PART I

~~Item 1.~~

Item 1.Identity of Directors, Senior Management and Advisers

Not applicable.

~~Item 2.~~

Item 2.Offer Statistics and Expected Timetable

Not applicable.

~~Item 3.~~

~~Key Information~~

Item 3.Key Information

~~Selected Financial Data~~

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 data and the selected consolidated statements of cash flows data for the years ended December 31, ~~2013, 2014~~2018, 2019 and ~~2015~~2020 and the selected consolidated balance sheets data as of December 31, ~~2014~~2019 and ~~2015~~2020 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 data and the selected consolidated statements of cash flows data for the years ended December 31, ~~2011~~2016 and ~~2012~~2017 and the selected consolidated balance sheets data as of December 31, ~~2012~~2016, 2017 and ~~2013, reflect~~2018 have been derived from our audited consolidated financial statements not included in this annual report.

The selected consolidated statements of operations data and cash flows data for the years ended December 31, 2016, 2017 and 2018 and the selected consolidated balance sheets data as of December 31, 2016, 2017 and 2018 have reflected the impact of retrospective adjustments for our divestiture of ~~Xunlei Kankan, which~~web game business in January 2018. The web game business has been classified as discontinued operations. WeIn 2019, we started to operate web game business again under a different business model by cooperating with third parties. Revenues from new web game business have ~~not~~been included in 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. continuing operations.

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.

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For the Year Ended December 31,
(in thousands of US$, except for share, per
share and per ADS data) 2011 2012 2013 2014 2015
Revenues, net of rebates and discounts 35,648 71,545 122,031 135,812 129,996
Business tax and surcharges (4,014 ) (5,379 ) (3,904 ) (1,878 ) (361 )
Net Revenues 31,634 66,166 118,127 133,934 129,635
Cost of revenues (14,662 ) (31,875 ) (50,258 ) (55,755 ) (60,034 )
Gross profit 16,972 34,291 67,869 78,179 69,601
Operating expenses(1)
Research and development expenses (10,974 ) (18,340 ) (21,740 ) (29,252 ) (38,250 )
Sales and marketing expenses (9,266 ) (15,933 ) (9,848 ) (13,527 ) (15,042 )
General and administrative expenses (11,732 ) (2,675 ) (18,663 ) (26,945 ) (28,774 )
Total operating expenses (31,972 ) (36,948 ) (50,251 ) (69,724 ) (82,066 )
Operating (loss)/income (15,000 ) (2,657 ) 17,618 8,455 (12,465 )
Interest income 270 1,377 1,189 6,733 5,833
Interest expense (339 ) (1,400 ) — (163 ) (239 )
Other income, net 1,415 564 4,679 13,966 3,627
Shares of (loss)/income from equity investees (7 ) (45 ) 25 (259 ) (12 )
(Loss)/income from continuing operations before income tax (13,661 ) (2,161 ) 23,511 28,732 (3,256 )
Income tax benefit/(expense) 2,816 (2,111 ) (560 ) (463 ) 886
Net (loss)/income from continuing operations (10,845 ) (4,272 ) 22,951 28,269 (2,370 )
Discontinued operations
Income/(Loss) from discontinued operations 11,867 4,782 (13,779 ) (20,330 ) (10,048 )
Income tax (expense)/benefit (1,033 ) (128 ) 1,207 1,923 (2,048 )
Net income/(loss) from discontinued operations 10,834 4,654 (12,572 ) (18,407 ) (12,096 )
Net (loss)/income (11 ) 382 10,379 9,862 (14,466 )
Less: net loss attributable to the non-controlling interest (1 ) (121 ) (283 ) (950 ) 1,299
Net (loss)/income attributable to Xunlei Limited (10 ) 503 10,662 10,812 (13,167 )
Beneficial conversion feature of series C convertible preferred shares from their modification — (286 ) — — —
Deemed contribution from series C preferred shareholders — 2,979 — — —
Contingent beneficial conversion feature of series C to a series C shareholder — — — (57 ) —
Deemed dividend to series D shareholder from its modification — — — (279 ) —
Accretion of series D to convertible redeemable preferred shares redemption value — (3,509 ) (4,300 ) (1,870 ) —
Accretion of series E to convertible redeemable preferred shares redemption value — — — (12,754 ) —
Amortization of beneficial conversion feature of series E — — — (4,139 ) —
Acceleration of amortization of beneficial conversion feature of Series E upon initial public offering — — — (49,346 ) —
Deemed dividend to certain shareholders from repurchase of shares — — — (14,926 ) —
Deemed dividend to preferred shareholders upon initial public offering — — — (32,807 ) —
Allocation of net income to participating preferred shareholders — — (4,094 ) — —
Net (loss)/income attributable to Xunlei Limited’s common shareholders (10 ) (313 ) 2,268 (105,366 ) (13,167 )
Weighted average number of common shares outstanding
Basic 59,143,208 61,447,372 61,447,372 194,711,227 335,987,595
Diluted 59,143,208 61,447,372 76,065,898 194,711,227 335,987,595
Net (loss)/income per share attributable to Xunlei Limited from continuing operations
Basic (0.45 ) (0.13 ) 0.24 (0.45 ) (0.00 )
Diluted (0.45 ) (0.13 ) 0.18 (0.45 ) (0.00 )
Net income/(loss) per share attributable to Xunlei Limited from discontinued operations
Basic 0.45 0.14 (0.20 ) (0.09 ) (0.04 )
Diluted 0.45 0.14 (0.17 ) (0.09 ) (0.04 )
Net loss attributable to holders of common shares of Xunlei Limited per ADS(2)
Basic (2.70 ) (0.20 )
Diluted (2.70 ) (0.20 )

* We soldThe following table presents our ~~Xunlei Kankan business in July 2015. As a result, Xunlei Kankan is accounted for as discontinued operations and our~~selected consolidated statements of comprehensive income/(loss) ~~in this annual report separates~~data for the ~~discontinued operations from our remaining business operations for all~~ years ~~presented.~~ended December 31, 2016, 2017, 2018, 2019 and 2020.

~~Note:~~


	For the Year Ended December 31,
	2016	2017	2018	2019	2020

	(in thousands of US$, except for share, per share and per ADS data)
Selected Consolidated Statements of Operations Data:
Revenues, net of rebates and discounts	140,985	201,911	232,132	181,267	186,683
Business tax and surcharges	(779)	(1,328)	(1,528)	(602)	(312)
Net revenues	140,206	200,583	230,604	180,665	186,371
Cost of revenues	(79,928)	(117,876)	(115,667)	(99,913)	(92,637)
Gross profit	60,278	82,707	114,937	80,752	93,734
Operating expenses(1)
Research and development expenses	(61,169)	(66,947)	(76,763)	(68,571)	(55,463)
Sales and marketing expenses	(14,601)	(19,888)	(35,322)	(31,820)	(18,064)
General and administrative expenses	(26,010)	(36,517)	(40,833)	(38,930)	(33,910)
Asset impairment loss, net of recoveries	—	(13,556)	(6,348)	2,147	(5,090)
Total operating expenses	(101,780)	(136,908)	(159,266)	(137,174)	(112,527)
Operating loss	(41,502)	(54,201)	(44,329)	(56,422)	(18,793)
Interest income	2,158	1,967	1,183	1,897	1,471
Interest expense	(239)	(239)	(239)	(75)	(406)
Other income, net	6,503	7,880	2,810	5,861	4,737
Shares of loss from equity investees	(195)	(1,875)	(307)	—	0
Loss from continuing operations before income tax	(33,275)	(46,468)	(40,882)	(48,739)	(12,991)
Income tax benefit	2,469	2,252	89	(4,676)	(1,149)
Loss from continuing operations	(30,806)	(44,216)	(40,793)	(53,415)	(14,140)
Discontinued operations:
Income from discontinued operations	7,791	7,538	1,533	—	—
Income tax expenses	(1,168)	(1,131)	(230)	—	—
Net income from discontinued operations	6,623	6,407	1,303	—	—
Net loss	(24,183)	(37,809)	(39,490)	(53,415)	(14,140)
Less: net loss attributable to the non-controlling interest	(72)	13	(212)	(246)	(300)
Net loss attributable to Xunlei Limited’s common shareholders	(24,111)	(37,822)	(39,278)	(53,169)	(13,840)
Weighted average number of common shares outstanding
Basic	334,155,668	331,731,963	334,965,987	337,845,675	337,429,601
Diluted	334,155,668	331,731,963	334,965,987	337,845,675	337,429,601
Net loss per share attributable to Xunlei Limited from continuing operations
Basic	(0.09)	(0.13)	(0.12)	(0.16)	(0.04)
Diluted	(0.09)	(0.13)	(0.12)	(0.16)	(0.04)
Net income per share attributable to Xunlei Limited from discontinued operations
Basic	0.02	0.02	0.00	—	—
Diluted	0.02	0.02	0.00	—	—
Net loss attributable to holders of common shares of Xunlei Limited per ADS⁽²⁾
Basic	(0.36)	(0.57)	(0.59)	(0.79)	(0.21)
Diluted	(0.36)	(0.57)	(0.59)	(0.79)	(0.21)

Notes:

We sold our web game business in January 2018. As a result, web game business is accounted for as discontinued operations and our consolidated statements of operations data in this annual report separate the discontinued operations from our remaining business operations for all years presented. In 2019, we started to operate web game business again under a different business model by cooperating with third parties. Revenues from web game business have been included in the continuing operations.

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(1)	Share-based compensation expenses were allocated in operating expenses as follows:


											For the Year Ended December 31,
											2016	2017	2018	2019	2020
	For the Year Ended December 31,
(in thousands of US$)	2011		2012		2013		2014		2015
											(in thousands of US$)
Research and development expenses		898		1,085		973		1,171		2,896	2,983	2,442	2,645	2,594	916
Sales and marketing expenses		73		46		43		66		131	98	88	404	381	185
General and administrative expenses		1,128		1,102		1,080		6,407		6,701	6,267	5,800	2,245	2,453	1,209
Total share-based compensation expenses		2,099		2,233		2,096		7,644		9,728	9,348	8,330	5,294	5,428	2,310

(2)

~~(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.

The following table presents our selected consolidated balance sheet data as of December 31, 2016, 2017, 2018, 2019 and 2020.

(in thousands of US$) 2012 2013 2014 2015
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents 81,906 93,906 404,275 361,777
Short-term investments 6,523 40,993 29,427 70,328
Total current assets 163,830 193,781 501,930 457,653
Total assets 202,204 244,403 580,362 538,361

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) 31,834 39,820 14,937 21,736
Total current liabilities 79,544 105,385 103,020 76,736
Total liabilities 97,886 124,835 123,341 93,680
Mezzanine equity 35,990 40,290 — —
Total Xunlei Limited’s shareholders’ equity 67,968 79,194 457,891 446,749
Non-controlling interest 360 84 (870 ) (2,068 )
Total liabilities, mezzanine equity and shareholders’ equity 202,204 244,403 580,362 538,361

For the Year Ended December 31,
(in thousands of US$) 2011 2012 2013 2014 2015
Selected Cash Flow Statement Data:
Net cash generated from operating activities 18,277 59,914 85,533 48,202 13,764
Net cash used in investing activities (36,875 ) (49,490 ) (78,352 ) (70,546 ) (54,982 )
Net cash generated from financing activities 50,032 17,692 2,487 333,268 5,030
Net increase/(decrease) in cash and cash equivalents 31,434 28,116 9,668 310,924 (36,188 )
Effect of exchange rates on cash and cash equivalents 562 441 2,332 (555 ) (6,310 )
Cash and cash equivalents at beginning of year 21,353 53,349 81,906 93,906 404,275
Cash and cash equivalents at end of year 53,349 81,906 93,906 404,275 361,777


	As of December 31,
	2016	2017	2018	2019	2020

	(in thousands of US$)
Selected Consolidated Balance Sheets Data:
Cash and cash equivalents	199,504	233,479	122,930	162,465	137,248
Short-term investments	181,960	138,915	196,538	102,847	117,821
Total current assets	412,305	430,783	362,899	316,583	302,282
Total assets	509,795	533,437	455,431	424,687	415,605
Accounts payable	33,376	49,819	22,629	24,213	20,644
Total current liabilities	93,405	141,696	108,035	111,286	103,276
Total liabilities	103,545	150,600	111,251	129,144	125,232
Total shareholders’ equity	408,238	384,997	345,296	296,878	292,154
Non-controlling interest	(1,988)	(2,160)	(1,116)	(1,335)	(1,781)
Total liabilities and shareholders’ equity	509,795	533,437	455,431	424,687	415,605

~~Capitalization and Indebtedness~~

The following table presents our selected consolidated statements of cash flows data for the years ended December 31, 2016, 2017, 2018, 2019 and 2020.


	For the Year Ended December 31,
	2016	2017	2018	2019	2020

	(in thousands of US$)
Selected Consolidated Statements of Cash Flows Data:	��
Net cash generated from/(used in) operating activities	16,970	(14,216)	(35,608)	(45,649)	(13,911)
Net cash (used in)/generated from investing activities	(158,335)	35,208	(69,357)	79,260	(20,756)
Net cash (used in)/generated from financing activities	(11,041)	2,561	929	12,177	2,679
Net (decrease)/increase in cash and cash equivalents and restricted cash	(152,406)	23,553	(104,036)	45,788	(31,988)
Effect of exchange rates on cash, cash equivalents and restricted cash	(9,867)	10,422	(6,513)	(3,270)	5,329
Cash, cash equivalents and restricted cash at beginning of year	361,777	199,504	233,479	122,930	165,448
Cash, cash equivalents and restricted cash at end of year	199,504	233,479	122,930	165,448	138,789

B.Capitalization and Indebtedness

Not applicable.

~~Reasons for the Offer and Use of Proceeds~~

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C.Reasons for the Offer and Use of Proceeds

Not applicable.

~~Risk Factors~~

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

~~Risks related to our business~~

~~We have a relatively limited operating history; our~~Our business model is currently undergoing significant innovation and transition, and our historical growth rate may not be indicative of our future ~~performance.~~performance and our new business may not be successful.

~~We have a relatively limited operating history.~~ We launched our then 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 also provide a range of internet value-added services. ~~Revenues from our~~Our cloud acceleration ~~subscription services~~products have ~~significantly increased since 2009 while revenues from our online advertising and other internet value-added services have increased steadily over~~maintained nationwide popularity in the past few years. ~~However, our~~Our business model currently 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~~internet. We have launched several new services and ~~projects.~~products in recent years, such as cloud computing products and products based on blockchain technology. The evolving business model and expansion into the new services involve new risks and challenges. 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~~cannot assure you that we will be able to ~~explore relationships with more smartphone makers to achieve broader acceptance of the Xunlei mobile products, we have not yet formed~~form significant business partnerships with major smartphone makers other than Xiaomi ~~and cannot assure you that~~so as to achieve broader acceptance of the Xunlei mobile products. We may also not be able to maintain the rapid growth of revenues from our mobile ~~strategy will succeed.~~

Weadvertising, from which we generated revenues for the first time in the fourth quarter of 2015. There are also ~~devoting significant energy and resources~~substantial uncertainties with respect 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~~business and ~~storage in the same way our traditional acceleration products utilize users’ idle uplink establishing and indexing files.~~blockchain business. 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 technologytechnologies supporting our cloud computing ~~project is relatively~~business and blockchain business are new and rapidly evolving. If we fail to explore these new technologies and apply them innovatively to keep our products and services competitive, we may experience immediate decline in the growth of our business. In addition, the regulatory environment surrounding these businesses may also be evolving and any unfavorable developments may adversely affect our businesses. Furthermore, the profitability of our new initiatives has yet to be proven. For example, although the blockchain technology is ~~still under improvement. Any failure in our~~said to be of immeasurable potential, its commercial value is yet to be proved. Despite that we have devoted a significant amount of resources to the development of ~~this~~blockchain technology, ~~could lead~~we may not be able to ~~unsatisfactory project outcomes and could~~realize our expected goals or create sufficient commercial values. As a result, our business, operating results, financial conditions may be significantly and adversely ~~impact our results.~~

affected.

In addition ~~as part~~to uncertainties of our ~~initiative to streamline existing businesses, we have sold~~new initiatives, 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~~traditional PC-based download acceleration subscriptions ~~have declined recently,~~also experienced declines in recent years, partly due to the change of our users’ online behaviors and the ongoing and ~~increased~~intensified government scrutiny of internet content in China. Although we ~~continue~~are continuously improving our existing products and services and rolling out new products and services to ~~enhance and update our products in order to make them attractive to~~attract our subscribers, our efforts may not be successful. Our subscriber base generally declined from ~~5.1~~4.4 million as of December 31, ~~2013~~2014 to ~~4.9~~3.8 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.~~2020. 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.”~~subscribers” and “—Risks Related to Doing Business in China—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.”

Due to the abovementioned factors, our historical growth rate may not be indicative of our future performance and our new business initiatives may not be successful, and we cannot assure you that we will grow at the same rate as we did in the past, if at all.

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The blockchain industry in China is an emerging industry. The laws and regulations governing the operation of blockchain products and services in China are developing and evolving and subject to changes. If we fail to comply with existing and future applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations may be materially and adversely affected.

We launched ThunderChain, a blockchain infrastructure platform, in 2018. Currently, our strategic focus in the blockchain sector is on the development of blockchain infrastructure. The blockchain industry in China is an emerging industry. The PRC government has yet to establish a comprehensive regulatory framework. The laws and regulations governing the operation of blockchain products and services in China are also rapidly developing and evolving. On January 10, 2019, the Cyberspace Administration of China, or CAC, issued the Provisions on the Administration of Blockchain Information Services, or the Blockchain Provisions, which came into effect on February 15, 2019. Pursuant to the Blockchain Provisions, a blockchain information service provider is required to file particulars of such service provider including its name, service category, service form, application field, and server address with the blockchain information service filing management system managed by the CAC and go through filing procedures within ten business days after it starts to provide services. After completing the filing procedure, the blockchain information service provider should display the filing number in a conspicuous position on the service provider’s websites and applications through which it provides services. Our subsidiaries providing blockchain information services have completed these filing procedures with relevant regulatory authorities and obtained the filing numbers. In addition, the operations of our blockchain services are still at an early stage. We may be required to make additional filings if we make further adjustments to our business operations. We cannot assure you that we will always be able to timely obtain or renew relevant permits, approvals or licenses that may be viewed necessary for our blockchain operations. If we fail to maintain any of these required permits, approvals or licenses in a timely manner, or at all, we may be subject to various penalties, including fines and discontinuation of or restriction on our operations. Any such disruptions in our business operations may have a material and adverse effect on our business, results of operations and financial condition.

In addition to filing requirements, the Blockchain Provisions also imposed an array of other requirements on the providers of blockchain information services. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Blockchain Information Services” for more details. Failure to comply with relevant requirements in the Blockchain Provisions may subject us to administrative penalties such as warning, being ordered to temporarily suspend relevant business operations to rectify within prescribed time period, or fines, or criminal liabilities, depending on which provisions are violated.

Since the blockchain technology and other related technologies are evolving rapidly, new laws, regulations and governmental policies are expected to be adopted from time to time by relevant PRC authorities to impose additional restrictions or require licenses or permits for operating blockchain related business. We are unable to predict with certainty the impact, if any, that future legislation, judicial interpretations or regulations relating to the blockchain industry will have on our business, financial condition and results of operations. To the extent that we are not able to fully comply with any new laws or regulations when they are promulgated, our business, financial condition and results of operations as well as the price of our ADSs may be materially and adversely affected.

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Regulatory uncertainties exist with respect to our historical LinkToken operations, which may have a material adverse effect on our business and results of operations.

LinkToken was developed in 2017. It was essentially a type of digital ticket. The underlying technology of LinkToken was blockchain technology. Users of OneThing Cloud could be rewarded with LinkTokens by voluntarily participating in OneThing Cloud reward program to share idle uplink bandwidth capacities and external storage to us. The amount of LinkTokens awarded depended on a number of factors including, but not limited to, the size of bandwidth and external storage users contribute, the length of time online, and the usage of computing resources. Rewarded LinkTokens could be used to redeem for a variety of products and services offered in the LinkToken Mall. In 2018, we disposed of the LinkToken operations and the related assets and liabilities to an independent third party. Upon the completion of the disposal in April 2019, the independent third party obtained the exclusive right to carry out LinkToken operations inside and outside mainland China, including without limitation, the formulation, amendment and execution of the rules governing the rewarding of LinkToken to users, operations of LinkToken Pocket and the LinkToken Mall. After the disposal, subject to rewarding rules determined by the independent third party, users of OneThing Cloud could still voluntarily participate in OneThing Cloud reward program to share idle uplink bandwidth capacities and external storage and be rewarded with LinkToken. In May 2019, we terminated our technical support to the independent third party with respect to its LinkToken operations. In April 2020, the independent third party terminated OneThing Cloud reward program, as a result of which users can no longer be rewarded with LinkTokens. Meanwhile, we launched our own reward program, which allows users to share idle uplink bandwidth capacities and external storage with us in exchange for a small amount of cash rewards. Although we have no longer been operating OneThing Cloud reward program since our disposal of LinkToken, we periodically receive user complaints regarding LinkToken, including the termination of OneThing Cloud reward program, which could cause reputational harm to our business operations and might also have a negatively impact on our business and results of operations.

Although we have no longer been operating LinkTokens after our disposal of such business to the independent third party, new laws, regulations and governmental policies regarding virtual coins may still be interpreted or even retroactively enforced against us regarding our previous dealings with LinkToken. On September 4, 2017, People’s Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, the MIIT, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission jointly promulgated the Announcement on Prevention of Token Fundraising Risks to strengthen the administration of the initial coin offerings activities. Pursuant to the announcement, “fundraising through token offerings” is referred to as a type of fundraising activities where an issuer raises “virtual currencies” such as Bitcoin or Ether from investors through the illegal issuance and subsequent circulation of tokens. Pursuant to the announcement, token fundraising activity is essentially an illegal public fundraising activity without obtaining government’s approval. It is a suspected illegal offering of tokens, illegal offering of securities, illegal fundraising, financial fraud, pyramid scheme, which are criminal offenses under the PRC law. The announcement prohibits fundraising activities through token issuance. In addition, the announcement also provides that token trading platform should not be engaged in (i) the exchange between any statutory currency with tokens and “virtual currencies,” (ii) the trading, either as a central counterparty or not, of the tokens or “virtual currencies,” and (iii) token or “virtual currency” pricing, information intermediary services or other services for tokens or “virtual currencies.” To date, no governmental financial regulators have imposed any administrative penalties against us relating to LinkTokens on the basis that we engaged in token fundraising activities. However, we cannot assure you that going forward, relevant PRC authorities would have the same view with us and would not impose retroactive regulatory restrictions or penalties on us for our prior dealings with LinkToken. Were that to happen, we might be subject to additional regulatory risks, and our business and results of operations may be adversely affected.

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~~52.0 million monthly unique visitors in December ~~2015, excluding the monthly unique visitors to Xunlei Kankan,~~2020 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.

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Our number of subscribers ~~has recently~~ experienced a decline in the past partly due to the ~~increasing~~intensified 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~~4.4 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 gradually reduced to ~~281,000~~175,000 existing subscribers as of December 31, ~~2015,~~2020, 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,~~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.”

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~~development of technologies may also render our acceleration technology obsolete. For example, the development of 5G technology significantly increased the speed of wireless mobile communications. Although people generally expect 5G technology would significantly change people’s life, when 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 theyhow it will happen 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~~yet to be ~~accessed from PCs,~~fully demonstrated. The new technology will create new business opportunities, but it may also alter people’s online habits, which in turn may have a negative impact on our businesses such as our membership subscription and ~~such new entrants may operate more effectively on mobile devices than our mobile products do.~~

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 mobilecloud computing products and services.

IfThe intellectual property protection mechanism we ~~fail to keep up with the technological development in the internet industry~~have implemented may not always be effective or sufficient. The premium acceleration services, Xunlei Cloud Drive 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 andother value-added services ~~less attractive~~we provide to our users have exposed us to 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~~expose us to 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~~costly. Any damage awards, injunctive relief and/or court orders could materially and adversely affect our existing business model, divert our management’s attention and ~~financial resources and~~ adversely impact our ~~business.~~

business and reputation.

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~~litigations based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of ~~other parties’~~third-party 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.”

In the ordinary course of our business, we receive, from time to time, written notices from third parties claiming that certain ~~content~~contents and games inon our network, websites, products or ~~on one or more of our websites~~services infringe their copyrights or the copyrights of third parties. These notices may ~~threaten~~contain threats to take legal actions against us or ~~request us to cease~~requests for cessation of distribution, marketing or displaying such ~~content~~contents or games on our network, websites, products or ~~websites. Claims~~services. As of the date of this annual report, we are involved in 19 pending copyright lawsuits in China. Almost all of these claims alleged that contents on our network, products or services constitute infringements of the plaintiffs’ copyrights. The total amount of damages claimed in these pending copyright lawsuits is approximately RMB18.3 million (US$2.7 million). See also “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” While we believe that none of these pending lawsuits are likely to have a material adverse effect on our business, 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~~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~~

Table 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.Contents

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~~download it to their ~~properties.~~local storage. We also provide users with cloud storage services through Xunlei Cloud Drive, which allows users to save documents, images, audios, videos and other files to cloud servers automatically upon completing the download at an accelerated speed. See “Item 4. Information on the Company—B. Business Overview—Our ~~Platform—Cloud accelerator—Subscription services.~~Platform.” In addition, certain of our services allow users to upload files and various media contents after they create accounts with us, converting the files into links and sharing such links with designated persons. We do not provide users with any links to third parties, nor do we download or save any contents from third parties for our users on our own initiative. Although we have made commercially reasonable efforts to request users to comply with applicable intellectual property laws, we cannot ensure that all of our users have the rights to use, transmit or share these contents if such content infringes third-party intellectual property rights. We have implemented internal procedures to meet the requirements under relevant PRC laws and regulations to monitor and review contents available on our platform, and remove contents promptly once we receive notice of infringement from the legitimate right holder. See also “Item 4. Information on the Company—B. Business Overview— 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 acceleration services and other value-added services, we cannot guarantee the effectiveness of our current implementation of intellectual property protection mechanisms and measures. We may be liable for ~~transmitting~~temporarily storing or ~~temporarily storing~~transmitting 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.

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.~~2012 which was revised in December 2020 and became effective on January 1, 2021. 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.

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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. For example, we developed Mobile Xunlei, which allows users to search, download and consume digital media content on their mobile devices in a user-friendly way. 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 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.

In addition, 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.

We may be subject to the risks of overseas expansion.

We have been exploring opportunities in overseas market. Operating business internationally may expose us to additional risks and uncertainties. As we have very limited experience in operating our business in overseas markets, we may be unable to attract a sufficient number of users, fail to anticipate competitive conditions or face difficulties in operating effectively in overseas markets. We may also fail to adapt our business models to the local market due to various legal requirements and market conditions. Our international operations and expansion efforts have resulted and may continue to result in increased costs and are subject to a variety of risks, including increased competition, fluctuations in foreign exchange rates, uncertain enforcement of our intellectual property rights, more complex distribution logistics and the complexity of compliance with foreign laws and regulations. Compliance with applicable Chinese and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws, restrictions on foreign investment, and anti-competition regulations, increases the costs and risk exposure of doing business in foreign jurisdictions. Although we have strived to comply with these laws and regulations, a violation by our employees, contractors or agents could nevertheless occur, especially during the exploratory stages. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. Violations of these laws and regulations could materially and adversely affect our brand, international growth efforts and business.

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We also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs and political instability. Margins on sales of our products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially and adversely affected by international trade regulations, including duties, tariffs and antidumping penalties. We are also exposed to credit and collectability risk on our trade receivables with customers in certain international markets. There can be no assurance that we can effectively limit our credit risk and avoid losses. In addition, political instability may also expose us to additional risks and uncertainties. If any of these economic or political risks materialize and we have failed to anticipate and effectively manage them, we may suffer a material adverse effect on our business and results of operations.

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. For example, it is expected that the development of 5G technology may have certain impacts on mobile internet user’s behavior. If 5G technology reduces our users’ demand for internet acceleration, our membership subscription and cloud computing services will be negatively affected unless we are able to successfully develop alternative products or services to take advantage of new opportunities created by this new technology. If we fail to 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 services, 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.

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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. For example, we were involved in a patent infringement case in China. The plaintiff alleged that our acceleration service infringed the plaintiff’s patent rights. In November 2018, the court dismissed the plaintiff’s all claims. The plaintiff subsequently appealed but its claims were dismissed by the appellate court as well. In March 2020, the plaintiff filed a petition to retrial case. As of the date of this annual report, the court has declined to retry the case. We are currently not involved in any patent infringement case in China. We believe that our products do not infringe 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.

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~~We may be 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~~certain 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~~the uncertainties surrounding the approach to ~~amend the laws in such jurisdictions, such as bills recently advocated in the U.S. aimed at~~intellectual property and online service providers that the new U.S. administration will take 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.

In addition, as a publicly listed company, we may be exposed to increased risk of litigation. For example, we were involved in shareholder class action lawsuits in the United States. See "Item 8. Financial Information-A. Consolidated Statements and Other Financial Information-Legal Proceedings." We may be involved in more class action lawsuits in the future. While we believe the claims in this lawsuit are without merit, such kinds of lawsuits could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the lawsuits. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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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. For example, the legal regimes relating to the recognition and enforcement of intellectual property rights in China and South America are particularly limited. Therefore, legal proceedings to enforce our intellectual property in these jurisdictions may progress slowly, during which time infringement may continue largely unimpeded. Countries that have relatively inefficient intellectual property protection and enforcement regimes represent a significant portion of the demand for our products. These factors may make it more challenging for us to enforce our intellectual property rights against infringement. The infringement of our intellectual property rights, particularly in these jurisdictions, may materially harm our business and competitiveness in these markets and elsewhere by reducing our sales, and adversely affecting our results of operations, and diluting our brand or reputation. 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.

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~~cannot 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 revenue model for our live streaming may not remain effective and we cannot guarantee that our future monetization strategies will be successfully implemented or generate sustainable revenues and profit.

We launched our live video streaming services in February 2016. In May 2018, we expanded our live streaming business by launching a live audio streaming product, PeiWan. In September 2019, we started to operate another live video streaming product, BuOu Live, by cooperating with a third party. In 2020, revenue from live streaming business was US$20.9 million, accounting for 11.2% of our total revenues in 2020. The live streaming industry is highly competitive and there are several well-established and successful players in this market. We may not be able to compete effectively with them and realize the growth of our live streaming business continuously. We are not sure whether our products will be accepted by the market and generate/continue to generate revenues as we expected. The user demand may also change, decrease substantially or dissipate and we may fail to anticipate and serve user demands effectively and timely.

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Although we factor in industry standards and expected user demand in determining how to optimize virtual item merchandizing effectively, if we fail to properly manage the supply and timing of our virtual items and their appropriate prices, our users may be less likely to purchase these virtual items from us. In addition, if users’ spending habits change and they choose to only access our content for free without additional purchases, we may not be able to continue to successfully implement the virtual items-based revenue model for live streaming, in which case we may have to provide other value-added services or products to monetize our user base. We cannot guarantee that our attempts to monetize our user base and products and services will continue to be successful, profitable or widely accepted, and therefore the future revenue and income potential of our business are difficult to evaluate.

We may fail to offer attractive content for our live streaming services, or attract and retain talented and popular broadcasters, which may materially adversely affect the operation of our live streaming services and its results of operations.

We offer live streaming content. Our content library is constantly evolving and growing to meet users’ evolving interests. We actively track viewership growth and community feedback to identify trending content and encourage our broadcasters to create content that caters to users’ constantly changing taste. However, if we fail to continue to expand and diversify our content offerings, identify trending and popular genres, or maintain the quality of our content, we may experience decreased viewership and user engagement, which may materially and adversely affect our results of operations and financial conditions.

In addition, we largely rely on our broadcasters to create high-quality and fun live streaming content. Popular broadcasters are key to the success of our ~~business depends on~~living streaming services. We have in place a comprehensive and effective incentive mechanism to encourage broadcasters to supply content that are attractive to our ~~ability~~users. We have also entered into multi-year cooperation agreements that contain exclusivity clauses with popular broadcasters and the talent agencies they cooperate with. However, if any of those broadcasters and/or the talent agencies decides to ~~maintain and enhance a strong brand. If~~breach the agreement or chooses not to continue the cooperation with us once the term of the agreement expires, or if we fail to ~~sustain or improve~~attract new talented and productive broadcasters, the ~~strength~~popularity of our ~~brand,~~platform may decline and the number of our users may decrease, which could materially and adversely affect our results of operations and financial condition.

We may be held liable for information or content displayed on, retrieved from or linked to our platforms, or distributed to our users, if such content is deemed to violate any PRC laws or regulations, or for improper or fraudulent activities conducted on our platform, and PRC authorities may impose legal sanctions on us and our reputation may be damaged.

Our live streaming services enable users to interact and chat with broadcasters and other users and engage in various other online activities. Although we require our broadcasters to register their real name, we are unable to independently verify the accuracy and authenticity of the identity information provided by them. For the registration of users before they become broadcasters, we rely on third-party organizations to verify their identities through mobile phone numbers or ID card number, which may ~~subsequently experience difficulty~~not always be reliable. In addition, we have put in ~~maintaining market share.~~place measures to monitor content on our platform generated by our users, but it is impossible for us to detect every piece of inappropriate or illegal content on our platform due to the immense quantity of user-generated content on our platform. Therefore, it is possible that broadcasters and/or users may engage in illegal, obscene or incendiary conversations or activities, including the publishing of inappropriate or illegal content that may be deemed unlawful under PRC laws and regulations on our platforms. For example, we received a notice from CAC in 2020, pointing out that there was certain inappropriate information discovered on our platform. We promptly fixed the issue and managed to avoid the risk of being removed from app stores by regulatory authorities. If any content on our platforms is deemed illegal, obscene or incendiary, or if appropriate licenses and third-party consents have not been obtained, claims may also be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement, other unlawful activities or other theories and claims based on the nature and content of the materials that are provided, uploaded, shared, published or otherwise accessed by users or us through our platforms. Defending any such actions could be costly and involve significant time and attention of our management and other resources. In addition, PRC authorities may impose legal sanctions on us, including, in serious cases, suspending or revoking the licenses necessary to operate our platforms if they find that we have not adequately managed the content on our platforms. Any such claims or sanctions against us could materially and adversely affect our business and our brand.

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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~~If we fail to sustain or improve the ~~Chinese internet market is highly competitive, maintaining and enhancing~~strength of our brand, ~~depends largely on our ability to retain a significant~~we may subsequently experience difficulty in maintaining market ~~share in China, which may be difficult and expensive.~~

share. We have developed our reputation and established a leading position by providing our users with a superior acceleration services and ~~video viewing experience.~~cloud computing services. 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~~cyber-attacks or ~~network issues,~~security breaches, can result in user dissatisfaction, ~~and~~ adverse publicity or leakage of confidential information of our users and customers, 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, security breach, and similar events despite our implementation of security measures, which may cause interruptions to the services we provide, degrade the user experience, disclosure of our data or user data, such as personal information, names, accounts, user IDs and passwords, and payment or transaction related information, or cause users to lose confidence in our products. Our efforts to protect our company data ~~or the information we receive~~and user data 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~~and servers contain 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, servers or technology platform, whether such failure results from intentional ~~cyber attacks~~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.

We have put in place various measures to prevent such incidents from happening and internal reporting procedures with respect to such incidents. However, such prevention measures may not function in a way as we expect due to the evolution of the sophistication of cyber-attacks, advances in technology, an increased level of sophistication and diversity of our products and services, an increased level of expertise of hackers, new discoveries in the field of cryptography or others, software bugs or other technical malfunctions, or other evolving threats.

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. For example, in 2020, one of our products experienced a system failure due to an extremely high usage rate, which lasted for around three hours and affected a large portion of our users. Although we have ~~not experienced extended periods of such~~fixed the server ~~interruptions, power shutdowns or internet connection problems across our entire network,~~promptly, 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.~~systems due to very limited available insurance products in the insurance market in China. 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.

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We rely on information technology systems to process, transmit and cache or store electronic information in our day-to-day operations, including customer, employee and company data. The secure processing, maintenance and transmission of this information is critical to our operations and the legal environment surrounding information security, storage, use, processing, disclosure and privacy is demanding with the frequent imposition of new and changing requirements. We also store certain information with third parties. Our information systems and those of our third-party vendors are subjected to computer viruses or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks and also are vulnerable to an increasing threat of continually evolving cybersecurity risks and external hazards, as well as improper or inadvertent staff behavior, all of which could expose confidential company and personal data systems and information to security breaches. Any such breach could compromise our networks, and the information stored therein could be accessed, publicly disclosed, lost or stolen. Such attacks could result in our intellectual property and other confidential information being lost or stolen, disruption of our operations, and other negative consequences, such as increased costs for security measures or remediation costs, and diversion of management attention. Any actual or perceived access, disclosure or other loss of information or any significant breakdown, intrusion, interruption, cyber-attack or corruption of customer, employee or company data or our failure to comply with federal, state, local and foreign privacy laws or contractual obligations with customers, vendors, payment processors and other third parties, could result in legal claims or proceedings, liability under laws or contracts that protect the privacy of personal information, regulatory penalties, disruption of our operations, and damage to our reputation, all of which could materially adversely affect our business, revenue and competitive position. For example, in 2020, a few individual users had taken advantage of a technical flaw of certain of our products to make fraudulent purchases and managed to cash out. We have promptly identified and patched the technical flaw. While we will continue to implement additional protective measures to reduce the risk of and detect cyber-incidents, cyber-attacks are becoming more sophisticated and frequent, and the techniques used in such attacks change rapidly. Our protective measures may not protect us against attacks and such attacks could have a significant impact on our business and reputation.

IfIn addition, there has been a trend tightening the regulation of privacy and user data protection globally. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we ~~fail~~store, process and share data with our customers, suppliers and third-party sellers. For example, the National Information Security Standardization Technical Committee issued the latest Standard of Information Security Technology—Personal Information Security Specification, which came into effect in March 2020. Under such standard, the personal data controller refers to ~~retain~~entities or persons who are authorized to determine the purposes and methods for using and processing personal information. The personal information controller should follow the principles of legality, justification and necessity in handling personal information. The personal information controller should obtain a consent from a personal information provider and provide such personal information provider an independent choice when the product or service offered by the personal information controller has multiple functions. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation jointly promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for regulatory authorities to identify illegal collection and use of personal information through mobile apps, for the app operators to conduct self-examination and self-correction, and for other participants to voluntarily monitor compliance. Moreover, the PRC Constitution, the PRC Criminal Law, the Civil Code of the PRC and the PRC Internet Security Law protect individual privacy in general, which require certain authorization or consent from internet users prior to collection, use or disclosure of their personal data and also protection of the security of the personal data of such users. In particular, Amendment 7 to the PRC Criminal Law prohibits institutions, companies and their employees in the telecommunications and other industries from selling or otherwise illegally disclosing a citizen's personal information obtained during the course of performing duties or providing services.

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In addition, we may need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. New privacy laws will continue to come into effect around the world in 2020, with one of the most significant being the California Consumer Privacy Act, or the CCPA, which became effective on January 1, 2020. Compliance with existing, ~~advertisers~~proposed and recently enacted laws, including implementation of the privacy and process enhancements called for under GDPR, CCPA and regulations from other legislations, can be costly. Any failure to comply with these regulatory standards could subject us to legal and reputational risks. Any inability, or ~~attract new advertisers,~~perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us or company officials, damage our ~~revenues may~~reputation, inhibit sales, and otherwise adversely affect our business.

Our results of operations could be materially and adversely ~~affected.~~

~~Historically, we generate a substantial portion of~~affected if our ~~revenues from online advertising. The revenues generated from~~cooperation with Itui regarding online advertising ~~decreased by 20.1%~~is unsuccessful. We may also be subject to penalties 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~~relevant authorities due to ~~our discontinuing the delivery~~certain actions or inactions of ~~advertisements on Xunlei Accelerator to further improve our user experience and to enhance user engagement on Xunlei Accelerator. The revenues generated from~~Itui in connection with online advertising, ~~further decreased to US$15.2 million in 2015 due to~~which is beyond our ~~sale in July 2015~~control.

We realized growth 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 usethe revenue from our online advertising services ~~decreased~~ from ~~485~~US$16.9 million in ~~2011 through the years~~2016 to ~~252 and 119~~US$27.8 million in ~~2014 and 2015, respectively, not including advertisers on the Guangdiantong third party platform. If we cannot retain~~2018. However, revenue from our ~~existing advertisers or develop new advertisers in the future, our revenues generated from~~ online advertising ~~will be materially~~service decreased to US$15.6 million in 2019, 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~~further decreased to US$13.2 million in ~~China are rapidly evolving, and the growth of these industries and their~~2020, primarily due to a generally decreased demand for our online advertising services. In May of 2020, we entered into an advertising revenue sharing agreement with a subsidiary of Itui International Inc., our largest shareholder. Itui provides Xunlei with online traffic monetization services, ~~is uncertain~~including the operation and ~~may be affected by factors out~~placement of advertisements, research and technology support with respect to advertising systems, business algorithm platform as well as content recommendation and other optimization services. By outsourcing our ~~control. We also have significant brand~~ advertising ~~and are seeking~~business to ~~further expand this portion~~Itui, we hope to take advantage of ~~advertising.~~Itui’s advanced precision targeting algorithm to achieve better placement of advertisement. However, we cannot assure you that we can improve the results of operations of regarding online advertising through such cooperation. In our cooperation with Itui, we require Itui to comply with all relevant laws and regulations regarding advertising business. However, we have no control over Itui and we cannot assure you that Itui will be able to ~~retain existing~~operate the advertising ~~agencies~~business and ~~advertisers or attract more~~its advertising ~~agencies~~platform legally and ~~advertisers~~successfully. We may still be liable for ~~brand advertising,~~certain circumstances in connection with Itui that are beyond our control, and our business may also be negatively affected. In addition, if we ~~fail~~are unable to ~~do so,~~maintain our cooperation with Itui for whatever reasons and we are unable to find a suitable replacement in a timely manner, or at all, our advertising revenue may experience significant declines. As a result, our business and financial condition may be negatively affected.

We rely on third-party platforms to distribute our mobile applications. If we are unable to maintain a good relationship with such platform providers, if their terms and conditions or pricing were changed to our detriment, if we violate, or if a platform provider believes that we have violated, the terms and conditions of its platform, or if any of these platforms loses market share or falls out of favor or is unavailable for a prolonged period of time, our mobile strategy may suffer.

We are subject to the standard policies and terms of service of third-party platforms, which govern the distribution of our mobile application on the platform. Each platform provider has broad discretion to change and interpret its terms of service and other policies with respect to us and other users, and those changes and interpretation may be unfavorable to us. A platform provider may also change its fee structure, add fees associated with access to and use of its platform, alter how we are able to advertise or distribute on the platform, or change how the personal information of its users is made available to application developers on the platform. Such changes may decrease the visibility or availability of our applications, limit our distribution capabilities, prevent access to our applications, reduce the amount of downloads and revenue we may recognize from the applications, increase our costs to operate on these platforms or result in the exclusion or limitation of our application on such platforms. Any such changes could adversely affect our business, financial condition or results of operations.

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If we violate, or a platform provider believes we have violated its terms of service (or if there is any change or deterioration in our relationship with these platform providers), that platform provider could limit or discontinue our access to the platform. A platform provider could also limit or discontinue our access to the platform if it establishes more favorable relationships with one or more of our competitors or it determines that we are a competitor. Any limit of, or discontinuation to, our access to any platform could adversely affect our business, financial condition or results of operations. In September 2016, all of our mobile applications, including Mobile Xunlei, were removed from Apple’s iOS App Store as a result of alleged possible violations of the developer license agreement between Apple and us. After a prolonged negotiation, Apple agreed that we could re-launch our mobile applications, including Mobile Xunlei, on Apple’s iOS App Store as long as our mobile applications comply with Apple’s policies for launching mobile applications on App Store and pass Apple’s scrutinization. In July 2020, we successfully re-launched our mobile applications on Apple’s iOS App Store, which means new users can download our mobile applications again. Although we have re-launched our mobile applications on App Store, we cannot assure you the removal of our mobile applications from App Store will not happen again in the future. Furthermore, other app stores also have the right to update their store policies. If we are deemed to violate their policies, our mobile applications are removed from App Store again or other app stores at the same time, which may significantly harm our mobile strategy, materially and adversely affect our business operations, results of operations and ~~prospects may be materially and adversely affected.~~

financial condition.

We are strictly regulated in China. Any lack of requisite licenses or permits applicable to our ~~business~~businesses or to our third-party services providers and any changes in government policies or regulations may have a material and adverse impact on our ~~business,~~businesses, financial ~~condition~~conditions 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 State Administration of Radio and Television, or SAPPRFT, (formerly 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,~~GAPPRFT), Ministry of Culture and Tourism (established in March 2018 as a result of institutional reform integrating the Ministry of Culture, and the Ministry of Tourism), or ~~MOC~~MOCT 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.

AWe are advised by our PRC legal counsel that a license for online transmission of audio-visual programs is required for the display of video content, including live streaming content, on our platform. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on online transmission of audio-visual programs.” ~~The~~We used to be a registered owner of such 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~~when 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 underwere operating Xunlei Kankan business. However, when we disposed of Xunlei Kankan business to a purchaser in July 2015, the registered owner of such license was also changed to the purchaser. After the disposal, Shenzhen Wangwenhua started to operate a live streaming business and a short video business. As advised by 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~~legal counsel, a license for online transmission of audio-visual programs is required for ~~our gathering~~operating short video business and ~~transmission~~live streaming business. In June 2018, Shenzhen Wangwenhua acquired 80% of ~~such internet audio-video programs, video clips and media files. Due to our failure to update our~~the equity interest of Henan Tourism Information Co., Ltd., or Henan Tourism, from an independent third party. Henan Tourism is a registered owner of the license for online transmission of audio-visual ~~programs,~~programs. However, Shenzhen Wangwenhua, the entity that operates both license-required businesses, is not a registered owner of the license for online transmission of audio-visual programs. As a result, relevant PRC government authorities may find that we are operating license-required business without obtaining a proper license, and thus may ~~be given a warning, ordered~~issue warnings, order us to rectify our violating operations and impose fines on us. In the case of serious violations ~~and/or fined up~~as determined by relevant authorities at its discretion, they may ban the violating operations, seize our equipment in connection with such operations and impose a penalty of one to ~~RMB30,000.~~two times of the amount of the total investment in such operations.

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The cloud computing services we provide to the internet users may be deemed to have included the content distribution network (CDN) services. Pursuant to the Notice of Ministry of Industry and Information Technology on Cleaning up and Standardizing the Internet Network Access Service Market, we have to update our existing value-added telecommunication services license, or VATS License, to specifically cover the CDN services. Shenzhen Onething Technologies Co., Ltd., or Shenzhen Onething, a subsidiary of Shenzhen Xunlei, and a subsidiary of Shenzhen Onething have obtained the VATS Licenses that cover the CDN services.

If the relevant PRC ~~government considers~~authority decides that we ~~were~~are operating certain business without the proper licenses or approvals, we may be warned, fined, ordered to rectify our violations or be imposed restrictions or even suspension on our relevant business. In addition to the above, if the PRC government 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,~~

Furthermore, for our cloud computing business, we are operating under the shared economy business model and therefore face certain risks related to this business model. We cannot assure you that our cooperation with all third parties for our cloud computing business complies with all laws and regulations. For example, we cannot assure you that our third-party service providers have obtained or applied for all permits and licenses required for providing relevant services to us. We cooperate with various third-party service providers to provide Internet Data Center (IDC) and Internet Service Provider (ISP) services for our CDN services. As PRC ~~government~~laws and regulations require IDC and ISP service providers to obtain the corresponding IDC licenses and ISP licenses, we require our third-party service providers to obtain such licenses. However, we cannot assure you that these third-party services providers maintain or are able to obtain in a timely manner or at all the required licenses. If our third-party service providers fail to obtain or maintain relevant approvals, licenses or permits required for operating such businesses, our third-party service providers could be subject to liabilities, penalties and operational disruptions. Even if these service providers are able to maintain proper licenses, it is possible that the services and bandwidth resources they provide may ~~promulgate~~not meet our requirements.

Violation of existing or future laws, regulations ~~restricting the types and content of advertisements that may be transmitted online, which could have a direct adverse impact~~or regulations 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. TheRelevant laws and regulations also require internet operators to take measures to ensure confidentiality of ~~information~~users’ information. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on internet privacy.” In November 2019, the MIIT issued the Notice on Carrying Out the Special Rectification of ~~users. Concerns about~~App Infringement on Users' Rights and Interests. Based on such notice, the MIIT required a number of mobile apps to be removed from application stores as these apps infringed users’ rights and interests and rectifications cannot be completed within a specified period of time. In early 2020, the MIIT also notified application stores to suspend downloading three mobile apps as these apps cannot complete rectification within a specified period of time.

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To comply with relevant laws and regulations, we periodically review our ~~practices with regard~~privacy policies and amend as needed based on the development and changes of our business to ~~the collection,~~ensure that we collect, 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~~process any of our users’ personal information ~~to any unrelated third party.~~after we obtain users’ prior consent. 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 with relevant laws and regulations may result in proceedings or actions against us by government entities or others, and could damage our reputation. ~~User~~For example, one of our mobile applications received a notice from a regulatory authority for failing to explicitly inform users of the purpose, method, and scope of our personal data collection. In response, we have modified the privacy policies of the product to the regulator's satisfaction. However, we cannot guarantee you that regulatory authorities will not find our privacy policies insufficient again in the future, and we may be ordered to modify our privacy policies and make rectifications to meet the requirements of relevant laws or regulations. If we fail to make modifications or rectifications to the satisfaction of relevant regulatory authorities, we may subject to administrative penalties or even removals of our mobile applications.

In addition, 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.

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~~continuing efforts on our cloud computing ~~project,~~business, 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~~business 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 and the building of Xunlei Tower, our new headquarters, primarily ~~through~~by using our existing internal cash ~~flow from operations~~reserves and ~~to a lesser degree, proceeds from private placements of preferred shares and our initial public offering However, if~~borrowing bank loans. 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,~~business, and our business may be materially and adversely affected.

Further, after the construction of Xunlei Tower is completed, we may operate the building ourselves, which may subject us to additional real estate related financial and operating risks.

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.

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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~~delivery network and cloud computing business as well as our ~~online game~~exploration and implementation of our new business strategies 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~~business 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.~~upfront. 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~~overestimate 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.~~services. If we cannot ~~pass on our costs and expenses to our users,~~maintain a cost-effective operation, 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.

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.

We generated a large portion of our revenue from the sales of CDN in 2020. As of December 31, 2020, we have a considerable portion of accounts receivable arising from the sales of CDN. In addition, we have outsourced our advertising operations to Itui in 2020. As a result, we generated a considerable portion of revenues from the advertising revenue sharing agreement we entered into with Itui. As a result, the financial soundness of our customers purchasing CDN from us, Itui, advertising agencies, or advertisers may affect our collection of accounts receivable. In general, a credit assessment of our CDN purchasers will be made to evaluate the collectability of the service fees before entering into any business contracts, and we require Itui to do the same with advertising agencies or advertisers. However, we cannot assure you that we or Itui will always be able to accurately assess the creditworthiness of each CDN purchaser, advertising agency, or advertiser, as applicable. Any inability of Itui, advertisers, advertising agencies or CDN purchasers, especially those that accounted for a significant percentage of our accounts receivables in the past, to pay us in a timely manner may adversely affect our liquidity and cash flows. For example, we made a provision for our accounts receivable of US$7.6 million in 2018 due to a CDN purchaser’s prolonged overdue payment and its shutdown of operations. In addition, the online advertising market in China is dominated by a small number of large advertising agencies. If the large advertising agencies that Itui has business relationships with demand higher rebates for their agency services, our results of operations will be materially and adversely affected.

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We had net operating cash outflows in 2018, 2019, and 2020 and may be subject to liquidity pressure in the future if we cannot generate sufficient cash from our operating activities in the future.

We had net operating cash outflows of US$35.6 million, US$45.6 million and US$13.9 million in 2018, 2019 and 2020. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Operating activities” for reasons of such net operating cash outflows. We cannot guarantee we will be able to generate positive and sufficient cash flows from operating activities in the future. If we have negative cash flows from operating activities in the future, our business, results of operations and liquidity may be adversely affected.

In addition, we are constructing a building which will be used as our research and development center and headquarters. We planned to invest RMB600.0 (US$92.0 million) million at the beginning of the project planning. Based on our latest estimates, we expect to invest a total of RMB450.0 million (US$69.0 million) for this construction project. In 2019, we entered into a loan facility agreement with a commercial bank to finance the construction project. The land use right and the building under construction were mortgaged to the bank and one of our subsidiaries also provided a guarantee to the bank. The maximum amount of loans we are able to take out is RMB400.0 million (US$61.3million). As of December 31, 2020, we took out RMB130.0 million (US$19.9 million). We plan to take out another loan under this facility for no more than RMB120.0 million (US$17.4 million) in the near future depending on the progress of the construction project. As of the date of this report, we anticipate the construction project will be completed within our budget. Although we had cash, cash equivalents and short-term investments of US$255.1 million as of December 31, 2020, we may be under liquidity pressure if we are unable to generate sufficient cash from our operating activities in the future, unable to renew our bank loans, or if the actual cost of the construction project goes beyond our estimated costs. In addition, we plan to complete the construction by 2021 or early 2022 and relocate to the new building afterwards. However, we cannot assure you that we will definitely be able to complete the construction by then due to a number of factors that are beyond our control including outbreak of pandemic, weather conditions, force majeure, labor disputes and government regulations. For example, the completion of the construction project is subject to government approval. We cannot guarantee you that relevant government authorities will grant us approval in our expected timeline. If we are unable to move into the new building as in our expected timeline, we will have to continue to pay office rental expenses. In addition, we may lease certain floors of the building to other parties and use the rental we receive to pay loan interest. If the new building cannot be put into use in our expected timeline, we will have to pay loan interest from our existing cash, which will increase our liquidity pressure. In the worst-case scenario, if we are unable to repay the loan, the bank may foreclose our building. As a result, we may have to rent other office space to continue our business operations and incur additional costs. Furthermore, we engaged a reputable national construction company to construct the building and a professional real estate consulting firm to manage the process. Disputes between construction company/real estate consulting firm/other construction service providers and us have arisen and may continue to arise in the future, which may cause delay to the completion of the construction project. For example, we have a pending lawsuit with a constructing company of our headquarters construction project, which may adversely affect our financial condition if we lose the case. The lawsuit may also divert our management’s attention and subject us to additional costs.

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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~~popular, high-quality 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~~We have ~~entered into exclusive operating agreements~~cooperated with ~~online~~third parties to operate certain web games since 2019. See "Item 4. Information on the Company-B. Business Overview-Our platform-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~~services." Operating online games in China ~~a variety of~~requires several permits and ~~approvals are required.~~approvals. For example, ~~publication of~~as advised by our PRC legal counsel, a VATS License is required for operating online games ~~music works~~ and ~~other~~an internet publication license is required for operating internet publishing ~~activities are subject~~services, which is defined as offering internet publications to the ~~regulation of~~public through the ~~GAPPRFT, which requires~~internet. Our online game operating subsidiaries have obtained the VATS License for operating our online games, but have not obtained the internet publishing services license. Based on our consultation with the responsible government authority, since our online game operating subsidiaries are only operators of online games ~~and other~~or only provide a platform for online game operations, they are not required to obtain the internet publishing services license. Therefore, our online game operating subsidiaries have not obtained the internet publishing services license. However, we cannot rule out the possibility that relevant government authorities may in future take the view that our online game operating subsidiaries are required 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~~services license and thus penalize us for operating online game ~~must~~business without a proper license. If that were to happen, we would be ~~screened~~subject to orders to the shut-up the website or delete all relevant online publications, confiscation of illegal income and ~~approved in advance~~major equipment or fines. In addition, according to relevant regulations, an online game has to be scrutinized by ~~GAPPRFT~~and obtain an approval number (ISBN number) from the SAPPRFT before it is allowed to be launched online. ~~Also, an imported~~In our cooperation with online game ~~should~~providers, we require that ISBN numbers have to be ~~approved~~obtained for the online games within the scope of our cooperation. However, as we are not the developers or publishers of those online games, we cannot assure you that the ISBN numbers of those online games are obtained strictly in ~~advance by MOC before its initial operation while a domestically developed~~compliance with relevant legal requirements and procedures without any defects or relevant amendment filings are made in compliance with relevant legal requirements. If the ISBN numbers are obtained not in compliance with relevant laws and regulations or amendment filings are not made timely, relevant government authorities may impose fines on us, confiscate our income generated from operating such online games and require us to delete all relevant online publications or discontinue our online game ~~should be filed~~business.

In addition, relevant PRC laws and regulations require that contents of online games are prohibited to advocate cult, superstition, obscenity, pornography, gambling or violence, or abet commission of crime. As we are not the developers of the online games we operate, we cannot assure you that the contents of the online games we operate are fully in compliance with ~~MOC within 30 days~~such requirement. Failure to comply with relevant PRC laws and regulations may subject us to liability, administrative actions or penalties imposed by relevant PRC authorities. The imposition of ~~commencing operations. See “Item 4. Information~~any of these penalties may result in a material and adverse effect on ~~the Company—B. Business Overview—Regulation—Regulation on online games.” We license from~~our ability to operate our online game ~~developers~~business and ~~operate MMOGs, and~~our results of operations. As we ~~share profits with these developers. We require developers~~do not have control over the contents of ~~certain~~the online games we operate, we cannot assure you that we will not be subject to ~~obtain the requisite approvals from GAPPRFT, and make the filings with MOC, for relevant online games.~~any intellectual property infringement claims or misappropriation claims. As of the date of this annual report, ~~most~~we were not involved in any lawsuits relating to the online games we operate. Defending those claims, with or without merits, could be costly and time-consuming, and diverge our management’s attention. If we or our third-party online game providers lose the cases, we may be required to compensate a large amount of damages or immediately discontinue the operation of relevant online games. If we are unable to find alternative solutions on commercially reasonable terms on a timely basis, our online game business, reputation and results of operations may be materially and adversely affected.

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In October 2019, General Administration of Press and Publication issued the Notice by the General Administration of Press and Publication of Preventing Minors from Indulging in Online Games, or Anti-indulgence Notice, which imposed an array of restrictive measures to prevent underage users to indulge in online games. For example, game operators are not allowed to provide underage users with any form of access to online games during the period from 22:00 p.m. each day to 8:00 a.m. of the next day and the total length of time for game operators to provide underage users with access to online games cannot exceed three hours a day during statutory holidays or 1.5 hours a day on days other than statutory holidays. The Anti-indulgence Notice also requires game operators to implement the real-name registration system for players of online games and take effective measures to restrict underage players from using paid services that are inconsistent with their capacity for civil conduct. We have implemented a real-name registration system for our online games. Game operators or developers of the online games on our platform are able to access to our real-name registration system and implement their anti-indulgence measures based on the identify information in our system. We have also cooperated with third parties in developing an anti-indulgence system pursuant to the Anti-indulgence Notice and started to implement such system for new mobile games that we offered in collaboration with third parties since April 2020. In February 2021, Shenzhen Press and Publication Bureau issued the Notice on Interface Docking of Anti-indulgence and Real Name Registration System to Prevent Minors from Indulging in Online Games, which requires all the online game enterprises in Guangdong Province to file the application before April 30, 2021, and all such games to connect with the national anti-indulgence and real-name registration system established by Publication Bureau of the Publicity Department of the CPC Central Committee before June 1, 2021. Although we have been preparing the requisite application and working on connecting our online games ~~currently in operation exclusively by us have obtained GAPPRFT’s approval~~to the national anti-indulgence and ~~completed filing with MOC. However,~~real-time registration system, we cannot assure you that we ~~or such~~will meet the relevant requirements in time. If any third-party online game operators, 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~~comply with the above requirements, we may have joint or ~~filings in a timely manner or at all,~~several liabilities and thus be subject to administrative penalties. Penalties under the ~~relevant authority may challenge the commercial operation~~Anti-indulgence Notice include fines and other penalties such as taking corrective actions during specified periods, shutting down of our online games operations and ~~determine~~license revocation due to the fact that we ~~are in violation~~did not implement those restrictions pursuant to the Anti-indulgence Notice. If any of the ~~relevant laws and regulations regarding online games, it would have the power~~above were to ~~among other things, levy fines against us, confiscate our income generated from operation of our online games and require us to discontinue~~happen, our online game ~~business.~~

business and results of operations would be negatively affected.

We operate in a competitive market and may not be able to compete effectively.

We face significant competition in different areas of our business. 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. For example, in the cloud computing sector, we face existing intensive competition from leading Chinese internet companies such as Alibaba and Tencent. They generally have a stronger competitive position and have more resources and technological capability to compete in this sector. We cannot guarantee you that we will certainly be able to compete effectively with them and continuously increase our market share or maintain our existing market share. In the cloud acceleration sector, although we currently have a ~~leading presence~~niche market in ~~the~~ China ~~market~~ for cloud acceleration products and services, we cannot guarantee that we will be able to maintain our ~~leading~~established 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.~~sector or from startups who may develop similar or alternative products. 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.”~~affected” and “—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.”

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~~unable 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.~~operations may be materially and adversely effected.

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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~~displayed on our platform 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 and October 2018, the ~~Standing Committee of the National People’s Congress~~SCNPC subsequently issued the amended Advertisement Law, which took effect on September 1, 2015 and October 26, 2018, 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. On July 4, 2016, SAIC issued the Interim Measures for the Administration of Internet Advertising to specifically regulate internet advertising activities. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on advertising business” for details. 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 and cessation of publishing the 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~~have taken several measures. ~~Almost~~In almost all of our advertising ~~contracts~~agreements, we require ~~that~~the advertising agencies or advertisers that ~~contract~~entered into agreements 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~~We have outsourced our ~~employees reviews all~~ advertising ~~materials~~business to Itui in 2020 and required Itui to set up an effective review mechanism for each advertisement it placed on our websites and platform so as to ensure the ~~content does not violate~~contents are in full compliance with relevant ~~laws and regulations before displaying such advertisements.~~legal requirements. However, we cannot assure you that all the ~~content~~contents contained in such advertisements isare 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, ifIf 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. A significant portion of the payments have been made through our online payment system since 2014. Although we have been able to control our payment handling ~~fees~~charges 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 distribution channels with higher costs. ~~Approximately 18%, 13%~~If more 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~~more 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~~or if we fail to minimize the associated payment handling ~~fees and further diversify the payment channels,~~charges, 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~~In June 2020, we terminated our 2010 share incentive plan, ~~on December 30, 2010, or the 2010 Plan, a second~~2013 share incentive plan ~~on November 18, 2013, as supplemented, or the 2013 Plan,~~ and ~~a third~~2014 share incentive plan ~~on April 24, 2014, as supplemented,~~and adopted a 2020 share incentive plan, or the ~~2014 plan.~~2020 Plan. Upon the termination of our then-existing share incentive plans, the awards that are granted and outstanding under those share incentive plans and the evidencing original award agreements shall remain effective and binding under the 2020 Plan, subject to any amendment and modification to the original award agreements that we shall determine. Under the ~~2010~~2020 Plan, we are authorized to issue a maximum number of ~~26,822,828~~31,000,000 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).~~awards. As of March 31, ~~2016, options to purchase a total of 2,097,410 common shares of our company were~~2021, 10,862,500 restricted share units had been granted and outstanding under the ~~2010~~2020 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~~there were also 1,036,000 unvested restricted shares ~~(excluding those forfeited) have been granted to certain executive officers~~that survived the termination of our previous share incentive plans and ~~other employees~~remained outstanding 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~~2020 Plan. ~~Our~~As of March 31, 2021, our unrecognized share-based compensation expenses relating to the ~~restricted shares granted~~awards outstanding under ~~each of~~ the ~~2013 Plan and the 2014~~2020 Plan amounted to US$~~10.9 million and US$8.4 million, respectively, as of March 31, 2016.~~1.4 million. 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 for whatever reasons, 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~~has 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.

WeAny misconduct of our employees 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,negatively affect our ~~business,~~reputation and ~~our equity investments may suffer impairment loss as a result of unsatisfactory target company performance, each of~~corporate image, which in turn may adversely affect our ~~growth~~business and prospects.

We believe that maintaining and enhancing our reputation and corporate image is of significant importance to the success of our business. If any of our employees engaged in any misconduct, whether or not related to the employee's work at our company, it may negatively affect our reputation and corporate image. Historically, there has been negative publicity about our company and our management, which adversely affected our brand, public image and reputation. A member of our senior management team who is also our director was subject to certain legal sanctions in China in the past due to copyright infringement activities when working at another company unrelated to us. Even though the infringement activities took place a number of years before the executive joined our company and had nothing to do with us, the past misconduct of the executive and the sanctions he was subject to may negatively affect our reputation and corporate image, which in turn may adversely affect our business and prospects. As part of our internal compliance procedures, we routinely conduct internal audits and inspections, including exit interviews and audits, on current and former employees. Any misconduct by our current or former employees uncovered from such compliance procedures, whether the misconduct relates to the employees' work with us, would potentially have material adverse impact on our reputation, results of ~~operations.~~operations, financial performance or future prospects. For example, in October 2020, we received a notification from Shenzhen Municipal Public Security Bureau that the bureau has filed a case for investigation of our former CEO, Mr. Lei Chen, for alleged embezzlement of the Company's assets, which, although did not result in material adverse impact on our financial reporting, caused harm to our company. In addition, we may also face disputes with former or current disgruntled employees. Any allegations against us, with or without merits, may negatively affect our reputation and corporate image.

Strategic alliances, investments or acquisitions may have a material and adverse effect on our business, reputation, results of operations and financial condition.

We may enter into strategic alliances with various third parties to further our business purposes from time to time. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counterparty, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor their actions. To the extent the third parties suffer negative publicity or harm to their reputations from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.

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We have in the past ~~and may~~invested in ~~the future selectively acquire~~ or ~~invest in other~~acquired additional assets, technologies or businesses ~~including those~~ that ~~complement~~are complementary to our existing business. WeIf we are presented with appropriate opportunities, we may ~~not, however, be able~~continue to ~~identify suitable targets for acquisitions or investments~~do so in the future. ~~Even if we are able to identify suitable candidates, we~~Investments or acquisitions and the subsequent integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. The costs of identifying and consummating investments and acquisitions may be ~~unable~~significant. We may also incur significant expenses in obtaining necessary approvals from relevant government authorities in China and elsewhere in the world. In addition, investments and acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities and exposure to ~~complete a transaction on terms commercially acceptable to us. If we fail to identify appropriate candidates~~potential unknown liabilities or ~~complete~~legal risks of the ~~desired transactions,~~acquired business. The cost and duration of integrating newly acquired businesses could also materially exceed our ~~growth may be impeded. If the target companies we invest in produce unsatisfactory results, we may suffer impairment loss in our equity investment.~~

expectations. 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;

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.

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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. In addition, COVID-19 had a severe and negative impact on the Chinese and the global economy. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. The weakness in the economy could erode investor confidence, which constitutes the basis of the credit market. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. 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, financial condition, and prospects would be materially and adversely affected by any severe or prolonged slowdown in the 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~~In addition, 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 byunder Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on ~~the~~such 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,~~As we ~~were~~are not an emerging growth company anymore, we are subject to the requirement to provide attestation by our independent registered public accounting firm on ~~our management’s assessment~~effectiveness of ~~our~~ internal control over financial ~~reporting for~~reporting.

Our management, with the ~~year ended December 31, 2015 as we qualified as~~participation of our chief executive officer and chief financial officer, has performed an ~~“emerging growth company,” as defined in the JOBS Act, as~~evaluation 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.~~

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 annual report, as required by Rule 13a-15(b) under the Exchange Act. Our management has concluded that our internal control over financial reporting was ~~ineffective~~effective as of December 31, ~~2015 due to one material weakness, one significant deficiency and other control deficiencies in~~2020. Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, also attested that our 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 relatedeffective. However, if we fail 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~~future, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in ~~the reliability of~~ our ~~consolidated~~reported financial ~~statements, which~~information. This could in turn ~~could~~limit our access to capital markets, harm our ~~business~~results of operations, and ~~negatively impact~~lead to a decline in the ~~market~~trading price of our ADSs. ~~Furthermore,~~Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we ~~have incurred~~list, regulatory investigations and ~~anticipate that we will continue~~civil or criminal sanctions. We may also be required 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.~~

restate our financial statements from prior periods.

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 materially and adversely affected by the outbreak of pandemics such as influenza A (H1N1), avian influenza, H7N9, or severe acute respiratory syndrome (SARS). or other epidemics. 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.

In response to the COVID-19 pandemic, we made remote working arrangement and suspended our offline work and all our business travels in early 2020 to ensure the safety and health of our employees. As a result, our customer service capacity was compromised which might have adversely affected our users’ experience. As of the end of April 2020, we had completely resumed our operations. Although COVID-19 has been largely contained in China, there are still uncertainties regarding the COVID-19 pandemic, including the duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. It is also uncertain whether or not COVID-19 or a mutated version of the coronavirus will return in the future. While the COVID-19 pandemic has not materially and adversely affected our business, operations, or financial results as of the date of this annual report, it may have far-reaching impact, directly and indirectly, on many aspects of our operations, including potential impact on our customers, product users, suppliers, employees, cooperation partners, and the market in general, and the scope and nature of the impact continue to evolve. Resurgence of confirmed cases have happened and could happened again in the future, which could lead to the re-imposition of various restrictions. We will continue to monitor and assess the development of the COVID-19 pandemic and intend to make adjustments to our business accordingly.

Risks ~~related~~Related to ~~our corporate structure~~

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, other than e-commerce service providers, may not exceed 50%., and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) requires that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. 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 exempted company and Giganology (Shenzhen) Ltd., or Giganology Shenzhen and Xunlei Computer (Shenzhen) Co., Ltd., or 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~~or its subsidiaries hold the licenses and permits necessary to conduct our resource discovery network, online advertising, online games, cloud computing and related businesses in China, and Shenzhen Xunlei 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.”

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We cannot assure you, however, that we will be able to enforce these contracts. Although we have been advised by ~~Zhong Lun Law Firm,~~King & Wood Mallesons, 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, impose fines, 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 aan initial term of ten years ~~which~~and an extended term of ten years since 2016. The operating contract 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,~~director, 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. IfPursuant to the contractual arrangements, we have the right to replace any shareholders of Shenzhen Xunlei at any time. For example, if any of the shareholders of Shenzhen Xunlei ~~especially Mr. Sean Shenglong Zou due to his significant equity interest in Shenzhen Xunlei,~~refuses or fails to perform his or her obligations under the contractual arrangements due to his or her significant equity interest in Shenzhen Xunlei and his or her relatively smaller percentage of equity interest in our Company, we ~~may have to~~can enforce ~~these agreements to~~the contractual arrangements and transfer his or her equity interests to another appointee of Giganology Shenzhen.

However, we cannot assure you that such transfer can be implemented successfully or without significant costs. As a result, there are risks that we might not be able to have an effective control over our variable interest entity in the future.

Moreover, the exercise of call options under the equity ~~interests~~interest 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—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~~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.

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.

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As a director ~~and~~and/or 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~~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,~~2020, we had cash or cash equivalents of approximately ~~RMB385.7~~RMB312.1 million (US$~~594.0~~47.8 million) and US$~~6.5~~30.7 million located within the PRC, of which ~~RMB190.9~~RMB89.6 million (US$~~29.4~~13.7 million) and US$0.5 million is held by Shenzhen Xunlei and its subsidiaries. We also have restricted cash of RMB10.1 million (US$1.5 million) as of December 31, 2020. 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.”

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:

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~~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, may not exceed the statutory limit, and any medium or long-term loan we extend to our variable interest entity must be ~~approved~~recorded and registered 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.~~2015 and the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Policy on the Management of Foreign Exchange Settlement under Capital Account, or SAFE Circular No. 16, which became effective on June 9, 2016. Although SAFE Circular No. 19 ~~allows~~and SAFE Circular No. 16 allow 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 to non-associated companies or ~~for the~~issuing 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.

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~~Substantial uncertainties~~Uncertainties exist with respect to the ~~enactment timetable,~~ interpretation and implementation of ~~draft~~the newly enacted 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~~On March 15, 2019, the ~~proposed~~National People’s Congress enacted the Foreign Investment Law, inwhich came into effect on January ~~2015 aiming to, upon its enactment,~~1, 2020 and 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~~However, since it is ~~currently soliciting comments on this draft~~relatively new, uncertainties still exist in relation to its interpretation and ~~substantial uncertainties exist~~implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to ~~its enactment timetable, interpretation~~existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and ~~implementation. The draft Foreign Investment Law, if enacted as proposed, may~~appropriate measures to cope with any of these or similar regulatory compliance challenges could materially ~~impact the viability of~~and adversely affect our current corporate structure, corporate governance and business ~~operations in many aspects.~~operations.

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~~Doing Business 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.

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,~~The growth rate of the Chinese economy has gradually slowed since 2010, and the impact of COVID-19 on the Chinese economy in 2020 is severe. Any prolonged slowdown in the ~~past~~Chinese economy may reduce 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~~demand for our products and services and materially and adversely affect our business and ~~operating results.~~results of operations.

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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 VATS License, which is required for our ICP ~~License~~services 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. We monitor digital media contents on our platform and periodically review and inspect whether there are contents that violate relevant PRC laws and regulations. However, we cannot assure you that we will always be able to identify and remove in a timely manner all digital media contents on our platform that violate relevant PRC laws and regulations. If we fail to timely remove relevant contents, we may be subject to relevant legal liabilities. In addition, 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.~~numbers in the past few years. 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. In December 2018, the Office of the Central Cyberspace Affairs Commission of China, or CAC, launched a campaign against illegal activities and inappropriate content on mobile apps and undertook restrictive measures against thousands of mobile apps, including suspension of mobile app operations for an indefinite period of time or permanently shutting down the mobile app operations. We regularly 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~~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~~175,000 existing subscribers as of the end of ~~2015.~~2020. 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.

We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.

We are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.

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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. Regulatory authorities may also stretch the interpretations of existing laws and regulations. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the ~~violation.~~violation or the stretched interpretation, which may subject us to liabilities and can materially and adversely affect our business. 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.

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.~~network and cloud computing. We do not own the resource discovery network and cloud computing due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet content provision or CDN services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

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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,~~live streaming, 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,~~MOCT, 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 or SAPPRFT 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.

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~~generated. transmitted 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,~~To date, we ~~are unable~~have not been able to quantify the magnitude and extent of such impact.

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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,~~Under the Civil Code of the People’s Republic of China, effective in January 2020, where any laws provide for the protection of data and network virtual property, such laws shall apply. However, 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.~~losses, as well as required the game operators to provide well-developed security systems to protect such virtual assets owned by game players. 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~~live streaming business and results of operations.

The ~~issuance and use of “virtual currency” in~~Notice on the ~~PRC has been regulated since 2007 in response to the growth~~Reinforcement of the ~~online games industry in China. In January 2007,~~Administration of Online Games issued by the Ministry of ~~Public Security, MOC, MIIT~~Culture and ~~GAPPRFT jointly issued a circular regarding online gambling which has implications for~~other governmental authorities on February 15, 2007 directs the ~~use~~People’s Bank of China to strengthen the administration of virtual ~~currency. To curtail online games~~currency to avoid any adverse impact on the PRC economic and financial system. This notice provides that ~~involve online gambling, as well as address concerns~~the total amount of virtual currency issued by an operator and the amount of purchased by individual users should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency ~~could~~should only be used to purchase virtual items. We created virtual currency “Golden Coins” for the operation of our live streaming services. Users can purchase “Golden Coins” from us so that they can purchase virtual gifts on our living streaming platforms to reward broadcasters they like. “Golden Coins” can also be used to purchase other value-added services on our live streaming platforms. Other than virtual gifts and value-added services, “Golden Coins” cannot 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 toany other ~~players.~~ purposes.

On June 4, 2009, ~~MOC and~~ the Ministry of ~~Commerce~~Culture and the MOFCOM jointly issued ~~a notice regarding strengthening~~ the ~~administration~~Notice on Strengthening the Administration of Online Game Virtual Currency, or the Virtual Currency Notice. The Virtual Currency Notice requires that the operators who engage in issuance 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 servicesoffering of ~~other entities.~~

~~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 shall apply for approval from the MOC through its provincial branches. The term “virtual currency” is widely used in the live streaming industry, such term as used in the live streaming industry does not fall under the definition under the Virtual Currency Notice. Although we do not think Virtual Currency Notice applies to the operation of our live streaming platform, given the wide discretion of relevant governmental authorities and uncertainties in the regulatory environment, we cannot assure you that ~~the PRC regulatory~~relevant governmental 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,~~future interpret the Virtual Currency Notice ~~prohibits online game operators from setting game features that involve~~in a different way and subject our operation to the ~~direct payment~~scope 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~~or issue new rules to ~~penalties, including mandatory corrective measures and fines. The occurrence~~regulate the virtual currency in our industry. In that case, our operation may be adversely affected.

Table of ~~any of the foregoing could materially and adversely affect our online games business and results of operations.~~Contents

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~~In October 2019, General Administration of Press and Publication issued the Anti-indulgence Notice which imposed an array of restrictions ~~could limit our ability to increase our~~on online game ~~business among minors.~~operators to prevent underage users from indulging in online games. The Anti-indulgence Notice also requires online game operators to take effective measures to restrict minors from using paid services that are inconsistent with their capacity for civil conduct. 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~~While we support these measures, these restrictions ~~if detected by the relevant government agencies, may result in fines and other penalties~~could also limit our ability to grow our user base for ~~us, including the shutting down of~~ our online ~~games operations and license revocation.~~game business. Furthermore, if these restrictions ~~were~~are expanded to apply to adult game players in the future, our ability to grow our user base could be further limited and 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.

In addition, the Chinese government has ~~recently~~in recent years 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. In August 2017, the CAC promulgated the Provisions on the Administration of Internet Comments Posting Services, and the Provisions on the Administration of Internet Forum and Community Services, both of which require providers of relevant services to establish information review and inspection mechanism. 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.”

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Fluctuations in exchange rates may have a material adverse effect on our results of operations and the value of your investment.

Fluctuation in the value of the Renminbi may have a material adverse effect on the value of your investment. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. 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~~conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value ~~of the Renminbi to the U.S. dollar, and the RMB appreciated more than 20%~~ against the U.S. dollar ~~over~~in 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.future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between ~~the RMB~~Renminbi 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~~Any significant appreciation or depreciation of the RMB may materially and ~~other distributions paid by~~adversely affect our ~~subsidiaries in China which are denominated in Renminbi. Our results of operations~~revenues, earnings and financial positions, and the value of, ~~your investment in~~and any dividends payable on, our ADSs ~~will be affected by~~in U.S. dollars. For example, to the ~~foreign exchange rate between~~extent that we need to convert U.S. dollars ~~and Renminbi. To the extent we hold assets denominated in Renminbi, any depreciation~~into RMB to pay our operating expenses, appreciation of the ~~Renminbi~~RMB against the U.S. dollar ~~could result in~~would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our 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 RMB would have a ~~reduction~~negative effect on the U.S. dollar amount available to us. In addition, a significant appreciation or depreciation in the value of ~~our Renminbi denominated assets. Similarly, should we repatriate any portion of~~ the ~~net proceeds~~RMB relative to ~~us from our initial public offering or cash from other offshore financing activities into China, such amount~~U.S. dollars 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~~significantly reduce the U.S. dollar equivalent ~~amounts~~ of our ~~financial results, the value~~earnings regardless of ~~your investment~~any underlying change in our ~~company and~~business or results of operations, which in turn could adversely affect the ~~dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices~~price of our ADSs.

~~Limited~~Very limited hedging ~~transactions~~options are available in China to reduce our exposure to exchange rate fluctuations. ~~We did~~To date, we have not ~~enter~~entered into any ~~forward contracts~~hedging transactions in an effort to ~~hedge~~reduce our exposure to ~~Renminbi-U.S. dollar~~foreign currency 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~~adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert ~~Renminbi~~RMB into foreign currency.

As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

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~~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 or registration with 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~~However, we may not be able to do so due to foreign exchange control imposed by the PRC government, which 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.

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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 and amended by the State Council on September 18, 2018, are triggered. Moreover, the Anti-Monopoly Law promulgated by the ~~Standing Committee of the National People’s Congress~~SCNPC 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~~took 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~~initial 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~~by the SAFE regulations. However, we cannot assure you that these shareholders have completed and will complete all subsequent amendment registrations as required by 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,~~as we do not have control over these shareholders. We may also 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.~~regulations since we do not have control over these the PRC resident shareholders. The failure or inability of our PRC resident shareholders or our future 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.

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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.

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 ofby us or our PRC stock option holders to ~~complete their~~comply with the SAFE ~~registrations~~regulations may subject us or 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.

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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.

On October 17, 2017, the SAT issued the Public Notice on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which took effect on December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including but not limited to SAT Circular 698 and amended the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise. SAT Public Notice 37 also introduced certain key changes to the current withholding regime, such as (i) non-resident enterprise’s withholding obligation for dividend was changed to arise on the date the payment is actually made as opposed to dividend declaration date; and (ii) non-resident enterprise’s obligation to self-report tax within seven days upon withholding agent’s failure to withhold was removed.

Under SAT Circular 7 and SAT Public Notice 37, 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 and SAT Public Notice 37, 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 of these rules and notices, 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~~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~~Under 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 incomecircumstances, preferential tax rates ~~for us~~may be applied if an enterprise meets the corresponding standards and ~~our wholly-owned subsidiary established in the Shenzhen Special Economic Zone before March 16, 2007 were 24% for 2011~~qualifications 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.completes certain procedures. See “Item 5. Operating and Financial Overview and Prospects—A. Operating Results—~~Taxation.”~~

Taxation” for details of tax benefits applicable to us. Preferential tax treatment and other government incentives granted to ~~Xunlei Computer~~our VIE and ~~Shenzhen Xunlei by the local governmental authorities~~subsidiaries 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~~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~~Regulation 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.

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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, including a significant amount of cash, 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.

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.

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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~~SCNPC 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.

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, ~~is prepared by~~as 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~~and a firm ~~must be~~ registered with the ~~Public Company Accounting Oversight Board, or the~~ PCAOB, ~~and are required by the~~is subject to laws ofin the United States pursuant to ~~undergo~~which the PCAOB conducts regular inspections ~~by PCAOB~~ to assess ~~their~~its compliance with the ~~laws of the United States and~~applicable professional standards. ~~Because we have substantiated operations within the Peoples’ Republic of~~Since our auditor is located in China, ~~and~~a jurisdiction where the PCAOB ~~is currently~~has been 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~~auditor is currently not ~~currently~~ inspected by the PCAOB.

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

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The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

~~This lack of PCAOB~~The PCAOB’s inability to conduct inspections ~~of audit work performed~~ in China prevents it from fully evaluating the ~~PCAOB from regularly evaluating audit work~~audits and quality control procedures of ~~any auditors that was performed in China including that performed by~~ our independent registered public accounting firm. As a result, we and investors ~~may be~~in our ordinary shares are deprived of the ~~full~~ benefits of such PCAOB inspections.

The inability of the PCAOB to conduct inspections of ~~audit work performed~~auditors in China makes it more difficult to evaluate the effectiveness of our ~~auditor’s~~independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors ~~in other jurisdictions~~outside of China that are subject to the PCAOB inspections, ~~on all of their work. Investors may~~which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information ~~and procedures~~ and the quality of our financial statements.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

~~If additional remedial measures are imposed on certain PRC-based accounting firms in administrative proceedings brought~~Proceedings instituted by the SEC weagainst PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could ~~be unable to file future~~result in financial statements ~~on a timely basis~~being determined to not be in compliance with the requirements of the Exchange Act.

~~In December 2012, the SEC instituted administrative proceedings against certain~~Starting in 2011 “big four” PRC-based accounting firms, including our independent registered public accounting firm, ~~alleging that these firms had violated~~were affected by a conflict between U.S. ~~securities laws~~and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the ~~SEC’s rules~~PCAOB sought to obtain from the Chinese firms access to their audit work papers and ~~regulations thereunder by failing to provide~~related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the ~~SEC~~U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the ~~firms’ work papers related to their audits of certain PRC-based companies that are publicly traded in~~China Securities Regulatory Commission, or 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 againstCSRC.

In late 2012, this ~~sanction. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to~~impasse led the SEC to ~~settle~~commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the ~~dispute and avoid~~Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their ~~ability~~right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. ~~The settlement requires~~On February 6, 2015, before a review by the Commissioner had taken place, the firms ~~to follow detailed procedures to seek to provide~~reached a settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms were to receive matching Section 106 requests, and were required to abide by a detailed set of procedures with ~~access~~respect to ~~Chinese firms’ audit documents~~such requests, which in substance require them to facilitate production via the CSRC. If they failed to meet specified criteria, the SEC retained authority to impose a variety of additional remedial measures on the firms ~~do not follow these procedures~~depending on the nature of the failure. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if ~~there is~~the results of such a ~~failure~~challenge would result in the ~~process between the~~ SEC ~~and the CSRC, the SEC could impose~~imposing penalties such as ~~suspensions, or it~~suspensions. If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, we could ~~restart~~be unable to timely file future financial statements in compliance with the ~~administrative proceedings.~~requirements of the Exchange Act.

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In the event ~~that~~the “big four” PRC-based accounting firms become subject to additional legal challenges by the SEC ~~restarts~~or the ~~administrative proceedings,~~PCAOB, 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,~~China, 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~~any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, ~~United States-listed~~U.S.-listed companies and the market price of our ~~ADSs~~common stock may be adversely affected.

If our independent registered public accounting firm ~~were~~was 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 not 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~~the ADSs from the ~~NASDAQ Global Select Market~~U.S. national securities exchanges or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of ~~our common stock~~the ADSs in the United States.

Risks ~~related~~Related to ~~our~~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.

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;

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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~~In addition, our shareholders may by ordinary resolution declare dividends, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. 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.

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,~~2021, we had ~~337,997,790~~334,651,981 common shares outstanding, ~~but excluding~~which excludes (i) ~~16,519,144~~9,519,144 common shares ~~issued to~~held by Leading Advice Holdings Limited, ~~for grants under our 2013 Plan and 2014 Plan that remained then unexercised or unvested,~~a share incentive awards holding platform, and (ii) ~~14,360,275~~24,706,080 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~~us 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.

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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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The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct how the common shares which are represented by your ADSs are voted.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying common shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. If we instruct the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying common shares which are represented by your ADSs in accordance with your instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give under specific circumstances when it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying common shares represented by your ADSs unless you withdraw such common shares and become the registered holder of such common shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the underlying common shares represented by your ADSs and become the registered holder of such common shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the common shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will, at the sole discretion of the depositary and as soon as practicable, notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying common shares represented by your ADSs.

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~~is uncertainty as to whether Cayman Islands courts or PRC courts would:

recognize or enforce ~~against us~~ judgments of courts of the United States obtained against us based on certain civil liability provisions of U.S. securities laws; ~~and~~or

~~impose liabilities against us, in~~

entertain original actions brought in the Cayman Islands or the PRC against us, based on certain civil liability provisions of U.S. securities ~~laws that are penal in nature.~~laws.

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Although there is no statutory ~~recognition~~enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, ~~although~~(and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands will, ~~in certain circumstances~~at common law, recognize and enforce a ~~non-penal~~foreign money judgment of a foreign court of competent jurisdiction without ~~retrial~~any reexamination of the merits of the underlying dispute based on the ~~merits.~~principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the liquidated sum for which such judgment has been given, provided such judgment (i) is final and conclusive, (ii) is not in respect of taxes, a fine or a penalty; and (iii) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties with the United States or the Cayman Islands that provide for the enforcement of foreign judgments and PRC courts strictly adopt the principle of reciprocity in judicial practice. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands.

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)~~Act (As Revised) 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.

It is also difficult or impossible for you to bring an action against us or against our directors and officers in China. Under the PRC Civil Procedures Law, foreign shareholders may bring an action based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to bring actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

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~~Table of ~~the Securities Act and may take advantage of certain reduced reporting requirements.~~Contents

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.

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.~~shareholders. 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,~~2021, our directors, executive officers and existing principal shareholders beneficially owned approximately ~~60.49%~~47.7% 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~~have ceased 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~~to make ~~certain~~some corporate activities more time-consuming and costly. ~~After~~In particular, as we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management ~~effort toward ensuring compliance~~efforts in assessing our internal control over financial reporting and comply with the ~~requirements of~~auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of ~~2002 and the other rules and regulations of the SEC.~~2002. 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.

We were named as a defendant in putative shareholder class action lawsuits in the United States, and we may be involved in more class action lawsuits in the future. Such lawsuits could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the lawsuits. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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We believe we were a passive foreign investment company for our taxable year ended December 31, ~~2015,~~2020, which could subject United States investors in the ADSs or common shares to significant adverse United States federal 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,~~2020, and we will very likely be a PFIC for our current taxable year ending December 31, ~~2016~~2021 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~~(generally determined on ~~that~~the basis of ~~fair market value)~~a quarterly average) during such year is attributable to assets that 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 federal 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~~

Item 4.Information on the Company

~~History and Development of 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,~~which currently, together with its various subsidiaries in the PRC, ~~currently operate~~operates 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 Xunlei Wangwenhua Co., Ltd. (formerly known as “Shenzhen Fengdong Networking Technologies Co., Ltd.”), or Wangwenhua, which was established in December 2005 and it primarily engages in software ~~development.~~development, technical consulting and other related technical services.

~~Xunlei Networking Technologies (Beijing)~~

Shenzhen Zhuolian Software Co., Ltd.~~, which was established in June 2009, and it primarily engages in the operating of our cloud computing project~~ (formerly known as ~~well as software development.~~

~~Xunlei~~“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.

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Xunlei Games Development (Shenzhen) Co., Ltd., or Xunlei Games, which was established in February 2010 and it primarily engages in the development of online game and computer software and advertising ~~services; and~~services.

Shenzhen Onething Technologies Co., Ltd.~~(formally known as~~, or Shenzhen ~~Wangxin Technologies Co., Ltd) ,~~Onething, which was established in September 2013 and it primarily engages in cloud computing technology development and related services.

~~Wangxin~~

Beijing Xunjing Technology Co., Ltd. (formerly known as “Wangxin Century Technologies (Beijing) Co., Ltd. (“”), or Beijing ~~Wangxin”),~~Xunjing, which was established in October ~~2015.~~2015 and currently a subsidiary of Wangwenhua. Beijing ~~Wangxin is expected to engage~~Xunjing primarily engages in technology development and related services.

·
Shenzhen Crystal Interactive Technologies Co., Ltd., which was established in May 2016 and currently a subsidiary of Shenzhen Onething, and primarily engages in development of computer software and provision of information technology services.
·
Beijing Onething Technologies Co., Ltd., which was established in January 2017 and primarily engages in development of computer software and provision of information technology service.
·
Henan Tourism Information Co., Ltd., which we acquired 80% of the total equity interest from an independent third party in June 2018 and primarily engages in computer software development, information consultation, entertainment services, advertising, and certain information services under Type II value-added telecommunication businesses.
·
Jiangxi Node Technology Services Co. Ltd., which was established in July 2020 and primarily engages in bandwidth purchasing.

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.~~

software. 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 May 2018, Xunlei Network HK acquired all equity interest of HK Onething Technologies Limited, or Onething HK. Onething HK operates our cloud computing business in Hong Kong, including selling our cloud computing device, Onething Cloud in Hong Kong and business development for international markets. In July 2018, Onething HK, together with a Thai individual and a Thai company, established Onething Co., Ltd. (Thailand), or Onething Thailand, in Thailand. Onething HK holds 49% of the total equity interest of Onething Thailand while has 90.57% of the total voting power of all equity interest of Onething Thailand. Onething Thailand primarily engages in cloud computing and blockchain business in Thailand, including selling our cloud computing device, Onething Cloud and providing blockchain services in Thailand.

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~~Networking Technologies 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 August 2016, we discontinued our Kuaipan Personal services due to a change of business focus.

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~~RMB130.0 million. As of December 31, 2019, Beijing Nesound International Media Corp., Ltd. had fully paid the whole consideration of RMB130.0 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.~~us. This sale is part of our strategy to streamline our business and continue our transition into mobile internet.

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Our principal executive offices are located at: 7/21-23/F, Block ~~11,~~B, Building No. 12, No.18 Shenzhen ~~Software~~Bay ECO-Technology Park, ~~Ke Ji Zhong 2nd~~Keji South Road, Yuehai Street, Nanshan District, Shenzhen, the People’s Republic of ~~China~~China. Our telephone number at this address is +86 ~~755-3391-2900.~~755-8633-8443. 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.~~5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital expenditures.

~~Business Overview~~

B.Business Overview

Overview

We are a leading ~~cloud-based acceleration~~innovator in shared cloud computing and blockchain 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 our users to quickly access, manage, and consume digital media ~~content. We are increasingly expanding~~content on the internet. In recent years, we have expanded our products and services from PC-based devices to mobile devices in part through ~~potentially~~ pre-installed acceleration products in mobile phones to further ~~expand~~enlarge our user base and offer our users a wider range of access points. We ~~target~~provide a wide range of products and services across cloud acceleration, blockchain, shared cloud computing and digital entertainment to deliver ~~superior user experience in terms of ease of access, management~~an efficient, smart and ~~consumption of digital media content anywhere, anytime, and on any device.~~

safe internet environment.

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:~~

services below:

Xunlei Accelerator, our most popular and free product, which enables users to accelerate digital transmission over the internet ~~is our most popular~~ and ~~free product, with~~has approximately ~~192~~52 million monthly unique visitors in December ~~2015,~~2020, according to our internal record; and

~~Our cloud~~

Cloud acceleration subscription services, which are delivered through ~~products such as~~our product, 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.~~reliability.

~~Benefitting from the large user base for~~In addition to our core product, Xunlei Accelerator, we have ~~further~~also developed ~~various~~cloud computing and other internet value-added services to ~~meet a fuller spectrum of our~~speed up corporate development and to keep pace with the latest industry trend and users’ ~~digital media content access~~changing needs. These value-added services and ~~consumption needs including (i)~~products primarily include live streaming services and online game services, ~~including web games and MMOGs, offered on~~which provide us with synergies in our ~~gaming platform; and (ii) fast bird services, providing internet acceleration services for~~business operations.

As a ~~fee.~~

~~We are increasingly extending our services to mobile devices, as~~ part of our cloud-based mobile ~~strategies.~~strategies, we launched 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~~app that allows users to search, download and consume digital media content on their mobile devices in a user friendly ~~way.~~way, in 2012 as an important step in expanding our services to mobile devices. Mobile Xunlei gained popularity while bigger screen phones with enhanced storage capacity changed mobile phone users’ behavior in accessing and consuming digital media content. Based on our own record, the monthly average daily active user ~~(“DAU”)~~ of this application ~~has exceeded nine~~was about five million ~~as of the date of this annual report.~~in 2020. 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~~Mobile Xunlei supplements our existing subscriptions business, enabling us to reach a wider ~~set~~scope of user base and to expand our services to additional devices of a user who has multiple devices.

Our mobile initiatives also ~~benefits~~benefit from our relationship with Xiaomi, one of our previous strategic shareholders. Since 2014, we have entered into a pre-installing ~~service~~services 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 Mobile 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, MIUI7, MIUI8, MIUI9, MIUI10, MIUI11 and ~~MIUI7, since the end of 2014,~~MIUI12.5 and ~~as of February 2015,~~ the software has been installed on Xiaomi phones sold in China, including both new phones shipments and system upgrades from existing Xiaomi phones.

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Another key part of our strategies is to continue our innovation in crowdsourcing ~~for~~of idle bandwidth capacity and ~~potentially~~potential storage from users of our cloud computing ~~project, which targets~~hardware devices so that we can continuously deliver computing resources to ~~utilize~~third parties, such as internet content providers, through our ~~users’ idle~~CDN services. We started to generate revenue from selling crowdsourced uplink capacity ~~and storage by using~~we collected from users of our ~~hardware devices. We plan for crowdsourced capacity~~cloud computing services to ~~supply an increasing percentage of the bandwidth that we use for our own acceleration services. In~~third parties in the third quarter of ~~2015,~~2015. To further develop our cloud computing business, we ~~reached an agreement~~launched our decentralized cloud computing product, OneThing Cloud, in 2017. OneThing Cloud is essentially a cloud-based storage and sharing device that allows users to ~~sell crowdsourced uplink capacity to~~share their idle internet bandwidth and storage resources with our content delivery networks. The third ~~parties. We intend to sell crowdsourced uplink capacity to more third party~~parties that purchased our cloud computing services mainly include internet content providers such as iQiyi and Xiaomi. In 2020, we launched our own reward program, which allows users of OneThing Cloud to share crowdsources idle uplink capacities and external storage with ~~bandwidth demand.~~us in exchange for a small amount of cash rewards.

~~The technological backbone~~In 2018, we launched StellarCloud, a shared cloud computing platform that upgraded our existing content delivery network (CDN) services to Infrastructure as a Service (IaaS). It provides powerful and cost-effective cloud computing solutions and shares its extensive node distribution with its enterprise users, enabling efficient and cost-effective access. StellarCloud also offers edge computing, function computing and shared CDN (SCDN) solutions to our enterprise users. Our customers of our ~~products~~StellarCloud include some of the leading internet companies in China.

In 2018, we launched ThunderChain, an open platform that enables our enterprise users to develop and ~~services is~~manage blockchain applications. It represents 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,first accomplishment after we shift our focus from developing application products based on ~~distributed computing architecture, along with~~blockchain technology to the research and development of blockchain infrastructures.

In September 2020, we launched a BaaS (Blockchain as a Service) platform, which is a high-performance blockchain technology platform based on the infrastructure of ThunderChain. With one-stop blockchain service solutions, it is designed to liberate enterprises and developers from complex technical issues in blockchain infrastructure and to drive innovation and productivity. In the current stage, our ~~indexing~~Baas Platform on ThunderChain covers five modules including application, access, service, key technology ~~enables users~~and resources. The BaaS Platform possesses the following features to ~~access content in an efficient manner.~~

fully meet users' business-driven demands for blockchain applications: one-stop blockchain service solutions, resource-based pricing, cost-effectiveness, user-friendliness and blockchain application interchangeability.

We generated revenues by monetizing our large user base, primarily through the following services:

Cloud acceleration subscription services. We provide premium cloud 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~~

~~Other~~

Cloud computing and other internet value-added services. We offer cloud computing services and multiple other value-added services to our users ~~including~~and customers, such as live streaming services and online ~~games, fast bird services~~game services; and

Sales of our cloud computing ~~project.~~devices. We sell hardware devices that provide our users with easy access to our cloud computing services such as OneThing Cloud. In 2020, we generated a small amount of revenues from selling OneThing Cloud device to our users.

Our revenues ~~from continuing operations, excluding Xunlei Kankan, which we disposed of in July, 2015, increased~~decreased from US$~~122.0~~232.1 million in ~~2013~~2018 to US$~~135.8~~181.3 million in ~~2014~~2019, and ~~decreased~~then increased to US$~~130.0~~186.7 million in ~~2015 after the disposal of Xunlei Kankan.~~2020. 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.~~

39.3 million in 2018, US$53.2 million in 2019 and US$13.8 million in 2020.

Our platform

On our platform, users can accelerate ~~digital media~~internet content transmission, develop and ~~play a broad range~~operate blockchain-based services and applications and enjoy popular forms of ~~the latest~~internet-based entertainment, such as watching live online ~~games, among other things.~~performance and playing online games.

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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 2020, we further tapped into our existing acceleration capacity and expanded the digital media content transmission solution provided by our Xunlei Accelerator to cover business users, in particular, online game companies. Depending on specific demands of online game companies, we are able to formulate individualized acceleration solutions tailored to such online game companies and help them better connect with target users of their online games.

In ~~September 2014,~~2020, we ~~acquired Kuaipan Personal~~also upgraded our Xunlei Accelerator by providing our users with personal cloud storage resources through launching Xunlei Cloud Drive. Instead of stretching increasingly inadequate local storage resources, Xunlei Cloud Drive allows users to save documents, files and ~~Kansunzi, two software services in support~~other internet contents they downloaded on the cloud server. Users can also upload documents and files on Xunlei Cloud Drive with security control and provides real-time back-ups. Our Xunlei Cloud Drive offers each user a free storage space of ~~cloud-sourced~~2 TB. Users can retrieve the internet contents they stored on Xunlei Cloud Drive whenever they want through different terminals including tablets, smartphones and desktops. Xunlei Cloud Drive also allows users to share the data saved on the cloud server among each other. Users are able to access our Xunlei Cloud Drive service for free through our Xunlei Accelerator. Subscribers of our premium cloud acceleration service will be able to enjoy a cloud storage ~~and sharing.~~

space of 3 to 6 TB.

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~~has been adopted ~~in 2014~~ by Xiaomi, a Chinese smartphone maker, on its operating systems MIUI6, MIUI7, MIUI8, MIUI9, MIUI10, MIUI11 and ~~MIUI7. Since then,~~MIUI12.5. Xiaomi installs our mobile acceleration plug-in on all of its new phones sold in China 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.~~

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Subscription services

We charge monthly or annual fees for our premium cloud acceleration subscription ~~services and other exclusive services at different VIP levels.~~services. 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~~our major premium acceleration ~~products:~~

~~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.

product, Green Channel. It allows our subscribers to transmit digital media files from the internet, 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. In addition to our major premium acceleration product, our product, Fast Bird, also accelerates our subscribers’ internet access by increasing the bandwidth of the network system provided by telecommunications service providers.

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~~some 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. In order to promote customer loyalty, we may elevate the VIP levels of our subscribers if they actively engage in our services. Once upgraded to certain higher VIP levels, our subscribers may be offered additional independent accounts, internally termed as sub-accounts, at no additional charges. Such sub-accounts allow users to access our premium acceleration services, at no additional charge. Starting from September 2016, we have ceased to provide new sub-accounts to users with upgraded VIP levels. Users with existing independent accounts are still able to use such accounts.

We had a subscriber base of 3.8 million, 4.0 million and 3.8 million as of December 31, 2018, 2019 and 2020, respectively. In this annual report, the number of subscribers as of a given day excludes any sub-accounts.

Mobile Xunlei ~~Mobile~~

Mobile Xunlei ~~Mobile~~ is a mobile application that allows users to search, download and consume digital media content on their mobile devices. The monthly average daily active user of this product ~~has exceeded nine~~was about five million ~~as of the end of February 2016.~~in 2020. We ~~started to~~ monetize our mobile traffic through advertising ~~sales and generated our first mobile advertising revenues in late 2015.~~

sales. 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~~crowdsources idle uplink capacity from internet users who have bought and connected our proprietary hardware, Zhuanqianbao, ~~(“ZQB”),~~or 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.~~us. We pay users of our ZQB devices for the use of their idle uplink capacity.

To further develop our cloud computing business and at the same time explore emerging blockchain technology, we launched our decentralized cloud computing product, OneThing Cloud, in 2017. OneThing Cloud is a cloud-based storage and sharing device, which crowdsources idle uplink capacity from our users who have bought and connected their OneThing Cloud devices to their network router. Similar to ZQB, users of OneThing Cloud can voluntarily share their idle computing resources to us. Through our proprietary technologies, we crowdsource idle computing resources contributed by users and convert them into cloud computing resources to be provided to our customers, such as internet content providers, through our CDN services. Users of OneThing Cloud can also voluntarily participate in our cash reward program and receive a small amount of cash while contributing idle uplink capacity to us.

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In 2018, we further advanced our cloud computing business and launched StellarCloud. StellarCloud is a distributed cloud computing platform that integrates the idea of shared economy and blockchain technology with cloud computing technology. Leveraging our proprietary technologies, such as stellar scheduling, weak network acceleration and network dynamic defense, and the advantages of extensive distribution of nodes over traditional cloud vendors, StellarCloud provides powerful and cost-effective cloud computing solutions, such as edge computing, function computing and shared CDN (SCDN) and shares its extensive node distribution with its enterprise users. In 2019, we further expanded our CDN network by jointly establishing dozens of distributed cloud computing node rooms across China with local IDC and ISP service providers. We installed our OneThing Cloud devices in these locations while local IDC and ISP service providers provide us with internet access and data center management services. By cooperating with these IDC and ISP service providers, we are able to collect idle bandwidth, storage space and other resources.

The ~~crowd-sourced~~crowdsourced uplink ~~capacity is~~capacities 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~~crowdsourced uplink ~~capacity~~capacities for our ~~subscription~~ business from time to time, reducing our purchase of bandwidth from traditional third-party carriers. In addition, relying on a large number of distributed cloud computing nodes, we are researching and developing advanced edge computing applications in anticipation of a rising new industry.

ThunderChain

We rolled out our first blockchain infrastructure product, ThunderChain, in May 2018. ThunderChain is an open platform that enables our users to develop and manage blockchain applications. We are dedicated to exploring practical adoptions of blockchain in various industries and sectors, and providing tools, frameworks, and guidelines for blockchain development. Through our ThunderChain open platform, we provide smart contract development services, blockchain implementation services, and blockchain commercial ecosystem establishment services. In December 2019, we updated ThunderChain’s portfolio of products across six major industry sectors, i.e. financial services, livelihood matters, justice, healthcare, government services and industries. With this set of releases, ThunderChain now can offer a wide range of effective blockchain product solutions.

Our ThunderChain platform addresses the difficulties that both enterprise users and developers face in applying blockchain in an all-dimensional approach. For example, our ThunderChain platform has a strong concurrent processing capability. It is able to process over a million transactions per second. By using dual consensus algorithm (DPoA+PBFT), our ThunderChain platform is also able to realize low latency, data consistency and avoid bifurcation of data. Our ThunderChain platform supports several programming languages such as solidity, C, and C++. Developers do not have to learn new languages to develop ThunderChain-based blockchain applications. In addition, blockchain applications that are developed based on our ThunderChain generally have a good scalability as our ThunderChain platform supports configurable consensus algorithm and underlying storage system replacement, which facilitates the upgrade of ThunderChain-based blockchain applications based on different application scenarios. In terms of data security and privacy, our ThunderChain platform provides several advanced privacy protection solutions and supports multiple cryptographic algorithms. With these difficulties solved, enterprise users and developers are able to focus on application innovations and function developments.

Based on ThunderChain, we launched BaaS (Blockchain as a Service) platform in 2020, which offers one-click deployment service and further lowers the thresholds for enterprise users and developers to develop blockchain-based products. The BaaS platform further frees enterprise users and developers from hassles in dealing with complex technical problems in developing blockchain-based products and enables enterprise users and developers to focus more on the functionality and business rationale of their products.

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Live streaming services

We launched our live streaming services in 2016 and adjusted our business model in 2017. Through our Xunlei Live website and mobile app, users are able to access our live video streaming services. While viewing live online performance delivered by broadcasters, users may interact with broadcasters, purchase virtual items from us to reward broadcasters they like. In May 2018, we supplemented our live streaming business by launching a live audio streaming product, PeiWan, through which users and broadcasters may interact with each other through audio streaming and purchase virtual items from our platform to reward each other. In September 2019, we further expanded our live video streaming services and started to operate another live video streaming product, BuOu Live, developed by a third party. Similar with Xunlei Live, users can purchase virtual items from us to reward broadcasters they like. The third party ~~carriers.~~cooperating with us will be entitled to a small portion of the revenue generated from BuOu Live based on the cooperation agreement we entered into with such third party.

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.

Online game services

To better serve our users, we partnered with third-party online game developers or service providers to offer our users an array of online games through our online game website and ~~purchase licenses from, or enter into revenue sharing arrangements with, game developers.~~mobile app. 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 typically enter into cooperation agreements with third-party online game developers or service providers and share revenues generated from online game operations pursuant to revenue sharing arrangements in the agreements.

After we disposed of our web game business and discontinued PC-based MMOGs business in 2018, we only operated mobile game business under our online game business. Since 2019, we started to cooperate with third parties to operate web game business under a business model different from that of our previous web game business. In 2019, we collaborate with a third-party online game provider to provide our users with an array of web games on our Xunlei game center website. In 2020, we partnered with additional third-party online game providers to operate web games. After logging into their Xunlei accounts, our users are able to play these web games provided by the third-party online game providers. Our users are also able to purchase virtual items in those web games using a payment channel provided by us. Mobile games developed by third-party online game developers are available on our mobile app as usual. Users can download mobile games they are interested in through our mobile app and login the games by using their Xunlei account.

WeIn addition to the above value-added services, we may also ~~provide~~from time to time offer other ancillary services ~~catering~~to cater to users’ needs and ~~adjust our ancillary service offerings from time to time~~ to supplement the major services we provide.

Advertising services

We provide advertising services primarily through various forms of advertisements placed on our PC websites and mobile platform. We experienced a decline in revenue from mobile advertising in 2019 and 2020, primarily due to a generally decreased demand for our online advertising services. With a view to improving the competitiveness of our advertising services, we entered into an advertising revenue sharing agreement with Itui, our largest shareholder, and outsourced our advertising business to it. Itui has developed a precision customer target algorithm, and by cooperating with them, we hope to improve advertisement placement and improve revenues as a result. Pursuant to the agreement, Itui will be responsible for operating our advertising services and share a portion of revenue generated from placing advertisements on our PC websites and mobile platform.

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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.~~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

for subscription services

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 8965 co-location centers, ~~and~~ over one million ~~third party~~third-party servers and over ~~9,000~~6,200 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.

Additionally, we entered into a framework service agreement with Alibaba Cloud Computing Co., Ltd., or Ali Cloud, in December 2018. Since then, Ali Cloud has provided us with cloud computing products and services. As of December 31, 2020, we were using 2,045 cloud servers and 8,010 cloud services provided by Ali Cloud through its six central nodes and 25 edge nodes.

~~Advertising~~Shared cloud computing model for edge computing services

We ~~provide advertising~~created a shared computing model and network by encouraging millions of personal users to share idle resources such as computing power, storage and bandwidth by deploying sharing economy smart devices such as OneThing Cloud and ZQB. With the shared cloud computing model, Xunlei provides high-quality, cost-effective cloud services ~~primarily through various forms~~for corporate clients. StellarCloud is a shared cloud computing platform which expands Xunlei’s existing CDN services to a novel cloud computing service stack, offering edge computing, function computing and shared CDN solutions.

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StellarCloud edge computing service allows users to deploy their own applications in the form of containers on shared nodes widely distributed on the internet, and make use of a considerable amount of resources such as computing power, storage and bandwidth on all these nodes. The key technology underlying the edge computing service is the container management system that we developed in-house. Unlike the mainstream container solutions designed for IDC environment, the system adopts a lightweight and highly fault-tolerant design that optimized for network and performance diversity of shared nodes, thus enables an efficient and reliable deployment and monitoring of containers among all the nodes.

StellarCloud CDN service is a distributed CDN service that integrates traditional cloud computing data centers and shared node networks. It provides common CDN capabilities such as video on demand, live video streaming, and file distribution. The system splits and encodes the data into segments and deploy them to multiple shared nodes according to a certain strategy. An end user requesting these data gets nearby nodes from our scheduling system, then establishes multiple peer-to-peer connections to fetch data segments concurrently and reassembles them into the original data. Combining our industry-leading peer-to-peer technology and the scheduling mechanism that has been improved for years, StellarCloud CDN moves data distribution from IDC to cost-effective shared nodes, cutting bandwidth costs without compromising the quality of service.

Blockchain platform

We launched ThunderChain, a high-performance blockchain infrastructure product, which can concurrently process millions of transactions per second. Based on our ~~websites~~proprietary homogeneous multi-chain framework, ThunderChain is designed to realize confirmation and ~~mobile platform. We had 399, 252~~interaction among homogeneous chains and ~~119 advertisers~~enable multiple transactions to be executed on different chains in ~~2013, 2014~~parallel. ThunderChain adopts DPoA+PBFT dual consensus algorithm, which results in low latency and ~~2015, respectively,~~makes it possible to generate one block per second. PBFT, as a consistency algorithm, is also able to avoid soft fork. ThunderChain supports smart contracts written in solidity language 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 advertisersis compatible with ~~creative and cost-effective advertising solutions. We strive~~Ethereum virtual machine, making it easy to ~~creatively utilize our integrated service interface in designing a particular advertising campaign for advertisers.~~

migrate applications from other blockchain platforms.

Marketing

~~Our user base has grown~~We built up our reputation and maintain our popularity 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. WeIn the meanwhile, we also 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,~~2020, we had 44113 patents granted in the PRC and four granted in the United States, while another 19551 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,~~2020, we have applied to register ~~174~~944 trademarks, of which we have received ~~153~~507 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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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.

As of the date of this annual report, we ~~have~~had implemented several initiatives to further commit to copyright protection. ~~In May 2014,~~For example, 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 torequire our ~~users through our websites or client applications, (3) adopt state-of-the-art fingerprinting-based filtering technologies, (4) cooperate with these~~third-party content providers ~~going forward~~ to ~~ensure the effectiveness of our content protection measures, and (5) incorporate additional content protection measures to the extent~~provide relevant contents that they are ~~necessary~~duly authorized to ~~effectively protect against copyright infringement. However,~~provide and do not infringe intellectual property rights of any other parties. We also make available on our ~~copyright protection~~websites and mobile applications reporting channels so that we can timely remove contents that infringe intellectual property rights of other parties. Despite the fact that we put in place preventive measures, ~~would not~~we may still be ~~able~~subject 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~~As of the date of this annual report, ~~the cases are awaiting decisions of first instance.For details, see~~we were involved in 19 copyright lawsuits. 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~~and/or 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

The establishment, operation and management of corporate entities in the PRC are governed by the Company Law of the PRC, or the Company Law, which was promulgated by the Standing Committee of the National People’s Congress, or the SCNPC, on December 29, 1993 and last amended and became effective on October 26, 2018. A foreign-invested company is also subject to the Company Law unless otherwise provided in the foreign investment laws.

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The establishment and operations of wholly foreign-owned enterprises were mainly governed by the Law of the PRC on Wholly Foreign-Owned Enterprises and its implementation rules, which had been repealed by the Foreign Investment Law of the PRC enacted by the National People’s Congress, or the NPC, on March 15, 2019 and became effective on January 1, 2020. On December 26, 2019, the State Council promulgated the Detailed Rules for the Implementation of the Foreign Investment Law of the PRC, which became effective on January 1, 2020.

Investment activities in the PRC by foreign investors ~~are subject to~~and foreign-invested enterprises were regulated by the Catalogue of Industries for Guiding Foreign Investment, last repealed by the Special Management Measures (Negative List) for the ~~Guidance~~Access of Foreign Investment ~~Industry,~~(2019 Version), or the Negative List (2019 Version), and the Catalogue of Industries for Encouraging Foreign Investment (2019 Version), or Encouraging Catalogue (2019 Version), which ~~was~~were promulgated ~~and is amended from time to time~~ by ~~the Ministry of Commerce and~~ the National Development and Reform Commission, or NDRC, and the ~~NDRC. The~~Ministry of Commerce on June 30, 2019 and became effective on July 30, 2019. In June 2020, the MOFCOM and the NDRC promulgated the Negative List (2020 Version), which became effective on July 23, 2020 and replaced the Negative List (2019 Version). In December 2020, the MOFCOM and the NDRC promulgated the Encouraging Catalogue ~~divides industries into three categories:~~(2020 Version), which became effective on January 27, 2021 and replace the Encouraging Catalogue (2019 Version). Pursuant to the Encouraging Catalogue (2020 Version) and the Negative List (2020 Version), foreign-invested projects are categorized as encouraged, restricted and prohibited. ~~Industries~~Foreign-invested projects that are not listed in the ~~Catalogue~~Negative list are permitted foreign invested projects.

Establishment of wholly foreign-owned enterprises is generally ~~open~~allowed in industries not included in the Negative List. For the restricted industries within the Negative List, some of the industries are limited to ~~foreign investment unless specifically~~equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted ~~by other PRC regulations.~~

~~Pursuant~~category projects are subject to government approvals and certain special requirements. Foreign investors are not allowed to invest in industries in the ~~latest Catalogue amended in March 2015, which took effect on April 10, 2015, the~~prohibited category. 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~~wholly owned PRC subsidiary, and Shenzhen Xunlei, our VIE, and its shareholders. Shenzhen Xunlei or its relevant subsidiary, holds the licenses and permits necessary to conduct our resource discovery network, cloud computing, online advertising, online games and related businesses in China and holds various operating subsidiaries that conduct a majority of our operations in China. Shenzhen Onething has obtained an updated VATS License to cover CDN service for our cloud computing business. Both of Giganology Shenzhen and Xunlei Computer, another ~~wholly-owned~~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 operated by Giganology Shenzhen and Xunlei Computer are deemed asto be permitted and open to foreign investment.

The establishment and change of foreign-invested enterprises was subject to record-filing procedures pursuant to the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, or FIE Record-filing Interim Measures, effective on the same day. Pursuant to FIE Record-filing Interim Measures, requirements, provided that the establishment if the establishment or change of FIE matters involve the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts is still required. In December 2019, the Ministry of Commerce and the State Administration for Market Regulation issued Measures for the Reporting of Foreign Investment Information, effective on January 1, 2020, which repealed the FIE Record-filing Interim Measures. Pursuant to the Measures, where foreign investors carry out investment activities directly or indirectly within China, foreign investors or foreign-funded enterprises shall report investment information to relevant commerce departments.

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.

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The principal regulations governing the telecommunications and internet information services we provide in the PRC include:

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Telecommunications regulations ~~(2014,~~ (2016, 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~~“Catalogue of Telecommunications Business,” an attachment to the Telecom Regulations and updated by MIIT’s Notice on Adjusting the ~~Catalog~~Catalogue 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~~content provider services, or ICP services, are classified asunder the second category of value-added telecommunications ~~businesses.~~businesses and the CDN services, the internet access services and the internet data center services are classified under the first category of value-added telecommunications business. Under the Telecom Regulations, commercial operators of value-added telecommunications services must ~~first~~ obtain ~~an ICP~~the VATS License covering the business classified under the relevant category from MIIT or its provincial level counterparts.

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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~~a VATS 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 VATS License covering the ICP ~~License~~services 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.

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Administrative measures for telecommunications business operating license ~~(2009,~~ (2017, 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~~VATS 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~~VATS 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~~VATS 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~~VATS License. The ~~ICP~~VATS License is subject to annual ~~review~~report requirement. An ICP service operator shall report certain information to the issuing authorities through the administrative platform in the first quarter every year. Such information includes the business performance of the telecommunications business in the previous year, service quality, the actual implementation of the network and information security guarantee systems and measures, among others. ICP service operator shall be responsible for the truthfulness of the information in 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.~~report.

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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,~~ (2016, 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.

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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~~a VATS License is prohibited from leasing, transferring or selling the ~~ICP~~VATS 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~~VATS License, and such company should establish and improve its internal internet and information security policies and standards and emergency management procedures.

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Circular of the Ministry of Industry and Information Technology on Clearing up and Regulating the Internet Access Service Market (2017), which, among others, further strengthens the supervision and management of the applications of cloud computing, big data and other applications. For an enterprise that conducts the CDN business without a VATS License specifically covering such business, it must submit a written commitment to the original license issuing authority before March 31, 2017, undertaking that an eligible VATS License will be obtained by the end of 2017. If such enterprise fails to make the commitment on time, it must carry out business activities strictly in compliance with their existing licenses. Furthermore, if the enterprise fails to obtain the eligible VATS License as committed it should terminate the relevant business starting from January 1, 2018.

To comply with these PRC laws and regulations, we operate our websites through Shenzhen Xunlei, our PRC variable interest entity. We, through Shenzhen Xunlei, currently ~~holds an~~hold a VATS License covering its ICP ~~License~~services expiring on April 30, ~~2020~~2025 and another VATS License for ~~the~~its provision of ~~internet information~~could computing services ~~and also a value-added telecommunication license for the provision of~~including internet data center services and internet access services expiring on ~~March 10, 2020,~~October 31, 2024, and ~~owns~~own the essential trademarks and domain names in relation to our value-added telecommunications business.

Shenzhen Onething and one of its subsidiaries have obtained VATS Licenses to cover the CDN service for our cloud computing 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:

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opposes the fundamental principles determined in the PRC’s Constitution;

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compromises state security, divulges state secrets, subverts state power or damages national unity;

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harms the dignity or interests of the State;

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incites ethnic hatred or racial discrimination or damages inter-ethnic unity;

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sabotages the PRC’s religious policy or propagates heretical teachings or feudal superstitions;

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disseminates rumors, disturbs social order or disrupts social stability;

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propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes;

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insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or

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includes other content prohibited by laws or administrative regulations.

The PRC government may shut down the websites of ~~ICP~~VATS License holders that violate any of such content restrictions and requirement, revoke their ~~ICP~~VATS 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~~April 25, 2016, SAPPRFT issued the Administrative Provisions on Audio-Visual Program Services through Private Network and Targeted Communication, which replaced 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~~Measures. Pursuant to ~~the activities relating~~these provisions, “audio-visual program services through private network and targeted communication” refer to ~~the opening, broadcasting, integration, transmission or download~~radio, TV program and other audio-visual program services to a targeted audience with TV and all types of ~~audio-visual programs via~~handheld electronic equipment as terminal recipients, and through setting up virtual private network through local networks and internet or with Internet and other information ~~network. An applicant~~networks as targeted transmission channels, including the provision of contents, integrated broadcast control, transmission and distribution, and other activities conducted by such forms as Internet protocol television (IPTV), private network mobile TV, and Internet TV. Any provider who engages in ~~the business of transmitting audio-visual programs~~aforesaid service must ~~apply for~~obtain a license ~~issued by GAPPRFT in accordance with the categories of business, receiving terminals, transmission networks~~from GAPPRFT. Wholly foreign-owned enterprises, Sino-foreign joint ventures and ~~other items. Foreign invested~~Sino-foreign cooperative 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 theAdministrative 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~~Audiovisual 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~~Audiovisual 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 March 10, 2017, SAPPRFT promulgated the Categories of the Internet Audio-Video Program Services, which classifies internet audio-video programs into four categories.

On May 21, 2008, GAPPRFT issued aNotice 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 theNotice 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.

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Further, on March 31, 2009, GAPPRFT issued theNotice on Strengthening the Administration of the Content of Internet Audio-visual Programs, or theNotice 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 theNotice 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~~Audiovisual Programs Received by Television Terminals.” On ~~April 1, 2010, GAPPRFT~~March 10, 2017, SAPPRFT issued theInternet Audio/Visual Program Services Categories (Provisional), or the Provisional Categories, which classified internet audio-visual programs into four categories. ~~However, at this stage,~~

On August 1, 2018, the ~~Provisional Categories do not include~~MIIT, the Ministry of Public Security of the PRC and other government agency jointly issued the Notice on Strengthening the Administration of the Internet Live Streaming Service which requires the internet ~~television~~live streaming service providers shall go through the procedures of filing with the competent department of telecommunications. The internet live streaming service providers engaged in telecommunications business and internet news information, network performances and internet live streaming of audio-visual programs shall apply to the relevant departments for permission to operate such telecommunication business and shall perform the procedures of record-filing with the local public security department within 30 days after the live streaming service being operated.

To comply with these laws and regulations, Henan Tourism Information Co., Ltd., or ~~mobile television, and it is unclear as to how~~Henan Tourism, one of our operating subsidiaries in the ~~categorization system under the newly adopted Provisional Categories will be enforced or how will it evolve. Shenzhen Xunlei’s~~PRC, currently holds a License for Online Transmission of Audio-visual Programs ~~is due for update but we have not been able~~with an effective period from February 2018 to ~~obtain such update.~~February 2021. We are currently preparing materials to renew and expand the scope of the license. See ~~“Risk~~“Item 3. Key Information—D. Risk factors—Risks related to our business—We are strictly regulated in China. Any lack of requisite licenses or permits applicable to our ~~business~~businesses or to our third-party services providers and any changes in government policies or regulations may have a material and adverse impact on our ~~business,~~businesses, financial ~~condition~~conditions and results of operations.��

”

Regulation on online cultural activities

On February 17, 2011, the MOC promulgated the ~~new~~Provisional Measures on Administration of Internet Culture ~~Culture,~~, or the Internet Culture Measures, which became effective as of April 1, 2011 and was amended on December 15, 2017. On March 18, 2011, the MOC issued 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~~regulates entities ~~that engage~~engaging in activities ~~related~~relating to “online cultural products.” “Online cultural products” are ~~classified~~defined 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;

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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

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exhibitions or contests related to online cultural products.

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On December 2, 2016, the MOC issued the Administrative Measures for Business Activities of Online Performances, which became effective on January 1, 2017. According to these measures, the business of transmitting in real time the content of online games presented or narrated via information networks such as the internet, mobile communication networks and mobile internet or uploading such contents for communication in the audio-visual form shall be administered as online performances. An operator of online performances shall apply for Online Culture Operating Permit with the competent provincial cultural administration department, and the business scope indicated on the Online Culture Operating Permit shall clearly include online performances. In addition, an operator of online performances shall present the number of its Online Culture Operating Permit in a prominent position on the homepage of its websites.

To comply with these ~~then-~~then and currently effective laws and regulations, Shenzhen Xunlei ~~holds~~obtained an Online Culture Operating Permit, which was last renewed in March ~~2016~~2019 with an effective period from March 16, ~~2016~~2019 to March 15, ~~2019 for~~2022 to offer music entertainment product online, operate online performance business and online shows business, and engage in the ~~operating~~exhibition of online ~~games (including issuance of virtual currency), music entertainment~~culture products and ~~animation and comic. Xunlei Games~~competition activities. Shenzhen Wangwenhua obtained an Online Culture Operating Permit ~~in July 2013~~ with an effective period from ~~July 30, 2013~~November 11, 2020 to ~~July 30, 2016 for the operating of~~May 1, 2023 to operate online ~~games (including issuance of virtual currency). We plan~~performance business and online shows business. In addition, Shenzhen Zhuolian Software Co., Ltd. obtained an Online Culture Operating Permit with an effective period from December 16, 2020 to ~~renew this permit before its expiration date.~~

January 8, 2024 to operate online performance business and online shows business.

Regulation on online games

~~MOC~~MOCT (formerly the MOC) is the government agency primarily responsible for regulating online games in the PRC. On June 3, 2010, MOC promulgated theProvisional Measures on the Administration of Online Games, ~~pursuant~~amended on December 15, 2017 and last repealed by the Decision of the Ministry of Culture and Tourism to Repeal the Measures for the Administration of Online Games and the Measures for the Administration of Tourism Development Plans, which became effective on July 10, 2019. Pursuant to the ~~content~~Provisional Measures on the Administration of Online Games, the contents 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, and Shenzhen Wangwenhua have obtained ~~the~~an Online Culture Operating Permit ~~respectively~~ for ~~operating~~our operation of online games.

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Further, the online publication of online games is subject to the regulation of SAPPRFT, formerly the GAPPRFT, under theAdministrative ~~Measures~~Provisions on ~~Network Publication~~Online Publishing Services and ICP service operators must obtain the ~~Network Publication Service License~~internet publishing services license prior to provision of any online game publishing services. On September 28, 2009, GAPPRFT, the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications jointly published theNotice 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.

Moreover, on December 1, 2016, MOC issued the Circular of the Ministry of Culture on Regulating the Operations of Online Games and Strengthening Interim and Ex-Post Regulation, which will become effective on May 1, 2017. MOC further clarified the scope of online game operation in the circular. If an enterprise conducts technical testing of online games by means of, among others, making the online games available for user registration, opening the fee-charging system of the online games or providing client-end software with direct server registration and log-in functions, such enterprise is deemed to be an online game operator. If an enterprise provides user systems, fee-charging systems, program downloading, publicity and promotion and other services for the online game products of another game operator and participates in sharing the revenue from the operations of online games, such enterprise is deemed as a joint operator, and must bear corresponding liabilities. In addition, enterprises engaging in online game operations must require users to register their real names by using valid identity documents and must limit the amount that a user may top up each time in a single game. In addition, the enterprises are required to send information that requires confirmation by users when they top up or make the payments, and the contact details for protecting users’ rights and interests must be indicated conspicuously in an online game.

On May 14, 2019, the MOCT issued a notice announcing the adjustment of the scope of business activities that are subject to the MOCT’s approval for Online Culture Operation License. Pursuant the notice, the MOCT will no longer be responsible for issuing Online Culture Operation License to companies operating online games and issuance and trading of virtual currency in connection with online game operations. On July 10, 2019, the MOCT abolished the Provisional Measures on the Administration of Online Games, which required online game operators to obtain Online Culture Operation License for operating online games and issuance and trading of virtual currency in connection with online game operations. As a result, Online Culture Operation License is no longer required for online game operators.

Our online ~~games~~game services are ~~currently provided~~operated by Shenzhen ~~Xunlei. Shenzhen~~Wangwenhua and Xunlei ~~holds an Internet Publication~~Games. Both entities have obtained the VATS License for ~~its publication of online games. We also require the developers of certain~~operating online games, but do not possess the internet publishing services license. For risks relating to ~~obtain~~ the ~~requisite approvals of relevant online games from GAPPRFT, and make the filings with MOC, for relevant online games. See “Risk~~internet publishing services license, see “Item 3. Key Information—D. 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~~popular, high-quality 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.

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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 theNotice 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 aCircular 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.

~~We have developed~~In October 2019, General Administration of Press and ~~implemented an anti-fatigue~~Publication issued the Anti-indulgence Notice, under which the total period of time for underage users to play online games is strictly restricted. For example, from 22:00 p.m. each day to 8:00 a.m. of the next day, game operators are not allowed to provide underage users with any form of access to online games they operate, and ~~compulsory~~the total length of time for game operators to provide underage users with access to online games cannot exceed three hours a day during statutory holidays or 1.5 hours a day on days other than statutory holidays. The Anti-indulgence Notice also requires game operators to implement the real-name registration system ~~in our~~for players of online games and ~~will cooperate~~take effective measures to restrict underage players from using paid services that are inconsistent with their capacity for civil conduct.

For the ~~National Citizen Identity Information Center to launch the identity verification~~online games on our platform, we have implemented a real-name registration system ~~upon the issuance of relevant implementing rules.~~for our online games. For game players who do not provide verified identity information, we assume that they are minors under 18 years of age. ~~In order~~Online game operators or developers rely on the identify information provide by us to ~~comply~~implement their anti-indulgence measures. With respect to anti-indulgence measures, we have cooperated with third parties in developing anti-indulgence measures and are currently working with our third-party online game providers to implement anti-indulgence measures pursuant to the ~~anti-fatigue rules,~~Anti-indulgence Notice. We are currently preparing application materials and working on connecting to the national anti-indulgence and real-name registration system. See “Item 3. Key Information—D. Risk Factors—Risks related to our business—We may not be able to successfully address the challenges and risks we ~~set up our system so that after three hours~~face in the online games market, such as a failure to operate popular, high-quality 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 ~~playing~~ our online ~~games, minors only receive half~~game business.”

Table 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.~~Contents

Regulation on online game virtual currency

On February 15, 2007, MOC, the People’s Bank of China and other relevant government authorities jointly issued theNotice 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 theNotice 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~~On May 14, 2019, the MOCT issued a notice announcing the adjustment of the scope of business activities that are subject to the MOCT’s approval for Online Culture ~~Operating Permit~~Operation License. Pursuant the notice, the MOCT will no longer be responsible for issuing Online Culture Operation License to companies operating online ~~game virtual currency,~~games and ~~have filed their~~ issuance and trading of virtual currency in connection with online game operations. On July 10, 2019, the ~~local branch~~MOCT abolished the Provisional Measures on the Administration of ~~MOC~~Online Games, which required online game operators to obtain Online Culture Operation License for operating online games and issuance and trading of virtual currency in ~~Guangdong.~~connection with online game operations. As a result, Online Culture Operation License is no longer required for online game operators.

Since Online Culture Operation License is no longer required for the issuance and trading of virtual currency in connection with online game operations, Xunlei Games did not renew its Online Culture Operation Licenses after expiration.

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Regulation on internet publication

~~GAPPRFT~~SAPPRFT (formerly the GAPPRFT) is the government agency responsible for regulating publication activities in the PRC. On June 27, 2002, MIIT and GAPPRFT jointly promulgated theTentative 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~~SAPPRFT and the MIIT jointly issued theAdministrative 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~~an internet publishing services 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.~~an internet publishing services 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 theRules for the Administration of Electronic Publication, or the Electronic Publication Rules, which took effect on April 15, ~~2008.~~2008 and was amended on August 28, 2015. 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.

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.~~2022. See ~~“Risk~~“Item 3. Key Information—D. 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~~and operate ~~and sub-license~~popular, high-quality 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.”

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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 theSeveral 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 theDecision on Strengthening the Protection of Online Information issued by the ~~Standing Committee of the National People’s Congress~~SCNPC of the PRC on December 28, 2012, or the Decision, and theOrder 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.

Pursuant to the Ninth Amendment to the Criminal Law of the PRC issued by the SCNPC on August 29, 2015, any internet service provider that fails to fulfill the obligations related to internet information security as required by applicable laws and refuses to take corrective measures, will be subject to criminal liability for (i) any large-scale dissemination of illegal information; (ii) any severe effect due to the leakage of users’ personal information; (iii) any serious loss of evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (a) sells or provides personal information to others unlawfully or (b) steals or illegally obtains any personal information will be subject to criminal liability in severe situations.

The SCNPC promulgated the Cybersecurity Law of the PRC, or the Cybersecurity Law, on November 7, 2016. Pursuant to the Cybersecurity Law, network operators shall follow their cybersecurity obligations according to the requirements of the classified protection system for cybersecurity, including: (a) formulating internal security management systems and operating instructions, determining the persons responsible for cybersecurity, and implementing the responsibility for cybersecurity protection; (b) taking technological measures to prevent computer viruses, network attacks, network intrusions and other actions endangering cybersecurity; (c) taking technological measures to monitor and record the network operation status and cybersecurity incidents; (d) taking measures such as data classification, and back-up and encryption of important data; and (e) other obligations provided by laws and administrative regulations. In addition, network operators shall follow the principles of legitimacy to collect and use personal information and disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered.

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On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance.

The National Information Security Standardization Technical Committee issued the latest Standard of Information Security Technology—Personal Information Security Specification, which came into effect in March, 2020 and replaced the 2017 version. Under such standard, a personal information controller should follow the principles of legality, justification and necessity in handling personal information, obtain a consent from personal information providers and provide the personal information providers an independent choice when the product or service provided by the personal information controller has multiple functions.

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.

However, our system may not be compliant with relevant laws and regulations in all respects. We have been ordered to rectify our app as it failed to explicitly inform users the purpose, method, and scope regarding personal data collection. We will continue to review and amend our privacy policies on our websites and mobile applications periodically based on the development and changes of our business operations so that we obtain proper consents from our users for collecting and using their personal information. See “Item 3. Key Information—D. Risk factors—Risks related to 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.”

Regulation on internet medicine information service

The State Food and Drug Administration, or the SFDA, promulgated theAdministration Measures on Internet Medicine Information Service on July 8, 2004, which was amended in November 2017, 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 has 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.~~

August 21, 2023. Shenzhen Wangwenhua has also 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 September 17, 2022.

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.

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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~~In July 2016, the SAIC issued the Interim Measures for the Administration of Internet Advertising to regulate internet advertising activities. According to these measures, no advertisement of any medical treatment, medicines, food for special medical purpose, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other special commodities or services subject to examination by an advertising examination authority as stipulated by laws and regulations may be published unless the advertisement has passed such examination. In addition, no entity or individual may publish any advertisement of over-the-counter medicines or tobacco on the internet. An internet advertisement must be identifiable and clearly identified as an “advertisement” to the consumers. Paid search advertisements are required to be clearly distinguished from natural search results. In addition, the following internet advertising activities are prohibited: providing or using any applications or hardware to intercept, filter, cover, fast forward or otherwise restrict any authorized advertisement of other persons; using network pathways, network equipment or applications to disrupt the normal data transmission of advertisements, alter or block authorized advertisements of other persons or load advertisements without authorization; or using fraudulent statistical data, transmission effect or matrices relating to online marketing performance to induce incorrect quotations, seek undue interests or harm the interests of others. Internet advertisement publishers are required to verify relevant supporting documents and check the content of the advertisement and are prohibited from publishing any advertisement with unverified content or without all the necessary qualifications. Internet information service providers that are not involved in internet advertising business activities but simply provide information services are required to block any attempt to publish an illegal advisement that they are aware of or should reasonably be aware of through their information services.

Since we have ~~obtained a~~outsourced our advertising business ~~license, which allows us~~ to Itui in 2020, we do not operate advertising ~~businesses,~~business on our own. We have required Itui to set up an effective review mechanism for each advertisement it places on our websites 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~~platform, and to ensure ~~that such content~~the contents are truthful, accurate, and in full compliance with ~~PRC~~relevant 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~~“Item 3. Key Information—D. Risk factors—Risks related to our business—Advertisements ~~we display~~displayed on our platform may subject us to penalties and other administrative actions.”

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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~~ amendedLaw 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~~

On June 28, 2016, the CAC issued the Administrative Provisions on Mobile Internet Applications Information Services, which became effective on August 1, 2016, to ~~do so~~further strengthen the administration over the mobile internet application information services. Pursuant to these provisions, owners or operators of mobile internet applications that provide information services are required to be responsible for information security management, which, among others, includes the following:

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certifying the identification information of the registered users;

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establishing and improving the protective mechanism for users information, following the principle of legality, rightfulness and necessity, and expressly stating the purpose, method and scope of, and obtaining user consent to, the collection and use of users’ personal information; and

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establishing and improving the verification mechanism for the content, taking measures against any illegal content, keeping the relevant records and reporting such content to relevant competent authorities.

On November 7, 2016, the SCNPC promulgated the Cyber Security Law of the People’s Republic of China, or Cyber Security Law, which became effective on June 1, 2017 to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with the constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others. In addition, the new Cyber Security Law requires network operators must not collect personal information irrelevant to their services. The network operators are required to strictly keep confidential users’ personal information that they have collected and to establish and improve user information protective mechanism. In the event of any unauthorized disclosure, damage or loss of collected personal information, network operators must take immediate remedial measures, notify the affected users and report the incidents to the relevant authorities in a timely manner.

On August 25, 2017, the CAC promulgated the Provisions on the Administration of Internet Comments Posting Services, which became effective on October 1, 2017. According to such provisions, internet comments posting services refer to the services of publishing transcripts, symbols, expressions, pictures, audio and ~~adequate basis may subject~~video and other information offered by Internet websites, applications, interactive communication platforms and other types of communication platforms with news and public opinion property and social mobilization function by way of post, reply, message, bullet screen and using other means. Providers of the internet comments posting services shall strictly assume the primary responsibilities and discharge the following obligations accordingly:

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verify the real identity information of registered users following the principle of using real name at foreground and volunteering to do so at background and forbid the provision of internet comments posting services for users whose real identity information is not verified;

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establish and improve a user information protection system;

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establish a system to review new comments before they are published when providing internet comments posting services;

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establish and improve an internet comments posting review and management, real-time check, emergency response and other information security management systems, timely identify and process illicit information and submit a report to the relevant competent authorities;

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develop information protection and management technologies for the internet comments posting, timely identify security flaws and bugs and other risks in internet comments posting services, take remedial measures and submit a report to the relevant competent authorities; and

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set up a reviewing and editing team and improve the professionalism of editors.

In addition, on August 25, 2017, the CAC promulgated the Administrative Provisions on Internet Forum and Community Services, which became effective on October 1, 2017, pursuant to which the internet forum and community service ~~provider~~providers shall assume the primary responsibility for establishing and improving the information inspection and verification, public information real-time check, emergency response and personal information protection and other information security management systems, put in place safe and controllable preventative measures, employ professionals based on service scope, and provide necessary technical support for the relevant departments in performing duties according to ~~liability~~the law. The internet forum and ~~certain~~community service providers shall not use internet forum and community services to publish or disseminate information banned by laws, regulations and the relevant provisions of the state. Where the internet forum and community service providers identify any aforementioned information, they shall cease the transmission of such information forthwith, delete and take other measures, retain the relevant records and timely submit a report to the CAC or its local branches.

Violation of these laws and provisions may result in penalties, ~~given by~~including fines, confiscation of illegal income. In the ~~State Security Bureau,~~case of serious violations, the ~~Ministry of Public Security and/~~competent telecommunication authority, public security authority and other relevant authorities may suspend relevant business, rectification or ~~MIIT~~close down the website, or revoke licenses or permits for their ~~respective local counterparts. As Shenzhen Xunlei is an ICP operator, it is~~business operations.

We are subject to the laws and regulations relating to information security and censorship. To comply with these laws and regulations, ~~it has~~we have 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.

Although instances in the past have suggested that our information security and content-filtering systems may not be compliant with relevant laws and regulations in all respects, we strive to improve our systems by continuously implementing additional protective and examining measures to reduce the risk of cyber-incidents and to detect improper or illegal contents. See "Item 3. Key Information-D. Risk factors-Risks related to our business-System failure, interruptions and downtime, including those caused by cyber-attacks or security breaches, can result in user dissatisfaction, adverse publicity or leakage of confidential information of our users and customers, and our business, financial condition, results of operations may be materially and adversely affected.”

Regulation on torts

The Tort Law was promulgated by the ~~Standing Committee of the National People’s Congress~~SCNPC on December 26, 2009 and became effective on July 1, 2010. In May 2020, the NPC promulgated the Civil Code of the People's Republic of China, which became effective on January 1, 2021 and replaced the Tort Law. Under ~~this law,~~Civil Code of the People's Republic of China, 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.

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Regulation on intellectual property rights

The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.

Under the Copyright Law (1990), as revised in 2001, 2010 and ~~2010,~~2020, 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 theMeasures for Administrative Protection of Copyright Relatedto 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, theMeasures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied.

Pursuant to theRegulation 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:

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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.

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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~~audiovisual 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.

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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 theProvisions 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~~contents 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~~NPC adopted the Patent Law in 1984, and amended it in 1992, 2000, 2008 and ~~2008,~~2020, 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~~As of December 31, ~~2015, 44 were granted~~2020, we had 94 registered patents in the PRC ~~while another seven~~and 522 patent applications ~~are~~were 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 2013 and ~~2013~~2019 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,~~2020, we had applied for registration of ~~174~~944 trademarks, of which we507 had ~~received 153~~been successfully 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~~Domain name

The domain names are protected under theAdministrative Measures on the Internet Domain Names promulgated by MIIT on ~~November 5, 2004~~August 24, 2017 and effective on ~~December 20, 2004.~~November 11, 2017. 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,~~June 18, 2019, CNNIC ~~promulgated~~issued the~~Implementation~~Implementing Rules of ~~Registration of~~National Top-Level Domain ~~Name~~Names Registration, ~~or the CNNIC Rules, which was renewed on June 5, 2009 and May 29, 2012, respectively.~~ Pursuant to theAdministrative Measures on the Internet Domain Names and the ~~CNNIC~~Implementing Rules of National Top-Level Domain Names Registration, 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 theCNNIC 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~~NPC enacted a newPRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, ~~2008.~~2008 and last revised on December 2018. 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, theCircular 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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In April 2020, the Ministry of Finance, the State Taxation Administration and the National Development and Reform Commission issued the Announcement on Continuing the Enterprise Income Tax Policies for the Large-Scale Development of Western China, which became effective on January 1, 2021, allowing enterprises operated in an encouraged industry that is established in western China to pay the enterprise income tax at a reduced rate of 15% from January 1, 2021 to December 31, 2030.

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~~“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.”

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~~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%.

On May 24, 2013, the Ministry of Finance, or the MOF, and the SAT issued theCircular 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~~took 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.

On April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Circular on Adjustment of VAT Rates, which became effective on May 1, 2018. According to the Circular on the Adjustment of VAT Rates, relevant VAT rates have been reduced since May 1, 2018, such as (i) VAT rates of 17% and 11% applicable to the taxpayers who have VAT taxable sales activities or imported goods are adjusted to 16% and 10%, respectively; and (ii) VAT rate of 11% originally applicable to the taxpayers who purchase agricultural products is adjusted to 10%.

On March 20, 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs of the PRC issued the Circular on Adjustment of VAT Rates, which became effective on April 1, 2019. According to the Circular on the Adjustment of VAT Rates, starting from April 1, 2019, the VAT rate of 10% was adjusted to 9% while the VAT rate of 16% was adjusted to 13%.

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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~~In February 2018, the SAT issued a new circular on issues relating to “beneficial owner” in tax treaties, or Circular No. 9, which will become effective on April 1, 2018 and replace Circular No. 601. Circular No. 9 provides a more flexible guidance to determine whether the applicant engages in substantive business activities. Furthermore, under the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, non-resident taxpayers which satisfy the criteria for entitlement to tax treaty benefits may, at the time of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits and are subject to further regulation by the tax authorities. If non-resident taxpayers fail to claim the tax treaty benefits with the withholding agent, or the materials and the information contained in the relevant reports and statements provided to the ~~SAT Circular 601,~~withholding agent do not satisfy the 5%criteria for entitlement to tax ~~rate does not automatically apply and approvals from competent local~~treaty benefits, the withholding agent shall withhold tax ~~authorities are required before an enterprise can enjoy~~pursuant to the ~~relevant~~provisions of PRC tax ~~treatments relating to dividends under the relevant taxation treaties.~~laws. 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:

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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

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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 or registration with 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 theCircular 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.

In March 2015, SAFE issued SAFE Circular No. 19, which took effect on June 1, 2015 and replaced SAFE Circular No. 142 and subsequently issued the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Policy on the Management of Foreign Exchange Settlement under Capital Account, or SAFE Circular No. 16 on June 9, 2016. Although SAFE Circular No. 19 and SAFE Circular No. 16 allow the use of RMB converted from the foreign currency-denominated capital for equity investments in the PRC, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMB for purposes beyond the business scope, issuing loans to non-associated companies (except the cases expressly allowed in the business scope), or issuing inter-company RMB loans.

On November 19, 2012, SAFE promulgated theCircular 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 theCircular 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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In February 2015, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment, or SAFE Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 delegates the authority to enforce the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment. On April 26, 2016, SAFE issued the Circular of the State Administration of Foreign Exchange on Further Promoting Trade and Investment Facilitation and Improving Authenticity Review, which provides that for outward remittances of the profit equivalent of more than US$ 50,000 (exclusive) by domestic institutions, banks shall review the relevant board resolution (or the partnership resolution) on profit distribution, the original copies of tax return forms and the financial statements evidencing the profits, in accordance with the principle of authentic transactions.

In January 2017, SAFE promulgated the Circular on Further Improving the Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular 3, which provides several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks should check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities should hold income to account for previous years’ losses before remitting the profits. Furthermore, according to SAFE Circular 3, domestic entities should make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

On October 23, 2019, SAFE promulgated the Circular on Further Facilitating Cross-border Trade and Investment, or SAFE Circular 28. Pursuant to SAFE Circular 28, restrictions on domestic equity investments made with capital funds by non-investing foreign-funded enterprises and restrictions on the use of funds in domestic asset realization accounts for foreign exchange settlement are cancelled.

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Regulation on foreign exchange registration of offshore investment by PRC residents

On October 21, 2005, SAFE issued theCircular 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 promulgatedthe 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.

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Regulation on employee share options

On December 25, 2006, the People’s Bank of China promulgated theAdministrative Measures for Individual Foreign Exchange. On February 15, 2012, SAFE issued theNotices 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 theApplication 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.

Our PRC citizen employees who have been granted share options or restricted shares, or PRC ~~optionees, will be~~grantees, are subject to the Stock Option ~~Rules when our company becomes an overseas listed company upon the completion of our initial public offering.~~Rules. If we or our PRC ~~optionees~~grantees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC ~~optionees~~grantees may be subject to fines and other legal sanctions. We may also face regulatory uncertainties that could restrict our ability to adopt additional ~~option~~share incentive plans for our directors and employees under PRC law. In addition, the State Administration for Taxation has issued certain circulars concerning employee share ~~options.~~awards. Under these circulars, our employees working in the PRC who exercise share options or hold the vested restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share ~~options~~awards with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share ~~options.~~options or hold the vested restricted shares. 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~~Company Law primarily governs the distribution of dividends paid by wholly foreign-owned enterprises ~~include:~~

after the Foreign Investment Law of the People's Republic of China and Regulation on the Implementation of the Foreign Investment Law of the People's Republic of China came into effect. Under the 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~~an 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~~statutory common reserves until its cumulative total reserve funds reaches 50% of its registered capital. ~~The board~~

Table 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.Contents

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 adoptedthe 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.

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.

Regulation on initial coin offerings

~~Organizational Structure~~

On September 4, 2017, People’s Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, the MIIT, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission jointly promulgated the Announcement on Prevention of Token Fundraising Risks to strengthen the administration of the initial coin offerings activities. Pursuant to the announcement, “fundraising through token offerings” is referred to as a type of fundraising activities where an issuer raises “virtual currencies” such as Bitcoin or Ether from investors through the illegal issuance and subsequent circulation of tokens. Pursuant to the announcement, token fundraising activity is essentially an illegal public fundraising activity without obtaining government’s approval. It is a suspected illegal offering of tokens, illegal offering of securities, illegal fundraising, financial fraud, pyramid scheme, which are criminal offenses under the PRC law. The announcement prohibits fundraising activities through token issuance. In addition, the announcement also provides that token trading platform should not be engaged in (i) the exchange between any statutory currency with tokens and “virtual currencies,” (ii) the trading, either as a central counterparty or not, of the tokens or “virtual currencies,” and (iii) token or “virtual currency” pricing, information intermediary services or other services for tokens or “virtual currencies.”

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We launched the LinkToken business in 2017 and disposed of such business to an independent third party in April 2019. We do not believe that we engaged in token fundraising activities by virtue of carrying out LinkToken operations prior to our disposal of such operations, nor do we believe that we would have been deemed to be a token trading platform, which is operated under a completely different business model. To date, no governmental financial regulators have imposed any administrative penalties against us relating to LinkTokens on the basis that we engaged in token fundraising activities. In April 2020, we launched our own reward program, which allows users to contribute their idle bandwidth capacity in exchange for a small amount of cash rewards. See “Item 4. Information on the Company—B. Business Overview—Our Platform—Cloud Computing” for more information on LinkToken and “Item 3. Key Information—D. Risk Factors—Regulatory uncertainties exist with respect to our previous LinkToken operations, which may have a material adverse effect on our business and results of operations” for regulatory uncertainties and risks relating to our previous LinkToken operations.

Regulation on blockchain information services

On January 10, 2019, the Cyberspace Administration of China, or CAC, issued the Provisions on the Administration of Blockchain Information Services, or the Blockchain Provisions, which came into effect on February 15, 2019. Pursuant to the Blockchain Provisions, a blockchain information service provider is required to file particulars of such service provider including its name, service category, service form, application field, and server address with the blockchain information service filing management system managed by the CAC and go through filing procedures within ten business days after it starts to provide services. After completing the filing procedure, the blockchain information service provider should display the filing number in a conspicuous position on the service provider’s websites and applications through which it provides services. Service providers that had already started to provide blockchain information services before the Blockchain Provisions became effective are required to do make-up filings within 20 business days after the Blockchain Provisions became effective. As of the date of this annual report, we had obtained the initial record-filing number.

In addition, the Blockchain Provisions also imposed an array of obligations to the providers of blockchain information services. For example, blockchain information service providers are required to set up various rules and procedures in terms of user registration, information verification, emergency response, and safeguard measures. Blockchain information service providers are also required to formulate and publish blockchain platform management rules and enter into a service agreement with users of blockchain information services. In addition, blockchain information service providers are obligated to verify the real name of the users of blockchain information services and are prohibited to offer services to users who fail to provide information relating to their real identity. Failure to comply with relevant requirements in the Blockchain Provisions may subject blockchain information service providers to administrative penalties such as warning, being ordered to temporarily suspend relevant business operations to rectify within prescribed time period, or fines, or criminal liabilities, depending on which provisions are violated.

On October 24, 2019, the Political Bureau of the CPC Central Committee carried out the 18th collective learning on the current situation and trend of blockchain technology development, and President Xi Jinping emphasized that the integrated application of blockchain technology played an important role in new technological innovation and industrial transformation in China.

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C.Organizational Structure

The following diagram illustrates our corporate structure, including our ~~subsidiaries and~~ variable interest entity and ~~the~~our principal subsidiaries and principal subsidiaries of our variable interest entity, as of the date of this annual report on Form 20-F:

~~Note:~~

Notes:

(1)

Shenzhen Xunlei is our variable interest entity. Mr. Sean Shenglong Zou, our co-founder ~~chairman~~ and ~~chief executive officer,~~director, 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.

68(3)

The 49% of the shares of Onething Co., Ltd. held by HK Onething Technologies Limited has 90.57% of the total voting power of all shares.

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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.~~

2026.

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.~~

2026.

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,~~King & Wood Mallesons, our PRC legal counsel:

·●

the ownership structures of our variable interest entity and our subsidiaries in China comply ~~with~~ all ~~existing~~applicable PRC ~~laws~~Laws and ~~regulations;~~regulations currently in effect; and

·●

the contractual arrangements among Giganology Shenzhen, our PRC subsidiary, Shenzhen Xunlei and its shareholders governed by PRC law are valid, binding and enforceable in accordance with the contractual arrangements’ terms, and will not result in any violation of PRC laws or regulations currently in effect.

We have been advised by ~~Zhong Lun Law Firm,~~King & Wood Mallesons, 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—D. 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.”

~~Property, Plant and Equipment~~

D.Property, Plant and Equipment

Our principal executive offices are located at 7/21-23/F Block ~~11,~~B, Building No.12, No.18 Shenzhen ~~Software~~Bay ECO-Technology Park, ~~Ke Ji Zhong 2nd~~Keji South Road, Yuehai Street, Nanshan District, Shenzhen, the People’s Republic of China, which comprises approximately ~~7,024~~7,575 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~~9,510 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,~~2021, 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. In addition, we expect to complete the construction of our headquarters building by the end of 2021 or early 2022 and relocate our principal executive offices to the new building afterwards.

~~Item 4A.~~

Item 4A. Unresolved Staff Comments

None.

~~Item 5.~~

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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~~“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~~do not include Xunlei Kankan and web game business, which have been classified as discontinued operations. In 2019, we started to operate web game business again under a ~~discontinued operation.~~different business model by cooperating with a third party. Revenues from web game business has been included in the continuing operations.

~~Operating Results~~

A.Operating Results

Overview

We operate a powerful internet platform in China based on cloud computing to enable our users to quickly access, manage and consume digital media ~~content. We are increasingly extending into~~content on the internet. In recent years, we have expanded our products and services from PC-based devices to mobile devices ~~with our mobile application and~~ in part through pre-installed acceleration plug-ins on mobile phones to further ~~expand~~enlarge our user base and offer our users a wider range of access points.

In addition, we have also started to provide blockchain products and services since 2018.

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~~acceleration-based subscription services (delivered through ~~products such as~~our product, Green ~~Channel, Offline Accelerator and Yunbo)~~Channel). Benefitting from the large user base accumulated by our core product, Xunlei Accelerator, we have further developed cloud computing services and various other value-added services to meet a fuller spectrum of our users’ digital media content access and consumption needs. These value-added products and services primarily include our ~~cloud computing project~~live streaming services and online ~~game.~~game services. 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:

·●

Service revenue. We generate revenue from various services we offer to users and clients. The services we offer primarily include acceleration subscription services, online advertising services and other internet value-added 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%~~45.1% of our ~~revenues~~revenue in ~~2014 and 63.4% in 2015.~~2020. 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 PC websites and mobile platform to advertisers. In May 2020, we have outsourced our advertising business to a subsidiary of Itui, our largest shareholder. Online advertising revenues contributed to ~~4.3%~~7.1% of our ~~revenues in 2014 and 3.7% in 2015 and we achieved mobile advertising~~ revenue in ~~the fourth quarter of 2015.~~2020. The revenues are derived principally from various forms of advertisements that ~~we place~~were placed on our ~~websites and~~ mobile platform.

·●

Cloud computing and other internet value-added services. Other internet value-added services~~. We offer multiple other value-added~~ primarily include live streaming services ~~to our users.~~and online game services. Revenues from cloud computing and other internet value-added services ~~contributed to 23.4%~~accounted for 47.0% of our ~~revenues~~total revenue in ~~2014 and 32.9%~~2020.

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●

Product revenue. We sell hardware devices mainly related to our cloud computing services, such as OneThing Cloud. Product revenue contributed 0.8% of our revenue in ~~2015.~~2020.

Our revenues ~~increased~~decreased from US$~~122.0~~232.1 million in ~~2013~~2018 to US$~~135.8~~181.3 million in ~~2014~~2019 and ~~decreased~~increased to US$~~130.0~~186.7 million in ~~2015.~~2020. 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~~39.3 million, US$53.2 million and US$13.8 million in ~~2015. We had net income attributable to~~2018, 2019 and 2020, respectively. Xunlei ~~Limited’s common shareholders of US$2.3 million in 2013, but net loss in the amount of US$105.4 million~~Kankan and ~~US$13.2 million in 2014 and 2015, respectively. The net loss of US$105.4 million in 2014 was primarily~~web game business are accounted for as discontinued operations 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~~those two businesses and our consolidated statements of comprehensive income/(loss) in this annual report separately ~~classifies~~classify the discontinued operations from our remaining business operations for all years presented.

Since 2019, we have started to operate web game business again under a different business model by cooperating with third parties. Revenues from web game business have been included in the continuing operations.

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.

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.~~

services.

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 and live streaming 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 and OneThing Cloud devices to their network router. ~~Our~~ ZQB and OneThing Cloud devices can allocate those users’ idle ~~uplink capacity~~computing resources to us for our further allocation to internet content providers and other internet users. We pay users of our ZQB ~~devices~~device for the use of their idle ~~capacity.~~ computing resources.Users of our OneThing Cloud can also receive a small amount of cash by participating in our own cash reward program, which allows us to crowdsource their idle computing resources.The ~~uplink capacity~~computing resources gathered from ZQB and OneThing Cloud 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~~crowdsourced capacities for our own ~~subscription~~ business from time to time, reducing our purchase of bandwidth from traditional ~~third party~~third-party carriers.

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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.~~us. 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~~services 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,~~services, which is expected to ~~continue to~~ reduce our bandwidth cost incurred in our purchase from traditional suppliers, contribute to the cost efficiency of our overall infrastructure and generate additional revenue when we sell those capacity to third parties.

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,~~in particular CDN business, although we expect such costs ~~would~~to be partly offset by the fact that we expect to source an increasing amount of bandwidth from our cloud computing ~~project.~~services. In addition, our operating expenses are expected to increase in the future, since we expect ~~increased headcount~~an increase in marketing expense in a competitive environment and an increase in employee compensation to ~~reflect the growth of our business.~~attract talents. 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.~~services.

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Description of certain statement of operations items

Revenues

We derive our revenues primarily from cloud acceleration subscription services, selling of cloud computing devices, online advertising services, and cloud computing and other internet value-added services, ~~including~~which consist primarily of cloud computing services, online games services, and ~~cloud computing~~live streaming services. The following table sets forth the principal components of our revenues by amounts and percentages of our revenues for the periods presented.


	For the Year Ended December 31,
	2018		2019		2020
	US$	%	US$	%	US$	%

	(in thousands, except for percentages)
Continuing operations
Subscriptions	81,877	35.3	81,532	45.0	84,299	45.1
Online advertising	27,781	12.0	15,643	8.6	13,206	7.1
Product revenue	54,604	23.5	8,269	4.6	1,412	0.8
Cloud computing and other internet value-added services	67,870	29.2	75,823	41.8	87,766	47.0
Total	232,132	100.0	181,267	100.0	186,683	100.0

For the Year Ended December 31,
Continuing operations 2013 2014 2015
(in thousands of US$, except for percentages) Amount % of
Revenues Amount % of
Revenues Amount % of
Revenues
Subscriptions 86,733 71.1 98,189 72.3 82,435 63.4
Online advertising 2,951 2.4 5,834 4.3 4,802 3.7
Other internet value-added services 32,347 26.5 31,789 23.4 42,759 32.9
Total 122,031 100.0 135,812 100.0 129,996 100.0

Subscriptions. We introduced our cloud acceleration subscription services in March ~~2009 and we~~2009. 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$~~1.6)~~1.4) per month or RMB99 (US$~~15.9)~~14.3) per year, and we also offer premium subscription packages with prices at RMB15 (US$~~2.4)~~2.2) per month or RMB149 (US$~~23.9)~~21.6) per year or RMB30 (US$~~4.8)~~4.3) per month or ~~RMB 288~~RMB288 (US$~~46.2)~~41.7) 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 %~~35.3% in ~~2013~~2018 to ~~72.3%~~45.0% in ~~2014,~~2019 and ~~decreased~~further increased to ~~63.4%~~45.1% in ~~2015.~~

2020.

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 regularly 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,~~authorities. We 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~~175,000 existing subscribers as of the end of ~~2015. Also see~~2020. See “Item 3. Key Information—D. Risk Factors—Risks related to ~~our business—~~doing business in China—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.” 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,~~To date, we ~~are unable~~have not been able to quantify the magnitude and extent of such impact.

Online advertising. Our online advertising revenues are derived ~~principally~~ from various forms of advertisements that ~~we place~~were placed on our PC websites and mobile platform. A significant majority of our advertisers purchase our online advertising services through third-party advertising agencies. As it is customary in the advertising industry in China, we pay rebates to third-party advertising agencies and recognize revenues net of these rebates.

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The revenues from our mobile advertising decreased from US$15.3 million in 2019 to US$13.2 million in 2020, accounting for 98.1% and 99.9% of the ~~first half~~online advertising revenues in 2019 and 2020, respectively. We expect the revenues from mobile advertising will account for the majority of ~~2013, we discontinued delivering advertisements on Xunlei Accelerator~~our advertising revenues in the future with our on-going transition to ~~further improve user experience and enhance user engagement, and~~mobile internet. We do not expect to generate a significant ~~advertising revenues from Xunlei Accelerator after 2014.We also do not expect to generate significant~~amount of other advertising revenues in the ~~future on~~foreseeable future. In May 2020, we outsourced our ~~PC platform, if at all, since we have sold Xunlei Kankan in July 2015. For details of~~advertising business to Itui, our ~~sale of Xunlei Kankan, see~~related party. See “Item 4. Information on the ~~Company — A. History~~Company—B. Business Overview—Our platform—Advertising services.”

Product revenue. Product revenue represents the revenue we generate primarily from the sales of hardware devices and ~~Development~~OneThing Cloud, in relation to our cloud computing services. The product revenue decreased from US$8.3 million in 2019 to US$1.4 million in 2020, primarily because we were gradually phasing out the sales of ~~the Company.” In the fourth quarter of 2015, we achieved mobile advertising revenue~~this product while exploring alternative ways for ~~the first time.~~

developing distributed cloud computing nodes.

~~Other~~Cloud computing and 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 cloud computing and other internet value-added services ~~decreased~~increased from US$~~32.3~~67.9 million in ~~2013~~2018 to US$~~31.8~~75.8 million in ~~2014~~2019 and ~~increased~~further to US$~~42.8~~87.8 million in ~~2015.~~2020.

~~A significant portion~~Revenues of ~~revenues of~~cloud computing and other internet value-added services were generated primarily from our live streaming services, online game services and our cloud computing services. For live streaming services, users purchase virtual gifts from us and send the gifts they purchase to broadcasters to show their support. We recognized revenue from the sales of virtual gifts in an amount of US$20.9 million in 2020. Our online games.~~For~~ business used to consist of web games, mobile games and PC-based MMOGs. In light of the overall decline in web game market and a shift of our strategy, we ~~had approximately 210,000, 283,000~~streamlined our business and ~~397,000 paying users~~disposed of our web game business in January 2018 and discontinued our PC-based MMOGs business in July 2018. In 2019, we started to operate web game business again under a business model different from our previous web game business. For cloud computing services, we recognize revenue when we provide bandwidth to our customers. We started to generate revenue from cloud computing services in 2015 and the revenue for the ~~years~~year ended December 31, ~~2013, 2014~~2020 increased by 51.4% on a year-over-year basis primarily due to an increased demand for your shared computing service. We expect the revenue from cloud computing and ~~2015, respectively. For~~other internet value-added services to increase in 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.future.

Cost of revenues

Our cost of revenues consists primarily of (i) bandwidth costs, (ii) ~~content costs,~~cost of inventories sold, (iii) ~~payment handling fees,~~cost of live streaming services, (iv) depreciation of servers and other equipment, (v) payment handling charges, and ~~(v) games revenue sharing~~(vi) other costs, ~~and others.~~including write-down of inventory. The following table sets forth the components of our cost of revenues by amounts and percentages of our revenues for the periods presented:


	For the Year Ended December 31,
	2018		2019		2020
	US$	%	US$	%	US$	%

	(in thousands, except for percentages)
Continuing operations
Bandwidth costs	48,118	20.7	57,093	31.5	62,384	33.4
Cost of inventories sold	31,634	13.6	7,181	4.0	1,660	0.9
Cost of live streaming services	23,928	10.3	20,734	11.4	15,640	8.4
Depreciation of servers and other equipment	5,018	2.2	5,198	2.9	6,247	3.3
Payment handling charges	3,016	1.3	1,658	0.9	1,459	0.8
Other costs	3,953	1.7	8,049	4.4	5,247	2.8
Total	115,667	49.8	99,913	55.1	92,637	49.6

For the Year Ended December 31,
Continuing operations 2013 2014 2015
(in thousands of US$, except
for percentages) Amount % of
Revenues Amount % of
Revenues Amount % of
Revenues
Bandwidth costs 28,174 23.1 33,545 24.7 37,218 28.6
Content costs, including amortization 1,061 0.9 — — 338 0.3
Payment handling fees 12,097 9.9 11,305 8.3 9,087 7.0
Depreciation of servers and other equipment 3,801 3.1 5,102 3.8 4,873 3.8
Games revenue sharing costs and others 5,125 4.2 5,803 4.3 8,518 6.5
Total 50,258 41.2 55,755 41.1 60,034 46.2

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Bandwidth costs. Bandwidth costs ~~are~~consist of the fees we pay to telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their internet data ~~centers.~~centers and the fees we compensate users of our ZQB and OneThing Cloud devices for the use of their idle uplink capacity. 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~~but we expect the ~~growth~~rate of ~~our business. In 2015,~~increase or the costs as a ~~portion~~percentage 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,~~revenues would decline as we expect to ~~increase~~reply more on crowdsourced bandwidth and further diversify our ~~bandwidth costs as we continue to scale in magnitude the capacity we crowdsource through our cloud computing project.~~procurement sources.

For details on our cloud computing ~~project,~~services, see “Item 4. Information on the ~~Company —~~ Company—B. Business Overview.”

Cost of inventories sold. Cost of inventories sold mainly consists of the cost associated with the sale of hardware devices including OneThing Cloud, in relation to our cloud computing services.

Cost of live streaming services. Cost of live streaming services mainly represents the fees we pay to broadcasters and the talent agencies. We expect such cost to remain relatively stable in the near future.

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 as a percentage of revenues to decrease as our total revenues are expected to increase, which is also consistent with the industry trend.

Payment handling ~~fees~~charges. Payment handling ~~fees~~charges 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~~charges as a percentage of revenues to ~~increase~~decrease as we continue to ~~grow~~optimize our ~~subscription-based and other paid service offerings.~~

channels for the collection of subscription fee.

~~Depreciation of servers and other equipment~~Other costs. 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~~Other costs mainly ~~represent the share~~include fast bird service cost, which we pay to telecommunication service providers for accelerating service we provide for our subscribers’ internet access, impairment cost, which arises from our write-down of ~~online game revenue remitted to developers of exclusive licensed games.~~inventory based on our assessment.

Operating expenses

Our operating expenses consist of (i) research and development expenses, (ii) sales and marketing expenses, ~~and~~ (iii) general and administrative ~~expenses.~~expenses, and (iv) asset impairment loss, net of recoveries. The following table sets forth the components of our operating expenses by amounts and percentages of our revenues for the periods presented:


													For the Year Ended December 31,
													2018		2019		2020
													US$	%	US$	%	US$	%
	For the Year Ended December 31,
	2013				2014				2015
(in thousands of US$, except for percentages)	Amount		% of Revenues		Amount		% of Revenues		Amount		% of Revenues
													(in thousands, except for percentages)
Research and development expenses		21,740		17.8		29,252		21.5		38,250		29.4	76,763	33.1	68,571	37.8	55,463	29.7
Sales and marketing expenses		9,848		8.1		13,527		10.0		15,042		11.6	35,322	15.2	31,820	17.6	18,064	9.7
General and administrative expenses		18,663		15.3		26,945		19.8		28,774		22.1	40,833	17.6	38,930	21.5	33,910	18.2
Asset impairment loss, net of recoveries													6,348	2.7	(2,147)	(1.2)	5,090	2.7
Total		50,251		41.2		69,724		51.3		82,066		63.1	159,266	68.6	137,174	75.7	112,527	60.3

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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~~future as we ~~continue toexpand our research and development team~~need to retain talents to develop new products and ~~update~~improve existing products, particularly ~~as we plan to continue devoting resources in the development of~~ our cloud computing ~~project~~services, blockchain technology, 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~~future as we expect to ~~hire additional sales personnel and~~ invest in brand enhancement efforts and the promotion of our products and services, particularly as we plan to increase our efforts in promoting our cloud computing ~~project,~~services, blockchain technology, Mobile Xunlei ~~Mobile~~ and ~~online games.~~

new products under development.

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~~future as we expect our business ~~continues~~ to ~~grow.~~continue to grow and as a result of general inflation.

Asset impairment loss, net of recoveries. Asset impairment loss, net of recoveries consists of assets written-offs after impairment and recoverability assessment, net of recovered amount of impaired assets. The asset impairment in 2020 represents a one-time write-off of certain receivables and prepayments in relation to our cloud computing business.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. ~~Under~~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 ~~current laws~~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 ~~we are~~except for stamp duties, which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not ~~subject to tax on income or capital gains. Additionally, there is no~~impose withholding tax on ~~dividends paid by us to our shareholders.~~

dividend payments.

China

~~On March 16, 2007,~~Pursuant to 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~~became effective on January 1, 2008, a ~~favorable statutory~~25% enterprise income tax rate ~~of 15%.~~ is generally applicable to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies.

In April 2009, the State Administration for Taxation, or SAT, issued ~~Circular Guoshuihan [2009] No. 203 stipulating~~a circular, which provides that ~~entities~~an enterprise that is qualified ~~for~~as the High and New Technology Enterprise, or HNTE, ~~status should~~is entitled to apply with the relevant tax authorities to enjoy the reduced ~~EIT~~enterprise income tax rate of 15% ~~provided under the EIT Law starting from the year when the HNTE certificate becomes effective.~~. In ~~addition, an entity qualified~~January 2016, relevant PRC government authorities further issued qualification criteria, application procedures and assessment processes for the qualification of HNTE. Each of Shenzhen Xunlei, Shenzhen Wangwenhua and Xunlei Computer currently possesses such HNTE ~~status can continue~~certificate. As a result, these three entities are qualified 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 thea preferential tax rate of 15% for the ~~years~~year ended December 31, 2020. The HNTE certificate possessed by Shenzhen Xunlei and Shenzhen Wangwenhua will expire in December 2023 and the HNTE certificate possessed by Xunlei Computer will expire in 2021. We plan to renew the HNTE certificate held by Xunlei Computer in 2021.

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Pursuant to the Notice of the Ministry of Finance and ~~2017.~~

the State Administration of Taxation on the Preferential Corporate Income Tax Policy and Catalogues for Hengqin New Area of Guangdong Province, Pingtan Comprehensive Experimental Area of Fujian Province and Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, enterprises established in, among others, Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone and engaging in businesses that fall within encouraged categories are eligible for a preferential enterprise income tax rate of 15%. Shenzhen Onething is eligible for such preferential enterprise income tax rate. We have completed the required filing procedures for Shenzhen Onething in 2020, and thus Shenzhen Onething enjoyed the preferential enterprise income tax rate of 15% in 2020.

According to a policy of the ~~PRC~~ State ~~tax bureau,~~Tax Administration of the PRC, enterprises that engage in research and development activities are entitled to claim ~~150%~~175% 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.~~Deduction, during the period from January 1, 2018 to December 31, 2020. Shenzhen Xunlei, ~~has~~Shenzhen Onething, Shenzhen Wangwenhua and Xunlei Computer have been claiming this Super Deduction in ascertaining its tax assessable ~~profits and brought forward tax losses from 2009 onwards. In addition, following the approval~~profits.

Moreover, an announcement issued by the ~~relevant tax authority~~State Administration of Taxation in ~~July 2010, Shenzhen Xunlei was recognized as an enterprise~~April 23, 2020 provides that enterprises located in the western provinces and engaged in ~~software development activities. Accordingly, it is~~the qualified industrial activities are entitled to a preferential enterprise income tax ~~holiday~~rate of ~~2-year Exemption~~15% upon filing with the in-charge taxation authorities. Our subsidiary, Jiangxi Node Technology Services Co. Ltd., or Jiangxi Node, is eligible for such tax incentive and ~~3-year 50% Reduction from 2010 onwards. In December 2013, Shenzhen Xunlei obtained~~is in the ~~certificate~~process of completing the ~~Key Software Enterprise~~relevant filings. Upon the completion of relevant filings, Jiangxi Node will be entitled to enjoy a preferential enterprise income tax rate of 15% for the next ten 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 after2030, starting from January 1, ~~2008, are subject to EIT at a rate of 25%.~~2021.

~~In addition, according~~According to the EIT Law and its implementation rules, foreign enterprises, which have no ~~establishment or place~~commercial presence in the PRC but derive dividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC, are subject to a 10% 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,~~2019 and December 31, 2020, the directors of the company decided to reinvest the retained earnings permanently in China and therefore no such WHT is required.

In addition, the current EIT Law treats enterprises established outside the PRC 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. If a company is considered as a PRC resident enterprise for tax purposes, it would be subject to the PRC Enterprise Income Tax at the rate of 25% on its worldwide income after January 1, 2008. As of December 31, 2020, our company has not accrued for PRC tax on such basis. Our company will continue to monitor its tax status.

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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.


	For the Year Ended December 31,
	2018		2019		2020
	US$	%	US$	%	US$	%

	(in thousands, except for percentages)
Net revenues
Service revenue	177,528	76.5	172,998	95.4	185,271	99.2
Product revenue	54,604	23.5	8,269	4.6	1,412	0.8
Total revenue, net of rebates and discounts	232,132	100.0	181,267	100.0	186,683	100.0
Business taxes and surcharge	(1,528)	(0.7)	(602)	(0.3)	(312)	(0.2)
Total net revenues	230,604	99.3	180,665	99.7	186,371	99.8
Cost of revenues
Service	(84,033)	(36.2)	(92,732)	(51.1)	(90,977)	(48.7)
Product	(31,634)	(13.6)	(7,181)	(4.0)	(1,660)	(0.9)
Total cost of revenues	(115,667)	(49.8)	(99,913)	(55.1)	(92,637)	(49.6)
Gross profit	114,937	49.5	80,752	44.6	93,734	50.2
Operating expenses
Research and development expenses	(76,763)	(33.1)	(68,571)	(37.8)	(55,463)	(29.7)
Sales and marketing expenses	(35,322)	(15.2)	(31,820)	(17.6)	(18,064)	(9.7)
General and administrative expenses	(40,833)	(17.6)	(38,930)	(21.5)	(33,910)	(18.2)
Asset impairment loss, net of recoveries	(6,348)	(2.7)	2,147	1.2	(5,090)	(2.7)
Total operating expenses	(159,266)	(68.6)	(137,174)	(75.7)	(112,527)	(60.3)
Operating loss	(44,329)	(19.1)	(56,422)	(31.1)	(18,793)	(10.1)
Interest income	1,183	0.5	1,897	1.1	1,471	0.8
Interest expense	(239)	(0.1)	(75)	(0.0)	(406)	(0.2)
Other income, net	2,810	1.2	5,861	3.2	4,737	2.5
Share of loss from equity investees	(307)	(0.1)	—	—	—	—
Loss from continuing operations before income tax	(40,882)	(17.6)	(48,739)	(26.8)	(12,991)	(7.0)
Income tax benefit	89	—	(4,676)	(2.6)	(1,149)	(0.6)
Net loss from continuing operations	(40,793)	(17.6)	(53,415)	(29.4)	(14,140)	(7.6)
Discontinued operations:
Income from discontinued operations before income taxes	1,533	0.7	—	—	—	—
Income tax expenses	(230)	(0.1)	—	—	—	—
Net income from discontinued operations	1,303	0.6	—	—	—	—
Net loss for the year	(39,490)	(17.0)	(53,415)	(29.4)	(14,140)	(7.6)
Less: Net profit attributable to the non-controlling interest	212	0.1	246	0.1	300	0.2
Net loss attributable to Xunlei Limited	(39,278)	(16.9)	(53,169)	(29.3)	(13,840)	(7.4)

For the Year Ended December 31,
2013 2014 2015
(in thousands of US$ except for percentage) Amount % of
Revenues Amount % of
Revenues Amount % of
Revenues

Revenues, net of rebates and discounts 122,031 100.0 135,812 100.0 129,996 100.0
Business taxes and surcharge (3,904 ) (3.2 ) (1,878 ) (1.4 ) (361 ) (0.3 )
Net revenues 118,127 96.8 133,934 98.6 129,635 99.7
Cost of revenues (50,258 ) (41.2 ) (55,755 ) (41.0 ) (60,034 ) 46.2
Gross profit 67,869 55.6 78,179 57.6 69,601 53.5
Operating expenses
Research and development expenses (21,740 ) (17.8 ) (29,252 ) (21.5 ) (38,250 ) (29.4 )
Sales and marketing expenses (9,848 ) (8.1 ) (13,527 ) (10.0 ) (15,042 ) (11.6 )
General and administrative expenses (18,663 ) (15.3 ) (26,945 ) (19.8 ) (28,774 ) (22.1 )
Total operating expenses (50,251 ) (41.2 ) (69,724 ) (51.3 ) (82,066 ) (63.1 )
Operating income/(loss) 17,618 14.4 8,455 6.3 (12,465 ) (9.6 )
Interest income 1,189 1.0 6,733 5.0 5,833 4.5
Interest expense — — (163 ) (0.1 ) (239 ) (0.2 )
Other income, net 4,679 3.9 13,966 10.2 3,627 2.8
Share of income/(loss) from equity investees 25 0.0 (259 ) (0.2 ) (12 ) (0.0 )
Income/(loss) from continuing operations before income tax 23,511 19.3 28,732 21.2 (3,256 ) (2.5 )
Income tax (expense)/benefit (560 ) (0.5 ) (463 ) 0.4 886 0.7
Net income/(loss) from continuing operations 22,951 18.8 28,269 20.8 (2,370 ) (1.8 )
Discontinued operations
Loss from discontinued operations before income taxes (13,779 ) — (20,330 ) — (10,048 ) —
Income tax benefit/(expense) 1,207 — 1,923 — (2,048 ) —
Net loss from discontinued operations (12,572 ) (10.3 ) (18,407 ) (13.5 ) (12,096 ) (9.3 )
Net income/(loss) 10,379 8.5 9,862 7.3 (14,466 ) (11.1 )
Less: Net loss attributable to the non-controlling interest (283 ) (0.2 ) (950 ) (0.7 ) (1,299 ) (1.0 )
Net income/(loss) attributable to Xunlei Limited 10,662 8.7 10,812 8.0 (13,167 ) (10.1 )

Year ended December 31, ~~2015~~2020 compared with year ended December 31, ~~2014.~~2019.

Revenues. Our revenues increased by 3.0% from US$181.3 million in 2019 to US$186.7 million in 2020, primarily due to the increases of revenues from cloud computing services and subscription service.

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Service revenue. Our service revenue increased by 7.1% from US$173.0 million in 2019 to US$185.3 million in 2020, primarily due to the increase of revenues from our cloud computing services and subscription service.

●

Our revenue from subscription services increased by 3.4% from US$81.5 million in 2019 to US$84.3 million in 2020, primarily due to an increase in average revenue per user.

●

Our online advertising revenues decreased by 15.6% from US$15.6 million in 2019 to US$13.2 million in 2020, primarily due to a decreased demand for our mobile advertising services.

●

Revenues derived from cloud computing and other internet value-added services increased by 15.8% from US$75.8 million in 2019 to US$87.7 million in 2020, primarily due to an increased demand for our shared cloud computing services.

Product revenue. Our product revenue decreased by ~~4.3%~~82.9% from US$~~135.8~~8.3 million in ~~2014~~2019 to US$~~130.0~~1.4 million in ~~2015. The decrease was~~2020, primarily due to a decrease in ~~subscription revenues.~~sales of OneThing Cloud as a result of a decreased demand of OneThing Cloud from users.

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.

~~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~~decreased by ~~7.7%~~7.3% from US$~~55.8~~99.9 million in ~~2014~~2019 to US$~~60.0~~92.6 million in ~~2015. The increase~~2020, primarily attributable to a decline in ~~our cost~~sales of ~~revenues was primarily due to the increase in bandwidth costs associated with~~ our cloud computing ~~project.~~

hardware products and revenue-sharing costs for our live streaming products.

Bandwidth costs. Our bandwidth costs increased by ~~10.9%~~9.3% from US$~~33.5~~57.1 million in ~~2014~~2019 to US$~~37.2~~62.4 million in ~~2015,~~2020, primarily due to the increased ~~bandwidth costs associated with~~sales of our cloud computing ~~project.~~

services.

~~Payment handling fees~~Cost of inventories sold. . Our ~~payment handling fees~~cost of inventories sold decreased by ~~19.6%~~76.9% from US$~~11.3~~7.2 million in ~~2014~~2019 to US$~~9.1~~1.7 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.

~~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~~2020, primarily due to a ~~13.2% increase~~decrease in ~~our revenues~~sales of OneThing Cloud products.

Cost of live streaming. Our cost of live streaming services decreased by 24.6% from ~~subscription services.~~

~~Our revenues from subscription services increased by 13.2% from~~ US$~~86.7~~20.7 million in ~~2013~~2019 to US$~~98.2~~15.6 million in ~~2014. The increase was mainly attributable~~2020, primarily due 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~~revenue-sharing costs as a result 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—parta decrease 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~~live-streaming 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%~~20.2% from US$~~3.8~~5.2 million in ~~2013~~2019 to US$~~5.1~~6.2 million in ~~2014, as~~2020, primarily due to an increase in depreciation of our shared cloud computing servers that we ~~acquired~~installed to our newly established distributed edge computing node centers across China in 2020.

Payment handling charges. Our payment handling charges decreased by 12.0% from US$1.7 million in 2019 to US$1.5 million in 2020, primarily because we cooperated with more ~~servers and other equipment to accommodate the increased needs for our acceleration and other product services.~~

third-party payment service providers that charged lower service fees.

~~Games revenue sharing~~Other costs ~~and others~~. These costs ~~increased~~decreased by ~~13.3%~~34.8% from US$~~5.1~~8.0 million in ~~2013~~2019 to US$~~5.8~~5.2 million in ~~2014, mainly because~~2020, primarily due to less write-down of our inventory for OneThing Cloud hardware device compared with that of 2019. In addition, we ~~generated more revenues from exclusive licensed games~~did not incur LinkToken mall redemption cost in ~~2014.~~2020 but incurred such cost in 2019.

Gross profit. As a result of the above, our gross profit increased by ~~15.2%~~16.1% from US$~~67.9~~80.8 million in ~~2013~~2019 to US$~~78.2~~93.7 million in ~~2014.~~ 2020.

Gross profit margin increased from ~~55.6%~~44.5% in ~~2013~~2019 to ~~57.6%~~US$50.2 million in ~~2014,~~2020, primarily due to ~~an decrease in payment handing fee.~~the increases of revenue from cloud computing and subscription service, both of which had improved gross margin.

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Operating expenses. Our operating expenses ~~increased~~decreased by ~~38.8%~~18.0% from US$~~50.3~~137.2 million in ~~2013~~2019 to US$~~69.7~~112.5 million in ~~2014,~~2020, primarily due to (i) decreased office lease expenses as a result of an ~~increase~~early termination of ~~staff~~certain office sites in an effort to streamline our operations; (ii) a decrease in labor cost as a result of optimization of organizational structure, benefits and compensation, ~~expenses, including share-based compensation.~~

and (iii) a decreased number of marketing and promotional activities as we prudently monitored the return on investment of our marketing campaigns.

Research and development expenses. Our research and development expenses ~~increased~~decreased by ~~34.6%~~19.1% from US$~~21.7~~68.6 million in ~~2013~~2019 to US$~~29.3~~55.5 million in ~~2014. The increase in our research and development expenses was~~2020, primarily due to the ~~rise in staff compensation expenses, both due to an increase in headcount~~optimization of organizational structure, employee benefits and ~~an increase in average salary and bonus levels.~~

compensation.

Sales and marketing expenses. Our sales and marketing expenses ~~increased~~decreased by ~~37.4%~~43.2% from US$~~9.8~~31.8 million in ~~2013~~2019 to US$~~13.5~~18.1 million in ~~2014. The increase in our sales and marketing expenses was~~2020, primarily due to ~~our increased spending on~~fewer marketing and ~~promotion.~~

promotional activities and the optimization of organizational structure, benefits and compensation.

General and administrative expenses. Our general and administrative expenses ~~increased~~decreased by ~~44.4%~~12.9% from US$~~18.7~~38.9 million in ~~2013~~2019 to US$~~26.9~~33.9 million in ~~2014. The increase in our general and administrative expenses was~~2020, primarily due to ~~an increase in staff compensation~~decreased rental expenses ~~including share-based compensation, both due to an increase in headcount~~as a result of consolidation of offices, decreased legal and ~~an increase in average salary~~professional fees and ~~bonus levels.~~the optimization of organizational structure.

~~Interest income~~Asset impairment loss, net of recoveries. ~~. Our interest income increased by 466.3% from~~We recorded a credit balance of US$~~1.2~~5.1 million in ~~2013~~2020, compared to US$~~6.7~~2.1 million in ~~2014. The~~2019, the increase was primarily due to ~~an increase~~a one-time write-off of certain receivables and prepayments in ~~cash held~~relation to our cloud computing business during the year.

Interest income. Our interest income decreased by 22.5% from US$1.9 million in ~~the form~~2019 to US$1.5 million in 2020, primarily due to a decrease of ~~interest-bearing~~time deposits in our bank ~~deposits representing net proceeds received from series E financing and our initial public offering in June 2014.~~account.

Interest expense. ~~We did not have any~~Our interest expense ~~2013 but had an interest expense of~~increased from US$~~0.2~~0.1 million in ~~2014, which represented~~2019 to US$0.4 million in 2020, primarily because increased interest ~~expenses~~was accrued for the long-term payables to certain shareholders ~~resulting~~arising from the repurchase of shares in 2014.

Other income, net. Our other income ~~increased~~decreased by ~~198.5%~~19.2% from US$5.9 million in 2019 to US$4.7 million in 2020, primarily because we recorded a gain of US$6.6 million in 2019 for the disposal of LinkToken related assets and liabilities and we did not have such gain in 2020. Other reasons for the decrease were primarily attributable to impairment of long-term investments recognized in 2019 while we did not have such impairment of long-term investments in 2020.

Income tax expense. Our income tax expense decreased from US$4.7 million in ~~2013~~2019 to US$~~14.0~~1.1 million in ~~2014,~~2020 primarily ~~due to an increase~~because we had a write-down of ~~US$6.5 million~~Shenzhen Xunlei’s deferred tax assets in ~~fair value changes~~2019 but did not have such write-down of ~~warrants liabilities resulting from expiration of series E warrants upon our initial public offering, and an increase of US$1.6 million~~deferred tax assets in ~~investment income from short-term investments and an increase of US$0.8 million in subsidy income.~~2020.

~~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)~~loss from continuing operations. As a result of the above, our net loss decreased from US$53.4 million in 2019 to US$14.1 million in 2020.

Net loss attributable to Xunlei Limited. As a result of the above, we generated a net ~~income~~loss attributable to Xunlei Limited of US$~~23.0~~53.2 million in ~~2013 but~~2019 and of US$13.8 million in 2020.

Year ended December 31, 2019 compared with year ended December 31, 2018.

Revenues. Our revenues decreased by 21.9% from US$232.1 million in 2018 to US$181.3 million in 2019, primarily due to decreases of revenues from OneThing Cloud hardware sales, online advertising services and live streaming services.

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Service revenue. Our service revenue decreased by 2.6% from US$177.5 million in 2018 to US$173.0 million in 2019, primarily due to a decreased demand for our online advertising services.

●

Our revenue from subscription services decreased by 0.4% from US$81.9 million in 2018 to US$81.5 million in 2019, primarily due to a decline in average revenue per subscriber.

●

Our online advertising revenues decreased by 43.7% from US$27.8 million in 2018 to US$15.6 million in 2019, primarily due to a decreased demand for our online advertising services mainly by the mobile gaming industry in 2019.

●

Revenues derived from cloud computing and other internet value-added services increased by 11.7% from US$67.9 million in 2018 to US$75.8 million in 2019, primarily due to an increase in demand for our shared cloud computing service.

Product revenue. Our product revenue decreased by 84.9% from US$54.6 million in 2018 to US$8.3 million in 2019, primarily due to a decrease in sales of OneThing Cloud product as we gradually phased out promotional activities for the OneThing Cloud and a decreased demand for OneThing Cloud from individual users.

Cost of revenues. Our cost of revenues decreased by 13.6% from US$115.7 million in 2018 to US$99.9 million in 2019, primarily attributable to a decline in cost of inventories sold as a result of decreased demand for our OneThing Cloud hardware and reduced revenue sharing costs of live streaming service.

Bandwidth costs. Our bandwidth costs increased by 18.7% from US$48.1 million in 2018 to US$57.1 million in 2019, primarily due to an increased capacity of our shared cloud computing.

Cost of inventories sold. Our cost of inventories sold decreased by 77.3% from US$31.6 million in 2018 to US$7.2 million in 2019, primarily due to a decrease in sale of OneThing Cloud as we gradually phased out promotional activities for the OneThing Cloud product and a decreased demand for the OneThing Cloud from individual users.

Cost of live streaming. Our cost of live streaming services decreased by 13.4% from US$23.9 million in 2018 to US$20.7 million in 2019, primarily due to a decline in revenue-sharing costs as a result of a decrease in our live streaming revenues.

Depreciation of servers and other equipment. Depreciation of servers and other equipment increased by 3.7% from US$5.0 million in 2018 to US$5.2 million in 2019, primarily due to an increase in depreciation of our shared cloud computing servers that we installed to our newly established distributed edge computing node rooms across China this year.

Payment handling charges. Our payment handling charges decreased by 45.0% from US$3.0 million in 2018 to US$1.7 million in 2019, primarily because we cooperated with more third-party payment service providers that charged lower service fees.

Other costs. These costs increased by 103.6% from US$4.0 million in 2018 to US$8.0 million in 2019, primarily due to a write-down of our inventory for OneThing Cloud hardware device in an amount of US$3.2 million based on our inventory impairment assessment.

Gross profit. As a result of the above, our gross profit decreased by 29.7% from US$114.9 million in 2018 to US$80.8 million in 2019.

Gross profit margin decreased from 49.5% in 2018 to 44.5% in 2019, primarily due to a decrease in Onething Cloud hardware sales and a lower level of online advertising revenues generated this year.

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Operating expenses. Our operating expenses decreased by 13.9% from US$159.3 million in 2018 to US$137.2 million in 2019, primarily due to (i) a decrease in technical services fee we incurred arising from collecting idle bandwidth from individual users due to the improvement of own technology and the increased bandwidth capacity we collected from Onething Cloud users, (ii) a decrease in labor cost as a result of our optimization of organizational structure, benefits and compensation, and (iii) a decreased number of marketing and promotional activities as we gradually phased out our promotion activities for Onething Cloud hardware.

Research and development expenses. Our research and development expenses decreased by 10.7% from US$76.8 million in 2018 to US$68.6 million in 2019, primarily due to our optimization of organizational structure, employee benefits and compensation.

Sales and marketing expenses. Our sales and marketing expenses decreased by 9.9% from US$35.3 million in 2018 to US$31.8 million in 2019, primarily due to a gradually decreased marketing and promotional activities during this year for the sales of OneThing Cloud hardware device.

General and administrative expenses. Our general and administrative expenses decreased by 4.7% from US$40.8 million in 2018 to US$38.9 million in 2019, primarily because we incurred less legal and consulting expenses as we were involved in less copyright lawsuits.

Asset impairment loss, net of recoveries. We recorded a credit balance of US$2.1 million in 2019, compared to an asset impairment loss of US$~~28.3~~6.3 million in 2018. The balance in 2019 represented a net recovery of the last installment of Xunlei Kankan purchase price which we impaired in 2017. The balance in 2018 represented receivables that were written-off after impairment and recoverability assessment, net of recovered amount of impaired assets.

Interest income. Our interest income increased by 60.4% from US$1.2 million in 2018 to US$1.9 million in 2019, primarily due to an increase in the balance of time deposits in our bank account.

Interest expense. Our interest expense decreased slightly from US$0.2 million in 2018 to US$0.1 million in 2019, primarily because less interest was accrued for the long-term payables to certain shareholders arising from the repurchase of shares in 2014.

Other income, net. Our other income increased by 108.6% from US$2.8 million in 2018 to US$5.9 million in 2019, primarily because we recorded a gain of approximately US$6.6 million on the disposal of LinkToken operations and its related assets and liabilities.

Income tax benefit. We recorded an income tax expense of US$4.7 million in 2019, as compared to an income tax benefit of US$0.1 million in 2018. We recorded an income tax expense in 2019 primarily due to a write-down of Shenzhen Xunlei’s deferred tax assets of US$7.4 million after our assessment based on a five-year profit forecast.

Net loss from continuing operations. As a result of the above, our net loss increased from US$40.8 million in 2018 to US$53.4 million in 2019.

Net income from discontinued operations. ~~Loss~~Net income from discontinued operations was US$~~12.6~~1.3 million in ~~2013~~2018 and ~~US$18.4 million~~nil in ~~2014.~~2019.

Net ~~income~~loss attributable to Xunlei Limited. As a result of the above, we generated a net ~~income~~loss attributable to Xunlei Limited of US$~~10.7~~39.3 million and US$53.2 million in ~~2013~~2018 and ~~US$10.8 million in 2014.~~2019, respectively.

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Inflation

~~Inflation~~To date, inflation in China has not materially 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~~2018, 2019 and ~~2015~~2020 were increases of ~~2.5%~~2.1%, ~~1.5%~~4.5% and ~~1.6%~~2.5%, respectively. Although we have not been materially affected by inflation in the past, we ~~may~~can provide no assurance that we will not 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~~the amounts reported in the accompanying consolidated financial statements and ~~liabilities, contingent assets and liabilities and revenues and expenses.~~related disclosures. We regularly evaluate these estimates ~~and assumptions~~ based on ~~the most recently available information, our own~~ historical experiences and on various other ~~factors~~assumptions that we believe to be ~~relevant under~~reasonable, the ~~circumstances. Since our financial reporting process inherently relies on~~result of which form the ~~use~~basis for making judgments about the carrying values of ~~estimates~~assets and ~~assumptions, our actual~~liabilities. 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.

Revenue recognition

Subscription revenues

We operate a VIP subscription program where VIP subscribers can have access to high speed online acceleration services, online streaming 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.~~subscribers. 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 subscription fees is initially recorded as ~~deferred~~contract liabilities. We satisfy our various performance obligations by providing services throughout the subscription period and revenue ~~and revenues are~~is 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~~a long-term liability. We evaluated the principal versus agent criteria and determined that we are the principal in the transaction and accordingly record ~~revenues~~revenue on a gross basis. In determining whether to report revenues gross for the amount of subscription ~~revenues,~~revenue, we ~~assesses~~assess 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~~Service fees levied by online system, fixed phone line and mobile payment channels (“Payment handling charges”) are recorded as the cost of revenues in the same period as the ~~revenues~~revenue for the subscription fee ~~are~~is recognized.

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~~It includes multiple performance obligations, primarily for advertisements to be displayed in different spots at different times, placed under different formats ~~include~~including but are not limited to videos, banners, links, logos and buttons.

Advertisements on our 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. 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 generally billed at the end of the display period and payments are due usually within three months.

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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~~straight-line basis over the contract period.

~~Transactions with third-party advertising agencies~~

(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~~

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.

display.

We provide sales incentives in the forms of discounts and rebates to ~~third party~~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~~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 ~~amount~~volume 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.

~~Transactions with advertisers~~

(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.

~~Other internet value-added services~~

~~(1)~~

~~Online game revenues~~

~~Users play games through our platform free of charge~~We estimated 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 accessiblerecorded sales rebates provided to the ~~users’ account over~~agencies and advertisers of US$394,000 for the ~~life~~year ended December 31, 2018, and nil for the years ended December 31, 2019 and 2020, respectively.

(c) Transactions with advertising platforms

We also cooperate with advertising platforms such as Guangdiantong and Baidu, of which, 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.

~~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, andadvertising platforms are responsible for ~~maintaining~~matching the requirements of advertisers or advertising agencies and ~~upgrading~~dispatching the ~~game~~advertising content ~~and virtual items. Accordingly, we record online game revenues, net of~~to our platforms by certain analysis systematically. As the ~~portion remitted to the game developers.~~

~~Given that online games~~advertising platforms 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~~viewed as ~~such change results from new information indicating a change~~customers in ~~the game player behavioral patterns.~~

~~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 arethese transactions, revenue is 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~~monthly 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 publicized on the platforms and pre-agreed sharing portion.

In May 2020, we entered into a user traffic monetization agreement with Beijing Itui Technology Co., Ltd. (“Beijing Itui”), a company controlled by the Company’s principal shareholder. Since May 2020, Beijing Itui has been handling all of ~~those users who have purchased virtual items~~our advertising resources, including matching the requirements of advertisers and dispatching the advertising content to our platforms. Beijing Itui is ~~made on a game-by-game basis.~~

~~To estimate~~viewed as the ~~date the user plays the game for the last time, we selected all paying users that logged on during a particular month~~customer and ~~continue to track these users’ log-on behaviors over at least a six-month period to determine if each user~~revenue is ~~“active” or “inactive,” which is determined~~recognized monthly 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 dependingdata publicized on the ~~games.~~platforms and pre-agreed sharing portion.

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.

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 videoLive 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~~

revenue

We operate a ~~pay per~~live streaming platform where users can access the platform, view ~~program in~~the live streaming content provided by our performers, and purchase virtual gifts which ~~subscribers pay a monthly fee~~they can grant to ~~watch and access a collection of movie contents. The subscription fee is time-based and is collected up-front from subscribers except~~performers in the ~~cases where they elect~~live streaming platform to ~~pay via~~show support for their ~~mobile operators. The subscription fee~~favorite performers. We are the principal in the provision of the live streaming content and experience, which is ~~collected~~considered as the performance obligation of us. We recognized revenue from sales of virtual gifts to the viewers when the ~~subscribers pay for their monthly phone fees. The terms of time-based subscriptions range from one month~~relevant virtual gifts are presented 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~~performers or over the duration of stated 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~~time-based item. We do not have further obligations to the ~~viewers.~~viewers after the virtual gifts are consumed immediately or after the stated period for time-based items. although we will continue to provide the live streaming content to the viewers in order to continue to generate more sales of virtual gifts.

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Cloud computing and other internet value-added services

~~(4)~~

~~Revenues from Cloud Computing~~

(a) Revenues from cloud computing

~~We launched Project Crystal,~~As part of our cloud computing ~~uplink capacity crowdsourcing project~~business, we engage in ~~2014.~~sale of OneThing Cloud. OneThing Cloud is a personal cloud hardware device that allows users to share their idle bandwidth with us, in exchange for LinkTokens. LinkTokens are not convertible into cash but they can be used to redeem for products and services offered in the LinkToken Mall. LinkTokens represent an obligation to deliver future services by the operator of LinkToken program.

Prior to April 1, 2019, the bandwidth shared by the users in exchange for LinkTokens was an identifiable benefit which we could reasonably estimate its fair value. The benefit that we received from user’s contribution of bandwidth was independent from OneThing Cloud that we sold to users.

In April 2019, we transferred the operation of LinkTokens, including the issuance and redemption obligation of LinkTokens, as well as the LinkTokens Mall to a third party, Beijing LinkChain Co., Ltd. (“Beijing LinkChain”). Upon completion of the transfer, users could continue to share their idle bandwidth with us in exchange for the LinkTokens issued by Hainan LinkChain Networking Technology Co., Ltd. (“Hainan LinkChain”), a wholly owned subsidiary of Beijing LinkChain. In addition, we were obligated to pay to Hainan LinkChain a pre-determined amount per active user of OneThing Cloud who shared their idle bandwidth with us. This arrangement expired in April 2020.

We primarily sold OneThing Cloud to individuals through online e-commerce platforms before 2019 and to corporate customers starting from 2019, and the performance obligation 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.

satisfied when the item is dispatched to the end customers.

The core ~~principle~~business concept of cloud computing is to collect idle uplink capacity from individuals with ~~compensation,~~reward, and ~~we target to commercialize~~deliver those collected computing resources to online video ~~streamers, app stores and other third parties.~~streaming platforms. On a monthly basis, we record the ~~capacity that~~bandwidth we deliver and recognize revenue from these online video streamers under contractual rates ~~applied.~~applied (price per GB of bandwidth multiplies total GBs of bandwidth per month).

~~(5)~~

~~Revenues from ZQB~~

~~As part~~Revenue is recognized net of ~~our cloud computing services, since~~return allowances when the ~~second quarter of 2015, we began~~products are delivered and title passes to ~~sell ZQB, a hardware~~customers. Return allowances, which ~~could work as a micro-computer~~reduce net revenues, are estimated based on ~~Linux system. Revenue~~historical experiences. Product warranties are estimated and recognized at the time we recognize revenue. The warranty period is one year. We accrue warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs.

(b) Online game revenues

Since 2018, we discontinued its web game business and started to operate web game business again under a co-operation model with third party games operators in 2019.

Web games – cooperating with third parties

We enter into a series of technical cooperation agreements with third party online game operators. Users access to our platform and purchase in-game virtual items which can then be used in games provided by the third-party online game operators. We provide the third-party online game operators with a portal which the online game operators can host the online games. We charge the online game operators based on a pre-determined portion of proceeds earned from paying users pursuant to the revenue sharing arrangements for the provision of portal and payment collection service to the online game operators. The third-party online game operators are the principal in the provision of games to users and we provide the relevant platform to the game operators, therefore, the game operators are viewed as the customers in these transactions.

The service fees receivable from the ~~sale of ZQB is~~third-party online game operators are variable, which are contingent upon future events (future cash proceeds paid by game players), and are recognized when the ~~item~~contingency is ~~dispatched to customers.~~met provided that collectability is reasonably assured.

~~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~~Table 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.Contents

Share-based ~~compensation~~

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~~Note 20 to our audited consolidated financial statements for the years ended December 31, ~~2013, 2014~~2018, 2019 and ~~2015.~~2020.

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 determinedWe measure share-based compensation at the ~~time of grants. All options are measured~~grant date based on the fair value of the award ondetermined using the ~~grant date~~Black Scholes option pricing model. As we have granted share options and ~~recognized as~~restricted shares with service only condition, we elected to recognize compensation ~~expenses based on the straight-line vesting method,~~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 ~~following table sets forth~~amount of compensation cost recognized at any date is at least equal to the ~~options granted that were outstanding as~~portion of ~~December 31, 2015:~~

Date of Option Grant
Options
outstanding Exercise price
(US$) Fair value of
options
(US$) Fair value of
common shares
(US$)
prior to 2012 8,618,325 — — —
March 1, 2012 75,615 0.01-3.97 1.01-2.82 2.83
August 1, 2012 7,917 3.97 1.10 3.01
March 1, 2013 7,292 3.97 1.17 3.20
August 1, 2013 267,500 3.97 1.13 3.23
November 18, 2013 366,761 2.11–3.97 0.99–1.60 3.15
March 5, 2014 52,000 3.97 0.89 3.06
June 24, 2014 512,642 2.11 1.43 2.98
September 5, 2014 32,233 3.97 0.62-0.66 2.67
January 1, 2015 473,500
0.08-3.30

0.76-1.38
1.46
Total 2,130,820

~~We estimate~~ the ~~fair value of share options granted using the Black-Scholes option pricing model. The key assumptions used to determine the fair~~grant-date value of the ~~options~~award that is vested at ~~the relevant grant dates were as follows:~~

For the Year Ended December 31,
2013 2014 2015
Risk-free interest rate (1) 0.77% to 1.76% 0.77% to 1.76% 0.77% to 1.76%
Dividend yield (2) — — —
Volatility rate (3) 43.8% to 51.3% 40.07% to 43.3% 40.07% to 43.3%
Expected term (in years) (4) 4.58 4.13 to 4.58 4.07 to 5.57

~~Notes:~~

~~(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;~~

~~(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:~~

For the Year Ended December 31,
(In thousands of US$) 2013 2014 2015
Sales and marketing expenses 43 66 131
General and administrative expenses 1,080 6,407 6,701
Research and development expenses 973 1,171 2,896
Total 2,096 7,644 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.

~~The following table sets forth the fair values of our common shares estimated from 2013 through the date of this annual report:~~

~~Date~~	~~Fair Value~~ ~~of common shares~~ ~~(per share)~~		~~Type of~~ ~~methodology~~	~~Type of valuation~~	~~Purpose of valuation~~
~~March 1, 2013~~		~~3.20~~	~~Income approach~~	~~Contemporaneous~~	~~Valuation of ESOP~~
~~August 1, 2013~~		~~3.23~~	~~Income approach~~	~~Contemporaneous~~	~~Valuation of ESOP~~
~~November 18, 2013~~		~~3.15~~	~~Income approach~~	~~Contemporaneous~~	~~Valuation of ESOP (including restricted shares)~~
~~December 31, 2013~~		~~3.14~~	~~Income approach~~	~~Contemporaneous~~	~~Valuation of ESOP (including restricted shares)~~
~~March 5, 2014~~		~~3.06~~	~~Income approach~~	~~Contemporaneous~~	~~Series E valuation and valuation of ESOP (including restricted shares)~~
~~March 31, 2014~~		~~3.06~~	~~Income approach~~	~~Contemporaneous~~	~~Valuation of ESOP (including restricted shares)~~
~~June 9, 2014~~		~~3.30~~	~~Income approach~~	~~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;

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.

~~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.

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.

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:~~

February 6,
2012 December 31,
2012 December 31,
2013 February 6,
2014 March 1,
2014
Spot price⁽¹⁾ 3.66 4.48 4.36 4.47 4.47
Risk-free interest rate⁽²⁾ 0.23 % 0.15 % 0.05 % 0 %* 0 %*
Volatility rate⁽³⁾ 47.3 % 41.2 % 30.33 % 0 %* 0 %*
Dividend yield⁽⁴⁾ — — — — —

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.

~~The major assumptions used in calculating the fair value of the series E warrants includes:~~

		~~March 5, 2014~~
~~Spot price~~⁽¹⁾		~~3.31 - 4.65~~
~~Risk-free interest rate~~⁽²⁾		~~0.04% - 0.12%~~
~~Volatility rate~~⁽³⁾		~~38.39% - 38.81%~~
~~Dividend yield~~⁽⁴⁾		—

~~(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.

~~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 IPO Scenario Liquidation
Scenario Redemption
Scenario
Expected Maturity Date Jun 30, 2014 Jun 30, 2014 Feb 28, 2018
Expected Volatility (1) 38.39 % 38.39 % 43.40 %
Risk-free interest rate (2) 0.06 % 0.06 % 1.18 %
Expected dividend yield — — —
Probability (3) 80.00 % 10.00 % 10.00 %

Valuation as of April 24, 2014 IPO Scenario Liquidation
Scenario Redemption
Scenario
Expected Maturity Date Jun 30, 2014 Jun 30, 2014 Feb 28, 2018
Expected Volatility (1) 43.10 % 43.10 % 44.03 %
Risk-free interest rate (2) 0.02 % 0.02 % 1.29 %
Expected dividend yield — — —
Probability (3) 80.00 % 10.00 % 10.00 %

~~Notes:~~

~~(1)~~

~~(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.~~

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.

~~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:~~

		~~March 5, 2014~~
~~Spot price~~⁽¹⁾		~~4.50 - 4.65~~
~~Risk-free interest rate~~⁽²⁾		~~0.12%~~
~~Volatility rate~~⁽³⁾		~~38.81%~~
~~Dividend yield~~⁽⁴⁾		—

~~(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.

~~The major assumptions used in calculating the fair value of the subscription rights includes:~~

March 5, 2014 April 24, 2014
Spot price⁽¹⁾ 3.31 - 4.65 3.39 - 4.64
Risk-free interest rate⁽²⁾ 0.04% 0.02%
Volatility rate⁽³⁾ 38.12% 42.74%
Dividend yield⁽⁴⁾ — —

~~(1)~~

~~(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.~~

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.

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.

Long-lived Assets

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.

Impairment of Goodwill

~~In 2013, indicator~~Goodwill represents the excess of ~~possible impairment was triggered by~~ the ~~significant decline~~purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from the acquired entity as a result of the Company’s acquisitions of interests 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 assumptionsits subsidiaries and ~~estimates regarding economic and future profitability. In 2013, this online game license had been provided~~consolidated VIEs. Goodwill is not amortized but is tested 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~~more frequently if events or changes in circumstances indicate that ~~the carrying value of the asset may not~~it might be ~~recoverable. According to ASC 350-20-35, an entity may~~impaired. We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not ~~(that is, a likelihood of more than 50 percent)~~ that the fair value of aeach reporting unit is less than ~~its~~the carrying amount, ~~including goodwill. But we select to proceed directly to perform a~~the quantitative impairment test is performed.

In performing the two-step ~~goodwill~~quantitative impairment ~~test. The~~test, the first step compares the fair values of aeach reporting unit to its carrying amount, including goodwill. If the fair value of aeach reporting unit exceeds its carrying amount, goodwill is not considered to be 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~~a reporting unit’s 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 the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. AnApplication of a goodwill impairment ~~loss is recognized for any excess in~~test requires significant management judgment, including the ~~carrying value~~identification of reporting units, allocation of assets, liabilities and goodwill ~~over~~to reporting units, and determination of the ~~implied~~ fair value of ~~goodwill. The judgment~~each reporting unit.

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Starting in ~~estimating~~2020, we adopted the FASB issued ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (the “Update”). To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit ~~includes estimating future cash flows, determining appropriate discount rates~~with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and ~~making other assumptions. Changes~~reason for the change in ~~these estimates and assumptions could materially affect~~accounting principle upon transition. It is more likely that, by adopting simplified measurement which eliminates the ~~determination of~~Step 2 from goodwill impairment test, an entity with the triggering event for goodwill impairment will recognize more goodwill impairment than it would do under the old model.

Our goodwill was attributable to the Company as a whole. The impairment test for goodwill determines the fair value of the reporting unit, the Company as a whole, and compares it to the carrying value of the assets and liabilities, including goodwill, of the reporting unit. The fair value of the Company was estimated by management using the discounted cash flow model derived from the long-term (five-year) cash flow projections, which included significant judgements and assumptions relating to revenue forecast and operating margins, discount rate of 18.2% that reflects market assessments of the time value and the specific risks relating to the Company, and cash flows beyond the five-year period are extrapolated using a terminal growth rate of 2%.

No goodwill impairment losses were recognized for the year ended December 31, ~~2015. However, if we continue to incur losses, we may face an~~2018, 2019 and 2020 based on the impairment ~~of goodwill.~~

test performed by us.

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.

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Management has evaluated the contractual arrangements among ~~Giganology~~(Giganology Shenzhen, Shenzhen Xunlei and its shareholders and concluded that ~~Giganology~~(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~~Note 29 to our audited consolidated financial statements for the years ended December 31, ~~2013, 2014~~2018, 2019 and ~~2015.~~

~~Business combinations~~

~~We account for acquisitions of entities that include inputs and processes and have~~2020. Non-controlling interests represent the ~~ability to generate economic benefit as business combinations. We allocate the purchase price~~portion of the ~~acquisition~~net assets of a subsidiary attributable to interests that are not owned by our company. The non-controlling interests are presented in the consolidated balance sheets, separately from equity attributable to the ~~tangible assets and identifiable intangible assets acquired based~~shareholders of our company. Non-controlling interests in the results of our company is presented on ~~their estimated fair values. The excess~~the face of the ~~purchase price over those fair values is~~consolidated statements of comprehensive income as an allocation of the total income or loss for the year between non-controlling shareholders and the shareholders of our company.

Allowance for expected credit losses

Effective on January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326) under a modified retrospective transition, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost with the cumulative-effect adjustment recognized to the opening balance of accumulated deficit of the Group as of January 1, 2020. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, referred to as a current expected credit losses (“CECL”) methodology, which will result in more timely recognition of credit losses. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be 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~~it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses. Our accounts receivable, due from related parties, other current assets (including other receivables) and other long-term non-current assets (including other long-term receivables) are ~~rendered and continuously monitor~~within the ~~recoverability~~scope of ASC Topic 326.

We assessed the credit loss for accounts ~~receivable. We use specific identification method in providing~~receivable with similar risk characteristics on a pool basis. The credit loss assessment 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 iseach pool was mainly based on ~~the best facts available~~past collection experience, consideration of current and ~~is re-evaluated~~future economic conditions 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.~~

collection trends.

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 year7.6 million as of December 31, ~~2013, 2014~~2019 and ~~2015.~~

US$9.3 million as of December 31, 2020.

Taxation and ~~uncertain tax positions~~

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~~judgments and estimates. Based on ~~management's~~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.~~dates.

~~On January 1, 2008, we~~We adopted the guidance regarding uncertain tax ~~positions. Management evaluates~~positions and evaluated 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.

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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~~

PRC value-added tax

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. In addition to the product revenues currently subject to VAT at a rate of 13% (17% before May 1, 2018 and ~~penalties were recorded in the years ended December 31, 2013, 2014~~16% before April 1, 2019), our advertising revenues, subscription revenue, online game revenue, revenue from cloud computing and ~~2015.~~

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live streaming revenue are now subject to VAT at a rate of 6%.

Commitments and ~~contingencies~~

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~~regard to legal cost, we recorded such costs as incurred.

Certain conditions may exist as of the date of ~~this annual report,~~the financial statements are issued, which may result in a loss to us, ~~and such loss~~but which 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~~in consultation 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~~We are involved in a number of cases pending in various courts. These cases are substantially related to alleged copyright infringement and ~~Disclosures~~routine and incidental matters to its business, among others. Adverse results in these lawsuits may include awards of ~~Disposals of Components of an Entity”,~~damages and may also result in, or even compel, a change in our business practices, 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 andcould impact our future financial results.~~” The standard~~ We have incurred US$4.7 million, US$2.0 million and US$1.2 million legal and litigation related expenses for the years ended December 31, 2018, 2019 and 2020, respectively.

As of the date of this annual report, we have 16 lawsuits pending against us with an aggregate amount of claimed damages of approximately RMB13.3 million (US$1.9 million) which occurred before December 31, 2020. Among these 16 pending lawsuits, 13 of them were relating to the alleged copyright infringement in the PRC. We have accrued for US$1.6 million litigation related expenses in “Accrued expenses and other liabilities” in the consolidated balance sheet as of December 31, 2020, which is ~~required~~the most probable and reasonably estimable outcome.

We estimated the litigation compensation based on judgments handed down by the court, out-of-court settlements of similar cases as well as advices from our legal counsel. We are 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, we do not expect that the outcome of these 16 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 we 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 ~~adopted by public business entities~~remote, if one or more of these legal matters were resolved against us in ~~annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the guidance~~a reporting period for ~~new disposals. The adoption~~amounts in excess of ~~this pronouncement does not have a significant impact on~~management’s expectations, 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 effectivestatements 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 vestingperiod 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~~materially adversely affected.

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Table of ~~the period in which a performance target could be achieved~~Contents

Recent Accounting Pronouncements

See Item 18 of Part III, “Financial Statements—Note 2—Summary of significant accounting policies—Recent accounting pronouncements.”

B.Liquidity 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.Capital Resources

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.

~~Liquidity and Capital Resources~~

~~To date, we~~ have financed our operations primarily ~~through~~by using our existing internal cash ~~generated from operations~~reserves and ~~to a lesser extent, proceeds from private placements of preferred shares to investors, and net proceeds received from our initial public offering.~~borrowing bank loans. As of December 31, ~~2015,~~2020, we had US$~~432.1~~255.1 million in cash and cash equivalents and short-term investments. As of the same date, we ~~did not have any~~also had US$1.5 million restricted cash, which represents cash deposited in a bank account due to legal or contractual restrictions, and US$19.9 million outstanding bank ~~loans.~~loans for the construction of our headquarters building.

~~We historically generated a significant portion~~In respect of our revenues from customers in the advertising ~~industry. Although our~~industry, although the general credit term for ~~our~~these 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~~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,~~2020, 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.~~168.5 million.

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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~~making loans to our PRC subsidiaries and variable interest entity and its subsidiaries or ~~to make~~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.” 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.~~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.

However, if the impact of the COVID-19 on the economy becomes prolonged and greater than expected, our supplies may be disrupted, our customers may reduce their demand for our products and services, and banks may demand us to repay bank loans before their maturity. Our liquidity and capital resources would be significantly affected if this were to happen. We will closely monitor the impact of the COVID-19 on the economy and on our company.

The following table sets forth a summary of our cash flows for the periods indicated:

For the Year Ended December 31,
(in thousands of US$) 2013 2014 2015
Net cash generated from operating activities 85,533 48,202 13,764
Net cash used in investing activities (78,352 ) (70,546 ) (54,982 )
Net cash generated from financing activities 2,487 333,268 5,030
Net increase/(decrease) in cash and cash equivalents 9,668 310,924 (36,188 )
Cash and cash equivalents at the beginning of year 81,906 93,906 404,275
Effect of exchange rates on cash and cash equivalents 2,332 (555 ) (6,310 )
Cash and cash equivalents at end of year 93,906 404,275 361,777


	For the Year Ended December 31,
	2018	2019	2020

	(in thousands of US$)
Net cash used in operating activities	(35,608)	(45,649)	(13,911)
Net cash (used in)/generated from investing activities	(69,357)	79,260	(20,756)
Net cash generated from financing activities	929	12,177	2,679
Net (decrease)/increase in cash, cash equivalents and restricted cash	(104,036)	45,788	(31,988)
Cash, cash equivalents and restricted cash at the beginning of year	233,479	122,930	165,488
Effect of exchange rates on cash, cash equivalents, and restricted cash	(6,513)	(3,270)	5,329
Cash, cash equivalents and restricted cash at end of year	122,930	165,448	138,789

As of December 31, ~~2015,~~2020, we had cash or cash equivalents, including restricted cash, of US$~~361.8~~138.8 million in total,including ~~RMB385.4~~RMB322.1 million (US$~~59.4~~49.4 million) and US$~~6.5~~30.7 million located within the PRC, of which ~~RMB210.5~~RMB99.7 million (US$~~32.4~~15.3 million) and US$0.5 million was held by our VIE, Shenzhen Xunlei, and its subsidiaries. We also had cash or cash equivalents of ~~RMB221.4~~RMB484.6 thousand (US$74.3 thousand), US$58.3 million, ~~(US$34.1 million), US$261.7~~HK$1.7 million (US$0.2 million) and ~~0.9~~THB2.1 million ~~Hong Kong dollars~~ (US$0.1 million) located outside of the PRC as of December 31, ~~2015.~~2020.

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Operating activities

Net cash ~~generated from~~used in operating activities amounted to ~~US$13.8~~US13.9 million in ~~2015,~~2020, which was primarily attributable to a net loss of US$~~14.5~~14.1 million, adjusted for certain non-cash expenses consisting principally of the depreciation of property and ~~amortization expenses~~equipment of US$~~17.8~~9.3 million, ~~share-based compensation~~impairment 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$1.1 million mainly attributable to the decrease in accrued payroll and employees benefit provision, and an decrease in prepaymentsprepayment and other current ~~assets~~accounts of US$~~3.2 million.~~

~~Net cash generated from operating activities amounted to US$48.2~~4.2 million, ~~in 2014, which was primarily attributable to a net income~~impairment of inventories 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$8.13.3 million, and a net change in working capital. The net change in working capital was primarily due to a decrease in accounts receivable ~~amounting to~~of US$~~4.7~~4.9 million, which was the settlement from customers before the year ended December 31, 2019, an increase in due from related parties of US$8.6 million, which was in line with the increase of advertising services revenues, a decrease ~~of our online advertising revenues, an increase~~ in ~~accrued liabilities and other~~accounts payable of ~~US$4.8~~US4.9 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.~~

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due to shorter payment term we made for our bandwidth purchases.

Net cash ~~generated from~~used in operating activities amounted to US$~~85.5~~45.6 million in ~~2013,~~2019, which was primarily attributable to a net ~~income~~loss of US$~~10.4~~53.4 million, adjusted for certain non-cash expenses consisting principally of the depreciation of property and ~~amortization expenses~~equipment of US$~~43.4~~5.8 million, share-based compensation of US$~~2.1~~5.4 million, impairment of long-term investments of US$19.8 million, and a net change in working capital. The net change in working capital was primarily due to an increase in accounts receivable of US$8.7 million, which was in line with the increase of cloud computing revenues, an increase in accounts payable of US$2.1 million, which was due to longer payment term we made for our bandwidth purchases, and a decrease in inventories of US$3.4 million, which was due to the sale of Onething Cloud hardware.

Net cash used in operating activities amounted to US$35.6 million in 2018, which was primarily attributable to a net loss of US$39.5 million, adjusted for certain non-cash expenses consisting principally of depreciation of property and equipment of US$5.6 million, allowance for doubtful accounts of US$7.7 million, share-based compensation of US$5.3 million, impairment of long-term investments of US$7.8 million, and a net change in working capital. The net change in working capital was primarily due to a decrease in accounts receivable ~~amounting to~~of US$~~13.7~~13.3 million, which was the settlement from customers before the year ended December 31, 2018, a decrease in accounts payable of US$27.7 million which was in line with the decrease ~~of our advertising revenues,~~in bandwidth cost, and an increase in ~~deferred revenue~~inventories of US$~~12.6~~10.2 million ~~as a result of increase~~which was in ~~our subscription fees prepaid by our subscribers, and~~line with the increase in ~~accounts payable of US$5.9 million primarily attributable to the increased procurement of bandwidth.~~

product sales.

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~~acquisition of long-term investments, payments to purchase short-term investments such as ~~equity interest~~treasury products, and acquisition of constructions in ~~limited partnerships that make venture capital investments on companies~~progress, which represents the construction cost in connection with ~~enterprise technologies, next generation hardware and related technologies.~~

our construction of Xunlei headquarters building.

Net cash used in investing activities amounted to US$~~55.0~~20.8 million in ~~2015,~~2020, primarily attributable to ~~the~~proceeds from disposal of short-term investments of US$167.4 million, which was partially offset by our purchase of short-term investments of US$~~222.2~~177.1 million.

Net cash generated from investing activities amounted to US$79.3 million ~~purchase~~in 2019, primarily attributable to proceeds from disposal of ~~intangible assets in the amount~~short-term investments of US$~~11.9~~450.7 million, which was partially offset by ~~proceeds from the sales and maturity~~our purchase of short-term investments ~~which amounted to~~of US$~~175.5~~355.3 million.

Net cash used in investing activities amounted to US$~~70.5~~69.4 million in ~~2014,~~2018, primarily attributable to ~~the~~proceeds from disposal of short-term investments US$223.7 million, which was partially offset by 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$341.8287.6 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$~~5.0~~2.7 million in ~~2015,~~2020, primarily attributable to ~~government grants received~~proceeds from bank borrowings of US$~~1.1~~7.8 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~~4.5 million.

Net cash generated from financing activities amounted to US$~~333.3~~12.2 million in ~~2014,~~2019, primarily attributable to proceeds from ~~our initial public offering in June 2014~~bank borrowings of US$~~93.9 million and our issuance~~11.3 million.

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Table 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.~~Contents

Net cash generated from financing activities amounted to US$~~2.5~~0.9 million in ~~2013 due to~~2018, mainly represented the proceeds from government ~~grants~~grant received.

Capital ~~Expenditures~~

expenditures

We made capital expenditures of US$~~7.4~~4.1 million, US$~~7.8~~14.7 million and US$~~13.8~~13.6 million in the years ended December 31, ~~2013, 2014~~2018, 2019 and ~~2015,~~2020, respectively. In the past, our capital expenditures were primarily used to purchase servers ~~and~~or other equipment for our ~~business. Our~~business and pay for construction in progress. We expect our capital expenditures ~~may~~to increase in the near term asalong with the growth of our ~~business continues to grow.~~business.

~~Research and Development~~

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,~~2020, we had a team of ~~452~~336 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.

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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~~	~~Primarily focuses on the development of our basic technologies to ensure that we use the most advanced transmission techniques to maintain our competitive advantage.~~

~~Application Engineering~~	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.~~

~~Trend Information~~

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~~2020 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.

~~Off-Balance Sheet Arrangements~~

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.

~~Contractual Obligations~~

F.Contractual Obligations

The following table sets forth our contractual obligations as of December 31, ~~2015:~~2020:


												Less than 1			More than 5
											Total	year	1-3 years	3-5 years	years
			Payment due by period
(in thousands of US$)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations⁽¹⁾		925		751		174		—		—
											(in thousands of US$)
Bandwidth lease obligations		25,680		15,715		9,965		—		—	3,794	3,388	406	—	—
Capital obligations		5,844		5,844		—		—		—	7,953	7,040	913	—	—
Total		32,449		22,310		10,139		—		—	11,747	10,428	1,319	—	—

~~(1)~~

~~Operating lease obligations are primarily related to the lease of office space. These leases expire on different dates.~~

As of December 31, ~~2015,~~2020, we had ~~irrevocable~~unconditional purchase obligations for ~~online game licenses~~switchboard, servers, office software and construction in process that had not been recognized in the amount of US$ ~~5.8~~7.6 million.

G.Safe Harbor

~~Safe Harbor~~

See ~~“Forward-Looking Statements.~~“Forward-looking Information.”

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~~Item 6.~~

~~Directors, Senior Management and Employees~~

Item 6.Directors, Senior Management and Employees

~~Directors and Senior Management~~

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	Age	Position/Title
~~Sean Shenglong Zou~~ Jinbo Li	44 45	~~Co-Founder,~~ Chairman and Chief Executive Officer
~~Hao Cheng~~ Sean Shenglong Zou	40 49	Co-Founder and Director
~~Qin Liu~~ Hao Cheng	43 45	Co-Founder and Director
~~Quan Zhou~~ Yubo Zhang	58 44	~~Director~~ President
~~Feng Hong~~ Raymond Weimin Luo	39 48	Director and Chief Operating Officer
~~Chuan Wang~~ Peng Shi	46 33	Director
~~Hongjiang Zhang~~ Hui Duan	55 41	Director
Jenny Wenjie Wu	41 46	Independent Director
~~Yongfu Yu~~ Ya Li	39 51	Independent Director
~~Lei Chen~~ Naijiang (Eric) Zhou	43 58	~~Co-Chief Executive Officer~~
~~Peng Huang~~	48	~~Chief Operating Officer~~
~~Tao Thomas Wu~~	50	Chief Financial Officer

Mr. Jinbo Li has been our chairman and chief executive officer since April 2020. Mr. Li is a successful serial entrepreneur with more than 20 years' experience in China's internet and technology industry. Mr. Li was part of Xunlei’s founding team and contributed to establishing and leading the core R&D team during the crucial early stage of Xunlei from 2004 to 2009. Mr. Li left Xunlei in January 2010 and acted as the chief executive officers of two internet ventures from 2010 to 2014. Mr. Li founded Itui International Inc., a company focusing on developing mobile applications for social networking services, in 2014 and acted as its chairman and chief executive officer since then. Mr. Li received his bachelor’s degree in 1998 from Shandong University in China and master’s degree in 2001 from Peking University in China.

Mr. Sean Shenglong Zou is one of our ~~co-founder~~co-founders and ~~has been~~served as our chief executive officer ~~and chairman since~~from our inception in February ~~2005.~~2005 to July 2017 and chairman of the board from our inception in February 2005 to December 2017. Mr. Zou currently serves as a director of our company. 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.~~United States 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 serving as a director of our ~~director~~company since our inception in February 2005. Mr. Hao Cheng currently also holds management positions in several of our subsidiaries. Mr. Cheng has worked at Ivision Ventures since January 2016. Prior to January 2016, Mr. Cheng served various management positions in several of our subsidiaries. For example, Mr. Cheng served as the ~~executive director~~general manager 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~~Yubo Zhang has been serving as our president since April 2020. Prior to rejoining us in April 2020, Mr. Zhang served as the chief executive officer of Beijing Nesound International Media Corp, Ltd., or Nesound, from ~~all executive positions~~April 2015 to April 2020. During his tenure at Nesound, Mr. Zhang combined the ~~company. He remains as~~respective advantages of live broadcasting and traditional film & television businesses and built a ~~member~~multifaceted platform incorporating self-produced exclusive contents, star development plans and Internet services. Mr. Zhang joined our company for the first time in August 2005 and was one of the ~~board of directors~~core founding members of our company. During his ten years with us, Mr. Zhang served various management positions including a senior vice president of our company and the president of a major subsidiary of our company from August 2005 to March 2015. Mr. Zhang received his bachelor’s degree in mechanical design and manufacturing from Jilin University of Technology in China in 1999.

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Mr. Raymond Weimin Luo has been serving as our chief operating officer and our director since April 2020. Mr. Luo has been an active entrepreneur and investor in China's internet industry since 2012. He was a managing partner at Hongtai Aplus Consumption Fund from 2018 to 2019, a venture partner at Morningside Capital from 2016 to 2018, and the chief executive officer of a supply chain company he founded from 2012 to 2016. Prior to that, Mr. Luo was the chief operating officer at Xunlei from 2006 to 2011. Mr. Luo received his bachelor’s degree in biological engineering from Jinan University in China in 1993.

Mr. ~~Qin Liu~~Peng Shi has been serving as a director of our company since ~~September 2005.~~April 2020. Mr. ~~Liu is~~Shi has also been serving as the president of product at Beijing Itui Technology Co., Ltd since March 2018. Prior to joing Beijing Itui, Mr. Shi served as the general manager at Qutoutiao Inc. Beijing branch from January 2018 to March 2018, the product director of Toutiao.com, a Chinese news and information content platform operated by Beijing Bytedance Technology Co., Ltd, from 2016 to 2017, the product vice president of Quanmin.tv, a live streaming platform operated by Shanghai Maimiao Information Technology Co., Ltd. from 2015 to 2016, the senior product officer of UCWeb Inc from May 2014 to June 2015, a senior product manager at Baidu, Inc. from April 2013 to May 2014, and a product manager at Qihoo 360 Technology Co., Ltd. from March 2010 to April 2013. Mr. Shi received his bachelor’s degree in software engineering from Beihai College of Beihang University in China in 2011.

Mr. Hui Duan has been serving as 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-listedour company since ~~June 2008, and~~April 2020. Mr. Duan currently also serves as ~~director in several non-public portfolio companies~~the chief technology officer of ~~the fund. From 2000 through 2008, Mr. Liu worked at Morningside IT Management Services (Shanghai)~~Beijing Itui Technology Co., Ltd. Prior to that, Mr. Duan founded his own company that provided HR SaaS products and ~~established its print media business~~services from October 2015 to 2017. From April 2008 to April 2015, Mr. Duan served various management positions at Xunlei including vice president and ~~served as publisher~~the chief executive officer of ~~The Bund, an upscale lifestyle weekly publication.~~a major subsidiary of Xunlei. Mr. ~~Liu~~Duan received ~~a master’s~~his bachelor’s degree in ~~business administration, or MBA,~~computer science from Peking University in 2001 and EMBA degree 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.

2015.

Ms. Jenny Wenjie Wu has ~~served~~been serving as our independent director since June 2014. Ms. Wu has also 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 servesserving as an independent non-executive director of Kingsoft Corporation Limited (3888.HK) since March 2013 and an independent non-executive director of BlueCity Holding Limited (NASDAQ: BLCT) since July 2020. Ms. Wu served as the chief investment officer of New Hope Group from ~~March 2013.~~November 2018 to February 2020. Prior to joining ~~Ctrip,~~New Hope Group, Ms. Wu was a founding and managing partner of Baidu Capital from November 2016 to November 2018. Ms. Wu successively served as the deputy chief financial officer, the chief financial officer, and the chief strategy officer at Trip.com Group Limited (NASDAQ: TCOM) from December 2011 to November 2016. 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 (0144.HK), 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~~master’s degree ~~in philosophy~~ in finance from the Hong Kong University of Science and Technology, and ~~both~~ a ~~Master’s~~master’s degree and a ~~Bachelor’s~~bachelor’s degree in economics from ~~Nan Kai~~Nankai University, China. Ms. Wu is a Chartered Financial Analyst (CFA).

since 2004.

Mr. ~~Yongfu Yu~~Ya Li has ~~served~~been serving as our independent director since ~~June 2014.~~March 2017. Mr. ~~Yu is~~Li founded Beijing Humanistic Intelligence Inc. in 2019 and currently ~~the president of Alibaba Group’s mobile internet division and Alimama since May 2015. Prior to current position, Mr. Yu was~~serves as the chief executive officer of ~~UCWeb Inc.,~~this company. Mr. Li currently is also a ~~provider of mobile internet software technology~~visiting research fellow and ~~services in China from the end of 2006~~master’s supervisor at Beijing University. From February 2015 to ~~May 2015. From 2001 to 2006,~~January 2019, Mr. ~~Yu worked at Legend Capital, a venture capital investment fund, focusing on the TMT industry. He~~Li 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.,~~Yidian Zixun. From May 2006 to September 2017, Mr. Li served successively as the chief operating officer, the chief financial officer, the president, and a ~~wholly owned subsidiary~~director of ~~Tencent~~Phoenix New Media (NYSE: FENG). From 2004 to 2006, Mr. Li served as the chief operating officer and the chief financial officer of Techedge Inc. From 2002 to 2006, Mr. Li served as the president of China Quantum Communications Inc. Mr. Li also served as directors for U.S. China Chamber of Commerce, Chinese Finance Society, National Council of Chinese Americans, and Council on U.S.-China Affairs from 1996 to 2005. Mr. Li holds an Executive MBA degree from the Wharton School at the University of Pennsylvania, a master degree in Computer Science from Temple University, and a bachelor degree in Control Systems Engineering from the University of Science & Technology of China.

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Mr. Naijiang (Eric) Zhou has been serving as our chief financial officer since September 2017. Mr. Zhou has twenty years of professional experience covering corporate finance, financial planning and analysis, domestic and international investment project due diligence, and mutual fund and private equity investment research and management in the U.S. and in China. Most recently, Mr. Zhou was an interim chief financial officer at ChinaCache International 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~~a Nasdaq-listed company. Mr. Zhou served as a senior vice president of ~~Tencent Cloud Computing (Beijing) Ltd.,~~ChinaCache from September 2015 to June 2016. From February 2010 to December 2014, he served as ~~manager~~the vice president of ~~Tencent’s cloud platform division~~finance and ~~deputy general manager of its open platform~~the chief financial officer at Sutor Technology Group Limited. Prior to that, Mr. Zhou served in various roles, including an executive vice president and ~~social advertising platform divisions.~~the chief financial officer at Richfield Investment Ltd., an equity research analyst at Roth Capital Partners, a principal financial planner at American Electric Power and a senior research analyst at U.S. Global Investors. Mr. ~~Chen also worked at Google and Microsoft before joining Tencent, creating data storage and e-commerce applications. Mr. Chen holds~~Zhou obtained a ~~bachelor of science~~bachelor’s degree with honors in ~~computer science and technology~~Petroleum Management Engineering from ~~Tsinghua~~China Petroleum University, and ~~a master’s degree~~an MBA in ~~computer science~~Finance and Ph.D. in Interdisciplinary Energy and Mineral Resources from the University of Texas at Austin.

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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~~Zhou is 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.CFA charter holder.

~~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.

~~Compensation~~

B.Compensation

For the fiscal year ended December 31, ~~2015,~~2020, we paid an aggregate of approximately US$1.9 million in cash to our executive officers, and we paid approximately US$~~12,000~~0.1 million in cash compensation to ~~two~~our non-executive directors. In addition, we paid approximately US$~~94,000~~0.3 million 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.~~Plan.” For restricted share grants outside the share incentive plan, see “—Share Incentive ~~Plans.~~Plan.”

Share Incentive ~~Plans~~Plan

~~We have adopted (i) a~~Our board of directors approved the termination of the 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,~~(the “Existing Plans”), and adopted a 2020 share incentive plan, or the ~~2014 Plan. The purpose~~2020 Plan, on June 30, 2020. Upon the termination of the ~~plans is to attract~~Existing Plans, the awards that are granted and ~~retain~~outstanding under the ~~best available personnel by linking~~Existing Plans and the ~~personal interests~~evidencing original award agreements shall survive the termination of the ~~members~~Existing Plans and remain effective and binding under the 2020 Plan, subject to any amendment and modification to the original award agreements that the Company shall determine. The restricted shares granted and outstanding under our 2013 share incentive plan and 2014 share incentive plan and held by Leading Advice Holding Limited on behalf of relevant grantees as of the ~~board, employees, and consultants to~~termination of the ~~success~~Existing Plans shall still be by Leading Advice Holding Limited on behalf of ~~our business and by providing such individuals with an incentive for outstanding performance to generate superior returns for our shareholders.~~

~~2010 Plan~~

those grantees under the 2020 Share Incentive Plan.

Under the 2020 Plan, the maximum aggregate number of common shares available for grant of awards is 31,000,000, consisting of (i) 13,805,945 common shares of the Company underlying the 2,761,189 American depositary shares the Company repurchased pursuant to the repurchase programs authorized by the Company in December 2014 and January 2016, (ii) 8,927,463 common shares of the Company reserved for issuance under the 2020 Plan, representing 8,927,463 common shares of the Company that were previously reserved under the Company’s 2010 share incentive plan but the corresponding share incentive awards had not been granted as of the termination of the Company’s 2010 share incentive plan, (iii) 7,871,564 common shares of the Company currently held by Leading Advice Holding Limited, the Company’s share incentive awards holding platform under the Company’s 2013 share incentive plan and 2014 share incentive plan, representing the amount of common shares of which the corresponding awards under the Company’s 2013 share incentive plan and 2014 share incentive plan had not been granted as of the termination of the Company’s 2013 share incentive plan and 2014 share incentive plan, and (iv) 395,028 common shares of the Company reserved for issuance under the 2020 Share Incentive Plan. Upon the termination of the Existing Plans and the adoption of the 2020 Plan, Leading Advice Holding Limited shall act as the holding platform of certain share incentive awards under the 2020 Share Incentive Plan and continue to hold 7,871,564 common shares of the ~~seventh amended and restated shareholders’ agreement dated as of April 24, 2014,~~Company under 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.~~ 2020 Plan.

As of March 31, ~~2016, options to purchase an aggregate number~~2021, 10,862,500 restricted share units had been granted and outstanding under the 2020 Plan. As of ~~2,097,410 common~~March 31, there were also 1,036,000 unvested restricted shares ~~were outstanding.~~

that survived the termination of our previous share incentive plans and remained outstanding under the 2020 Plan. The following paragraphs summarize the terms of the ~~2010~~2020 Plan.

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Types of awards.The ~~following briefly describe~~2020 Plan permits the ~~principal features~~awards of option, restricted share, restricted share unit or other types of award approved by the ~~various awards that may be granted under~~committee or the ~~2010 Plan.~~board.

~~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.

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~~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~~The 2020 Plan shall be administered by ~~our~~the 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 to whom the board shall delegate the authority to grant or amend awards to participants other than any of ~~directors (or a similar body) formed in accordance with applicable exchange rules. The plan administrator will determine~~ the ~~provisions~~compensation committee members and ~~terms and conditions of each grant.~~independent directors.

Award agreement.Options, restricted shares, or restricted share units granted under the ~~2010~~2020 Plan are evidenced by an award agreement that sets forth the terms, conditions, and limitations for each grant.

Option exercise price.The exercise price per share subject to an option shall be determined by the ~~plan administrators which may be a fixed or variable price related to~~compensation committee and set forth in the ~~fair market value of the subject of the grant.~~award agreement. The exercise price may be amended or adjusted in the absolute discretion of the ~~plan administrators,~~compensation committee, 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~~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.~~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.~~restrictions. Except as otherwise provided by the ~~plan administrators,~~committee or pursuant to the 2020 Plan, no ~~option award~~awards shall be assigned, transferred, or otherwise disposed of other than by will or the laws of descent and distribution.

Termination~~Termination.~~. Unless terminated earlier, the ~~2010~~2020 Plan will expire automatically in ~~December 2020. With the approval of our board of directors, the plan administrators may, at~~June 2030. At any time and from time to time, our board of directors may terminate, amend or modify the ~~2010 Plan. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval~~2020 Plan; provided, however, that (a) to the extent necessary and desirable to comply with applicable ~~law.~~

laws or stock exchange rules, shareholder approval is required for any amendment in such a manner and to such a degree as required, unless we decide to follow home country practice, and (b) unless we decide to follow home country practice, shareholder approval is required for any amendment to the 2020 Plan that (i) increases the number of shares available under the 2020 Plan, or (ii) permits the committee to extend the term of the 2020 Plan or the exercise period for an option beyond ten years from the date of grant.

The following table summarizes, as of March 31, ~~2016,~~2021, the outstanding ~~options~~awards granted to our executive officers and directors ~~and other individuals as a group~~ under ~~our 2010 Plan.~~

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the 2020 plan.

~~Name~~

~~Common shares~~
~~underlying~~
~~options awarded~~

Number of restricted

Exercise price

Name

shares awarded ⁽¹⁾

(US$/share)

Date of grant

Date of expiration

~~Tao Thomas Wu~~

Naijiang (Eric) Zhou

—

March 1, 2018

~~2.11~~

~~November 18, 2013~~

~~November 17, 2020~~

~~2.11~~

~~June 24, 2014~~

~~June 24, 2021~~

~~Other Individuals as a Group~~⁽¹⁾

~~1,243,010~~

~~Total~~

~~2,097,410~~

—

(1)	The number in this column does not include the common shares issued to the grantee upon vesting of restricted shares.

*	Less than one percent of our total outstanding share capital.

~~(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~~2021, our employees other than directors and 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~~as 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 vestedgroup held 11,578,500 outstanding 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~~restricted share units 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.

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~~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.

~~Eligibility~~. ~~The restricted shares may be granted to members of our directors, senior management, employees, advisors and consultants of our company.~~

~~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 vestedremain unvested. These restricted shares and ~~it will solicit voting instruction~~restricted share units were granted on various dates 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.~~

~~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~~1, 2016 through 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.~~

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~~Name~~	~~Number of restricted~~ ~~shares granted~~			~~Date of grant~~
~~Lei Chen~~			*	~~November 3, 2014~~
~~Peng Huang~~			*	~~November 18, 2013~~
			*	~~September 1, 2015~~
~~Tao Thomas Wu~~			*	~~November 18, 2013~~
~~Other Individuals as a Group~~		~~10,050,365~~
~~Total~~		~~15,467,985~~

~~Less than one percent of our total outstanding share capital.~~

1, 2021.

Employment Agreements

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.

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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~~
C.Board Practices
Board of Directors
Our board of directors consists of ~~nine~~eight 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~~
committee
Our audit committee consists of Ms. Jenny Wenjie Wu and Mr. ~~Yongfu Yu,~~Ya Li, 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~~Ya Li 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;

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·●

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; and

·●

meeting separately and periodically with management and the independent registered public accounting ~~firm; and~~firm.

~~reporting regularly to the board.~~

Compensation ~~Committee~~

committee

Our compensation committee consists of Ms. Jenny Wenjie Wu, Mr. ~~Yongfu Yu~~Ya Li and Mr. ~~Chuan Wang,~~Jinbo Li, and is chaired by Mr. ~~Chuan Wang.~~Jinbo Li. Our board of directors has determined that each of Ms. Jenny Wenjie Wu and Mr. ~~Yongfu Yu~~Ya Li 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:

·●

reporting regularly to the board;

●

reviewing the total compensation package for our ~~three~~two 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~~two most senior executives;

·●

reviewing the compensation of our directors and making recommendations to the board with respect to it; and

~~115~~

·●

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~~Ya Li and Mr. ~~Feng Hong,~~Raymond Weimin Luo, and is chaired by Mr. ~~Feng Hong.~~Raymond Weimin Luo. Our board of directors has determined that each of Ms. Jenny Wenjie Wu and Mr. ~~Yongfu Yu~~Ya Li 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

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·●

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~~owe fiduciary duties to our company, including a ~~fiduciary~~duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith ~~and with a view~~ to be in our best interests. Our directors must also exercise their powers only for a proper purpose. 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. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than what may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care, and these authorities are likely to be followed in the Cayman Islands. 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. A shareholder may in certain circumstances have rights to damages if a duty owed by the 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)~~(i) 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)~~(ii) 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.

~~116~~
D. ~~Employees~~
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,~~2020, we had ~~1,014~~595 employees, including ~~139~~92 in general administration, ~~679~~444 in research and development and ~~196~~59 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 groupedWe group 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.~~administration. 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~~
E.Share Ownership
For information regarding the share ownership of our directors and officers, see “Item 7. Major Shareholders and Related Party ~~Transactions —~~ 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 —~~ Compensation—Share Incentive Plans.”

~~Item 7.~~ ~~Major Shareholders and Related Party Transactions~~

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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~~2021 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~~334,651,981 total outstanding common shares as of March 31, ~~2016,~~2021, excluding (i) ~~16,519,144~~9,519,144 common shares ~~issued to~~held by Leading Advice Holdings Limited, ~~for grants under our 2013 Plan and 2014 Plan that remained then unexercised or unvested,~~a share incentive awards holding platform, and (ii) ~~14,360,275~~24,706,080 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,~~2021, 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.

Common Shares Beneficially Owned
Number %(1)
Directors and executive officers**:
Sean Shenglong Zou⁽²⁾ 32,814,606 9.71 %
Hao Cheng⁽³⁾ 13,133,952 3.89 %
Qin Liu⁽⁴⁾ 4,166,667 1.23 %
Quan Zhou⁽⁵⁾ 22,446,587 6.64 %
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 73,324,678 21.69 %

Principal Shareholders:
Xiaomi Ventures Limited⁽¹²⁾ 93,653,572 27.71 %
King Venture Holdings Limited⁽¹³⁾ 37,500,000 11.09 %
Vantage Point Global Limited⁽¹⁴⁾ 20,814,606 6.16 %
IDG Funds⁽¹⁵⁾ 22,446,587 6.64 %
~~117~~

Common Shares Beneficially Owned


Number

%^†

Directors and executive officers**:





Jinbo Li⁽¹⁾

133,018,479

39.7
%
Sean Shenglong Zou⁽²⁾

22,931,611

6.9
%
Hao Cheng

*

*

Yubo Zhang

*

*

Raymond Weimin Luo

—

—

Peng Shi

—

—

Hui Duan

—

—

Jenny Wenjie Wu

*

*

Ya Li

*

*

Naijiang (Eric) Zhou

*

*

All directors and executive officers as group

159,793,522

47.7
%
Principal shareholders:





Itui International Inc.⁽³⁾

133,018,479

39.7
%
Sean Shenglong Zou⁽²⁾

22,931,611

6.9
%
Morgan Stanley entities⁽⁴⁾

17,650,355

5.3
%
Notes:
*
*
Less than 1% of the total outstanding common shares.
**
**
The business address of ~~Messrs.~~Messrs Jinbo Li, Sean Shenglong Zou, ~~Hao Cheng, Tao Thomas~~Yubo Zhang, Raymond Weimin Luo, Naijiang (Eric) Zhou and Ms. Jenny Wenjie Wu ~~and Lei Chen~~ is 7/21-23/F, Block ~~11,~~B, Building #12, 18 Shenzhen ~~Software~~Bay ECO-Technology Park, ~~Ke Ji Zhong 2nd~~Keji South Road, Yuehai Street, Nanshan District, Shenzhen, 518057, the People’s Republic of China. The business address of Hao Cheng is CITIC Mangrove Bay 10A-1402. The business address of Mr. Peng Shi and Mr. Hui Duan is Room 407, Taixing Building, No.11 Huayuan East Road, Haidian District. Beijing 100089, China. The business address of Mr. Ya Li is Room 1B-2901 Park 1872, 217 Ba Li Zhuang Bei Li, Chaoyang District, Beijing, China.

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†

~~(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,~~March 31, 2021, by ~~337,997,790, being~~ the sum of (i) the total number of outstanding common shares as of March 31, 2021, 334,651,981, and (ii) 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.~~March 31, 2021.

(1)

Mr. Jinbo Li does not hold any common shares of our company directly. Mr. Jinbo Li, through his holding vehicle, owns 19.4% of the total outstanding shares (equal to 54.5% of the total voting power of all outstanding shares) of Itui International Inc., which in turn owns 133,018,479 common shares of our company. By virtual of his controlling interest in Itui International Inc., Mr. Jinbo Li is deemed to be a beneficial owner of 133,018,479 common shares of our company.

(2)

Represents (i) ~~20,814,606~~2,186,322 ADSs and one common ~~shares~~share directly 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~~2,400,000 ADSs 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~~101,820,239 common shares and 6,239,648 ADSs 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.Itui International Inc., 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~~liability company incorporated 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~~Cayman Islands. Mr. Jinbo Li, our chairman and chief executive officer, through his holding vehicle, owns 19.4% 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~~total outstanding shares (equal to 54.5% of the ~~State~~total voting power of ~~Delaware. The general partner~~all outstanding shares) of ~~IDG Investment V L.P. is IDG Technology Venture Investment V, LLC, a limited liability partnership organized under the laws~~Itui International Inc. Xiaomi Ventures Limited owns 16.3% of the ~~State~~total outstanding shares of ~~Delaware. The managing members~~Itui International Inc. and has a veto right in determining how Itui International Inc.’s voting power should be exercised when Itui International Inc. votes as a shareholder of ~~the general partner~~our company on certain matters in relation to our company. As a result, Mr. Jinbo Li and Xiaomi Ventures Limited are deemed to be beneficial owners 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~~power over, 101,820,239 common shares and 6,239,648 ADSs 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.~~

~~118~~

~~(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.~~Itui International Inc. Xiaomi Ventures Limited is wholly owned by Xiaomi Corporation, a limited liability company organized under the laws of the Cayman ~~Islands.~~Islands and listed on the Hong Kong Stock Exchange (Stock code: 1810). The business address of Xiaomi Ventures Limited is ~~68 Qinghe~~Xiaomi Campus, No. 33 Xi Erqi Middle ~~Street WuCaiCheng Office Building, 12th Floor,~~Road, Haidian District, Beijing, the 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~~Itui International Inc. is ~~Kingsoft Tower, No. 33 Xiaoying West~~Room 407, 4/F, Taixing Building, 11 Huayuan East Road, Haidian District, Beijing, the People’s Republic of China.

(4)

~~(14)~~

Represents ~~20,814,606~~17,650,355 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~~Morgan Stanley entities as 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.,December 31, 2020, as reported on the ~~Amendment No. 1 to~~ Schedule 13G ~~filed~~filled by ~~the IDG Funds with the SEC~~Morgan Stanley and affiliated parties 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.~~12, 2021. 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~~Morgan Stanley is ~~c/o IDG Capital Management (HK) Limited, Unit 5505, The Center, 99 Queen’s Road Central, Hong Kong.~~1585 Broadway, New York, NY10036.

To our knowledge, as of March 31, ~~2016, 169,284,236~~2021, 257,537,789 of our outstanding common shares ~~are~~were held by ~~four~~two record holders in the United States including ~~134,837,645~~257,537,785 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~~include 24,706,080 common shares ~~consisting of shares~~(i) 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~~(ii) repurchased by ~~the~~our 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).~~but not yet cancelled. 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~~
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~~we 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~~certain 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.

~~120~~

~~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~~expired 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.~~plan.”

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~~RMB40,000 to Mr. Chuan Wang, our former chairman, 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,~~2020, 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~~Game sharing cost paid and payable to Zhuhai Qianyou was approximately US$~~1.8 million, US$0.4 million~~9,000 in 2018 and ~~US$0.1 million, respectively.~~nil in both 2019 and 2020. As of December 31, ~~2013, 2014~~2018, 2019 and ~~2015, US$0.2 million,US$0.1 million~~2020, the amount of unpaid and ~~less than US$0.1 million, respectively, of the~~outstanding game sharing cost we ~~owe~~owed to Zhuhai Qianyou ~~remained unpaid~~was approximately US$2,000, US$2,000 and ~~outstanding.~~

US$2,000, respectively.

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~~For the years ended December 31, ~~2015,~~2018, 2019 and 2020, 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~~RMB45.3 million, RMB44.7 million and RMB43.8 million (US$~~0.8~~6.4 million)., respectively.

~~Pre-installing Services Agreements~~Transactions with Xiaomi

~~Cooperation Framework Agreement.~~ ~~On August 1,~~In December 2013, we entered into a Cooperation Framework Agreement with Millet Communication Technology Co., Ltd., or ~~the Framework Agreement, with Xiaomi Technology to arrange for the pre-installation~~Millet Communication, a company controlled by one 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~~shareholders, Xiaomi Ventures Limited. Parties would enter into separate agreements to carry detailed cooperation.

Xunlei Accelerator Mobile Pre-installing Services Agreement. ~~On December 1, 2013,~~ In 2014, we entered into a Xunlei Accelerator Mobile Pre-installing Services Agreement, or the Pre-installing Services Agreement, with Beijing Xiaomi Mobile Software ~~Company Limited,~~Co., Ltd., or Beijing Xiaomi, a company controlled by one of our shareholders, Xiaomi ~~group company.~~Ventures Limited. Through such cooperation, Xiaomi phones ~~will~~would be pre-installed with our mobile acceleration applications and Xiaomi phone users ~~will~~would have access to our acceleration services. We provided such pre-installing service at no charge which was consistent with our pre-installing agreements with other unrelated parties. The Pre-installing Services Agreement had a term of one year, which is renewed on a yearly basis. Parties renewed such agreement in 2015 and 2016. In 2017, we entered into a supplemental agreement of the Pre-installing Services Agreement, or the Supplemental Agreement, with another Xiaomi group company, Guangzhou Millet Information Service Co., Ltd., or Guangzhou Millet. Pursuant to the Supplemental Agreement, Guangzhou Millet replaced Beijing Xiaomi under the Pre-installing Services Agreement. Parties further agreed in the Supplemental Agreement that Guangzhou Millet will share with us a portion of the revenue generated from the advertising services offered by Guangzhou Millet through Xunlei Accelerator that we pre-installed in Xiaomi’s mobile phones as compensation for technology solution services we provided to Guangzhou Millet. The Supplemental Agreement had a term of two years from mid-June 2017 to mid-June 2019 and was automatically extended for another two years from mid-June 2019 to mid-June 2021. In 2020, we recognized a revenue of US$2.5 million from Guangzhou Millet. As of December 31, 2020, the amount of outstanding revenue from Guangzhou Millet was US$1.5 million, which was settled in April 2021.

Cloud Computing Service Agreement. We entered into an agreement with Millet Communication in 2015, an agreement with Beijing Xiaomi in 2017 and an agreement with Xiaomi Technology in April 2019 to provide cloud computing services at market prices based on the actual usage. Millet Communication, Beijing Xiaomi and Xiaomi Technology are companies controlled by one of our shareholders, Xiaomi Ventures Limited. In 2020, our total cloud computing revenue was US$2.2 million from Xiaomi Technology. As of December 31, 2020, the amount of outstanding cloud computing revenue US$0.6 million from Xiaomi Technology.

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Transactions with Itui International Inc.

Advertising services Agreement. In May 2020, we entered into a user traffic monetization agreement with Itui. Pursuant to the agreement, Itui will be responsible for operating our advertising services and share a portion of revenue generated from placing advertisements on our PC websites and mobile platform. The 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 serviceyear. In 2020, we recognized a net revenue of ~~US0.3$~~US$7.3 million from ~~Beijing Xiaomi in 2015.~~

~~In 2015, we received sales orders from Xiaomi Technology to provide online advertising services~~placing advertisements on our ~~website. Our total advertising revenue~~PC websites and mobile platform from ~~those orders was less than US$0.1 million.~~Itui. As of December 31, ~~2015,~~2020, the amount of outstanding advertising services revenue from Itui was US$7.7 million.

Cloud Computing Service Agreement. We entered into an agreement with Itui in July 2019 to provide cloud computing services at the market price and renewed the agreement in July 2020. The renewed agreement has a term of one year. In 2020, we ~~did not have any~~generated cloud computing revenue of US$1.1 million from Itui. As of December 31, 2020, the amount of outstanding ~~receivable~~cloud computing revenue from ~~Xiaomi Technology.~~Itui was US$1.2 million.

Acquisition of Shanxian Daojia

~~Interests of Experts and Counsel~~

In September 2020, Xunlei Wangwenhua entered into a share purchase agreement with the shareholders of Shenzhen Qianhai Shanxian Daojia Co., Ltd., or Shanxian Daojia, to acquire 100% equity interests of Shanxian Daojia for nil cash consideration. Mr. Weimin Luo, a director and the chief operating officer of our company, is a shareholder of Shanxian Daojia controlling 60% of all equity interests of Shanxian Daojia. When Shanxian Daojia was acquired, it had a net debt of approximately RMB5.4 million. Shanxian Daojia was a company principally operating an internet platform for food delivery services. The purpose of this acquisition is to acquire the skilled talents of Shanxian Daojia. After the acquisition, we changed the name of Shanxian Daojia to Shenzhen Yunwang Wulian Technology Co., Ltd.

C.Interests of Experts and Counsel
Not applicable.

~~Item 8.~~ ~~Financial Information~~
Item 8. Financial Information
A. ~~Consolidated Statements and Other 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. In addition, two putative shareholder class action lawsuits have been filed in the United States District Court for the Southern District of New York against our company and certain current and former officers and directors of our company: Dookeran v. Xunlei Limited, et al. (filed on January 18, 2018, Case No. 18-cv-467 (S.D.N.Y.)), and Peng Li v. Xunlei Limited, et al. (filed on January 24, 2018, Case No. 18-cv-646 (S.D.N.Y.)). Purporting to sue on behalf of all investors who purchased or acquired Xunlei stock from October 10, 2017 to January 11, 2018, plaintiffs allege that certain statements regarding OneCoin in the company’s press releases and on a quarterly investor call were false and misleading because, among other things, they failed to disclose that OneCoin was a disguised “initial coin offering” and “initial miner offering” and constituted “unlawful financial activity.” Plaintiffs seek to recover under Sections 10(b) and 20(a) of the U.S. Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On April 12, 2018, the court consolidated the actions under the caption In re Xunlei Limited Securities Litigation, No. 18-cv-467 (PAC) and appointed lead plaintiffs who filed a consolidated amended compliant on June 4, 2018. We filed a motion to dismiss the amended compliant on August 3, 2018. In September 2019, the U.S. District Judge for the Southern District of New York, Paul A. Crotty, dismissed the two consolidated federal securities class action with prejudice because Xunlei's use of blockchain technology to reward OneCoin (later named as LinkToken) to customers for sharing excess storage and bandwidth did not amount to an initial coin offering and thus did not violate Chinese law. As our OneCoin rewarding program was not illegal, the court concluded we did not make a misrepresentation or omit material facts in failing to describe the Rewards Program as an illegal initial coin offering. The court also ruled that the complaint failed to plead facts giving rise to a strong inference of an intent to deceive, manipulate, or defraud.

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~~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~~In addition, 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 on our common shares, we will pay those dividends which are payable in respect of the common shares underlying our ADSs to the depositary, as the registered holder of such common shares, and the depositary then will pay such amounts to our ADS holders in proportion to the ~~same extent as holders of our~~ common shares underlying the ADSs held by such ADS holders, 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~~
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.

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~~Item 9.~~

~~The Offer and Listing~~

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~~Offering and Listing Details~~

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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B.Plan of Distribution
Trading Price
High Low
Annual Highs and Lows
2014 16.18 6.56
2015 14.34 5.93

Quarterly Highs and Lows
First Quarter 2015 8.66 5.93
Second Quarter 2015 14.34 6.25
Third Quarter 2015 12.04 6.71
Fourth Quarter 2015 8.36 6.58

Monthly Highs and Lows
October 2015 8.36 6.90
November 2015 8.20 6.58
December 2015 8.06 6.80
January 2016 7.66 6.00
February 2016 6.12 5.14
March 2016 6.74 5.68
April 2016 (through April 20, 2016) 7.49 6.00
B. ~~Plan of Distribution~~
Not applicable.
C. ~~Markets~~
C.Markets
Our ADSs have been listed on NASDAQ Global Select Market since June 24, 2014 under the symbol “XNET.”
D.Selling Shareholders
D. ~~Selling Shareholders~~
Not applicable.
E.Dilution
Not applicable.
F.Expenses of the Issues
Not applicable.

E. ~~Dilution~~
Item 10. Additional Information
A.Share Capital
Not applicable.
F. ~~Expenses of the Issue~~
~~Not applicable.~~
~~Item 10.~~ ~~Additional Information~~
A. ~~Share Capital~~
~~Not applicable.~~
B. ~~Memorandum and Articles of Association~~
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 immediately upon completion of our initial public offering of our common shares represented by ADSs.
C. ~~Material Contracts~~
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~~
D.Exchange Controls
See “Item ~~4.B.~~4. Information on the Company—Business Overview—Regulation—~~Regulations Relating to Foreign Exchange.~~ Regulation on foreign exchange control and administration.”
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~~Taxation~~

E.Taxation
Cayman Islands Taxation
According to Maples and Calder (Hong Kong) LLP, 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~~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.
Payments of dividends and capital in respect of the shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of the Shares, nor will gains derived from the disposal of the shares be subject to Cayman Islands income or corporation tax.
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.~~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).

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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~~Public Notice 37 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~~Public Notice 37 and SAT Circular 7, and we may be required to expend valuable resources to comply with SAT ~~Circular 698~~Public Notice 37 and SAT Circular 7 or to establish that we should not be taxed under SAT ~~Circular 698~~Public Notice 37 and SAT Circular 7 in the future.

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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 (as defined below) 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~~There can be no assurance that 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 (by vote or value), 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.

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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,~~2020, and we will very likely be classified as a PFIC for our current taxable year ending December 31, ~~2016~~2021 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~~(generally determined on the basis of ~~fair market value)~~a quarterly average) during such year is attributable to assets that 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, 25% or 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.~~Foreign Investment Company Rules.”

Dividends

Subject to the discussion below under “Passive ~~foreign investment company rules,~~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,~~2020, and we will very likely be classified as a PFIC for our current taxable year ending December 31, ~~2016.~~2021. Each non-corporate U.S. Holder is advised to consult ~~their~~its 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,~~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~~their 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,~~2020, and we will very likely be classified as a PFIC for our current taxable year ending December 31, ~~2016.~~2021. 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.

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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 a national securities exchange that is registered with the SEC, or on a foreign exchange or market that the IRS determines is a qualified exchange that has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. Our ADSs are listed 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.~~Market, which is an established securities market in the United States. 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 a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC. 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 any 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.

If a U.S. Holder makes a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer treated as marketable stock or the IRS consents to the revocation of the election. It should also be noted that it is intended that only the ADSs and not the ordinary shares will be listed on the NASDAQ Global Select Market. Consequently, if a U.S. Holder holds ordinary shares that are not represented by ADSs, such holder will generally not be eligible to make a mark-to-market election if we are or were to become a PFIC.

Because a mark-to-market election technically 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~~
F.Dividends and Paying Agents
Not applicable.

143

~~Statement by Experts~~

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G.Statement by Experts
Not applicable.
~~129~~
H. ~~Documents on Display~~
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.~~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~~
I.Subsidiary Information
Not applicable.

~~Item 11.~~
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
Our financing activities are denominated mainly in U.S. ~~dollars. The~~dollars while interest bearing loan we borrowed this year for the construction of our headquarters building is denominated in Renminbi, or RMB. 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~~is 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~~Since June 2010, 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 RMBhas fluctuated 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~~at times 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.~~unpredictably. 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.

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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~~RMB would have a negative effect on the U.S. dollar amounts available to us.

~~130~~

As of December 31, 2020, we had RMB-denominated cash and cash equivalents, and short-term investments of RMB632.9 million, HKD-denominated cash and cash equivalents, restricted cash and short-term investments of HKD1.7 million, THB-denominated cash and cash equivalents, restricted cash and short-term investments of THB2.1 million and U.S. dollar-denominated cash, cash equivalents and short-term investments of US$157.8 million. We also had RMB-denominated restricted cash of RMB10.1 million. Assuming we had converted RMB632.9 million into U.S. dollars at the exchange rate of RMB6.5249 for US$1.00 on December 31, 2020 released by the State Administration of Foreign Exchange of the PRC, our U.S. dollar cash balance would have had a US$97.0 million increase. If the RMB had depreciated by 10% against the U.S. dollar, our U.S. dollar cash balance would have had a US$88.2 million increase instead. Assuming we had converted US$157.8 million into RMB at the exchange rate of RMB6.5249 for US$1.00 on December 31, 2020 released by the State Administration of Foreign Exchange of the PRC, our RMB cash balance would have had a RMB1.0 billion increase. If the RMB had depreciated by 10% against the U.S. dollar, our RMB cash balance would have had a RMB1.1 billion increase instead.

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~~

Item 12.Description of Securities Other than Equity Securities

~~Debt Securities~~

A.Debt Securities
Not applicable.
B. ~~Warrants and Rights~~
B.Warrants and Rights
Not applicable.
C. ~~Other Securities~~
C.Other Securities
Not applicable.

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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:
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
·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
$0.05 (or less) per ADS
·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
·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
Expenses of the depositary
·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~~In addition, the depositary ~~in 2015 in connection with~~has agreed to waive the ~~establishment of our ADS facility.~~
~~132~~
~~PART II~~
~~Item 13.~~ ~~Defaults, Dividend Arrearages and Delinquencies~~
~~None.~~
~~Item 14.~~ ~~Material Modifications to the Rights of Security Holders and Use of Proceeds~~
~~The following “Use of Proceeds” information relates to our initial public offering of 7,315,000~~issuance fees for 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~~issued (i) in connection with our ~~initial public offering, including~~follow-on equity offerings, (ii) to our founders and senior management, and (iii) in connection with our employee incentive plans. In 2020, we received approximately US$0.3 million (after withholding tax) from the ~~over-allotment option, were approximately US$11.3 million, including underwriting discounts~~depositary.

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PART II
Item 13.Defaults, Dividend Arrearages 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~~Delinquencies
None.

Item 14.Material Modifications to the ~~directors, officers, general partners~~Rights of ~~our company or their associates, persons owning 10% or more~~Security Holders and Use of ~~our common shares, or our affiliates.~~Proceeds
None.
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~~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,~~2020, 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.~~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)~~(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a ~~company's~~company’s assets, ~~(2)~~(ii) 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~~company’s receipts and expenditures are being made only in accordance with authorizations of a ~~company's~~company’s management and directors, and ~~(3)~~(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a ~~company's~~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~~2020 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~~ Based on this evaluation, management concluded that our 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~~was effective as of December 31, ~~2014 and had not been remediated as~~2020.

147

Table of ~~December 31, 2015. The material weakness is related to a lack~~Contents

Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, has audited the effectiveness 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~~company’s internal control over financial reporting as of December 31, ~~2015, based~~2020, as stated in its report, which appears on ~~criteria established in Internal Control — Integrated Framework (2013) issued by COSO.~~

page F-2 of this annual report on Form 20-F.

Attestation Report of the Registered Public Accounting Firm

This annual report on Form 20-F ~~does not include~~includes an attestation report of the company’s independent registered public accounting firm because ~~the company~~we are a large accelerated filer and we are no longer qualified as an “emerging growth company” as defined under the JOBS Act as of December 31, ~~2015.~~2020.

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, there were 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.~~

Item 16A.Audit Committee Financial Expert

Our board of directors has determined that each of Ms. Jenny Wenjie Wu anand Mr. Ya Li, our independent ~~director~~directors (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.~~ 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.~~
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.
Our chairman and chief executive officer, Mr. Jinbo Li, currently also serves as the chairman and chief executive officer of Itui International Inc., our shareholder holding approximately 39.7% of our outstanding share capital as of March 31, 2021. Mr. Jinbo Li is the founder and a shareholder of Itui International Inc. Section III of our code of business conduct and ethics provides that no employee shall serve on a board of directors or trustees or on a committee of any entity (whether profit or not-for-profit) whose interests could reasonably be expected to conflict with those of the Company. Employees must obtain prior approval from the board of directors before accepting any such board or committee position. The Company may revisit its approval of any such position at any time to determine whether an employee’s service in such position is still appropriate. Section III also provides that no employee may have any financial interest (ownership or otherwise) in any other business or entity if such interest requires the employee to devote time to it during such employee’s working hours at the Company. On April 11, 2020, our board of directors granted Mr. Jinbo Li a waiver from compliance with the above provisions of our code of business conduct and ethics so that Mr. Jinbo Li is able to simultaneously serve as the chairman and the chief executive officer at both our company and Itui International Inc.
~~Item 16C.~~

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.

148

2014 2015
Audit fees⁽¹⁾ US$ 800,000 US$ 746,085
Audit-related fees⁽²⁾ US$ 1,046,002 US$ —
All other fees⁽³⁾ US$ — US$ —

Table of Contents

2018

2019

2020

(in US$)
Audit fees⁽¹⁾

754,903

905,356

1,019,720
Audit-related fees⁽²⁾

—

—

—
All other fees⁽³⁾

—

—

—
(1) “Audit fees” represents the aggregate fees billed for each of the fiscal years listed for professional services rendered by our principal ~~auditors~~accountant for the audit of our annual financial statements or services that are normally provided by the ~~auditors~~accountant in connection with statutory and regulatory filings or ~~engagements.~~engagements for each of the fiscal years listed.
~~135~~
(2) “Audit-related fees” represents the aggregate fees billed for ~~professional~~each of the fiscal years listed for assurance and related services ~~rendered~~ by our principal ~~auditors in connection with our initial public offering in 2014, other than~~accountant that are reasonably related to the ~~underlying~~performance of the audit ~~and~~or review of our financial ~~statements.~~statements and are not reported under “audit fees” above.
(3) “All other fees” ~~means~~represents the aggregate fees billed in each of the fiscal years listed for ~~services rendered other than services reported under “Audit fees”~~products and ~~“Audit-related fees”~~services provided by our principal ~~auditors.~~accountant, other than the services reported in “audit fees” and “audit-related fees” above.
The policy of our audit committee is to ~~preapprove~~pre-approve all audit and non-audit services provided by our independent ~~auditors,~~auditor, including audit services, audit-related services and ~~tax~~other 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 independent auditor only provides us with audit services. Our audit committee has approved all of our audit fees ~~audit-related fees and tax fees~~ for the year ended December 31, ~~2015.~~2020.

~~Item 16D.~~
Item 16D.Exemptions from the Listing Standards for Audit Committees
Not applicable.

~~Item 16E.~~
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In ~~December 2014,~~June 2020, our board of directors ~~authorized~~approved a ~~share repurchase~~share-buyback program ~~or the Repurchase Program, whereby~~under which our company may repurchase up to US$20 million of our common shares or ADSs ~~from December 22, 2014 to December 31, 2015.~~over the next twelve months. The share repurchases may be made from time to time on the open market at the prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable ~~laws~~rules 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.regulations. We publicly announced the ~~Repurchase Program~~share-buyback program on ~~December 22, 2014.~~
June 29, 2020.
The following table is a summary of the shares repurchased by us during ~~2015~~2020 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.~~share-buyback program.








Approximate Dollar

Total Number of

Value of ADSs that

ADSs Purchased as

May Yet Be

Total Number of

Average Price Paid

Part of the Publicly

Purchased Under
Period

ADSs Purchased

Per ADS

Announced Plan

the Plan
July 2020 to August 2020

1,191,392

US$3.75

1,191,392

US$15.53 million
Total

1,191,392



1,191,392



Period
Total Number of
ADSs Purchased Average Price Paid
Per ADS 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
March 12 – March 31 192,803 6.44 192,803 2,814,715
April 7 – April 7 1,000 6.65 1,000 2,813,715
September 29 – September 30 2,940 7.13 2,940 2,810,775
December 18 – December 30 16,876 6.94 16,876 2,793,899
Total 213,619 — 213,619 —
Item 16F.Change in Registrant’s Certifying Accountant
Not applicable.
~~(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~~
149

~~PwC HK’s reports on our consolidated financial statements as~~Table 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.~~Contents

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.~~ 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.~~2019. 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~~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 in order to utilize the experience of Mr. Raymond Weimin Luo 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~~Jinbo Li and our compensation committee is not composed solely of independent directors.
Maples and Calder (Hong Kong) LLP, 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.~~
Item 16H.Mine Safety Disclosure
Not applicable.

PART III
~~Item 17.~~ Item 17.Financial Statements
We have elected to provide financial statements pursuant to Item 18.

~~Item 18.~~
150
Table of Contents
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

~~Item 19.~~
~~Exhibits~~
Exhibit

Number
Description of ~~Document~~Documents
1.1
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)
2.1
~~2.1~~
Registrant’s specimen American depositary receipt (included in Exhibit 2.3)
2.2
~~2.2~~
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)
2.3*
~~2.3~~
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)
2.4*
Description of securities
4.1
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)
4.2
~~4.2~~
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)
~~138~~
~~Exhibit~~
~~Number~~ ~~Description of Document~~
4.3
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)
4.4
~~4.4~~
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)
4.5
~~4.5~~
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)
4.6
~~4.6~~
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)
4.7
~~4.7~~
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)
4.8

~~4.8~~
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)
4.9
~~4.9~~
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)
4.10
2020 share incentive plan (incorporated by reference to Exhibit 99.1 of Form 6-K (file no. 001-35224) furnished to the SEC on July 2, 2020)
~~4.10~~
4.11
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)

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4.12
~~4.11~~		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)
4.13
~~4.12~~		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)
4.14
~~4.13~~		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)
4.15
~~4.14~~		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)
4.16
~~4.15~~		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 and further amended on September 29, 2016 (incorporated by reference to Exhibit ~~10.9~~4.15 of our ~~registration statement~~annual report on Form ~~F-1~~20-F (file no. ~~333-196221)~~001-35224) filed with the SEC on ~~May 23, 2014)~~April 20, 2017)
4.17
~~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~~

~~Exhibit~~ ~~Number~~		~~Description of Document~~
~~4.17~~ 4.18		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)
4.19
~~4.18~~		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)
4.20
~~4.19~~		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)
4.21
~~4.20~~		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)
4.22
~~4.21~~		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)
4.23
~~4.22~~		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)
4.24
~~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)
4.25
~~4.24~~		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)
4.26
~~4.25~~		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)
4.27
~~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)

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4.28
~~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)
4.29
~~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 and further amended on September 29, 2016 (incorporated by reference to Exhibit ~~10.22~~4.28 of our ~~registration statement~~annual report on Form ~~F-1~~20-F (file no. ~~333-196221)~~001-35224) filed with the SEC on ~~May 23, 2014)~~April 20, 2017)
4.30
~~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~~		~~Description of Document~~
~~4.30~~ 4.31		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)
4.32
~~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)
4.33
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. (incorporated by reference to Exhibit 4.32 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 21, 2016)
4.34
4.33*		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. (incorporated by reference to Exhibit 4.33 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 21, 2016)
4.35		English summary of General Contract for the Construction of Xunlei Building dated April 24, 2018 between Shenzhen Xunlei Networking Technologies Co., Ltd. and China Construction Second Engineering Bureau Ltd. (incorporated by reference to Exhibit 4.34 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 29, 2019)
8.1* 4.36		English translation of the Financing Agreement dated January 2, 2019 between Shenzhen Xunlei Networking Technologies Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd. Shenzhen Branch (incorporated by reference to Exhibit 4.35 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 29, 2019)
4.37		English translation of the Maximum Mortgage Contract dated January 2, 2019 between Shenzhen Xunlei Networking Technologies Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd. Shenzhen Branch (incorporated by reference to Exhibit 4.36 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 29, 2019)
4.38		English translation of the Irrevocable Letter of Guarantee of Maximum Amount dated March 15, 2018 between Shenzhen Xunlei Networking Technologies Co., Ltd. and China Merchants Bank Shenzhen Branch (incorporated by reference to Exhibit 4.37 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 29, 2019)
4.39		English translation of the Credit Agreement dated March 15, 2018 between Shenzhen Xunlei Networking Technologies Co., Ltd. and China Merchants Bank Shenzhen Branch (incorporated by reference to Exhibit 4.38 of our annual report on Form 20-F (file no. 001-35224) filed with the SEC on April 29, 2019)
4.40*		English translation of the Credit Agreement dated October 21, 2020 between Shenzhen Xunlei Networking Technologies Co., Ltd. and China Merchants Bank Shenzhen Branch
8.1*		List of ~~significant~~principal subsidiaries and variable interest ~~entities~~entity of the Registrant
11.1
~~11.1~~		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)
12.1*
12.1*		Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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Table of Contents

12.2*
12.2*		Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1**
13.1**		Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**
13.2**		Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*
15.1*		Consent of Maples and Calder (Hong Kong) LLP
15.2*		Consent of King & Wood Mallesons
15.2* 15.3*		~~Consent of Zhong Lun Law Firm~~

15.3*		Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm

15.4*		~~Consent of PricewaterhouseCoopers, an independent registered public accounting firm~~

~~16.1~~101.INS*		~~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)~~Inline XBRL Instance Document
101.SCH*
101.INS*		~~XBRL Instance Document~~

101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

*Filed herewith

~~Filed herewith~~

**Furnished herewith

~~Furnished herewith~~

~~141~~

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Table of Contents

SIGNATURES
The registrant ~~hereby~~here by 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.

~~Xunlei Limited~~
Xunlei Limited
~~By:~~
~~/s/ Sean Shenglong Zou~~
By:
~~Name: Sean Shenglong Zou~~
/s/ Jinbo Li
Name:
Jinbo Li
Title:
Chairman of the Board and Chief Executive Officer
~~Date: April 21, 2016~~

~~142~~
Date: April 26, 2021

155

Table of Contents

Index to consolidated financial statements

		Page
Report of Independent Registered Public Accounting Firm		F-2
~~Report of independent registered public accounting firm~~	~~F-2~~

~~Report of independent registered public accounting firm~~	~~F-3~~

Consolidated Balance Sheets as of December 31, ~~2014~~2019 and ~~2015~~2020	~~F-4~~	F-5

Consolidated Statements of Comprehensive ~~Income~~Loss for the Years Ended December 31, ~~2013 , 2014~~2018, 2019 and ~~2015~~2020	~~F-6~~	F-7

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, ~~2013 , 2014~~2018, 2019 and ~~2015~~2020	~~F-8~~	F-9

Consolidated ~~Statement~~Statements of Cash Flows for the Years ended December 31, ~~2013 , 2014~~2018, 2019 and ~~2015~~2020	~~F-11~~	F-10

Notes to Consolidated Financial Statements	~~F-13~~	F-11

F-1

Table of Contents

Report of ~~independent registered public accounting firm~~Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Xunlei ~~Limited:~~Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
~~In our opinion,~~We have audited the accompanying consolidated balance sheets of Xunlei Limited and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive ~~income/(loss),~~loss, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of ~~Xunlei Limited and its subsidiaries (collectively,~~ the ~~“Group”) for~~three years in the ~~year~~period ended December 31, ~~2013~~2020 in conformity with accounting principles generally accepted in the United States of America. ~~These~~Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, ~~are the responsibility~~for maintaining effective internal control over financial reporting, and for its assessment of the ~~Group’s management.~~effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express ~~an opinion~~opinions on ~~these~~the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our ~~audit.~~ audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our ~~audit of these statements~~audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the ~~audit~~audits to obtain reasonable assurance about whether the consolidated financial statements are free of material ~~misstatement. An audit includes~~misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the consolidated financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the ~~overall financial statement presentation.~~design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our ~~audit provides~~audits provide a reasonable basis for our ~~opinion.~~opinions.

F-2

Table of Contents

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting 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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill impairment assessment

As described in Notes 2(l) and 14 to the consolidated financial statements, the Company’s consolidated goodwill balance was US$22.6 million as of December 31, 2020. The goodwill balance was associated with the Company as a whole, being the sole reporting unit of the Company. Management conducts a goodwill impairment test on an annual basis, or more frequently if events or changes in circumstances indicate that the goodwill may be impaired. The impairment test for goodwill determines the fair value of the reporting unit and compares it to the carrying value of the assets and liabilities, including goodwill, of the reporting unit. The fair value is estimated by management using the discounted cash flow model. The discounted cash flow model is derived from the long-term cash flow projections prepared by management which include significant judgments and assumptions relating to revenue forecast, operating margins, the discount rate, and the terminal growth rate. As a result of the impairment test, management determined that the estimated fair value of the reporting unit exceeded its carrying value and therefore no goodwill impairment losses were recognized for the year ended December 31, 2020.

The principal considerations for our determination that performing procedures relating to goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue forecast, operating margins, the discount rate, and the terminal growth rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

F-3

Table of Contents

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness, accuracy, and relevance of underlying data used in the model; and (iv) evaluating the reasonableness of significant assumptions used by management, related to revenue forecast, operating margins, the discount rate, and the terminal growth rate. Evaluating management’s significant assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) historical performance; (ii) the consistency with relevant market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model and reasonableness of certain significant assumptions, including the discount rate and the terminal growth rate.

/s/PricewaterhouseCoopers Zhong Tian LLP

~~PricewaterhouseCoopers~~Shenzhen, the People’s Republic of China

April 26, 2021

We have served as the Company’s auditor since 2014.

F-4

Table of Contents

Xunlei Limited

Consolidated Balance Sheets

(Amounts expressed in thousands of United States dollars (“USD”),

As at

As at
except for number of shares and per share data)

Note

December 31, 2019

December 31, 2020
Assets

Current assets:

Cash and cash equivalents

5

162,465

137,248
Short-term investments

6

102,847

117,821
Accounts receivable, net (Allowance for credit losses of USD7,604 and USD9,329 as of December 31, 2019 and 2020, respectively)

7

27,533

22,983
Inventories

8

5,537

1,726
Due from related parties

26

1,658

10,970
Prepayments and other current assets (Allowance for credit losses of USD5,503 and USD10,283 as of December 31, 2019 and 2020, respectively)

9

16,543

11,534
Total current assets

316,583

302,282

Non-current assets:






Restricted cash

2(f)

2,983

1,541
Long-term investments

10

26,365

26,734
Deferred tax assets

24

1,118

—
Property and equipment, net

11

38,770

50,725
Right-of-use assets

12

8,747

1,954
Intangible assets, net

13

9,426

8,857
Goodwill

2(l), 14

20,382

22,607
Other long-term prepayments and non-current assets

9

313

905
Total assets

424,687

415,605

Liabilities






Current liabilities:






Accounts payable (including accounts payable of the consolidated variable interest entities (“VIE”) and its subsidiaries without recourse to the Company of USD 23,865 and USD 20,588 as of December 31, 2019 and 2020, respectively (note 29))

24,213

20,644
Due to related parties (including due to related parties of the consolidated VIE and its subsidiaries without recourse to the Company of USD 2 and USD 55 as of December 31, 2019 and 2020, respectively)

26

5,002

5,389
Contract liabilities and deferred income, current portion (including contract liabilities and deferred income, current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 31,988 and USD 34,040 as of December 31, 2019 and 2020, respectively)

15

31,988

34,040
Income tax payable (including income tax payable of the consolidated VIE and its subsidiaries without recourse to the Company of USD 2,436 and USD 2,500 as of December 31, 2019 and 2020, respectively)

2,550

2,553
Accrued liabilities and other payables (including accrued liabilities and other payables of the consolidated VIE and its subsidiaries without recourse to the Company of USD 38,502 and USD 33,361 as of December 31, 2019 and 2020, respectively (note 29))

16

42,840

38,689
Lease liabilities, current portion (including lease liabilities, current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 4,621 and USD 1,912 as of December 31, 2019 and 2020, respectively)

12

4,693

1,961
Total current liabilities

111,286

103,276

F-5

Table of Contents

Xunlei Limited

Consolidated Balance Sheets (Continued)

(Amounts expressed in thousands of United States dollars (“USD”),



As at

As at
except for number of shares and per share data)

Note

December 31, 2019

December 31, 2020
Non-current liabilities:

Contract liabilities and deferred income, non-current portion (including contract liabilities and deferred income, non-current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 1,223 and USD 920 as of December 31, 2019 and 2020, respectively)

15

1,223

920
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIE and its subsidiaries without recourse to the Company of USD 1,179 and USD 1,085 as of December 31, 2019 and 2020, respectively)

24

1,179

1,085
Bank borrowings (including bank borrowing of the consolidated VIE and its subsidiaries without recourse to the Company of USD 11,324 and USD 19,924 as of December 31, 2019 and 2020, respectively)

17

11,324

19,924
Lease liabilities, non-current portion (including lease liabilities, non-current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 4,073 and USD 27 as of December 31, 2019 and 2020, respectively)

12

4,132

27
Total liabilities

129,144

125,232
Commitments and contingencies

28

Equity



Common shares (368,877,205 shares issued and 339,165,241 shares outstanding as of December 31, 2019; 368,877,205 shares issued and 334,401,981 shares outstanding as of December 31, 2020)

18

85

84
Additional paid-in-capital

472,052

469,887
Accumulated other comprehensive loss

(13,425)

(2,144)
Statutory reserves

5,132

5,414
Treasury shares (29,711,964 shares and 34,475,224 shares as of December 31, 2019 and 2020, respectively)

7

8
Accumulated deficits

(166,973)

(181,095)
Total Xunlei Limited’s shareholders’ equity

296,878

292,154
Non-controlling interests

21

(1,335)

(1,781)
Total liabilities and shareholders’ equity

424,687

415,605

The accompanying notes are an integral part of these consolidated financial statements.

F-6

Table of Contents

Xunlei Limited

Consolidated Statements of Comprehensive Loss

(Amounts expressed in thousands of USD,


Years ended December 31,
except for number of shares and per share data)

Note

2018

2019

2020
Net revenues

Service revenue

177,528

172,998

185,271
Product revenue



54,604

8,269

1,412
Total revenues, net of rebates and discounts

2(q), 2(y)

232,132

181,267

186,683
Business taxes and surcharges



(1,528)

(602)

(312)
Net revenues



230,604

180,665

186,371
Cost of revenues





Service

22

(84,033)

(92,732)

(90,977)
Product

22

(31,634)

(7,181)

(1,660)
Total cost of revenues



(115,667)

(99,913)

(92,637)
Gross profit



114,937

80,752

93,734
Operating expenses





Research and development expenses



(76,763)

(68,571)

(55,463)
Sales and marketing expenses



(35,322)

(31,820)

(18,064)
General and administrative expenses



(40,833)

(38,930)

(33,910)
Asset impairment loss, net of recoveries



(6,348)

2,147

(5,090)
Total operating expenses



(159,266)

(137,174)

(112,527)
Operating loss



(44,329)

(56,422)

(18,793)
Interest income



1,183

1,897

1,471
Interest expense



(239)

(75)

(406)
Other income, net

23

2,810

5,861

4,737
Share of loss from equity investees



(307)

—

—
Loss from continuing operations before income tax



(40,882)

(48,739)

(12,991)
Income tax benefits/(expenses)

24

89

(4,676)

(1,149)
Net loss from continuing operations



(40,793)

(53,415)

(14,140)
Discontinued operations

4



Income from discontinued operations before income taxes



1,533

—

—
Income tax expenses



(230)

—

—
Net profit from discontinued operations



1,303

—

—
Net loss for the year



(39,490)

(53,415)

(14,140)
Less: net loss attributable to the non-controlling interests



(212)

(246)

(300)
Net loss attributable to Xunlei Limited



(39,278)

(53,169)

(13,840)

F-7

Table of Contents

Xunlei Limited

Consolidated Statements of Comprehensive Loss (Continued)

(Amounts expressed in thousands of USD,


Years ended December 31,
except for number of shares and per share data)

Note

2018

2019

2020

Net loss for the year

(39,490)

(53,415)

(14,140)
Other comprehensive (loss)/income: Currency translation adjustments, net of tax

(5,539)

(650)

11,135
Comprehensive loss

(45,029)

(54,065)

(3,005)
Less: comprehensive loss attributable to non-controlling interests

(34)

(219)

(446)
Comprehensive loss attributable to Xunlei Limited

(44,995)

(53,846)

(2,559)

Loss per share for common shares, basic





Continuing operations

25

(0.12)

(0.16)

(0.04)
Discontinued operations

25

0.00

N/A

N/A
Total loss per share for common shares, basic

(0.12)

(0.16)

(0.04)

Loss per share for common shares, diluted





Continuing operations

25

(0.12)

(0.16)

(0.04)
Discontinued operations

25

0.00

N/A

N/A
Total loss per share for common shares, diluted

(0.12)

(0.16)

(0.04)

Weighted average number of common shares used in calculating continuing operations





Basic

25

334,965,987

337,845,675

337,429,601
Diluted

25

334,965,987

337,845,675

337,429,601

The accompanying notes are an integral part of these consolidated financial statements.

F-8

Table of Contents

Xunlei Limited

Consolidated Statements of Changes in Shareholders’ Equity

Total



Accumulated

Xunlei

(Amounts expressed in thousands

Additional

other

Limited’s

Non-

of USD, except for number of

Common shares

Treasury stock

paid-in

Accumulated

Statutory

comprehensive

shareholders’

controlling

Total
shares and per share data)

Shares

Amount

Shares

Amount

capital

deficits

reserves

loss

equity

interest

equity
Balance at January 1, 2018

333,643,560

83

35,233,649

9

461,330

(74,526)

5,132

(7,031)

384,997

(2,160)

382,837

Share-based compensation

—

—

—

—

5,294

—

—

—

5,294

—

5,294
Restricted shares vested

2,879,220

1

(2,879,220)

(1)

—

—

—

—

—

—

—
Net loss

—

—

—

—

—

(39,278)

—

—

(39,278)

(212)

(39,490)
Currency translation adjustments

—

—

—

—

—

—

—

(5,717)

(5,717)

152

(5,565)
Contribution by non-controlling interest holders

—

—

—

—

—

—

—

—

—

197

197
Acquisition of a subsidiary

—

—

—

—

—

—

—

—

—

907

907
Balance at December 31, 2018

336,522,780

84

32,354,429

8

466,624

(113,804)

5,132

(12,748)

345,296

(1,116)

344,180

Share-based compensation

—

—

—

—

5,428

—

—

—

5,428

—

5,428
Restricted shares vested

2,642,465

1

(2,642,465)

(1)

—

—

—

—

—

—

—
Cancellation of common shares

(4)

—

—

—

—

—

—

—

—

—

—
Net loss

—

—

—

—

—

(53,169)

—

—

(53,169)

(246)

(53,415)
Currency translation adjustments

—

—

—

—

—

—

—

(677)

(677)

27

(650)
Balance at December 31, 2019

339,165,241

85

29,711,964

7

472,052

(166,973)

5,132

(13,425)

296,878

(1,335)

295,543

Repurchase of common shares

(5,956,960)

(1)

5,956,960

1

(4,475)

—

—

—

(4,475)

—

(4,475)
Share-based compensation

—

—

—

—

2,310

—

—

—

2,310

—

2,310
Restricted shares vested

1,193,700

—

(1,193,700)

—

—

—

—

—

—

—

—
Appropriation of statutory reserves

—

—

—

—

—

(282)

282

—

—

—

—
Net loss

—

—

—

—

—

(13,840)

—

—

(13,840)

(300)

(14,140)
Currency translation adjustments

—

—

—

—

—

—

—

11,281

11,281

(146)

11,135
Balance at December 31, 2020

334,401,981

84

34,475,224

8

469,887

(181,095)

5,414

(2,144)

292,154

(1,781)

290,373

The accompanying notes are an integral part of these consolidated financial statements.

F-9

Table of Contents

Xunlei Limited

Consolidated Statements of Cash Flows

(Amounts expressed in thousands of USD except for

Years ended December 31,
number of shares and per share data)

2018

2019

2020
Cash flows from operating activities

Net loss for the year

(39,490)

(53,415)

(14,140)
Adjustments to reconcile net loss to net cash used in operating activities

—Depreciation of property and equipment

5,595

5,824

9,277
—Amortization of intangible assets

1,231

1,200

1,216
—Amortization of the right-of-use assets

—

5,634

3,685
—Allowance for credit losses

7,680

19

1,137
—Impairment/(recovery) of prepayments and other assets

(1,516)

(2,147)

4,168
—Loss/(gain) on disposal of property and equipment

37

144

(55)
—Share-based compensation

5,294

5,428

2,310
—Share of loss from equity investees

307

—

—
—Investment income from short-term investments

(1,117)

(1,708)

(664)
—Impairment of inventories

200

3,578

3,283
—Impairment of long-term investments

7,794

19,831

794
—Net unrealized gains on long-term investments

—

(10,907)

(794)
—Investment income on disposal of long-term investments

—

(579)

(214)
—Interest expense accrued on long-term payable

239

75

406
—Deferred taxes

1,748

4,361

966
—Deferred government grants

(1,050)

(1,735)

(865)
Changes in operating assets and liabilities:

—Accounts receivable

13,256

(8,739)

5,048
—Prepayments and other assets

(2,000)

772

(1,263)
—Due from/to related parties

11,457

(684)

(8,598)
—Accounts payable

(27,728)

2,086

(4,938)
—Inventories

(10,178)

3,435

643
—Contract liabilities

7,680

(664)

289
—Income tax payable

(390)

98

(163)
—Accrued liabilities and other payables

(14,657)

(12,580)

(11,707)
—Lease liabilities

—

(4,976)

(3,732)
Net cash used in operating activities

(35,608)

(45,649)

(13,911)

Cash flows from investing activities



Purchase of short-term investments

(287,553)

(355,294)

(177,075)
Proceeds from disposal of short-term investments

223,738

450,687

167,439
Proceeds from disposal of property and equipment

442

576

721
Proceeds from disposal of long-term investments

—

528

1,076
Purchase of intangible assets

(2,121)

(433)

(59)
Acquisition of long-term investments

—

(2,838)

—
Repayment of loans to employees

201

711

696
Acquisition of property and equipment

(1,419)

(3,084)

(134)
Payment for construction in progress

(2,645)

(11,593)

(13,420)
Net cash (used in)/generated from investing activities

(69,357)

79,260

(20,756)

Cash flows from financing activities

Repurchase of shares

—

—

(4,475)
Governments grants received

732

853

—
Contribution by non-controlling

197

—

—
Proceeds from bank borrowings

—

11,324

7,816
Repayment of loans due to a related party arising from a business combination

—

—

(662)
Net cash generated from financing activities

929

12,177

2,679

Net (decrease)/increase in cash, cash equivalents and restricted cash

(104,036)

45,788

(31,988)
Cash, cash equivalents, and restricted cash at beginning of year

233,479

122,930

165,448
Effect of exchange rates on cash and cash equivalents, and restricted cash

(6,513)

(3,270)

5,329
Cash, cash equivalents, and restricted cash at end of year

122,930

165,448

138,789
Supplemental disclosure of cash flow information

Income tax paid

—

(142)

(356)
Non-cash investing and financing activities

—Acquisition of property and equipment in form of other payables

(1,093)

(321)

(5,217)
—Acquisition of right-of-use assets and lease liabilities, net off impact from lease modification

N/A

2,723

(3,325)

The accompanying notes are an integral part of these consolidated financial statements.

F-10

Table of Contents

Xunlei Limited

Notes to the 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 Company completed its initial public offering (“IPO”) on June 24, 2014 on the NASDAQ Global Market. Each American Depositary Shares (“ADSs”) of the Company represents five common shares.
These 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 of December 31, 2020, the Company’s major subsidiaries, VIE and VIE’s subsidiaries are as follows:

% of direct

or indirect

Place of

Period of

economic

Name of entities

incorporation

incorporation

Relationship

ownership

Principal activities
Shenzhen Xunlei Networking Technologies Co., Ltd. (“Shenzhen Xunlei”)
People’s Republic of China (“PRC”)
January 2003
VIE
100
%
Development of software, provision of online and related advertising, membership subscription and online game services, as well as sales of software licenses

Giganology (Shenzhen) Co., Ltd. (“Giganology Shenzhen”)
PRC
June 2005
Subsidiary
100
%
Development of computer software and provision of information technology services to related companies

Shenzhen Xunlei Wangwenhua Co., Ltd. (formerly known as “Shenzhen Fengdong Networking Technologies Co., Ltd.”) (“Wangwenhua”)
PRC
December 2005
VIE’s subsidiary
100
%
Development of software for related companies and provision of advertising services

Shenzhen Zhuolian Software Co., Ltd. (formerly known as “Xunlei Software (Shenzhen) Co., Ltd.”)
PRC
January 2010
VIE’s subsidiary
100
%
Provision of software technology development for related companies

Xunlei Games Development (Shenzhen) Co., Ltd. (“Xunlei Games”)
PRC
February 2010
VIE’s subsidiary
70
(note 21)
%
Development of online game and computer software for related companies and provision of advertising services

Xunlei Network Technologies Limited (“Xunlei BVI”)
British Virgin Islands
February 2011
Subsidiary
100
%
Holding company

Xunlei Network Technologies Limited (“Xunlei HK”)
Hong Kong
March 2011
Subsidiary
100
%
Holding company and development of computer software

Xunlei Computer (Shenzhen) Co., Ltd. (“Xunlei Computer”)
PRC
November 2011
Subsidiary
100
%
Development of computer software and provision of information technology services

Shenzhen Onething Technologies Co., Ltd. (“Onething”)
PRC
September 2013
VIE’s subsidiary
100
%
Development of computer software, sale of hardware, and provision of information technology services

Beijing Xunjing Technologies Co., Ltd. (formerly known as “Wangxin Century Technologies (Beijing) Co., Ltd.”) (“Beijing Xunjing”)
PRC
October 2015
VIE’s subsidiary
100
%
Development of computer software and provision of information technology services

F-11

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

1. Organization and nature of operations (Continued)


					% of direct
					or indirect
	Place of		Period of		economic
Name of entities	incorporation		incorporation	Relationship	ownership		Principal activities
Shenzhen Crystal Interactive Technologies Co., Ltd. (“Crystal Interactive”)	PRC		May 2016	VIE’s subsidiary	100	%	Development of computer software and provision of information technology services

Beijing Onething Technologies Co., Ltd.	PRC		January 2017	VIE’s subsidiary	100	%	Provision of technology services and development of computer software

HK Onething Technologies Ltd. (“HK Onething”)	Hong Kong	~~March 21, 2014,~~	December 2017	Subsidiary	100	%	Development of cloud computing technology and provision of related services

Hainan Onething E-Sports Co., Ltd.	PRC		May 2018	Subsidiary	100	%	Development of computer software and E-sports related services

Henan Tourism Information Co., Ltd. (“Henan Tourism”)	PRC		June 2018	VIE’s Subsidiary	80 (note 21)	%	Software development, tourism consulting and other related services

Onething Co., Ltd. (Thailand) (“Thailand Onething”)	Thailand		July 2018	Subsidiary	49 (note 21)	%	Development of cloud computing technology and provision of related services

Hainan Xunlei Blockchain Technology Co., Ltd.	PRC		August 2018	VIE’s subsidiary	100	%	Development of computer software and provision of information technology services

Shenzhen Yunwang Wulian Technology Co., Ltd. (formerly known as “Shenzhen Qianhai Shanxian Daojia Technology Co., Ltd.”, “Shanxian Daojia”)	PRC		September 2020	Subsidiary	100	%	Development of computer software and provision of information technology services

Jiangxi Node Technology Service Co., Ltd.	PRC		July 2020	Subsidiary	100	%	Development of computer software and provision of information technology services

Note a : The English names of the PRC companies represent management’s translation of the Chinese names of these companies as they have not adopted formal English names.

The Group engages primarily in the provision of premium downloading services to its members, online advertising services on its websites and mobile phone applications, sales of bandwidth, sales of cloud computing hardware, platform for live streaming services, online game platform for game developers and users and other internet value added services.

To comply with the 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 Company received all of the economic benefits and residual interest and absorbed all of the risks and expected losses from Shenzhen Xunlei.

F-12

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

1. Organization and nature of operations (Continued)

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 legal 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 legal shareholder of Shenzhen Xunlei has repaid the loans in its entirety in accordance with the loan agreement. The legal 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 legal 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 legal 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 RMB 30 million. The term of this agreement lasts 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 legal 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. This agreement expired on November 15, 2016 and has been extended to 2026.

—Equity Pledge Agreement between Giganology Shenzhen and the legal shareholders of Shenzhen Xunlei—Under this agreement, the legal shareholders of Shenzhen Xunlei pledged all of their equity interests in Shenzhen Xunlei to Giganology Shenzhen. If Shenzhen Xunlei and/or its legal 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.

—Power of Attorney—Each legal 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 starting from 2011 unless the business operation agreement among Giganology Shenzhen, Shenzhen Xunlei and the legal shareholders of Shenzhen Xunlei is terminated in advance. This period may be extended at Giganology Shenzhen’s discretion.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

1. Organization and nature of operations (Continued)

—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.

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.

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Xunlei Limited

Notes to the 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 laws 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 laws 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.

On December 26, 2018, the Standing Committee of National People’s Congress published the Draft FIE Law on its official website for public consultation (the “2018 Draft Foreign Investment Law”). The 2018 Draft Foreign Investment Law does not explicitly recognize the variable interest entity structure as a form of foreign investment. Since the 2018 Draft Foreign Investment Law remains silent with respect to the variable interest entity structure as a form of foreign investment, the validity of the Group’s VIE structure as a whole and each of the agreements comprising VIEs will not be affected by the 2018 Draft Foreign Investment Law. It leaves leeway for government’s future regulation of the variable interest entity structure. According to the deliberation and voting results from the final session of the 13^th National People’s Congress on March 15, 2019, the FIE Law has been enacted and there was no substantial change to the 2018 Draft Foreign Investment Law. However, it is possible that future laws, administrative regulations, or provisions of the State Council may recognize the variable interest entity structure as a form of foreign investment but at the same time impose additional requirements/restrictions on the contractual arrangements. It is also possible that further laws, administrative regulations, or provisions of the State Council may explicitly exclude the variable interest entity structure as a form of foreign investment.

If a finding was made by PRC authorities under existing laws and regulations and becomes effective, 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.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies

(a) Basis of presentation and use of estimates

The consolidated financial statements of the Group 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 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 allowance for credit losses, valuation allowance of deferred tax assets, 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.

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.

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Xunlei Limited

Notes to the 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 29 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 between non-controlling shareholders and the shareholders of the Company.

(c)Business combinations

The Group accounts for acquisitions of entities that include inputs and processes and have the ability to generate economic benefit as business combinations. The Group allocates 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.

(d) 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 statement of comprehensive income, 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 4. 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.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(d) Discontinued operations (Continued)

Non-current assets or disposal groups are classified as held for sale assets 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 sale 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.

(e) Foreign currency translation

The Company’s reporting and functional currency is the United States Dollar (‘‘USD’’). Xunlei BVI, Xunlei HK and HK Onething’s functional currency is the USD, and Thailand Onething’s functional currency is the Thai Baht (“THB”). 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 the one released by Chinese State Administration of Foreign Exchange.

(f) Cash and cash equivalents and restricted cash

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.

Cash that is restricted as to withdrawal or for use or pledged as security is reported separately on the face of the consolidated balance sheets, and is included in the total cash, cash equivalents, and restricted cash in the consolidated statements of cash flows. The Group's restricted cash is substantially cash balance on deposit required by its business partners, commercial banks and the court.

(g) Short-term investments

Short-term investments include deposits placed with banks with original maturities of more than three months but within 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, net” on the statement of comprehensive income and measured based on the actual amount of interest the Group received.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(h) Allowance for expected credit losses

Effective on January 1, 2020, the Group adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326) under a modified retrospective transition, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost with the cumulative-effect adjustment recognized to the opening balance of accumulated deficit of the Group as of January 1, 2020. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, referred to as a current expected credit losses (“CECL”) methodology, which will result in more timely recognition of credit losses. The CECL methodology requires that the full amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit losses subsequently, which may require earlier recognition of credit losses. The Group’s accounts receivable, due from related parties and other current assets (including other receivables) and other long-term non-current assets (including other long-term receivables) are within the scope of ASC Topic 326.

The Group assessed the credit loss for accounts receivable with similar risk characteristics on a pool basis. The credit loss assessment for each pool was mainly based on past collection experience, consideration of current and future economic conditions and changes in our collection trends.

The credit allowances provided for accounts receivable from continuing operations as of December 31, 2019 and 2020 were USD 7,604,000 and USD 9,329,000, respectively.

(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 normal course of business after allowing for the costs of realization.

(j) Long-term investments

The Group holds investments in privately held companies. Prior to adopting ASU 2016-01, Financial Instruments on January 1, 2018, for those investments over which the Group does not have significant influence and without readily determined fair value, the Group carried the investment at cost and only adjusted for other-than-temporary declined in fair value and distribution of earnings that exceed the Group’s share of earnings.

On January 1, 2018, the Group adopted ASU 2016-01, Financial Instruments, and started to measure long-term equity investments, other than equity method investments, at fair value through earnings. For those investments over which the Group does not have significant influence and without readily determinable fair value, the Group elected to record these investments at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Under this measurement alternative, changes in the carrying value of equity investments will be required to be made whenever there are observable price changes in orderly transactions for the identical or similar investment of the same issuer.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2.            Summary of significant accounting policies (Continued)
(j)           Long-term investments (Continued)
Management regularly evaluates the impairment of long-term equity investments based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss recognized equal to the excess of the investment costs over its fair value at the end of each reporting period for which the assessment is made. The fair value would then become the new cost basis of investment.
During the years ended December 31, 2018, 2019 and 2020 the Group recognized an impairment of USD 7,794,000, USD 19,830,000 and USD 794,000, and share of loss of equity investees of USD 317,000, NaN and NaN, respectively, from equity method investments.
(k)          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. If the Group commits to a plan to abandon a long-lived asset before the end of its previous estimated useful life, depreciation shall be revised to reflect a shortened useful life.

Estimated useful lives
Residual rate
Servers and network equipment
3-5 years
5
%
Computer equipment
5 years
5
%
Furniture, fittings and office equipment
3-5 years
5
%
Motor vehicles
5 years
5
%
Leasehold improvements
Shorter of lease term or 3 years
—

Repair and maintenance costs are expensed as incurred. Expenditures that substantially increase an asset’s useful life are capitalized. Upon sale or disposal, 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 comprehensive loss. The cost and related accumulated depreciation are removed from the balance sheets.
(l)           Goodwill
Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed from the acquired entity as a result of the Company’s acquisitions of interests in its subsidiaries and consolidated VIEs. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2.            Summary of significant accounting policies (Continued)
(l)           Goodwill (Continued)
In performing the two-step quantitative impairment test, the first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be 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 goodwill to the carrying value of a reporting unit’s 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 the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, allocation of assets, liabilities and goodwill to reporting units, and determination of the fair value of each reporting unit.
Starting in 2020, the Company adopted the FASB issued ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (the “Update”). To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. It is more likely that, by adopting simplified measurement which eliminates the Step 2 from goodwill impairment test, an entity with the triggering event for goodwill impairment will recognize more goodwill impairment than it would do under the old model.
The Group’s goodwill was attributable to the Company as a whole. The impairment test for goodwill determines the fair value of the reporting unit, the Company as a whole, and compares it to the carrying value of the assets and liabilities, including goodwill, of the reporting unit. The fair value of the Company was estimated by management using the discounted cash flow model derived from the long-term (five-year) cash flow projections, which included significant judgements and assumptions relating to revenue forecast and operating margins, discount rate of 18.2% that reflects market assessments of the time value and the specific risks relating to the Company, and cash flows beyond the five-year period are extrapolated using a terminal growth rate of 2%.
NaN goodwill impairment losses were recognized for the years ended December 31, 2018, 2019 and 2020 based on the impairment test performed by the Group.
(m)         Intangible assets
Intangible assets, which include land use rights, acquired computer software, online game licenses and audio-visual license, are carried at cost less accumulated amortization with no residual value and impairment loss, if any. Amortization of intangible assets is computed using the straight-line method over the estimated useful lives of the assets as follows:

Estimated useful lives
Land use rights
30 years
Acquired computer software
5 years
Online game licenses
1-3 years
Audio-visual license
9 years

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(n) Impairment of long-lived assets

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.

(o) 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 regard 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.

(p) Operating leases

On January 1, 2019, the Group adopted ASC Topic 842 Leases (“ASC 842”) to revise the accounting for leases. The adoption of new lease standard requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet.

Lessees shall follow the requirements to classify most leases as either financing or operating using principles similar to previous lease accounting. In the statement of comprehensive income, a lessee shall present both of the following: a) for finance leases, the interest expense on the lease liability and amortization of the right-of-use asset are not required to be presented as separate line items and shall be presented in a manner consistent with how the entity presents other interest expense and depreciation or amortization of similar assets, respectively; b) for operating leases, lease expense shall be included in the lessee’s income from continuing operations.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(p) Operating leases (Continued)

The Group adopted ASC 842 on a modified retrospective basis and did not restate comparative periods. The adoption of ASC 842 resulted in the recognition of right-of-use assets and related lease liabilities of approximately USD11.8 million and USD11.4 million, respectively, which were reported on the consolidated balance sheet as of January 1, 2019. The Group have elected the short-term lease exemption for all leases with a lease term of 12 months. Payments associated with short-term leases are recognized on a straight-line basis as an expense in profit or loss.

The standard also requires a lessee to recognize a single lease cost related to operating lease, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The net profit after tax had not to be materially impacted as a result of adopting the new rules.

With the adoption of ASC 842, the Group assesses, at contract inception, whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining the appropriate discount rate to use in calculating the present value of contractual lease payments, management regularly evaluates the lessee’s incremental borrowing rate, as the rate implicit in the lease cannot be readily determined.

See note 12 for additional disclosures on operating lease arrangements.

(q) Revenue recognition

The Group adopted ASC Topic 606 Revenue from Contracts with Customer (“ASC 606”), from January 1, 2018, using the modified retrospective method. The core principle of the ASC 606 is an entity should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Revenue is recognized when or as the control of the services or goods is transferred to the customer. Depending on the terms of the contract and the laws that apply to the contract, control of the services and goods may be transferred over time or at a point in time.

A contract liability is the Group’s obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. Contract costs includes incremental costs of obtaining a contract and costs to fulfil a contract.

The Group generates revenues from various streams. Net revenues presented in the consolidated statements of loss represent revenues from service and product sales net off sales discount, value-added tax and related surcharges.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(q) Revenue recognition (Continued)

(I) 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. 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 contract liabilities. The Group satisfies its various performance obligations by providing services throughout the subscription period 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 records 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 charges’’) 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 over a particular period of time. It includes multiple performance obligations, primarily for advertisements to be displayed in different spots at different times, placed under different formats including but are 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.

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.

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.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(q) Revenue recognition (Continued)

(II) Advertising revenues (Continued)

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 394,000, NaN and NaN for the years ended December 31, 2018, 2019 and 2020, respectively.

Transactions with advertising platforms

Xunlei also cooperates with advertising platforms such as Guangdiantong and Baidu, of which, the advertising platforms are responsible for matching the requirements of advertisers or advertising agencies and dispatching the advertising content to Xunlei's platforms by certain analysis systematically. As the advertising platforms are viewed as customers in these transactions, revenue is recognized monthly based on the data publicized on the platforms and pre-agreed sharing portion.

In May 2020, the Group entered into a user traffic monetization agreement with Beijing Itui Technology Co., Ltd. (“Beijing Itui”), a company controlled by the Company's principal shareholder. Since May 2020, Beijing Itui has been handling all of the Group's advertising resources, including matching the requirements of advertisers and dispatching the advertising content to Xunlei's platforms. Beijing Itui is viewed as the customer and revenue is recognized monthly based on the data publicized on the platforms and pre-agreed sharing portion.

(III) Live streaming revenue

The Group operates a live streaming platform where users can access the platform, view the live streaming content provided by the Group’s performers, and purchase virtual gifts which they can grant to performers in the live streaming platform to show support for their favorite performers. Xunlei is the principal in the provision of the live streaming content and experience, which is considered as the performance obligation of the Group. The Group recognized revenue from sales of virtual gifts to the viewers when the relevant virtual gifts are presented to the performers or over the duration of stated period of the time-based item. The Group does not have further obligations to the viewers after the virtual gifts are consumed immediately or after the stated period for time-based items, although the Group will continue to provide the live streaming content to the viewers in order to continue to generate more sales of virtual gifts.

(IV) Cloud computing and other internet value-added services

(i) Revenues from cloud computing

As part of the Group’s cloud computing business, the Group engages in sale of OneThing Cloud. OneThing Cloud is a personal cloud hardware device that allows users to share their idle bandwidth with the Group, in exchange for LinkTokens. LinkTokens are not convertible into cash but they can be used to redeem products and services offered in the LinkTokens Mall. LinkTokens represent an obligation to deliver future services by the operator of the LinkToken program.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(q) Revenue recognition (Continued)

(IV) Cloud computing and other internet value-added services (Continued)

(i) Revenues from cloud computing (Continued)

Prior to April 1, 2019, the bandwidth shared by the users in exchange for LinkTokens is an identifiable benefit which the Group can reasonably estimate fair value. The benefit that the Group receives from user’s contribution of bandwidth is independent from OneThing Cloud that the Group sells to users.

In April 2019, the Group transferred the operation of LinkTokens, including the issuance and redemption obligation of LinkTokens, as well as the LinkTokens Mall to a third party, Beijing LinkChain Co., Ltd. (“Beijing LinkChain”). Upon completion of the transfer, users could continue to share their idle bandwidth with the Group in exchange for the LinkTokens issued by Hainan LinkChain Networking Technology Co., Ltd. (“Hainan LinkChain”), a wholly owned subsidiary of Beijing LinkChain, (note 9). In addition, the Group is obligated to pay to Hainan LinkChain a pre-determined amounts per active user of OneThing Cloud who shared their idle bandwidth with the Group. This arrangement expired in April 2020.

In April 2020, the Group launched the OneThing Cloud app, allowing users to contribute their idle bandwidth capacity in exchange for certain amount of cash rewards. As the sales of OneThing Cloud and purchase of excess bandwidth by the Group are considered separate transactions, the sales of OneThing Cloud should be reported as revenue, while cash rewards given for purchase of bandwidth should be reported as bandwidth cost.

The Group primarily sells OneThing Cloud to individuals through online e-commerce platforms before 2019 and also corporate customers starting from 2019. The performance obligation is satisfied when the item is dispatched to the end customers.

The core business concept of cloud computing is to collect idle uplink capacity from individuals with reward, and deliver those collected computing resources to online video streaming platforms. On a monthly basis, the Group records the bandwidth it delivers and recognizes revenue from these online video streamers under contractual rates applied (price per GB of bandwidth multiplies total GBs of bandwidth per month).

Revenue is recognized net of return allowances when the products are delivered and title passes to customers. Return allowances, which reduce net revenues, are estimated based on historical experiences. Product warranties are estimated and recognized at the time the Company recognizes revenue. The warranty period is 1 year. The Company accrues warranty liabilities at the time of sale, based on historical and projected incident rates and expected future warranty costs.

(ii) Revenues from online games

Since 2018, the Group discontinued its web game business and started to operate web game business again under a co-operation model with third party games operators in 2019.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(q) Revenue recognition (Continued)

(IV) Cloud computing and other internet value-added services (Continued)

(ii) Revenues from online games (Continued)

Web games – cooperating with third parties

The Group enters into a series of technical cooperation agreements with third party online game operators. Users access to the Group’s platform and purchase in-game virtual items which can then be used in games provided by the third-party online game operators. The Group provides the third-party online game operators with a portal which the online game operators can host the online games. The Group charges the online game operators based on a pre-determined portion of proceeds earned from paying users pursuant to the revenue sharing arrangements for the provision of portal and payment collection service to the online game operators. The third-party online game operators are the principal in the provision of games to users and the Group provide the relevant platform to the game operators, therefore, the game operators are viewed as the customers in these transactions.

The service fees receivable from the third-party online game operators are variable, which are contingent upon future events (future cash proceeds paid by game players), and are recognized when the contingency is met provided that collectability is reasonably assured.

(r) Sales and marketing expenses

Sales and marketing expenses comprise primarily salary, 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 22,935,000, USD 20,974,000 and USD 11,026,000 for the years ended December 31, 2018, 2019 and 2020, respectively.

Shipping and handling fee is recorded in sales and marketing expenses.

(s) General and administrative expenses

General and administrative expenses consist primarily of salary and benefits, professional service fees, legal expenses and other administrative expenses.

(t) Research and development costs

The Group incurred research and development costs to develop its downloading software and bandwidth crowdsourcing technologies to enhance the competitive advantages of the Group’s key products, such as Xunlei Accelerator and cloud computing services. Costs incurred during the research phase are expensed as incurred. Costs incurred for the development of the downloading software and bandwidth crowdsourcing technologies 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.

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 were immaterial for the periods presented.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(u) 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. 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.

PRC Value Added Tax

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. In addition to the product revenues currently subject to VAT at a rate of 13% (16% before April 1, 2019 and 17% before May 1, 2018), the Group’s advertising revenues, subscription revenue, online game revenue, revenue from cloud computing services and live streaming revenue are now subject to VAT at a rate of 6%.

According to the policy of the PRC State Tax Bureau, starting from April 1, 2019 to December 31, 2021 enterprises that engage in postal services, telecommunication services and consumer services are entitled to claim 110% of the input tax incurred as tax credit in determining VAT payable.

(v) 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 from continuing operations for such employee benefits, which are expensed as incurred, were USD 12,501,000, USD 12,337,000 and USD 7,949,000 for the years ended December 31, 2018, 2019 and 2020, respectively.

(w) 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.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2.            Summary of significant accounting policies (Continued)
(x)          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.
(y)          Segment reporting
The Group’s Chief Executive Officer has been identified as the chief operating decision maker, 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, over 99%of revenues of the Group were derived from mainland China.
An analysis of the different types of revenues for the years ended December 31, 2018, 2019 and 2020 are summarized as follows:

Revenue from continuing operations

Years ended December 31,
(In thousands)

2018

2019

2020
Subscription revenue

81,877

81,532

84,299
Product revenue (note a)

54,604

8,269

1,412
Live streaming revenue

31,031

26,920

20,866
Advertising revenue

27,781

15,643

13,206
Cloud computing service and other internet value-added services (note b)

36,839

48,903

66,900
Total

232,132

181,267

186,683

Notes:
(a)   Product revenue comprise sales of OneThing Cloud devices and hard disks.
(b)   Other internet value-added services mainly comprise provision of technical services.
(z)          Net loss per share
Net basic loss per share is computed by dividing net 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 loss is allocated between common shares and other participating securities based on their participating rights.
Net diluted loss per share is calculated by dividing net 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 loss per share if their effects would be anti-dilutive. Common share equivalents consist of the common shares issuable upon the conversion of the stock options, using the treasury stock method.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(aa) 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 adjustments.

(bb) 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.

(cc) Dividends

Dividends are recognized when declared. NaN dividends were declared for the years ended December 31, 2018, 2019 and 2020. 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.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

2. Summary of significant accounting policies (Continued)

(dd) Recent accounting pronouncements

Income Tax (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions for recognizing deferred taxes for equity method investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of the disclosure requirements of ASU 2019-12 will have on its consolidated financial statements and does not expect the impact to have a material effect on its consolidated financial statements.

Clarifying the interactions between Topic 321, Topic 323, and Topic 815: In January 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-01 to clarify the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020.

3. Business combination
In September 2020, the Group entered into a sale and purchase agreement to acquire 100% equity interests of Shanxian Daojia from Weimin Luo, a director and Chief Operating Officer of the Company (see note 26), and a third party individual at NaN consideration while taken up the net liabilities of Shanxian Daojia The allocation of the purchase price at the date of acquisition is as follows:

USD (In thousands)
As of acquisition date
Property and equipment, net
17
Accrued liabilities and other payables
(798)
Goodwill
781
Total
—

Shanxian Daojia is a company principally operating an internet platform for daily services. The purpose of this acquisition is to acquire the skilled talents of Shanxian Daojia and goodwill arising from this acquisition is attributable to the acquired workforce. This acquisition was completed on September 30, 2020. The acquired goodwill is not deductible for tax purposes. Acquisition related costs were immaterial and were included in general and administrative expenses for the year ended December 31, 2020.
Pro forma revenue data and pro forma earnings data was not disclosed because the impact was immaterial.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

4. Discontinued operations
In December 2017, the Company signed a contract (“Disposal Agreement”) to divest its web game business, a major line of the Group’s online game business, to Shenzhen Xunyi Network Technology Corp., Ltd. (“Shenzhen Xunyi”), a company operated by a few former core members of Xunlei’s web game business at a consideration of RMB 4,180,000 (equivalent to approximately USD 640,000). The disposal was due to a shift of strategy to allow the Group better manages its internal resources, including internal traffic referral and corporate allocation. The disposal was completed in January 2018 and a gain of USD 1.4 million was recognized.
As part of the disposal and according to the Disposal Agreement, Xunlei agreed to assist the Buyer to collect and pay certain receivables and payables of the web game business for a period of no longer than one year after the completion of disposal. In addition, the Buyer agreed to enter into business cooperation services with Xunlei, including purchase of advertising services in the next 24 months, after signing the Disposal Agreement, under a separate negotiated term. Relevant business cooperation agreements have been signed in January 2018 at market term.
Results of the discontinued operation

Year ended
USD (In thousands)
December 31, 2018
Revenues, net of rebates and discounts
656
Business taxes and surcharges
(1)
Net revenues
655
Cost of revenues
(16)
Gross profit
639
Operating expenses

Research and development expenses
(419)
Sales and marketing expenses
(63)
General and administrative expenses
(18)
Total operating expenses
(500)
Operating income
139
Gain on disposal of web game
1,394
Income tax expenses
(230)
Income from discontinued operations
1,303

Cash flows generated from the discontinued operation

Year ended
USD (In thousands)
December 31, 2018
Net cash generated from operating activities
1,065
Net cash flow for the ~~effects~~year
1,065

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

5.            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, 2019 and 2020 primarily consist of the following currencies:

December 31, 2019

December 31, 2020




USD



USD
(In thousands)

Amount

equivalent

Amount

equivalent
RMB

322,972

46,296

312,581

47,906
USD

115,805

115,805

89,050

89,050
Hong Kong Dollar

2,202

283

1,737

224
THB

2,417

81

2,052

68
Total

162,465

137,248

As at December 31, 2019 and 2020, included in the cash and cash equivalents are time deposits with original maturities of three months or less of USD 34,000,000 and USD 27,200,000 respectively.

6.            Short-term investments

(In thousands)

December 31, 2019

December 31, 2020
Time deposits

102,555

68,828
Investments in financial instruments (note)

292

48,993
Total

102,847

117,821

Note:      The investments were issued by commercial banks in the PRC 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 sheets at the principal amount plus accrued interest. Interest income is recorded in “Other income, net” in the consolidated statements of comprehensive loss.

7.            Accounts receivable, net

(In thousands)

December 31, 2019

December 31, 2020
Accounts receivable

35,137

32,312
Less: Allowance for credit losses

(7,604)

(9,329)
Accounts receivable, net

27,533

22,983

The following table presents movement in the allowance for expected credit loss:

(In thousands)

December 31, 2018

December 31, 2019

December 31, 2020
Balance at beginning of the year

31

7,709

7,604
Additions

7,680

19

1,137
Exchange difference

(2)

(124)

588
Balance at end of the year

7,709

7,604

9,329

The top 10 customers accounted for about 63% and 65% of accounts receivable as of December 31, 2019 and 2020, respectively.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

8.          Inventories

(In thousands)

December 31, 2019

December 31, 2020
Hardware devices (note)

9,091

4,830
Others

162

324
Less: Impairment

(3,716)

(3,428)
Total

5,537

1,726

Note:      Hardware devices mainly include OneThing Cloud and hard disks. OneThing Cloud is a hardware, which can act as a micro server between users and Xunlei, which enables users to share their idle uplink capacity with Xunlei.
The inventory written down was USD 3,523,000 and USD 3,283,000 for the years ended December 31, 2019 and 2020, respectively.

9.            Prepayments and other current assets

(In thousands)

December 31, 2019

December 31, 2020
Current portion:

Advance to suppliers (note a)

3,579

1,483
Receivable related to Linktoken disposal (note b)

3,536

—
Interest-free loans to employees (note c)

3,185

1,896
Rental and other deposits

1,990

1,670
Proceed receivable

1,105

137
Prepayment for taxation

936

112
Prepaid management insurance

249

241
Advance to employees for business purposes

211

86
Interest receivable

4

2
Deposit related to an ongoing litigation (note d)

—

4,751
Others

1,748

1,156
Total of prepayments and other current assets

16,543

11,534
Non-current portion:

Low-interest loans to employees, non-current portion (note c)

313

905
Total of long-term prepayments and other assets

313

905

Notes:
(a) Advances to suppliers primarily include prepayments to bandwidth suppliers.
(b) In September 2018, Onething entered into a sale and purchase agreement with Beijing LinkChain to dispose of ~~discontinued operations discussed in Note 3~~the operation and related assets and liabilities of LinkToken program. In June 2019, certain supplemental agreements were entered into with Beijing LinkChain and Hainan LinkChain, the rights and obligations related to LinkToken program was transferred to Hainan LinkChain.
The receivable related to LinkToken disposal as of December 31, 2019 included the consideration receivable due from Hainan LinkChain and the amount recoverable from expenses paid on behalf of Hainan LinkChain.
An impairment provision of USD 3,536,000 was recognized as of December 31, 2020, due to the deterioration of Hainan LinkChain’s operation and financial position.

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Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

9. Prepayments and other current assets (Continued)

(c)

The Group had entered into loan contracts with certain employees as toof December 31, 2020, under which the ~~date is April 21, 2016~~Group provided interest-free loans or low-interest loans to these employees. The loan amounts vary amongst different employees from repayable on demand to repayable in equal installments on a monthly basis over a term of 5 to 10 years. The balances classified as current represented loan amounts that are repayable on demand or repayable within the next twelve months from the balance sheet date.

(d)	The balance as of December 31, 2020 represented the deposits placed in a custodian bank account of the court to secure an order for preservation of assets against a supplier of the Group.

10.          Long-term investments

(In thousands)

December 31, 2019

December 31, 2020
Equity interests without a readily determinable fair value:

Balance at beginning of the year

33,638

26,365
Additions

2,838

—
Disposal

(1,055)

—
Net unrealized gains on investments held

10,907

794
Exchange difference

(132)

369
Less: impairment loss on long-term investments

(19,831)

(794)
Balance at end of the year

26,365

26,734

Total long-term investments

26,365

26,734

Details of the Group's ownership of the long-term investments are as follows:

Percentage of ownership of

shares as of December 31,

Investee

2019

2020

Equity method investments:

Zhuhai Qianyou Technology Co., Ltd.

19.00
%
19.00
%
Shenzhen Mojingou Information Services Co., Ltd. (formerly named as “Xunlei Big Data Information Service Co., Ltd.”).

28.77
%
28.77
%
Equity interests without a readily determinable fair value: Guangzhou Yuechuan Network Technology Co., Ltd.

9.30
%
9.30
%
Shanghai Guozhi Electronic Technology Co., Ltd.

16.80
%
16.80
%
Guangzhou Hongsi Network Technology Co., Ltd.

19.90
%
19.90
%
Chengdu Diting Technology Co., Ltd.

12.74
%
12.74
%
Xiamen Diensi Network Technology Co., Ltd.

14.25
%
14.25
%
11.2 Capital I, L.P.

2.03
%
2.03
%
Cloudtropy

9.69
%
9.69
%
Tianjin Kunzhiyi Network Technology Co., Ltd. (note a)

19.90
%
N/A

Shanghai Lexiang Technology Co., Ltd. ("Shanghai Lexiang") (note b)

13.54
%
7.81
%
Hangzhou Feixiang Data Technology Co., Ltd.

28.00
%
28.00
%
Shenzhen Meizhi Interactive Technology Co., Ltd.

9.40
%
9.40
%
Beijing Yunhui Tianxia Technology Co., Ltd.

13.70
%
13.70
%
Yingshi Innovation Technology Co., Ltd. (formerly named as “Shenzhen Arashi Vision Interactive Technology Co., Ltd.” or “Insta360”)

8.73
%
8.73
%
Beijing Cloudin Technology Limited Co., Ltd.

4.12
%
4.12
%
Quanxun Huiju Networking Technology (Beijing) Co., Ltd.

5.40
%
5.40
%

F-35

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

10.          Long-term investments (Continued)
Notes :
(a)
The company has been deregistered in May 2020.
(b)
In October 2020, the Group disposed 4.82% of the equity interest in Shanghai Lexiang, for which full impairment have been provided in December 2019, at a consideration of USD 268,000. The remaining equity interest in Shanghai Lexiang was remeasured based on this observable price change from the disposal, a fair value gain of USD 794,000 was recognized accordingly.
The Group recognized impairment against this investment of USD 794,000 as of December 31, 2020, after considering Shanghai Lexiang’s operation performance, financial and liquidity position after the above transaction.

11.          Property and equipment
Property and equipment consist of the following:

(In thousands)

December 31, 2019

December 31, 2020
Servers and network equipment

39,130

35,827
Computer equipment

1,762

1,565
Furniture, fixtures and office equipment

806

836
Motor vehicles

406

481
Leasehold improvements

6,566

6,604
Total original costs

48,670

45,313
Less: Accumulated depreciation

(28,357)

(33,006)
Less: Accumulated impairment

(4)

(3)
Sub-total

20,309

12,304
Construction in progress

18,461

38,421
Total

38,770

50,725

NaN impairment loss was recognized for the years ended December 31, 2018, 2019 and 2020.
Impairment loss of USD 6,000 and USD 1,000 has been reversed as of December 31, 2019 and December 31, 2020 due to disposal.
Depreciation expense recognized for the years ended December 31, 2018, 2019 and 2020 are summarized as follows:


Years ended December 31
(In thousands)

2018

2019

2020
Cost of revenues

5,018

5,198

6,247
Research and development expenses

331

300

529
General and administrative expenses

245

317

2,492
Sales and marketing expenses

1

9

9
Total

5,595

5,824

9,277

F-36

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

12.        Right-of-use assets and lease liabilities
The right-of-use assets represented the office lease in the Group, are amortized over the lease terms, which are greater than 1 year but less than 3 years. Right-of-use assets for long-term operating leases were as below:

(In thousands)
Office leases
Balance at January 1, 2019 on adoption of ASC 842 Leases

11,819
Additions
~~F- 2~~

3,830
Modification of operating lease

~~Report of independent registered public accounting firm~~(1,107)
Amortization

~~To the Board~~(5,634)
Effect of ~~Directors and Shareholders of Xunlei Limited:~~foreign currency exchange differences

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’’)(161)
Net book amount at December 31, ~~2015 and 2014,~~2019

8,747
Additions

500
Modification of operating lease

(3,825)
Amortization

(3,685)
Effect of foreign currency exchange differences

217
Net book amount at December 31, 2020
1,954

During the years ended December 31, 2019 and 2020, the general and administrative expenses for long-term operating lease were USD 6,077,000 and USD 3,762,000, respectively. A charge of USD 301,000 and USD 291,000 were recognized in relation to short-term lease for the years ended December 31, 2019 and 2020. The future minimum payments under non-cancellable short-term operating leases of office rental will be USD 119,000 in 2021. The weighted average discount rate related to operating lease was 5.5% and 5.4% respectively as of December 31, 2019 and 2020, and the weighted average remaining lease term were 2 years and 1 year as of December 31, 2019 and 2020, respectively.
The total cash payments in respect of operating lease was USD 5,149,000 and USD 3,797,000 for the years ended December 31, 2019 and 2020, respectively.
The undiscounted cash payment for each of the next five years as of December 31, 2019 is:

(In thousands)


2020

5,034
2021

3,000
2022

1,279
Total undiscounted payments

9,313
Less: effect of discounting

(488)
Discounted lease liabilities

8,825

The undiscounted cash payment for each of the next five years as of December 31, 2020 is:

(In thousands)


2021

1,998
2022

28
Total undiscounted payments

2,026
Less: effect of discounting

(38)
Discounted lease liabilities

1,988

F-37

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

13.            Intangible assets, net

December 31, 2019

December 31, 2020

Net book

Net book
(In thousands)

Cost

Amortization

Impairment

value

Cost

Amortization

Impairment

value
Land use rights

4,769

(1,017)

—

3,752

5,099

(1,258)

0

3,841
Acquired computer software

2,391

(1,433)

—

958

3,530

(2,853)

0

677
Online game licenses

5,910

(5,193)

(717)

—

0

0

0

0
Audio-visual license

5,621

(905)

—

4,716

6,010

(1,671)

0

4,339

18,691

(8,548)

(717)

9,426

14,639

(5,782)

0

8,857

Amortization expense recognized for the years ended December 31, 2018, 2019 and 2020 are summarized as follows:

Years ended December 31
(In thousands)

2018

2019

2020
Cost of revenues

266

5

—
General and administrative expenses

721

1,136

1,210
Research and development expenses

244

59

6
Total

1,231

1,200

1,216

The estimated aggregate amortization expense for each of the next five years as of December 31, 2020 is:

(In thousands)

Intangible assets
2021

1,107
2022

1,050
2023

1,036
2024

972
2025 and thereafter

4,692

The weighted average amortization periods of intangible assets as at December 31, 2019 and 2020 are as below:

(In year)

December 31, 2019

December 31, 2020
Land use rights

30

30
Acquired computer software

5

5
Online game licenses

3

—
Audio-visual license

9

9
Total weighted average amortization periods

12

10

14.          Goodwill

(In thousands)

December 31, 2019

December 31, 2020
Beginning balance

20,717

20,382
Addition (note)

—

815
Foreign currency translation adjustment

(335)

1,410
Ending balance

20,382

22,607

Note:      The addition of goodwill in 2020 was related to the acquisition of Shanxian Daojia, please refer to note 3 for the acquisition.
NaN impairment loss was recognized for the years ended December 31, 2018, 2019 and 2020.

F-38

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

15.          Contract liabilities and deferred income

(In thousands)

December 31, 2019

December 31, 2020
Contract liabilities (Note a)

Membership subscription

29,769

31,981
Others

2,142

2,513
Other deferred income

Government grants

1,300

466
Total

33,211

34,960
Less: non-current portion (Note b)

(1,223)

(920)
Contract liabilities and deferred income, current portion

31,988

34,040

Notes:
(a) Contract liabilities were related to unsatisfied performance obligations at the ~~results of their operations and their cash flows for each~~end of the ~~two years~~year. Due to the generally short-term duration of the contracts, the majority of the performance obligations are satisfied 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) Note December 31,
2014 December 31,
2015
Assets
Current assets:
Cash and cash equivalents 4 404,275 361,777
Short-term investments 5 29,427 70,328
Accounts receivable, net 6 5,180 11,266
Inventories 10 — 480
Deferred tax assets 23 2,091 689
Due from related parties 22 22 45
Prepayments and other current assets 7 13,890 13,068
Held-for-sale assets 3 47,045 —
Total current assets 501,930 457,653

Non-current assets:
Long-term investments 11 5,498 11,319
Deferred tax assets 23 10,862 8,593
Property and equipment, net 8 16,408 18,036
Intangible assets, net 9 15,100 13,433
Goodwill 2(l), (m) 23,237 21,896
Prepayments for content copyrights 7 1,532 —
Other long-term prepayments and receivables 7 5,795 7,431
Total assets 580,362 538,361

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) 14,937 21,736
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) 22 84 38
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 12 27,745 25,113
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) 2,554 2,470
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) 13 30,333 27,379
Held-for-sale liabilities 3 27,367 —
~~F- 4~~
~~Xunlei Limited~~
~~Consolidated Balance Sheets (Continued)~~
(Amounts expressed in thousands of United States
dollars (“USD”), except for number of shares and per
share data) Note December 31,
2014 December 31,
2015
Total current liabilities 103,020 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) 12 6,825 5,383
Deferred tax liability, non-current portion 23 8,552 6,378
Due to related parties, non-current portion 22 4,137 4,337
Other long-term payable 807 846
Total liabilities 123,341 93,680
Commitments and contingencies 26
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) 17 82 85
Additional paid-in-capital 446,202 458,270
Accumulated other comprehensive income/(loss) 5,894 (4,152 )
Statutory reserves 5,132 5,132
Treasury shares (30,274,602 shares and 29,558,094 shares as at December 31, 2014 and 2015, respectively) 17 7 7
Retained earnings/(Accumulated deficits) 574 (12,593 )
Total Xunlei Limited’s shareholders’ equity 457,891 446,749
Non-controlling interest 19 (870 ) (2,068 )
Total liabilities and shareholders’ equity 580,362 538,361
~~The accompanying notes are an integral part of these consolidated financial statements.~~
~~F- 5~~
~~Xunlei Limited~~
~~Consolidated Statements of Comprehensive Income/(Loss)~~
(Amounts expressed in thousands of USD, Years ended December 31,
except for number of shares and per share data) Note 2013 2014 2015
Revenues, net of rebates and discounts 2(r) 122,031 135,812 129,996
Business taxes and surcharges (3,904 ) (1,878 ) (361 )
Net revenues 118,127 133,934 129,635
Cost of revenues 14 (50,258 ) (55,755 ) (60,034 )
Gross profit 67,869 78,179 69,601
Operating expenses
Research and development expenses (21,740 ) (29,252 ) (38,250 )
Sales and marketing expenses (9,848 ) (13,527 ) (15,042 )
General and administrative expenses (18,663 ) (26,945 ) (28,774 )
Total operating expenses (50,251 ) (69,724 ) (82,066 )
Operating income / (loss) 17,618 8,455 (12,465 )
Interest income 1,189 6,733 5,833
Interest expense — (163 ) (239 )
Other income, net 25 4,679 13,966 3,627
Share of income/(loss) from an equity investee 25 (259 ) (12 )
Income/(loss) from continuing operations before income tax 23,511 28,732 (3,256 )
Income tax (expense)/benefit 23 (560 ) (463 ) 886
Net income/(loss) from continuing operations 22,951 28,269 (2,370 )
Discontinued operations
Loss from discontinued operations before income taxes (13,779 ) (20,330 ) (10,048 )
Income tax benefit / (expense) 1,207 1,923 (2,048 )
Net loss from discontinued operations (12,572 ) (18,407 ) (12,096 )

Net income/(loss) 10,379 9,862 (14,466 )
Less: net loss attributable to the non-controlling interest (283 ) (950 ) (1,299 )
Net income/(loss) attributable to Xunlei Limited 10,662 10,812 (13,167 )
Allocation of net income to participating preferred shareholders 16 (4,094 ) — —
Accretion of Series D to convertible redeemable preferred shares redemption value 16 (4,300 ) (1,870 ) —
Contingent beneficial conversion feature of series C to one Series C shareholder 15 — (57 ) —
Deemed dividend to Series D shareholder from its modification 15 — (279 ) —
Accretion of Series E to convertible redeemable preferred shares redemption value 15 — (12,754 ) —
Amortization of beneficial conversion feature of Series E 15 — (4,139 ) —
Acceleration of amortization of beneficial conversion feature of Series E upon initial public offering 15 — (49,346 ) —
Deemed dividend to certain shareholders from repurchase of shares 18 — (14,926 ) —
Deemed dividend to preferred shareholders upon initial public offering 15 — (32,807 ) —

Net income/(loss) attributable to Xunlei Limited’s common shareholders 2,268 (105,366 ) (13,167 )
Net income/(loss) 10,379 9,862 (14,466 )
Other comprehensive income / (loss): Foreign currency translation adjustment, net of tax 2,775 (114 ) (9,945 )
Comprehensive income/(loss) 13,154 9,748 (24,411 )
Less: comprehensive loss attributable to non-controlling interest shareholders (276 ) (955 ) (1,198 )
Comprehensive income/(loss) attributable to Xunlei Limited 13,430 10,703 (23,213 )
Basic net income/(loss) per share attributable to Xunlei Limited from continuing operations 21 0.24 (0.45 ) (0.00 )
Basic net loss per share attributable to Xunlei Limited from discontinued operations 21 (0.20 ) (0.09 ) (0.04 )
Weighted average number of common shares outstanding—basic 21 61,447,372 194,711,227 335,987,595
Diluted net income/(loss) per share attributable to Xunlei Limited from continuing operations 21 0.18 (0.45 ) (0.00 )
Diluted net loss per share attributable to Xunlei Limited from discontinued operations 21 (0.17 ) (0.09 ) (0.04 )
Weighted average number of common shares outstanding—diluted 21 76,065,898 194,711,227 335,987,595
~~The accompanying notes are an integral part of these consolidated financial statements.~~
~~F- 6~~
~~Xunlei Limited~~
~~Consolidated statements of changes in shareholders’ equity~~
(Amounts expressed in
thousands of USD,
except for number of
shares and per share Series C convertible
non-redeemable
preferred share Series B convertible
non-redeemable
preferred shares Series A-1
convertible
non-redeemable
preferred shares Series A convertible
non-redeemable
preferred shares Common shares Treasury stock Additional
paid-in Retained Statutory Accumulated
other
comprehensive Total
shareholders’ Non-
controlling
data) Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount capital earnings reserves income equity interest
Balance at December 31, 2012 5,728,264 1 30,308,284 8 36,400,000 9 26,416,560 7 61,447,372 15 — — 59,540 2,011 3,142 3,235 67,968 360
Share-based compensation — — — — — — — — — — — — 2,096 — — — 2,096 —
Issuance of common shares — — — — — — — — — — 9,073,732 2 (2 ) — — — — —
Statutory reserves — — — — — — — — — — — — — (1,336 ) 1,336 — — —
Series D preferred shares accretion — — — — — — — — — — — — — (4,300 ) — — (4,300 ) —
Net income / (loss) — — — — — — — — — — — — — 10,662 — — 10,662 (283 )
Translation adjustments — — — — — — — — — — — — — — — 2,768 2,768 7
Balance at 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 61,634 7,037 4,478 6,003 79,194 84
Accretion of Series D to convertible redeemable preferred shares redemption value — — — — — — — — — — — — (717 ) (1,153 ) — — (1,870 ) —
BCF upon Series E tranche 1 — — — — — — — — — — — — 52,377 — — — 52,377 —
BCF upon Series E tranche 2 — — — — — — — — — — — — 1,109 — — — 1,109 —
Accretion of Series E to convertible redeemable preferred shares redemption value — — — — — — — — — — — — (10,229 ) (2,525 ) — — (12,754 ) —
Amortisation of BCF of Series E — — — — — — — — — — — — (3,206 ) (933 ) — — (4,139 ) —
Contingent beneficial conversion feature of series C to one Series C shareholder — — — — — — — — — — — — 57 (57 ) — — — —
Deemed dividend of Series D convertible preferred shares from their modifications — — — — — — — — — — — — — (279 ) — — (279 ) —
~~F- 7~~
~~Xunlei Limited~~
~~Consolidated statements of changes in shareholders’ equity (Continued)~~
(Amounts expressed in
thousands of USD,
except for number of
shares and per share Series C convertible
non-redeemable
preferred share Series B convertible
non-redeemable
preferred shares Series A-1
convertible
non-redeemable
preferred shares Series A convertible
non-redeemable
preferred shares Common shares Treasury stock Additional
paid-in Retained Statutory Accumulated
other
comprehensive Total
shareholders’ Non-
controlling
data) Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount capital earnings reserves income equity interest
Repurchase of preferred shares and common shares — — (3,756,065 ) (1 ) (591,451 ) — (477,180 ) — (14,664,637 ) (4 ) — — (47,403 ) (11,674 ) — — (59,082 ) —
Acceleration of amortisation of BCF of Series E upon initial public offering (“IPO”) — — — — — — — — — — — — (49,346 ) — — — (49,346 ) —
Deemed dividend to preferred shareholders upon IPO — — — — — — — — — — — — (32,807 ) — — — (32,807 ) —
Issuance of common shares and conversion of preferred shares upon IPO (5,728,264 ) (1 ) (26,552,219 ) (7 ) (35,808,549 ) (9 ) (25,939,380 ) (7 ) 277,834,210 71 — — 470,712 — — — 470,759 —
IPO expenses — — — — — — — — — — — — (4,216 ) — — — (4,216 ) —
Issuance of common shares for share incentive plans — — — — — — — — — — 24,195,412 5 (5 ) — — — — —
Exercised share options — — — — — — — — 1,431,320 — (1,431,320 ) — 295 — — — 295 —
Vested restricted shares — — — — — — — — 1,563,222 — (1,563,222 ) — — — — — — —
Share-based compensation - replacement awards in the acquisition of Kingsoft Cloud Storage business — — — — — — — — — — — — 303 — — — 303 —
Share-based compensation - others — — — — — — — — — — — — 7,644 — — — 7,644 —
Statutory  Reserve — — — — — — — — — — — — — (654 ) 654 — — —
Components of comprehensive income:
Net income / (loss) — — — — — — — — — — — — — 10,812 — — 10,812 (949 )
Translation adjustments — — — — — — — — — — — — — — — (109 ) (109 ) (5 )
Balance at December 31, 2014 — — — — — — — — 327,611,487 82 30,274,602 7 446,202 574 5,132 5,894 457,891 (870 )
~~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 Series C convertible
non-redeemable
preferred share Series B convertible
non-redeemable
preferred shares Series A-1
convertible
non-redeemable
preferred shares Series A convertible
non-redeemable
preferred shares Common shares Treasury stock Additional
paid-in Retained Statutory Accumulated
other
comprehensive Total
shareholders’ Non-
controlling
data) Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount capital earnings reserves income equity interest
Balance at December 31, 2014 — — — — — — — — 327,611,487 82 30,274,602 7 446,202 574 5,132 5,894 457,891 (870 )
Issuance of common shares for the vesting of restricted shares and the exercise of share options — — — — — — — — 10,991,120 3 (3 )
Issuance of common shares for exercised share options — — — — — — — — 9,092,265 2 (9,092,265 ) (2 ) 3,630 3,630
Repurchase of common shares — — — — — — — — (1,068,095 ) 1,068,095 (1,287 ) (1,287 )
Share-based compensation — — — — — — — — 9,728 9,728
Restricted shares vested — — — — — — — — 3,683,458 1 (3,683,458 ) (1 )
Net loss — — — — — — — — (13,167 ) (13,167 ) (1,299 )
Translation adjustments — — — — — — — — (10,046 ) (10,046 ) 101
Balance at December 31, 2015 — — — — — — — — 339,319,115 85 29,558,094 7 458,270 (12,593 ) 5,132 (4,152 ) 446,749 (2,068 )
~~The accompanying notes are an integral part of these consolidated financial statements.~~
~~F- 9~~
~~Xunlei Limited~~
~~Consolidated Statement of Cash Flows~~
(Amounts expressed in thousands of USD except for number of Years ended December 31,
shares and per share data) 2013 2014 2015
Cash flows from operating activities
Net income/(loss) 10,379 9,862 (14,466 )
Adjustments to reconcile net income/(loss) to net cash generated from operating activities (i)
—Depreciation of property and equipment 5,112 6,500 5,646
—Amortization of intangible assets 38,314 38,741 12,149
—Allowance for doubtful accounts 4,921 1,767 4
—Loss on disposal of property and equipment — — 4
—Gain from barter transactions (2,059 ) (4,428 ) (409 )
—Share-based compensation 2,096 7,644 9,728
—Decrease in fair value of warrants (1,531 ) (8,054 ) —
—Share of loss / (income) from equity investee (25 ) 259 12
—Investment income on short-term investments (356 ) (317 ) (997 )
—Impairment of intangible assets 808 — —
—Loss on exchange of warrants — 405 —
—Deemed disposal gain on long-term investments — (449 ) (702 )
—Interest expense accrued on long-term payable — 163 239
—Deferred taxes (822 ) (1,856 ) 873
—Deferred government grants (1,284 ) (2,059 ) (1,969 )
Changes in operating assets and liabilities:
—Accounts receivable 13,655 4,699 1,395
—Prepayments and other assets (333 ) (9,180 ) 3,815
—Due from/to related parties (96 ) (168 ) (70 )
—Accounts payable 5,924 2,569 301
—Inventories — — (526 )
—Deferred revenue 12,630 (2,643 ) (294 )
—Income tax payable 116 (5 ) 153
—Accrued liabilities and other payables (1,916 ) 4,752 (1,122 )
Net cash generated from operating activities 85,533 48,202 13,764
Cash flows from investing activities
Acquisition of property and equipment (7,372 ) (7,770 ) (4,931 )
Purchase of short-term investments (246,153 ) (330,471 ) (222,157 )
Proceeds from disposal of short-term investments 213,506 341,792 175,513
Proceeds from disposal of fixed assets — — 25
Proceeds from disposal of Kankan — — 16,687
Purchase of intangible assets (36,005 ) (38,056 ) (11,894 )
Acquisition of long-term investments (1,390 ) (2,359 ) (8,330 )
Acquisition of Kingsoft Cloud Storage business — (33,000 ) —
Loans (to)/repayment of loan from employees (856 ) (767 ) 105
Advance to or repayment of advance from a shareholder (82 ) 85 —
Net cash used in investing activities (78,352 ) (70,546 ) (54,982 )
Cash flows from financing activities
Issuance of Series E preferred shares — 275,314 —
Issuance of Series E warrants — 34,686 —
Payment of Series E financing expenses — (343 ) —
Repurchase of shares — (69,303 ) (1,287 )
Proceeds from initial public offering — 93,881 —
Payment of initial public offering expenses — (3,504 ) —
Prepayment for share repurchase plan — (1,000 ) 288
Governments grants received 2,487 856 1,055
Proceeds from exercise of vested share options — 1,523 4,974
Initial public offering expenses reimbursement received — 1,158 —
Net cash generated from financing activities 2,487 333,268 5,030
~~F- 10~~
~~Xunlei Limited~~
~~Consolidated Statement of Cash Flows~~
(Amounts expressed in thousands of USD except for number of Years ended December 31,
shares and per share data) 2013 2014 2015
Net increase/(decrease) in cash and cash equivalents 9,668 310,924 (36,188 )
Cash and cash equivalents at beginning of year 81,906 93,906 404,275
Effect of exchange rates on cash and cash equivalents 2,332 (555 ) (6,310 )
Cash and cash equivalents at end of year 93,906 404,275 361,777
Supplemental disclosure of cash flow information
Interests paid — — —
Income tax paid — 241 82
Non cash investing and financing activities
—Acquisition of property and equipment in form of other payables 4,157 240 4,468
—Initial public offering expenses in form of other payables — 712 —
—Purchase of intangible assets in form of accounts payable 25,695 21,860 62
—Acquisition of intangible assets in form of barter transactions 4,058 4,030 —
—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 4,300 1,870 —
—Contingent beneficial conversion feature of series C to one Series C shareholder — 57 —
—Deemed dividend to Series D shareholder from its modification — 279 —
—Accretion of Series E to convertible redeemable preferred shares redemption value — 12,754 —
—Amortization of beneficial conversion feature of Series E — 4,139 —
—Deemed dividend to certain shareholders from repurchase of shares — 14,926 —
—Acceleration of amortization of beneficial conversion feature of Series E upon initial public offering — 49,346 —
—Deemed dividend to preferred shareholders upon initial public offering — 32,807 —
~~(i)~~ ~~Combines adjustment relating to both continuing and discontinued operations.~~
~~The accompanying notes are an integral part of these consolidated financial statements.~~
~~F- 11~~
~~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:
~~Name of entities~~ ~~Place of~~
~~incorporation~~ ~~Date of~~
~~incorporation~~ ~~Relationship~~ ~~% of direct~~
~~or indirect~~
~~economic~~
~~ownership~~ ~~Principal activities~~
~~Shenzhen Xunlei Networking Technologies, Co., Ltd (“Shenzhen Xunlei”).~~ ~~China~~ ~~January 2003~~ ~~VIE~~ ~~100~~ % ~~Development of software, provision of online and related advertising, membership subscription and online game services; as well as sales of software licenses~~
~~Giganology (Shenzhen)~~
~~Co. Ltd (“Giganology Shenzhen”)..~~ ~~China~~ ~~June 2005~~ ~~Subsidiary~~ ~~100~~ % ~~Development of computer software and provision of information technology services to related companies~~
~~Shenzhen Fengdong Networking Technologies, Co., Ltd. (“Fengdong”)~~ ~~China~~ ~~December 2005~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~Development of software for related companies~~

~~Shenzhen Xunlei Kankan Information Technologies Co., Ltd (formerly known as “155 Networking (Shenzhen) Co., Ltd”).~~ ~~China~~ ~~August 2008~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~Development of software for related companies(note a)~~
~~Xunlei Software (Beijing) Co., Ltd (“Xunlei Beijing”).~~ ~~China~~ ~~June 2009~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~Development of software for related companies~~
~~Xunlei Software (Shenzhen) Co., Ltd(“Xunlei Software”).~~ ~~China~~ ~~January 2010~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~Provision of software technology development for related companies~~
~~F- 12~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
1. ~~Organization and nature of operations (Continued)~~
~~Name of entities~~ ~~Place of~~
~~incorporation~~ ~~Date of~~
~~incorporation~~ ~~Relationship~~ ~~% of direct~~
~~or indirect~~
~~economic~~
~~ownership~~ ~~Principal activities~~
~~Xunlei Software (Nanjing) Co., Ltd. (“Xunlei Nanjing”)~~   ~~China~~   ~~January 2010~~   ~~VIE’s subsidiary~~ ~~100~~ % ~~Development of computer software and online games for related companies and provision of advertising services (note b)~~
~~Xunlei Games Development (Shenzhen) Co., Ltd.~~ ~~China~~ ~~February 2010~~ ~~VIE’s subsidiary~~ 70 % ~~Development of online game and computer software for related companies and provision of advertising services~~
~~Xunlei Network Technologies Limited (“Xunlei BVI”)~~
~~British Virgin Islands~~ ~~February 2011~~ ~~Subsidiary~~ ~~100~~ % ~~Holding company~~
~~Xunlei Network Technologies Limited (“Xunlei HK”)~~ ~~Hong Kong~~ ~~March 2011~~ ~~Subsidiary~~ ~~100~~ % ~~Development computer software of related companies and provision of advertising services~~
~~Xunlei Computer (Shenzhen) Co., Ltd (“Xunlei Computer”)~~ ~~China~~ ~~November 2011~~ ~~Subsidiary~~ ~~100~~ % ~~Development of computer software and provision of information technology services to related companies~~
~~Shenzhen Onething Technologies Co., Ltd (“One Thing”)~~ ~~China~~ ~~September 2013~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~Development of computer software and provision of information technology services to related companies~~
~~Wangxin Century Technologies (Beijing) Co., Ltd (“Beijing Wangxin”)~~ ~~China~~ ~~October 2015~~ ~~VIE’s subsidiary~~ ~~100~~ % ~~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.following period. The amount of ~~service fees payable from Shenzhen Xunlei to Giganology Shenzhen~~revenue recognized that was included in contract liabilities balance at the beginning of the year was USD 26,911,000 and USD 30,189,000 for the years ended December 31, ~~2013, 2014~~2019 and ~~2015 was USD nil, USD 1,228 thousand and USD 1,235 thousand,~~2020, 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. ~~Summary of significant accounting policies~~
~~(a)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(h)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(k)~~ ~~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.
~~Estimated useful lives~~ ~~Residual rate~~
~~Servers and network equipment~~ ~~5 years~~ 5 %
~~Computer equipment~~ ~~5 years~~ 5 %
~~Furniture, fittings and office equipment~~ ~~5 years~~ 5 %
~~Motor vehicles~~ ~~5 years~~ 5 %
~~Leasehold improvements~~ ~~shorter of lease term or 3 years~~ —
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. ~~Summary of significant accounting policies (Continued)~~
~~(n)~~ ~~Intangible assets~~
I) ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(o)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(p)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~Revenue recognition (Continued)~~
I) ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~Revenue recognition (Continued)~~
~~II)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~Revenue recognition (Continued)~~
~~III)~~ ~~Other internet value-added services (Continued)~~
~~iii)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(r)~~ ~~Revenue recognition (Continued)~~
v) ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(v)~~ ~~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 Years ended December 31,
(In thousands) 2013 2014 2015
Subscription revenue 86,733 98,189 82,435
Advertising revenue 2,951 5,834 4,802
Other internet value-added services (note a) 32,347 31,789 42,759
Total 122,031 135,812 129,996
~~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) December 31,
2014 December 31,
2015
Registered capital 54,467 112,435
Additional paid-in capital 161 161
Statutory reserves 5,132 5,132
Total 59,760 117,728
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. ~~Summary of significant accounting policies (Continued)~~
~~(ff)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(ff)~~ ~~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. ~~Summary of significant accounting policies (Continued)~~
~~(ff)~~ ~~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.
~~Results of the discontinued operation~~
USD (In thousands) 2013 2014 2015
Revenues, net of rebates and discounts 58,213 47,075 15,677
Business taxes and surcharges (1,746 ) (1,480 ) (447 )
Net revenues 56,467 45,595 15,230
Cost of revenues (43,002 ) (42,704 ) (13,240 )
Gross profit 13,465 2,891 1,990
Operating expenses
Research and development expenses (7,092 ) (6,035 ) (3,245 )
Sales and marketing expenses (16,762 ) (15,726 ) (7,384 )
General and administrative expenses (4,410 ) (3,016 ) (3,051 )
Total operating expenses (28,264 ) (24,777 ) (13,680 )
Net gain from exchanges of content copyrights 1,020 1,556 137
Operating loss (13,779 ) (20,330 ) (11,553 )
Gain on disposal of Kankan — — 1,505
Income taxes benefits/(expenses) 1,207 1,923 (2,048 )
Loss from discontinued operations (12,572 ) (18,407 ) (12,096 )
~~Assets and liabilities of the discontinued operation~~
~~USD (In thousands)~~ ~~December 31,~~
~~2014~~
~~Assets~~
~~Accounts receivable, net~~ ~~23,741~~
~~Prepayments and other current assets~~ ~~670~~
~~Copyrights related to content-current portion~~ ~~16,013~~
~~Property and equipment, net~~ ~~1,111~~
~~Intangible assets~~ ~~4,997~~
~~Prepayment for content~~ ~~456~~
~~Other long-term prepayments and receivables~~ 57
~~Total assets held for sale~~ ~~47,045~~
~~Liabilities~~
~~Accounts payables~~ ~~25,267~~
~~Deferred revenue, current portion~~ ~~1,018~~
~~Accrued liabilities and other payables~~ ~~1,082~~
~~Total liabilities held for sale~~ ~~27,367~~
~~Cash flows generated from/ (used in) discontinued operations~~
USD (In thousands) 2013 2014 2015
Net cash generated from/(used in) operating activities 10,439 2,293 (1,554 )
Net cash (used in)/generated from investing activities (16,402 ) (34,661 ) 9,135
Net cash used in financing activities — — —
Net cash flow for the year (5,963 ) (32,368 ) 7,581
~~F- 38~~
~~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:
December 31, 2014 December 31, 2015
(In thousands) Amount USD
equivalent Amount USD
equivalent
RMB 674,001 110,149 606,845 93,454
USD 294,036 294,036 268,198 268,198
HKD 697 90 969 125
Total 404,275 361,777
~~Time deposits with original maturities of three months or less as of December 31, 2014 and 2015 primarily consist of the following currencies:~~
December 31, 2014 December 31, 2015
(In thousands) Amount USD
equivalent Amount USD
equivalent
RMB 156,749 25,617 349,099 53,760
USD 5,500 5,500 260,597 260,597
Total 31,117 314,357
5. ~~Short-term investments~~
(In thousands) December 31,
2014 December 31,
2015
Investments in financial instruments (note) 29,427 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) December 31,
2014 December 31,
2015
Accounts receivable 5,311 11,392
Less: Allowance for doubtful accounts (131 ) (126 )
Accounts receivable, net 5,180 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) December 31,
2013 December 31,
2014 December 31,
2015
Balance at beginning of the year — — 131
Additions — 523 4
Reversals — —
Write-off — (393 ) —
Exchange difference — 1 (9 )
Balance at end of the year — 131 126
~~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) December 31,
2014 December 31,
2015
Current portion:
Advance to suppliers 520 882
Interest-free loans to employees (note a) 3,625 3,200
Low-interest loans to employees, current portion (note b) 64 —
Advance to employees for business purposes 585 957
Interest receivable 5,380 564
Rental and other deposits 774 224
Prepayment for share repurchase plan (note c) 1,000 712
Prepaid game sharing costs 458 —
Prepaid professional fees 900 —
Prepaid management insurance 179 209
Receivable from Nesound (note d) — 4,004
Prepayment for taxation — 2,041
Others 405 275
Total of prepayments and other current assets 13,890 13,068
Non-current portion:
Prepayments for online game licenses 5,346 4,786
Long term receivable — 1,812
Low-interest loans to employees, non-current portion (note b) 449 833
Total of long-term prepayments and other assets 5,795 7,431
~~F- 40~~
~~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) December 31,
2014 December 31,
2015
Servers and network equipment 32,109 37,332
Computer equipment 1,947 1,544
Furniture, fixtures and office equipment 651 856
Motor vehicles 339 320
Leasehold improvements 1,692 2,504
Total original costs 36,738 42,556
Less: Accumulated depreciation (20,330 ) (24,534 )
Construction in progress — 14
Total 16,408 18,036
~~Depreciation expense recognized for the years ended December 31, 2013, 2014 and 2015 are summarized as follows:~~
(In thousands)
December 31,
2013
December 31,
2014 December 31,
2015
Cost of revenues 4,317 5,652 5,003
General and administrative expenses 690 715 628
Sales and marketing expenses 105 133 15
Total 5,112 6,500 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 December 31, 2014 December 31, 2015
(In thousands) Cost Amortization Impairment Net book
value Cost Amortization Impairment Net book
value
Land use rights 5,279 (253 ) — 5,026 5,123 (409 ) — 4,714
Trademarks 6,168 (167 ) — 6,001 5,812 (1,107 ) — 4,705
Non-compete agreement 1,502 (252 ) — 1,250 1,415 (472 ) — 943
Technology (including right-to-use) 2,399 (100 ) — 2,299 2,261 (377 ) — 1,884
Acquired computer software 1,468 (1,141 ) — 327 619 (255 ) — 364
Internal use software development costs 716 (537 ) — 179 675 (641 ) — 34
Online game licenses (note a) 5,304 (4,478 ) (808 ) 18 5,827 (4,268 ) (770 ) 789
22,836 (6,928 ) (808 ) 15,100 21,732 (7,529 ) (770 ) 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:~~
Years ended December 31
(In thousands) 2013 2014 2015
Cost of Revenue 1,369 1,141 693
General and administrative expenses 269 372 386
Research and development expenses — 542 1,589
Total 1,638 2,055 2,668
~~The estimated aggregate amortization expense for each of the next five years as of December 31, 2015 is:~~
(In thousands) Intangible assets
2016 2,234
2017 2,002
2018 1,688
2019 1,321
2020 and thereafter 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) December 31,
2014 December 31,
2015
Copyrights related to content (i) 2.78 —
Land use right 30 30
Trademarks 7 7
Non-compete agreement 4 4
Technology (including right-to-use) 8 8
Acquired computer software 5 5
Internal use software development costs 5 5
Online game licenses 3 3
Domain name (i) 5 —
Total weighted average amortization periods 3.97 11.08
~~(i) Copyrights related to content and domain name are related to the discontinued operation.~~
~~10.~~ ~~Inventories~~
~~(In thousands)~~ ~~December 31,~~
~~2014~~ ~~December 31,~~
~~2015~~
~~ZQB~~ — 92
~~Online shopping mall inventories (note a)~~ — ~~229~~
~~Others~~ — ~~159~~
~~Total~~ — ~~480~~
~~Note a:~~ ~~online shopping mall inventories include Xiaomi TV box, gaming discs etc.~~
~~F- 43~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
~~11.~~ ~~Long-term investments~~
(In thousands) December 31,
2014 December 31,
2015
Equity method investments:
Balance at beginning of the year 2,785 2,965
Additions — —
Share of  loss from equity investees (259 ) (12 )
Dilution gains arising from deemed disposal of investments (ii) (iii) 449 702
Transfer to cost method investments — (1,349 )
Exchange differences (10 ) (144 )
Balance at end of the year 2,965 2,162
Cost method investments:
Balance at beginning of the year 164 2,533
Additions (i) 2,359 6,506
Transfer from equity method investments — 1,349
Exchange difference 10 (429 )
Less: impairment loss on long-term investments (802 )
Balance at end of the year 2,533 9,157

Total long-term investments 5,498 11,319
~~Details of the Group’s ownership are as follows:~~
Percentage of ownership of shares
as of December 31,
Investee 2014 2015
Equity method investments:
Zhuhai Qianyou Technology, Co., Ltd. (“Zhuhai Qianyou”), 19.00 % 19.00 %
Guangzhou Yuechuan Network Technology, Co., Ltd. (“Guangzhou Yuechuan”) (ii) 19.13 % 19.13 %
Chengdu Diting Technology, Co., Ltd. (“Chengdu Diting”) (ii) 16.58 % —
Cost method investments:
Shenzhen Kushiduo Network Science and Technology Co., Ltd. (“Shenzhen Kushiduo”)(i) 10.00 % 12.5 %
Shanghai Guozhi Electronic Technology Co., Ltd. (“Shanghai Guozhi”) 21.00 % 21.00 %
Guangzhou Wucai Information Technology Co., Ltd.(“Guangzhou Wucai”) 10.00 % 10.00 %
Guangzhou Hongsi Network Technology Co., Ltd.(“Guangzhou Hongsi”) 19.90 % 19.90 %
Tianjin Kunzhiyi Network Technology Co., Ltd.(“Tianjin Kunzhiyi”) (iii) 19.99 % 19.99 %
Chengdu Diting Technology, Co., Ltd. (“Chengdu Diting”) (ii) — 13.27 %
Suzhou Heidisi network technology co., Ltd.("Suzhou Heidisi") (i) — 19.90 %
Xiamen Diensi network technology co., Ltd.("Xiamen Diensi") (i) — 15.00 %
Nanjing Qianyi Video information technology co., Ltd.("Nanjing Qianyi") (i) — 20.00 %
11.2 Capital I, L.P. Ltd. ( "11.2 Capital")(i) — 2.24 %
Cloudtropy(i) — 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.~~ ~~Long-term investments (Continued)~~
~~(ii)~~ 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) December 31,
2014 December 31,
2015
Deferred revenue
Membership subscription revenues 27,543 24,502
Online game revenues 1,111 1,120
Pay per view subscription revenues — —
Deferred income
Government grants 4,863 4,032
Reimbursement from the depository (i) 1,053 842
Total 34,570 30,496
Less: non-current portion (ii) (6,825 ) (5,383 )
Deferred revenue and income, current portion 27,745 25,113
~~(i)~~ 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.
~~(ii)~~ 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) December 31,
2014 December 31,
2015
Payroll and welfare 11,800 10,570
Agency commissions and rebates—online advertising 8,017 2,443
Payables for advertisement on exclusive online games 2,515 1,643
Receipts in advance from customers 1,133 —
Tax levies 556 1,605
Payables for purchase of equipment 240 4,999
Legal and litigation related expenses (Note 24) 451 2,601
Professional fees 2,460 908
Staff reimbursements 440 611
Rental expense 382 4
Payables for proceeds from selling exercised stock options 872 177
Advance for exercise of stock options 356 —
Payables for gaming distribution — 158
Payables to Nesound — 622
Others 1,111 1,038
Total 30,333 27,379
~~14.~~ ~~Cost of revenues~~
Years ended December 31,
Cost of revenue from continuing operations(In
thousands) 2013 2014 2015
Bandwidth costs 28,174 33,545 37,218
Content costs, including amortization 1,061 — 338
Payment handling fees 12,097 11,305 9,087
Depreciation of servers and other equipment 3,801 5,102 4,873
Games revenue sharing costs and others (note a) 5,125 5,803 8,518
Total 50,258 55,755 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 4~~^th 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 5^th 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,~~2019 and 2020, the ~~fair value~~non-current portion consists of ~~Series D warrants was~~membership subscription of USD ~~2,186 thousand. For the year ended on December 31, 2012 and 2013, the fair value (loss) / gain recorded were USD 710 thousand~~781,000 and USD ~~1,531 thousand, respectively.~~
~~Exchange of Series D warrants~~751,000, 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:~~
December 31,
2013 February 6,
2014
Spot price⁽¹⁾ 4.36 4.47
Risk-free interest rate⁽²⁾ 0.05 % 0 %*
Volatility rate⁽³⁾ 30.33 % 0 %*
Dividend yield⁽⁴⁾ — —
* ~~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:~~
~~March 5,~~
~~2014~~
~~Spot price~~⁽¹⁾ ~~3.31 - 4.65~~
~~Risk-free interest rate~~⁽²⁾ ~~0.04% - 0.12~~ %
~~Volatility rate~~⁽³⁾ ~~38.39% - 38.81~~ %
~~Dividend yield~~⁽⁴⁾ —
~~(1)~~ 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%
~~(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.~~
~~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.
Years ended
December
31,2013 Years ended
December
31,2014
Beginning balance 35,990 40,290
Deemed dividend to Series D shareholder from its modification — 279
Accretion of Series D to convertible redeemable preferred shares redemption value 4,300 1,870
Repurchase of preferred shares — (15,003 )
Deemed dividend to preferred shareholders upon IPO — 4,008
Converted to common shares upon IPO — (31,444 )
Ending balance 40,290 —
~~F- 51~~
~~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 considerationgovernment grants of USD ~~200 million. Pursuant to the agreement, the Company issued 70,975,491 Series E Tranche 1 Preferred Shares at~~442,000 and 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.~~ 169,000, respectively.

16.          Accrued liabilities and other payables

(In thousands)

December 31, 2019

December 31, 2020
Payroll and welfare

14,995

12,871
Tax levies

4,538

3,394
Payables related to Kankan

3,733

2,581
Payables for advertisement

3,606

1,895
Legal and litigation related expenses (note 28)

2,765

1,640
Professional fees

2,714

2,106
Agency commissions and rebates—online advertising

2,521

2,696
Payables for construction in progress

1,382

5,291
Tax surcharges

1,076

1,095
Payables for technological services

778

617
Payables for gaming distribution

288

148
Deposits from customers

225

229
Payables for proceeds from selling exercised stock options and restricted shares

94

137
Payables for purchase of equipment

21

29
Others

4,104

3,960
Total

42,840

38,689

F-39

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

17.          Bank borrowings

(In thousands)

December 31, 2019

December 31, 2020
Bank borrowings

11,324

19,924

The bank borrowings were borrowed by Shenzhen Xunlei for the construction of Xunlei Building, which was pledged by the land use rights of Xunlei Building and the building under construction. The net interest expense of USD NaN, USD 470,000 and USD 890,000 has been capitalized for the years ended December 31, 2018, 2019 and December 31, 2020 respectively.
The bank borrowings are denominated in RMB, and the interest rate is calculated based on LPR plus 15 or 30 basis points.
As of December 31, 2020, the bank borrowings will be due according to the following schedule:

(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.thousands)
~~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)~~ ~~December 31,~~
~~2015~~
~~Beginning balance~~ —
~~Addition~~ ~~275,314~~
~~Exercise of Series E subsequent sale rights~~ ~~28,568~~
~~BCF upon Series E~~ ~~(53,486~~ )
~~Amortisation of BCF of Series E~~ ~~4,139~~
~~Accretion of Series E to convertible redeemable preferred shares redemption value~~ ~~12,754~~
~~Acceleration of amortization of BCF of Series E upon IPO~~ ~~49,346~~
~~Deemed dividend to preferred shareholders upon IPO~~ ~~27,396~~
~~Converted to common shares upon IPO~~ ~~(344,031~~ )
~~Ending balance~~ —
~~F- 53~~
~~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:~~
~~March 5,~~
~~2014~~
~~Spot price~~⁽¹⁾ ~~4.50 - 4.65~~
~~Risk-free interest rate~~⁽²⁾ ~~0.12~~ %
~~Volatility rate~~⁽³⁾ ~~38.81~~ %
~~Dividend yield~~⁽⁴⁾ —
~~(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. 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%.
~~(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.~~
~~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:~~
March 5,
2014 April 24,
2014
Spot price⁽¹⁾ 3.31 - 4.65 3.39 - 4.64
Risk-free interest rate⁽²⁾ 0.04 % 0.02 %
Volatility rate⁽³⁾ 38.12 % 42.74 %
Dividend yield⁽⁴⁾ — —
~~(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. 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%.
~~(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.~~
~~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) 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
2) ~~A sale of other disposition of all or substantially all of the assets of the Company or the Group~~
3) ~~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~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
~~18.~~ ~~Repurchase of shares (continued)~~
Periods Total Number of ADS Purchased Average Price Paid Per ADS 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(note b)
March 12 – March 31 (note a) 192,803 6.44 192,803 2,814,715
April 7 – April 7 1,000 6.65 1,000 2,813,715
September 29 – September 30 2,940 7.13 2,940 2,810,775
December 18 – December 30 16,876 6.94 16,876 2,793,899
Total 213,619 — 213,619 2,793,899

Principal amounts
Within 1 year
~~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.

—
Between 1 to 2 years
~~Note b~~ ~~Due to the expiration of the Repurchase Program, such amount is no longer available for repurchase after December 31, 2015.~~

—
Between 2 to 3 years
~~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.

747
Between 3 to 4 years
~~19.~~ ~~Non-controlling interest~~

~~Non-controlling interest includes the interest owned by a shareholder of the Company in a subsidiary of the consolidated VIE.~~996
Between 4 to 5 years

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.996
Beyond 5 years

17,185

18.          Common shares
The Company’s Memorandum and Articles of Association authorizes the Company to issue 1,000,000,000 shares of USD 0.00025 par value per common share as of December 31, 2020. Each common share is entitled to 1 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, 2019 and 2020, there were 339,165,241 and 334,401,981 common shares outstanding, respectively.

19.          Repurchase of shares
In June 2020, the board of directors of the Company authorized a share buyback program (the "Share Buyback Program"), whereby the Company may repurchase up to USD 20 million of common shares or ADSs from June 29, 2020 for twelve months on the open market at the prevailing market prices, in privately negotiated transactions, in block trades and through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations.

~~F- 61~~

~~Xunlei Limited~~

~~Notes to consolidated financial statements~~

~~(Amounts in US dollars unless otherwise stated)~~

F-40

~~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

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

19.          Repurchase of shares (Continued)

The following table is a summary of the shares repurchased by the Company under the Share Buyback Program. All shares were purchased through privately negotiated transactions and publicly purchasing from the open market pursuant to the Share Buyback Program:


Total number of ADSs purchased as

Average price
Period

part of the publicly announced plan

paid per ADS
July 8 - July 31

857,147

3.72
August 3 - August 18

334,245

3.86
Total for the year ended December 31, 2020

1,191,392



During the year ended December 31, 2020, 1,191,392 ADSs were purchased at an aggregate consideration of USD 4,475,000 under the Share Buyback Program. NaN shares were repurchased during the years ended December 31, 2018 and 2019.

20.          Share-based compensation
2010 share incentive plan
In December 2010, the Group adopted a share incentive plan, which is referred to as the 2010 Share Incentive 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 share 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 number of shares available for such grants as of December 31, 2020 is 11,284,463.
The maximum term of any issued share option is seven or ten years from the grant date. Share options granted to employees and officers vest over a four-year schedule as stated below:
(1) One-fourth of the options shall be vested upon the first anniversary of the grant date;
(2) 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~~next thirty-six months. (¹/₄₈ of ~~the plan is to attract and retain the best available personnel by linking the personal interests~~options shall be vested per month subsequently)
Share 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 November 2014, the Company issued to the depositary bank of 10,000,000 common shares, which were reserved for the future exercise of share options or vesting of restricted shares.

F-41

Table of Contents

Xunlei Limited

Notes to the 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 activities for the years ended December 31, 2018, 2019 and 2020:






Weighted


Weighted

Weighted-

average

average

average

remaining

Aggregate

Number of

exercise

grant-date

contractual life

intrinsic


share options

price (USD)

fair value (USD)

(years)

value (USD)
Outstanding, January 1, 2018

389,815

3.90

—

1.64

0
Vested and expected to vest at January 1, 2018

389,693

3.90

0.95

1.64

0
Exercisable at January 1, 2018

389,190

3.90

0.95

1.64

0
Expired

(373,315)

3.89






Outstanding, December 31, 2018

16,500

3.97

—

1.37

0
Vested and expected to vest at December 31, 2018

16,500

3.97

1.56

1.37

0
Exercisable at December 31, 2018

16,500

3.97

1.56

1.37

0
Expired

(6,500)

3.97

Outstanding, December 31, 2019

10,000

3.97

—

1.16

0
Vested and expected to vest at December 31, 2019

10,000

3.97

1.01

1.16

0
Exercisable at December 31, 2019

10,000

3.97

1.01

1.16

0
Expired

(10,000)

3.97

Outstanding, December 31, 2020

—

—

—

—

0
Vested and expected to vest at December 31, 2020

—

—

—

—

0
Exercisable at December 31,��2020

—

—

—

—

0

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, 2019 and 2020 and the exercise price.
As at December 31, 2019 and 2020, there were 0 unrecognised share-based compensation costs related to share options of 2010 Plan.
In addition, the vesting schedule of the restricted shares under 2010 Plan are determined by the directors of the Company. As at December 31, 2020, 10,770,520 restricted shares (2019: 10,770,520), excluding those converted from share options, were granted to employees and officers under 2010 Plan and the unvested restricted shares granted to employees and officers vest as follows:
(1)
410,000 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,these restricted shares ~~or restricted share units may~~shall 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~~within 2021.
(2)
390,000 of these ~~options was from June to December in 2014, whereas, the lock-up period for the~~restricted shares ~~was 6 months from the IPO closing date, i.e. June 24, 2014, which would result in the expiration~~shall be vested within 2022.
(3)
390,000 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~~shall be vested within 2023.
(4)
70,000 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:~~
Number of
share options Weighted
average
exercise
price (USD) Weighted-
average
grant-date
fair
value (USD) Weighted
average
remaining
contractual
life
(years) Aggregate
intrinsic
value (in
thousands)
Outstanding, December 31, 2012 20,222,662 1.30 2.82 40,788
Granted 1,076,761 3.33 1.27
Forfeited (326,647 ) 3.32
Outstanding, December 31, 2013 20,972,776 1.37 — 2.03 39,420
Vested and expected to vest at December 31, 2013 20,701,286 1.32 0.40 1.89 41,014
Exercisable at December 31, 2013 19,382,156 1.17 0.31 1.67 40,771
Granted 1,566,381 3.23 1.01
Forfeited (371,989 ) 3.96
Expired (1,116,531 ) 0.26
Converted to restricted shares (3,776,711 ) 3.14
Exercised (7,333,641 ) 0.18
Outstanding, December 31, 2014 9,940,285 1.88 1.95 3,067
Vested and expected to vest at December 31, 2014 9,642,307 1.86 0.49 1.87 3,057
Exercisable at December 31, 2014 9,129,958 1.81 0.41 1.49 3,042
Granted 561,705 0.88 0.76
Forfeited (1,494,922 ) 3.22
Expired (3,606,304 ) 1.78
Converted to restricted shares (80,000 ) 2.40
Exercised (3,189,944 ) 0.25 4.46 556
Outstanding, December 31, 2015 2,130,820 2.13
Vested and expected to vest at December 31, 2015 1,008,645 1.76 0.73 4.62 464
Exercisable at December 31, 2015 1,430,870 2.16 0.86 4.03 406
~~A summary of the~~these restricted shares ~~activities under the 2010 Plan for the years ended December 31, 2015~~shall be vested within 2024.

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Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

20.          Share-based compensation (Continued)
2010 share incentive plan (Continued)
A summary of the restricted shares activities under the 2010 Plan for the years ended December 31, 2018, 2019 and 2020 is presented below:

Weighted-average

Number of

grant-date fair


restricted shares

value
Unvested at January 1, 2018

1,272,150


Expected to vest at January 1, 2018

1,081,327


Granted

6,750,520

2.32
Vested

(267,630)


Forfeited

(1,103,000)


Unvested at December 31, 2018

6,652,040


Expected to vest at December 31, 2018

5,654,234

Granted

800,000

0.81
Vested

(1,296,540)

Forfeited

(971,000)

Unvested at December 31, 2019

5,184,500

Expected to vest at December 31, 2019

4,406,825

Vested

(965,500)

Forfeited

(2,959,000)

Unvested at December 31, 2020

1,260,000

Expected to vest at December 31, 2020

1,071,000

Forfeitures are estimated at the time of grant and 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 15% for employees and nil for directors and advisors.
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, 2019 and 2020, total unrecognized compensation expense relating to the restricted shares was USD 8,981,000 and USD 2,000,000, respectively. The number of restricted shares issued to non-employees and vested as of December 31, 2019 and 2020 were both 60,000.
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 officers to the success of the Group’s business. Under the 2013 Plan, the maximum number of restricted shares that may be granted is 9,073,732 shares.
The vesting schedule of the restricted shares under the 2013 Plan are determined by the directors of the Company. As at December 31, 2020, 8,664,980 restricted shares (2019: 8,664,980) were granted to senior officers under the 2013 Plan and there were no unvested restricted shares under the 2013 Plan.

F-43

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

20. Share-based compensation (Continued)
2013 share incentive plan (Continued)
A summary of the restricted shares activities under the 2013 Plan for the years ended December 31, 2018, 2019 and 2020 is presented below:

Number of

restricted shares
Unvested at January 1, 2018

Number of
restricted shares Weighted-Average
Grant-Date Fair
Value
Unvested at January 1, 2014: —
Converted from share options 1,505,787 1.71
Vested —
Forfeited —
Unvested at January 1, 2015: 1,505,787
Converted from share options 80,000 1.71
Vested (390,560 )
Forfeited (763,010 )
Unvested at December 31, 2015 432,217
Vested and expected to vest at December 31, 2015 367,384
587,760
Vested

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.(525,140)
Forfeited

~~F- 63~~
(28,445)
~~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~~Unvested at December 31, ~~2014 and 2015 and the exercise price.~~2018

~~Total fair values of share options vested as of~~34,175
Expected to vest at December 31, ~~2014 and 2015 were USD 7,923 thousand and USD 6,297 thousand, respectively.~~2018

29,049
Unvested at January 1, 2019
34,175
Vested
(27,475)
Forfeited
(6,700)
Unvested at December 31, 2019
—
Expected to vest at December 31, 2019
—

Forfeitures are estimated at the time of grant and 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, 2019 and 2020, total unrecognized compensation expense relating to the restricted shares was both NaN. The number of restricted shares issued to non-employees and vested as of December 31, 2019 and 2020 were 60,000.
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 Holdings Limited, a company owned by the co-founder, to facilitate the administration of the 2014 Plan. The 2014 Plan was administered by the Company’s compensation committee.
The vesting schedule of the restricted shares under the 2014 Plan is determined by the directors of the Company. As of December 31, 2020, 14,536,000 restricted shares (2019: 14,536,000) were granted to employees and officers under the 2014 Plan and the 26,000 unvested restricted shares granted to employees and officers shall be vested within 2021.

F-44

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

20. Share-based compensation (Continued)
2014 share incentive plan (Continued)

A summary of the restricted shares activities under the 2014 Plan for the years ended December 31, 2018, 2019 and 2020 is presented below:

Number of

restricted

shares
Unvested at January 1, 2018
5,806,350
Vested
(2,086,450)
Forfeited
(243,250)
Unvested at December 31, 2018
3,476,650
Expected to vest at December 31, 2018
2,955,153
Unvested at January 1, 2019
3,476,650
Vested
(1,318,450)
Forfeited
(837,000)
Unvested at December 31, 2019
1,321,200
Expected to vest at December 31, 2019
1,123,020
Unvested at January 1, 2020
1,321,200
Vested
(228,200)
Forfeited
(1,067,000)
Unvested at December 31, 2020
26,000
Expected to vest at December 31, 2020
22,100

Forfeitures are estimated at the time of grant and are revised, if necessary, 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, 2020, the total unrecognized compensation expense relating to the restricted shares was USD 12,000 (2019: USD 766,000).
2020 share incentive plan
In June 2020, the Group terminated its 2010 Plan, 2013 Plan and 2014 Plan (the “Existing Plans”) and adopted a 2020 share incentive plan, which is referred to as the 2020 Share Incentive Plan (“the 2020 Plan”). Under the 2020 Plan, the maximum aggregate number of shares of the Company that may be granted is 31,000,000.
Upon termination of the Existing Plans, the awards that are granted and outstanding under the Existing Plans remain effective under the 2020 Plan, subject to any amendment and modification to the original award agreements that the Company shall determine.
As of December 31, 2020, 0 shares have been granted under the 2020 Plan.

F-45

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

20.          Share-based compensation (Continued)
2020 share incentive plan (Continued)
Total compensation costs recognized for the years ended December 31, 2018, 2019 and 2020 are as follows:

Years ended December 31,
(In thousands)

2018

2019

2020
Sales and marketing expenses

404

381

185
General and administrative expenses

2,245

2,453

1,209
Research and development expenses

2,645

2,594

916
Total

5,294

5,428

2,310

21.        Non-controlling interests
Non-controlling interests are recognized to reflect the portion of the equity of majority-owned subsidiaries and VIE's which is not attributable, directly or indirectly, to the controlling shareholder. The non-controlling interests in the Company's consolidated financial statements consist primarily of the non-controlling interests in Xunlei Games, Thailand Onething and Henan Tourism.

22.         Cost of revenues

Years ended December 31,
Cost of revenues from continuing operations (In thousands)

2018

2019

2020
Bandwidth costs

48,118

57,093

62,384
Cost of inventories sold

31,634

7,181

1,660
Cost of live streaming

23,928

20,734

15,640
Depreciation of servers and other equipment

5,018

5,198

6,247
Payment handling charges

3,016

1,658

1,459
Other costs (note)

3,953

8,049

5,247
Total

115,667

99,913

92,637

Note: Other costs mainly included write-down of inventories.

23.          Other income, net

Continuing Operations

Years ended December 31,
(In thousands)

2018

2019

2020
Government subsidy income

2,096

2,061

2,287
Investment income from short-term investments

5,817

4,020

2,943
Net unrealized gains arising from long-term investments

—

10,907

794
Investment income on disposal of long-term investments

—

579

214
Impairment of long-term investments

(7,794)

(19,831)

(794)
Exchange gain/(loss), net

1,216

(402)

(2,948)
Settlement income

414

1,531

—
Gains from disposal of Linktoken program

—

6,630

—
Value-added tax deduction

—

427

1,361
Others

1,061

(61)

880
Total

2,810

5,861

4,737

F-46

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

24. Taxation

(i)	Cayman Islands

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, 0 Cayman Islands withholding tax will be imposed.

(ii)	PRC Enterprise Income Tax (“EIT”)

The PRC enterprise income tax is calculated based on the taxable income determined under the PRC laws and accounting standards.

Under the Enterprise Income Tax (“EIT”) Law, foreign invested enterprises and domestic enterprises are subject to a unified EIT rate of 25%. In accordance with the implementation rules of the EIT Law, a qualified “High and New Technology Enterprise” (“HNTE”) is eligible for a preferential tax rate of 15%, a “Software Enterprise” (“SE”) is entitled exemption from income taxation for the first two years, counting from the first profitable year, and reduction by half for the next three years, and a certified National Key Software Enterprise (“NKSE”) is entitled a preferential tax rate of 10%.

Shenzhen Xunlei, Wangwenhua and Xunlei Computer have been recognized as HNTE and entitled to preferential tax rate of 15%for the years ended December 31, 2018, 2019 and 2020. Onething has been recognized as HNTE and entitled to preferential tax rate of 15% for the years ended December 31, 2018 and 2019. Onething continued to adopt a preferential tax rate of 15% for the year ended December 31, 2020, as it was established in Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone and met the requirements set out by local authorities for the preferential tax rate.

According to a policy of the PRC State Tax Bureau, enterprises that engage in research and development activities are entitled to claim 175% of the research and development expenses incurred in a year as tax deductible expenses in determining their tax assessable profits for that year (“Super Deduction”).

The other PRC subsidiaries and consolidated VIEs are subject to a 25% EIT rate.

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 the Company out of any profits of Giganology Shenzhen and Xunlei Computer derived after January 1, 2008. Up to December 31, 2020, both Giganology Shenzhen and Xunlei Computer did not declare any dividend to the parent company and have determined that they have 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, 0 withholding income tax was accrued or required to be accrued for the years ended December 31, 2018, 2019 and 2020.

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 EIT at the rate of 25% on its worldwide income for the period after January 1, 2008. As of December 31, 2019 and 2020, the Company has not accrued for PRC tax on such basis. The Company will continue to monitor its tax status.

F-47

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

24.          Taxation (Continued)
(ii)          PRC Enterprise Income Tax (“EIT”) (Continued)
The current and deferred portions of income tax expense included in the consolidated statements of operations are as follows:

Continuing operations

Years ended December 31,
(In thousands)

2018

2019

2020
Current income tax (benefits)/expenses

(471)

315

183
Deferred income tax expenses

382

4,361

966
Income tax (benefits)/expenses

(89)

4,676

1,149

The aggregate amount and per share effect of the tax holidays and concession are as follows:

Years ended December 31,


2018

2019

2020
Aggregate dollar effect (In thousands)

(3,776)

(3,856)

197
Per share effect—basic

(0.01)

(0.01)

(0.00)
Per share effect—diluted

(0.01)

(0.01)

(0.00)

The reconciliation of total tax (benefits)/expenses computed by applying the respective statutory income tax rates to pre-tax loss is as follows:

Continuing operations

Years ended December 31,
(In thousands)

2018

2019

2020
Income tax benefit at PRC statutory rate (based on statutory tax rate applicable to enterprises in China)

(10,384)

(11,886)

(3,736)
Effects of differences in tax rates in different jurisdictions applicable to entities of the Group outside of the PRC

485

788

787
Non-deductible expenses

245

228

101
Effect of Super Deduction

(881)

(1,920)

(733)
Effect of tax holidays and tax concessions

3,776

3,856

(197)
Change in valuation allowance of deferred tax assets

6,720

13,180

4,704
Effect on deferred tax assets due to change in tax rates

(167)

—

—
Expiration of tax loss

562

400

84
Others

(445)

30

139
Income tax (benefits)/expenses

(89)

4,676

1,149

F-48

Table of Contents

Xunlei Limited

Notes to the consolidated financial statements

(Amounts in US dollars unless otherwise stated)

24.          Taxation (Continued)
(ii)          PRC Enterprise Income Tax (“EIT”) (Continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities balances of December 31, 2019 and 2020 are as follows:

(In thousands)

December 31, 2019

December 31, 2020
Deferred tax assets:




Net operating losses carried forward (note a)

27,712

32,458
Impairment of long-term equity investments

4,061

4,233
Impairment of other receivables

1,553

1,858
Impairment of accounts receivable

1,140

1,451
Impairment of inventories

549

540
Allowance for advance to suppliers

346

369
Impairment of property and equipment

14

15
Valuation allowance

(34,257)

(40,924)
Deferred tax assets, net (note b)

1,118

—

Deferred tax liabilities:

Deferred credit arising from an asset acquisition

(1,179)

(1,085)

Notes:
(a)
As of December 31, ~~2014 and 2015, there were~~2020, the accumulated net operating loss of USD ~~1,462 thousand and~~3,079,000 of the Group’s subsidiaries incorporated in Hong Kong can be carried forward indefinitely to offset future taxable income, the remaining accumulated net operating loss of 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 different179,797,000 mainly arose from the Company’s ~~estimate,~~subsidiaries and consolidated VIEs established in the ~~actual share-based compensation related~~PRC, which can be carried forward 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~~offset future taxable income and will expire during the ~~years ended December 31, 2013, 2014 and 2015 were estimated using the following assumptions:~~
~~Options granted~~period from 2021 to ~~employees~~2030.
Years ended December 31, 2013 2014 2015
Risk-free interest rate⁽¹⁾ 0.77% to 1.76 % 0.77% to 1.76 % 0.77% to 1.76 %
Dividend yield⁽²⁾ — — —
Volatility rate⁽³⁾ 43.8% to 51.3 % 40.07% to 43.3 % 40.07% to 43.3 %
Expected term (in years)⁽⁴⁾ 4.58 4.13 to 4.58 4.07 to 5.57
~~(1)~~ ~~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.~~
(b)
~~(2)~~ ~~The Company has no history or expectation of paying dividends on its common shares.~~
~~(3)~~ ~~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~~2019 and 2020, the deferred tax assets and liabilities balances are expected 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)~~ 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.
~~(2)~~ 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.
~~(3)~~ ~~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:~~
Number of
restricted
shares Weighted-Average
Grant-Date Fair
Value
Unvested at January 1, 2014: 8,095,238
Granted 4,233,558 2.89
Vested (1,563,222 )
Forfeited (3,564,796 )
Unvested at December 31, 2014 7,200,778
Vested (2,627,815 )
Forfeited (776,565 )
Unvested at December 31, 2015 3,796,398
Vested and expected to vest at December 31, 2015 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~~be recoverable 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.follows:
~~As of December 31, 2015, 6,620,500 restricted shares were granted to certain officers and employees of the Group:~~
Deferred tax assets
~~(1)~~ 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.

(In thousands)

2019

2020
Within one year

133

—
After one year

985

—

1,118

—

~~(2)~~ 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:~~
Number of
restricted
shares Weighted-Average
Grant-Date Fair
Value
Unvested at January 1, 2014 —
Granted 3,896,500 1.77
Unvested at January 1, 2015 3,896,500
Granted 3,890,500 1.53
Vested (859,100 )
Forfeited (1,166,500 )
Unvested at December 31, 2015 5,761,400
Vested and expected to vest at December 31, 2015 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:~~
Years ended December 31,
(In thousands) 2013 2014 2015
Sales and marketing expenses 43 66 131
General and administrative expenses 1,080 6,407 6,701
Research and development expenses 973 1,171 2,896
Total 2,096 7,644 9,728
Deferred tax liabilities

(In thousands)

2019

2020
Within one year

(165)

(176)
After one year

(1,014)

(909)

(1,179)

(1,085)

~~F- 67~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
F-49
~~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) Years ended December 31,
2013 2014 2015
Numerator:
Net income/(loss) from continuing operations 22,951 28,269 (2,370 )
Net loss from discontinued operations (12,572 ) (18,407 ) (12,096 )
Net income / (loss) 10,379 9,862 (14,466 )
Less: Net (loss) attributable to the non-controlling interest (283 ) (950 ) (1,299 )
Net income/(loss) attributable to Xunlei Limited 10,662 10,812 (13,167 )
Accretion of Series D to convertible redeemable preferred shares redemption value (4,300 ) (1,870 ) —
Contingent beneficial conversion feature of series C to one Series C shareholder — (57 ) —
Deemed dividend to Series D shareholder from its modification — (279 ) —
Accretion of Series E to convertible redeemable preferred shares redemption value — (12,754 ) —
Amortization of beneficial conversion feature of Series E — (4,139 ) —
Deemed dividend to certain shareholders from repurchase of shares — (14,926 ) —
Acceleration of amortization of beneficial conversion feature of Series E upon initial public offering — (49,346 ) —
Deemed dividend to preferred shareholders upon IPO — (32,807 ) —
Allocation of net income to participating preferred shareholders (4,094 ) — —
Net income/(loss) attributable to Xunlei Limited’s common shareholders 2,268 (105,366 ) (13,167 )
Numerator of basic net income/(loss) per share from continuing operations 14,840 (86,959 ) (1,071 )
Numerator of basic net loss per share from discontinued operations (12,572 ) (18,407 ) (12,096 )
Dilutive effect of warrant (1,531 ) — —
Numerator for diluted income/(loss) per share from continuing operations 13,309 (86,959 ) (1,071 )
Numerator for diluted loss per share from discontinued operations (12,572 ) (18,407 ) (12,096 )
Denominator:
Denominator for basic net income/(loss) per share-weighted average shares outstanding 61,447,372 194,711,227 335,987,595
Dilutive effect of warrants 2,218,935 — —
Dilutive effect of share options and restricted shares 12,399,591 — —
Denominator for diluted net income/(loss) per share 76,065,898 194,711,227 335,987,595
Basic net income/(loss) per share from continuing operations 0.24 (0.45 ) (0.00 )
Basic net loss per share from discontinued operations (0.20 ) (0.09 ) (0.04 )
Diluted net income/(loss) per share from continuing operations 0.18 (0.45 ) (0.00 )
Diluted net loss per share from discontinued operations (0.17 ) (0.09 ) (0.04 )
~~F- 68~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
Table of Contents
~~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:
Years ended December 31,
2013 2014 2015
Preferred shares—weighted average 110,953,534 93,213,683 —
Share options and restricted shares —weighted average 2,513,017 9,041,434 1,673,342
Xunlei Limited
~~22.~~
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

24.          Taxation (Continued)
(ii)          PRC Enterprise Income Tax (“EIT”) (Continued)

Movement of valuation allowance is as follows:

Years ended December 31,
(In thousands)

2018

2019

2020
Beginning balance

(16,599)

(20,181)

(34,257)
Additions

(6,720)

(13,180)

(4,704)
Exchange difference

3,138

(896)

(1,963)
Ending balance

(20,181)

(34,257)

(40,924)

In 2018, valuation allowance was provided for net operating loss carryforwards of Onething, Xunlei Games, Beijing Xunjing and Crystal Interactive 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 these entities were not included in the tax strategy plan.
In 2019 and 2020, valuation allowance was provided for net operating loss carryforwards of the Group because it was more likely than not that such deferred tax assets will be realized based on the Group's estimate of future taxable income of those companies.
As of December 31, 2020, the tax returns of the Group’s subsidiaries, VIE and its subsidiaries since their respective dates of incorporation are still open to examination.

F-50
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

25.          Basic and diluted net loss per share
Basic and diluted net loss per share for the years ended December 31, 2018, 2019 and 2020 are calculated as follows:

(Amounts expressed in thousands of

USD, except for number of shares and per

Years ended December 31,
share data)

2018

2019

2020
Numerator:






Net loss from continuing operations

(40,793)

(53,415)

(14,140)
Net income from discontinued operations

1,303

—

—
Net loss

(39,490)

(53,415)

(14,140)
Less: Net loss attributable to the non-controlling interest

(212)

(246)

(300)
Net loss attributable to Xunlei Limited’s common shareholders

(39,278)

(53,169)

(13,840)
Numerator of basic net loss per share from continuing operations

(40,581)

(53,169)

(13,840)
Numerator of basic net income per share from discontinued operations.

1,303

—

—
Numerator for diluted loss per share from continuing operations

(40,581)

(53,169)

(13,840)
Numerator for diluted income per share from discontinued operations

1,303

—

—
Denominator:



Denominator for basic net loss per share-weighted average shares outstanding

334,965,987

337,845,675

337,429,601
Denominator for diluted net loss per share

334,965,987

337,845,675

337,429,601
Basic net loss per share from continuing operations

(0.12)

(0.16)

(0.04)
Basic net income per share from discontinued operations

0.00

N/A

N/A
Diluted net loss per share from continuing operations

(0.12)

(0.16)

(0.04)
Diluted net income per share from discontinued operations

0.00

N/A

N/A

All potentially dilutive securities were not included in the calculation of dilutive net income per share for the years ended December 31, 2018, 2019 and 2020 as their effects would be anti-dilutive.

F-51
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

26.          Related party transactions
The table below sets forth the related parties and their relationships with the Group:
Related Party

~~Related Party~~ ~~Relationship with the Group~~
~~Zhuhai Qianyou~~ ~~Equity investment of the Group~~
~~Hao Cheng~~ ~~Co-founder and shareholder of the Group~~
~~Chuan Wang~~ ~~Director of the Company~~
~~Shenglong Zou~~ ~~Co-founder and shareholder of the Group~~
~~Beijing Millet technology Co., LTD (“Beijing Xiaomi”)~~ ~~Company owned by a shareholder of the Group~~
~~Leading Advice Holdings Limited~~ ~~Company owned by a Co-founder and shareholder of the Group~~
~~Vantage Point Global Limited~~ ~~Shareholder of the Company~~
~~Aiden & Lasmine Limited~~ ~~Shareholder of the Company~~
~~Kingsoft Corporation Limited~~
Relationship with the Group
Chuan Wang
Chairman and director of the Company (note i)
Shenglong Zou
Co-founder, director and shareholder of the Company
Weimin Luo

Director and Chief Operating Officer of the Company
Shenzhen Crystal Technology Co., Ltd. ("Shenzhen Crystal”)
Company owned by a co-founder and director of the Company
Vantage Point Global Limited
Shareholder of the Company
Aiden & Jasmine Limited
Shareholder of the Company
Millet Technology Co., Ltd. (“Xiaomi Technology”)

Note ii
Millet Communication Technology Co., Ltd. (“Millet Communication Technology”)

Note ii
Beijing Xiaomi Mobile Software Co., Ltd. (“Beijing Xiaomi Mobile Software”)

Note ii
Beijing Millet Payment Technologies Co., Ltd. (“Beijing Millet Payment Technologies”)

Note ii
Guangzhou Millet Information Service Co., Ltd. (“Guangzhou Millet”)

Note ii
Shenzhen Xiaomi Technology Co., Ltd. (“Shenzhen Xiaomi”)

Note ii
Beijing Itui

Company owned by the principal shareholder of the Company (note iii)
Beijing Itui Online Network Technology Co., Ltd. (“Itui Online”)

Company owned by the principal shareholder of the Company (note iii)

F-52
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

26.          Related party transactions (Continued)
Note:
(i) Chuan Wang has resigned from the board on April 2, 2020.
~~During the years ended December 31, 2013, 2014 and 2015, significant~~
(ii) Prior to April 2, 2020, these companies were related ~~party transactions were as follows:~~
Years ended December 31,
(In thousands) 2013 2014 2015
Game sharing costs paid and payable to Zhuhai Qianyou (note a) 1,760 402 127
Advance to Hao Cheng 85 — —
Repayment from Hao Cheng — 85 —
Technology service revenue from Beijing Xiaomi — 303 344
Advertisement revenue from Beijing Xiaomi — 871 —
Advance to Shenglong Zou — 10 —
Advance to Chuan Wang — 7 —
Accrued to Aiden & Jasmine Limited (note b) — 1,125 54
Accrued to Vantage Point Global Limited(note b) — 3,012 146
~~note a – The Company obtained an exclusive game operation right from Zhuhai Qianyou, which is specialized in developing online games. According~~companies to the ~~agreement,~~Company as they were affiliated companies of a shareholder of the Company, ~~will share revenues derived~~Xiaomi Ventures Limited (“Xiaomi Ventures”).
On April 2, 2020, Xiaomi Ventures ceased to be the shareholder of the Company as Xiaomi Ventures together with certain shareholders of the Company exchanged their common shares of the Company for the shares of Itui International Inc. (“Itui”). In addition, Xiaomi Ventures entitled to certain veto rights in determining Itui’s voting on the Company. As a result, Xiaomi Ventures and the companies controlled by Xiaomi Ventures continued to be related parties of the Company.
(iii) These companies become related parties of Xunlei since April 2, 2020.
During the years ended December 31, 2018, 2019 and 2020, significant related party transactions were as follows:

Years ended December 31,
(In thousands)

2018

2019

2020
Game sharing costs paid and payable to an investee company

9

—

—
Bandwidth revenue from Beijing Xiaomi Mobile Software (note a)

4,254

1,815

—
Bandwidth revenue from Xiaomi Technology (note a)

—

875

2,211
Forum service fees paid and payable to Xiaomi Technology (note b)

38

13

—
Advertisement revenue from Guangzhou Millet (note c)

—

19

—
Technology service revenue from Guangzhou Millet (note d)

3,932

2,460

2,466
Advertisement revenue from Shenzhen Xunyi (note e)

493

—

—
Bandwidth revenue from Shenzhen Xunyi (note e)

160

—

—
Accrued to Vantage Point Global Limited (note f)

146

46

243
Accrued to Aiden & Jasmine Limited (note f)

54

17

91
Advertisement revenues from Beijing Itui (note g)

—

—

7,269
Bandwidth revenues from Itui Online (note h)

—

—

1,119
Bandwidth cost from an investee company

—

—

594
Advertisement revenue from Shenzhen Xiaomi (note i)

—

—

53
Repayment of loans to Weimin Luo arising from a business combination (note 3)

—

—

662

F-53
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

26.          Related party transactions (Continued)
Notes:
(a) From July 2017 to July 2019, Onething entered into a contract with Beijing Xiaomi Mobile Software for the provision of bandwidth to Beijing Xiaomi Mobile Software at a price benchmarking against market price, based on actual usage.
From August 2019 till now, Onething entered into the contract with Xiaomi Technology for the provision of bandwidth to Xiaomi Technology at a price benchmarking against market price, based on actual usage.
(b) Onething Cloud devices were available for sale on the online platform operated by Xiaomi Technology starting from August 2018 till April 2019, during which Xiaomi Technology was entitled to receive service fees based on a certain percentage of sales on the ~~licensed games~~platform.
(c) From 2017, an advertising services contract was entered into with ~~Zhuhai Qianyou.~~
~~note b –~~ Guangzhou Millet at a price benchmarking against market price.
(d) The Group is entitled to receive a mutually agreed sharing of net advertising revenue covering a period from mid-June 2017 to mid-June 2019, as compensation for technology solution services provided to Guangzhou Millet. The contract was extended for two years from mid-June 2019 to mid-June 2021 based on the same term.
(e) In 2018, a sales contract was entered into with Shenzhen Xunyi for provision of bandwidth and advertising services at a price benchmarking against market price, based on actual usage.
(f) In 2014, the Group repurchased 3,860,733 common shares from Aiden & Jasmine Limited (Co founder’s company) for ~~USD10,879 thousand~~USD10,879,000 and 10,334,679 common shares from Vantage Point Global Limited ~~(Founder’s company)~~ for ~~USD29,121 thousand.~~USD29,121,000. 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~~1,451,000 (including interest of USD ~~37 thousand)~~363,000) and USD ~~3,012 thousand~~3,883,000 (including interest of USD ~~100 thousand)~~971,000) respectively. The interest accrued ~~in 2015~~for the year ended December 31, 2020 was USD ~~54 thousand~~91,000 and ~~146 thousand~~USD 243,000 for Aiden & ~~Lasmine~~Jasmine Limited and Vantage Point Global Limited respectively.
The Group has repaid USD 3,883,000 to Vantage Point Global Limited in January 2021.
As
(g) In 2020, an user traffic monetization agreement was entered into with Beijing Itui, according to which Xunlei is entitled to receive a mutually agreed sharing of ~~December 31, 2013, 2014~~net advertising revenue covering a period from mid-May 2020 to mid-May 2021.
(h) The Company entered into a sales contract with Itui Online for provision of bandwidth at a price benchmarking against market price and charged based on actual usage since 2019.
(i) In 2020, a user traffic monetization agreement was entered into with Shenzhen Xiaomi, according to which Xunlei is entitled to receive a mutually agreed sharing of net advertising revenue

F-54
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

26.          Related party transactions (Continued)
As of December 31, 2019 and 2020, the amounts due from/to related parties were as follows:

(In thousands)

December 31, 2019

December 31, 2020
Amounts due from related parties




Accounts receivable from Guangzhou Millet

1,361

1,456
Accounts receivable from Xiaomi Technology

262

576
Accounts receivable from Itui Online

—

1,153
Accounts receivable from Beijing Itui

—

7,689
Accounts receivable from Shenzhen Xiaomi

—

60
Other receivable from Xiaomi Technology

14

15
Other receivable from Shenzhen Crystal

6

6
Other receivable from Shenglong Zou

9

9
Other receivable from Chuan Wang

6

6

(In thousands)

December 31, 2019

December 31, 2020
Amounts due to related parties




Accounts payable to investee companies

2

55
Other payable to Vantage Point Global Limited

3,640

3,883
Other payable to Aiden & Jasmine Limited

1,360

1,451

27.          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-55
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

27.          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, 2019 and 2020.

Fair value measurements as at December 31, 2019

Quoted prices

Significant

in active market

other

Significant

for identical

observable

unobservable

assets

inputs

inputs
(In thousands)

Total

(Level 1)

(Level 2)

(Level 3)
Short term investments:




Investments in financial instruments

292

—

292

—

292

—

292

—

Fair value measurements as at December 31, 2020

Quoted prices

Significant

in active market

other

Significant

for identical

observable

unobservable

assets

inputs

inputs
(In thousands)

Total

(Level 1)

(Level 2)

(Level 3)
Short term investments:








Investments in financial instruments

48,993

—

48,993

—

48,993

—

48,993

—

Investments in privately held companies for which the Company elected to record using the measurement alternative are re-measured on a non-recurring basis, and are categorized within Level 3 under the fair value hierarchy. The values are estimated based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, as well as rights and obligations of the securities.

28.          Commitments and contingencies
Bandwidth purchase commitments
The Group purchase bandwidth in the PRC under non-cancellable contract expiring on different dates. Payments under purchase of bandwidth are expensed on a straight-line basis over the duration of the respective periods.
Future minimum payments under non-cancellable bandwidth contracts consist of the following as of December 31, 2020:

(In thousands)


2021

3,388
2022

406

3,794

F-56
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

28.          Commitments and contingencies (Continued)
Capital commitments
As at December 31, 2020, the Group has unconditional purchase obligations for office software and construction in progress that had not been recognized in the amount of USD 7,953,000.

(In thousands)


2021

7,040
2022

0
2023

913

7,953

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 4,667,000 and USD 1,955,000 legal and litigation related expenses for the years ended December 31, 2018 and 2019, respectively, while the Group had reversed USD 1,217,000 legal expense for the year ended December 31, 2020.
Up to April 26, 2021, which is the date when the consolidated financial statements were issued, the Group had 16 lawsuits pending against the Group with an aggregate amount of claimed damages of approximately RMB 13.3 million (USD 1.9 million) which occurred before December 31, 2020 (2019: RMB 82.0 million (USD 11.9 million)). Of the 16 pending lawsuits, 13 lawsuits were relating to the alleged copyright infringement in the PRC. The Group had accrued for USD 1,640,000 litigation related expenses in ‘‘Accrued liabilities and other payables’’ in the consolidated balance sheet as of December 31, 2020 (2019: USD 2,765,000), 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 counsels. 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 16 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. 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 its members, which are six major U.S. entertainment content providers. In that agreement, the Group agreed to implement a comprehensive system of measures designed to prevent unauthorized downloading of and access to such content providers’ works. Despite the fact that the Group put in place preventive measures, the Group may still be subject to copyright infringement suits. In January 2015, a number of MPAA member studios filed 28 copyright infringement lawsuits against the Group on 28 video products in the Shenzhen Nanshan District Court in China. The court combined these cases into 2 cases for trial and entered a judgment on both cases on August 21, 2017. The court held, among others, that the Group infringed the plaintiffs’ copyright on 28 video products and were required by the court to compensate the plaintiff for a total of RMB 1.4 million (USD 0.2 million), the compensation costs was paid by the Group in 2018.

F-57
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

28.          Commitments and contingencies (Continued)

Litigation (Continued)
In addition, 2 putative shareholder class action lawsuits have been filed in the United States District Courts for the Southern District of New York against the Company and certain current and former officers and directors of the Company. Purporting to sue on behalf of all investors who purchased or acquired Xunlei stock from October 10, 2017 to January 11, 2018, plaintiffs allege that certain statements regarding OneCoin, later renamed as LinkToken, in the Company’s press releases and on a quarterly investor call were false and misleading because, among other things, they failed to disclose that OneCoin was a disguised “initial coin offering” and “initial miner offering” and constituted “unlawful financial activity.” Plaintiffs seek to recover under Sections 10(b) and 20(a) of the U.S. Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On April 12, 2018, the court consolidated the actions under the caption In re Xunlei Limited Securities Litigation, No. 18-cv-467 (RJS) and appointed lead plaintiffs who filed a consolidated amended compliant on June 4, 2018. The Company filed a motion to dismiss the amended compliant on August 3, 2018, and the motion of dismiss was granted by United States District Court Southern District of New York on September 11, 2019 and no notice of appeal or motion for extension of time was filed by the plaintiffs within 60 days after entry of the court's motion, therefore the class action was dismissed in November 2019.

29.          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 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.

F-58
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

29.          Certain risks and concentration (Continued)
PRC regulations (Continued)
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 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.
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 “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 did not 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, 2020, Shenzhen Xunlei and its subsidiaries held patents granted in the PRC and in the United States. Presently, certain patent applications are being examined by the State Intellectual Property Office of the PRC.
As of December 31, 2020, Shenzhen Xunlei and its subsidiaries have applied to register trademarks, of which the Company has received registered trademarks in different applicable trademark categories including registered with World Intellectual Property Organization.

F-59
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

29.          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, before elimination of balances with the Company and its subsidiaries, as of and for the years ended:

As of December 31,
(In thousands)

2019

2020
Current assets:

Cash and cash equivalents

34,847

14,284
Short-term investments

292

—
Accounts receivable, net

30,686

32,485
Due from related parties

1,644

10,955
Inventories

5,330

1,726
Prepayments and other current assets

20,747

15,712
Total current assets

93,546

75,162
Non-current assets:

Long-term investments

5,337

5,706
Deferred tax assets

985

—
Property and equipment, net

38,417

50,532
Intangible assets, net

9,426

8,857
Goodwill

20,382

22,607
Other long-term prepayments and non-current assets

313

905
Right-of-use assets

8,619

1,915
Restricted cash

2,983

1,541
Total non-current assets

86,462

92,063
Total assets

180,008

167,225
Current liabilities:

Accounts payable (including inter-companies balances with the Company and its subsidiaries of USD 21,297 and USD 30,439 as of December 31, 2019 and 2020, respectively (note a))

45,162

51,027
Due to a related party

2

55
Contract liabilities and deferred income, current portion

31,988

34,040
Income tax payable

2,436

2,500
Accrued liabilities and other payables (including inter-companies balances with the Company and its subsidiaries of USD 152,904 and USD 152,611 as of December 31, 2019 and 2020, respectively (note b))

191,406

185,972
Lease liabilities, current portion

4,621

1,912
Total current liabilities

275,615

275,506
Non-current liabilities:

Contract liabilities and deferred income, non-current portion

1,223

920
Deferred tax liabilities

1,179

1,085
Lease liabilities, non-current portion

4,073

27
Bank borrowings

11,324

19,924
Total non-current liabilities

17,799

21,956
Total liabilities

293,414

297,462

F-60
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

29.          Certain risks and concentration (Continued)
PRC regulations (Continued)
Notes:
(a) Excluding the ~~amounts due to / from related parties were as follows:~~
(In thousands) December 31,
2013 December 31,
2014 December 31,
2015
Amounts due to related parties
Accounts payable to Zhuhai Qianyou 225 84 38
Long-term payable to Aiden & Lasmine Limited (note 16) — 1,125 1,179
Long-term payable to Vantage Point Global Limited (note 16) — 3,012 3,158
(In thousands) December 31,
2013 December 31,
2014 December 31,
2015
Amounts due from related parties
Accounts receivable from Beijing Xiaomi — 5 30
Other receivable from Hao Cheng 85 — —
Other receivable from Shenglong Zou — 10 9
Other receivable from Chuan Wang — 7 6
~~23.~~ ~~Taxation~~
~~(i)~~ ~~Cayman Islands~~
~~Under~~inter-companies balances with 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~~of USD 21,297,000 and USD 30,439,000, the ~~Shenzhen Special Economic Zone~~balance 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.~~ ~~Taxation (Continued)~~
~~(ii)~~ ~~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.~~ ~~Taxation (Continued)~~
~~(ii)~~ ~~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 accruedaccounts payable as of December 31, ~~2014~~2019 and ~~2015. The undistributed earnings from~~2020, was USD 23,865,000 and USD 20,588,000, respectively.
(b) Excluding the ~~Group’s PRC entities~~inter-companies balances with the Company and its subsidiaries of USD 152,904,000 and USD 152,611,000, the balance of accrued liabilities and other payables as of December 31, ~~2014~~2019 and ~~2015 amounted to USD38,393 thousand~~2020 was USD 38,502,000 and USD ~~34,313 thousand,~~33,361,000, 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 Years ended December 31,
(In thousands) 2013 2014 2015
Current income tax expenses 175 397 289
Deferred income tax benefits 385 66 (1,175 )
Taxation for the year 560 463 (886 )
~~The aggregate amount and per share effect of the tax holiday are as follows:~~
Years ended December 31,
2013 2014 2015
Aggregate dollar effect(in thousands) 4,638 2,784 (830 )
Per share effect—basic 0.08 0.01 0.00
Per share effect—diluted 0.06 0.01 0.00
~~F- 72~~

Years ended December 31,
(In thousands)

2018

2019

2020
Net revenues from continuing operations

231,616

177,520

186,413
Net loss attributable to Xunlei Limited

(40,728)

(56,328)

(10,673)

Years ended December 31,
(In thousands)

2018

2019

2020
Net cash provided by/(used in) operating activities

7,548

(16,047)

(21,008)
Net cash used in investing activities

(7,925)

(5,001)

(9,160)
Net cash provided by financing activities

2,096

11,707

7,154

1,719

(9,341)

(23,014)

Foreign exchange risk
The Group’s financing activities are denominated mainly in 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 RMB into other currencies. The revenues and expenses of the Company’s subsidiaries, consolidated VIE and its subsidiaries are generally denominated in RMB and their assets and liabilities are denominated in RMB.
Concentration of customer risk
The top 10 customers accounted for 23%, 31% and 38% of the net revenues for the years ended December 31, 2018, 2019 and 2020, respectively.
Credit risk
As of December 31, 2019 and 2020, substantially all of the Group’s cash and cash equivalents, restrict cash and short-term investments 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, restricted cash and short-term investments.
Prior to entering into sales agreements, the Group performs ongoing credit assessments of its customers, taking into account their financial position, credit history and other factors such as current market conditions. Further, the Group has not experienced any significant bad debts with respect to its accounts receivable for the years ended December 31, 2019 and 2020, the addition of allowance for doubtful accounts for the year ended December 31, 2018 was mainly arisen from the cloud computing service to a customer.
F-61
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

29.          Certain risks and concentration (Continued)
Credit risk (Continued)
The Group is exposed to credit risk in relation to other assets comprised of due from related parties and other receivables, which are typically unsecured. In evaluating the collectability of the balances, the Group considered various factors, including the related parties and third parties’ repayment history and their credit-worthiness. An allowance for credit losses is made when collection of the full amount is no longer probable.

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(bb)) 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 168,493,000 as of December 31, 2020, or 58% of the Company's total consolidated net assets. 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.

30.        Subsequent events
The Company performed an evaluation of subsequent events through April 26, 2021, which is the date the financial statements were issued, and did not identify any material events or transactions that would require adjustment to or disclosure in the financial statements.

31.        Additional information: condensed financial statements of the Company
Regulation S-X requires condensed financial information as to financial position, statements of cash flows 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.

F-62
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

31.        Additional information: condensed financial statements of the Company (Continued)
The Company did not have significant other commitments, long-term obligations, or guarantees as of December 31, 2020.
Condensed Balance Sheets

(In thousands)

December 31, 2019

December 31, 2020
Assets

Current assets:

Cash and cash equivalents

7,683

57,585
Short-term investments

102,555

47,525
Due from subsidiaries and consolidated VIEs

277,241

279,043
Prepayments and other current assets

274

860
Total current assets

387,753

385,013
Non-current assets:

Investments in subsidiaries and consolidated VIEs

(79,165)

(79,936)
Total assets

308,588

305,077
Liabilities

Current liabilities:

Accounts payable

55

55
Due to subsidiaries and consolidated VIEs

9,737

10,750
Contract liabilities and deferred income, current portion

1

1
Accrued liabilities and other payables

1,918

2,118
Total current liabilities

11,711

12,924
Total liabilities

11,711

12,924
Commitments and contingencies

Shareholders’ equity

Common shares

85

84
Treasury shares (29,711,964 shares and 34,475,224 shares as of December 31, 2019 and 2020, respectively)

7

8
Other shareholders’ equity

296,785

292,061
Total Xunlei Limited’s shareholders’ equity

296,877

292,153
Total liabilities and shareholders’ equity

308,588

305,077

F-63
Table of Contents
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)

31.        Additional information: condensed financial statements of the Company (Continued)
Condensed Statements of Operations

Years ended December 31,
(In thousands)

2018

2019

2020
Operating expenses






Sales and marketing expenses

0

(1)

0
General and administrative expenses

(1,483)

(1,247)

(1,438)
Total operating expenses

(1,483)

(1,248)

(1,438)
Operating loss

(1,483)

(1,248)

(1,438)
Interest income

879

1,496

2
Interest expense

(239)

(75)

(399)
Other income, net

4,646

4,712

2,455
(Loss)/profit from subsidiaries and consolidated VIE



- Continuing operations

(43,221)

(57,787)

(14,361)
- Discontinued operations

139

0

0
Loss before income tax

(39,279)

(52,902)

(13,741)
Income tax expenses

0

(267)

(99)
Net loss

(39,279)

(53,169)

(13,840)
Net loss attributable to Xunlei Limited’s common shareholders

(39,279)

(53,169)

(13,840)

Condensed Statements of Cash Flows

Years ended December 31,
(In thousands)

2018

2019

2020
Cash flows from operating activities






Net cash used in operating activities

(88,309)

(171,796)

(12,704)
Cash flows from investing activities



Net cash generated from investing activities

37,788

52,359

12,051
Cash flows from financing activities



Net cash used in financing activities

—

—

(4,475)
Net decrease in cash and cash equivalents

(50,521)

(119,437)

(5,128)
Cash and cash equivalents at beginning of year

280,196

229,675

110,238
Effect of exchange rates on cash and cash equivalents

0

0

0
Cash and cash equivalents at end of year

229,675

110,238

105,110

F-64
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
~~23.~~ ~~Taxation (Continued)~~
~~(ii)~~ ~~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 Years ended December 31,
(In thousands) 2013 2014 2015
Income tax expense/(benefit) at PRC statutory rate (based on statutory tax rate applicable to enterprises in Shenzhen, China) 5,878 7,211 (438 )
Effects of differences in tax rates in different jurisdictions applicable to entities of the Group outside of the PRC 667 (838 ) 2,400
Non-deductible expenses 102 714 14
Effect of Super Deduction available to Shenzhen Xunlei (1,763 ) (1,365 ) -
Effect of tax holiday (5,270 ) (4,613 ) (369 )
Change in valuation allowance of deferred tax assets — 291 4,750
Effect on deferred tax assets due to change in tax rates 1,764 (103 ) (8 )
Outside basis difference arising from VIE and its subsidiaries in the PRC 713 478 (2,174 )
Expiration of tax loss 31 51 290
Others (1,562 ) (1,363 ) (5,351 )
Income tax expense/ (benefit) 560 463 (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) December 31,
2014 December 31,
2015
Deferred tax assets, current portion:
Net operating loss carried forward(Note a) 315 417
Amortization of intangible assets arising from intragroup transactions (Note b) 69 95
Amortization of content copyrights (Note c) 1,675 —
Impairment of online game licenses 32 23
Impairment of long-term equity investment — 115
Allowance for advance to suppliers — 120
Valuation allowance — (81 )
Deferred tax assets, current portion, net 2,091 689
Deferred tax assets, non-current portion: — —
Net operating loss carried forward(Note a) 6,103 13,016
Allowance for doubtful accounts 796 —
Amortization of intangible assets arising from intragroup transactions (Note b) 105 54
Impairment of online game licenses 16 —
Amortization of Content Copyrights (Note c) 4,133 —
Valuation allowance (291 ) (4,477 )
Deferred tax assets, non-current portion, net 10,862 8,593

Deferred tax liability, non-current portion: — —
Outside basis difference (Note d) (8,552 ) (6,378 )
~~F- 73~~
~~Xunlei Limited~~
~~Notes to consolidated financial statements~~
~~(Amounts in US dollars unless otherwise stated)~~
~~23.~~ ~~Taxation (Continued)~~
~~(ii)~~ ~~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 1,398
2017 889
2018 6,191
2019 3,647
2020 and thereafter 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:~~
Years ended December 31,
(In thousands) 2013 2014 2015
Beginning balance (43 ) — (291 )
Additions — (291 ) (4,268 )
Write-off 43 — —
Ending balance — (291 ) (4,559 )
~~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.~~ ~~Taxation (Continued)~~
~~(ii)~~ ~~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.~~
Fair value measurements as at December 31, 2014
(In thousands) Total Quoted prices
in active market
for indentifical
assets
(Level 1) Significant
other
observable
inputs
(Level 2) Significant
observable
inputs
(Level 3)
Cash equivalent: time deposits with original maturities less than three months 31,117 — 31,117 —
Short term investments:
Investments in financial instruments 29,427 —
29,427
—
60,544 —
60,544
—
Fair value measurements as at December 31, 2015
(In thousands) Total Quoted prices
in active market
for indentifical
assets
(Level 1) Significant
other
observable
inputs
(Level 2) Significant
observable
inputs
(Level 3)
Cash equivalent: time deposits with original maturities less than three months 314,357 — 314,357 —
Short term investments:
Investments in financial instruments 70,328 — 70,328 —
384,685 — 384,685 —
~~25.~~ ~~Other income, net~~
Continuing Operations Years ended December 31,
(In thousands) 2013 2014 2015
Subsidy income 1,393 2,236 1,902
Fair value changes of warrants liabilities 1,531 8,054 —
Investment income from short-term investments 1,847 3,471 3,666
Dilution gains arising from deemed disposal of investment (Note 11) — 449 702
Investment loss impairment of long-term investment — — (802 )
Exchange losses (252 ) (176 ) (2,771 )
Settlement income 249 489 755
Others (89 ) (557 ) 175
4,679 13,966 3,627
~~F- 76~~
~~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 751
2017 174
2018 —
925
~~Bandwidth lease commitments~~
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 15,715
2017 9,965
25,680
~~Capital commitments~~
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:
As of December 31,
(In thousands) 2014 2015
Current assets:
Cash and cash equivalents 43,849 32,461
Short-term investments 28,575 69,522
Accounts receivable, net 5,508 11,573
Due from related parties 6 30
Deferred tax assets 1,358 351
Inventories — 480
Prepayments and other current assets 10,147 31,659
Held for sale assets 46,325 —
Total current assets 135,768 146,076
Non-current assets:
Equity method investments 5,498 9,884
Deferred tax assets 8,262 6,791
Property and equipment, net 16,370 17,991
Construction in progress — 14
Intangible assets, net 16,635 14,297
Goodwill 23,237 21,896
Prepayments for content copyrights 1,239 —
Other long-term prepayments 5,795 7,430
Total non-current assets 77,076 78,303
Total assets 212,844 224,379
Current liabilities:
Accounts payables 24,504 33,262
Due to a related party 84 38
Deferred revenue and income, current portion 27,534 24,902
Income tax payable 2,554 2,407
Accrued liabilities and other payables 85,701 131,312
Held for sale liabilities 26,438 —
Total current liabilities 166,815 191,921
Non-current liabilities:
Deferred revenue and income, non-current portion 6,452 4,751
Total non-current liabilities 6,452 4,751
Total liabilities 173,267 196,672
Years ended December 31,
(In thousands) 2013 2014 2015
Net revenue from continuing operations 116,381 132,515 129,198
Net income / (loss) attributable to Xunlei Limited 13,940 12,677 (6,408 )
~~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)~~
Years ended December 31,
(In thousands) 2013 2014 2015
Net cash provided by operating activities 92,580 70,822 41,723
Net cash used in investing activities (66,243 ) (78,335 ) (51,721 )
Net cash provided by financing activities 2,487 856 1,055
28,824 (6,657 ) (8,943 )
~~Foreign exchange risk~~
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) December 31,
2014 December 31,
2015
Assets
Current assets:
Cash and cash equivalents 309,457 292,175
Due from subsidiaries and consolidated VIEs 67,397 92,864
Prepayments and other current assets 6,709 1,090
Total current assets 383,563 386,129
Non-current assets:
Intangible assets, net 394 —
Investments in subsidiaries and consolidated VIEs 82,360 68,481
Total assets 466,317 454,610
Liabilities
Current liabilities:
Accounts payable 101 101
Deferred revenue and income, current portion 211 211
Accrued liabilities and other payables 2,328 1,735
Total current liabilities 2,640 2,047
Non-current liabilities:
Deferred revenue and income, non-current 842 632
Warrants liabilities — —
Due to related parties, non-current portion 4,137 4,337
Other long-term payable 807 845
Total liabilities 8,426 7,861
Commitments and contingencies
Shareholders’ equity
Common shares 82 85
Treasury shares 30,274,602 shares as at December 31, 2014 and 29,558,094 shares as at December 31, 2015 7 7
Other shareholders’ equity 457,802 446,657
Total Xunlei Limited’s shareholders’ equity 457,891 446,749
Total liabilities, mezzanine equity and shareholders’ equity 466,317 454,610
~~F- 84~~
~~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~~
Years ended December 31,
(In thousands) 2013 2014 2015
Revenues — — —
Cost of revenues (2,264 ) (1,673 ) (131 )
Gross profit (2,264 ) (1,673 ) (131 )
Operating expenses
Research and development expenses — — —
Sales and marketing expenses (241 ) — —
General and administrative expenses (972 ) (996 ) (1,314 )
Total operating expenses (1,213 ) (996 ) (1,314 )
Operating loss (3,477 ) (2,669 ) (1,445 )
Interest income 706 6,171 5,318
Interest expense — (163 ) (239 )
Other income, net 1,651 7,602 (3,261 )
Income / (loss) from subsidiaries and consolidated VIEs 11,782 (129 ) (13,540 )
Income / (loss) before income tax 10,662 10,812 (13,167 )
Income tax — — —
Net income / (loss) 10,662 10,812 (13,167 )
Net income attributable to the non-controlling interest — — —
Net income / (loss) attributable to Xunlei Limited’s common shareholders 10,662 10,812 (13,167 )
~~Condensed statement of cash flows~~
Years ended December 31,
(In thousands) 2013 2014 2015
Cash flows from operating activities
Net cash generated from/(used in) operating activities 4,708 (41,485 ) (26,069 )
Cash flows from investing activities
Net cash (used in) / generated from investing activities (3,843 ) (10,333 ) 3,812
Cash flows from financing activities
Net cash (used in) / generated from financing activities (2,242 ) 332,412 4,975
Net (decrease) / increase in cash and cash equivalents (1,377 ) 280,594 (17,282 )
Cash and cash equivalents at beginning of year 30,240 28,863 309,457
Effect of exchange rates on cash and cash equivalents — — —
Cash and cash equivalents at end of year 28,863 309,457 292,175
~~F- 85~~

Title of each class	Name of each exchange on which registered	Ticker symbol
American depositary shares, each representing five common shares	The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)	XNET

Common shares, par value US$0.00025 per share*	The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)


Large accelerated filer ☐	Accelerated filer ⌧	Non-accelerated filer ☐	Emerging growth company ☐

	◻
US GAAPx⌧	International Financial Reporting Standards as issued	~~Other~~¨
	by the International Accounting Standards Board ¨☐	Other ☐

~~INTRODUCTION~~	1
~~FORWARD-LOOKING INFORMATION~~	1	Page
~~PART I~~		2
INTRODUCTION		1
FORWARD-LOOKING INFORMATION		2
PART I		3
Item 1.	Identity of Directors, Senior Management and Advisers	2 3
Item 2.	Offer Statistics and Expected Timetable	2 3
Item 3.	Key Information	2 3
Item 4.	Information on the Company	43 58
Item 4A.	Unresolved Staff Comments	71 99
Item 5.	Operating and Financial Review and Prospects	71 100
Item 6.	Directors, Senior Management and Employees	~~108~~ 124
Item 7.	Major Shareholders and Related Party Transactions	~~117~~ 131
Item 8.	Financial Information	~~122~~ 135
Item 9.	The Offer and Listing	~~123~~ 137
Item 10.	Additional Information	~~124~~ 137
Item 11.	Quantitative and Qualitative Disclosures about Market Risk	~~130~~ 144
Item 12.	Description of Securities Other than Equity Securities	~~131~~ 145
PART II		~~133~~ 147
Item 13.	Defaults, Dividend Arrearages and Delinquencies	~~133~~ 147
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	~~133~~ 147
Item 15.	Controls and Procedures	~~133~~ 147
Item 16A.	Audit Committee Financial Expert	~~135~~ 148
Item 16B.	Code of Ethics	~~135~~ 148
Item 16C.	Principal Accountant Fees and Services	~~135~~ 148
Item 16D.	Exemptions from the Listing Standards for Audit Committees	~~136~~ 149
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	~~136~~ 149
Item 16F.	Change in Registrant’s Certifying Accountant	~~136~~ 149
Item 16G.	Corporate Governance	~~137~~ 150
Item 16H.	Mine Safety Disclosure	~~138~~ 150
PART III		~~138~~ 150
Item 17.	Financial Statements	~~138~~ 150
Item 18.	Financial Statements	~~138~~ 151
Item 19.	Exhibits	~~138~~ 151
SIGNATURES	~~142~~	155

	For the Year Ended December 31,
(in thousands of US$, except for share, per share and per ADS data)	2011			2012			2013			2014			2015
Revenues, net of rebates and discounts		35,648			71,545			122,031			135,812			129,996
Business tax and surcharges		(4,014	)		(5,379	)		(3,904	)		(1,878	)		(361	)
Net Revenues		31,634			66,166			118,127			133,934			129,635
Cost of revenues		(14,662	)		(31,875	)		(50,258	)		(55,755	)		(60,034	)
Gross profit		16,972			34,291			67,869			78,179			69,601
Operating expenses(1)
Research and development expenses		(10,974	)		(18,340	)		(21,740	)		(29,252	)		(38,250	)
Sales and marketing expenses		(9,266	)		(15,933	)		(9,848	)		(13,527	)		(15,042	)
General and administrative expenses		(11,732	)		(2,675	)		(18,663	)		(26,945	)		(28,774	)
Total operating expenses		(31,972	)		(36,948	)		(50,251	)		(69,724	)		(82,066	)
Operating (loss)/income		(15,000	)		(2,657	)		17,618			8,455			(12,465	)
Interest income		270			1,377			1,189			6,733			5,833
Interest expense		(339	)		(1,400	)		—			(163	)		(239	)
Other income, net		1,415			564			4,679			13,966			3,627
Shares of (loss)/income from equity investees		(7	)		(45	)		25			(259	)		(12	)
(Loss)/income from continuing operations before income tax		(13,661	)		(2,161	)		23,511			28,732			(3,256	)
Income tax benefit/(expense)		2,816			(2,111	)		(560	)		(463	)		886
Net (loss)/income from continuing operations		(10,845	)		(4,272	)		22,951			28,269			(2,370	)
Discontinued operations
Income/(Loss) from discontinued operations		11,867			4,782			(13,779	)		(20,330	)		(10,048	)
Income tax (expense)/benefit		(1,033	)		(128	)		1,207			1,923			(2,048	)
Net income/(loss) from discontinued operations		10,834			4,654			(12,572	)		(18,407	)		(12,096	)
Net (loss)/income		(11	)		382			10,379			9,862			(14,466	)
Less: net loss attributable to the non-controlling interest		(1	)		(121	)		(283	)		(950	)		1,299
Net (loss)/income attributable to Xunlei Limited		(10	)		503			10,662			10,812			(13,167	)
Beneficial conversion feature of series C convertible preferred shares from their modification		—			(286	)		—			—			—
Deemed contribution from series C preferred shareholders		—			2,979			—			—			—
Contingent beneficial conversion feature of series C to a series C shareholder		—			—			—			(57	)		—
Deemed dividend to series D shareholder from its modification		—			—			—			(279	)		—
Accretion of series D to convertible redeemable preferred shares redemption value		—			(3,509	)		(4,300	)		(1,870	)		—
Accretion of series E to convertible redeemable preferred shares redemption value		—			—			—			(12,754	)		—
Amortization of beneficial conversion feature of series E		—			—			—			(4,139	)		—
Acceleration of amortization of beneficial conversion feature of Series E upon initial public offering		—			—			—			(49,346	)		—
Deemed dividend to certain shareholders from repurchase of shares		—			—			—			(14,926	)		—
Deemed dividend to preferred shareholders upon initial public offering		—			—			—			(32,807	)		—
Allocation of net income to participating preferred shareholders		—			—			(4,094	)		—			—
Net (loss)/income attributable to Xunlei Limited’s common shareholders		(10	)		(313	)		2,268			(105,366	)		(13,167	)
Weighted average number of common shares outstanding
Basic		59,143,208			61,447,372			61,447,372			194,711,227			335,987,595
Diluted		59,143,208			61,447,372			76,065,898			194,711,227			335,987,595
Net (loss)/income per share attributable to Xunlei Limited from continuing operations
Basic		(0.45	)		(0.13	)		0.24			(0.45	)		(0.00	)
Diluted		(0.45	)		(0.13	)		0.18			(0.45	)		(0.00	)
Net income/(loss) per share attributable to Xunlei Limited from discontinued operations
Basic		0.45			0.14			(0.20	)		(0.09	)		(0.04	)
Diluted		0.45			0.14			(0.17	)		(0.09	)		(0.04	)
Net loss attributable to holders of common shares of Xunlei Limited per ADS(2)
Basic											(2.70	)		(0.20	)
Diluted											(2.70	)		(0.20	)

	For the Year Ended December 31,
Continuing operations	2013				2014				2015
(in thousands of US$, except for percentages)	Amount		% of Revenues		Amount		% of Revenues		Amount		% of Revenues
Subscriptions		86,733		71.1		98,189		72.3		82,435		63.4
Online advertising		2,951		2.4		5,834		4.3		4,802		3.7
Other internet value-added services		32,347		26.5		31,789		23.4		42,759		32.9
Total		122,031		100.0		135,812		100.0		129,996		100.0

Date of Option Grant	Options outstanding		Exercise price (US$)		Fair value of options (US$)		Fair value of common shares (US$)
prior to 2012		8,618,325		—		—		—
March 1, 2012		75,615		0.01-3.97		1.01-2.82		2.83
August 1, 2012		7,917		3.97		1.10		3.01
March 1, 2013		7,292		3.97		1.17		3.20
August 1, 2013		267,500		3.97		1.13		3.23
November 18, 2013		366,761		2.11–3.97		0.99–1.60		3.15
March 5, 2014		52,000		3.97		0.89		3.06
June 24, 2014		512,642		2.11		1.43		2.98
September 5, 2014		32,233		3.97		0.62-0.66		2.67
January 1, 2015		473,500		0.08-3.30		0.76-1.38		1.46
Total		2,130,820

	February 6, 2012			December 31, 2012			December 31, 2013			February 6, 2014			March 1, 2014
Spot price⁽¹⁾		3.66			4.48			4.36			4.47			4.47
Risk-free interest rate⁽²⁾		0.23	%		0.15	%		0.05	%		0	%*		0	%*
Volatility rate⁽³⁾		47.3	%		41.2	%		30.33	%		0	%*		0	%*
Dividend yield⁽⁴⁾		—			—			—			—			—

Valuation as of March 5, 2014	IPO Scenario			Liquidation Scenario			Redemption Scenario
Expected Maturity Date		Jun 30, 2014			Jun 30, 2014			Feb 28, 2018
Expected Volatility (1)		38.39	%		38.39	%		43.40	%
Risk-free interest rate (2)		0.06	%		0.06	%		1.18	%
Expected dividend yield		—			—			—
Probability (3)		80.00	%		10.00	%		10.00	%

Valuation as of April 24, 2014	IPO Scenario			Liquidation Scenario			Redemption Scenario
Expected Maturity Date		Jun 30, 2014			Jun 30, 2014			Feb 28, 2018
Expected Volatility (1)		43.10	%		43.10	%		44.03	%
Risk-free interest rate (2)		0.02	%		0.02	%		1.29	%
Expected dividend yield		—			—			—
Probability (3)		80.00	%		10.00	%		10.00	%

	March 5, 2014	April 24, 2014
Spot price⁽¹⁾	3.31 - 4.65	3.39 - 4.64
Risk-free interest rate⁽²⁾	0.04%	0.02%
Volatility rate⁽³⁾	38.12%	42.74%
Dividend yield⁽⁴⁾	—	—

	Common Shares Beneficially Owned
	Number		%(1)
Directors and executive officers**:
Sean Shenglong Zou⁽²⁾		32,814,606		9.71	%
Hao Cheng⁽³⁾		13,133,952		3.89	%
Qin Liu⁽⁴⁾		4,166,667		1.23	%
Quan Zhou⁽⁵⁾		22,446,587		6.64	%
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		73,324,678		21.69	%

Principal Shareholders:
Xiaomi Ventures Limited⁽¹²⁾		93,653,572		27.71	%
King Venture Holdings Limited⁽¹³⁾		37,500,000		11.09	%
Vantage Point Global Limited⁽¹⁴⁾		20,814,606		6.16	%
IDG Funds⁽¹⁵⁾		22,446,587		6.64	%


	Common Shares Beneficially Owned
	Number	%^†
Directors and executive officers:**
Jinbo Li⁽¹⁾	133,018,479	39.7	%
Sean Shenglong Zou⁽²⁾	22,931,611	6.9	%
Hao Cheng	*	*
Yubo Zhang	*	*
Raymond Weimin Luo	—	—
Peng Shi	—	—
Hui Duan	—	—
Jenny Wenjie Wu	*	*
Ya Li	*	*
Naijiang (Eric) Zhou	*	*
All directors and executive officers as group	159,793,522	47.7	%
Principal shareholders:
Itui International Inc.⁽³⁾	133,018,479	39.7	%
Sean Shenglong Zou⁽²⁾	22,931,611	6.9	%
Morgan Stanley entities⁽⁴⁾	17,650,355	5.3	%

	Trading Price
	High		Low
Annual Highs and Lows
2014		16.18		6.56
2015		14.34		5.93

Quarterly Highs and Lows
First Quarter 2015		8.66		5.93
Second Quarter 2015		14.34		6.25
Third Quarter 2015		12.04		6.71
Fourth Quarter 2015		8.36		6.58

Monthly Highs and Lows
October 2015		8.36		6.90
November 2015		8.20		6.58
December 2015		8.06		6.80
January 2016		7.66		6.00
February 2016		6.12		5.14
March 2016		6.74		5.68
April 2016 (through April 20, 2016)		7.49		6.00


Persons depositing or withdrawing shares must pay:		For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)		·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
$0.05 (or less) per ADS		·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

$0.05 (or less) per ADSs per calendar year		·Depositary services
Registration or transfer fees		·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
Expenses of the depositary		·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

	2014		2015
Audit fees⁽¹⁾	US$	800,000	US$	746,085
Audit-related fees⁽²⁾	US$	1,046,002	US$	—
All other fees⁽³⁾	US$	—	US$	—


				Approximate Dollar
			Total Number of	Value of ADSs that
			ADSs Purchased as	May Yet Be
	Total Number of	Average Price Paid	Part of the Publicly	Purchased Under
Period	ADSs Purchased	Per ADS	Announced Plan	the Plan
July 2020 to August 2020	1,191,392	US$3.75	1,191,392	US$15.53 million
Total	1,191,392		1,191,392

Period	Total Number of ADSs Purchased		Average Price Paid Per ADS		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
March 12 – March 31		192,803		6.44		192,803		2,814,715
April 7 – April 7		1,000		6.65		1,000		2,813,715
September 29 – September 30		2,940		7.13		2,940		2,810,775
December 18 – December 30		16,876		6.94		16,876		2,793,899
Total		213,619		—		213,619		—

Exhibit Number		Description of ~~Document~~Documents
1.1		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)
2.1
~~2.1~~		Registrant’s specimen American depositary receipt (included in Exhibit 2.3)
2.2
~~2.2~~		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)
2.3*
~~2.3~~		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)
2.4*		Description of securities
4.1		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)
4.2
~~4.2~~		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)

~~Exhibit~~ ~~Number~~		~~Description of Document~~
4.3		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)
4.4
~~4.4~~		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)
4.5
~~4.5~~		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)
4.6
~~4.6~~		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)
4.7
~~4.7~~		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)
4.8
~~4.8~~		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)
4.9
~~4.9~~		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)
4.10		2020 share incentive plan (incorporated by reference to Exhibit 99.1 of Form 6-K (file no. 001-35224) furnished to the SEC on July 2, 2020)
~~4.10~~
4.11		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)

	~~Xunlei Limited~~
				Xunlei Limited
	~~By:~~	~~/s/ Sean Shenglong Zou~~
	By:	~~Name: Sean Shenglong Zou~~ /s/ Jinbo Li
		Name:	Jinbo Li
		Title:	Chairman of the Board and Chief Executive Officer

~~Date: April 21, 2016~~


(Amounts expressed in thousands of United States dollars (“USD”),		As at	As at
except for number of shares and per share data)	Note	December 31, 2019	December 31, 2020
Assets
Current assets:
Cash and cash equivalents	5	162,465	137,248
Short-term investments	6	102,847	117,821
Accounts receivable, net (Allowance for credit losses of USD7,604 and USD9,329 as of December 31, 2019 and 2020, respectively)	7	27,533	22,983
Inventories	8	5,537	1,726
Due from related parties	26	1,658	10,970
Prepayments and other current assets (Allowance for credit losses of USD5,503 and USD10,283 as of December 31, 2019 and 2020, respectively)	9	16,543	11,534
Total current assets		316,583	302,282

Non-current assets:
Restricted cash	2(f)	2,983	1,541
Long-term investments	10	26,365	26,734
Deferred tax assets	24	1,118	—
Property and equipment, net	11	38,770	50,725
Right-of-use assets	12	8,747	1,954
Intangible assets, net	13	9,426	8,857
Goodwill	2(l), 14	20,382	22,607
Other long-term prepayments and non-current assets	9	313	905
Total assets		424,687	415,605

Liabilities
Current liabilities:
Accounts payable (including accounts payable of the consolidated variable interest entities (“VIE”) and its subsidiaries without recourse to the Company of USD 23,865 and USD 20,588 as of December 31, 2019 and 2020, respectively (note 29))		24,213	20,644
Due to related parties (including due to related parties of the consolidated VIE and its subsidiaries without recourse to the Company of USD 2 and USD 55 as of December 31, 2019 and 2020, respectively)	26	5,002	5,389
Contract liabilities and deferred income, current portion (including contract liabilities and deferred income, current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 31,988 and USD 34,040 as of December 31, 2019 and 2020, respectively)	15	31,988	34,040
Income tax payable (including income tax payable of the consolidated VIE and its subsidiaries without recourse to the Company of USD 2,436 and USD 2,500 as of December 31, 2019 and 2020, respectively)		2,550	2,553
Accrued liabilities and other payables (including accrued liabilities and other payables of the consolidated VIE and its subsidiaries without recourse to the Company of USD 38,502 and USD 33,361 as of December 31, 2019 and 2020, respectively (note 29))	16	42,840	38,689
Lease liabilities, current portion (including lease liabilities, current portion of the consolidated VIE and its subsidiaries without recourse to the Company of USD 4,621 and USD 1,912 as of December 31, 2019 and 2020, respectively)	12	4,693	1,961
Total current liabilities		111,286	103,276


(Amounts expressed in thousands of USD,		Years ended December 31,
except for number of shares and per share data)	Note	2018	2019	2020
Net revenues
Service revenue		177,528	172,998	185,271
Product revenue		54,604	8,269	1,412
Total revenues, net of rebates and discounts	2(q), 2(y)	232,132	181,267	186,683
Business taxes and surcharges		(1,528)	(602)	(312)
Net revenues		230,604	180,665	186,371
Cost of revenues
Service	22	(84,033)	(92,732)	(90,977)
Product	22	(31,634)	(7,181)	(1,660)
Total cost of revenues		(115,667)	(99,913)	(92,637)
Gross profit		114,937	80,752	93,734
Operating expenses
Research and development expenses		(76,763)	(68,571)	(55,463)
Sales and marketing expenses		(35,322)	(31,820)	(18,064)
General and administrative expenses		(40,833)	(38,930)	(33,910)
Asset impairment loss, net of recoveries		(6,348)	2,147	(5,090)
Total operating expenses		(159,266)	(137,174)	(112,527)
Operating loss		(44,329)	(56,422)	(18,793)
Interest income		1,183	1,897	1,471
Interest expense		(239)	(75)	(406)
Other income, net	23	2,810	5,861	4,737
Share of loss from equity investees		(307)	—	—
Loss from continuing operations before income tax		(40,882)	(48,739)	(12,991)
Income tax benefits/(expenses)	24	89	(4,676)	(1,149)
Net loss from continuing operations		(40,793)	(53,415)	(14,140)
Discontinued operations	4
Income from discontinued operations before income taxes		1,533	—	—
Income tax expenses		(230)	—	—
Net profit from discontinued operations		1,303	—	—
Net loss for the year		(39,490)	(53,415)	(14,140)
Less: net loss attributable to the non-controlling interests		(212)	(246)	(300)
Net loss attributable to Xunlei Limited		(39,278)	(53,169)	(13,840)


									Total
								Accumulated	Xunlei
(Amounts expressed in thousands					Additional			other	Limited’s	Non-
of USD, except for number of	Common shares		Treasury stock		paid-in	Accumulated	Statutory	comprehensive	shareholders’	controlling	Total
shares and per share data)	Shares	Amount	Shares	Amount	capital	deficits	reserves	loss	equity	interest	equity
Balance at January 1, 2018	333,643,560	83	35,233,649	9	461,330	(74,526)	5,132	(7,031)	384,997	(2,160)	382,837

Share-based compensation	—	—	—	—	5,294	—	—	—	5,294	—	5,294
Restricted shares vested	2,879,220	1	(2,879,220)	(1)	—	—	—	—	—	—	—
Net loss	—	—	—	—	—	(39,278)	—	—	(39,278)	(212)	(39,490)
Currency translation adjustments	—	—	—	—	—	—	—	(5,717)	(5,717)	152	(5,565)
Contribution by non-controlling interest holders	—	—	—	—	—	—	—	—	—	197	197
Acquisition of a subsidiary	—	—	—	—	—	—	—	—	—	907	907
Balance at December 31, 2018	336,522,780	84	32,354,429	8	466,624	(113,804)	5,132	(12,748)	345,296	(1,116)	344,180

Share-based compensation	—	—	—	—	5,428	—	—	—	5,428	—	5,428
Restricted shares vested	2,642,465	1	(2,642,465)	(1)	—	—	—	—	—	—	—
Cancellation of common shares	(4)	—	—	—	—	—	—	—	—	—	—
Net loss	—	—	—	—	—	(53,169)	—	—	(53,169)	(246)	(53,415)
Currency translation adjustments	—	—	—	—	—	—	—	(677)	(677)	27	(650)
Balance at December 31, 2019	339,165,241	85	29,711,964	7	472,052	(166,973)	5,132	(13,425)	296,878	(1,335)	295,543

Repurchase of common shares	(5,956,960)	(1)	5,956,960	1	(4,475)	—	—	—	(4,475)	—	(4,475)
Share-based compensation	—	—	—	—	2,310	—	—	—	2,310	—	2,310
Restricted shares vested	1,193,700	—	(1,193,700)	—	—	—	—	—	—	—	—
Appropriation of statutory reserves	—	—	—	—	—	(282)	282	—	—	—	—
Net loss	—	—	—	—	—	(13,840)	—	—	(13,840)	(300)	(14,140)
Currency translation adjustments	—	—	—	—	—	—	—	11,281	11,281	(146)	11,135
Balance at December 31, 2020	334,401,981	84	34,475,224	8	469,887	(181,095)	5,414	(2,144)	292,154	(1,781)	290,373


(Amounts expressed in thousands of USD except for	Years ended December 31,
number of shares and per share data)	2018	2019	2020
Cash flows from operating activities
Net loss for the year	(39,490)	(53,415)	(14,140)
Adjustments to reconcile net loss to net cash used in operating activities
—Depreciation of property and equipment	5,595	5,824	9,277
—Amortization of intangible assets	1,231	1,200	1,216
—Amortization of the right-of-use assets	—	5,634	3,685
—Allowance for credit losses	7,680	19	1,137
—Impairment/(recovery) of prepayments and other assets	(1,516)	(2,147)	4,168
—Loss/(gain) on disposal of property and equipment	37	144	(55)
—Share-based compensation	5,294	5,428	2,310
—Share of loss from equity investees	307	—	—
—Investment income from short-term investments	(1,117)	(1,708)	(664)
—Impairment of inventories	200	3,578	3,283
—Impairment of long-term investments	7,794	19,831	794
—Net unrealized gains on long-term investments	—	(10,907)	(794)
—Investment income on disposal of long-term investments	—	(579)	(214)
—Interest expense accrued on long-term payable	239	75	406
—Deferred taxes	1,748	4,361	966
—Deferred government grants	(1,050)	(1,735)	(865)
Changes in operating assets and liabilities:
—Accounts receivable	13,256	(8,739)	5,048
—Prepayments and other assets	(2,000)	772	(1,263)
—Due from/to related parties	11,457	(684)	(8,598)
—Accounts payable	(27,728)	2,086	(4,938)
—Inventories	(10,178)	3,435	643
—Contract liabilities	7,680	(664)	289
—Income tax payable	(390)	98	(163)
—Accrued liabilities and other payables	(14,657)	(12,580)	(11,707)
—Lease liabilities	—	(4,976)	(3,732)
Net cash used in operating activities	(35,608)	(45,649)	(13,911)

Cash flows from investing activities
Purchase of short-term investments	(287,553)	(355,294)	(177,075)
Proceeds from disposal of short-term investments	223,738	450,687	167,439
Proceeds from disposal of property and equipment	442	576	721
Proceeds from disposal of long-term investments	—	528	1,076
Purchase of intangible assets	(2,121)	(433)	(59)
Acquisition of long-term investments	—	(2,838)	—
Repayment of loans to employees	201	711	696
Acquisition of property and equipment	(1,419)	(3,084)	(134)
Payment for construction in progress	(2,645)	(11,593)	(13,420)
Net cash (used in)/generated from investing activities	(69,357)	79,260	(20,756)

Cash flows from financing activities
Repurchase of shares	—	—	(4,475)
Governments grants received	732	853	—
Contribution by non-controlling	197	—	—
Proceeds from bank borrowings	—	11,324	7,816
Repayment of loans due to a related party arising from a business combination	—	—	(662)
Net cash generated from financing activities	929	12,177	2,679

Net (decrease)/increase in cash, cash equivalents and restricted cash	(104,036)	45,788	(31,988)
Cash, cash equivalents, and restricted cash at beginning of year	233,479	122,930	165,448
Effect of exchange rates on cash and cash equivalents, and restricted cash	(6,513)	(3,270)	5,329
Cash, cash equivalents, and restricted cash at end of year	122,930	165,448	138,789
Supplemental disclosure of cash flow information
Income tax paid	—	(142)	(356)
Non-cash investing and financing activities
—Acquisition of property and equipment in form of other payables	(1,093)	(321)	(5,217)
—Acquisition of right-of-use assets and lease liabilities, net off impact from lease modification	N/A	2,723	(3,325)


	Estimated useful lives	Residual rate
Servers and network equipment	3-5 years	5	%
Computer equipment	5 years	5	%
Furniture, fittings and office equipment	3-5 years	5	%
Motor vehicles	5 years	5	%
Leasehold improvements	Shorter of lease term or 3 years	—


		Estimated useful lives
Land use rights		30 years
Acquired computer software		5 years
Online game licenses		1-3 years
Audio-visual license		9 years


Revenue from continuing operations	Years ended December 31,
(In thousands)	2018	2019	2020
Subscription revenue	81,877	81,532	84,299
Product revenue (note a)	54,604	8,269	1,412
Live streaming revenue	31,031	26,920	20,866
Advertising revenue	27,781	15,643	13,206
Cloud computing service and other internet value-added services (note b)	36,839	48,903	66,900
Total	232,132	181,267	186,683


USD (In thousands)		As of acquisition date
Property and equipment, net		17
Accrued liabilities and other payables		(798)
Goodwill		781
Total		—


		Year ended
USD (In thousands)		December 31, 2018
Revenues, net of rebates and discounts		656
Business taxes and surcharges		(1)
Net revenues		655
Cost of revenues		(16)
Gross profit		639
Operating expenses
Research and development expenses		(419)
Sales and marketing expenses		(63)
General and administrative expenses		(18)
Total operating expenses		(500)
Operating income		139
Gain on disposal of web game		1,394
Income tax expenses		(230)
Income from discontinued operations		1,303


	December 31, 2019		December 31, 2020
		USD		USD
(In thousands)	Amount	equivalent	Amount	equivalent
RMB	322,972	46,296	312,581	47,906
USD	115,805	115,805	89,050	89,050
Hong Kong Dollar	2,202	283	1,737	224
THB	2,417	81	2,052	68
Total		162,465		137,248


	Percentage of ownership of
	shares as of December 31,
Investee	2019		2020
Equity method investments:
Zhuhai Qianyou Technology Co., Ltd.	19.00	%	19.00	%
Shenzhen Mojingou Information Services Co., Ltd. (formerly named as “Xunlei Big Data Information Service Co., Ltd.”).	28.77	%	28.77	%
Equity interests without a readily determinable fair value: Guangzhou Yuechuan Network Technology Co., Ltd.	9.30	%	9.30	%
Shanghai Guozhi Electronic Technology Co., Ltd.	16.80	%	16.80	%
Guangzhou Hongsi Network Technology Co., Ltd.	19.90	%	19.90	%
Chengdu Diting Technology Co., Ltd.	12.74	%	12.74	%
Xiamen Diensi Network Technology Co., Ltd.	14.25	%	14.25	%
11.2 Capital I, L.P.	2.03	%	2.03	%
Cloudtropy	9.69	%	9.69	%
Tianjin Kunzhiyi Network Technology Co., Ltd. (note a)	19.90	%	N/A
Shanghai Lexiang Technology Co., Ltd. ("Shanghai Lexiang") (note b)	13.54	%	7.81	%
Hangzhou Feixiang Data Technology Co., Ltd.	28.00	%	28.00	%
Shenzhen Meizhi Interactive Technology Co., Ltd.	9.40	%	9.40	%
Beijing Yunhui Tianxia Technology Co., Ltd.	13.70	%	13.70	%
Yingshi Innovation Technology Co., Ltd. (formerly named as “Shenzhen Arashi Vision Interactive Technology Co., Ltd.” or “Insta360”)	8.73	%	8.73	%
Beijing Cloudin Technology Limited Co., Ltd.	4.12	%	4.12	%
Quanxun Huiju Networking Technology (Beijing) Co., Ltd.	5.40	%	5.40	%