 2015.
F- 41
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
9.
Intangible assets, net
The following table presents the movement in intangible assets:
Continuing
operations
(In thousands)
Land use rights
Trademarks
Non-compete agreement
Technology (including right-to-
use)
Acquired computer software
Internal use software
development costs
Online game licenses (note a)
December 31, 2014
December 31, 2015
Cost Amortization
(253)
5,279
(167)
6,168
(252)
1,502
Impairment
—
—
—
Net book
value
5,026
6,001
1,250
Cost Amortization Impairment
—
5,123
—
5,812
—
1,415
(409)
(1,107)
(472)
2,399
1,468
716
5,304
22,836
(100)
(1,141)
(537)
(4,478)
(6,928)
—
—
—
(808)
(808)
2,299
327
179
18
15,100
2,261
619
675
5,827
21,732
(377)
(255)
(641)
(4,268)
(7,529)
—
—
—
(770)
(770)
Net book
value
4,714
4,705
943
1,884
364
34
789
13,433
Note a:
In 2013, indicator of possible impairment triggered the Group to perform an impairment test for one online game license. The impairment test was
triggered by the significant decline in the revenue generated by online game. For the quarter ended December 31, 2013, this online game only
generated revenue amounted to USD 27 thousand as compared to USD 303 thousand for the quarter ended September 30, 2013, which was
significantly lower than the Group’s expectation. The impairment test was performed using a discounted cash flow analysis that requires certain
assumptions and estimates regarding economics and future profitability. As of December 31, 2015, full provision for impairment has been provided for
this online game license.
Amortization expense recognized for the years ended December 31, 2013, 2014 and 2015 are summarized as follows:
(In thousands)
Cost of Revenue
General and administrative expenses
Research and development expenses
Total
2013
1,369
269
—
1,638
Years ended December 31
2015
693
386
1,589
2,668
2014
1,141
372
542
2,055
The estimated aggregate amortization expense for each of the next five years as of December 31, 2015 is:
(In thousands)
2016
2017
2018
2019
2020 and thereafter
Intangible assets
2,234
2,002
1,688
1,321
6,188
F- 42
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
9.
Intangible assets, net (continued)
The weighted average amortization periods of intangible assets as at December 31, 2014 and 2015 are as below:
(In year)
Copyrights related to content (i)
Land use right
Trademarks
Non-compete agreement
Technology (including right-to-use)
Acquired computer software
Internal use software development costs
Online game licenses
Domain name (i)
Total weighted average amortization periods
(i) Copyrights related to content and domain name are related to the discontinued operation.
10.
Inventories
(In thousands)
ZQB
Online shopping mall inventories (note a)
Others
Total
Note a:
online shopping mall inventories include Xiaomi TV box, gaming discs etc.
F- 43
December 31,
2014
2.78
30
7
4
8
5
5
3
5
3.97
December 31,
2015
—
30
7
4
8
5
5
3
—
11.08
December 31,
2014
—
—
—
—
December 31,
2015
92
229
159
480
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
11.
Long-term investments
(In thousands)
Equity method investments:
Balance at beginning of the year
Additions
Share of loss from equity investees
Dilution gains arising from deemed disposal of investments (ii) (iii)
Transfer to cost method investments
Exchange differences
Balance at end of the year
Cost method investments:
Balance at beginning of the year
Additions (i)
Transfer from equity method investments
Exchange difference
Less: impairment loss on long-term investments
Balance at end of the year
Total long-term investments
Details of the Group’s ownership are as follows:
Investee
Equity method investments:
Zhuhai Qianyou Technology, Co., Ltd. (“Zhuhai Qianyou”),
Guangzhou Yuechuan Network Technology, Co., Ltd. (“Guangzhou Yuechuan”) (ii)
Chengdu Diting Technology, Co., Ltd. (“Chengdu Diting”) (ii)
Cost method investments:
Shenzhen Kushiduo Network Science and Technology Co., Ltd. (“Shenzhen Kushiduo”)(i)
Shanghai Guozhi Electronic Technology Co., Ltd. (“Shanghai Guozhi”)
Guangzhou Wucai Information Technology Co., Ltd.(“Guangzhou Wucai”)
Guangzhou Hongsi Network Technology Co., Ltd.(“Guangzhou Hongsi”)
Tianjin Kunzhiyi Network Technology Co., Ltd.(“Tianjin Kunzhiyi”) (iii)
Chengdu Diting Technology, Co., Ltd. (“Chengdu Diting”) (ii)
Suzhou Heidisi network technology co., Ltd.("Suzhou Heidisi") (i)
Xiamen Diensi network technology co., Ltd.("Xiamen Diensi") (i)
Nanjing Qianyi Video information technology co., Ltd.("Nanjing Qianyi") (i)
11.2 Capital I, L.P. Ltd. ( "11.2 Capital")(i)
Cloudtropy(i)
December 31,
2014
December 31,
2015
2,785
—
(259)
449
—
(10)
2,965
164
2,359
—
10
2,533
5,498
2,965
—
(12)
702
(1,349)
(144)
2,162
2,533
6,506
1,349
(429)
(802)
9,157
11,319
Percentage of ownership of shares
as of December 31,
2015
2014
19.00%
19.13%
16.58%
10.00%
21.00%
10.00%
19.90%
19.99%
—
—
—
—
—
—
19.00%
19.13%
—
12.5%
21.00%
10.00%
19.90%
19.99%
13.27%
19.90%
15.00%
20.00%
2.24%
1.13%
(i)
In 2015, the Group made equity investments in five more unrelated privately-held companies. The shares held by the Group are not in-substance
common stock and therefore the Group accounted for these investments according to ASC 320 as equity activities using the cost method. In August
2015, the Group increased investment of USD 39 thousand to purchase 25 thousand shares of Shenzhen Kushiduo. As a result, the Group's
ownership interest in Shenzhen Kushiduo increased from 10% to 12.5%.
F- 44
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
11.
(ii)
Long-term investments (Continued)
In May of 2014, the Group obtained the right to appoint a director to Chengdu Diting and thus had one out of five seats on the board of directors of this
investee. Given the existence of significant influence, the Group started to apply equity method in May 2014 although the Group's ownership interest in
Chengdu Diting decreased from 19.9% to 16.58% because Chengdu Diting issued new shares to a third party for a total consideration of RMB 10
million (USD 1,627 thousand). In April of 2015, the new investor of Chengdu Diting injected capital of RMB 39.07 million (USD 6.39 million). As a
result of the transaction, the Group 's ownership interest in Chengdu Diting diluted from 16.58% to 13.27%. So the recognition of Chengdu Diting's
ownership for the Group transferred from equity method to cost method. The Group recorded a dilution gain of RMB 4.38 million (USD 702 thousand)
arising from the sale of shares by the investee to third parties at a price in excess of the per share carrying value of the shares owned by the Group in
2015.
(iii)
In September of 2015, Tianjin Kunzhiyi suffered from financial difficulties and lost most of its core R&D staff. As a result, new games couldn't be
promoted as committed in investment agreement with the Group. The Group recognized impairment of RMB 5 million (USD 802 thousand) for
ownership interest in Tianjin Kunzhiyi as considered necessary.
12.
Deferred revenue and income
(In thousands)
Deferred revenue
Membership subscription revenues
Online game revenues
Pay per view subscription revenues
Deferred income
Government grants
Reimbursement from the depository (i)
Total
Less: non-current portion (ii)
Deferred revenue and income, current portion
December 31,
2014
December 31,
2015
27,543
1,111
—
4,863
1,053
34,570
(6,825)
27,745
24,502
1,120
—
4,032
842
30,496
(5,383)
25,113
(i)
(ii)
In December of 2014, the Company received from its depositary a reimbursement of USD 1.2 million, net of withholding tax of USD0.3 million. This
reimbursement was recognized as deferred income and amortized over the depositary service period of 5 years.
As of December 31, 2015, the non-current portion included Membership subscription revenue of USD 719 thousand (2014: USD 1,120 th0usand),
Government grants of USD 4,032 thousand (2014: USD 4,863 thousand), and Reimbursement from the depositary of USD 632 thousand (2014: 842
thousand).
F- 45
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
13.
Accrued liabilities and other payables
(In thousands)
Payroll and welfare
Agency commissions and rebates—online advertising
Payables for advertisement on exclusive online games
Receipts in advance from customers
Tax levies
Payables for purchase of equipment
Legal and litigation related expenses (Note 24)
Professional fees
Staff reimbursements
Rental expense
Payables for proceeds from selling exercised stock options
Advance for exercise of stock options
Payables for gaming distribution
Payables to Nesound
Others
Total
14.
Cost of revenues
Cost of revenue from continuing operations(In
thousands)
Bandwidth costs
Content costs, including amortization
Payment handling fees
Depreciation of servers and other equipment
Games revenue sharing costs and others (note a)
Total
December 31,
2014
11,800
8,017
2,515
1,133
556
240
451
2,460
440
382
872
356
—
—
1,111
30,333
December 31,
2015
10,570
2,443
1,643
—
1,605
4,999
2,601
908
611
4
177
—
158
622
1,038
27,379
2013
28,174
1,061
12,097
3,801
5,125
50,258
Years ended December 31,
2014
33,545
—
11,305
5,102
5,803
55,755
2015
37,218
338
9,087
4,873
8,518
60,034
Note a: gaming revenue share costs and others mainly include gaming sharing costs and cost of ZQB.
15.
Redeemable convertible preferred shares
Series D convertible redeemable preferred shares
On January 31, 2012, the Company entered into an agreement to issue Series D preferred shares and warrants to a third-party investor for a total consideration
of USD37,500 thousand. Pursuant to the agreement, the company issued 10,580,397 series D preferred shares at USD 3.544 per share; and warrants to purchase
2,218,935 Series D preferred shares at USD 3.38 per share at the option of the holders. In addition, the third-party investor also purchased a total of 5,036,367
existing shares directly from other then existing shareholders and they were entitled to the same rights as attached to the respective classes of existing shares.
F- 46
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series D convertible redeemable preferred shares (Continued)
The key terms of the Series D preferred shares were as follows:
Dividend rights
The holders of the Series D preferred shares were entitled to participate in any dividend pari passu with common shareholders of the Company on an as-
converted basis.
Liquidation preferences
Amount shall be paid to Series D holders before any distribution or payment shall be made to the holders of Series A, Series A-1, Series B and C Preferred
Shares. If asset for distribution is insufficient to pay off Series D holders, the assets shall be distributed among the holders of Series D in proportion to the full
amounts to which they would otherwise be respectively entitled thereon on an as-converted basis.
Upon issuance of Series E preferred shares, the liquidation preference of Series D preferred shares was amended. Before any distribution or payment shall be
made to the Series A, A-1, B and C shareholders (for the purpose of this clause, such holders did not include Skyline Global Company Holdings Limited
(‘‘Skyline Holdings’’, or ‘‘Series D Investor’’), the Series D holder, who also held any Series A, A-1, B and any other Junior Securities) an amount shall be
paid with respect to each share held by Skyline Holdings equal to original issue price.
Voting rights
The holders of the Series D preferred shares shall be entitled to such number of votes equal to the whole number of common shares into which such Series D
preferred shares are convertible.
Conversion rights
Each share of the Series D preferred shares was convertible at the option of the holder, at any time after the issuance of such shares, and each share can be
converted into one common share of the Company. The conversion was subject to adjustments for certain events, including but not limited to additional equity
securities issuance, reorganization, mergers, share dividends, distribution, subdivisions, redemptions, combinations, or consolidation of common shares. The
conversion price was also subject to adjustment in the event the Company issues additional common shares at a price per share that is less than such conversion
price. In such case, the conversion price shall be reduced to adjust for dilution on a weighted average basis.
In addition, each share of the Series D preferred shares would automatically be converted into common shares of the Company (i) upon the closing of an initial
public offering of the Company’s shares or (ii) upon written notice to convert given to the Company by the holders of a majority of Series D preferred
shareholders.
F- 47
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series D convertible redeemable preferred shares (Continued)
Redemption Right
The Series D preferred shares were redeemable at any time after the 4th anniversary of the initial closing of February 6, 2012 to request the Company to
purchase all Series D preferred shares and shares issuable upon the conversion or exercise of the Series D warrants if an initial public offering is not
consummated. This redemption right expires after the 5th anniversary of the initial closing of the transaction. The redemption price shall be equal to the
aggregate amount of price paid at USD3.544, plus all declared but unpaid dividends up to the date of redemption plus interest of 8% per annum compounded
annually from the closing of the Series D preferred shares investment(“Initial Closing”) up to and including the date of redemption.
The Company had determined that the Series D preferred shares should be classified as mezzanine equity. The Series D warrant is initially measured at its fair
value and the initial carrying value for Series D preference shares is allocated on a residual basis as it was liability classified. The initial carrying value for
Series D preference shares was USD 32,481 thousand, and the related capitalized expense was USD2,012 thousand. There were no beneficial conversion
features for the Series D preferred shares.
The carrying value of the preferred shares was accreted from its carrying value on the date of issuance to the redemption value using effective interest method
from date of issuance to the earliest redemption date. The accretion was recorded against retained earnings, or in the absence of retained earnings, by charging
against additional paid-in capital. Once additional paid-in capital had been exhausted, additional charges were recorded by increasing the accumulated deficit.
The Company had determined that conversion and redemption features embedded in the Series D convertible redeemable preferred shares were not required to
be bifurcated and accounted for as a derivative.
Series D Warrants
The holder of Series D warrants had the right to exercise the warrants at the earlier of (i) 24 months from date of Initial Closing or (ii) automatically exercised
immediately prior to the closing of the following transactions: (a) mergers or consolidation of the Company, b) initial public offering, c) transaction in which in
excess of 50% of the Company’s equity is transferred to any person, d) sale, transfer, lease, assignment conveyance, exchange, mortgage, or other disposition of
all or substantially all of the assets of the Company. The warrants were not entitled to dividend rights nor to vote until the warrants were exercised and shares
became issuable. Series D warrants was classified as a liability and initially measured at their fair value at USD 3,007 thousand. As of December 31, 2013, the
fair value of Series D warrants was USD 2,186 thousand. For the year ended on December 31, 2012 and 2013, the fair value (loss) / gain recorded were USD
710 thousand and USD 1,531 thousand, respectively.
Exchange of Series D warrants and the issuance of Series E warrants
The warrants to purchase 1,952,663 and 266,272 Series D preferred shares at USD3.38 per share expired on February 6, 2014 and March 1, 2014, respectively.
On the date of the expiration, the warrant was measured at a fair value of USD2,414 thousand. It was agreed that upon issuance of the Series E preferred shares
on March 5, 2014, the Company would issue to the Series D investor warrants to purchase 3,406,824 Series E preferred shares with an exercise price of
USD2.82. These warrants are exercisable at the option of the holder, at any time, no later than the earlier of (1) the pricing date of the initial public offering of
the Company or (2) March 1, 2015. As the warrants were exercised into mezzanine equity, the warrants are classified as a liability and were initially measured
at a fair value of USD2,819 thousand.
F- 48
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series D convertible redeemable preferred shares (Continued)
Exchange of Series D warrants and the issuance of Series E warrants (Continued)
The exchange of the Series D warrants and the issuance of the Series E warrants were considered to be a related transaction and are accounted for as a single
transaction because the holder was willing to allow the Series D warrants to expire in contemplation that they would be issued Series E warrants. A loss of
USD405 thousand, which was the difference in value of the Series D warrants on the expiration date and the value of the Series E warrants on the issuance date
was charged to the income statement in quarter one of 2014.
The fair value of the Series D warrants and the Series E warrants was estimated by the Company with the assistance of an independent valuation firm based on
the Company’s estimates and assumptions. The valuation report provided the Group with guidelines in determining the fair value, but the determination was
made by the Group. The Group applied the Black-Scholes Option Pricing Model to calculate the fair value of the Series D warrant on the valuation date.
The major assumptions used in calculating the fair value of the Series D warrants include:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
December 31,
2013
4.36
0.05%
30.33%
—
February 6,
2014
4.47
0%*
0%*
—
*
Given that the maturity date of Series D warrant was February 6, 2014, the volatility rate and risk-free interest rate did not affect the valuation of the
warrant on February 6, 2014.
The major assumptions used in calculating the fair value of the Series E warrants include:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5,
2014
3.31 - 4.65
0.04% - 0.12%
38.39% - 38.81%
—
(1)
(2)
(3)
(4)
Spot price – based on the fair value of 100 percent equity interest of the Company which was allocated to preferred shares and common shares of the
Company as at the valuation date under different scenarios. For the valuation on March 5, 2014 and March 31, 2014, the probability of the occurrence
of an IPO is assumed to be 80%, the probability of the occurrence of a liquidation event is assumed to be 10% and the probability of the occurrence of a
redemption event is assumed to be 10%
Risk-free interest rate – based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
Volatility – based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
The Company has no history or expectation of paying dividends on its common shares.
F- 49
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series D convertible redeemable preferred shares (Continued)
Exchange of Series D warrants and the issuance of Series E warrants (Continued)
Triggering of the anti-dilution clause
Upon issuance of Series E preferred shares in March and April 2014, the Company adjusted the Series D conversion price from USD3.5 to USD2.86 per share
for 6,771,454 Series D preferred shares held by the Series D Investor. The Company concluded that the downward conversion price adjustment is in accordance
with the anti-dilution clause in the original Series D financing agreement. As a result of this anti-dilution, the Company would issue a total of 8,391,850
common shares on a fully-converted basis of the original 6,771,454 Series D preferred shares when the conversion right is exercised by the holder. The
downward adjustment of the conversion price did not contain a contingent beneficial conversion feature.
For the remaining 3,808,943 Series D preferred shares held by the Series D Investor, the Series D investor agreed to waive the anti-dilution clause as the Series
D Investor has planned to sell these shares to the Company upon the issuance of Series E preferred shares in March 2014. The waiver of this anti-dilution clause
was accounted for as a modification of the terms of the Series D preferred shares. However, it was determined that the incremental value contributed by the
Series D Investor was deemed to be a transfer of value between the preferred shareholders because 1) the change in value of the common shares before and after
the modification was deemed to be negligible and 2) the modification of the Series D preferred shares were also made concurrent with the sale of the Series E
preferred shares. The Company concluded that this was evidence to suggest that most of the value was transferred from the Series D preferred shareholder to the
other existing preferred shareholders. Therefore, no accounting charge was recorded.
Upon the completion of the IPO on 24 June 2014, the Company adjusted the Series D conversion price from USD2.86 to USD2.27 per share relating to
6,771,454 Series D preferred shares held by the Series D Investor. The Company concluded that the downward conversion price adjustment is in accordance
with the anti-dilution clause in the latest shareholders agreement. As a result of this anti-dilution, the Company would issue a total of 10,581,726 common
shares on a fully-converted basis of the original 6,771,454 Series D preferred shares when the conversion right is exercised by the holder. At the time of this
anti-dilution, the Series D preferred shares anti-diluted contained a beneficial conversion feature of USD4,008 thousand as a deemed dividend to Series D
Investor and charged against retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
Modification of redemption rights
Upon issuance of the Series E preferred shares in March 2014, the Company amended the redemption rights of 6,771,454 Series D preferred shares. The Series
D investor shall have the right to request the Company to purchase its shares after February 28, 2017 but no later than February 28, 2018. Prior to the
modification, the holder had the right to request the Company to purchase its shares after February 6, 2016 but no later than February 6, 2017. The amendment
of the redemption date was accounted for as modification of the terms of Series D preferred shares. The incremental value received by the Series D preferred
shareholder amounted to USD279 thousand and was deemed to be a transfer of value between the preferred shareholder and common shareholders and the
amount was charged to retained earnings.
In determining the accounting for the modification of the Series D preferred shares, the Company estimated the valuation of the Series D preferred shares with
the assistance of an independent valuation firm based on the Company’s estimates and assumptions. Option-pricing method was used to allocate enterprise
value to preferred and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, ‘‘Valuation of Privately-
Held Company Equity Securities Issued as Compensation’’. The method treats common stock and preferred stock as call options on the enterprise’s value, with
exercise prices determined based on the liquidation preference of the preferred stock. The option-pricing method involves making estimates of the anticipated
timing of a potential liquidity event, such as a sale of the Company or an initial public offering, and estimates of the volatility of the Company’s equity
securities.
F- 50
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series D convertible redeemable preferred shares (Continued)
Modification of redemption rights (Continued)
The anticipated timing was based on the plans of management. Estimating the volatility of the share price of a privately held company was complex because
there is no readily available market for the shares. The Company estimated the volatility of its shares to range from 38.39% to 43.40% based on the historical
volatility of comparable publicly traded shares of companies engaged in similar lines of business.
Modification of liquidation rights
Upon issuance of the Series E preferred shares, the Company amended the liquidation rights of Skyline Holdings’ common shares, Series A preferred shares,
Series A-1 preferred shares, and Series B preferred shares (collectively, the ‘‘Series D Investor Shares’’). As a result of this amendment, the Series D Investor
Shares had priority to receive proceeds from the Company upon liquidation over the common shares, Series A preferred shares, Series A-1 preferred shares,
Series B preferred shares and Series C preferred shares held by other investors. This right given to the Skyline Holdings was non-transferable to a third party.
The amendment of the liquidation rights was accounted for as modification of the terms of Series D Investor Shares. However, the incremental value received
by Skyline Holdings is deemed to be negligible. No accounting charge was recorded by the Company. Similar to the modification of the Series D preferred
shares as stated above, the fair value of the Series D preferred shares was estimated by the Company with the assistance of an independent valuation firm based
on the Company’s estimates and assumptions. The Option-pricing method as described above, was also used to account for this modification. The Company
estimated the volatility of its shares to range from 38.39% to 43.40% based on the historical volatility of comparable publicly traded shares of companies
engaged in similar lines of business.
The Group had determined that there was no beneficial conversion feature attributable to the Series D preferred shares because the initial and adjusted effective
conversion prices of these preferred shares were higher than the fair value of the Company’s common shares determined by the Group with the assistance from
an independent valuation firm.
Initial public offering
Upon the completion of the IPO on 24 June 2014, the Series D Investor did not exercise Series E warrants, and the fair value of Series E warrants was nil. The
fair value gain of USD2,922 thousand was recorded for the year ended December 31, 2014 as other income. As a result, 10,581,726 common shares were
issued, and the balance of Series D preferred shares was transferred to common shares and additional paid-in capital on that date.
Beginning balance
Deemed dividend to Series D shareholder from its modification
Accretion of Series D to convertible redeemable preferred shares redemption value
Repurchase of preferred shares
Deemed dividend to preferred shareholders upon IPO
Converted to common shares upon IPO
Ending balance
F- 51
Years ended
December
31,2013
35,990
—
4,300
—
—
—
40,290
Years ended
December
31,2014
40,290
279
1,870
(15,003)
4,008
(31,444)
—
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares
On March 5, 2014, the Company entered into an agreement to issue Series E preferred shares (the ‘‘Series E Tranche 1 Preferred Shares’’) and warrants to a
third-party investor (‘‘Series E Tranche 1 Investor’’) for a total consideration of USD 200 million. Pursuant to the agreement, the Company issued 70,975,491
Series E Tranche 1 Preferred Shares at USD 2.82 per share; and warrants to purchase 17,743,873 Series E preferred shares at USD 2.82 per share at the option
of the holders. In addition, within 3 months after the closing, the Series E Tranche 1 Investor shall have the right (‘‘Subscription Rights’’) to purchase, or
designate any other person/party to purchase from the Company an additional 35,487,746 Series E preferred shares, at a price equal to USD 2.82 per share.
The key terms of the Series E preferred shares were as follows:
Dividend rights
The holders of the Series E preferred shares were entitled to participate in any dividend pari passu with common shareholders of the Company on an as-
converted basis.
Liquidation preferences
Before any distribution or payment shall be made to the holders of Series A, Series A-1, Series B, Series C and D preferred shares, an amount shall be paid to
Series E holders with respect to each Series E preferred share held by the Series E holder equal to 100% of the applicable original issue price.
Voting rights
The holders of the Series E preferred shares shall be entitled to such number of votes equal to the whole number of common shares into which such Series E
preferred shares are convertible.
Conversion rights
Each of the Series E preferred shares was convertible at the option of the holder, at any time after the issuance of such shares, and each share could be converted
into one common share of the Company. The conversion was subject to adjustments for certain events, including but not limited to additional equity securities
issuance, reorganization, mergers, share dividends, distribution, subdivisions, redemptions, combinations, or consolidation of common shares. The conversion
price was also subject to adjustment in the event the Company issues additional common shares at a price per share that was less than such conversion price. In
such case, the conversion price shall be reduced to adjust for dilution on a weighted average basis.
In addition, each of the Series E preferred shares would automatically be converted into common shares of the Company (i) upon the closing of an initial public
offering of the Company’s shares or (ii) upon written notice to convert given to the Company by the holders of a majority of Series E preferred shareholders.
F- 52
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares (Continued)
Redemption right
The Series E preferred shares were redeemable at the option of the investor any time after March 1, 2018 but not later than March 1, 2019.
The redemption price shall be equal to the aggregate amount of price paid per such share pursuant to the share purchase agreement (i.e. USD 2.82), plus interest
on the original issue price applicable to each Series E convertible redeemable preferred share at a rate of 15% per annum compounded annually from the
issuance date up to and including the date of redemption, plus all declared but unpaid dividends and distributions on any such Shares; If the Company did not
have sufficient funds to redeem all of the redeemable shares, the Company shall redeem a pro rata portion of each holder’s redeemable shares out of funds
legally available; and redeem the remaining shares as soon as practically after the Company had funds legally available therefor.
The Company had determined that the Series E preferred shares should be classified as mezzanine equity in the unaudited condensed consolidated balance
sheets because the preferred shares are only contingently redeemable by the holder four years after the issuance date. The carrying value of the preferred shares
is accreted from its carrying value on the date of issuance to the redemption value using the effective interest method from date of issuance to the earliest
redemption date. The accretion was recorded against retained earnings, or in the absence of retained earnings, by charging against additional paid-in capital.
Once additional paid-in capital has been exhausted, additional charges should be recorded by increasing the accumulated deficit.
The Company assessed beneficial conversion feature attributable to the Series E Tranche 1 Preferred Shares and determined that there was a beneficial
conversion feature with an amount of USD52,377 thousand, which was bifurcated from the carrying value of Series E Tranche 1 Preferred Shares as a
contribution to additional paid-in capital upon issuance of Series E Tranche 1 Preferred Shares. The discount of USD52,377 thousand resulting from the
recognition of the beneficial conversion feature were amortized from the date of the issuance to the first redemption date of the Series E Tranche 1 Preferred
Shares as a deemed dividend to preferred shareholders and charged against retained earnings, and in the absence of retained earnings, a charge to additional
paid-in capital. The beneficial conversion feature is calculated based on the difference between an adjusted conversion price of USD2.31 and the Company’s
common share fair value of USD3.05 multiplied by the number of shares into which the preferred shares are convertible into. The conversion price was adjusted
from USD2.82 to USD2.31 principally because liability classified instruments, such as the warrants and the subscription rights (see below for further
information) were issued with the Series E Tranche 1 Preferred Shares. Since the warrants and the subscription rights are classified as liability, the sales
proceeds are first allocated to the warrants and the subscription rights’ full fair value (not relative fair value) and the residual amount of the sales process is
allocated to the Series E Tranche 1 Preferred Shares to calculate the beneficial conversion feature.
(In thousands)
Beginning balance
Addition
Exercise of Series E subsequent sale rights
BCF upon Series E
Amortisation of BCF of Series E
Accretion of Series E to convertible redeemable preferred shares redemption value
Acceleration of amortization of BCF of Series E upon IPO
Deemed dividend to preferred shareholders upon IPO
Converted to common shares upon IPO
Ending balance
F- 53
December 31,
2015
—
275,314
28,568
(53,486)
4,139
12,754
49,346
27,396
(344,031)
—
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares (Continued)
Exchange of Series E Tranche 1 Investor options for transfer restrictions
As part of the issuance of the Series E Tranche 1 Preferred Shares, the Series E Tranche 1 Investor and the Company’s founders (who are also employees) and
two employees (collectively the ‘‘Grantees’’) of the Company agreed that (i) Series E Tranche 1 Investor will grant to the Grantees the right to purchase certain
number of restricted shares of the Series E Tranche 1 Investor’s own shares with a total subscription consideration of not more than USD20 million at a
subscription price subscription price per share that reflects the valuation of the Series E Tranche 1 Investor being USD10 billion (the ‘‘Series E Tranche 1
Investor Options’’); and (ii) the Grantees agreed to impose a transfer restriction (the ‘‘Transfer Restrictions’’) on 39,934,162 common shares, 3,394,564
unvested restricted shares, 180,000 unvested options and 180,000 vested options (the ‘‘Shares’’) owned by the Grantees. The Transfer Restrictions prohibit the
Grantees from transferring their shares to another person/party until April 24, 2018 or April 24, 2019 as appropriate without the prior written consent of the
holders of at least 75% of the Series E Tranche 1 Preferred Shares holders The Series E Tranche 1 Investor Options and the Transfer Restrictions are not tied to
the Grantees’ future employment with the Company.
The value of the Transfer Restrictions was determined to be significantly greater than the value of Series E Tranche 1 Investor Options. In determining the value
of the Transfer Restrictions, the Company was assisted by an independent valuation firm based on data provided by the Company. The valuation of the Transfer
Restrictions is estimated to be USD43.3 million (refer to the valuation methodology below). For the valuation of the Series E Tranche 1 Investor Options, the
Company was only able to obtain limited financial information from the Series E Tranche 1 Investor, a private company, to perform a valuation analysis. This
information includes high level 2013 revenue data and information of a third party investment transaction that valued the Series E Tranche 1 Investor at USD10
billion in August of 2013. Given the lack of financial information, the Company is unable to determine a more precise estimate of the fair value of the Series E
Tranche 1 Investor Options on the exchange date. If the fair value of the Series E Tranche 1 Investor Options were worth USD43.3 million, the estimated value
of the Transfer Restrictions, the Series E Tranche 1 Investor itself would need to be estimated at a valuation in excess of USD30 billion on March 5, 2014. The
Company does not expect the valuation of the Series E Tranche 1 Investor to increase by 200% from USD 10 billion in August 2013 to USD 30 billion in March
2014. Hence, no incremental benefit was given to the Grantees and no compensation expense was recognized.
To determine the fair value of the Transfer Restrictions, the Company valued the common shares with the Transfer Restrictions and compared this value to the
value of the common shares without the restriction. The difference was determined to be the value of the Transfer Restrictions. A put option pricing model was
used to determine the discount to be applied to the common shares to arrive at the value of common shares with the Transfer Restrictions. Pursuant to that
model, the Company used the cost of a put option, which can be used to hedge the price change before a share subject to transfer restriction can be sold, as the
basis to determine the discount for transfer restrictions. A put option was used because it incorporates certain company-specific factors, including timing of the
expected initial public offering or duration of the Transfer Restriction and the volatility of the share price companies engaged in the same industry.
Series E Warrants
The Series E warrants (‘‘Series E warrants’’) granted to the Series E Tranche 1 Investor is exercisable at the option of the Series E Tranche 1 Investor, at any
time, on or after January 1, 2015 and no later than March 1, 2015. The warrants are not exercisable if the Company has completed the initial public offering in
the United States by December 31, 2014. The exercise price shall be adjusted from time to time as provided below: proportionate adjustment for issuance of
additional common shares, share split and combination, dividend and distributions, reclassification, reorganization, merger, and consolidations.
F- 54
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares (Continued)
Series E Warrants (Continued)
The warrants are not entitled to dividend rights nor to vote until the warrants are exercised and shares become issuable. The Series E warrants are initially
measured at its fair value and the initial carrying value for Series E Tranche 1 Preferred Shares is allocated on a residual basis as the warrant is liability
classified. The Series E warrants are initially measured at their fair value of USD 6,477 thousand.
The fair value of the Series E warrants were estimated by the Company with the assistance from an independent valuation firm based on data provided by the
Company. The valuation report provided by the Company with guidelines in determining the fair value, but the determination was made by the Company. The
Company applied the Black-Scholes Option Pricing Model to calculate the fair value of the Series E warrants on the valuation date.
The major assumptions used in calculating the fair value of the Series E warrants include:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5,
2014
4.50 - 4.65
0.12%
38.81%
—
(1)
(2)
(3)
(4)
Spot price – based on the fair value of 100 percent equity interest of the Company which is allocated to preferred shares and common shares of the
Company as at the valuation date under different scenarios. The probability of the occurrence of an IPO is assumed to be 80%, the probability of the
occurrence of a liquidation event is assumed to be 10% and the probability of the occurrence of a redemption event is assumed to be 10%.
Risk-free interest rate – based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
Volatility – based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
The Company has no history or expectation of paying dividends on its common shares.
Subscription Rights
Within 3 months after March 5, 2014, the Series E Tranche 1 Investor shall have Subscription Rights to purchase, or designate any other person/party to
purchase from the Company an additional number of 35,487,746 Series E preferred shares, at a price equal to the purchase price per share (USD 2.82) of the
Series E issuance. The exercise price shall be adjusted from time to time as provided below: proportionate adjustment for issuance of additional common shares,
share split and combination, dividend and distributions, reclassification, reorganization, merger, and consolidations. The Subscription Rights are not entitled to
dividend rights nor to vote until the Subscription Rights have been exercised and shares are issuable.
On April 24, 2014, two of the three Series E Tranche 2 Investors exercised the Subscription Rights assigned to them by the Series E Tranche 1 Investor to
purchase USD100 million while the third Series E Tranche 2 investor purchased the remaining USD10 million. Upon the exercise of the Subscription Rights,
the fair value of the warrant liability of USD 29,223 thousand was derecognized and credited to carrying amount of the Series E Tranche 2 Preferred Shares.
F- 55
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares (Continued)
Subscription Rights (Continued)
The fair value of the Subscription Rights was estimated by the Company with the assistance from an independent valuation firm based on data provided by the
Company. The valuation report provided by the Company with guidelines in determining the fair value, but the determination was made by the Company. The
Company applied the Black-Scholes Option Pricing Model to calculate the fair value of the Subscription Rights on the valuation date. The Subscription Rights
are initially measured at their fair value of USD 28,208 thousand. As of April 24, 2014, the fair value of Subscription Rights was USD 29,223 thousand.
The major assumptions used in calculating the fair value of the Subscription Rights include:
Spot price(1)
Risk-free interest rate(2)
Volatility rate(3)
Dividend yield(4)
March 5,
2014
3.31 - 4.65
0.04%
38.12%
—
April 24,
2014
3.39 - 4.64
0.02%
42.74%
—
(1)
(2)
(3)
(4)
Spot price – based on the fair value of 100 percent equity interest of the Company which is allocated to preferred shares and common shares of the
Company as at the valuation date under different scenarios. The probability of the occurrence of an IPO is assumed to be 80%, the probability of the
occurrence of a liquidation event is assumed to be 10% and the probability of the occurrence of a redemption event is assumed to be 10%.
Risk-free interest rate – based on the US Treasury Bond & Notes BFV curve from Bloomberg as at the valuation date.
Volatility – based on the average historical volatility of the comparable companies from Bloomberg as at the valuation date.
The Company has no history or expectation of paying dividends on its common shares.
Issuance of Series E Tranche 2 Preferred Shares
On April 24, 2014, the Company issued Series E convertible redeemable preferred shares (the ‘‘Series E Tranche 2 Preferred Shares’’) to three investors (the
‘‘Series E Tranche 2 Investors’’) to subscribe 39,037,382 Series E Tranche 2 Preferred Shares for a total consideration of USD110 million.
The Company assessed the beneficial conversion feature attributable to the Series E Tranche 2 Preferred Shares and determined that there was a beneficial
conversion feature with an amount of USD1,109 thousand for the Series E Tranche 2 Preferred Shares of USD10 million issued to one investor. For the
remaining Series E Tranche 2 Preferred Shares of USD100 million issued to another two investors, there was no beneficial conversion feature attributable to
them.
F- 56
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
15.
Redeemable convertible preferred shares (Continued)
Series E convertible redeemable preferred shares (Continued)
Initial public offering
Upon the completion of the IPO on 24 June 2014, the Company adjusted the Series E conversion price from USD2.82 to USD2.4 per share relating to
110,014,440 Series E preferred shares held by the Series E investors. The Company concluded that the downward conversion price adjustment is in accordance
with the anti-dilution clause in the latest shareholders agreement. As a result of this anti-dilution, the Company issued a total of 129,166,667 common shares on
a fully-converted basis when the conversion right is exercised by the Series E shareholders. The triggering of the anti-dilution clause resulted in a beneficial
conversion feature amounted to USD 27,396 thousand which was charged to retained earnings in 2014 as a deemed dividend to Series E shareholders. And the
unamortized beneficial conversion features of Series E preferred shares of USD49,346 thousand were recognized upon the completion of the IPO as a deemed
dividend to Series E investors and charged against retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
Upon the completion of the IPO on 24 June 2014, the Series E warrants are not exercisable in future. As a result, the fair value of Series E warrants liability of
USD6,381 thousand was derecognized and the related fair value gain was recognized as other income.
16.
Convertible preferred shares
The key terms of the Series A, Series A-1, Series B and Series C preferred shares are as follows:
Dividend rights
The holders of the Series A, Series A-1, Series B and Series C preferred shares are entitled to participate in any dividend pari passu with common shareholders
of the Company on an as-converted basis.
Liquidation preferences
In the event of a liquidation, dissolution or winding up of the Company, available assets and funds of the Company are distributed to the holders of the preferred
shares in order of 1) Series C and Series B which are grouped as one class for the purpose of liquidation preference, 2) Series A-1 and then 3) Series A, at their
respective original issuance price per share plus any declared but unpaid dividends adjusted for share splits, share dividends, recapitalizations, and other
adjustments. In the event that available assets and funds are insufficient to permit payment to the holders of the less senior class of preferred shares, the assets
and funds will be distributed ratably to that class of preferred shareholders based on their proportional share ownership. After the distribution to the holders of
Series C and Series B, Series A-1, Series A preferred shares and common shares are made, any remaining legally available assets and funds shall be distributed
to the holders of common shares and Series C and Series B, Series A-1 and Series A preferred shares pro rata on an as-converted basis.
In addition, the following events are deemed liquidation events in which case any proceeds derived from such deemed liquidation events will be distributed in
the order discussed above. If no proceeds are derived from such deemed liquidation events, the Series B preferred shareholders shall have the right to require the
Company to repurchase all or any of the outstanding Series B preferred shares at the original issue price.
F- 57
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
16.
Convertible preferred shares (Continued)
Liquidation preferences (Continued)
1)
2)
3)
Any consolidation or merger of the Company or other corporate reorganization, in which the shareholders of Company own less than a majority of the
voting power of the Company or surviving company, after such consolidation, merger or reorganization
A sale of other disposition of all or substantially all of the assets of the Company or the Group
A transfer or an exclusive licensing of all or substantially all of the intellectual property of the Company
However, all liquidation events or deemed liquidation event have to be approved by a special resolution passed by a duly convened general meeting of the
Company, which require presence of a representative from the common shareholders, a representative from Series A-1 preferred shareholders and a
representative from Series B preferred shareholders. Accordingly, the Company determined that the deemed liquidation events are within the control of the
Company and the Series B preferred shareholders do not have control of the Company. Therefore, the deemed liquidation events do not preclude the Series B
preferred shares from being classified within permanent equity.
Voting rights
The holders of the Series A, Series A-1, Series B and Series C preferred shares shall be entitled to such number of votes equal to the whole number of common
shares into which such Series A, Series A-1, Series B and Series C preferred shares are convertible.
Conversion rights
Each share of the Series A, Series A-1, Series B and Series C preferred shares is convertible at the option of the holder, at any time after the issuance of such
shares, and each share can be converted into one common share of the Company. In addition, each share of the Series A, Series A-1, Series B and Series C
preferred shares would automatically be converted into common shares of the Company upon (i) an underwritten public offering of the company’s shares on
major stock exchanges, including Nasdaq Global Market that results in proceeds to the Company of at least USD 50 million (“QIPO”) or (ii) upon written notice
to convert given to the Company by the holders of a majority of such class or series of preferred shares in issue, in each case voting as a separate class on an as
converted basis, as applicable.
At the time of issuance, the Series A preferred shares issued to one of the shareholders in 2005 contained a beneficial conversion feature of USD 54 thousand
and the amount was charged to retained earnings in 2005 as a deemed dividend.
At the time of anti-dilution, the Series C preferred shares anti-diluted in 2012 contained a beneficial conversion feature of USD 286 thousand and the amount
was charged to retained earnings in 2012 as a deemed dividend. There were no beneficial conversion features for the other issuance.
In April, 2011, the Company removed the USD 50 million threshold from the definition of QIPO. The removal of the threshold is not expected to have a
significant impact to the financial statements of the Company.
None of the preferred shares are redeemable at the holders’ option.
F- 58
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
16.
Convertible preferred shares (Continued)
Modification in 2012
Upon issuance of Series D preferred shares in January 2012 as discussed in note 13, the Company adjusted the Series C conversion price from USD5.24 to
USD4.14 per share; and obtained an exclusive option to purchase at any time within 12 months after the date of the conversion for all, but not less than all, of
Series C preferred shares at the purchase price of USD4.607 per common share. The Series C conversion price could be adjusted for any share dividends, sub-
division and consolidation, and unpaid dividend. As a result of this modification, the Company would issue a total of 7,248,293 common shares on a fully-
converted basis of the original 5,728,264 Series C preferred shares when the conversion right is exercised by the holder. Other terms of the Series C preferred
shares including the original liquidation rights remained unchanged.
The Company concluded that the downward conversion price adjustment from USD 5.24 to USD 5.13 is in accordance with the anti-dilution clause in the
original Series C financing agreement. The incremental downward price adjustment from USD 5.13 to USD 4.14 and the right to an exclusive purchase option
are accounted for as modifications of the terms of Series C preferred shares. The incremental value contributed by the Series C preferred shareholder amounted
to USD 2,905 thousand and was deemed to be a wealth transfer between the preferred shareholder and common shareholders and the amount was charged to
additional paid-in capital.
In determining the accounting for the modification of the Series C preferred shares, the Group also relied on, in part, a valuation report retrospectively prepared
by an independent valuer based on data provided by the Group. The valuation report provided the Group with guidelines in determining the fair value, but the
determination was made by the Group. Option-pricing method was used to allocate enterprise value to preferred and ordinary shares, taking into account the
guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation”. The
method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices determined based on the liquidation preference of
the preferred stock.
The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of the Company or an initial public
offering, and estimates of the volatility of the Group’s equity securities. The anticipated timing is based on the plans of management. Estimating the volatility of
the share price of a privately held company is complex because there is no readily available market for the shares. The Group estimated the volatility of its
shares to range from 55.36% to 59.91% based on the historical volatility of comparable publicly traded shares of companies engaged in similar lines of business.
Modification in 2014
In January of 2014, the Company modified the anti-dilution terms relating to 5,613,699 Series C preferred shares held by one investor (‘‘Series C Investor 1’’).
The modification effectively amended the anti-dilution triggering price from USD4.14 to USD2.81 per share. The incremental downward trigger price
adjustment from USD 4.14 to USD 2.81 is accounted for as modifications of the terms of Series C preferred shares. The incremental value contributed by the
Series C preferred shareholder was deemed to be a transfer of value between the preferred shareholders because the change in the value of the common shares
before and after the modification was deemed to be negligible. The Company concluded that this was evidence to suggest that most of the value was transferred
from this Series C preferred shareholder to the other existing preferred shareholders. No accounting charge was recorded by the Company.
F- 59
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
16.
Convertible preferred shares (Continued)
Triggering of the anti-dilution clause
Upon issuance of Series E preferred shares in March and April 2014, the Company adjusted the Series C conversion price from USD4.14 to USD3.64 and from
USD3.64 to USD3.63 per share relating to 114,565 Series C preferred shares held by one investor (‘‘Series C Investor 2’’), respectively. The Company
concluded that the downward conversion price adjustment is in accordance with the anti-dilution clause in the original Series C financing agreement. As a result
of this anti-dilution, the Company would issue a total of 165,236 common shares on a fully-converted basis of the original 114,565 Series C preferred shares
when the conversion right is exercised by the holder. At the time of this anti-dilution, the Series C preferred shares anti-diluted in 2014 contained a beneficial
conversion feature of USD 58 thousand and the amount was charged to retained earnings in 2014 as a deemed dividend. The issuance of the Series E Tranche 1
Preferred Shares did not triggered the anti-dilution term of Series C Investor 1 as their shares were modified as described above.
Upon the completion of the IPO on 24 June 2014, the Company adjusted the Series C conversion price from USD4.14 to USD3.89 and from USD3.63 to
USD3.45 per share relating to 5,613,699 Series C preferred shares held by Series C Investor 1 and 114,565 Series C preferred shares held by Series C Investor
2, respectively. The Company concluded that the downward conversion price adjustment is in accordance with the anti-dilution clause in the latest shareholders
agreement. As a result of this anti-dilution, the Company issued a total of 7,724,419 common shares on a fully-converted basis when the conversion right is
exercised by the Series C shareholders. The triggering of the anti-dilution clause resulted in a beneficial conversion feature amounted to USD 1,403 thousand as
a deemed dividend to Series C shareholders and charged against retained earnings, and in the absence of retained earnings, a charge to additional paid-in capital.
As a result, 96,024,567 common shares were issued, and the balance of Series A, Series A-1, Series B and Series C preferred shares was transferred to common
shares and additional paid-in capital on the same date.
17.
Common shares
The Company’s Memorandum and Articles of Association authorizes the Company to issue 1,000,000,000 shares of USD0.00025 par value per common share
as of December 31, 2015. Each common share is entitled to one vote. The holders of common shares are also entitled to receive dividends whenever funds are
legally available and when declared by the Board of Directors, which is subject to the approval by the holders of the common shares representing a majority of
the aggregate voting power of all outstanding shares. As of December 31, 2014 and 2015, there were 327,611,487 and 339,319,115 common shares outstanding,
respectively.
18.
Repurchase of shares
The following table is a summary of the shares repurchased by the Company during 2015 under the Repurchase Program. No shares were repurchased during
2015 except during the month indicated and all shares were purchased through privately negotiated transactions as a mean of exercising share options from
Xunlei’s employees pursuant to the Repurchase Program (in thousands, except per share and per ADS amounts):
F- 60
18.
Repurchase of shares (continued)
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Periods
March 12 – March 31 (note a)
April 7 – April 7
September 29 – September 30
December 18 – December 30
Total
Total Number of
ADS Purchased
192,803
1,000
2,940
16,876
213,619
Average Price Paid
Per ADS
6.44
6.65
7.13
6.94
—
Total Number of
ADSs Purchased as
Part of the Publicly
Announced Plan
192,803
1,000
2,940
16,876
213,619
Approximate
Dollar Value of
ADSs that May Yet
Be Purchased
Under the Plan
(note b)
2,814,715
2,813,715
2,810,775
2,793,899
2,793,899
Note a
In December 2014, our board of directors authorized a share repurchase program, or the Repurchase Program, whereby our company may
repurchase up to US$20 million of our common shares or ADSs from December 22, 2014 to December 31, 2015. The share repurchases may
be made in accordance with applicable laws and regulations through open market transactions, privately negotiated transactions or other
legally permissible means as determined by our management, including through Rule 10b5-1 share repurchase plans. We publicly announced
the Repurchase Program on December 22, 2014.
Note b
Due to the expiration of the Repurchase Program, such amount is no longer available for repurchase after December 31, 2015.
Note c
In January 2016, our board of directors authorized a second share repurchase program, whereby our company may repurchase up to US$20
million of our common shares or ADSs from January 27, 2016 to December 31, 2016 through the same means as the Repurchase Program.
19.
Non-controlling interest
Non-controlling interest includes the interest owned by a shareholder of the Company in a subsidiary of the consolidated VIE.
In February 2010, Shenzhen Xunlei set up a new subsidiary named Xunlei Games Development (Shenzhen) Co., Ltd (“Xunlei Games”) and holds 70% of its
equity interest. A shareholder of the Company contributed RMB 3,000 thousand (equivalent to USD439 thousand) and holds 30% equity interest in Xunlei
Games, which was accounted for as a non-controlling interest of the Group.
F- 61
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20.
Share-based compensation
2010 share incentive plan
During the years presented, the Company granted share options to employees, officers and directors of the Group.
These options were granted with exercise prices denominated in the USD, which is the functional currency of the Company. The maximum term of any issued
stock option is seven or ten years from the grant date. Stock options granted to employees and officers vest over a four-year schedule as stated below:
(1)
(2)
One-fourth of the options shall be vested upon the first anniversary of the grant date;
The remaining three quarters of the options shall be vested on monthly basis over the next thirty-six months. (1/48 of options shall be vested per month
subsequently)
Stock options granted to directors were subject to a vesting schedule of approximately 32 months.
All share-based payments to employees are measured based on their grant-date fair values. Compensation expense is recognized on a straight-line basis over the
requisite service period.
In December 2010, the Group adopted a share incentive plan, which is referred to as the 2010 Share Option Plan (“the 2010 Plan”). The purpose of the plan is to
attract and retain the best available personnel by linking the personal interests of the members of the board, employees, and consultants to the success of the
Group’s business and by providing such individuals with an incentive for outstanding performance to generate superior returns for our shareholders. Under the
2010 Plan, the maximum number of shares in respect of which options, restricted shares, or restricted share units may be granted is 26,822,828 shares
(excluding the share options previously granted to the directors who are the founders of the Company). The amount of shares available for such grants as of
December 31, 2015 is 5,847,465.
On June 11, 2014, our board of directors decided to extended the contractual life for certain vested share options to June 11, 2015, because the maturity date of
these options was from June to December in 2014, whereas, the lock-up period for the shares was 6 months from the IPO closing date, i.e. June 24, 2014, which
would result in the expiration of these options before the exercise. The incremental share-based compensation of USD768 thousand is recognized at the time of
modification.
In the business combination of personal cloud storage business completed on September 5, 2014, the Group granted share options under the 2010 Plan to
replace the unvested awards owned by the employees who are transferred to the Group, the portion of the fair-value-based measure of the replacement award
attribute to pre-combination service of USD 303 thousand was allocated to the consideration, while the portion attribute to post-combination service of USD44
thousand was recorded as share based compensation expense over the remaining vesting period.
On December 1, 2014, our board of directors approved the conversion of certain vested and unvested share options with relatively high exercise price into
restricted shares. In this conversion, 3,776,711 share options were cancelled and 1,505,787 restricted shares were granted. The incremental share-based
compensation of USD 2,214 thousand is recorded over the remaining vesting period of 2 to 4.5 years.
In November 2014, the Company issued to a depositary bank for American Depositary Shares, 10,000,000 common shares, which were reserved for the future
exercise of share options or vesting of restricted shares.
F- 62
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20.
Share-based compensation (Continued)
2010 share incentive plan (Continued)
The following table summarizes the share option activity for the years ended December 31, 2013, 2014 and 2015:
Outstanding, December 31, 2012
Granted
Forfeited
Outstanding, December 31, 2013
Vested and expected to vest at December 31, 2013
Exercisable at December 31, 2013
Granted
Forfeited
Expired
Converted to restricted shares
Exercised
Outstanding, December 31, 2014
Vested and expected to vest at December 31, 2014
Exercisable at December 31, 2014
Granted
Forfeited
Expired
Converted to restricted shares
Exercised
Outstanding, December 31, 2015
Vested and expected to vest at December 31, 2015
Exercisable at December 31, 2015
Number of
share options
20,222,662
1,076,761
(326,647)
20,972,776
20,701,286
19,382,156
1,566,381
(371,989)
(1,116,531)
(3,776,711)
(7,333,641)
9,940,285
9,642,307
9,129,958
561,705
(1,494,922)
(3,606,304)
(80,000)
(3,189,944)
2,130,820
1,008,645
1,430,870
Weighted
average
exercise
price (USD)
1.30
3.33
3.32
1.37
1.32
1.17
3.23
3.96
0.26
3.14
0.18
1.88
1.86
1.81
0.88
3.22
1.78
2.40
0.25
2.13
1.76
2.16
Weighted-
average
grant-date
fair
value (USD)
Weighted
average
remaining
contractual
life
(years)
2.82
Aggregate
intrinsic
value (in
thousands)
40,788
1.27
—
0.40
0.31
1.01
0.49
0.41
0.76
0.73
0.86
2.03
1.89
1.67
39,420
41,014
40,771
1.95
1.87
1.49
3,067
3,057
3,042
4.46
4.62
4.03
556
464
406
A summary of the restricted shares activities under the 2010 Plan for the years ended December 31, 2015 is presented below:
Unvested at January 1, 2014:
Converted from share options
Vested
Forfeited
Unvested at January 1, 2015:
Converted from share options
Vested
Forfeited
Unvested at December 31, 2015
Vested and expected to vest at December 31, 2015
Weighted-Average
Grant-Date Fair
Value
1.71
1.71
Number of
restricted shares
—
1,505,787
—
—
1,505,787
80,000
(390,560)
(763,010)
432,217
367,384
Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates. Based
upon the Company’s historical and expected forfeitures for stock options granted, the directors of the Company estimated that its future forfeiture rate would be
20% for employees and nil for directors and advisors.
F- 63
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20.
Share-based compensation (Continued)
2010 share incentive plan (Continued)
The aggregate intrinsic value in the table above represents the difference between the estimated fair value of the Company’s common shares as of December 31,
2014 and 2015 and the exercise price.
Total fair values of share options vested as of December 31, 2014 and 2015 were USD 7,923 thousand and USD 6,297 thousand, respectively.
As of December 31, 2014 and 2015, there were USD 1,462 thousand and USD 1,147 thousand of unrecognized share-based compensation costs related to share
options, which were expected to be recognized over a weighted-average vesting period of 2.84 and 4.03 years, respectively. To the extent the actual forfeiture
rate is different from the Company’s estimate, the actual share-based compensation related to these awards may be different from the expectation.
The Black-Scholes option pricing model is used to determine the fair value of the stock options granted to employees. The fair values of stock options granted
during the years ended December 31, 2013, 2014 and 2015 were estimated using the following assumptions:
Options granted to employees
Years ended December 31,
Risk-free interest rate(1)
Dividend yield(2)
Volatility rate(3)
Expected term (in years)(4)
2013
2014
2015
0.77% to 1.76%
0.77% to 1.76%
0.77% to 1.76%
—
—
—
43.8% to 51.3%
4.58
40.07% to 43.3%
4.13 to 4.58
40.07% to 43.3%
4.07 to 5.57
(1)
(2)
(3)
The risk-free interest rate of periods within the contractual life of the share option is based on the USD denominated China Government Bond yield as
at the valuation dates.
The Company has no history or expectation of paying dividends on its common shares.
Expected volatility is estimated based on the average of historical volatilities of the comparable companies in the same industry as at the valuation
dates.
(4)
The expected term is developed by assuming the share options will be exercised in the middle point between the vesting dates and maturity dates.
2013 share incentive plan
In November 2013, the Group adopted a share incentive plan, which is referred to as the 2013 Share Incentive Plan (“the 2013 Plan”). The purpose of the plan is
to motivate, attract and retain the best available personnel by linking the personal interests of senior management to the success of the Group’s business. The
Group appointed Leading Advice Holdings Limited (“Leading Advice”), a BVI company owned by the Group’s chairman and chief executive officer for no
consideration, to administer the plan and as the Administrator. Leading Advice has no activities other than administering the plan and does not have employees.
The Group has considered whether Leading Advice is a variable interest entity and, if so, whether the Group is the primary beneficiary. The Group concluded
that it is not the primary beneficiary of Leading Advice.
F- 64
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20. Share-based compensation (Continued)
2013 share incentive plan (Continued)
On behalf of the Group, the Administrator has the authority to select the eligible participants to whom awards will be granted: determine the types of awards and
the number of shares covered: establish the terms, conditions and provisions of such awards; cancel or suspend awards; and, under certain conditions to
accelerate the exercisability of awards. The Administrator is authorized to interpret the 2013 Plan; to establish, amend, and rescind any rules and regulations
relating to the 2013 Plan; to determine the terms of agreements entered into with recipients under the 2013 Plan; and, to make all other determinations that may
be necessary or advisable for the administration of the 2013 Plan. In the event of any disagreement between the Group and Leading Advice, the Group’s
decision shall be final and binding.
In November 2013, the Company issued 9,073,732 common shares to Leading Advice. Although the shares were legally issued to Leading Advice, Leading
Advice does not have any of the rights of a typical common share holder. Leading Advice 1) is not entitled to dividends 2) does not have the right to vote prior
to vesting and 3) does not have the right to sell the unvested portion of the awards or awards that have not been granted. In addition, upon 1) the liquidation of
Leading Advice 2) the dissolution of Leading Advice and 3) the expiration of the 2013 Plan, common shares not granted as awards shall be transferred back to
the Group at no consideration. Given the structure of this arrangement, while the common shares have been legally issued, the common shares issued to Leading
Advice do not have the attributes of unrestricted, issued and outstanding shares. Therefore, the 9,073,732 common shares issued to Leading Advice are
accounted as treasury shares until these common shares are earned by the senior management or employees for service provided to the Group.
For the awards that have been granted and become vested, Leading Advice held shares for the grantees’ benefit and exercise the voting rights on their behalf.
The grantees will be entitled to dividends and have the right to request Leading Advice to transfer vested award to a transferee designated by the grantees.
Shares that have been granted and vested continued to be held by and voting rights exercised by Leading Advice on behalf of the grantee at the closing of a
QIPO.
Before the closing of a QIPO, the Company would have a “right of first refusal” with respect to any proposed transfer of vested restricted shares. After the
closing of a QIPO, vested restricted shares may not be sold or transferred for a period of six months or a period of time determined by the underwriter (the
‘‘lock up period’’). If the grantee terminates its employment prior to the closing date of a QIPO and a trade sale, the Group would have the right to acquire the
vested restricted shares from the senior officer at a market price as determined by third-party valuation experts.
Upon the closing of IPO, the administrator of the 2013 Plan was changed from Leading Advice to the Company’s compensation committee.
Under the 2013 Plan, the maximum number of restricted shares that may be granted is 9,073,732 shares.
As of December 31, 2015, 7,987,435 restricted shares were granted to a few senior officers.
F- 65
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20.
Share-based compensation (Continued)
2013 share incentive plan (Continued)
(1)
(2)
(3)
6,209,809 of these restricted shares will vest over a four-year schedule in which one-fourth of the restricted shares shall be vested upon the first,
second, third, and fourth anniversary of the grant date, respectively.
1,037,894 of these restricted shares will vest over a five-year schedule in which one-fifth of the restricted shares shall be vested upon the first, second,
third, fourth and fifth anniversary of the grant date, respectively.
The remaining 649,732 restricted shares granted will vest over a three-year schedule in equal instalments on a monthly basis over a thirty-six month
vesting period.
A summary of the restricted shares activities under the 2013 Plan for the years ended December 31, 2013, 2014and 2015 is presented below:
Unvested at January 1, 2014:
Granted
Vested
Forfeited
Unvested at December 31, 2014
Vested
Forfeited
Unvested at December 31, 2015
Vested and expected to vest at December 31, 2015
Weighted-Average
Grant-Date Fair
Value
2.89
Number of
restricted
shares
8,095,238
4,233,558
(1,563,222)
(3,564,796)
7,200,778
(2,627,815)
(776,565)
3,796,398
3,226,939
Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates.
All restricted shares granted to senior officers are measured based on their grant-date fair values. Compensation expense is recognized on a straight-line basis
over the requisite service period. As of December 31, 2015, total unrecognized compensation expense relating to the restricted shares was USD 13,866
thousand. No restricted shares were issued to non-employees.
F- 66
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20.
Share-based compensation (Continued)
2014 share incentive plan
In April 2014, the Group adopted a share incentive plan, which is referred to as the 2014 Share Incentive Plan (“the 2014 Plan”). The purpose of the plan is to
motivate, attract and retain the best available personnel by linking the personal interests of senior management to the success of the Group’s business. Under the
2014 Plan, the maximum number of restricted shares that may be granted is 14,195,412 shares to certain officers, directors or employees of, or advisors or
consultants to the Company and its subsidiaries and consolidated affiliated entities. The company issued 14,195,412 common shares to Leading Advice, a
company owned by the Group’s chairman and chief executive officer. The issuance of common shares was to facilitate the administration of the 2014 plan. The
2014 Plan was administered by the Company’s compensation committee.
As of December 31, 2015, 6,620,500 restricted shares were granted to certain officers and employees of the Group:
(1)
(2)
5,270,500 of these restricted shares will vest over a five-year schedule in which one-fifth of the restricted shares shall be vested upon the first, second,
third, fourth and fifth anniversary of the grant date, respectively.
The remaining 1,350,000 restricted shares will vest over a four-year schedule in which one-fourth of the restricted shares shall be vested upon the first,
second, third and fourth anniversary of the grant date, respectively.
A summary of the restricted shares activities under the 2014 Plan for the years ended December 31, 2015 is presented below:
Unvested at January 1, 2014
Granted
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
Vested and expected to vest at December 31, 2015
Weighted-Average
Grant-Date Fair
Value
1.77
1.53
Number of
restricted
shares
—
3,896,500
3,896,500
3,890,500
(859,100)
(1,166,500)
5,761,400
4,897,100
Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates.
All restricted shares granted are measured based on their grant-date fair values. Compensation expense is recognized on a straight-line basis over the requisite
service period. As of December 31, 2015, the total unrecognized compensation expense relating to the restricted shares was USD 9,683 thousand. No restricted
shares were issued to non-employees.
Total compensation costs recognized for the years ended December 31, 2013, 2014and 2015 are as follows:
(In thousands)
Sales and marketing expenses
General and administrative expenses
Research and development expenses
Total
2013
43
1,080
973
2,096
Years ended December 31,
2015
131
6,701
2,896
9,728
2014
66
6,407
1,171
7,644
F- 67
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
21.
Basic and diluted net income/ (loss) per share
Basic and diluted net income/ (loss) per share for the years ended December 31, 2013, 2014 and 2015 are calculated as follows:
(Amounts expressed in thousands of
United States dollars (“USD”), except for number
of shares and per share data)
Numerator:
Net income/(loss) from continuing operations
Net loss from discontinued operations
Net income / (loss)
Less: Net (loss) attributable to the non-controlling interest
Net income/(loss) attributable to Xunlei Limited
Accretion of Series D to convertible redeemable preferred shares redemption value
Contingent beneficial conversion feature of series C to one Series C shareholder
Deemed dividend to Series D shareholder from its modification
Accretion of Series E to convertible redeemable preferred shares redemption value
Amortization of beneficial conversion feature of Series E
Deemed dividend to certain shareholders from repurchase of shares
Acceleration of amortization of beneficial conversion feature of Series E upon initial public
offering
Deemed dividend to preferred shareholders upon IPO
Allocation of net income to participating preferred shareholders
Net income/(loss) attributable to Xunlei Limited’s common shareholders
Numerator of basic net income/(loss) per share from continuing operations
Numerator of basic net loss per share from discontinued operations
Dilutive effect of warrant
Numerator for diluted income/(loss) per share from continuing operations
Numerator for diluted loss per share from discontinued operations
Denominator:
Denominator for basic net income/(loss) per share-weighted average shares outstanding
Dilutive effect of warrants
Dilutive effect of share options and restricted shares
Denominator for diluted net income/(loss) per share
Basic net income/(loss) per share from continuing operations
Basic net loss per share from discontinued operations
Diluted net income/(loss) per share from continuing operations
Diluted net loss per share from discontinued operations
F- 68
2013
22,951
(12,572)
10,379
(283)
10,662
(4,300)
—
—
—
—
—
—
—
(4,094)
2,268
14,840
(12,572)
(1,531)
13,309
(12,572)
Years ended December 31,
2015
2014
28,269
(18,407)
9,862
(950)
10,812
(1,870)
(57)
(279)
(12,754)
(4,139)
(14,926)
(49,346)
(32,807)
—
(105,366)
(86,959)
(18,407)
—
(86,959)
(18,407)
(2,370)
(12,096)
(14,466)
(1,299)
(13,167)
—
—
—
—
—
—
—
—
—
(13,167)
(1,071)
(12,096)
—
(1,071)
(12,096)
61,447,372
2,218,935
12,399,591
76,065,898
0.24
(0.20)
0.18
(0.17)
194,711,227
—
—
194,711,227
(0.45)
(0.09)
(0.45)
(0.09)
335,987,595
—
—
335,987,595
(0.00)
(0.04)
(0.00)
(0.04)
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
21.
Basic and diluted net income/ (loss) per share (Continued)
The following common shares equivalents were excluded from the computation of diluted net income per common share for the periods presented because
including them would have had an anti-dilutive effect:
Preferred shares—weighted average
Share options and restricted shares —weighted average
22.
Related party transactions
The table below sets forth the related parties and their relationships with the Group:
2013
110,953,534
2,513,017
Years ended December 31,
2015
—
1,673,342
2014
93,213,683
9,041,434
Related Party
Zhuhai Qianyou
Hao Cheng
Chuan Wang
Shenglong Zou
Beijing Millet technology Co., LTD (“Beijing Xiaomi”)
Leading Advice Holdings Limited
Vantage Point Global Limited
Aiden & Lasmine Limited
Kingsoft Corporation Limited
Relationship with the Group
Equity investment of the Group
Co-founder and shareholder of the Group
Director of the Company
Co-founder and shareholder of the Group
Company owned by a shareholder of the Group
Company owned by a Co-founder and shareholder of the Group
Shareholder of the Company
Shareholder of the Company
Shareholder of the Company
During the years ended December 31, 2013, 2014 and 2015, significant related party transactions were as follows:
(In thousands)
Game sharing costs paid and payable to Zhuhai Qianyou (note a)
Advance to Hao Cheng
Repayment from Hao Cheng
Technology service revenue from Beijing Xiaomi
Advertisement revenue from Beijing Xiaomi
Advance to Shenglong Zou
Advance to Chuan Wang
Accrued to Aiden & Jasmine Limited (note b)
Accrued to Vantage Point Global Limited(note b)
2013
1,760
85
—
—
—
—
—
—
—
Years ended December 31,
2015
127
—
—
344
—
—
—
54
146
2014
402
—
85
303
871
10
7
1,125
3,012
note a – The Company obtained an exclusive game operation right from Zhuhai Qianyou, which is specialized in developing online games. According to the
agreement, the Company will share revenues derived by the licensed games with Zhuhai Qianyou.
note b – In 2014, the Group repurchased 3,860,733 common shares from Aiden & Jasmine Limited (Co founder’s company) for USD10,879 thousand and
10,334,679 common shares from Vantage Point Global Limited (Founder’s company) for USD29,121 thousand. According to the repurchase contract, the
Company was entitled to an amount (the “Withheld Price”) to withhold any taxes with respect to this repurchase as required under the applicable laws. If the
Seller has not been specifically required by the applicable governmental or regulatory authority to pay any taxes as required under the applicable laws in
connection with the repurchase, after the fifth anniversary of the Closing Date, the Company will pay to the Seller the Withheld Price with a simple interest
thereon at the rate of five percent (5%) per annum (the “repayment price”) from the Closing Date. Therefore, the Withheld Price for Aiden & Jasmine Limited
and Vantage Point Global Limited
F- 69
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
22.
Related party transactions (Continued)
was USD 1,125 thousand (including interest of USD 37 thousand) and USD 3,012 thousand (including interest of USD 100 thousand) respectively. The interest
accrued in 2015 was USD 54 thousand and 146 thousand for Aiden & Lasmine Limited and Vantage Point Global Limited respectively.
As of December 31, 2013, 2014 and 2015, the amounts due to / from related parties were as follows:
(In thousands)
Amounts due to related parties
Accounts payable to Zhuhai Qianyou
Long-term payable to Aiden & Lasmine Limited (note 16)
Long-term payable to Vantage Point Global Limited (note 16)
(In thousands)
Amounts due from related parties
Accounts receivable from Beijing Xiaomi
Other receivable from Hao Cheng
Other receivable from Shenglong Zou
Other receivable from Chuan Wang
23.
(i)
Taxation
Cayman Islands
December 31,
2013
December 31,
2014
December 31,
2015
225
—
—
84
1,125
3,012
38
1,179
3,158
December 31,
2013
December 31,
2014
December 31,
2015
—
85
—
—
5
—
10
7
30
—
9
6
Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. Additionally, upon payment of dividends by the
Company to its shareholders, no Cayman Islands withholding tax will be imposed.
(ii)
PRC Enterprise Income Tax (“EIT”)
Giganology Shenzhen, the VIE and its subsidiaries which were established in the Shenzhen Special Economic Zone of the PRC were all subject to EIT at a rate
of 15% before 2008. On March 16, 2007, the PRC National People’s Congress promulgated the New Enterprise Income Tax Law (the ”New EIT Law”), which
became effective on January 1, 2008, adopting a unified EIT rate of 25%. In addition, the New EIT Law also provides a five-year transitional period starting
from its effective date for those enterprises that were established before the date of promulgation of the New EIT Law and that were entitled to preferential
income tax rates under the then effective tax laws or regulations. On December 26, 2007, the State Council issued the “Circular to Implementation of the
Transitional Preferential Policies for the Enterprise Income Tax”. Pursuant to this Circular, the transitional income tax rates for enterprises established in the
Shenzhen Special Economic Zone before March 16, 2007 were 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012, respectively. Thus, the
applicable EIT rate for Giganology Shenzhen, the VIE and its subsidiaries, which were established in the Shenzhen Special Economic Zone before March 16,
2007, was 25%, 25% and 25% for the years 2013, 2014 and 2015, respectively.
As approved by the local tax authority, Giganology Shenzhen was further exempt from EIT for two years commencing from its first year of profitable operation
after offsetting prior years’ tax losses, followed by a 50% reduction for the next three years (“2-year Exemption and 3-year 50% Reduction”) as a software
enterprise. The first year of profit operation of Giganology Shenzhen was 2006. According to new EIT Law, Giganology Shenzhen could still enjoy the tax
holidays which were grandfathered by the New EIT Law.
F- 70
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23.
(ii)
Taxation (Continued)
PRC Enterprise Income Tax (“EIT”) (Continued)
Accordingly, the applicable EIT rates for Giganology Shenzhen were 25%, 25% and 25% for the years ended December 31, 2013, 2014 and 2015, respectively.
On April 14, 2008, relevant governmental regulatory authorities released further qualification criteria, application procedures and assessment processes for
meeting the High and New Technology Enterprise (“HNTE”) status under the New EIT Law which would entitle qualified and approved entities to a favorable
statutory tax rate of 15%.
In April 2009, the State Administration for Taxation (“SAT”) issued Circular Guoshuihan [2009] No. 203 (“Circular 203”) stipulating that entities which
qualified for the HNTE status should apply with in-charge tax authorities to enjoy the reduced EIT rate of 15% provided under the New EIT Law starting from
the year when the new HNTE certificate becomes effective. In addition, an entity which qualified for the HNTE status can continue to enjoy its remaining tax
holiday from January 1, 2008 provided that it has obtained the HNTE certificate according to the new recognition criteria set by the New EIT Law and the
relevant regulations.
In February 2011, Shenzhen Xunlei obtained the HNTE certificate with effect from January 1, 2011.
According to a policy promulgated by the State tax bureau of the PRC and effective from 2008 onwards, enterprises engage in research and development
activities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its tax assessable
profits for that year (“Super Deduction”). Shenzhen Xunlei has been claiming such Super Deduction in ascertaining its tax assessable profits from 2009
onwards. In addition, approved by the relevant local tax authority in July 2010, Shenzhen Xunlei was recognized as an enterprise engaged in software
development activities, accordingly, it is entitled to a tax holiday of 2-year Exemption and 3-year 50% Reduction from 2010 onwards.
In December 2013, Shenzhen Xunlei obtained the certificate of Key Software Enterprise for the years ended December 31, 2013 and 2014, which enabled
Shenzhen Xunlei to enjoy the preferential tax rate of 10% for the years of 2013 and 2014. In 2015, Shenzhen Xunlei obtained the certificate of the Hi-Tech
Enterprise for the years ended December 31, 2015, 2016 and 2017, which enables Shenzhen Xunlei to enjoy the preferential tax rate of 15% for the years of
2015, 2016 and 2017. As a result, the applicable tax rate of Shenzhen Xunlei for the years ended December 31, 2013, 2014 and 2015 were 10%, 10% and 15%
respectively.
The subsidiaries and VIE’s subsidiaries, which were established after January 1, 2008, were subject to EIT at a rate of 25%.
Xunlei Computer was established in 2011 in the Shenzhen Special Economic Zone, the PRC. As approved by the relevant tax authority in June 2013, Xunlei
Computer was further exempted from EIT for two years commencing from its first year of profitable operation after offsetting prior years’ tax losses, followed
by a 50% reduction for the next three years (“2-year Exemption and 3-year 50% Reduction”). The first year of profit operation of Xunlei Computer is 2013.
Shenzhen Onething was established in 2013 in the Shenzhen Special Economic Zone, the PRC. In 2015, Shenzhen Onething filed for the Qianhai Enterprise,
which enables Shenzhen Onething to enjoy the preferential tax rate of 15% as long as it continues to file for Qianhai Enterprise in subsequent years until
December 31, 2020. As a result, the applicable tax rate of Shenzhen Onething for the years ended December 31, 2015 was 15%.
F- 71
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23.
(ii)
Taxation (Continued)
PRC Enterprise Income Tax (“EIT”) (Continued)
Dividends paid by the PRC subsidiaries of the Group out of the profits earned after December 31, 2007 to non-PRC tax resident investors are subject to PRC
withholding tax. The withholding tax (“WHT”) on dividends is 10%, unless a foreign investor’s tax jurisdiction has a tax treaty with the PRC that provides for a
lower withholding tax rate and the foreign investor is recognized as the beneficial owner of the income under the relevant tax rules. The 10% WHT is applicable
to any dividends to be distributed from Giganology Shenzhen and Xunlei Computer to the Company out of any profits of these two companies derived after
January 1, 2008. Up to December 31, 2015, both Giganology Shenzhen and Xunlei Computer did not declare any dividend to the parent company and have
determined that it has no present plan to declare and pay any dividends. The Group currently plans to continue to reinvest its subsidiaries’ undistributed
earnings, if any, in its operations in China indefinitely. Accordingly, no withholding income tax was accrued or required to be accrued as of December 31, 2014
and 2015. The undistributed earnings from the Group’s PRC entities as of December 31, 2014 and 2015 amounted to USD38,393 thousand and USD 34,313
thousand, respectively. An estimated foreign withholding taxes of USD3,839 thousand and USD 3,431 thousand would be due if these earnings were remitted as
dividends as of December 31, 2014 and 2015, respectively.
Moreover, the current EIT Law treats enterprises established outside of China with “effective management and control” located in the PRC as PRC resident
enterprises for tax purposes. The term “effective management and control” is generally defined as exercising overall management and control over the business,
personnel, accounting, properties, etc. of an enterprise. The Company, if considered a PRC resident enterprise for tax purposes, would be subject to the PRC
Enterprise Income Tax at the rate of 25% on its worldwide income for the period after January 1, 2008. As of December 31, 2015, the Company has not accrued
for PRC tax on such basis. The Company will continue to monitor its tax status.
The current and deferred portions of income tax expense included in the consolidated statements of operations are as follows:
Continuing operations
(In thousands)
Current income tax expenses
Deferred income tax benefits
Taxation for the year
The aggregate amount and per share effect of the tax holiday are as follows:
Aggregate dollar effect (in thousands)
Per share effect—basic
Per share effect—diluted
F- 72
2013
175
385
560
2013
4,638
0.08
0.06
Years ended December 31,
2015
289
(1,175)
(886)
2014
397
66
463
Years ended December 31,
2015
(830)
0.00
0.00
2014
2,784
0.01
0.01
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23.
(ii)
Taxation (Continued)
PRC Enterprise Income Tax (“EIT”) (Continued)
The reconciliation of total tax expense/(benefit) computed by applying the respective statutory income tax rates to pre-tax income/(loss) is as follows:
Continuing operations
(In thousands)
Income tax expense/(benefit) at PRC statutory rate (based on statutory tax rate applicable to
enterprises in Shenzhen, China)
Effects of differences in tax rates in different jurisdictions applicable to entities of the Group
outside of the PRC
Non-deductible expenses
Effect of Super Deduction available to Shenzhen Xunlei
Effect of tax holiday
Change in valuation allowance of deferred tax assets
Effect on deferred tax assets due to change in tax rates
Outside basis difference arising from VIE and its subsidiaries in the PRC
Expiration of tax loss
Others
Income tax expense/ (benefit)
2013
Years ended December 31,
2015
2014
5,878
7,211
667
102
(1,763)
(5,270)
—
1,764
713
31
(1,562)
560
(838)
714
(1,365)
(4,613)
291
(103)
478
51
(1,363)
463
(438)
2,400
14
-
(369)
4,750
(8)
(2,174)
290
(5,351)
(886)
The tax effects of temporary differences that give rise to the deferred tax asset and liability balances at December 31, 2014 and 2015 are as follows:
(In thousands)
Deferred tax assets, current portion:
Net operating loss carried forward(Note a)
Amortization of intangible assets arising from intragroup transactions (Note b)
Amortization of content copyrights (Note c)
Impairment of online game licenses
Impairment of long-term equity investment
Allowance for advance to suppliers
Valuation allowance
Deferred tax assets, current portion, net
Deferred tax assets, non-current portion:
Net operating loss carried forward(Note a)
Allowance for doubtful accounts
Amortization of intangible assets arising from intragroup transactions (Note b)
Impairment of online game licenses
Amortization of Content Copyrights (Note c)
Valuation allowance
Deferred tax assets, non-current portion, net
Deferred tax liability, non-current portion:
Outside basis difference (Note d)
F- 73
December 31,
2014
December 31,
2015
315
69
1,675
32
—
—
—
2,091
—
6,103
796
105
16
4,133
(291)
10,862
—
(8,552)
417
95
—
23
115
120
(81)
689
—
13,016
—
54
—
—
(4,477)
8,593
—
(6,378)
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23.
(ii)
Taxation (Continued)
PRC Enterprise Income Tax (“EIT”) (Continued)
Note a: As of December 31, 2015, the Group had tax loss carryforwards of USD 53,161 thousand, which can be carried forward to offset future taxable
income. The net operating tax loss carryforwards will begin to expire as follows:
(In thousands)
2016
2017
2018
2019
2020 and thereafter
1,398
889
6,191
3,647
41,036
53,161
Note b: Before 2008, Giganology Shenzhen sold several self-developed software at a market valuation of approximately RMB42 million to Shenzhen Xunlei.
Shenzhen Xunlei was entitled to capitalize the amounts as intangible assets for tax purposes and the respective amortization charges could be entitled to
claim tax deduction. As a result, this transaction had created a temporary difference between the accounting base (on a group basis) and the tax base
(on Shenzhen Xunlei standalone basis) and led to origination of a deferred tax asset.
Note c: As mentioned in Note 2(n), the Group adopts certain accelerated amortization methods for amortization of certain Content Copyrights for accounting
purposes, while straight- line method is adopted for PRC tax reporting. Accordingly, the differences have led to origination of temporary differences.
Note d: The deferred tax liabilities arising from the aggregate retained earnings and reserves of the VIE and its subsidiaries that are expected to be recovered by
Giganology Shenzhen and other affiliates of the Group in the future periods, amounted to USD 34,210 thousand and USD 25,512 thousand as of
December 31, 2014 and 2015, respectively.
Movement of valuation allowance is as follows:
(In thousands)
Beginning balance
Additions
Write-off
Ending balance
2013
(43)
—
43
—
2014
—
(291)
Years ended December 31,
2015
(291)
(4,268)
—
(4,559)
—
(291)
Valuation allowances had been provided against the net deferred tax assets because it is more likely than not that all of the deferred tax asset will not be
realized. In 2013, valuation allowance was written off due to the termination of the business of Xunlei Nanjing. In 2014, valuation allowance was provided for
net operating loss carry forward of Onething because it was more likely than not that such deferred tax assets will not be realized based on the Group's estimate
of Onething’s future taxable income. In 2015, valuation allowance was provided for net operating loss carry forward of Xunlei Beijing, Xunlei Youxi and
Onething because it was more likely than not that such deferred tax assets will not be realized based on the Group's estimate of their future taxable income, and
the fact that the three entities were not included in the tax strategy plan.
F- 74
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23.
(ii)
Taxation (Continued)
PRC Enterprise Income Tax (“EIT”) (Continued)
As of December 31, 2015, the tax returns of the Group’s subsidiaries, VIE and its subsidiaries since their respective dates of incorporation are still open
to examination.
24.
Fair value measurements
Effective January 1, 2008, the Group adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for
measuring fair value and expands financial statement disclosures about fair value measurements. Although adoption did not impact the Group’s consolidated
financial statements, ASC 820-10 requires additional disclosures to be provided on fair value measurements.
ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2—Include other inputs that are directly or indirectly observable in the marketplace or based on quoted price in markets that are not active
Level 3—Unobservable inputs which are supported by little or no market activity and are significant to the overall fair value measurement
ASC 820-10 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost
approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or
liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value
indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace
an asset.
F- 75
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
24.
Fair value measurements (Continued)
The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 2014 and 2015.
(In thousands)
Cash equivalent: time deposits with original maturities less than three
months
Short term investments:
Investments in financial instruments
(In thousands)
Cash equivalent: time deposits with original maturities less than three
months
Short term investments:
Investments in financial instruments
25.
Other income, net
Continuing Operations
(In thousands)
Subsidy income
Fair value changes of warrants liabilities
Investment income from short-term investments
Dilution gains arising from deemed disposal of investment (Note 11)
Investment loss impairment of long-term investment
Exchange losses
Settlement income
Others
Fair value measurements as at December 31, 2014
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active market
for indentifical
assets
(Level 1)
Significant
observable
inputs
(Level 3)
—
—
—
31,117
29,427
60,544
—
—
—
Fair value measurements as at December 31, 2015
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active market
for indentifical
assets
(Level 1)
Significant
observable
inputs
(Level 3)
—
—
—
314,357
70,328
384,685
—
—
—
Total
31,117
29,427
60,544
Total
314,357
70,328
384,685
2013
1,393
1,531
1,847
—
—
(252)
249
(89)
4,679
F- 76
Years ended December 31,
2015
1,902
—
3,666
702
(802)
(2,771)
755
175
3,627
2014
2,236
8,054
3,471
449
—
(176)
489
(557)
13,966
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
26.
Commitments and contingencies
Rental commitments
The Group leases facilities in the PRC under non-cancellable operating leases expiring on different dates. Payments under operating leases are expensed on a
straight-line basis over the periods of the respective leases, including any free rental periods.
Total office rental expenses under all operating leases were USD 2,786 thousand, USD 3,068 thousand and USD 2,751 thousand for the years ended
December 31, 2013, 2014 and 2015, respectively.
Future minimum payments under non-cancellable operating leases of office rental consist of the following as of December 31, 2015:
(In thousands)
2016
2017
2018
Bandwidth lease commitments
751
174
—
925
The Group leases bandwidth in the PRC under non-cancellable operating leases expiring on different dates. Payments under bandwidth leases are expensed on a
straight-line basis over the duration of the respective lease periods, including any lease free periods.
Total bandwidth leasing costs for continuing operations under all operating leases were USD 28,174 thousand, USD 33,545 thousand and USD 37,218 thousand
for the years ended December 31, 2013, 2014 and 2015. Total bandwidth leasing costs for discontinued operations under all operating leases were USD 7,279
thousand, USD 6,828 thousand and USD 2,983 thousand for the years ended December 31, 2013, 2014 and 2015.
Future minimum payments under non-cancellable bandwidth leases consist of the following as of December 31, 2015:
(In thousands)
2016
2017
Capital commitments
15,715
9,965
25,680
As at December 31, 2015, the Group had irrevocable purchase obligations for certain copyrights and online game licenses that had not been recognized in the
amount of USD nil and USD 5,844 thousand, respectively.
Litigation
The Group is involved in a number of cases pending in various courts. These cases are substantially related to alleged copyright infringement as well as routine
and incidental matters to its business, among others. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a
change in the Group’s business practices, which could impact the Group’s future financial results. The Group had incurred USD 263 thousand, USD 1,073
thousand and USD 3,307 thousand legal and litigation related expenses for the years ended December 31, 2013, 2014 and 2015, respectively.
F- 77
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
26.
Commitments and contingencies (Continued)
Litigation (Continued)
The Group is involved in a number of cases pending in various courts. These cases are substantially related to alleged copyright infringement as well as routine
and incidental matters to its business, among others. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a
change in the Group’s business practices, which could impact the Group’s future financial results. The Group had incurred USD 263 thousand, USD 1,073
thousand and USD 3,307 thousand legal and litigation related expenses for the years ended December 31, 2013, 2014 and 2015, respectively.
Up to April 21, 2016, which is the date when the consolidated financial statements were issued, the Group had 65 lawsuits pending against the Group with an
aggregate amount of claimed damages of approximately RMB 6.96 million (USD 1.07 million) which occurred before December 31, 2015. Of the 65 pending
lawsuits, 53 lawsuits were relating to the alleged copyright infringement in the PRC. The Group had accrued for USD 2,601 thousand litigation related expenses
in ‘‘Accrued expenses and other liabilities’’ in the consolidated balance sheet as of December 31, 2015, which is the most probable and reasonably estimable
outcome.
The Group estimated the litigation compensation based on judgments handed down by the court, out-of-court settlements of similar cases as well as advices
from the Group’s legal counsel. The Group is in the process of appealing certain judgments for which the losses had been accrued. Although the results of
unsettled litigation and claims cannot be predicted with certainty, the Group does not expect that the outcome of the 65 lawsuits will result in the amounts
accrued materially different from the range of reasonably possible losses. In the opinion of management, there was not at least a reasonable possibility the
Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for asserted legal and other
claims. However, the outcome of litigation is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, if
one or more of these legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the
Company’s consolidated financial statements for that reporting period could be materially adversely affected.
In May 2014, the Group entered into a content protection agreement with the Motion Picture Association of America, Inc., or MPAA, and six major U.S.
entertainment content providers, which are the members of MPAA. In January 2015, a number of MPAA member studios filed copyright infringement lawsuits
against the Group with an aggregate amount of claimed damages of RMB 8.40 million (USD 1.37 million), and the cases are awaiting trial as of April 21, 2016.
As the litigations remain in their preliminary stages, the Group is unable to express any opinion on the likelihood of an unfavorable outcome or any estimate of
the amount or range of any potential loss. Subsequent to December 31, 2015, there were additional claims mainly related to alleged copyright infringement
made in the ordinary course of business against the Group. The Group has assessed that none of these claims that occurred between January 1, 2016 and April
21, 2016 will result in the amount accrued materially different from the range of reasonably possible losses in the consolidated financial statements of the
Group.
F- 78
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
27.
Certain risks and concentration
PRC regulations
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in internet businesses, including the provision of
online video and online advertising services. Specifically, foreign ownership in an internet content provider or other value-added telecommunication service
providers may not exceed 50%. The Group conducts its operations in China principally through contractual arrangements among Giganology Shenzhen, its
wholly-owned PRC subsidiary, and Shenzhen Xunlei and its shareholders. Shenzhen Xunlei holds the licenses and permits necessary to conduct its resource
discovery network, online video, online advertising, online games and related businesses in China and hold various operating subsidiaries that conduct a
majority of its operations in China. The Company conducts all of its operations in China through, Shenzhen Xunlei, a variable interest entity, which it
consolidates as a result of a series contractual arrangements enacted. If the Company had direct ownership of Shenzhen Xunlei, it would be able to exercise its
rights as a shareholder to effect changes in the board of directors of Shenzhen Xunlei, which in turn could effect changes at the management level, subject to
any applicable fiduciary obligations. However, under the current contractual arrangements, it relies on Shenzhen Xunlei and its shareholders’ performance of
their contractual obligations to exercise effective control. In addition, its operating contract with Shenzhen Xunlei has a term of ten years, which is subject to
Giganology Shenzhen’s unilateral termination right. None of Shenzhen Xunlei or its shareholders may terminate the contracts prior to the expiration date.
Further, the Group believes that the contractual arrangements among Giganology Shenzhen, Shenzhen Xunlei and its shareholders are in compliance with PRC
law and are legally enforceable. However, the Chinese government may issue from time to time new laws or new interpretations on existing laws to regulate this
industry. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and the Group’s legal structure and scope of operations
in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s ability to conduct business in the PRC. The PRC
government may also require the Company to restructure the Group’s operations entirely if it finds that its contractual arrangements do not comply with
applicable laws and regulations. Furthermore, it could revoke the Group’s business and operating licenses, require it to discontinue or restrict its operations,
restrict its right to collect revenues, block its website, require it to restructure its operations, impose additional conditions or requirements with which the Group
may not be able to comply, or take other regulatory or enforcement actions against the Group that could be harmful to its business. The imposition of any of
these penalties may result in a material and adverse effect on the Group’s ability to conduct the Group’s business. In addition, if the imposition of any of these
penalties causes the Group to lose the rights to direct the activities of the VIE and its subsidiaries or the right to receive their economic benefits, the Group
would no longer be able to consolidate the VIE. The Group does not believe that any penalties imposed or actions taken by the PRC Government would result in
the liquidation of the Company, Giganology Shenzhen or Shenzhen Xunlei.
As of December 31, 2015, the aggregate retained earnings and distributable reserves of VIE and VIE’s subsidiaries amounted to approximately USD 25,512
thousand (2014: USD 34,210 thousand), which has been included in the consolidated financial statements.
As stated above, Shenzhen Xunlei holds assets that are important to the operation of the Group’s business, including patents for proprietary technology, related
domain names and trademarks. If Shenzhen Xunlei or its subsidiaries falls into bankruptcy and all or part of its assets become subject to liens or rights of third-
party creditors, the Group may be unable to conduct its business activities in China, which could have a material adverse effect on the Group’s future financial
position, results of operations or cash flows. However, the Group believes this is a normal business risk many companies face. The Group will continue to
closely monitor the financial conditions of Shenzhen Xunlei and its subsidiaries.
F- 79
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
27.
Certain risks and concentration (Continued)
PRC regulations (Continued)
Shenzhen Xunlei and its subsidiaries’ assets comprise both recognized and unrecognized revenue-producing assets. The recognized revenue-producing assets
include intangible assets, purchased property and equipment. The balances of these assets held by the VIE and its subsidiaries are included in “copyrights
related to content, current portion”, “property and equipment, net” and “intangible assets, net” in the consolidated balance sheet and specifically in the VIE table
on the following page. The unrecognized revenue-producing assets mainly consist of license, patents, trademarks, and domain names which are not recorded in
the financial statement as they didn’t meet the recognition criteria set in ASC 350-30-25. The licenses stated above primarily consist of licenses that grant the
VIE and its subsidiaries the right to produce and broadcast internet, radio, and television programs. One of them is the ICP licenses as described in note 1.
As of December 31, 2015, Shenzhen Xunlei and its subsidiaries held patents granted in the PRC and in the United States. Presently, patent applications are
being examined by the State Intellectual Property Office of the PRC and also patent application is being reviewed by the United States Patent and Trademark
Office.
As of December 31, 2015, Shenzhen Xunlei and its subsidiaries have applied to register trademarks, of which the Company has received registered trademarks
in different applicable trademark categories including trademark registered with the United States Patent and Trademark Office and trademark registered with
World Intellectual Property Organization.
As of December 31, 2015, Shenzhen Xunlei held one domain name that was recognized as an intangible asset and other domain names that are not recorded in
the financial statements.
F- 80
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
27.
Certain risks and concentration (Continued)
PRC regulations (Continued)
The following consolidated financial information of the Group’s VIE and its subsidiaries from continuing operations was included in the accompanying
consolidated financial statements as of and for the years ended:
(In thousands)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Due from related parties
Deferred tax assets
Inventories
Prepayments and other current assets
Held for sale assets
Total current assets
Non-current assets:
Equity method investments
Deferred tax assets
Property and equipment, net
Construction in progress
Intangible assets, net
Goodwill
Prepayments for content copyrights
Other long-term prepayments
Total non-current assets
Total assets
Current liabilities:
Accounts payables
Due to a related party
Deferred revenue and income, current portion
Income tax payable
Accrued liabilities and other payables
Held for sale liabilities
Total current liabilities
Non-current liabilities:
Deferred revenue and income, non-current portion
Total non-current liabilities
Total liabilities
(In thousands)
Net revenue from continuing operations
Net income / (loss) attributable to Xunlei Limited
As of December 31,
2015
2014
43,849
28,575
5,508
6
1,358
—
10,147
46,325
135,768
5,498
8,262
16,370
—
16,635
23,237
1,239
5,795
77,076
212,844
24,504
84
27,534
2,554
85,701
26,438
166,815
6,452
6,452
173,267
32,461
69,522
11,573
30
351
480
31,659
—
146,076
9,884
6,791
17,991
14
14,297
21,896
—
7,430
78,303
224,379
33,262
38
24,902
2,407
131,312
—
191,921
4,751
4,751
196,672
2013
116,381
13,940
Years ended December 31,
2015
129,198
(6,408)
2014
132,515
12,677
F- 81
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
27.
Certain risks and concentration (Continued)
PRC regulations (Continued)
(In thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Foreign exchange risk
2013
92,580
(66,243)
2,487
28,824
2014
70,822
(78,335)
Years ended December 31,
2015
41,723
(51,721)
1,055
(8,943)
(6,657)
856
The Group’s financing activities are denominated mainly in the USD. The RMB is not freely convertible into foreign currencies. Remittances of foreign
currencies into the PRC and exchange of foreign currencies into the RMB require approval by foreign exchange administrative authorities and certain
supporting documentation. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of the
RMB into other currencies. The revenues and expenses of the Company’s subsidiaries, consolidated VIE and its subsidiaries are generally denominated in the
RMB and their assets and liabilities are denominated in the RMB.
Concentration of customer risk
The top 10 customers accounted for 14%, 16% and 26% of the net revenues for the years ended December 31, 2013, 2014 and 2015, respectively. Prior to
entering into sales agreements, the Group performs credit assessments of its customers to assess the credit history of its customers. Further, the Group has not
experienced any significant bad debts with respect to its accounts receivable.
Credit risk
As of December 31, 2014 and 2015, substantially all of the Group’s cash and cash equivalents were held at reputable financial institutions in the jurisdictions
where the Group and its subsidiaries are located. The Group believes that it is not exposed to unusual risks as these financial institutions have high credit
quality. The Group has not experienced any losses on its deposits of cash and cash equivalents.
Prior to entering into sales agreements, the Group performs credit assessments of its customers to assess the credit history of its customers. Further, the Group
has not experienced any significant bad debts with respect to its accounts receivable.
28.
Subsequent events
Restricted shares grant
In March 2016, 1,018,500 restricted shares had been granted to certain executive officers or employees of the Group.
Repurchase of shares
In January 2016, our board of directors authorized a second share repurchase program, whereby our company may repurchase up to US$20 million of our
common shares or ADSs from January 26, 2016 to January 26, 2017 through the same means as the Repurchase Program. We publicly announced this second
repurchase program on January 27, 2016.
F- 82
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
28.
Subsequent events (continued)
Investments
In March 2016, the Group paid USD 12.7 million as the consideration to acquired 10% equity interests in Shanghai Lexiang Technologies Co., Ltd (Lexiang), a
company in Shanghai, the PRC which invests in research and development of virtual reality. This acquisition was closed in March, 2016.
29.
Restricted net assets
Relevant PRC laws and regulations permit payments of dividends by the Company’s subsidiaries, VIE and VIE’s subsidiaries in China only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company’s subsidiaries, VIE and VIE’s
subsidiaries in China are required to make certain appropriation of net after-tax profits or increase in net assets to the statutory surplus fund (see Note 2(cc))
prior to payment of any dividends. As a result of these and other restrictions under PRC laws and regulations, the Company’s subsidiaries, VIE and VIE’s
subsidiaries in China are restricted in their ability to transfer their net assets to the Company in terms of cash dividends, loans or advances, which restricted
portion amounted to USD 59,760 thousand and USD 117,728 thousand as of December 31, 2014 and 2015, respectively. Even though the Company currently
does not require any such dividends, loans or advances from the PRC subsidiaries, VIE and VIE’s subsidiaries for working capital and other funding purposes,
the Company may in the future require additional cash resources from the Company’s subsidiaries, VIE and a VIE’s subsidiaries in China due to changes in
business conditions, to fund future acquisitions and development, or merely to declare and pay dividends to make distributions to shareholders.
F- 83
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
30.
Additional information: condensed financial statements of the Company
Regulation S-X require condensed financial information as to financial position, changes in financial position and results of operations of a parent company as
of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of
consolidated and unconsolidated subsidiaries together exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
The Company records its investment in its subsidiaries, VIE and VIE’s subsidiaries under the equity method of accounting.
Such investments are presented on the separate condensed balance sheets of the Company as “Long-term investments”.
The subsidiaries did not pay any dividends to the Company for the periods presented. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with U.S. GAAP have been condensed and omitted. The footnote disclosures represent supplemental information
relating to the operations of the Company, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of
the Group.
The Company did not have significant other commitments, long-term obligations, or guarantees as of December 31, 2015.
Condensed balance sheets
(In thousands)
Assets
Current assets:
Cash and cash equivalents
Due from subsidiaries and consolidated VIEs
Prepayments and other current assets
Total current assets
Non-current assets:
Intangible assets, net
Investments in subsidiaries and consolidated VIEs
Total assets
Liabilities
Current liabilities:
Accounts payable
Deferred revenue and income, current portion
Accrued liabilities and other payables
Total current liabilities
Non-current liabilities:
Deferred revenue and income, non-current
Warrants liabilities
Due to related parties, non-current portion
Other long-term payable
Total liabilities
Commitments and contingencies
Shareholders’ equity
Common shares
Treasury shares 30,274,602 shares as at December 31, 2014 and 29,558,094 shares as at December 31, 2015
Other shareholders’ equity
Total Xunlei Limited’s shareholders’ equity
Total liabilities, mezzanine equity and shareholders’ equity
F- 84
December 31,
2014
December 31,
2015
309,457
67,397
6,709
383,563
394
82,360
466,317
101
211
2,328
2,640
842
—
4,137
807
8,426
82
7
457,802
457,891
466,317
292,175
92,864
1,090
386,129
—
68,481
454,610
101
211
1,735
2,047
632
—
4,337
845
7,861
85
7
446,657
446,749
454,610
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
30.
Additional information: condensed financial statements of the Company (continued)
Condensed statements of operations
(In thousands)
Revenues
Cost of revenues
Gross profit
Operating expenses
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Total operating expenses
Operating loss
Interest income
Interest expense
Other income, net
Income / (loss) from subsidiaries and consolidated VIEs
Income / (loss) before income tax
Income tax
Net income / (loss)
Net income attributable to the non-controlling interest
Net income / (loss) attributable to Xunlei Limited’s common shareholders
2013
—
(2,264)
(2,264)
—
(241)
(972)
(1,213)
(3,477)
706
—
1,651
11,782
10,662
—
10,662
—
10,662
2014
Years ended December 31,
2015
—
(131)
(131)
—
(1,673)
(1,673)
—
—
(996)
(996)
(2,669)
6,171
(163)
7,602
(129)
10,812
—
10,812
—
10,812
—
—
(1,314)
(1,314)
(1,445)
5,318
(239)
(3,261)
(13,540)
(13,167)
—
(13,167)
—
(13,167)
Condensed statement of cash flows
(In thousands)
Cash flows from operating activities
Net cash generated from/(used in) operating activities
Cash flows from investing activities
Net cash (used in) / generated from investing activities
Cash flows from financing activities
Net cash (used in) / generated from financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of year
F- 85
2013
Years ended December 31,
2015
2014
4,708
(41,485)
(26,069)
(3,843)
(10,333)
(2,242)
(1,377)
30,240
—
28,863
332,412
280,594
28,863
—
309,457
3,812
4,975
(17,282)
309,457
—
292,175
Exhibit 4.32
Execution Version
Beijing Nesound International Media Corp., Ltd.
AND
Shenzhen Xunlei Networking Technologies Co., Ltd.
AND
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
Equity Transfer Agreement
For
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
May of 2015
Contents
Article 1
Definitions and Interpretation
Article 2
Equity Transfer and Consideration
Article 3
Payment of Price
Article 4
Conditions Precedent
Article 5
Post-closing Obligations and Arrangement for Transition Period
Article 6
Representations and Warranties
Article 7
Covenants and Undertakings
Article 8
Breach of Contract and Indemnity
Article 9
Effectiveness and Termination
Article 10
Miscellaneous
Appendix I: Content and Form of Confirmation on Conditions Precedent
Appendix II: Representations and Warranties of the Target Company and the Transferor
Appendix III: Disclosure Letter
Appendix IV: Equity Transfer Agreement for Industrial and Commercial Registration
2
6
7
7
9
10
11
16
18
19
Equity Transfer Agreement
This Equity Transfer Agreement (“Agreement”) is duly made and entered into by and among the following Parties on May 13, 2015 in Shenzhen, PRC:
(1)
(2)
(3)
Shenzhen Xunlei Networking Technologies Co., Ltd. (“Transferor”), a limited liability company incorporated and existing under the PRC laws, with
its registered address at 7&8/F, No.11 Building, Shenzhen Software Park, Keji Mid. 2nd Road, Nanshan District, Shenzhen, and its legal representative
being ZOU Shenglong;
Beijing Nesound International Media Corp., Ltd. (“Transferee”), a company limited by shares incorporated and existing under the PRC laws, with its
registered address at Room 601, 6/F, Hezhan Mansion, No.79 Banjing Road, Haidian District, Beijing, and its legal representative being LIU Wenwu;
and
Shenzhen Xunlei Kankan Information Technologies Co., Ltd. (“Target Company”), a limited liability company incorporated and existing under the
PRC laws, with its registered address at Room 701, No.11 Building, Shenzhen Software Park Phase II, Keji Mid. 2nd Road, Nanshan District,
Shenzhen, and its legal representative being JIN Hui.
(The Transferor, the Transferee and the Target Company shall be hereinafter referred to collectively as the “Parties”, and individually as a “Party” while the
other party as the “Other Party”.)
WHEREAS
A.
B.
C.
D.
The Target Company mainly engages in the Internet online video business, including the PC and mobile video play services, which specifically refers
to the provision of video watching service to Internet users through its self-built website after obtaining the legal information network dissemination
right and other relevant copyright of the video by means of self-production, procurement, exchange, introduction or otherwise (“Target Business”);
On the date of this Agreement, the Transferor holds all registered capital (i.e. RMB10 million in total) of the Target Company and is the sole
shareholder of the Target Company;
The Transferor, the Transferee and the Target Company have entered into an acquisition framework agreement on March 31, 2015 (“Acquisition
Framework Agreement”), under which, the Transferor will transfer all of its equity in the Target Company to the Transferee, and transfer the assets,
staff and business contracts relating to the Target Business to the Target Company or the Transferee (“Transaction”), so that the Target Company can
carry out the Target Business as an independent going concern from the Closing Date;
The Transferor, the Transferee and the Target Company will enter into a business and assets transfer agreement on May 14, 2015 (“Business and
Assets Transfer Agreement”), under which, the Transferor will transfer the assets, staff and business contracts relating to the Target Business held by
it to the Target Company, upon effectiveness of this Agreement; and
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E.
The Transferee desires to purchase, and the Transferor agrees to transfer to the Transferee, the 100% equity of the Target Company held by the
Transferor in accordance with the terms and conditions of this Agreement.
Therefore, the Parties have agreed as follows with respect to the Equity Transfer:
Article 1 Definitions and Interpretation
1.1
Definitions
Unless otherwise defined herein, when used herein, the following terms shall have the following meanings:
Agreement
refers to this Equity Transfer Agreement, including any other document (if any) assigning,
supplementing, revising and replacing such Agreement.
Indemnifying Party
shall have the meaning ascribed thereto in Item (1) of Article 8.4 hereof.
Force Majeure
refers to political turmoil, earthquake, typhoon, flood, fire, war or other events that are unpredictable
and the occurrence and consequence of which is inevitable or unpreventable, to the Parties.
Financial Statements
shall have the meaning ascribed thereto in Article 7.1 of Appendix II hereto.
Date of Financial Statements
refers to March 31, 2015.
Related Parties
shall have the meaning ascribed thereto in the Accounting Standards for Enterprises No.36 —
Disclosure of Related Parties (Cai Kuai [2006] No.3).
Related Party Transaction
shall have the meaning of “Related Party Transaction” as ascribed thereto in the Accounting Standards
for Enterprises No.36 — Disclosure of Related Parties (Cai Kuai [2006] No.3).
SARFT
refers to the State Administration of Press, Publication, Radio, Film and Television of the PRC.
Equity Transfer
shall have the meaning ascribed thereto in Article 2.1 hereof.
AIC
refers to the State Administration for Industry and Commerce of the PRC and local institutions
exercising similar powers at all levels.
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Completion of Industrial and
Commercial Registration/Complete
Industrial and Commercial Registration
refers to that the Target Company completes the application for change registration with the AIC with
respect to the Equity Transfer pursuant to the Transaction Documents, and the Transferee has been
registered as the sole shareholder of the Target Company, and the AIC has issued the changed business
license to the Target Company with respect to the Equity Transfer.
Business Day
refers to any day other than Saturday, Sunday or statutory holidays in the PRC.
Post-closing Obligations
shall have the meaning ascribed thereto in Article 5.1 hereof.
Closing Date
shall have the meaning ascribed thereto in Article 3.1 hereof (i.e. the definition of Closing Date in the
Business and Assets Transfer Agreement).
Transaction Documents
refer to this Agreement, the Business and Assets Transfer Agreement, the Collaboration and Non-
competition Agreement and the appendices and schedules to the said documents.
Accounting Rules
refer to the accounting systems, rules and principles and normative documents applicable to the Target
Company on the date of this Agreement.
Target Company
shall have the meaning ascribed thereto in the recital of this Agreement; and for the avoidance of
doubt, any reference to the Target Company herein shall also include the branches of the Target
Company, including but not limited to Shenzhen Xunlei Kankan Information Technologies Co., Ltd.,
Beijing Branch.
Target Website
refers to collectively the Target Domain and the websites on the same URL, i.e. Kankan Website
Target Domain
Approval
(www.kankan.com).
refers to kankan.com.
refers to any franchise, license, permit, approval, waiver, consent, authorization, registration or filing
issued by any Governmental Authority.
Encumbrance
refers to any mortgage, lien, guarantee, pledge, security interest, preemptive right or other adverse
claim or third party encumbrance.
Person
refers to any natural person, legal person, partnership, limited liability company, company limited by
shares, society, trust, unincorporated organization, or any other legal entity of whatsoever nature that is
established under any Applicable Laws, or any Governmental Authority.
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Litigation
shall have the meaning ascribed thereto in Article 11.1 of Appendix II hereto.
Audio-visual License
refers to the License for Online Transmission of Audio-visual Programs issued by the SARFT.
Applicable Laws
with respect to any Person, refers to the public, valid and applicable ordinances, laws, administrative
regulations, local regulations, rules, decisions, orders, judicial interpretation, judgment, verdicts,
arbitration awards or other normative documents that are binding upon such Person or any property of
such Person.
Indemnified Party
shall have the meaning ascribed thereto in Item (1) of Article 8.4 hereof.
Transferee
Tax
shall have the meaning ascribed thereto in the recital hereof.
refers to any form of tax, collection, duty, dues, levies or any withholding tax of any nature (including
but not limited to the individual income tax, enterprise income tax, business tax, stamp tax or any
relevant fine, punishment, surcharge or interest) that is imposed, collected or levied, or is receivable,
by any tax authority of any applicable jurisdiction under Applicable Laws.
Alternative Transaction
shall have the meaning ascribed thereto in Item (1) of Article 7.3 hereof.
Conditions Precedent
shall have the meaning ascribed thereto in Article 4.1 hereof.
Confirmation on Conditions Precedent
shall have the meaning ascribed thereto in Item (12) of Article 4.1 hereof.
Yuan
Subsidiary
refers to Renminbi, the legal currency of the PRC.
with respect to any Person, refers to any legal person, partnership, limited liability company, company
limited by shares, society, trust or other entity in which the securities or other interests owned by such
Person (individually or through or with the collaboration of any other Person) enable such Person to
generally have at least fifty percentage (50%) voting power in terms of election of board of directors or
other similar decision-making institution, or enable such Person to be entitled to otherwise determine
its businesses and policies.
4
Indebtedness
with respect to any Person, refers to all liabilities of such Person and other obligations which may
cause such Person to make external payment. With respect to the Target Company, refers to the sum of
all obligations (whether existing or conditional) to be paid or repaid by the Target Company in cash,
including but not limited to: (a) all obligations towards the borrowed money; (b) any bond (including
short-term financing bonds, corporate bonds, bonds and convertible bonds of the Target Company,
etc.) or note, etc. that is issued, honored, endorsed or issued but unpaid by the Target Company; (c)
any repayment obligation owed to the goods supplier or service provider due to procurement of goods
or services or similar arrangement; (d) any repayment obligation generated from issuance of letter of
credit by the Target Company; (e) payable premium resulting from the repurchase and exchange of
assets, businesses and interests; (f) all unpaid liabilities for which the Target Company has provided
guarantee to any Party or otherwise has any direct or indirect payment obligation to any Party; and (g)
other financial activities occurred under other transactions and which shall be deemed as liabilities
under the PRC Accounting Rules.
Governmental Authority
refers to any government or its affiliated institutions, any department or agency of any government or
its affiliated institutions, any legislation authority, court or arbitral tribunal, and any regulatory
institution of any stock exchange, with jurisdiction.
Intellectual Property Rights or IPR
Material Adverse Effect
refers to any patent, trademark, service mark, registered design, domain name, utility model,
copyright, invention, confidential information, trade secret, proprietary production process and
equipments, brand name, database right, trade name or any right similar to the aforesaid in any country
and region, and the interests of any of the aforesaid (whether registered or not, and including the
application for granting the aforesaid and the right to apply for any of the aforesaid in any place of the
world).
refers to any effect, change or development that will individually or together with other effect, change
or development (or may be reasonably expected to) cause any obvious adversity to (a) the overall
business (especially the Target Business), assets, finance or other conditions, operation results or
operation of the Target Company, or (b) the ability of the Transferor and/or the Target Company to
complete the Equity Transfer pursuant to the terms of the Transaction Documents (provided that in
each case, it shall not include any such adverse effect, change or development that has been cured or
remedied during the reasonable time limit).
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Material Contracts
shall have the meaning ascribed thereto in Article 6.2 of Appendix II.
PRC
refers to the People’s Republic of China, and for the purpose of this Agreement, the PRC shall not
include Hong Kong Special Administrative Region, Macau Special Administrative Region and
Taiwan.
Transferor
shall have the meaning ascribed thereto in the recital hereof.
1.2
Interpretation
In this Agreement, unless otherwise stated herein:
(1)
(2)
(3)
(4)
(5)
(6)
Unless the context otherwise requires, “Article” or “Appendix” refers to the article of or appendix to this Agreement. The WHEREAS Clause
of this Agreement shall be an integral part of this Agreement.
The numbers and headings of articles are inserted for convenience only, and shall not affect the interpretation or construction of this
Agreement.
Any reference to an “Article” without any indication immediately following to any particular part of such Article, shall be deemed to refer to
all content of such Article instead of any item, paragraph or provision of such Article.
“Written/in writing” refers to the correspondence sent by letter, email or fax.
“Including” and similar words are not restrictive, and the term “without limitation” shall be deemed to immediately follow “including” when
interpreting “including”.
If the occurrence date of any event as provided in this Agreement is on a day other than a Business Day, such event shall be deemed to occur
on the Business Day immediately following such date.
(7)
When used herein, “no less than” shall include the number per se.
Article 2 Equity Transfer and Consideration
2.1
Equity Transfer
As of the date of this Agreement, the registered capital of the Target Company is Ten Million Yuan (RMB10,1000,000), all contributed in currency and
has been paid in full by the Transferor. All equity of the Target Company held by the Transferor is free from any Encumbrance. Subject to compliance
with all provisions of this Agreement, the Transferee agrees to purchase from the Transferor the 100% equity of the Target Company held by the
Transferor, and the Transferor agrees to transfer such equity to the Transferee (“Equity Transfer”).
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2.2
Equity Transfer Consideration
The aggregate consideration for Equity Transfer shall be Ten Million Yuan (RMB10,000,000) in total (“Consideration”). The Transferee shall pay the
Consideration to the Transferor in accordance with Article 3 hereof.
2.3
Excluded Liabilities
(1)
Unless otherwise provided in the Transaction Documents, no provision of this Agreement shall assign to the Transferee or be construed as the
Transferee’s acceptance of, any responsibility or obligation that is not explicitly accepted by it under this Agreement, including:
(a)
(b)
Any tax liability of the Transferor and the Target Company or any of its Related Parties occurred before the Closing Date, whether it
has due at that time; and
Any responsibility or obligation of the Transferor and the Target Company and any of its Related Parties occurred before the Closing
Date.
(2)
Unless otherwise provided in the Transaction Documents, the Transferor shall discharge all liabilities, responsibilities and obligations relating
to the Target Company that are not explicitly accepted by the Transferee under this Agreement.
3.1
Payment of Price
Article 3 Payment of Price
The Parties unanimously agree that, subject to the satisfaction of all Conditions Precedent set forth in Article 4.1 or the written waiver of such
Conditions Precedent by the Transferee, on the payment date of the Second Installment of Price (as defined in the Business and Assets Transfer
Agreement) in the Business and Assets Transfer Agreement (“Closing Date”), the Transferee shall remit the Consideration (i.e. Ten Million Yuan
(RMB10,000,000)) as provided in Article 2.2 hereof into the payee’s account designated by the Transferor. Meanwhile, on or before the Closing Date,
the Transferor shall provide closing documents to the Transferee pursuant to the Transaction Documents. The Parties unanimously confirm that the
Closing Date is preliminarily set as May 31, 2015.
3.2
Commencement of Rights
Unless otherwise agreed in the Transaction Documents, prior to the Closing Date, the Transferor shall enjoy and assume all rights and obligations
relating to the equity of the Target Company; and from the Closing Date, all rights and obligations relating to the equity of the Target Company
transferred by the Transferor shall be enjoyed and assumed by the Transferee.
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4.1
Conditions Precedent
Article 4 Conditions Precedent
The obligation of the Transferee to pay the Consideration is dependent on the Transferee’s written confirmation of the satisfaction (or the Transferee’s
written waiver) of all the following conditions (each condition shall be referred to as a “Condition Precedent”):
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
The Parties hereto shall have duly executed and delivered this Agreement, and this Agreement shall have become effective and remain in full
force and effect on the Closing Date;
The Transferor has duly performed and complied with the requirements of this Agreement, and duly completed all undertakings and
obligations hereunder which shall be performed prior to the Closing Date;
The representations and warranties made by the Transferor in Article 6.1 hereunder and Articles 1, 2, 3.2, 5, 7, 8, 10, 11, 13 and 15 of
Appendix II shall be true and accurate on the date of this Agreement, and remain true and accurate as of the Closing Date as if made on the
Closing Date; except for the foregoing, other representations and warranties made by the Transferor in Appendix II hereto shall be true and
accurate in material aspects on the date of this Agreement, and remain true and accurate as of the Closing Date as if made on the Closing
Date;
From the date of this Agreement to the Closing Date, there is no valid injunction, prohibition or law to restrict or prohibit the completion of
the transaction contemplated hereunder;
The Target Company has no Material Adverse Effect prior to the Closing Date, except for those caused by the fault of Nesound;
The Target Company and the Transferor shall have approved the Equity Transfer and the Transaction Documents in accordance with the
provisions of their constitutional documents, and such approvals shall remain fully valid on the Closing Date;
The handover of articles, bank account information, certificates and licenses, seals, documents, accounting vouchers, archives, agreements and
contracts and other assets within the normal and reasonable scope, in connection with the Target Company and the Target Business, is
completed (except for the specimen seal impression at the bank);
Pursuant to the Applicable Laws and any contract executed by the Target Company, the notices and/or consents (if any) required to be sent to
or obtained from the counterparty of the contract for the purpose of the Equity Transfer shall have been sent or obtained, except for those
notices or consents that are not required in accordance with the provisions of the Transaction Documents;
The Target Company has filed application to the AIC with respect to the matters concerning the Equity Transfer and obtained the acceptance
notice issued by the AIC, pursuant to the provisions of this Agreement;
8
(10)
The Transferor has submitted to the competent Governmental Authority applications for change of the ICP filing registration, ICP license,
network culture operation license (excluding the Audio-visual License) under its name to delete the Target Domain from the said certificates
and licenses, and such applications have been officially accepted by the competent authority;
(11)
The Transferor has submitted the renewal application for the Audio-visual License with the SARFT; and
(12)
The Transferor has provided to the Transferee a confirmation on Conditions Precedent (“Confirmation on Conditions Precedent”) (please
see Appendix I hereto for the format) that is signed by the authorized representative of the Transferor and confirms the satisfaction of the said
conditions above.
4.2
Completion Term and Termination of Conditions Precedent
The Parties shall make best efforts to ensure all Conditions Precedent be satisfied within six months from the date of this Agreement or other period as
may be otherwise agreed by the Parties in writing.
Where any Condition Precedent fails to be satisfied due to reasons of the Transferor within the said completion term of the Conditions Precedent and is
not waived by the Transferee, and still fails to be satisfied, or waived by the Transferee within thirty (30) Business Days upon receipt of the written
notice from the Transferee by the Transferor, the Transferee shall be entitled to issue a written notice to the Target Company and the Transferor to
terminate the Transaction Documents, and the Transaction Documents shall be terminated from the date when the Target Company or the Transferor
receives such written notice of termination.
Article 5 Post-closing Obligations and Arrangement for Transition Period
5.1
Post-closing Obligations
The Transferor shall complete the following obligations within six months after the Closing Date (each obligation shall be referred to as a “Post-closing
Obligation”):
(1)
(2)
Make reasonable efforts to cooperate with the Transferee and the Target Company to enable the Target Company to obtain the ICP license,
the network culture operation license, the radio and television program production and operation license;
The Transferor will waive the Audio-visual License in its name so as to cooperate with the Target Company in applying for the Audio-visual
License including the Target Domain. The Transferee and the Target Company shall be responsible for applying with the SARFT for
obtaining the Audio-visual License including the Target Domain, so as to replace the Audio-visual License in the name of and held by the
Transferor, and the Transferor shall provide full cooperation and assistance for this;
9
(3)
(4)
Make reasonable efforts to cooperate with the Transferee and the Target Company in Completing Industrial and Commercial Registration with
respect to the Equity Transfer and obtaining the new business license;
The Transferee and the Target Company may at any time replace the executive director, legal representative or supervisor of the Target
Company after the Closing Date, and the Transferor shall make reasonable efforts to cooperate; and
(5)
The Transferor has duly performed and complied with the requirements of the Transaction Documents including this Agreement.
5.2
Delivery and Replacement of Specimen Seal Impression at the Bank
On the date of receipt of the Consideration by the Transferor, the Transferor agrees to deliver the specimen seal impression of the Target Company at
the bank to the Transferee, and cooperate with the Transferee in going through the formalities with the banks for change of the specimen seal
impression at the bank and the authorized representative.
5.3
Arrangement for Transitional Period
Unless otherwise agreed in the Transaction Documents, from the date of this Agreement to the Closing Date (“Transition Period”), all revenues and
expenditures of the Target Company shall be enjoyed and assumed by the Transferor, and after the Closing Date, all revenues and expenditures of the
Target Company shall be enjoyed and assumed by the Target Company and the Transferee.
6.1
Representations and Warranties of the Target Company and the Transferor
Article 6 Representations and Warranties
(1)
(2)
The Target Company and the Transferor hereby jointly and severally make the representations and warranties set forth in Article 6.1 and
Appendix II to the Transferee. The Target Company and the Transferor confirm that the Transferee’s execution and performance of the
Transaction Documents relies on the truth, accuracy and no misleadingness of the representations and warranties of the Target Company and
the Transferor.
The Target Company is legally incorporated and validly existing under the PRC laws. Each of the Target Company and the Transferor has the
powers and authorities to execute and perform the Transaction Documents to which it is a party. All actions as necessary for authorizing each
of the Target Company and the Transferor to execute and perform the Transaction Documents to which it is a party have been taken or will be
taken prior to the date of this Agreement. The Transaction Documents to which the Target Company and the Transferor are parties thereto will
become valid and binding obligations of the Target Company and the Transferor upon execution and delivery, and may be enforced against
the Target Company and the Transferor in accordance with their respective terms.
10
6.2
Representations and Warranties of the Transferee
The Transferee has represented and warranted to the other Parties as follows: the Transferee is legally incorporated and validly existing under the laws
at the place of its incorporation; the Transferee has the powers and authorities to execute and perform the Transaction Documents to which it is a party;
all actions as necessary for authorizing the Transferee to execute and perform the Transaction Documents to which it is a party have been taken or will
be taken prior to the date of this Agreement; the Transaction Documents to which the Transferee is a party will become valid and binding obligations
of the Transferee upon execution and delivery, and may be enforced against the Transferee in accordance with their respective terms.
7.1
Business Operation
Article 7 Covenants and Undertakings
(1)
The Target Company and the Transferor undertake that, during the Transition Period, except for the purpose of implementation of this
Transaction and unless otherwise agreed by the Parties in writing, the Target Company shall take and the Transferor shall and shall cause the
Target Company to take the following actions:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Operate business, execute and perform contracts in the way consistent with the past practices and prudent business practices and in
compliance with the Applicable Laws, in the normal course of business;
Make best efforts to ensure that the current employees and other employment forms, suppliers, clients and other Persons with whom
it has business connection continue providing services;
Guarantee the integrity of the current business organization;
Maintain all operating assets and equipments (including any self-owned IPR or IPR held under license) in normal operation and good
maintenance conditions;
Maintain all material operating licenses and qualifications of the Target Company to be continuously effective;
Prudently take proper measures to protect its IPR, including but not limited to timely going through the registration formalities for
the software independently developed or held by the Target Company or other IPR of the Target Company, as required by the
Applicable Laws to maintain the exclusiveness, confidentiality and value of such IPR;
11
(vii)
Immediately inform the Transferee of any circumstance leading to any substantial breach of any warranty of the Target Company and
the Transferor or other terms of this Agreement; and
(viii) Make best efforts to deal with and resolve all problems disclosed to the Transferee by the Target Company and the Transferor due to
the Equity Transfer and mentioned herein, prior to the date of Completion of Industrial and Commercial Registration.
(2)
The Target Company and the Transferor undertake that, during the Transition Period, except for the purpose of implementation of this
Transaction and unless otherwise agreed by the Parties in writing, without prior written consent of the Transferee, the Target Company may
not take, and the Transferor may not cause or allow the Target Company to take any of the following acts (and if the Transferee fails to give
written consent within five (5) Business Days after the Transferor has provided the written application or notice, the Transferee shall be
deemed to have consented):
(i)
(ii)
(iii)
(iv)
(v)
(vi)
To enter into any agreement or arrangement with the Transferor and/or its Related Parties on an unfair transaction basis or not in the
normal course of business;
To enter into any expenditure-type contract or undertaking with an amount of over 200,000 Yuan (or equivalent amount in other
currency) (or make any bidding or offer that may lead to such contract or undertaking), or enter into any agreement, contract,
arrangement or transaction that will substantially impede the Target Company and the operation of the Target Business or will cause
any material change or Material Adverse Effect thereto, other than in the normal course of business;
Whether it is general and in the normal course of business or not, to acquire or dispose, or agree to acquire or dispose any business or
asset with the value of over 500,000 Yuan (or equivalent amount in non-RMB currency), except for the Related Party Transaction
made for satisfaction of this Transaction;
To terminate the operation of the existing businesses of the Target Company or change any material part of its business activities;
To sell or dispose all or substantially all intangible Assets or Assets of the Target Company;
To distribute any profits by payment of dividends, capitalization of reserves or otherwise;
(vii)
To designate the appointment of the vice president of the management team or above of the Target Company;
(viii)
To establish or revise the conditions for any employee option or participation plan without written consent of the Transferee;
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(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
Where the Target Company attracts any investment or equity transaction other than the Equity Transfer or obtain any investment or
equity transaction undertaking, or makes any equity investment in any other Target Company, except for the approval of transfer of
equity of the Target Company for the purpose of performance of the Transaction Documents;
To set up or allow the incurring or issuance of any Indebtedness or Encumbrance that constitutes the guarantee, lien or mortgage of
all or any goodwill, asset or right of the Target Company;
To sell, transfer, use under license, mortgage or set up any Encumbrance over, or otherwise dispose any trademark, patent, copyright
or other IPR of the Target Company;
Except for the purpose of performance of the Transaction Documents, to revise or restate the articles of association of the Target
Company;
Except for the purpose of performance of the Transaction Documents, the Target Company issues any decision of executive director
or shareholder,; and
To make any direct or indirect external transfer of the interests of the Target Company, except for the daily normal operation of the
Target Company.
(3)
The Transferor and the Transferee agree that the Transferee will dispatch financial or business personnel to review any expenditure-type
contract or undertaking with an amount of over 100,000 Yuan (or equivalent amount in other currency) (or make any bidding or offer that may
lead to such contract or undertaking), in order to avoid entering into any agreement, contract, arrangement or transaction that will substantially
impede the Target Company and the operation of its main business or will cause any material change or Material Adverse Effect thereto, other
than in the normal course of business.
7.2
Undertakings of Transferee
The Transferee undertakes:
(1)
(2)
To pay the Consideration to the Transferor on time and in full and fulfill other obligations provided hereunder in accordance with the
provisions of this Agreement;
To cooperate with the Transferor in preparing and making any necessary documents relating to the Equity Transfer and cooperate with the
Transferor in going through the approval, registration and filing formalities with relevant Governmental Authority in connection with the
Equity Transfer and as required by the Applicable Laws; and
(3)
For the purpose of completing this Transaction, to handle other matters as may be reasonably required by the Transferor.
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7.3
Exclusivity
The Target Company and the Transferor undertake that, during the Transition Period, without prior written consent of the Transferee or unless
otherwise agreed herein, the Target Company and the Transferor may not, and the Transferor shall cause the Target Company or its Related Parties and
their respective directors, supervisors, senior executives, employees, representatives or agents not to:
(1)
(2)
Launch, induce or encourage any purchase and sale or other disposal that involves the equity of the Target Company, or any merger or
consolidation that involves the Target Company, or any inquiry, quotation or offer that involves any purchase and sale or other disposal of the
Target Business operated directly by the Transferor or through its Related Parties (each shall be referred to as an “Alternative Transaction”);
Participate in any discussion or negotiation on the Alternative Transaction, or provide or disclose any information on the Target Company or
the Target Business for the Alternative Transaction; or
(3)
Enter into any written or oral agreement, arrangement or understanding for the Alternative Transaction, with or without binding effect.
7.4
Further Cooperation
The Target Company and the Transferor undertake that:
(1)
(2)
(3)
During the Transition Period, the Target Company shall, and the Transferor shall cause the Target Company and its directors, supervisors,
senior executives and employees to make reasonable efforts to cooperate with the Transferee on any required information and document
request;
During the Transition Period, with prior reasonable notice and during the normal working hours, the Target Company shall allow, the
Transferor shall cause the Target Company to allow, the Transferee and its authorized personnel and professional consultants to enter into the
place of operation and verify all documents, books and records, and shall instruct its managerial personnel and employees to timely provide
information and make explanations to the Transferee and its authorized professional consultants;
The documents and materials that have already been or may be provided to the Transferee and its professional consultants by the Target
Company or its representatives are authentic, accurate and complete, without any intentional concealment or gross omission, and the
signatures and seals on such documents and materials are authentic, and all duplicate materials or copies are consistent with the originals.
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7.5
Notice on Particular Matters
Each Party to this Agreement undertakes that, during the Transition Period, it shall immediately notify the other Parties upon knowledge of the
following matters and attach the corresponding certification documents:
(1)
(2)
(3)
(4)
(5)
Any notice or statement published by any Person for the consent, approval, authorization, order, registration, filing or other formalities that
shall be obtained by or may be required from such Person with respect to the Equity Transfer;
Any notice or statement published by any Governmental Authority with respect to the Equity Transfer;
Any legal action, dispute, claim, litigation, investigation or other procedure initiated by or handled by any Governmental Authority, which
involves or otherwise affects the ability of any Party hereto to fulfill its obligations hereunder or complete the Equity Transfer;
Any other event which may be reasonably expected to have any Material Adverse Effect on the Equity Transfer; and
The fact on satisfaction of any Condition Precedent.
7.6
Compliance with Transaction Documents
The Target Company and the Transferor undertake to duly perform and comply with the provisions of the Transaction Documents including this
Agreement, without triggering any default event or potential default event.
7.7
Notice of Adverse Circumstance
Upon execution of this Agreement, where the Target Company or the Transferor is aware of any of the following important facts, and:
(1)
(2)
(3)
such fact is severely inconsistent with any statement, representation or warranty made by the Target Company and the Transferor under this
Agreement;
such fact suggests that any statement, representation or warranty made by the Target Company and the Transferor under this Agreement is
false or misleading; or
such fact will affect the acceptance of the equity of the Target Company by a prudent acquirer or affect the Transferee’s payment of the
Consideration,
then the Target Company and the Transferor shall immediately issue a written notice to the Transferee. The Transferee shall, within fifteen (15) days
upon receipt of such notice, be entitled to terminate this Agreement by giving written notice of the intention to do so to the Target Company and the
Transferor, and/or demand the Target Company and the Transferor to assume the corresponding liabilities for breach of contract. The said termination
notice will not affect any right available to the Transferee under this Agreement, other Transaction Documents or Applicable Laws.
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8.1
Liabilities for Breach of Contract
Article 8 Breach of Contract and Indemnity
This Agreement shall be binding upon the Parties once effective. Where any Party breaches any representation, warranty or other obligation hereunder,
or such representation or warranty contains any false, misleading or inaccurate information which causes any harm to the other Party, or where any
Party’s breach results in the non-performance or partial performance of this Agreement, all economic liabilities and legal liabilities arising out thereof
shall be assumed by the breaching Party and the breaching Party shall indemnify the losses caused to Other Parties.
8.2
Transferor’s Indemnity
(1)
(2)
(3)
From and after the date of this Agreement, the Transferor shall indemnify, defend, protect and hold the Transferee harmless against the losses
incurred due to, arising out of or resulting from (a) any breach of the representation or warranty of the Target Company and the Transferor and
(b) any breach of any covenant or undertaking which shall be performed by the Target Company and/or the Transferor as set forth in this
Agreement and other Transaction Documents, by the Target Company and the Transferor.
Without prejudice to the generality of the foregoing, whether the Transferor has made disclosure to the Transferee prior to the Closing Date
hereunder, if the Target Company or the Transferor causes any loss to the Target Company and the Transferee after the Closing Date due to
any fact or circumstance existing on and before the Closing Date (including but not limited to any defect in operation license, compliance of
the taxation and business operation, IPR infringement, non-compliance in labor, social security or housing provident fund, etc.), the Transferor
shall assume such loss and make compensation at the equivalent amount.
Notwithstanding the foregoing, given that the Transferor is the sole shareholder of the Target Company and the absolute actual controller of
the Target Company, and after the Closing Date, the Transferee will become the sole shareholder of the Target Company, and the loss of the
Target Company will become indirect loss of the Transferee; therefore, for any liability for breach of contract or other legal liability which
shall be assumed by the Target Company to the Transferee under this Agreement on basis of any cause prior to the Closing Date, the
Transferee shall be entitled to demand the Transferor in lieu of the Target Company to assume all expenditures and losses in connection
therewith or make compensation of equivalent amount to the Target Company. In this case, the Transferor undertakes to unconditionally
waive any and all rights of recovery or recourse against the Target Company.
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Notwithstanding the foregoing:
(1)
(2)
Where any representation or warranty set forth in Article 6.1 hereof is proved to be untrue or inaccurate, but such untrue or inaccurate
representation or warranty does not cause any loss to the Transferee, the Transferor shall not be required to make any compensation to the
Transferee;
Where the Transferor breaches any obligation or liability provided herein (including but not limited to the obligation on representation and
warranty as provided in Article 6.1 hereof) which causes any loss to the Transferee, the Transferor shall only be liable for any claim request
made by the Transferee in writing within twenty four (24) months after the Closing Date; and
(3)
The Transferor is not required to make any repeated compensation to the Other Parties to this Agreement for the same breach.
8.3
Transferee’s Indemnity
From and after the date of this Agreement, the Transferee shall indemnify, defend, protect and hold the Transferor harmless against any loss incurred
due to or resulting from or relating to (a) any breach of the Transferee’s representation and warranty and (b) any breach of covenant or undertaking
which shall be performed by the Transferee as set forth in this Agreement and other Transaction Documents, by the Transferee. In particular, where the
Transferee fails to timely pay the Consideration to the Transferor in accordance with the provisions of Article 3 hereof, then for each day in delay, the
Transferee shall pay 0.02% of the payable amount in delay to the Transferor as late interest.
8.4
Notice of Claim
(1)
(2)
The Party (“Indemnified Party”) entitled to indemnity under Article 8 hereof shall, upon knowledge of any loss which have caused or may
cause any claim request, immediately notify each Party (“Indemnifying Party”) obligated to provide indemnity under Article 8 hereof.
The Parties agree that any delay in notifying the Indemnifying Party about the claim request (including any third party claim request) by the
Indemnified Party shall not release the Indemnifying Party from this obligation, unless and only to the extent that the Indemnifying Party has
suffered damage due to the delay of such notice.
8.5
Matters Related to Third Party
(1)
Where what the Indemnified Party shall notify the Indemnifying Party under Article 8.4 is any claim request made by a third party, the
Indemnifying Party shall (a) retain an attorney reasonably acceptable to the Indemnified Party to defend any such claim request made against
the Indemnified Party; (b) control and handle any necessary or desirable procedure or negotiation in connection with such claim request to
make defense for the Indemnified Party; and (c) take any other measures or proceedings to solve or defend any such claim request.
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(2)
(3)
Without written consent of the Indemnified Party, the Indemnifying Party may not make any settlement or compromise of any claim request,
or consent to any judgment, unless such settlement, compromise or judgment (a) contains any term to unconditionally release any and all
obligations of the Indemnified Party in connection with such claim request, and (b) does not contain any statement or recognition of any fault,
culpability or omission made by any Indemnified Party or its representative.
In either circumstance, the Indemnified Party and the Indemnifying Party shall mutually and reasonably notify each other all matters
concerning any third party claim request, and shall rapidly and mutually notify any and all relevant important progress in writing and shall
mutually provide full cooperation and assistance for its defense, negotiation or settlement.
Article 9 Effectiveness and Termination
9.1
Effectiveness
This Agreement shall become effective from the date when the Parties duly sign it.
9.2
Early Termination
This Agreement may be terminated in advance prior to the Closing Date in accordance with the following provisions:
(1)
(2)
(3)
With unanimous written consent of the Parties;
Where the Transferee terminates this Agreement in accordance with Article 4.2; and
Where any Governmental Authority with jurisdiction makes any final permanent injunction, regulation, rule, ordinance or order to restrict,
prohibit or rescind the completion of the Equity Transfer, any Party may terminate this Agreement.
9.3
Effect of Termination
Where this Agreement is terminated in accordance with Article 9.2, except for Article 1 (Definitions and Interpretations), Article 8 (Breach of Contract
and Indemnity), Article 10.2 (Notice), Article 10.5 (Applicable Laws and Dispute Resolution), Article 10.6 (Confidentiality and Information
Disclosure), Article 10.7 (Severability) and the agreement reached under this Article 9.3, this Agreement shall be null and void and no longer have any
binding effect and force, and except for the refund of all Consideration paid by the Transferee to the Transferor by the Transferor, neither Party shall
assume any liability or obligation hereunder. Provided that, notwithstanding the termination of this Agreement, any Party shall be liable for the losses
caused to the other Parties due to its breach of this Agreement prior to the termination of this Agreement.
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10.1
Fees
Article 10 Miscellaneous
The fees of the Parties incurred by retaining outside counsels, accountants and other consultants shall be respectively borne by the Transferor and the
Transferee. If this Transaction is successfully completed, KanKan is not required to pay any agency fee or consulting fee for this Transaction. The
Parties shall respectively bear the Tax, costs and fees arising out of the execution and performance of this Agreement.
10.2
Notice
(1)
All notices, demands, requests, consents, waivers and other communications required or permitted hereunder shall be made in writing
(including telegraph, telex or similar written form) and shall be sent, posted or mailed, delivered or telexed to the following address:
Transferee:
Transferor:
Target Company:
Beijing Nesound International Media Corp., Ltd.
GU Feng
Attn:
010-88594185
Fax:
Room 601, 6/F, Hezhan Mansion, No.79 Banjing Road, Haidian District,
Address:
Beijing (registered address)
Shenzhen Xunlei Networking Technologies Co., Ltd.
Attn:
Fax:
Address:
HUANG Peng
0755- 26035777
7&8/F, No.11 Building, Shenzhen Software Park Phase II, Keji Mid. 2nd
Road, Nanshan District, Shenzhen
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
Attn:
Fax:
Address:
HAO Zhizhong
0755- 26035777
Room 701, No.11 Building, Shenzhen Software Park Phase II, Keji Mid. 2nd
Road, Nanshan District, Shenzhen
(2)
All notices, demands or other communications sent or delivered under Article 10.2 (1) shall be deemed to have sent or delivered under the
following circumstances: (a) in case of express courier or personal delivery, they shall be deemed to have served when the relevant notices,
demands or communications are sent to the relevant address stated above; and (b) in case of fax, they shall be deemed to have served when the
relevant notices, demands or communications are transmitted to the said fax number and the report on successful fax transmission is obtained.
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10.3
Amendment
Any amendment to this Agreement may only become effective after each Party signs a written agreement for that.
10.4 Waiver
The failure of any Party hereto to exercise or timely exercise any of its rights, powers or remedies hereunder shall not be deemed as a waiver, and any
single or partial exercise shall not preclude any other further exercise or preclude other exercise or exercise of any other rights, powers or remedies.
Moreover, the waiver of any Party hereto to hold the breaching Party accountable for any breach shall not be deemed as such Party’s waiver of any
right to hold the breaching Party accountable for any other breach subsequently occurred.
10.5
Applicable Laws and Dispute Resolution
(1)
(2)
This Agreement shall be governed by and interpreted in accordance with the PRC laws.
In case of any dispute arising out of the interpretation or implementation of this Agreement, the Parties shall first attempt to solve such dispute
through friendly negotiation. Where the dispute cannot be solved through negotiation within sixty days after a Party serves the written notice
on demanding commencement of negotiation to Other Parties, then either Party may submit the dispute to the China International Economic
and Trade Arbitration Commission, South China Sub-Commission for arbitration, and the relevant Parties agree to entrust the chairman of the
Commission to appoint one arbitrator to arbitrate the dispute in Shenzhen in accordance with the rules of the Commission then in force. The
arbitration award shall be final and binding upon the Parties and may not be appealed. The arbitration fee shall be borne by the defeating
party, unless otherwise provided by the arbitration award.
(3)
In case of any dispute and during the arbitration of any dispute, except for the disputed matters, the Parties shall continue exercising their
respective other rights hereunder and performing their respective other obligations hereunder.
10.6
Confidentiality and Information Disclosure
(1)
Neither Party shall, nor shall cause its Related Parties, shareholders, directors, senior executives, employees, representatives or agents to,
directly or indirectly disclose the existence of the Transaction Documents or any information on the Equity Transfer (including any
information obtained by such Party when participating in the negotiation and execution of the Equity Transfer), unless (a) with the prior
written consent of the non-disclosing Party, or (b) such information is required to be disclosed under the Applicable Laws and is only
disclosed to the necessary extent conforming to any rule or policy of any stock exchange or such Applicable Laws; provided that the
disclosing Party shall issue an immediate written notice to the non-disclosing Party about its disclosure need, so that the non-disclosing Party
may, to the extent permitted by the then circumstance, have reasonable opportunity to: (a) obtain any protection order or other form of
protection to avoid disclosure, and (b) give advice on the words and content of such disclosure.
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(2)
(3)
Notwithstanding the foregoing, the Parties shall be entitled to disclose the existence of this Agreement, the Equity Transfer and other matters
to the corresponding banks and the accountants and legal counsels retained by them and their business partners and employees within
necessary scope, provided that the individuals or entities who know such information shall have agreed to assume confidentiality obligation
not less than those provided herein.
Without prior written consent of the other Parties of this Agreement, neither Party may disclose matters or information relating to this
Transaction on any press conference, industry or professional media, marketing materials and other media to any third party or the public;
where a Party indeed needs to make such disclosure to any third party or the public, the content of its disclosure shall be first recognized by
other Parties hereto in writing.
10.7
Severability
All obligations hereunder shall be deemed as separate obligations and be enforceable, and where any or several obligations hereunder cannot be
enforced, the enforceability of other obligations shall not be affected. Where this Agreement is unenforceable against any Party, it shall not affect the
enforceability of this Agreement between other Parties. Where any or several provisions in this Agreement or other Transaction Documents and their
auxiliary documents is held to be invalid, illegal or unenforceable in any aspect under any Applicable Laws, or where the Governmental Authority
demands any revision thereto, the validity, legality and enforceability of the remaining provisions shall not be thereby affected or damaged in any
aspect. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions,
and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions
as much as possible.
10.8
Assignment
Without prior written consent of other Parties, neither Party may assign all or part of its rights and obligations hereunder to any third party. Provided
that the Transferee may, by notifying the Transferor five (5) Business Days in advance in writing, assign all or part of its rights and obligations
hereunder to its Related Party to enjoy and assume the same (in which case, the Transferee shall assume the joint and several liability for the
obligations of its Related Party under this Agreement).
10.9
Entire Agreement
This Agreement and other Transaction Documents constitute all agreement among the Parties with respect to the subject matter of this Agreement. In
case of any conflict with any previous oral or written agreement of the Parties, this Agreement shall prevail. Any modification to this Agreement must
be made in written form agreed by the Parties.
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10.10 Appendices
The appendices to this Agreement shall be integral parts of this Agreement and mutually supplementary to the body of this Agreement and shall have
the same legal force with this Agreement.
10.11 Counterpart
This Agreement shall be written in Chinese and made in triplicate, with each Party holding one copy of the same legal force. The signed copy includes
the copy sent by fax or telex, and each copy shall be deemed as original, but all signed copies shall together be deemed as one and the same instrument.
10.12
Preference
Where any other agreement (including but not limited to Appendix IV: Equity Transfer Agreement for Industrial and Commercial Registration attached
hereto) is required to be executed for the Equity Transfer in the format provided by the Governmental Authority for the purpose of requesting the
Governmental Authority to implement any particular act, this Agreement and other Transaction Documents shall prevail over such agreement, and such
agreement may only be used for requesting the Governmental Authority to implement such particular act, and may not be used for establishing and
demonstrating any right or obligation of relevant parties for matters provided in such agreement.
(The remainder of this page is intentionally left blank.)
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In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Beijing Nesound International Media Corp., Ltd.
/s/ LIU Wenwu
By:
Name: LIU Wenwu
Title:
Legal Representative
In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Shenzhen Xunlei Networking Technologies Co., Ltd.
/s/ ZOU Shenglong
By:
Name: ZOU Shenglong
Title:
Legal Representative
In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
By:
Name:
Title:
/s/ JIN Hui
JIN Hui
Legal Representative
Exhibit 4.33
Execution Version
Beijing Nesound International Media Corp., Ltd.
AND
Shenzhen Xunlei Networking Technologies Co., Ltd.
Business and Assets Transfer Agreement
For
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
May of 2015
Contents
Article 1 Definitions and Interpretation
Article 2 Sale and Purchase
Article 3 Transferred Assets
Article 4 Transferred Employees
Article 5 Business Contract
Article 6 Handling of Accounts Receivable and Accounts Payable Prior to Closing
Article 7 Leased Premises
Article 8 Target Business Files
Article 9 Representations and Warranties of the Parties
Article 10 Further Representations and Warranties of Transferor
Article 11 Transition Period and Post-closing Matters
Article 12 Closing
Article 13 Breach of Contract and Indemnity
Article 14 Termination
Article 15 Confidentiality
Article 16 Governing Law and Dispute Resolution
Article 17 Notice
Article 18 Miscellaneous
2
7
8
11
12
16
18
19
20
21
25
28
32
34
34
36
36
37
Business and Assets Transfer Agreement
This Business and Assets Transfer Agreement (“Agreement”) is duly made and entered into by and among the following Parties on May 14, 2015 in Shenzhen,
PRC:
(1)
(2)
(3)
Shenzhen Xunlei Networking Technologies Co., Ltd. (“Transferor”), a limited liability company incorporated and existing under the PRC laws, with
its registered address at 7&8/F, No.11 Building, Shenzhen Software Park, Keji Mid. 2nd Road, Nanshan District, Shenzhen, and its legal representative
being ZOU Shenglong;
Beijing Nesound International Media Corp., Ltd. (“Nesound”), a company limited by shares incorporated and existing under the PRC laws, with its
registered address at Room 601, 6/F, Hezhan Mansion, No.79 Banjing Road, Haidian District, Beijing, and its legal representative being LIU Wenwu;
and
Shenzhen Xunlei Kankan Information Technologies Co., Ltd. (“Kankan”, and together with Nesound collectively referred to as the “Transferee”), a
limited liability company incorporated and existing under the PRC laws, with its registered address at Room 701, No.11 Building, Shenzhen Software
Park Phase II, Keji Mid. 2nd Road, Nanshan District, Shenzhen, and its legal representative being JIN Hui.
(The Transferor, Nesound and Kankan shall be hereinafter referred to collectively as the “Parties”, and individually as a “Party” while the other party as the
“Other Party”.)
WHEREAS
A.
B.
C.
Kankan mainly engages in the Internet online video business, including the PC and mobile video play services, which specifically refers to the
provision of video watching service to Internet users through its self-built website after obtaining the legal information network dissemination right and
other relevant copyright of the video by means of self-production, procurement, exchange, introduction or otherwise (“Target Business”);
On the Date of this Agreement, the Transferor holds all registered capital of 10 million Yuan of Kankan, and is the sole shareholder of Kankan, and
part of the assets and personnel required for Kankan’s operation of the Target Business are under the name of the Transferor, and relevant Business
Contracts are signed in the name of the Transferor or related parties of the Transferor with others;
The Transferor, Nesound and Kankan have entered into an acquisition framework agreement on May 31, 2015 (“Acquisition Framework
Agreement”), under which the Transferor will transfer its 100% equity in Kankan to Nesound, and will transfer the assets, personnel and contracts
relating to the Target Business to Nesound or Kankan (“Transaction”), and the specific scope of transfer shall be subject to the provisions of this
Agreement;
1
D.
E.
The Transferor, Nesound and Kankan have entered into an equity transfer agreement on May 31, 2015 (“Equity Transfer Agreement”, see Appendix
V), under which the Transferor will transfer its 100% equity in Kankan to Nesound; and
Unless otherwise agreed herein, in order to ensure that Kankan can continuously and independently operate the Target Business, the Transferor desires
to sell and transfer to Kankan, and Kankan desires to accept the transfer from the Transferor, the Transferred Assets and Business Contracts and
establish labor relationship with the Transferred Employees, in accordance with the terms and conditions of this Agreement.
Therefore, the Parties have agreed as follows with respect to the business and assets transfer matters concerning the Target Business:
1.1
Definitions
Unless otherwise defined herein, when used herein, the following terms shall have the following meanings:
Article 1 Definitions and Interpretation
Transaction
Agreement
Confidential Information
shall have the meaning ascribed thereto in the WHEREAS Clause C hereof.
refers to this Business and Assets Transfer Agreement, including any other document (if any)
supplementing, revising and replacing such Agreement.
refers to the confidential and proprietary information on the business of the Disclosing Party obtained
or received by the Receiving Party, including but not limited to the information on customers,
copyright holders, advertisers, technologies, trade secrets, pricing, know-how, inventions, processes,
documents, business opportunity, procedure and operation; information relating to the transaction
under this Agreement and relevant documents, including but not limited to this Agreement; and other
information which shall be deemed in good faith as confidential by its nature and/or under its
disclosure circumstance.
Business Day
Fixed Assets
refers to any day other than Saturday, Sunday or statutory holidays in the PRC.
shall have the meaning ascribed thereto in Article 3.1 (1) hereof.
2
Equity Transfer Agreement
shall have the meaning ascribed thereto in the WHEREAS Clause D hereof.
Transition Committee
shall have the meaning ascribed thereto in Article 11.1 hereof.
Related Parties
shall have the meaning ascribed thereto in the Accounting Standards for Enterprises No.36 —
Disclosure of Related Parties (Cai Kuai [2006] No.3).
Closing Date
shall have the meaning ascribed thereto in Article 12.3 hereof.
Closing Conditions
shall have the meaning ascribed thereto in Article 12.1 hereof.
Closing Documents
shall have the meaning ascribed thereto in Article 12.1 (9) hereof.
Transaction Documents
collectively refers to this Agreement, the Equity Transfer Agreement, the Collaboration and Mutual
Non-competition Agreement (see Appendix V hereto) and their respective appendices and schedules.
Receiving Party
refers to the Party that obtains the Confidential Information from any other Party.
Kankan
refers to Shenzhen Xunlei Kankan Information Technologies Co., Ltd. and its subordinate branches.
Target Business
shall have the meaning ascribed thereto in the WHEREAS Clause A hereof.
Target Business Files
shall have the meaning ascribed thereto in Article 8.1 hereof.
Disclosing Party
refers to the Party that discloses the Confidential Information to any other Party.
Person
refers to any natural person, company, enterprise or other economic organization, governmental
authority or department, or any joint venture, association or partnership, trade union or representative
body for employees (whether it is an independent legal person or not).
Business Contract
shall have the meaning ascribed thereto in Article 5.1 hereof.
3
Date of this Agreement
refers to the date first written above, i.e. the effective date of this Agreement.
Purchase Price
shall have the meaning ascribed thereto in Article 2.3 hereof.
Acquisition Framework Agreement
shall have the meaning ascribed thereto in the WHEREAS Clause C hereof.
Transferee
Parties
Tax
shall have the meaning ascribed thereto in the recital hereof.
shall have the meaning ascribed thereto in the recital hereof.
refers to any form of tax, collection, duty, dues, levies or any withholding tax of any nature (including
but not limited to the individual income tax, enterprise income tax, business tax, stamp tax or any
relevant fine, punishment, surcharge or interest) that is imposed, collected or levied, or is receivable,
by any tax authority of any applicable jurisdiction under Applicable Laws.
Other Party
shall have the meaning ascribed thereto in the recital hereof.
Date of Satisfaction of Conditions
shall have the meaning ascribed thereto in Article 12.2 (3) hereof.
Intangible Assets
shall have the meaning ascribed thereto in Article 3.1 (2) hereof.
Party
Domain
Yuan
shall have the meaning ascribed thereto in the recital hereof.
refers to www.kankan.com.
refers to Renminbi, the legal currency of the PRC.
Governmental Authority
refers to any government or its affiliated institutions, any department or agency of any government or
its affiliated institutions, any legislation authority, court or arbitral tribunal, and any regulatory
institution of any stock exchange, with jurisdiction.
4
Intellectual Property Rights or IPR
Encumbrance
Nesound
PRC
refers to any patent, trademark, service mark, registered design, domain name, utility model, copyright,
invention, confidential information, trade secret, proprietary production process and equipments, brand
name, database right, trade name or any right similar to the aforesaid in any country and region, and
the interests of any of the aforesaid (whether registered or not, and including the application for
granting the aforesaid and the right to apply for any of the aforesaid in any place of the world).
refers to any mortgage, lien, guarantee, pledge, security interest, preemptive right or other adverse
claim or third party encumbrance.
shall have the meaning ascribed thereto in the recital hereof.
refers to the People’s Republic of China, and shall, for the purpose of this Agreement, exclude Hong
Kong Special Administrative Region, Macau Special Administrative Region and Taiwan.
PRC Accounting Rules
refers to the accounting rules generally accepted in the PRC on the Date of this Agreement.
Material Adverse Effect
Applicable Laws
refers to any effect, change or development that will individually or together with other effect, change
or development (or may be reasonably expected to) cause any obvious adversity to (a) the overall
business (especially the Target Business), assets, finance or other conditions, operation results or
operation of Kankan, or (b) the ability of the Transferor and/or Kankan to complete the Transaction
pursuant to the terms of the Transaction Documents (provided that in each case, it shall not include any
such adverse effect, change or development that has been cured or remedied during the reasonable time
limit).
with respect to any Person, refers to the public, valid and applicable ordinances, laws, administrative
regulations, local regulations, rules, decisions, orders, judicial interpretation, judgment, verdicts,
arbitration awards or other normative documents that are binding upon such Person or any property of
such Person.
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Mobile Client
Desktop Client
refers to the mobile products installed by Xunlei Kankan in the cell phones or PADs of users, divided
into application and backend of two different operation systems, namely IOS and Android, and named
“Xunlei Kankan”.
refers to the PC client products installed by Xunlei Kankan in the PCs of users, divided into client
application and backend of different copyrights, and respectively named “Xunlei Kankan HD TV” and
“Kankan TV”.
Transferor
shall have the meaning ascribed thereto in the recital hereof.
Transferred Employees
shall have the meaning ascribed thereto in Article 4.1 hereof.
Transferred Assets
refer and only refer to the relevant Fixed Assets and Intangible Assets and all ownership, operation
rights, IPRs and other rights and interests on such assets as listed in Appendix I (unless otherwise
explicitly specified in this Agreement, free of any Encumbrance) legally held by the Transferor as
necessary for carrying out the Target Business and to be transferred to Kankan by the Transferor
pursuant to this Agreement.
1.2
Interpretation
In this Agreement, unless otherwise stated herein:
(1)
(2)
(3)
(4)
(5)
Unless the context otherwise requires, “Article” or “Appendix” refers to the article of or appendix to this Agreement. The WHEREAS Clause
of this Agreement shall be an integral part of this Agreement.
The numbers and headings of articles are inserted for convenience only, and shall not affect the interpretation or construction of this
Agreement.
Any reference to an “Article” without any indication immediately following to any particular part of such Article, shall be deemed to refer to
all content of such Article instead of any item, paragraph or provision of such Article.
“Written/in writing” refers to the correspondence sent by letter, email or fax.
“Including” and similar words are not restrictive, and the term “without limitation” shall be deemed to immediately follow “including” when
interpreting “including”.
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(6)
If the occurrence date of any event as provided in this Agreement is on a day other than a Business Day, such event shall be deemed to occur
on the Business Day immediately following such date.
(7)
When used herein, “no less than” shall include the number per se.
Article 2 Sale and Purchase
2.1
Sale and Purchase
The Transferor hereby undertakes to transfer the Fixed Assets, Intangible Assets (the scope of which is set forth in Appendix I hereto), Business
Contracts and other assets relating to the Target Business to Kankan, so that Kankan may carry out the Target Business as an independent going
concern from the Closing Date. Meanwhile, the Transferor shall make reasonable efforts to procure the transfer of the labor relationship of the
Transferred Employees to Kankan in accordance with the terms and conditions agreed herein.
The Transferor acknowledges that Nesound and Kankan rely on the representations, warranties and undertakings made by the Transferor in this
Agreement and other Transaction Documents to enter into this Agreement.
Nesound acknowledges that the Transferor relies on the representations, warranties and undertakings made by Nesound in this Agreement and other
Transaction Documents to enter into this Agreement.
2.2
Excluded Assets and Liabilities
Unless otherwise provided in the Transaction Documents, no provision of this Agreement shall transfer to Nesound and Kankan, or be interpreted as
the Nesound’s or Kankan’s acceptance of, any assets, liabilities or obligations that are not explicitly accepted by Nesound or Kankan under this
Agreement, including any assets, liabilities or obligations of the Transferor or any of its Related Parties incurred prior to the Closing Date, whether
they are due or not at that time.
2.3
Purchase Price and Payment
The Parties agree that the consideration for the transaction under this Agreement shall be One Hundred and Twenty Million Yuan (RMB120,000,000)
(“Purchase Price”), and the Purchase Price shall be paid in accordance with the provisions set forth below in this Agreement. The Transferor shall,
legally provide invoice or receipt to the Transferee, within fifteen Business Days upon receipt of the Purchase Price.
(1)
First Installment of Price. The first installment of price shall be 26 million Yuan. The Parties unanimously agree that the earnest money of 26
million Yuan already paid by Nesound to the Transferor on April 8, 2015 pursuant to the Acquisition Framework Agreement shall be
automatically turned into the said first installment of price on the Date of this Agreement.
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(2)
(3)
3.1
Scope
(1)
(2)
Second installment of price. The second installment of price shall be Sixty Eight Million Yuan (RMB68,000,000) (“Second Installment of
Price”).The Parties unanimously agree that, subject to the terms and conditions agreed herein, within six months after the Transaction
Documents have been legally executed and become effective or on the Closing Date (whichever earlier), the Transferee shall remit the Second
Installment of Price into the payee’s account designated by the Transferor.
Final payment. The final payment amount shall be Twenty Six Million Yuan (RMB26,000,000). The Parties unanimously agree that, on the
first anniversary date of the Closing Date, the Transferee shall remit the said final payment to the payee’s account designated by the
Transferor.
Article 3 Transferred Assets
Servers, office facilities and supplies and other fixed assets in connection with the Target Business, as specifically specified in Part I of
Appendix I (“Fixed Assets”).
Domain names, trademarks, copyrights, patents, know-how, backend systems, users and member accounts and relevant data (including but not
limited to kankan.com, mobile client and desktop icon client), and other intangible assets (as specifically set forth in Part II of Appendix I) and
audio-visual programs copyright database (as specifically set forth in Part III of Appendix I) in connection with the Target Business
(collectively the “Intangible Assets”). For the avoidance of doubt, Intangible Assets shall not include the IPRs authorized and licensed by the
Transferor to Kankan and Nesound for use, as explicitly specified in the Collaboration and Mutual Non-competition Agreement. The Parties
acknowledge and agree that, due to the large quantity of the Transferred Assets, if upon execution of this Agreement, where the Transferor
finds out any omission in the Transferred Assets recorded in relevant appendices to this Agreement which shall be transferred, the Parties
agree that the Transferor shall make reasonable efforts to continue to transfer such assets to Kankan and it shall not be deemed as a breach of
this Agreement by the Transferor.
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3.2
Transfer of Ownership
As to the Closing Date, unless otherwise agreed in this Agreement, the Transferor shall have completed the transfer or application for transfer of all
ownerships and legal rights and interests of the Transferred Assets to Kankan and delivered all necessary and reasonably required documents, and
taken all necessary and reasonably required actions for the transfer or application for transfer of all ownerships and/or other legal rights and interests of
the Transferred Assets, in accordance with the provisions of this Clause:
(1)
(2)
(3)
As of the Closing Date, the Transferor has delivered all Fixed Assets and Intangible Assets that can be delivered directly (including but not
limited to the website, mobile client, desktop icon client, know-how, backend system, users and member accounts and relevant data for the
operation of the Target Business, etc. ) to Kankan at the reasonable time and place designated by Kankan in writing. Within six Business Days
after the Transferor has delivered the assets to the Transferee in accordance with the list of assets set forth in the Appendix, if Nesound raises
no objection, it shall be deemed that the Transferred Assets have been duly delivered. The Transferred Assets shall be deemed to have been
duly delivered on the delivery date, and from the date of duly delivery, the ownership of the Transferred Assets shall be transferred to Kankan.
As of the Closing Date, the Transferor shall complete the formalities for application for and registration of the ownership change of the
domains, trademarks, copyrights, patents and other Intangible Assets in accordance with the requirements of the Applicable Laws. On the date
when the application materials for the transfer of such Intangible Assets are accepted by the relevant competent Governmental Authority
(subject to the timely provision of acceptance notice) or on the date when the application materials for the transfer of such Intangible Assets
are submitted to the relevant competent Governmental Authority (in the absence of the timely provision of acceptance notice, in which case,
Nesound and Kankan may jointly designate a representative to accompany and witness the submission onsite), the Transferred Assets shall be
deemed to have been officially delivered, and from the date of official delivery, the ownership of the Transferred Assets shall be transferred to
Kankan.
Where any interest or right listed in the List of Transferred Assets in Appendix I hereto is owned by any party other than the Transferor, the
Transferor shall make reasonable efforts to cause such third party to transfer all ownerships and legal rights and interests in the Transferred
Assets to Kankan and/or Nesound, and deliver all required reasonable and necessary documents, and cooperate in taking all reasonable and
necessary actions as required for the completion of the transfer of all ownerships and legal rights and interests of the Transferred Assets. The
Parties agree that such transfer consideration shall have been included in the Purchase Price, and Nesound and/or Nesound shall not be
required for paying any amount or fee to such third party, unless otherwise explicitly and specifically agreed in this Agreement and other
Transaction Documents.
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3.3
Shared and Common Parts of Fixed Assets
For the shared and common parts of Fixed Assets as listed in Part I of Appendix I, the Transferor shall deliver the same to Kankan within and no later
than six months after the Closing Date.
3.4
Reservation of Right
For all copyrighted content to be transferred, in order to guarantee the continuous operation of the Target Business and carrying out cooperation
necessary to the Parties, Kankan and Nesound agree to grant to the Transferor the right to use such content in and on the current and future products
and platforms of the Transferor after the Closing Date, and if there is any advertisement income from the play of such content on the products of
Xunlei, the Parties shall carry out profits sharing upon negotiation with reference to the industry practices (and Kankan shall enjoy the majority of such
income), provided that such authorized use must be within the scope of use determined in the business cooperation agreement signed by the Parties in
advance, and the Transferor may not have any act of use beyond such scope.
3.5
Transitional Use
For the avoidance of doubt, subject to satisfaction of the terms and conditions of this Agreement, and prior to the transfer of the Transferred Assets to
Kankan and/or Nesound pursuant to Article 3.2, the Transferor shall:
(1)
(2)
(3)
Continue in using and operating the Transferred Assets in the normal way only for the purpose of carrying out Target Business;
Continue in making payments to customers, business partners and suppliers in the normal business operation; and
On or before the Date of this Agreement, take custody and maintain the Transferred Assets to prevent any impairment in value.
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4.1
Scope
Article 4 Transferred Employees
The Parties unanimously confirm that on the Date of this Agreement, there are 307 employees relating to the Target Business in total, of which, the
labor relationship of 237 employees is in the name of Kankan, and the labor relationship of the remaining 65 employees is in the name of the
Transferor. Four employees are dispatched employees who are dispatched to Kankan. One employee is in the name of Qianzhao Technology
(Shenzhen) Co., Ltd. Nesound and Kankan agree that Kankan will receive all employees relating to the Target Business (“Transferred Employees”)
for salaries, benefits and treatment conditions no less favorable than those currently provided by the Transferor, including 70 Transferred Employees to
be transferred (see Appendix II for the list). For such Transferred Employees, subject to Kankan’s provision of salaries, benefits and treatment
conditions no less favorable than those currently provided by the Transferor (excluding the employee stock option provided by the overseas parent
company of the Transferor), except for those currently have established labor relationship with Kankan, the Transferee agrees that it has obligations to
procure Kankan to receive all core employees (see Part I of Appendix II for the list) and all remaining employees (see Part II of Appendix II for the
list), and the Transferor shall make reasonable efforts to cooperate. Besides, the Transferor shall make reasonable efforts to procure that (1) Transferred
Employees who have entered into labor contracts with Kankan which have expired prior to the Closing Date have renewed labor contracts to the
satisfaction of the Transferee with Kankan; (2) Transferred Employees who have not established labor relationship with Kankan have entered into labor
contracts and confidentiality agreements to the satisfaction of the Transferee with Kankan; and (3) the core employees have entered into the non-
compete agreements with Kankan.
4.2
Arrangement of Transferred Employees
The Transferor shall make reasonable efforts to perform its obligations to all Transferred Employees prior to the Closing Date.
Kankan will assume relevant liabilities as the employer of the Transferred Employees from the date immediately following the Closing Date. For the
avoidance of doubt, the Parties further agree and confirm that, from the date when the Transferred Employees enter into employee contracts with
Kankan, such Transferred Employees have established labor relationship with Kankan, and the length of service of such Transferred Employees with
the original employer may be all included in the calculation of length of service in Kankan on a continuous basis, and for this change and transfer of
labor relationship, the Transferor (i.e. original employer) is not required to pay any compensation to the Transferred Employee, or make any
compensation or indemnity to Kankan.
4.3
Necessary Assistance
The Transferor further undertakes to provide reasonable assistance to Nesound during the negotiation and agreement on the terms of labor contracts
between Nesound and Kankan as one party and the Transferred Employees as the other party, provided that such assistance will not impede the normal
operation of the Target Business.
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5.1
Scope
Article 5 Business Contract
The Transferor shall transfer the rights and obligations of the business contracts it has entered into in relation to the Target Business (“Business
Contracts”, the specific scope of which is set forth in Appendix III and which are only limited to the contracts listed in Appendix III and any business
contract relating to the Target Business that is newly entered into from the Date of this Agreement to the Closing Date, and any contract relating to the
Target Business but not listed in Appendix III) as a whole to Kankan in accordance with the provisions of this Agreement. Appendix III shall set forth
and list the Business Contracts which may be transferred without consent from the counterparty of such contracts and the Business Contracts which
may only be transferred after obtaining the consent from the counterparty of such contracts. Prior to the Closing Date, the Transferor shall complete the
transfer of all Business Contracts which can be transferred to Kankan prior to the Closing Date in accordance with the indications in Appendix III.
After the Closing Date, for the Business Contracts which are not required to be transferred upon negotiation among the Parties or which fail to be
transferred prior to the Closing Date, the Parties agree to deal with the same in accordance with Article 5.5 of this Agreement. The Parties acknowledge
and agree that, due to the large quantity of Business Contracts, if upon execution of this Agreement, the Transferor finds out any omission of contracts
that shall be recorded in the list in Appendix III of this Agreement and transferred, the Parties agree that the Transferor shall make reasonable efforts to
continue in transferring such contracts to Kankan and it shall not be deemed as a breach of this Agreement by the Transferor.
5.2
Transfer of Business Contracts
The Parties unanimously agree and confirm that, as of the Closing Date, the Transferor shall have procured relevant parties to the Business Contracts to
enter into Contract Transfer Agreement or other novation agreement as showed in Appendix IV with Kankan, and make best efforts to procure all
Business Contracts to be transferred to Kankan in accordance with the transfer methods and principles agreed in Appendix III. The effective date of the
transfer as a whole of the rights and obligations agreed in the Contract Transfer Agreement executed between the relevant parties to each Business
Contract and Kankan shall be the date of transfer of rights and obligations of the Business Contracts (“Contract Transfer Date”). Prior to the Contract
Transfer Date, the Transferor shall always perform and comply with the Business Contracts.
5.3
Allocation of Interests and Responsibilities of Business Contracts
Subject to Article 5.4 and Article 5.5 hereof, from the Contract Transfer Date, Kankan shall:
(1)
(2)
Be entitled to enjoy the interests of the Business Contracts; and
Assume, perform and complete all obligations and liabilities which shall be performed under the Business Contracts.
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5.4
Liabilities of the Transferor
Unless otherwise agreed herein, nothing herein shall:
(1)
(2)
(3)
Require Nesound and Kankan to perform any obligation which is due prior to the Contract Transfer Date or which should have been
performed prior to the Closing Date;
Cause Nesound and Kankan to be liable for any loss arising out of any act, negligence, breach or omission of and under any Business Contract
prior to the Closing Date, or any failure to obtain the recognition or consent from any third party for the execution of this Agreement, or any
breach of the Business Contracts due to this Agreement or its closing; or
Cause Nesound and Kankan to assume any obligation due to or for any contract or service provided by the Transferor prior to the Closing
Date.
For the avoidance of doubt, the proceeds and costs actually earned and required to be paid by Kankan prior to the Closing Date with respect to the
Business Contracts shall be enjoyed and borne by the Transferor.
5.5
Business Contracts That Are Not Required to Transfer or That Fail to Be Transferred Prior to Closing Date
Where the interests or burden under any Business Contract cannot be effectively transferred to Kankan prior to the Closing Date due to any reason:
(1)
(2)
(3)
For the Business Contracts that fail to be transferred prior to the Closing Date, the Transferor shall make reasonable efforts to procure such
Business Contracts to be novated or transferred after the Closing Date;
After the Closing Date and before the novation or transfer of the Business Contracts, the actual rights and obligations of all Business Contracts
that are not transferred shall be finally enjoyed and borne by Kankan and/or Nesound, and the Transferor shall directly hold such Business
Contracts for the benefits of Kankan. And if pursuant to the Business Contracts, subcontracting is allowed and legal, Kankan shall serve as the
subcontractor of the Transferor to perform all obligations that should be performed by the Transferor after the Closing Date, and shall
compensate the Transferor against all costs relating to the failure of Kankan and/or Nesound to perform any of the said obligations.
After the Closing Date and before the novation or transfer of the Business Contracts, the Transferor shall, within ten (10) Business Days upon
its receipt of all or part of the commercial interests of the Business Contracts, transfer the same to Kankan, and upon consent of the
Transferor, Kankan shall be entitled to audit the accounts, books and other materials of the Transferor prior to the Closing Date by itself or
through the accounting firm it designated for the purpose of confirming all of the said commercial interests; and the Transferor shall provide
reasonable cooperation and assistance for the said audit.
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(4)
For Business Contracts which are not transferred due to any reason, where Kankan has caused any claim or demand by any third party right
holder due to occupation or use of the subject assets under such Business Contracts (including but not limited to the licensed Intangible Assets
and the lease interests, etc.), if Kankan occupies and uses such subject assets in strict compliance with the provisions of such Business
Contract, the Transferor shall solve the same at its own costs and compensate any possible loss of Kankan suffered thereby (if any); if Kankan
occupies and uses such subject assets in breach of the provisions of such Business Contracts, the Transferor shall not be liable for any possible
loss of Kankan suffered thereby and Kankan shall indemnify the Transferor against any possible loss caused thereby.
5.6
Delivery of Documents
Unless otherwise agreed herein, as of the Closing Date, the Transferor shall have provided to Kankan: (1) originals of the Business Contracts, and
where the originals are unable to be provided, the Transferor shall have provided the copies, scanned copies, emails and other relevant legal proofs of
such contracts, (2) the Contract Transfer Agreement, third party consents, notices or other documents proving the transfer or novation of the Business
Contracts as corresponding to each Business Contract.
5.7
Legal Dispute and Litigation Matters
With respect to the legal disputes and litigation matters concerning Kankan, the Target Business, the Transferred Assets and the Business Contracts, the
Parties hereby agree and confirm to deal with the same in accordance with the following principles:
(1)
For the infringement act or breach act committed by any third party against Kankan, the Target Business, the Transferred Assets and the
Business Contracts prior to the Closing Date, which causes any loss to Kankan or the Transferor or its Related Parties, only the Transferor
may collect evidence and carry out right protection activities, bring relevant lawsuits and enjoy all relevant rights and obligations, and the
Transferor may collect evidence prior to the Closing Date on a continuous basis, and shall continue in enjoying the rights and interests from
such collection of evidence after the Closing Date. In this case, where any cooperation is required from Kankan or Nesound (e.g. borrowing
the originals that prove the ownership, etc.), Kankan and Nesound shall provide assistance and cooperation.
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(2)
(3)
(4)
For any infringement act or breach act committed by any third party against Kankan, the Target Business, the Transferred Assets and the
Business Contracts after the Closing Date, which causes any loss to Kankan, Kankan shall independently collect evidence and carry out right
protection activities, bring relevant lawsuits and enjoy all relevant rights and obligations, and the Transferor shall provide necessary and
reasonable cooperation.
As of the Date of this Agreement, please see Appendix VII for the known litigations in connection with Kankan, the Target Business, the
Transferred Assets and the Business Contracts. The Parties unanimously agree that, the Transferor shall be liable for any known or potential
contract or tort dispute or controversy in connection with Kankan and the Target Business due to reasons prior to the Closing Date (whether it
is infringement act or breach act), and Kankan and/or Nesound shall be liable for any new sued case resulting from any infringement or breach
act committed by Kankan and/or Nesound after the Closing Date. If, after the Closing Date, the Transferor shall be responsible for solving any
dispute or case relating to Kankan and the Target Business prior to the Closing Date or due to reasons happened prior to the Closing Date, and
indemnifying the loss of Kankan suffered thereby , ; in which case, without consent of the Transferor, Kankan and/or Nesound may not settle
or reach any agreement with any third party without authorization, and the costs relating to litigation, including without limitation the
attorney’s fee, shall be first agreed by the Transferor; where Kankan and/or Nesound breach any of the said provisions, the Transferor shall
assume no liability to Kankan and/or Nesound.
Notwithstanding any contrary to the foregoing, if for the Accounts Receivable (defined as below) as may be enjoyed by the Transferee under
Article 6.1 hereof after the Closing Date, the Transferor agrees that all proceeds it obtained through protection of rights or relevant dispute
resolution shall belong to Kankan. On this basis, after the Closing Date and at the request of the Transferee from time to time, the Transferor
also agrees to proactively cooperate in its own name with the demand and recovery for Accounts Receivable proposed by Kankan, including
but not limited to issuing warning letter in its own name, entrusting lawyers to issue lawyer’s letter, bringing lawsuits or initiating arbitration
against the debtors and providing evidence and materials, etc., so as to assist the Transferee in recovering the Accounts Receivable. With prior
written confirmation of Kankan, the reasonable expenses and costs actually incurred by the Transferor for the purposes of demanding and
recovering Accounts Receivable on behalf of Kankan, shall be borne by Kankan.
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6.1
Handling of Accounts Receivable
Article 6 Handling of Accounts Receivable and Accounts Payable Prior to Closing
Notwithstanding the foregoing, the Parties agree that, on the Closing Date, all cumulative accounts receivable incurred in the name of the Transferor
arising out of the Target Business (including the net amount after deducting the bad debts provisions from the accounts payable incurred prior to the
Contract Transfer Date on a cumulative basis under Article 5 (Business Contracts) hereof, collectively referred to as “Accounts Receivable”, which
shall use the List of Payable and Receivable Contracts (see Appendix VIII hereto for specific information) corresponding with the Accounts
Receivable, as the reconciliation basis ) shall be enjoyed and assumed by Kankan. For the avoidance of doubt, the Accounts Receivable for which
bad debts provisions have been accrued shall be beyond the scope of transfer. The Parties agree that, prior to the Closing Date, March 31, 2015 shall be
taken as the benchmark date to carry out reconciliation confirmation of any incurred but unpaid Accounts Receivable of the Transferor and its Related
Parties on a cumulative basis with respect to the Target Business, and based thereupon, the aggregate Accounts Receivable as of the Closing Date and
the corresponding contract lists and details shall be submitted to the Transferee within twelve (12) Business Days after the Closing Date, provided that
the Accounts Receivable may not exceed One Hundred and Forty Five Million Yuan (RMB145,000,000). Kankan shall assume the obligation of actual
demand and recovery. The Transferor shall assume the nominal collection obligation, and on the Closing Date, the balance after deducting the
Accounts Receivable from the Accounts Payable (defined as below) shall be maintained at Ten million Yuan (RMB10,000,000), and if the balance
after deducting the Accounts Receivable from the Accounts Payable exceeds Ten million Yuan, the Transferor shall release the Transferee from
relevant discharge obligation for any difference in excess; and if the balance after deducting the Accounts Receivable from the Accounts Payable is less
than Ten million Yuan, the Transferee will pay in full the difference in a lump sum to the Transferor within fifteen (15) days after the Closing Date.
Within 12 months after the Closing Date, based on the Accounts Receivable and the contract details confirmed on the Closing Date, the Transferor
shall submit to the Transferee the breakdown of the collected amounts as of the end of last month on the 12th day of each month. Given that the
Accounts Payable is larger than the Accounts Receivable on the Closing Date, the relevant collected amounts after the Closing Date shall be first used
to offset and pay the Accounts Payable, until the Accounts Payable on the Closing Date are paid in full.
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6.2
Handling of Accounts Payable
The Parties agree that, as of the Closing Date, all cumulative accounts payable (including the accounts payable cumulatively incurred prior to the
Contract Transfer Date under Article 5 (Business Contracts) hereof, collectively referred to as “Accounts Payable”, which shall use the List of Payable
and Receivable Contracts (see Appendix VIII hereto for specific information) corresponding with the Accounts Receivable, as the reconciliation basis
(except for the part of the bandwidth)) incurred in the name of the Transferor relating to the Target Business (including but not limited to the purchase
price of copyrights and bandwidth, advertisement rebate, shared profits of film, market promotion fee and personnel costs as well as other daily
operation costs incurred in the name of the Related Parties, and the costs paid by the Transferor and its Related Parties on behalf of Kankan, etc.) shall
be borne by Kankan and Kankan shall assume the relevant obligation for actual payment thereof (unless otherwise provided in Article 6.1 hereof).
Within twelve (12) Business Days after the Closing Date, the Parties shall carry out reconciliation confirmation over the Accounts Payable of the
Transferor and its Related Parties cumulatively incurred with respect to the Target Business on the Closing Date, and the specific amount of the
Accounts Payable shall be subject to the breakdown of such reconciliation. The Transferor (or its Related Parties) shall assume the nominal payment
obligation. Within 12 months after the Closing Date, pursuant to the breakdown of Accounts Payable confirmed on the Closing Date, the Transferor
shall submit the list of Accounts Payable as of the end of the month and relevant payment basis to the Transferee on the 12th Business Day of each
month. Kankan will, within 5 Business Days upon receipt of such notice, pay the amounts payable for the month to the Transferor, and the Transferor
shall arrange payment within 5 Business Days upon receipt of such payment. In addition, Kankan may demand the direct deduction of the Accounts
Payable that shall be payable to the Transferor under this Article, from the collected amount of the Accounts Receivable as enjoyed by Kankan and
actually received by the Transferor in accordance with Article 6.1 hereof. For the Accounts Payable after deducting the collected amount of the
Accounts Receivable from the Accounts Payable due in this month, the Transferee shall pay all amounts to the Transferor within 5 Business Days upon
the provision of relevant lists. In case of any litigation or loss (including but not limited to loss of business, financial loss and claims, etc.) arising out of
the Transferee’s failure to timely perform the said payment obligation, that liability shall be borne by the Transferee.
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6.3
Handling of Prepaid and Deferred Accounts
As to March 31, 2015, the breakdown of the prepaid and deferred accounts is set forth in Appendix IX: “List of Prepayments”. The Parties agree that
such List is only for reference, and the specific list and breakdown shall be checked and reconciliated by the Parties on the Closing Date in accordance
with the following principles, and the Transferee shall assume the prepaid and deferred fees in accordance with the following principles:
(1) The Transferee only assumes the prepaid fees for the prepaid and exchanged copyrighted content that is not launched before the Closing Date and
is launch after the Closing Date.
(2) For other prepaid and deferred amounts, taking the Closing Date as the cutting point, the amount prepaid for the Target Business prior to the
Closing Date shall be borne by the Transferor, and the corresponding prepaid and deferred accounts after the Closing Date shall be borne by the
Transferee.
(3) Within fifteen (15) Business Days after the Closing Date, the Parties shall carry out reconciliation confirmation over the prepaid accounts of the
Transferor and its Related Parties relating to the Target Business that have cumulatively incurred on the Closing Date and are actually paid or
otherwise paid consideration (e.g. the unlaunched part of the Transferor in the exchange transaction listed in Appendix IX), and the Transferee
shall pay to the Transferor in a lump sum the prepaid accounts confirmed by the Transferee in accordance with the said principles within twenty
(20) Business Days after the Closing Date.
7.1
Scope
Article 7 Leased Premises
For the leased premises currently used by Kankan in connection with the Target Business, please see Appendix X: List of Leased Premises of Kankan
attached hereto for details (“Leased Premises”).
7.2
Transfer of Leased Premises
The Parties unanimously agree and confirm that the Leased Premises will be handled in accordance with the following principles:
(1) For Leased Premises relating to No.4 and No.6 in Appendix X, the Transferor shall assist in communicating with the lessor of such Leased
Premises, and change the signing entity of the lessee to such lease agreement into Kankan prior to the Closing Date, after which Kankan will
continue in leasing such Premises as lessee.
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(2) For Leased Premises relating to No.1 and No.9 in Appendix X, Kankan will continue using the same within two (2) months upon the Closing
Date, and will jointly with the Transferee assume the rental, property management fee and utilities charge corresponding to such Leased Premises
and all expenses arising out of such Leased Premises; and the rental and property management fee shall be paid to the Transferor by two
installments respectively on the Closing Date and the expiry of one month after the Closing Date; other costs shall be settled and directly paid to
the Transferor in a lump sum at the end of the use by Kankan. Upon expiry of two months after the Closing Date, Kankan shall vacate from such
Leased Premises within three (3) Business Days; otherwise, the Transferor shall be entitled to independently dispose relevant office assets of
Kankan inside such Leased Premises.
(3) For Leased Premises relating to No.2 in Appendix X, the signing entity of the lessee to such lease agreement shall be changed into the Transferor
prior to the Closing Date, and such Leased Premises will no longer be leased by Kankan.
(4) For Leased Premises relating to No.3, 5, 7 and 8 in Appendix X, Kankan will no longer use the same and such Leased Premises shall be
independently disposed by the Transferor.
(5)
In case of involving any change to the registered address, where such change of registered address cannot be completed prior to the Closing Date,
the Parties shall complete such change within six (6) months after the Closing Date.
The Parties unanimously agree and confirm that, given that it needs communication with the lessor for changing the signing entity of the lessee to the
tenancy contract relating to the Leased Premises, if such change cannot be completed prior to the Closing Date, the Parties shall negotiate to solve the
same, and the Transferor shall not be deemed to have breached this Agreement.
8.1
Target Business Files
Article 8 Target Business Files
The Transferor shall prepare and keep appropriate and accurate files for the Target Business, including all certificates and licenses, seals, documents,
accounting vouchers, agreements, contracts and files in connection with Kankan and the Target Business (“Target Business Files”), subject to the
records in Appendix VI: List of Target Business Files, so that when Kankan transfers the Target Business, Kankan may continue in fully and validly
carrying out the Target Business based on the information in such Files. For the avoidance of doubt, such Target Business Files shall be only related to
the Target Business and do not include files and documents and other relevant materials that are not within the scope of transfer.
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8.2
Delivery
As of the Closing Date, the Transferor has delivered all Target Business Files to Kankan, subject to Appendix VI: List of Target Business Files.
Each Party represents and warrants to Other Parties that, as of the Date of this Agreement and the Closing Date:
Article 9 Representations and Warranties of the Parties
9.1
Capacity
It has necessary powers and authorities to execute and deliver this Agreement and other Closing Documents, and complete the transaction
contemplated under the said Agreement and Documents.
9.2
Authority for Action
The execution and delivery of this Agreement and other Closing Documents, and the completion of the transactions contemplated under this
Agreement and other Closing Documents have been duly authorized by all necessary actions, without any other procedure to authorize this Agreement
or the completion of this Transaction.
9.3
Binding Agreement
This Agreement shall constitute legal, valid and binding obligations to the Parties and may be enforceable against them in accordance with its terms.
Unless otherwise provided herein, the execution or performance of this Agreement and the completion of transactions hereunder do not require any
consent, approval, order or authorization from any Governmental Authority or any third party, or any filing or registration with or any notice issued by,
any Governmental Authority or any third party. The execution, delivery or performance of this Agreement does not conflict, violate or breach any
provision of any contract, agreement, other legal arrangement, law or order, which is binding upon this Agreement.
9.4
Legal Incorporation and Valid Existing
Each Party further represents and warrants to the other Parties that:
(1)
(2)
It is a company duly incorporated and validly existing under the Applicable Laws, and in good standing;
It has necessary corporate powers and authorities to engage in the businesses it currently engages in, and to own, lease or operate its properties
and assets; and
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(3)
It has necessary powers and approvals required for operating its assets and engaging in the business it currently engages in.
Article 10 Further Representations and Warranties of Transferor
From the Date of this Agreement to the Closing Date, in case of any update to the following representations and warranties of the Transferor, the Transferor
shall timely disclose the same to the Transferee. Where such change belongs to any matter as explicitly expected to occur hereunder for the purpose of realizing
this Transaction, it shall not be deemed as breach of contract by the Transferor. The Transferor hereby represents and warrants with respect to the transfer of the
Target Business as follows, as of the Date of this Agreement and the Closing Date:
10.1
Transferred Assets
(1)
(2)
(3)
(4)
Ownership. The Transferor and/or its Related Parties own valid and transferrable ownership or other legal rights generating from the Business
Contracts of the Transferred Assets and the registration fees or annual fees in connection with the software copyright, patent, etc. listed in Part
II, Appendix I have all been paid. The Transferred Assets are not subject to any encumbrance or security interests or third party claim, and the
Transferor and/or its Related Parties have the right to transfer the Transferred Assets to Kankan, except for those the Transferor has no right to
transfer pursuant to the Business Contracts. Neither the ownership of the Transferor and/or its Related Parties over the Transferred Assets nor
the transfer of the same to Kankan will violate any Applicable Laws or any third party interests. Unless otherwise agreed herein, the execution
or delivery by the Transferor of this Agreement will not cause the Transferor to violate any license, sub-license or other agreement relating to
the Transferred Assets.
Necessary Assets. The Transferred Assets constitute necessary and reasonably required assets for the organization, management, operation
and exploration of the Target Business, and except for the Transferred Assets, there is no other asset that is necessary for the normal operation
of the Target Business.
Status of the Transferred Assets. To the extent applicable, the Transferred Assets are in good and usable condition and generally comply with
their proposed purposes.
Domain and Website Registration. The Transferor has completed and maintained all registration necessary to protect itself in connection with
the Domain and relevant websites in accordance with the Applicable Laws at its own costs and there is no Governmental Authority to raise
objection or express any issue to such registrations.
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(5)
Kankan.com Website, Mobile Client and Desktop Icon Client. The Transferor undertakes that for the kankan.com, mobile client and desktop
icon client which relate to the Target Business and are handed over by it at the time of Closing, the Transferor or the Related Parties of the
Transferor own the IPR of all main content therein, or have all necessary authorization to use, display, exhibit or publish such content at the
time of Closing, except that such deficiency will have no material adverse effect on the Target Business. The use and transmission of all main
content in kankan.com, mobile client and desktop icon client by the Transferor or the Related Parties of the Transferor on the Closing Date,
including without limitation all texts, pictures and various video programs uploaded, will not infringe upon the IPR or other rights of any third
party, and except as disclosed by the Transferor to Kankan and the Transferee (see Appendix VII: List of Litigations, which may be
supplemented and updated by the Transferor as of the execution Date of this Agreement to the Closing Date), there is no third party instituting
any legal proceedings against the content in kankan.com, mobile client and desktop icon client.
10.2
Business Contracts
(1)
(2)
Each Business Contract, the term of which has not expired, has full force during its term.
For all Business Contracts required to be transferred prior to the Closing Date, except as disclosed by the Transferor, the Transferor has
performed all obligations as required by such contracts in material aspects and the Transferor has neither violated the main provisions of any
Business Contracts nor received any notice for default, termination or the like relating to such Business Contracts from the counterparty of
other Business Contracts.
(3)
The Business Contracts are all signed by the Transferor or the Related Parties of the Transferor.
10.3
Suppliers and Clients
To the knowledge of the Transferor after reasonable and prudent inquiry, there is no notice sent by any party or other client or supplier which is a party
to any Business Contract required to be transferred prior to the Closing Date or in connection with the Target Business to the Transferor or Kankan
stating its intention to reduce or cease the material business contact with the Transferor or Kankan, and no undertaking or intention expressed by the
said party or other client or supplier to substantially reduce or terminate the material business with Kankan or the Transferor.
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10.4
Related Party Transaction
Currently there is no agreement or arrangement, whether it may be legally enforced or not, to which the Transferor is a party and whereby the
incumbent or former directors of the Transferor or the Related Parties of the Transferor or of any of the said incumbent or former directors enjoy any
interests and which may affect the Target Business or the Transferred Assets.
Except for the transactions proposed hereunder or under other Transaction Documents and except as disclosed by the Disclosure Letter under the
Equity Transfer Agreement, there is no transaction, agreement, contract, undertaking or debtor-creditor relationship between the Transferor and its
Related Parties and Kankan on the Closing Date. In the event that there is any payment or paying obligation and responsibility of Kankan to the
Transferor or its Related Parties on the Closing Date, the Transferor shall, and shall procure its Related Parties to waive or exempt such obligations and
responsibilities of Kankan.
10.5
Accounts Receivable and Accounts Payable
The accounts, financial records, Business Contracts and performance certificates corresponding to the Accounts Receivable and the Accounts Payable
have all been duly held and duly kept by the Transferor. The amounts of the Accounts Receivable and the Accounts Payable have been recorded
authentically, accurately and completely per the Applicable Laws and the requirements of the US Accounting Rules. The transactions corresponding to
the Accounts Receivable and the Accounts Payable have no Business Contract or undertaking irrelevant to the Target Business or deviating from the
normal business, and there is no false or untrue Business Contract or undertaking.
10.6
No Dispute
Except as disclosed in Appendix VII hereto, there is no pending civil or criminal demand, action, litigation, investigation or other legal proceedings
with respect to the Transferred Assets, Business Contracts or Transferred Employees against the Transferor or Kankan; except as disclosed by the
Transferor, there is no contractual provisions or court judgment or injunction that may restrict or affect the Transferred Assets known to the Transferor
or Kankan; the execution and performance of this Agreement by the Transferor and the exercise of any rights hereunder by Kankan and/or Nesound
will not violate any right, contract, judgment, decree or law binding upon the said Parties, the Transferred Assets or the Transferred Employees.
10.7
No Violation of Law
Except as disclosed by the Transferor, to the extent applicable to the Target Business, the Transferor has always complied and will continue complying
with the Applicable Laws in material aspects. The Transferor has not violated any main contractual obligation in any material Business Contracts.
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10.8
Government Documents
All documents issued by any Governmental Authority which may have adverse effect on the performance by the Transferor of its obligations hereunder
have been disclosed to Nesound.
10.9
Liquidation and Bankruptcy
The Transferor currently faces no liquidation or dissolution proceedings and has no reason to believe that it will face any liquidation or dissolution
proceedings.
10.10
IPR
All IPRs currently owned by the Transferor and used for carrying out the Target Business conflicts with no rights of other parties. Unless otherwise
agreed herein to or except as disclosed by the Transferor, the Transferor will not violate any license, sub-license or other agreement or any non-
disclosure agreement to which it is a party or otherwise binding upon it due to its execution or delivery of this Agreement. Unless otherwise agreed
herein or except as disclosed by the Transferor, for the exercise of the IPR by the Transferor or its successor, the Transferor is not obligated to pay
money or consideration in other form to any third party, and no third party is entitled to obtain any money or consideration in other form in this regard.
The transaction hereunder will not infringe upon, abuse or violate the IPR of any Person. For the IPR or IPR license acquired by Kankan and/or
Nesound due to the transaction hereunder, the use of such IPR by Kankan and/or Nesound by means not violating the relevant agreements signed by it
and the Applicable Laws will not be determined as infringement in any effective court judgment or legal proceedings and cause Kankan and/or
Nesound to actually assume any losses. The Transferor has legal and contractual rights, ownership and interests over all data collected from the users
that its Target Business serves or acquired by disclosure. The main aspect of the collection and use of the personal information of consumers by the
Transferor complies with the Applicable Laws relating to its operation. To the knowledge of the Transferor after reasonable and prudent inquiry, for
the IPR under this Article, no Person has instituted or will potentially institute any pending or closed litigation, claim or legal proceeding against its
validity, enforceability or ownership.
10.11 No Contingent Liability and No Transfer of Debt
Except as otherwise stipulated herein and in other Transaction Documents, the execution and delivery of this Agreement and the completion of the
transactions hereunder will not cause any type of liability, whether accrued, absolute, contingent, due, undue or others, and whether should be recorded
or reflected in the balance sheet as prepared in accordance with the PRC Accounting Rules or not, to be transferred from the Transferor to Kankan,
Nesound or any of its Related Parties prior to the Closing Date, including without limitation, the employment or Tax payment, or responsibility relating
to the failure of the Transferred Assets to pass approval or complete the registration with the relevant Governmental Authority, or the failure of the
Business Contracts to be transferred or replaced per this Agreement.
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10.12 Other Interests of Transferor
Neither the Transferor nor its Related Parties directly or indirectly has any interests in any business in competition with the Target Business.
10.13 Governmental Permit
Except for the registration and filing as agreed in Article 12.2 hereof, the approval, consent and authorization of the relevant Governmental Authority
as required for completing this Transaction in accordance with the Applicable Law and the Transaction Documents and the necessary registration and
filing with the relevant Governmental Authority have all been obtained.
11.1
Transition Committee
Article 11 Transition Period and Post-closing Matters
The Parties agree that within three Business Days as of the Date of this Agreement, the Transferor and Nesound shall jointly establish a transition
committee (“Transition Committee”) to discuss the matters in relation to this Transaction for the purpose of ensuring the smooth hand-over and stable
transition of the Target Business. The duration of the Transition Committee shall be from the Date of this Agreement to the Closing Date (“Transition
Period”). The Transition Committee shall be composed of the representatives of the Transferor, Kankan and Nesound. The Parties agree that Nesound
shall designate the financial principal and other principal to guide and supervise respectively the finance and operational management of Kankan and
the Transferor shall provide reasonable cooperation and designate a person to actively coordinate with Nesound on the hand-over work.
11.2
Normal Business Operation
(1)
The Transferor undertakes that from the Date of this Agreement to the Closing Date, except for the purpose of implementation of this
Transaction, it shall take the following actions:
(a)
(b)
Operate the Target Business in the way consistent with the past practices and prudent business practices and in compliance with the
Applicable Laws;
Make reasonable efforts to ensure that the Transferred Employees and other employment forms, suppliers, clients and other persons
with business connection with it continue providing services to Kankan;
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(c)
(d)
Maintain all Fixed Assets in normal operation and good maintenance conditions except for normal wear and tear and maintain and
update the Intangible Assets;
Immediately inform Nesound of any circumstance leading to any substantial breach of any representations and warranties of the
Transferor or other terms of this Agreement;
(2)
The Transferor undertakes that from the Date of this Agreement to the Closing Date, except for the purpose of implementation of this
Transaction or with the consent of the Transition Committee which must include the consent of the representative designated by Nesound, it
shall not, and shall procure its Related Parties not to take any of the following actions:
(a)
(b)
(c)
(d)
(e)
(f)
enter into any agreement or arrangement irrelevant to this Transaction or outside the normal business operation with Kankan;
terminate the operation of the Target Business or change the material part of its business acts;
dispose any part of the Transferred Assets, except for any disposal in the normal course of transaction and for the purpose of
operating the Target Business or the related party transactions conducted for the satisfaction of the transaction conditions;
set or establish any encumbrance on any Transferred Assets or set or establish any encumbrance affecting the Transferred Assets;
make any amendment to the employment terms and conditions or employee benefits of any Transferred Employee, or employ or
dismiss any Transferred Employee;
in terms of the nature, scope and method of the operation of the Target Business, in any way deviating from the normal business
operation of the Target Business, including (without limitation):
(i)
enter into any abnormal or irregular contract or commitment which has material effect on the Target Business;
(ii)
enter into or offer to enter into any new contract with more than 100,000 Yuan of capital expenditure (except for accepting
any bid which has been made) or submit any new bid with more than 100,000 Yuan of capital expenditure;
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(iii)
introduce new series or type of copyrighted content, product or service with respect to the Target Business;
(g)
Carry out or neglect in carrying out or procure or allow carrying out or neglecting in carrying out any act or matter that will lead to or
may lead to any obligation, warranty and undertaking in violation of this Agreement and being restated on the Closing Date.
Notwithstanding anything herein, as for this Article 11.2, where Kankan takes any actions for the purpose of its normal business operation, including
without limitation entering into or performing normal business contracts, which requires the consent of the Transition Committee, the representative
designated by Nesound refuses to give consent or fails to act. The Transferor or Kankan may send a formal written notice to the representative of
Nesound and in case that such representative fails to respond to this notice within five Business Days as of the sending date, it shall be deemed that the
representative of Nesound has consented.
11.3
Further Assistance
(1)
(2)
(3)
(4)
The Transferor undertakes that within fifteen Business Days as of the Closing Date, it will independently or at the request of Nesound
complete the adjustments and amendments to the user clauses and services of all websites, players, platforms, Networking Services Agreement
of Xunlei and Member Services Terms of Xunlei in order to delete all content relating to Kankan.
The Transferor undertakes that within three months as of the Closing Date, it will thoroughly delete data in relation to the Transferred Assets
and the Target Business, which will not be divulged or resold by itself or through its Related Affiliates or its agent, unless otherwise stipulated
in the Transaction Documents, including without limitation the relevant data as agreed in the Collaboration and Non-competition Agreement.
For any reasonable request made by Nesound within six months as of the Closing Date requesting the Transferor to coordinate in realizing the
normal operation of kankan.com website, Mobile Terminal and Desktop Icon Client, the Transferor shall provide active cooperation so as to
smoothly realize the purchase of purchase of the Transferred Assets and the Target Business by Nesound.
Where Nesound makes any reasonable request within one year as of the Closing Date, the Transferor shall, and shall procure it and relevant
Related Parties immediately sign, acknowledge and/or deliver any necessary guarantee or document so as to realize the rights of Kankan and
Nesound over the Transferred Assets and the Target Business.
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(5)
(6)
On the Closing Date, for any conditions precedent to closing waived by the Transferee in advance in writing or those matters allowed to
continue delivery or performance after the Closing Date hereunder, the Transferor shall complete delivery and transfer procedures within three
months as of the Closing Date.
For those Transferred Assets which only require the acceptance by the Governmental Authority of application prior to the Closing Date as per
Article 3.2 hereof, where the Transferor receives from the Governmental Authority any requirement on supplementing, amending application
materials or refusal to handle registration procedures for transfer or change of ownership, it shall immediately notify Kankan in writing and
cooperate with Kankan in supplementing and amending the application documents and resubmit such applications for change of ownership of
the Transferred Assets with the Governmental Authority.
11.4
Transition Arrangement
Unless otherwise agreed herein, during the Transition Period, all revenues and expenditures of Kankan, including without limitation all revenues and
expenditures relating to the Target Business, the Transferred Assets and the Transferred Employees shall all be enjoyed and assumed by the Transferor,
and after the Closing Date, all revenues and expenditures of Kankan, including without limitation all revenues and expenditures relating to the Target
Business, the Transferred Assets and the Transferred Employees shall all be enjoyed and assumed by Kankan and Nesound.
12.1
Closing Conditions
Article 12 Closing
The obligations of Nesound to pay the Second Installment of Price pursuant to Article 2.3 (2) hereof shall be dependent on the confirmation by
Nesound of the satisfaction of or the written waiver by Nesound hereunder, the following conditions (each a “Closing Condition”) on or prior to the
Closing Date:
(1)
(2)
(3)
the Parties to the Transaction Documents shall have duly executed and delivered the Transaction Documents which shall have come into legal
effect and remain in full force on the Closing Date;
the Transferor shall have duly performed and complied with the requirements of the Transaction Documents and all closing conditions as
agreed in the Equity Transfer Agreement shall also been satisfied or explicitly waived by the Transferor in writing;
from the Date of this Agreement to the Closing Date, there is no valid injunction, prohibition or law restricting or prohibiting the completion
of the transaction hereunder;
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(4)
(5)
(6)
(7)
(8)
(9)
Pursuant to the Applicable Laws and any contract concluded by the Transferor, for the purpose of this Transaction, the notices and/or consents
(if any) required to be sent to or obtained from the counterparty of the contract shall have been sent or obtained, and the Contract Transfer
Agreements required to be signed shall have been signed and obtained, except for those agreements that are not required to be transferred in
accordance with the provisions of the Transaction Documents;
The Transferor and Kankan shall have approved this Transaction and the Transaction Documents in accordance with the provisions of their
constitutional documents, and such approvals shall remain in full force and effect on the Closing Date;
The representations and warranties made by the Transferor in Articles 9, 10.1, 10.4, 10.6, 10.8 to 10.13 hereunder shall be authentic and
accurate on the Date of this Agreement, and remain authentic and accurate as of the Closing Date as if made on the Closing Date; except for
the foregoing, other representations and warranties made by the Transferor in Article 9 hereunder shall be authentic and accurate in material
aspects on the Date of this Agreement, and remain authentic and accurate as of the Closing Date as if made on the Closing Date;
the undertakings and all obligations hereunder of the Transferor, including without limitation that the Transferor shall have completed the
transfer of or handled the transfer application procedures for Transferred Assets, Transferred Employees, Business Contracts and Target
Business Files respectively pursuant to Articles 3, 4, 5 and 8 hereof and have submitted the detailed lists and relevant documents of the
Accounts Receivable and the Accounts Payable prior to the Closing to Nesound pursuant to Article 6;
During the Transition Period, there is no event, transaction, condition or change which may have material adverse effect to the Target
Business, copyrighted content database of the Transferred Assets, Fixed Assets and the basic stableness of the Transferred Employees and
substantially impede the occurrence of closing, except for the event, transaction, condition or change caused by the fault of Nesound.
The Transferor shall have executed and delivered to Nesound the following documents (“Closing Documents”) on or prior to the Closing
Date:
(a)
the Contract Transfer Agreement or other transfer instrument or novation arrangement recognized by Nesound of all Business
Contracts (excluding those not required to be transferred as agreed to by the Parties upon negotiation) and the originals, photocopies,
etc. in relation to the Business Contracts under Article 5.6;
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(b)
(c)
(d)
(e)
(f)
(g)
(h)
the documents evidencing the completion of hand-over of the Transferred Assets and the Target Business Files between the
Transferor and Nesound or Kankan;
those intangible assets proposed to be transferred which are required to apply for approval, registration and filing with the
Governmental Authority shall have been submitted application with the relevant Governmental Authority; where the Governmental
Authority issues acceptance notice, such notice shall have been obtained; where the Governmental Authority does not issue
acceptance notice, the representative jointly designated by Nesound and Kankan shall have accompanied and witnessed the
submission onsite;
the Transferor shall have provided the detailed lists and payment progress of the Accounts Payable and Accounts Receivable;
the third party written consent documents (if applicable) as required for the effectiveness of this Transaction, excluding those issued
by the shareholders of Nesound;
necessary resolutions by the shareholders’ meeting and the board of directors of the Transferor as required to approve this
Transaction and other Transaction Documents;
labor contracts, non-compete and non-disclosure agreement consistent with the Applicable Laws and signed with the Transferred
Employees and the documents evidencing the termination of labor relationship between the Transferred Employees and the
Transferor;
The Transferor shall have provided to the Purchasor a confirmation letter on the Closing Conditions that is signed by the authorized
representative of the Transferor and confirms the satisfaction of the said conditions above.
12.2
Satisfaction and Waiver
(1)
(2)
To the extent permissible under the Applicable Laws, Nesound and the Transferor may, in writing, waive agreement, waive a certain Closing
Condition, and stipulate the time during which the Transferor shall complete the obligation relating to such waived Closing Condition therein.
Notwithstanding the foregoing, where the Transferor believes all the Closing Conditions have been satisfied except for those waived in
accordance with Article 12.2 (1), the Transferor shall issue a notice for completion of the Closing Conditions to Nesound together with all
evidencing documents.
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(3)
Nesound shall review the relevant documents within five Business Days upon its receipt of the notice for completion of the Closing
Conditions:
(a)
(b)
(c)
In case of no objection by Nesound, Nesound shall notify by written letter the Transferor to confirm that the Closing Conditions have
all been satisfied, the sending date of which shall be the “Date of Satisfaction of Conditions”.
In case of objection by Nesound, Nesound may opt to (a) demand the Transferor to take further actions or provide further documents
until Nesound confirms the satisfaction of all Closing Conditions, then Nesound shall notify its confirmation by written letter to the
Transferor, the sending date of which shall be the “Date of Satisfaction of Conditions”, or (b) demand the Transferor to sign a
waiver agreement of Closing Conditions with Nesound, and the execution date thereof shall be the “Date of Satisfaction of
Conditions”.
Where the Transferor has already completed the Closing Conditions other than those stated in Articles 12.1 (7) and 12.1 (9), and
completed 80% of the Closing Conditions as stated in Articles 12.1 (7) and 12.1 (9) (except that the 80% principle shall not apply to
the items indicated as “Material Assets”, “Material Agreements” and “Material Certificates and Licenses” in Appendix I, Appendix
III and Appendix VI which must have been delivered and transferred), Nesound shall not unreasonably delay in delivering the written
confirmation for closing to the Transferor. Within three Business Days as of the satisfaction of the above conditions, Nesound shall
pay the Second Installment of Price to the Transferor.
12.3
Closing Date
After the Date of Satisfaction of Conditions, the Parties shall proactively complete the actions stated in Article 12.2 hereof and shall agree on a certain
date as the “Closing Date” which shall not be later than the fifth Business Day as of the Date of Satisfaction of Conditions. The Parties unanimously
confirm that the Closing Date shall be preliminarily set as May 31, 2015. For the avoidance of doubt, the closing hereunder shall only occur after the
occurrence of the closing under the Equity Transfer Agreement.
12.4
Termination Date
The Parties shall make best efforts to ensure all Closing Conditions be satisfied within 6 months as of the Date of this Agreement. Such period may be
extended upon written agreement by the Parties.
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13.1
Breach of Contract
Article 13 Breach of Contract and Indemnity
This Agreement shall be binding upon the Parties once effective. Where any Party breaches any representation, warranty or other obligation hereunder,
or such representation or warranty contains any false, misleading or inaccurate information which causes any harm to the other Party, or where any
Party’s breach results in the non-performance or partial performance of this Agreement, all economic liabilities and legal liabilities arising out thereof
shall be assumed by the breaching Party and the breaching Party shall indemnify the losses caused to Other Parties.
13.2
Transferor’s Indemnity
The Transferor further undertakes to indemnify, defend and hold Nesound, Kankan and their Related Parties harmless against relevant losses, debts,
taxes, damages, judgments, compensation, penalties and reasonable costs and expenses in connection therewith suffered by the Transferee arising out
of or in connection with the acts of the Transferor (except for those related to the nonfeasance of Nesound upon Closing), which include but not limited
to the following:
(1)
(2)
(3)
Failure to obtain the approvals, consents or authorizations from Governmental Authority as required for the completion of the transaction
provided hereunder and the Target Business and the Transferred Assets on or before the Closing Date and which shall be on part of the
Transferor in accordance with the provisions of this Agreement, or to complete all required registration and filing, including but not limited to
any necessary approval and registration of the Target Business by the Governmental Authority;
Any third party claim, litigation, administrative or judicial investment or other proceeding initiated against any Party prior to the Closing Date
and relating to the Target Business, which may have adverse effect on the execution and performance of this Agreement, including but not
limited to any relevant fine or punishment, or any other type of liability in connection with the Transferred Assets and the transfer or
alienation thereof (as the case may be);
All obligations and legal liabilities arising out of or in connection with the Target Business or the Transferred Assets due to causes prior to the
Closing Date (including but not limited to third party claim, tax liability, administrative charge and fine and other payment obligations
provided in the Applicable Laws, whether such claim or legal liability is happened after the Closing Date or not);
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(4)
(5)
(6)
Any actual or alleged infringement upon any third party IPR or any other right by the Transferor in connection with the Target Business and
prior to the Closing Date (including but not limited to any copyright infringement upon the relevant videos, photos or texts on the website of
kankan.com, Mobile Client and Desktop Client), or failure to timely eliminate the content of such infringement or alleged infringement;
Any breach of the representations and warranties under Article 8 and Article 9 hereof; and
Any breach of other terms of this Agreement and other Transaction Documents.
Notwithstanding the foregoing:
(1)
(2)
Where any representation or warranty set forth in Article 10 hereof is proved to be inauthentic or inaccurate, but such inauthentic or inaccurate
representation or warranty does not cause any loss to Nesound and Kankan, the Transferor shall not be required to make any compensation to
Nesound;
Where the Transferor breaches any obligation or liability provided herein (including but not limited to the obligation on representation and
warranty as provided in Article 10 hereof) which causes any loss to the Transferee, the Transferor shall only be liable for any claim request
made by the Transferee within twenty four (24) months after the Closing Date; and
(3)
The Transferor is not required to make any repeated compensation to the Other Parties to this Agreement for the same breach.
13.3
Nesound’s Indemnity
From and after the date of this Agreement, Nesound shall indemnify, defend, protect and hold the Transferor harmless against any loss incurred due to
or resulting from or relating to (a) any breach of Nesound’s representation and warranty and (b) any breach of covenant or undertaking which shall be
performed by Nesound as set forth in this Agreement and other Transaction Documents, by Nesound.
In particular, where Nesound fails to timely pay the Consideration to the Transferor in accordance with the provisions of Article 2.3 hereof, then for
each day in delay, Nesound shall pay 0.02% of the payable amount in delay to the Transferor as late interest.
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14.1
Termination Event
Article 14 Termination
Unless otherwise provided herein, this Agreement may be terminated at the time or prior to the Closing under the following circumstances:
(1)
(2)
With the unanimous written consent of the Transferor and Nesound; or
Where the court with jurisdiction or any Governmental Authority issues any order, decree, judgment or takes any other measures to
permanently impede, restrict or prohibit the transaction contemplated hereunder, or determine the substantial part of the Target Business
carried out in the current way as illegal, then the Transferor or Nesound may terminate this Agreement.
14.2
Termination Procedure
Where the Transferor or Nesound terminates this Agreement in accordance with Article 14.1, a written notice shall be immediately issued the Other
Parties in accordance with Article 17.1, and the transaction contemplated hereunder shall be terminated with such notice, without any further action of
any Party.
14.3
Effect of Termination
The termination of this Agreement will not affect any right or obligation already occurred prior to such termination, provided that no provision hereof
may release any Party from any liability incurred prior to the termination of this Agreement.
15.1
Confidentiality
Article 15 Confidentiality
(1)
Neither Party shall, nor shall cause its Related Parties, shareholders, directors, senior executives, employees, representatives or agents to,
directly or indirectly disclose the existence of the Transaction Documents or any information on the Transaction (including any information
obtained by such Party when participating in the negotiation and execution of the Transaction), unless (a) with the prior written consent of the
Disclosing Party, or (b) such information is required to be disclosed under the Applicable Laws and is only disclosed to the necessary extent
conforming to any rule or policy of any stock exchange or such Applicable Laws; provided that the disclosing Party shall issue an immediate
written notice to the non-Disclosing Party about its disclosure need, so that the non-Disclosing Party may, to the extent permitted by the then
circumstance, have reasonable opportunity to: (a) obtain any protection order or other form of protection to avoid disclosure, and (b) give
advice on the words and content of such disclosure.
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(2)
(3)
Notwithstanding the foregoing, the Parties shall be entitled to disclose the existence of this Agreement, the Transaction and other matters to
the corresponding banks and the accountants and legal counsels retained by them and their business partners and employees within necessary
scope, provided that the individuals or entities who knows such information shall have agreed to assume confidentiality obligation equivalent
to those provided herein.
Without prior written consent of the other Parties of this Agreement, neither Party may disclose matters or information relating to this
Transaction on any press conference, industry or professional media, marketing materials and other media to any third party or the public;
where a Party indeed needs to make such disclosure to any third party or the public, the content of its disclosure shall be first recognized by
other Parties hereto in writing.
(4)
Upon termination of this Agreement, the confidentiality obligation shall survive and remain in full force and effect.
15.2
Exception
If the Receiving Party can prove the following circumstances, the said restriction shall not apply to the corresponding part of the Confidential
Information:
(1)
(2)
(3)
(4)
(5)
Where it was known by the Receiving Party without assuming any confidentiality obligation;
Where such information is obtained after the Date of this Agreement from any third party that legally owns Confidential Information, without
breaching any contractual or legal obligation binding upon the Disclosing Party for such information;
Where is or becomes a part of the public domain other than the fault of the Receiving Party;
Where is independently confirmed or obtained by the Receiving Party or its employees;
Where is required for disclosure by any law, regulation, administrative or judicial act, provided that the Receiving Party shall immediately
notify the Disclosing Party upon receipt of notice of such disclosure so that the Disclosing Party may have the opportunity to seek for any
other legal remedial measures to maintain the confidentiality of the Confidential Information; or
(6)
Where is approved to be published with written authorization of the Disclosing Party.
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16.1
Governing Law
Article 16 Governing Law and Dispute Resolution
The execution, validity, interpretation and performance of this Agreement and the resolution of any dispute hereunder shall be governed by the PRC
laws.
16.2
Arbitration
(1)
(2)
In case of any dispute arising out of the interpretation or implementation of this Agreement, the Parties shall first attempt to solve such dispute
through friendly negotiation. Where the dispute cannot be solved through negotiation within sixty days after a Party serves the written notice
on demanding commencement of negotiation to the Other Parties, then either Party may submit the dispute to the China International
Economic and Trade Arbitration Commission, South China Sub-Commission for arbitration, and the relevant Parties agree to entrust the
chairman of the Commission to appoint one arbitrator to arbitrate the dispute in Shenzhen in accordance with the rules of the Commission
then in force. The arbitration award shall be final and binding upon the Parties and may not be appealed. The arbitration fee shall be borne by
the defeating party, unless otherwise provided by the arbitration award.
In case of any dispute and during the arbitration of any dispute, except for the disputed matters or obligations which may refuse to perform
under Applicable Laws, the Parties shall continue exercising their respective other rights hereunder and performing their respective other
obligations hereunder.
17.1
Notice
Article 17 Notice
All notices and correspondences between the Parties shall be made in writing and written in Chinese, and delivered to the following corresponding
correspondence addresses by fax with transmission confirmation or courier service:
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Nesound: Beijing Nesound International Media Corp., Ltd.
Attn:
Fax:
Address: Room 601, 6/F, Hezhan Mansion, No.79 Banjing Road, Haidian District, Beijing (registered address)
GU Feng
010-88594185
Transferor: Shenzhen Xunlei Networking Technologies Co., Ltd.
Attn:
Fax:
Address: 7&8/F, No.11 Building, Shenzhen Software Park Phase II, Keji Mid. 2nd Road, Nanshan District, Shenzhen
HUANG Peng
0755- 26035777
Kankan
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
Attn:
Fax:
Address: Room 701, No.11 Building, Shenzhen Software Park Phase II, Keji Mid. 2nd Road, Nanshan District, Shenzhen
General Manager HAO
0755- 26035777
17.2
Time
Any notice or correspondence shall be deemed to have been received at the following time:
(1)
In case of sent by fax with transmission confirmation, the time indicated on the corresponding transmission record, provided that if the
sending time is after 5:00 p.m. in the afternoon at the place of receipt or on a non-Business Day, the date of receipt shall be deemed as the next
Business Day at the place of receipt; or
(2)
In case of sent by courier service, the date of signature for receipt by the receiving Party or its process agent at the address of such Party.
Article 18 Miscellaneous
18.1
Effectiveness
This Agreement shall become effective from the Date of this Agreement.
18.2
Termination of Acquisition Framework Agreement
The Parties unanimously agree that, from the effective date of this Agreement, the Acquisition Framework Agreement shall become automatically
terminated and invalid.
18.3
Taxes
The fees of the Parties incurred by retaining outside counsels, accountants and other consultants shall be respectively borne by the Transferor and
Nesound. If this Transaction is successfully completed, KanKan is not required to pay any agency fee or consulting fee for this Transaction. The Parties
shall respectively bear the Tax, costs and fees arising out of the execution and performance of this Agreement.
37
18.4
Entire Agreement
This Agreement and other Transaction Documents constitute all agreement among the Parties with respect to the subject matter of this Agreement. In
case of any conflict with any previous oral or written agreement of the Parties, this Agreement shall prevail. Any modification to this Agreement must
be made in written form agreed by the Parties.
18.5
Amendment
Any amendment to this Agreement may only become effective after each Party signs a written agreement for that.
18.6
Assignment
Without prior written consent of the other Parties, neither Party may assign all or part of its rights and obligations hereunder to any third party.
Provided that Nesound may, by notifying the Transferor five (5) Business Days in advance in writing, assign all or part of its rights and obligations
hereunder to its Related Party to enjoy and assume the same (in which case, Nesound shall assume the joint and several liability for the obligations of
its Related Party under the Transaction Documents).
18.7
Succession
This Agreement shall be binding upon the Parties and their successors and permitted assigns, and shall be inure to the Parties and each of their
successors and permitted assigns.
18.8 Waiver
The failure of any Party hereto to exercise or timely exercise any of its rights, powers or remedies hereunder shall not be deemed as a waiver, and any
single or partial exercise shall not preclude any other further exercise or preclude other exercise or exercise of any other rights, powers or remedies.
Moreover, the waiver of any Party hereto to hold the breaching Party accountable for any breach shall not be deemed as such Party’s waiver of any
right to hold the breaching Party accountable for any other breach subsequently occurred.
18.9
Severability
All obligations hereunder shall be deemed as separate obligations and be enforceable, and where any or several obligations hereunder cannot be
enforced, the enforceability of other obligations shall not be affected. Where this Agreement is unenforceable against any Party, it shall not affect the
enforceability of this Agreement between other Parties. Where any or several provisions in this Agreement or other Transaction Documents and their
auxiliary documents is held to be invalid, illegal or unenforceable in any aspect under any Applicable Laws, or where the Governmental Authority
demands any revision thereto, the validity, legality and enforceability of the remaining provisions shall not be thereby affected or damaged in any
aspect. The Parties shall, through good faith negotiation, make efforts to replace such invalid, illegal or unenforceable provisions with valid provisions,
and the economic effects produced by such valid provisions shall be close to the economic effects of such invalid, illegal or unenforceable provisions
as much as possible.
38
18.10 Appendices
The appendices to this Agreement shall be integral parts of this Agreement and mutually supplementary to the body of this Agreement and shall have
the same legal force with this Agreement.
18.11 Counterpart
This Agreement shall be made in triplicate, with each Party holding one copy with the same legal force. The signed copy includes the copy sent by fax
or telex, and each copy shall be deemed as original, but all signed copies shall together be deemed as one and the same instrument.
(The remainder of this page is intentionally left blank.)
39
In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Beijing Nesound International Media Corp., Ltd.
By:
Name:
Position:
/s/ LIU Wenwu
LIU Wenwu
Legal Representative
In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Shenzhen Xunlei Networking Technologies Co., Ltd.
By:
Name:
Position:
/s/ ZOU Shenglong
ZOU Shenglong
Legal Representative
In Witness Whereof, the Parties have caused this Agreement to be executed by their duly authorized representatives on the date first written above.
Shenzhen Xunlei Kankan Information Technologies Co., Ltd.
By:
Name:
Position:
/s/ JIN Hui
JIN Hui
Legal Representative
List of Significant Subsidiaries and Variable Interest Entities
Exhibit 8.1
Subsidiaries
Giganology (Shenzhen) Co. Ltd.
Xunlei Network Technologies Limited
Xunlei Network Technologies Limited
Xunlei Computer (Shenzhen) Co., Ltd.
Variable Interest Entities
Shenzhen Xunlei Networking Technologies, Co., Ltd.
Shenzhen Onething Technologies Co., Ltd.
Place of Incorporation
PRC
British Virgin Islands
Hong Kong
PRC
PRC
PRC
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.1
I, Sean Shenglong Zou, certify that:
1. I have reviewed this annual report on Form 20-F of Xunlei Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: April 21, 2016
By:
/s/ Sean Shenglong Zou
Name:
Title:
Sean Shenglong Zou
Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.2
I, Tao Thomas Wu, certify that:
1. I have reviewed this annual report on Form 20-F of Xunlei Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual
report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over
financial reporting.
Date: April 21, 2016
By:
/s/ Tao Thomas Wu
Name:
Title:
Tao Thomas Wu
Chief Financial Officer
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the annual report of Xunlei Limited (the “Company”) on Form 20-F for the year ended December 31, 2015 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Sean Shenglong Zou, Chief Executive Officer of the Company, hereby certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 21, 2016
By:
/s/ Sean Shenglong Zou
Name:
Title:
Sean Shenglong Zou
Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
In connection with the annual report of Xunlei Limited (the “Company”) on Form 20-F for the year ended December 31, 2015 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Tao Thomas Wu, Chief Financial Officer of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 21, 2016
By:
/s/ Tao Thomas Wu
Name:
Title:
Tao Thomas Wu
Chief Financial Officer
Exhibit 15.1
Our ref
Direct tel
Email
SSY/660874-000001/9415290v2
+852 3690 7498
sophie.yu@maplesandcalder.com
Xunlei Limited
4/F, Hans Innovation Mansion, North Ring Road
No. 9018 High-Tech Park, Nanshan District
Shenzhen, 518057
People’s Republic of China
21 April 2016
Dear Sirs
Xunlei Limited
We have acted as legal advisers as to the laws of the Cayman Islands to Xunlei Limited, an exempted limited liability company incorporated in the Cayman
Islands (the "Company"), in connection with the filing by the Company with the United States Securities and Exchange Commission (the "SEC") of an annual
report on Form 20-F for the year ended 31 December 2015 ("Form 20-F").
We hereby consent to the reference of our name under the heading "Item 10. Additional Information – E. Taxation – Cayman Islands Taxation" in the Form 20-
F.
Yours faithfully
/s/ Maples and Calder
Maples and Calder
CONSENT LETTER
To
Xunlei Limited
7/F Block 11, Shenzhen Software Park
Ke Ji Zhong 2nd Road, Nanshan District
Shenzhen, 518057
People’s Republic of China
Dear Sir/Madam:
Exhibit 15.2
April 21, 2016
We consent to the reference to our firm under the headings “Item 3. Key Information—D. Risk Factors” and “Item 4. Information on the Company—C.
Organizational Structure” in Xunlei Limited’s Annual Report on Form 20-F for the year ended December 31, 2015, which will be filed with the Securities and
Exchange Commission (hereinafter the “SEC”) in April 2016, and further consent to the incorporation by reference of the summaries of our opinions under
these headings into Xunlei Limited’s registration statement on Form S-8 (File No. 333—200633) that was filed on November 28, 2014. We also consent to the
filing with the SEC of this consent as an exhibit to the Annual Report on Form 20-F for the year ended December 31, 2015.
In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of
1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully,
/s/ Zhong Lun Law Firm
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-200633) of Xunlei Limited of our report dated April
21, 2016 relating to the consolidated financial statements, which appears in this Form 20-F.
Exhibit 15.3
/s/ PricewaterhouseCoopers Zhong Tian LLP
PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
April 21, 2016
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-200633) of Xunlei Limited of our report dated March
21, 2014, except for the effects of discontinued operations discussed in Note 3 to the consolidated financial statements, as to which the date is April 21, 2016,
relating to the consolidated financial statements, which appears in this Form 20-F.
Exhibit 15.4
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Hong Kong
April 21, 2016