proven. For example, although the blockchain technology is still under improvement. Any failure in oursaid 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 thisblockchain technology, could leadwe may not be able to unsatisfactory project outcomes and couldrealize our expected goals or create sufficient commercial values. As a result, our business, operating results, financial condition may be significantly and adversely impact our results.
affected.
In addition as partto uncertainties of our initiative to streamline existing businesses, we have soldnew 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, ourtraditional 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 increasedintensified government scrutiny of internet content in China. Although we continueare 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 toattract our subscribers, our efforts may not be successful. Our subscriber base generally declined from 5.14.4 million as of December 31, 20132014 to 4.93.8 million as of December 31, 2014. Although2020. As of December 31, 2021, our subscriber base increased againback to 5.0 million as of December 31, 2015, such an upward trend may not sustain.4.4 million. 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.
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. In 2022, we launched a blockchain-based enterprise digital collection service platform to utilize ThunderChain to provide a number of services, including digital collection minting, showcasing and management, among others. The digital collections minted via blockchain technology are permanently preserved in the ThunderChain with unique serial numbers through the deployment of smart contract technology.
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.
Laws and regulations in China, such as Circular on Further Preventing and Disposing of Risks in Virtual Currency Trading and Speculation, prohibit all fungible tokens trading activities, including but not limited to, initial coin offerings, information intermediary and pricing services, derivative transactions, among others. However, due to the lack of laws
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and regulations specifically addressing non-fungible tokens, or NFTs, substantial uncertainties exist with respect to the definition and scope of NFTs as well as how NFT-related businesses are regulated in China. Therefore, as of the date of this report, it is unclear whether the digital collections provided on our platform would be recognized as NFTs, whether the services we provide would be subject to laws and regulations regulating fungible token trading activities and, if so, how our services would be regulated. New laws or regulations or the interpretation and application of existing laws or regulations concerning token-related services, may be inconsistent with our practices and thus we may need to adjust our business to comply with new laws, regulations and orders from competent governmental authorities, if any, from time to time, which could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business. We cannot assure you that we would be able to satisfy the governmental authorities’ orders or requirements and fully comply with any new token-related rules or interpretations on a timely basis. We might be subject to additional regulatory risks, including adjustment or even termination of our current business practices, and our business and results of operations may be adversely affected.
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.
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
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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 19648.0 million monthly unique visitors in December 2015, excluding the monthly unique visitors to Xunlei Kankan,2021 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.
OurWe experienced a decline in the number of subscribers has recently experienced a decline partly due to the increasingintensified 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 hadput in more efforts to increasemonitor 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 a total subscribers from 5.1of 4.4 million as of December 31, 2013 to 4.9 millionsubscribers 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 281,000173,000 existing subscribers as of December 31, 2015,2021, 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. In addition, the 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 how it will happen are yet to be 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 cloud computing products and services.
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The intellectual property protection mechanism we have implemented may not always be effective or sufficient. The premium acceleration services, Xunlei Cloud Drive and other value-added services we provide to our users have exposed us to and may continue to expose us to copyright infringement claims and other related claims, which could be time-consuming and 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 adversely impact our 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 litigations based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of third-party rights. In the ordinary course of our business, we receive, from time to time, written notices from third parties claiming that certain contents and games on our network, websites, products or services infringe their copyrights or the copyrights of third parties. These notices may contain threats to take legal actions against us or requests for cessation of distribution, marketing or displaying such contents or games on our network, websites, products or services. As of the date of this annual report, we are involved in 12 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 RMB5.6 million (US$0.9 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, with or without merit, may lead to damage awards and/or court orders, diversion of our management’s attention and financial resources and negative publicity affecting our brand and reputation, and therefore may adversely affect our results of operations and business prospects.
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 download it to their local storage. We also provide users with cloud storage services through Xunlei Cloud Drive, which allows users to download and upload documents, images, audios, videos and other files to cloud servers at an accelerated speed. See “Item 4. Information on the Company—B. Business Overview—Our 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 temporarily storing or 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.
The validity, enforceability and scope of protection of intellectual property in internet-related industries in different jurisdictions are uncertain and still evolving. As we face increasing competition and as litigation becomes more common in resolving commercial disputes in our business expansion in overseas countries, 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 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
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subject us and other internet service providers to significant administrative burdens and litigation risks. See “Item 4. 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 where we have business operations such as the Middle East and Southeast Asia 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.
In addition, as our business expands overseas, we may be subject to intellectual property infringement claims and lawsuits in jurisdictions other than China, such as the Middle East and Southeast Asia. The costs of performing these procedures and obtaining authorization and licensing for the growing content on our platform and use of such content in the various jurisdictions into which we may expand our business may increase, which could materially and adversely affect our business, financial condition and results of operations.
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. 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 the companies manufacturing or selling these devices would always ensure that their devices perform reliably and are maximally compatible with our systems. Any faulty connection between these devices and our products may result in user dissatisfaction with our products, which could damage our brand and have a material and adverse effect on our financial results. In addition, the lower resolution, functionality and memory associated with some mobile devices may make the use of our products and services through such devices more difficult and the versions of our products and services we develop for these devices may fail to attract users. Manufacturers or distributors may establish unique technical standards for their devices and, as a result, our products may not work or work properly or be viewable on all devices on which they are installed. Furthermore, new, comparable products which are specifically created to function on mobile operating systems, as compared to some of our products that were originally designed to be accessed from PCs, and such new entrants may operate more effectively on mobile devices than our mobile products do.
Although we have not begun monetizing our mobile products other than mobile advertising in 2015,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.
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We may be subject to the risks of overseas expansion.
We have been exploring opportunities in overseas market. In 2021, we launched Hiya, an audio live streaming platform in overseas markets. Currently, users of this product are mainly from the Middle East and Southeast Asia. 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 difficulties in obtaining licenses, approvals or other applicable government authorizations, content controls imposed by local authorities, uncertain enforcement of our intellectual property rights, potential claims for intellectual property infringements and the complexity of compliance with foreign laws and regulations. Compliance with applicable laws, regulations and rules related to our business, including those related to live streaming services, content restrictions, data privacy, virtual items, anti-corruption laws, anti-money laundering and protection of minors, results in costs and potential risks in doing business in multiple jurisdictions including the Middle East and Southeast Asia. In some cases, compliance with the laws and regulations in one jurisdiction may result in a violation of the laws and regulations of another jurisdiction. As we expand our business overseas, we cannot assure you that we will be able to fully comply with the legal requirements of each jurisdiction and successfully adapt our business model to local market conditions. Due to the complexities involved in the expansion of our business globally, we cannot assure you that we will be able to comply with all local laws or regulations, including licensing requirements, in a timely or complete manner.
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 do notfail 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 project,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
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technologies or to achieve the intended results or if our innovations cannot respond to the needs of our users or if our users are not attracted to our upgraded or new products and services, we may not be able to maintain or expand our user base, and our business, results of operations and prospects may be materially and adversely affected.
We face and expect to continue to face copyright infringement claims and other related claims, including claims based on content available through our services, which could be time-consuming and costly to defend and may result in damage awards, injunctive relief and/or court orders, divert our management’s attention and financial resources and adversely impact our business.
Our success depends, in large part, on our ability to operate our business without infringing, misappropriating or otherwise violating third-party rights, including third-party intellectual property rights. Internet, technology and media companies are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights.
In May 2014, we entered into a content protection agreement with the Motion Picture Association of America, Inc., or MPAA, and six major U.S. entertainment content providers, which are the members of MPAA. Under this agreement, we agreed to implement a comprehensive system of measures designed to prevent unauthorized downloading of and access to such content providers’ works. Among these content protection measures, we agreed to (1) implement a filtering system that will be applied to these content providers’ video content, (2) filter these content providers’ video content prior to making any such content available to our users through our websites or client applications, (3) adopt state-of-the-art fingerprinting-based filtering technologies, (4) cooperate with these content providers going forward to ensure the effectiveness of our content protection measures, and (5) incorporate additional content protection measures to the extent that they are necessary to effectively protect against copyright infringement. We may not be able to fulfill all of our obligations under such agreement in a timely manner, due to a variety of factors which may be outside of our control. In addition, even if we comply with all of our obligations under the content protection agreement, the implementation of content protection measures may affect our users’ experience or otherwise make our services and products less competitive than those of our competitors, which could in turn materially and adversely affect our business, financial condition and results of operations. In January 2015, a number of MPAA member studios filed copyright infringement lawsuits against us in the Shenzhen Nanshan District Court in China, and, as of the date of this annual report, those cases are awaiting decisions of first instance. Although we expect that the outcome of these lawsuits would not have a substantial negative impact on our financials, we cannot provide you with any estimate as to such outcome or assure you that it would not have material adverse impact upon our business. Even if we won the court ruling for these current proceedings or ultimately reached settlement with MPAA and the relevant members, we cannot assure you that any of these parties would not initiate other proceedings against us. Also see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
In the ordinary course of our business, we receive, from time to time, written notices from third parties claiming that certain content and games in our network or on one or more of our websites infringe their copyrights or the copyrights of third parties. These notices may threaten to take legal actions against us or request us to cease distribution, marketing or displaying such content or games on our network or websites. Claims alleging copyright infringement or other claims arising from the content accessible through our distributed computing network, or on our websites or through our other services, such as the legal proceeding initiated by MPAA members or any potential legal proceedings that may be initiated by, for example, the Motion Picture Association Inc., with or without merit, may lead to damage awards and/or court orders, diversion of our management’s attention and financial resources and negative publicity affecting our brand and reputation, and therefore may adversely affect our results of operations and business prospects. In addition, a significant number of these claims relate to content on Xunlei Kankan. We have completed our sale of Xunlei Kankan to a third party buyer in July 2015. As a result, our exposure to claims in relation to intellectual property have significantly decreased, although we still expect to face a number of copyright infringement claims and other related claims in the future in relation to our other products and services.
We were subject to a number of lawsuits in China for alleged copyright infringements over the years, a number of which are still outstanding as of the date of this annual report. Although we have not been, nor are we currently a party to or aware of, any legal proceeding, investigation or claim that, in the view of our management, is likely to materially and adversely affect our business, financial position or results of operations, these existing and future claims may divert our management’s attention and financial resources and adversely impact our business.
The premium acceleration services and other value-added services we provide to our subscribers may expose us to additional copyright infringement claims, which could materially and adversely affect our existing business model.
We provide subscribers with limited space to temporarily store content downloaded on our servers for optimal acceleration performance. Subscribers may also request our cloud servers to transmit a file on their behalf and upload it to their properties. See “Item 4. Information on the Company—B. Business Overview—Our Platform—Cloud accelerator—Subscription services.” In addition, certain of our services allow users to upload files after they create accounts with us, converting the files into links and sharing such links with designated persons. We may be liable for transmitting or temporarily storing content or creating links representing content on behalf of our subscribers if such content infringes third-party intellectual property rights, and any such potential legal liabilities could materially and adversely affect our business.
Our technologies, business methods and services, including those relating to our resource discovery network, may be subject to third-party patent claims or rights, such as issued patents or pending patent applications, that limit or prevent their use.
We cannot assure you that our technologies, business methods and services, including those relating to our resource discovery network, will be free from claims of patent infringements, and that holders of patents would not seek to enforce such patents against us in China, the United States or any other jurisdictions. Based onFor example, we were involved in a patent infringement case in China. The plaintiff alleged that our own analysis, weacceleration 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. In April 2020, 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 believe that we are currently infringinginfringe 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. 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.
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 beenWe 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, the Middle East and Southeast Asia, by virtue of our listing in the United States, the ownership of our ADSs by investors, doing business in overseas markets, 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. With the expansion of our overseas business, users in different jurisdictions such as the Middle East and Southeast Asia are able to access our products and services. If we are determined to be bound by the copyright laws and regulations in jurisdictions outside China despite our effortsby virtual of allowing users in those jurisdictions to control access to our products and services, by users outside China. For example, the Recording Industry Association of America filed a letter with the Office of the United States Trade Representative in November 2010 accusing certain of our divested or discontinued products of facilitating intellectual property infringement. Although we take steps to block users logging in from IP addresses that are located in certain jurisdictions, including the United States, from accessing certain of our services, due to technological limitations, such efforts may not be 100% successful, and any unintended access to our services may increase our risk of becoming subject to copyright laws in such jurisdictions. Even if our efforts to block IP addresses located in the United States or other jurisdictions are successful, recent efforts to amend the laws in such jurisdictions, such as bills recently advocated in the U.S. aimed at online service providers, may increase our risk of becoming impacted by copyright laws in such jurisdictions. In addition, as a publicly listed company, we may be exposed to increased risk of litigation.
If we are ever held towould be subject to United States copyright law, that could increase our riskheightened risks of direct or indirect copyright liability for our resource discovery, acceleration or other services.intellectual property infringement liabilities. 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 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 notcannot 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 provide live streaming services to users in China mainly through Xunlei Live and Xunlei mobile app. In 2021, we further launched Hiya, an audio live streaming platform, in overseas markets in 2021. The users of Hiya currently are mainly from the Middle East and Southeast Asia. We expect to increase our revenue from living streaming services through launching this new live audio streaming product in overseas markets. In 2021, revenue from live streaming business was US$35.1 million, accounting for 14.7% of our total revenues in 2021. 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 our competitors and realize intended growth of our live streaming business. We are not sure whether our products will be accepted by the market and generate projected revenues. The user demand may also change, decrease substantially or dissipate and we may fail to anticipate and serve user demands effectively and timely. 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
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continue to be successful, profitable or widely accepted, and therefore the future revenue and income potential of our business may be difficult to evaluate.
Hiya is available in overseas markets. Each different country or region has different regulations and judicial systems. We cannot assure you that we will be able to carry out business operations in different jurisdictions in a fully compliant manner. Once the relevant regulatory authorities in these countries or regions believe that our products or services violate the relevant laws and regulations of the country or region, they have the right to take legal measures such as ordering us to cease business operations and imposing administrative penalties, which could materially and adversely affect our live streaming business in overseas markets. In addition, the legal systems of different countries and regions such as the Middle East and Southeast Asia may not be as developed. Once disputes or lawsuits arise in connection with our business in these countries and regions, it may be difficult for us to obtain effective remedies, which may adversely affect our business operations, results of operations and financial condition.
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 condition.
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 onlive streaming services. We have in place a comprehensive and effective incentive mechanism to encourage broadcasters to supply content that are attractive to our abilityusers. We have also entered into multi-year cooperation agreements that contain exclusivity clauses with popular broadcasters. However, if any of those broadcasters and/or the talent agencies decides to maintain and enhance a strong brand. Ifbreach 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 improveattract new talented and productive broadcasters, the strengthpopularity 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 laws or regulations in China and other jurisdictions, or for improper or fraudulent activities conducted on our platform, and authorities in China and other jurisdictions 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 difficultynot 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
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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.
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. SinceIf we fail to sustain or improve the Chinese internet market is highly competitive, maintaining and enhancingstrength of our brand, depends largely on our ability to retain a significantwe 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 hashave 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 attackscyber-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 receiveand 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 containsand 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 attackscyber-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 suchfixed 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
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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.
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 are 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.
In 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 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 October 2020. Under such standard, the personal data controller refers to 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. In addition, the CAC, the MIIT, the Ministry of Public Security and the State Administration for Market Regulation jointly promulgated the Administrative Provisions on Algorithm Recommendations of Internet Information Services on December 31, 2021, with effect from March 1, 2022, which requires algorithm recommendation service providers to establish and improve their management systems and technical measures for, among others, data security and personal information protection.
Moreover, the PRC Civil Code, the PRC Cyber Security Law, the Personal Information Protection Law, and the PRC Data Security Law protect individual privacy and personal data security in general by requiring internet service providers to collect data in accordance with the laws and in a proper manner, and obtain consent from internet users prior to the collection, use or disclosure of internet users’ personal data. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Internet Privacy” and “Regulations on Information Security and Censorship.” These laws and regulations are relatively new and substantial uncertainties exist with respect to the interpretation and implementation of these laws and regulations. We may need to adjust our business practice to comply with these cyber security and data security requirements from time to time.
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Since January 2019, in order to better implement the PRC Cybersecurity Law and the PRC Law for the Protection of Consumer Rights and Interests, relevant PRC government departments have jointly launched ongoing nationwide special rectification programs relating to the illegal collection and use of personal information by mobile apps. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, or the MIIT, 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. On July 19, 2021, the MIIT issued a list of the applications that infringe users’ interests and rights. Shenzhen Xunlei was identified as having misled users to click to enter other information pages or third-party application download pages without clear notification on the homepage. We promptly took actions in response to the identified issue and completed the required rectification. On July 23, 2021, the MIIT launched the 2021 Special Rectification Program, aimed at rectifying disruption of market order, infringement on users’ rights and interests, threats on data security, and violation of relevant regulations on qualifications and resources management by the internet companies. In October, 2021, we received two notices from the Guangdong Communication Administration, who found that our system had sensitive information leakage risk. We promptly fixed the vulnerabilities as required. In December 2021, the Guangdong Communication Administration conducted an onsite inspection of Shenzhen Xunlei. Shenzhen Xunlei took actions in response to the issues identified by the authority during the inspection and completed the rectification as required.
IfAs we failexpand our business overseas, we are subject to retainlaws and regulations and other policies in different jurisdictions related to the collection, use, retention, security, transfer or other processing of identifiable personal information. We may need to comply with increasingly complex and stringent regulations protecting business and personal data in the United States, Europe and other jurisdictions. These legal requirements are constantly evolving and impose different obligations in different jurisdictions. 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 continued 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 or attract new advertisers, our revenuesproposed 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 as these laws may be materiallyinterpreted and applied in ways that are inconsistent with our business practices. Compliance with emerging and evolving requirements in multiple jurisdictions may result in us changing our business practices, which could adversely affected.
Historically, we generate a substantial portionaffect our business and results of our revenues from online advertising. The revenues generated from online advertising decreased by 20.1% from US$48.0 million in the year ended December 31, 2013 to US$38.4 million in the year ended December 31, 2014 primarily due to our discontinuing the delivery of advertisements on Xunlei Accelerator to further improve our user experience and to enhance user engagement on Xunlei Accelerator. The revenues generated from online advertising further decreased to US$15.2 million in 2015 due to our sale in July 2015 of Xunlei Kankan, which historically contributed a significant portion of our advertising revenues and a majority of our advertisers.operations. We cannot assure you that we can continue to retain our advertising agencies and advertisers or attract new advertising agencies and advertisers. The number of advertisers that use our online advertising services decreased from 485 in 2011 through the years to 252 and 119 in 2014 and 2015, respectively, not including advertisers on the Guangdiantong third party platform. If we cannot retain our existing advertisers or develop new advertisers in the future, our revenues generated from online advertising will be materially and negatively affected. Since our arrangements with third-party advertising agencies are typically one-year framework agreements, such advertising arrangements may be easily amended or terminated without incurring liabilities.
A number of our advertisers are e-commerce companies and online game operators. The online game and e-commerce industries in China are rapidly evolving, and the growth of these industries and their demand for online advertising services is uncertain and may be affected by factors out of our control. We also have significant brand advertising and are seeking to further expand this portion of advertising. However, we cannot assure you that we will be able to retain existingcomply with the requirements of laws and regulations in different jurisdictions and other laws and regulations in a timely manner or in full. Any inability, or perceived inability, to adequately address privacy laws and regulations laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in various administrative penalties, including fines, suspension of business operations in local jurisdictions and reputational damage.
Our results of operations could be materially and adversely affected if our cooperation with Itui regarding online advertising agenciesis unsuccessful. We may also be subject to penalties from relevant authorities due to certain actions or inactions of Itui in connection with online advertising, which is beyond our control.
We realized growth of the revenue from our online advertising services from US$16.9 million in 2016 to US$27.8 million in 2018. However, revenue from our online advertising service decreased to US$15.6 million in 2019, and advertisers or attract morefurther decreased to US$13.2 million in 2020, primarily due to a generally decreased demand for our online advertising agenciesservices. In May of 2020, we entered into an advertising revenue sharing agreement with a subsidiary of Itui International Inc., our largest shareholder. In 2021, we renewed such agreement with the subsidiary of Itui International Inc. Under such agreement, Itui provides us with online traffic monetization services, including the operation and advertisersplacement of
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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 advertising business to Itui, we hope to take advantage of Itui’s advanced precision targeting algorithm to achieve better placement of advertisement. However, we cannot assure you that we can further improve the results of operations of online advertising through such cooperation in the future. In 2021, we recorded revenue from our online advertising service of US$12.3 million. 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 operate the advertising business and its advertising platform legally and 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 failare 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 decline. 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.
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 businessbusinesses 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 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 IndustryMIIT, the National Radio and Information Technology (formerlyTelevision Administration, or NPPA the National Press and Publication Administration, or the NPPA, the Ministry of Information Industry), or MIIT, the General Administration of PressCulture and Publication, Radio, Film and TelevisionTourism (established in March 20132018 as a result of institutional reform integrating the State Administration of Radio, Film and Television, and the General Administration of Press and Publication), or GAPPRFT, Ministry of Culture, and the Ministry of Tourism), or MOCMOCT and other relevant
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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.” TheWe 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 butwhen 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 through Xunlei Live website and mobile app. 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 thelegal counsel, a license for online transmission of audio-visual programs is required for our gatheringproviding video content display services and transmissionoperating a 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 ourthe 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, neither Shenzhen Wangwenhua nor Shenzhen Xunlei, the entity that operates both license-required businesses, is 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 issue warnings, order us to rectify our violating operations and impose fines on us. In the case of serious violations as determined by relevant authorities at its discretion, they may ban the violative operations, seize our equipment in connection with such operations and impose a penalty of one to two times of the amount of the total investment in such operations.
The cloud computing services we provide to the internet users may be givendeemed 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 VATS License to specifically cover the CDN services. Shenzhen Onething Technologies Co., Ltd., or Shenzhen Onething, a warning,subsidiary of Shenzhen Xunlei, and a subsidiary of Shenzhen Onething have obtained the VATS Licenses that cover the CDN services.
Our business model for CDN services, namely, a shared computing model and network, is relatively new and there are no laws or regulations on this specific model so far. It is possible that the relevant PRC authority may in the future decide that we are operating certain businesses without the proper licenses or approvals. Were that to happen, we would be warned, fined, ordered to rectify our violations and/or fined upbe imposed restrictions or even suspension on our relevant business. In addition to RMB30,000.
Ifthe above, if the PRC government considers that we were operating without the proper licenses or approvals or promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of any part of our business, it has the power to, among other things, levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations. In addition,
Furthermore, we operate our cloud computing business that integrates the idea of shared economy model and are subject to 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 governmentlaws 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 promulgatenot meet our requirements.
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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 impactor 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, VIEvariable interest entity 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 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 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.
To comply with relevant laws and regulations, we have established information security systems to protect user’s privacy, we also have adopted a risk detection mechanism for data security defects and vulnerabilities, and set up an emergency response mechanism for data security incidents. We also periodically review our privacy policies and amend as needed based on the development and changes of users. Concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputationwe collect and operating results.
We apply strict management and protectionprocess to any information provided by users, and under our privacy policy, without ourensure that we comply with relevant requirements such as obtaining users’ prior consent we will not provide anybefore the collection and processing of our users’their personal information to any unrelated third party.information. 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. UserFor example, in September, 2021 one of our mobile applications received a notice from a regulatory authority for failing to explicitly inform users in our privacy policy that their device information would be provided to third parties’ SDKs. 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 workingcontinuing 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 projectbusiness 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 throughby using our existing internal cash flow from operationsreserves and to a lesser degree, proceeds from private placements of preferred shares and our initial public offering However, ifborrowing 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
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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.
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 discoverydelivery network and cloud computing business as well as our online gameexploration 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 projectbusiness 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-estimateoverestimate 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 2021. As of December 31, 2021, 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, which resulted in a large account receivable as well. Thus, 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
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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, or if we are unable to collect account receivable from Itui pursuant to our revenue sharing agreement in a timely manner, our results of operations will be materially and adversely affected.
We had net operating cash outflows in 2019, 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$45.6 million in 2019 and US$13.9 million in 2020. In 2021, we had net cash generated from operating activities of US$15.8 million in 2021. 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$94.1 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$70.6 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$62.7 million). As of December 31, 2021, we took out RMB128.6 million (US$20.2 million). We plan to take out another loan under this facility for no more than RMB130.0 million (US$20.4 million) in the near future depending on the progress of the construction project. As of the date of this annual report, we anticipate the construction project will be completed within our budget. Although we had cash, cash equivalents and short-term investments of US$239.0 million as of December 31, 2021, 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 the second half of 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. Further, the sporadic outbreak of COVID-19 cases in China has caused and may continue to cause delay in our planned use of the building. 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-licensepopular, 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, weWe have entered into exclusive operating agreementscooperated with online game developers so that we can gain exclusive rights to certain online games and, in addition to offering these games on our own websites, also have the option of sub-licensing these games to other websites to diversify our game revenue stream. Exclusive arrangements of this type require more initial capital investment in acquiring operating rights for the games, and involve more business risks, such as risks associated with the potential failure to find appropriate sub-licensees for the games or failure to engage a sufficient number of game players to make these games profitable for us. We expect that we will continue to make investments to acquire operating rights under such exclusive operating arrangements. If we are unable to generate sufficient revenues in these markets to obtain sufficient return for our investments, our future results of operations and financial condition could be materially and adversely affected.
In addition,third parties to operate onlinecertain web games in China, a variety of permits and approvals are required. For example, publication of online games, music works and other internet publishing activities are subject to the regulation of the GAPPRFT, which requires operators of online games and other internet publishing services to obtain an internet publication license prior to providing any such services.since 2019. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation onOur Platform—Online game services.” Operating online games in China requires several permits and approvals. For example, as advised by our PRC legal counsel, a VATS License is required for operating online games and an Internet Publishing Services License is required for operating internet publication.”publishing services, which is defined as offering internet publications to the public through the internet. Our online game operating subsidiaries, Shenzhen Xunlei, Shenzhen Wangwenhua and Xunlei Games, have obtained the VATS License for operating our online games. Shenzhen Xunlei, which holds 100% of the equity interest in Shenzhen Wangwenhua and 70% of the equity interest in Xunlei Games, has obtained an internet publication licenseInternet Publishing Services License for the publication of internet games.games, with an expiry date of September 17, 2022. However, neither Shenzhen Xunlei’s internet publication license doesWangwenhua nor Xunlei Games has obtained the Internet Publishing Services License. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practices of relevant government authorities, we cannot assure you that relevant government authorities would not includerequire Shenzhen Wangwenhua and Xunlei Games to obtain the publicationInternet Publishing Services Licenses as well. As a result, relevant PRC government authorities may find that certain of music works and otherour online game operating subsidiaries are operating internet publishing activities. Applicableservices without proper license and thus may penalize us accordingly. If that were to happen, we would be subject to orders to the shut-up the website or delete all relevant online publications, confiscation of illegal income and major equipment or fines. In addition, according to relevant regulations, also specify that eachan online game musthas to be screenedscrutinized by and approved in advance by GAPPRFTobtain an approval number (ISBN number) from the NPPA before it is allowed to be launched online. Also, an importedIn our cooperation with online game shouldproviders, we require that ISBN numbers have to be approvedobtained 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 developedcompliance 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 filedbusiness.
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 dayssuch 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. Informationany of these penalties may result in a material and adverse effect on the Company—B. Business Overview—Regulation—Regulation on online games.” We license fromour ability to operate our online game developersbusiness and operate MMOGs, andour results of operations. As we share profits with these developers. We require developersdo not have control over the contents of certainthe 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, mostwe 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.
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, the Anti-indulgence Notice 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. Furthermore, on August 30, 2021, the NPPA issued the Notice on Further Strict Management to Prevent Minors from Indulging in Online Games, which requires all online game operators to provide services to minors only on any Friday, Saturday, Sunday and statutory holidays from 8:00 p.m. to 9:00 p.m., i.e. for one hour, and not to provide online games in any form to users who have not registered or logged in with their real names. 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
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access to our real-name registration system and implement their anti-indulgence measures based on the identity information in our system. In addition to the real-name registration system already in place, we have adjusted the systems in the games we operate to comply with the requirements under this notice. 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. As of the date of this annual report, we have completed the requisite filing and connected our online games to the National Anti-Indulgence and Real Name Registration System as required. However, if any third-party online game operators, developers or we fail to comply with the above requirements, we may have joint or several liabilities and thus be subject to administrative penalties. Penalties under the Anti-indulgence Notice include fines and other penalties such as taking corrective actions during specified periods, shutting down of our online games currently in operation exclusively by us have obtained GAPPRFT’s approvaloperations and completed filing with MOC. However, we cannot assure youlicense revocation due to the fact that we or such online game developers can obtain GAPPRFT’s approvals or completedid not implement those restrictions pursuant to the filings with MOC for all the games in a timely manner or at all.Anti-indulgence Notice. If we or such online game developers fail to obtain these licenses, approvals or filings in a timely manner or at all, the relevant authority may challenge the commercial operation of our online games and determine that we are in violationany of the relevant laws and regulations regarding online games, it would have the powerabove were to among other things, levy fines against us, confiscate our income generated from operation of our online games and require us to discontinuehappen, 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 presenceniche market in the China market for cloud acceleration products and services, we cannot guarantee that we will be able to maintain our leadingestablished 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 ableunable 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.
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.
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Advertisements we displaydisplayed 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, the Standing Committee ofSCNPC enacted the National People’s Congress issued the amended Advertisement Law, which took effect on September 1, 2015 and was last amended on April 29, 2021, 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 employhave taken several measures. AlmostBefore we outsourced our advertising business to Itui in 2020, in almost all of our advertising contracts require thatagreements, we required the advertising agencies or advertisers that contractentered into agreements with us:us to: (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 ofWe outsourced our employees reviews all advertising materialsbusiness 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 violatecontents are in full compliance with relevant laws and regulations before displaying such advertisements.legal requirements. However, we cannot assure you that all the contentcontents 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.
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 feescharges by encouraging our subscribers to use the third-party online payment system which charges relatively lower levels of handling fees compared with other payment channels, we cannot assure you that these third-party payment service providers will not increase fee levels charged to us or we are able to continuously maintain our cooperative relationship with them in commercially acceptable terms. Also, the subscribers may change their habits to make payments through mobile phones or other third-party online
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payment channels with higher costs. Approximately 18%, 13% and 4% of the paymentsIf that were made by our subscribers via distribution channels such as mobile service operators in 2013, 2014 and 2015, respectively. If a majority of subscribers use the mobile phone as their payment channels and the cost remains unchanged or even increasesto happen in the future, our cost of operations may significant increase. Ifor 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.
affected due to any suspension of these payment channels and we may not be able to find any suitable alternatives in a timely manner, or at all.
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 aIn June 2020, we terminated our 2010 share incentive plan, on December 30, 2010, or the 2010 Plan, a second2013 share incentive plan on November 18, 2013, as supplemented, or the 2013 Plan, and a third2014 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 20102020 Plan, we are authorized to issue a maximum number of 26,822,82831,000,000 common shares of our company upon exercise of the options or other types of awards (excluding an aggregateawards. There were also 4800,000 unvested restricted shares that survived the termination of 8,410,200 shares already issued toour previous share incentive plans and remained outstanding under the directors who are our founders upon exercise of founder options, which were not granted pursuant to the 2010 Plan).2020 Plan. As of March 31, 2016, options to purchase a total of 2,097,410 common shares of our company were2022, 25,184,375 restricted share units had been granted and outstanding under the 20102020 Plan. Under the 2013 Plan, we are authorized to issue a maximum number of 9,073,732 restricted shares to members of our senior management, counsel or consultant to our company. Under the 2014 Plan, we are authorized to issue a maximum number of 14,195,412 restricted shares to our directors, officers, employees and advisors or consultants to our company. As of March 31, 2016, 7,820,985restricted shares (excluding those forfeited) have been granted to certain executive officers and other employees under the 2013 Plan, and 7,587,000 restricted shares (excluding those forfeited) have been granted to certain executive officers and other employees under the 2014 Plan. Our2022, our unrecognized share-based compensation expenses relating to the restricted shares grantedawards outstanding under each of the 2013 Plan and the 20142020 Plan amounted to US$10.9 million and US$8.4 million, respectively, as of March 31, 2016.16.9 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.options, restricted shares and restricted share units. 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.
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 havehas significantly
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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 ofcorporate image, which in turn may adversely affect our growthbusiness 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.
We have in the past and mayinvested in the future selectively acquire or invest in otheracquired additional assets, technologies or businesses including those that complementare complementary to our existing business. WeIf we are presented with appropriate opportunities, we may not, however, be ablecontinue to identify suitable targets for acquisitions or investmentsdo so in the future. Even if we are able to identify suitable candidates, weInvestments 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 unablesignificant. 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 candidatespotential unknown liabilities or completelegal 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:
· |
| 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; |
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· | 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.
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 conflict between Ukraine and Russia and the imposition of broad economic sanctions on Russia may raise cost for our overseas business operations and even disrupt
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global markets. 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. OurIn 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.
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 thesuch company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. However, we were notWe are subject to the requirement to provide attestation by our independent registered public accounting firm on our management’s assessmenteffectiveness of our internal control over financial reporting forreporting.
Our management, with the year ended December 31, 2015 as we qualified asparticipation of our chief executive officer and chief financial officer, has performed an “emerging growth company,” as defined in the JOBS Act, asevaluation 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 ineffectiveeffective as of December 31, 2015 due to one material weakness, one significant deficiency2021. Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, also audited and other control deficiencies inconcluded 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 investorfuture, 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 consolidatedreported financial statements, whichinformation. This could in turn couldlimit our access to capital markets, harm our businessresults of operations, and negatively impactlead to a decline in the markettrading 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 incurredlist, regulatory investigations and anticipate that we will continuecivil 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 requirementsrestate our financial statements from prior periods.
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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.
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. 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. Moreover, it is also uncertain to what extent variants of coronavirus such as Delta and Omicron or other mutated version will negatively affect economic life and the society as a whole. 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 relatedRelated 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 telecommunication services overseas and maintain a good track record. In addition,
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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) Co., 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 holdsor 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.”
We cannot assure you, however, that we will be able to enforce these contracts. Although we have been advised by Zhong Lun Law Firm,TransAsia Lawyers, 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.
In addition, if the PRC government deems that our contractual arrangements with the variable interest entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. We may also not be able to repay the notes and other indebtedness, and our shares may decline in value or become worthless, if we are unable to assert our contractual control rights over the assets of our PRC subsidiaries, which contribute to 95.47% of our revenues in 2021. Our holding company in the Cayman Islands, the variable interest entities, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the variable interest entities and, consequently, significantly affect the financial performance of the variable interest entities and our company as a group.
We rely on contractual arrangements with ourthe 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, ourthe 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 isand an extended term of ten years since 2016. The operating contract will be automatically extended for an additional 10-year period subject to Giganology Shenzhen’s unilateral termination right and may be extended as requested by Giganology Shenzhen.right. In general, none of Shenzhen Xunlei orand 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
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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.
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, ourthe 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 tocan enforce these agreements tothe 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 the variable interest entity in the future.
Moreover, the exercise of call options under the equity interestsinterest 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 ourthe variable interest entity and its subsidiaries, and our ability to conduct our business may be adversely affected.
Contractual arrangements with ourthe 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-ownedwholly owned subsidiary in China, and Shenzhen Xunlei, ourthe variable interest entity in China and its shareholders, as well as the intellectual property framework agreement between Xunlei Computer and Shenzhen Xunlei were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment on taxation, and the PRC tax authorities may impose interest on late payments on Shenzhen Xunlei, for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if Shenzhen Xunlei’s tax liabilities increase significantly or if it is required to pay interest on late payments.
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The shareholders of Shenzhen Xunlei may have potential conflicts of interest with us, which may materially and adversely affect our business.
Sean Shenglong Zou, Hao Cheng, Fang Wang, Jianming Shi and Guangzhou Shulian Information Investment Co., Ltd. are shareholders of Shenzhen Xunlei. We provide no incentives to the shareholders of Shenzhen Xunlei for the purpose of encouraging them to act in our best interests in their capacity as the shareholders of Shenzhen Xunlei. We may replace the shareholders of Shenzhen Xunlei at any time pursuant to the currently effective equity option agreements between us and these shareholders.
As a director and executive officer of our company, Mr. Zou and Mr. Cheng each has a duty of loyalty and care to us under Cayman Islands law. We are not aware that other publicly listed companies in China with a similar corporate and ownership structure as ours have brought conflicts of interest claims against the shareholders of their respective variable interest entities. However, we cannot assure you that when conflicts arise, the shareholders of Shenzhen Xunlei will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of Shenzhen Xunlei, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.
We may rely principally on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of Giganology Shenzhen and Xunlei Computer to pay dividends to us could have a material adverse effect on our ability to conduct our business.
We are a holding company and we may rely principally on dividends and other distributions on equity paid by our wholly-ownedwholly 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, ourthe 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, 2015,2021, we had cash or cash equivalents of approximately RMB385.7RMB356.4 million (US$594.056.0 million) and US$6.530.9 million located within the PRC, of which RMB190.9RMB138.3 million (US$29.420.1 million) and US$0.59 million is held by Shenzhen Xunlei and its subsidiaries. We also have restricted cash of RMB26.0 million (US$4.1 million) as of December 31, 2021. 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 “—“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.”
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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:
· |
| 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 |
On August 29, 2008,March 30, 2015, SAFE promulgatedissued the Circular on the Relevant Operating Issues Concerning the ImprovementReform of the AdministrationAdministrative Rules of the Payment and Settlement of Foreign CurrencyExchange 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 ofbecame effective on June 1, 2015. SAFE Circular 19 adopts a concept of “discretionary conversion,” which is defined as the conversion of a foreign-invested enterprise’s foreign currency registered capital in accordance with the enterprise’s actual business needs. No review of the purpose of the funds is required at the time of conversion under SAFE Circular 19. However, use of any RMB funds converted from its registered capital shall be based on actual transactions. In addition, equity investments using converted registered capital are no longer prohibited under SAFE Circular 19.
SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, on June 9, 2016, which became effective on the same day. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to RMB in their own discretion. SAFE Circular 16 provides an integrated standard for the conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis, which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted RMB shall not be provided as loans to its non-affiliated entities, or used for construction and purchase of non-self-used real estate (excluding real estate enterprises) or unless otherwise expressly provided in law, directly or indirectly used in securities investment or other financial management excluding the bank capital preservation products.
Although SAFE Circular No. 19 allowsand 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 on RMB capital of foreign-invested enterprises 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 theissuing inter-company RMB loans. We expect that ifViolations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we converthold, including the net proceeds we received from our initial publicequity offering into Renminbi pursuantand notes offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China.
On October 23, 2019, SAFE issued the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or SAFE Circular No. 142 and28. 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 able28 allows non-investment foreign-invested enterprises to use such Renminbitheir capital funds to make equity investments in certainChina, provided that such investments do not violate the Negative List and that the target investment projects are genuine and in compliance with PRC laws. In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities inby offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain necessary government approvals on a timely basis, if at all, with respect to future loans by us to our
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PRC throughsubsidiaries or with respect to future capital contributions by us to our PRC subsidiaries.
If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from our equity offering and notes offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We may lose the ability to use and enjoy assets held by ourthe 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 ourthe variable interest entity, ourthe 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 ourthe 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, ourthe 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 ourthe 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.
Substantial uncertaintiesUncertainties exist with respect to the enactment timetable, interpretation and implementation of draftthe 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 ofOn March 15, 2019, the proposedNational 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 MOFCOMHowever, since it is currently soliciting comments on this draftrelatively new, uncertainties still exist in relation to its interpretation and substantial uncertainties existimplementation. 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, interpretationexisting 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, mayappropriate measures to cope with any of these or similar regulatory compliance challenges could materially impact the viability ofand 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 investmentDoing 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.
SubstantiallyAlmost 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.
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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 pastChinese 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 maydemand for our products and services and materially and adversely affect our business and operating results.
results of operations.
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 Licenseservices 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, toTo date, we have deleted millionsapproximately a half million of cached files, blocked over one million digital files and added thousands of key words to our automatic keyword filtration system. As we continued our compliance efforts in response to the government’s internet content campaign, we saw a recovery trend in the number of total subscribers in the second, third and fourth quarters of 2015 and the first quarter of 2016. In addition, we permitted temporary suspension of services by about 281,000 existing subscribers as of the end of 2015. We may experience still further decline in user and subscriber numbers as we continue in our efforts to comply with the rules and regulations of the Chinese government.
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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.
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business primarily through our PRC subsidiaries and the variable interest entity and its subsidiaries in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and it may influence our operations, which could result in a material adverse change in our operation and the value of our ordinary shares and ADSs. Also, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers.
For example, on July 6, 2021, the relevant PRC government authorities made public the Opinions on Strictly Scrutinizing Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As a follow-up, on December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, and the CSRC issued a draft Administration Measures for the Filing of Overseas Securities Offerings and Listings by Domestic Companies, for public comments. These draft measures propose to establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. Specifically, an overseas offering and listing by a PRC company, whether directly or indirectly, an initial or follow-on offering, must be filed with the CSRC. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
On April 13, 2020, the CAC, the NDRC and other PRC government authorities jointly promulgated the Measures for Cybersecurity Reviews, which was amended on December 28, 2021 with effect from February 15, 2022. The Measures for Cybersecurity Reviews require that, among others, operators of “critical information infrastructure” purchasing internet products or services or network platform operators carrying out data processing activities, that affect or may affect national security, shall apply with the Cybersecurity Review Office for a cybersecurity review. In addition, a network platform operator holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before any public offering and listing on a foreign stock exchange. On November 14, 2021, the CAC released the draft Administrative Measures for Internet Data Security, or the Draft Measures for Internet Data Security, for public comments, which requires, among others, that a prior cybersecurity review would be required for the overseas listing of data processors that process over one million users’ personal information, or the listing of data processors in Hong Kong that affects or may affect national security. Since the Draft Measures for Internet Data Security are in the process of being formulated and the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law remain unclear on how relevant rules and regulations will be interpreted, amended and implemented by the
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relevant PRC governmental authorities, it remains uncertain how PRC governmental authorities will regulate overseas listing in general and whether we are required to obtain any specific regulatory approvals from the CSRC, CAC or any other PRC governmental authorities for our future offshore offerings (if any). If the CSRC, CAC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our future offshore offerings (if any), we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
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. PRC government has significant oversight over the conduct of our business and it has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. 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
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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 |
· | 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. |
· | New laws and regulations may be promulgated that will regulate internet activities, including |
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, 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
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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 unablehave not been able to quantify the magnitude and extent of such impact.
We may be sued by our game players and held liable for losses of virtual assets by such players, which may negatively affect our reputation and business, financial condition and results of operations.
While playing online games or participating in other online activities, players acquire and accumulate some virtual assets, such as special equipment and other accessories. Such virtual assets may be important to online game players and have monetary value and, in some cases, are sold for actual money. In practice, virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other users and occasionally through data loss caused by a delay of network service, a network crash or hacking activities.
Currently,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 gameslive streaming business and results of operations.
The issuance and use of “virtual currency” inNotice on the PRC has been regulated since 2007 in response to the growthReinforcement of the online games industry in China. In January 2007,Administration of Online Games issued by the Ministry of Public Security, MOC, MIITCulture and GAPPRFT jointly issued a circular regarding online gambling which has implications forother governmental authorities on February 15, 2007 directs the usePeople’s Bank of China to strengthen the administration of virtual currency. To curtail online gamescurrency to avoid any adverse impact on the PRC economic and financial system. This notice provides that involve online gambling, as well as address concernsthe 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 couldshould 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 live 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 CommerceCulture and the MOFCOM jointly issued a notice regarding strengthening the administrationNotice 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 regulatoryrelevant 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 involvein a different way and subject our operation to the direct paymentscope 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 usor issue new rules to penalties, including mandatory corrective measures and fines. The occurrenceregulate the virtual currency in our industry. In that case, our operation may be adversely affected.
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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. TheseIn 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 ouron 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 implementWhile we support these measures, these restrictions if detected by the relevant government agencies, may result in fines and other penaltiescould 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 wereare 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 recentlyin recent years intensified its efforts to remove inappropriate content disseminated over the internet and wireless networks.internet. 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. In December, 2019, the CAC promulgated the Regulations on the Ecological Governance of Network Information Content, which provides that network information content service platforms should fulfill the main responsibility of content management and establish an ecological governance mechanism for network information, and improve their systems for user registration, account management, information publishing review, emergency response, and etc. In October, 2021, the CAC issued the Notice on Further Strengthening the Regulation on Online Information of Entertainment Celebrities, which requires internet platforms to, among others, monitor information posted by celebrities online so as to timely identify hot topics that could involve illegal or undesirable actions and to promptly report to the competent authorities in such event. As we implemented programs to comply with these regulations, we saw our subscriber numbershave experienced a decline in the number of subscribers and such number may see more subscriber or usercontinue to 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.”
We face uncertainties with respect to the promulgation, interpretation and implementation of Notice 78.
On November 12, 2020, the NRTA issued the Notice on Strengthening the Management of Online Show Live Streaming and E-commerce Live Streaming, or Notice 78. According to Notice 78, platforms providing online show live streaming or e-commerce live streaming services shall, among other things, register their information and business operations by November 30, 2020, ensure real-name registration for all live streaming hosts and virtual gifting users, prohibit users that are minors or without real-name registration from virtual gifting, and set a limit on the maximum amount of virtual gifting per time, per day, and per month.
There are currently no explicit provisions as to what limits on virtual gifting will be imposed by the NRTA pursuant to Notice 78 and it is unclear how and to what degree any such limits would be imposed on different platforms. Given there are no explicit provisions on how to set limits on virtual gifting, we are currently not able to assess the potential impact from this requirement under Notice 78 on the virtual gifting spending activities on our platform. Any such limits ultimately imposed may negatively impact our revenues derived from virtual gifting and our results of operations.
Notice 78 requests live streaming platforms for online shows and e-commerce to register with the National Internet Audio-Visual Platforms Information Management System. We are in the process of application for such registration for our live streaming business. Notice 78 also sets forth requirements for certain live streaming businesses
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with respect to, among others, real-name registration, limits on user spending on virtual gifting, restrictions on minors on virtual gifting, live streaming review personnel requirements, and content tagging requirements. We have implemented a real-name registration system for all of our live streaming hosts and users. For more information on Notice 78, see “Item 4. Information on the Company—B. Business Overview —Regulation— Regulations on Online Live-streaming Services.”
Since some of the requirements in Notice 78 remain unclear and have no explicit provisions or implementation standards, we are still in the process of getting further guidance from regulatory authorities and evaluating the applicability and effect of the various requirements under Notice 78 on our business. Any further rulemaking under Notice 78 or other intensified regulation with respect to live streaming may increase our compliance burden in the live streaming business, and may have an adverse impact on our business and results of operations.
We may be adversely affected by PRC regulations to limit the methods that internet companies may apply when using algorithms, and the types of algorithms they may use.
Recently, the PRC government has taken steps to more closely regulate how internet companies use algorithms. For instance, the CAC, together with eight other governmental authorities, jointly issued the Guidelines on Strengthening the Comprehensive Regulation of Algorithms for Internet Information Services on September 17, 2021, which provides that daily monitoring of data use, application scenarios and effects of algorithms shall be carried out by the relevant regulators, and security assessments of algorithms shall be conducted by the relevant regulators. The guidelines also provide that an algorithm filing system shall be established, and classified security management of algorithms shall be promoted. In addition, the CAC, the MIIT, the Ministry of Public Security and the State Administration for Market Regulation jointly promulgated the Administrative Provisions on Algorithm Recommendation of Internet Information Services on December 31, 2021, effective on March 1, 2022, which provides that algorithms recommendation service providers are not allowed to use algorithms to register false user accounts, block information, give excessive recommendations, and that users should be given the option to easily turn off algorithm recommendation services.
To comply with the Administrative Provisions on Algorithm Recommendation of Internet Information Services, we may need to further adjust our business and operations. For instance, algorithm recommendation service providers are required to publicly disclose the basic principles, purposes, intentions, and relevant operating mechanisms of algorithm-related products. In response to this requirement, we have publicly disclosed the operation mechanism on our Xunlei App and provided an option for our users to turn off algorithm-driven recommendation services. However, the impact on our business operations is still substantially uncertain since this rule is relatively new and uncertainties still exist in relation to its interpretation.
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 theconditions 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 overin 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 RMBRenminbi 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 allA majority of our revenues were denominated in Renminbi. We principally rely on dividendsAny significant appreciation or depreciation of the RMB may materially and other distributions paid byadversely affect our subsidiaries in China which are denominated in Renminbi. Our results of operationsrevenues, earnings and financial positions, and the value of, your investment inand any dividends payable on, our ADSs will be affected byin U.S. dollars. For example, to the foreign exchange rate betweenextent that we need to convert U.S. dollars and Renminbi. To the extent we hold assets denominated in Renminbi, any depreciationinto RMB to pay our operating expenses, appreciation of the RenminbiRMB against the U.S. dollar could result inwould 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 reductionnegative 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 portionthe RMB relative to U.S. dollars would significantly reduce the
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U.S. dollar equivalent amounts of our financial results, the valueearnings regardless of your investmentany underlying change in our company andbusiness 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 pricesprice of our ADSs.
LimitedVery limited hedging transactionsoptions are available in China to reduce our exposure to exchange rate fluctuations. We didTo date, we have not enterentered into any forward contractshedging transactions in an effort to hedgereduce our exposure to Renminbi-U.S. dollarforeign 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 successfullyadequately 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 RenminbiRMB 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 alla majority of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our wholly-ownedwholly 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 ourthe 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. TheHowever, 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.
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 CongressSCNPC 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
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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.
Any failure or perceived failure by us to comply with the anti-monopoly and anti-unfair competition laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.
The PRC government has adopted a series of anti-monopoly and anti-unfair competition laws and regulations and has recently enhanced its enforcement of such laws and regulations. The PRC Anti-monopoly Law and the relevant implementing rules (i) require that where concentration of undertakings reaches the filing threshold stipulated by the State Council, a filing must be made with the anti-monopoly authority before the parties implement the concentration, (ii) prohibit a business operator with a dominant market position from abusing such position, such as by selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, or refusing to trade with a trading party without any justifiable cause, and (iii) prohibit business operators from entering into monopoly agreements, which refer to agreements that eliminate or restrict competition with competing business operators or transaction counterparties, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities or fixing the price of commodities for resale to third parties, unless the agreements satisfy certain exemptions under the PRC Anti-monopoly Law. Furthermore, in February 2021, the Anti-monopoly Commission of the State Council officially promulgated the Anti-Monopoly Guidelines for the Internet Platform Economy Sector, or the Anti-Monopoly Guidelines. The Anti-Monopoly Guidelines prohibit certain monopolistic acts of internet platforms so as to protect market competition and safeguard the interests of users and undertakings participating in the internet platform economy, including without limitation, prohibiting platforms with a dominant position from abusing their market dominance (such as discriminating against customers in terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology to block competitors’ interfaces, favorable positioning in search results of goods displays, using bundle services to sell services or products, compulsory collection of unnecessary user data). In addition, the Anti-Monopoly Guidelines also reinforce antitrust merger review for internet platform related transactions to safeguard market competition. As the Anti-Monopoly Guidelines were newly promulgated, it is still uncertain how they will impact on our business, financial condition, results of operations and prospects.
According to the PRC Anti-unfair Competition Law, unfair competition, which refers to the production and operating activities where the operator disrupts the market competition order and damages the legitimate rights and interests of other operators or consumers in violation of the provisions of the PRC Anti-unfair Competition Law, shall be prohibited. Pursuant to the PRC Anti-unfair Competition Law, operators shall abide by the principle of voluntariness, equality, impartiality, integrity and adhere to laws and business ethics during market transactions. Operators in violation of the PRC Anti-unfair Competition Law may be subject to civil, administrative or criminal liabilities depending on the specific circumstances.
The PRC anti-monopoly enforcement agencies have strengthened enforcement under the PRC Anti-Monopoly Law in recent years. For example, on February 7, 2021, the Anti-Monopoly Commission of the State Council published Anti-Monopoly Guidelines for the Internet Platform Economy Sector that specified circumstances where an activity of an internet platform will be identified as monopolistic act as well as concentration filing procedures for business operators, including those involving variable interest entities. Also, in April 2021, the SAMR, the Cyberspace Administration of China and the State Taxation Administration, or the SAT, held an administrative guidance meeting for Internet platform enterprises. In addition, many platforms, including 34 enterprises which attended such administrative guidance meeting as representatives of Internet platform enterprises, are required to conduct a comprehensive self-inspection and make necessary rectification accordingly. Although we are not in the list of 34 enterprises, we have been actively conducting necessary self-inspection and rectifications in accordance with such guidance. We cannot guarantee you that we will be able to be in full compliance with all applicable rules and regulations at all times.
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As a result of the regulators’ focus on anti-monopoly and anti-unfair competition compliance and enhanced regulation of platform enterprises, our business practice and expansion strategy may be subject to heightened regulatory scrutiny. Any anti-monopoly or anti-unfair competition related lawsuit, regulatory investigations or administrative proceedings initiated against us could also result in constraints on our future investments and acquisitions. As a result, we may be subject to significant difficulties in pursuing our investment and acquisition strategy.
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 taketook 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 amendmentinitial registration with the local SAFE branch in relation to all our previous private financings and their subsequent ownership changes by April 2012 as required underby 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 theircomply with the SAFE registrationsregulations 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, underUnder 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 byUnder 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 usmay 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 2011qualifications 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 Computerthe variable interest entity and Shenzhen Xunlei by the local governmental authoritiessubsidiaries 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-ownedwholly 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—RegulationsRegulation 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 CongressSCNPC promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.
As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice do not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
TheOur auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, is prepared byas 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 accountingand a firm must be registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, and are required by theis subject to laws ofin the United States pursuant to undergowhich the PCAOB conducts regular inspections by PCAOB to assess theirits compliance with the laws of the United States andapplicable professional standards. Because we have substantiated operations within the Peoples’ Republic ofSince our auditor is located in China, anda jurisdiction where the PCAOB is currentlyhas 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 Chinaauditor is not currently inspected by the PCAOB.
This lack of PCAOB inspections of audit work performed in China prevents the PCAOB from regularly evaluating audit work of any auditors that was performed in China including that performed by our independent registered public accounting firm. As a result, we and investors may bein our ADSs are deprived of the full benefits of such PCAOB inspections.
The inability of the PCAOB to conduct inspections of audit work performedauditors in China makes it more difficult to evaluate the effectiveness of our auditor’sindependent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors in other jurisdictionsoutside of China that are subject to the PCAOB inspections, on all of their work. Investors maywhich could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information and procedures and the quality of our financial statements.
Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
If additional remedial measures are imposedThe Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on certain PRC-based accounting firms in administrative proceedings brought byDecember 18, 2020. The HFCAA states if the SEC determines that we could be unable to file future financial statements onhave filed audit reports issued by a timely basis in compliance with the requirements of the Exchange Act.
In December 2012, the SEC instituted administrative proceedings against certain PRC-based accounting firms, including our independent registered public accounting firm alleging that these firms had violated U.S. securities laws andhas not been subject to inspection for the SEC’s rules and regulations thereunder by failing to provide toPCAOB 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 firms’ work papers related to their audits of certain PRC-based companies that are publicly tradedover-the-counter trading market in the United States. On January 22, 2014,December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an initial administrative law decision wasissuer as a “Commission Identified Issuer” if the issuer has filed an annual report containing an audit report issued sanctioning theseby a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and suspending them from practicingHong Kong. The PCAOB identified our auditor
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as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Therefore, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report on Form 20-F.
Whether the PCAOB will be able to conduct inspections of our auditor before the SECissuance of our financial statements on Form 20-F for the year ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a periodnumber of six months.factors out of our, and our auditor’s control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.
On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 12, 2014, four4, 2022, the U.S. House of these PRC-based accounting firms appealedRepresentatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States in 2023.
The approval of the CSRC or other PRC government authorities may be required in connection with our future offshore offerings (if any) under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC persons or entities to obtain the approval of the CSRC prior to the SEC against this sanction. In February 2015, eachlisting and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the four PRC-based accounting firms agreed to a censureregulations remain unclear, and to pay a fine to the SEC to settle the dispute and avoid suspensionour future offshore offerings (if any) may ultimately require approval of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these proceduresCSRC approval is required, it is uncertain whether we can or how long it will take us to obtain the approval and, even if there iswe obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our future offshore offerings (if any), or a failurerescission of such approval if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
On July 6, 2021, the process betweenrelevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the SECLaw. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As a follow-up, on December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, and the CSRC issued a draft Administration Measures for the SEC could impose penalties such as suspensions,Filing of Overseas Securities Offerings and Listings by Domestic Companies, for public comments. These draft measures propose to establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. Specifically, an overseas offering and listing by a PRC company, whether directly or it could restartindirectly, an initial or follow-on offering, must be filed with the administrative proceedings.
InCSRC. The examination and determination of an indirect offering and listing will be conducted on a substance-over-form basis, and an offering and listing shall be deemed to be a PRC company’s indirect overseas offering and listing if the event thatissuer meets the SEC restartsfollowing conditions: (i) any of the administrative proceedings, depending uponoperating income, gross profit, total assets, or net assets of the final outcome, listed companiesPRC enterprise in the United States with majormost recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC operations may find it difficultcitizens or impossible to retain auditors in respect of their operationsare ordinarily resident in the PRC, which couldand the principal place of business is in the PRC or carried out in the PRC. The issuer or its affiliated PRC entity, as the case may be, shall file with the CSRC for its initial public offering,
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follow-on offering and other equivalent offing activities. Particularly, the issuer shall submit the filing with respect to its initial public offering and listing within three business days after its initial filing of the listing application, and submit the filing with respect to its follow-on offering within three business days after the completion of the follow-on offering. Failure to comply with the filing requirements may result in financial statements being determinedfines to the relevant PRC companies, suspension of their businesses, revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons. Theses draft measures also set forth certain regulatory red lines for overseas offerings and listings by PRC enterprises.
There are substantial uncertainties as to whether these draft measures to regulate direct or indirect overseas offerings and listings will be further amended, revised or updated, their enactment timetable and final content. As the CSRC may formulate and publish guidelines for filings in the future, these draft measures do not be in compliance with theprovide for detailed requirements of the Exchange Act, including possible delisting. Moreover, any negative news aboutsubstance and form of the proceedings against these audit firmsfiling documents. In a Q&A released on CSRC’s official website on December 24, 2021, the respondent CSRC official indicated that the proposed new filing requirement will start with new issuers and listed companies seeking follow-on financings and other financing activities. As for the filings for other listed companies, the regulator will grant an adequate transition period and apply separate arrangements. The Q&A also pointed out that, if compliant with relevant PRC laws and regulations, companies with compliant VIE structures may cause investor uncertainty regarding China-based, United States-listed companiesseek overseas listing after completion of the CSRC filing. Nevertheless, the Q&A did not specify what would qualify as a “compliant VIE structure” and what relevant PRC laws and regulations are required to be complied with. Given the substantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that, if ever required, we would be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.
On December 27, 2021, the NDRC and the marketMinistry of Commerce jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or the 2021 Negative List, which became effective on January 1, 2022. Pursuant to the Special Administrative Measures, if a PRC company engaging in a prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities. In addition, the foreign investors of the issuer shall not be involved in the company’s operation and management, and their shareholding percentages shall be subject, mutatis mutandis, to the relevant regulations on domestic securities investments by foreign investors. As the 2021 Negative List is relatively new, there remain substantial uncertainties as to the interpretation and implementation of these new requirements, and it is unclear as to whether and to what extent listed companies like us will be subject to these new requirements. If we are required to comply with these requirements and fail to do so on a timely basis, if at all, our business operations, financial condition and business prospect may be adversely and materially affected.
In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the future that approval and filing from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the Measures for Cybersecurity Review and the Draft Measures for Internet Data Security, are required for our future offshore offerings (if any), it is uncertain whether we can or how long it will take us to obtain such approval or complete such procedures and any such approval could be rescinded or rejected. Any failure to obtain or delay in obtaining such approval or completing such filing procedures for our future offshore offerings (if any), or a rescission of any such approval if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or filing or other government authorization for our future offshore offerings (if any). These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our future offshore offerings (if any) into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSslisted securities. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our future offshore offerings (if any) before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our future offshore offerings (if any), we may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firmobtain a waiver of such approval requirements, if and when procedures are established to auditobtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and issue an opinion onadversely affect our business, prospects, financial statements, our financial statements could be determined to not be in compliance withcondition, reputation, and 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 delistingtrading price of our common stock from the NASDAQ Global Select Market or deregistration from the SEC, which would substantially reduce or effectively terminate the tradinglisted securities.
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Risks relatedRelated to ourOur 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; |
· | 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
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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. OurIn 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, 2016,2022, we had 337,997,790337,427,946 common shares outstanding, but excludingwhich excludes (i) 16,519,14410,889,429 common shares issued toheld 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) 14,360,27520,559,830 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 programsus but not yet cancelled.All our outstanding common shares represented by ADSs were freely transferable by persons other than our “affiliates” without restriction or additional registration under the Securities Act of 1933, as amended, or Securities Act. The remaining common shares will be available for sale subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.
Certain holders of our common shares have the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs, in the public market could cause the price of our ADSs to decline.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
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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.
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 convert your ADSs into the underlying 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 substantiallyalmost 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 substantiallyalmost 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.
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There are uncertaintiesis uncertainty as to whether Cayman Islands courts or PRC courts would:
· | recognize or enforce |
· | entertain original actions brought in the Cayman Islands or the PRC against us, based on certain civil liability provisions of U.S. securities |
ThereAlthough there is no statutory recognitionenforcement 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 circumstancesat common law, recognize and enforce a non-penalforeign money judgment of a foreign court of competent jurisdiction without retrialany 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.
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As a result, our public shareholders may have more difficultydifficulties 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.
Since we are a Cayman Islands exempted company, the rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.
WeUnder the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are an emerging growthobviously unreasonable may be declared null and void. Cayman Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In addition, the circumstances in which a shareholder of a Cayman Islands company withinmay sue the meaningcompany derivatively, and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a company organized in the United States.
Furthermore, our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the laws of most U.S. jurisdictions. The directors of a Cayman Islands company, without shareholder approval, may implement a sale of any assets, property, part of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. We have elected not to voluntarily comply with such auditor attestation requirements. Therefore, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any newbusiness, 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 outsecurities of the extended transition period undercompany. Our ability to create and issue new classes or series of shares without shareholders’ approval could have the JOBS Act is irrevocable.
effect of delaying, deterring or preventing a change in control without any further action by our shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices.
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, 2016,2022, our directors, executive officers and existing principal shareholders beneficially owned approximately 60.49%47.5% 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 ceasehave 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 willto make certainsome corporate activities more time-consuming and costly. AfterIn particular, as we are no longer an “emerging growth company,” we expect to incur significant
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expenses and devote substantial management effort toward ensuring complianceefforts in assessing our internal control over financial reporting and comply with the requirements ofauditor 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.
We believe we were a passive foreign investment company for our taxable year ended December 31, 2015,2021, 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 acompany” (a “PFIC”), for United States federal income tax purposes for our taxable year ended December 31, 2015,2021, and we will very likely be a PFIC for our current taxable year ending December 31, 20162022 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 thatthe 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.”
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Item 4.Information on the Company
A.History and Development of the Company
We commenced operations in January 2003 through the establishment of Shenzhen Xunlei, Networking Technologies Co., Ltd., or Shenzhen Xunlei. Shenzhen Xunlei,which currently, together with its various subsidiaries in the PRC, currently operateoperates 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 ourthe 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 |
| Xunlei Games Development (Shenzhen) Co., Ltd., or Xunlei Games, which was established in February 2010 and |
| Shenzhen Onething Technologies Co., Ltd. |
| ● | 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 June 2014, we completed the initial public offering of our ADSs, which are listed on the NASDAQ Global Select Market under the symbol “XNET.”
In September 2014, we, through Shenzhen Xunlei, Network Technology Co., Ltd., acquired from subsidiaries of Kingsoft Corporation Limited Kuaipan Personal and Kansunzi, both software services in support of cloud-sourced storage and sharing, and their related business and assets, for an aggregate cash consideration of US$33 million. In August 2016, we discontinued our Kuaipan Personal services due to a change of business focus.
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In July 2015, we completed the sale of our entire stake in Xunlei Kankan to Beijing Nesound International Media Corp., Ltd., an independent third party, for a consideration of RMB130RMB130.0 million. As of December 31, 2019, Beijing Nesound International Media Corp., Ltd. had fully paid the whole consideration of RMB130.0 million of which RMB26.0 million (US$ 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.
In April 2021, Xunlei Network HK acquired all equity interest of Funi. Pte. Ltd, or Funi, from an independent third party. Funi was established in Singapore and primarily engages in live audio streaming business in the Middle East and business development for international markets.
Our principal executive offices are located at: 7/21-23/F, Block 11,B, Building No. 12, No.18 Shenzhen SoftwareBay ECO-Technology Park, Ke Ji Zhong 2ndKeji South Road, Yuehai Street, Nanshan District, Shenzhen, the People’s Republic of ChinaChina. 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.
B.Business Overview
Overview
We are a leading cloud-based accelerationinnovator 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, store, manage, and consume digital media content. We are increasingly expandingcontent 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 expandenlarge our user base and offer our users a wider range of access points. We targetprovide 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, managementan 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 |
· | Cloud acceleration subscription services, which are delivered through |
Benefitting from the large user base forIn addition to our core product, Xunlei Accelerator, we have furtheralso developed variouscloud computing and other internet value-added services to meet a fuller spectrum of ourspeed up corporate development and to keep pace with the latest industry trend and users’ digital media content accesschanging 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 onwhich provide us with synergies in our gaming platform; and (ii) fast bird services, providing internet acceleration services forbusiness 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 applicationapp 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 ninewas about 4.4 million as of the date of this annual report.in 2021. 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 applicationMobile Xunlei supplements our existing subscriptions business, enabling us to reach a wider setscope of user base and to expand our services to additional devices of a user who has multiple devices.
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Our mobile initiatives also benefitsbenefit from our relationship with Xiaomi, one of our previous strategic shareholders. Since 2014, we have entered into a pre-installing serviceservices 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 and MIUI7, since the end of 2014, 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.
An importantAnother key part of our strategies is to continue our innovation in crowdsourcing forof idle bandwidth capacity and potentiallypotential storage from users of our cloud computing project, which targetshardware devices so that we can continuously deliver computing resources to utilizethird parties, such as internet content providers, through our users’ idleCDN services. We started to generate revenue from selling crowdsourced uplink capacity and storage by usingwe collected from users of our hardware devices. We plan for crowdsourced capacitycloud computing services to supply an increasing percentage of the bandwidth that we use for our own acceleration services. Inthird parties in the third quarter of 2015,2015. To further develop our cloud computing business, we reached an agreementlaunched 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 toshare 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 partyparties 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 backboneIn 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 productsStellarCloud 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 ismanage 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 withblockchain 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 indexingBaas Platform on ThunderChain covers five modules including application, access, service, key technology enables usersand 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.
In February 2022, we launched a blockchain based enterprise digital collection service platform, which aims to help enterprises and organizations achieve on-chain for their digital assets. This platform provides services such as digital collection minting, showcasing, management, among others, based on the infrastructure of ThunderChain.
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; |
· | Cloud computing and other internet value-added services. We offer cloud computing services and multiple other value-added services to our users |
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· | Sales of our cloud computing |
Our revenues from continuing operations, excluding Xunlei Kankan, which we disposed of in July, 2015, increased from US$122.0181.3 million in 20132019 to US$135.8186.7 million in 20142020 and decreasedfurther to US$130.0239.6 million in 2015 after the disposal of Xunlei Kankan.2021. 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.
53.2 million in 2019, US$13.8 million in 2020 and a net income of US$1.2 million in 2021.
Our platform
On our platform, users can accelerate digital mediainternet content transmission, develop and play a broad rangeoperate blockchain-based services and applications and enjoy popular forms of the latestinternet-based entertainment, such as watching live online games, among other things.performance and playing online games.
Cloud basedCloud-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: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 Personalalso 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 supportother 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-sourced500 GB. 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.
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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 washas been adopted in 2014 by Xiaomi, a Chinese smartphone maker, on its operating systems MIUI6, MIUI7, MIUI8, MIUI9, MIUI10, MIUI11, MIUI12 and MIUI7. Since then,MIUI13. 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.
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 followingour major premium acceleration products:
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 ofsome 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, and allow users to access our premium acceleration services, at no additional charges. 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 4.0 million, 3.8 million and 4.4 million as of December 31, 2019, 2020 and 2021, 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 ninewas about 4.4 million as of the end of February 2016.in 2021. 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. ManySome 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-sourcescrowdsources 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
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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.
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-sourcedcrowdsourced uplink capacity iscapacities 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-sourcedcrowdsourced uplink capacitycapacities for our subscription business from time to time, reducing our purchase of bandwidth from traditional third partythird-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, outstanding 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 innovation and functional development.
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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In February 2022, we launched a blockchain based enterprise digital collection service platform, which aims to help enterprises and organizations achieve on-chain for their digital assets. This platform provides a number of services including digital collection minting, showcasing, management, among others. The digital collections minted on Xunlei’s ThunderChain are uniquely identified by the ThunderChain technology, and are permanently preserved in the ThunderChain with unique serial numbers on the chain through the deployment of smart contract technology.
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 2018 and 2021, we supplemented our live streaming business by launching live audio streaming products, 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 2021, we launched Hiya, an audio live streaming platform, in overseas markets. Currently, overseas users of Hiya are mainly from the Middle East and Southeast Asia. Similar to our live audio streaming platform in China, overseas users are able to interact with broadcasters through Hiya by purchasing virtual items from us and rewarding virtual items to broadcasters. As of the date of this annual report, the business operations of Hiya covered countries in Middle East and Southeast Asia, and we plan to further expand our overseas live streaming business to global markets.
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 providefrom time to time offer other ancillary services cateringto 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 mobile platform and PC websites. 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
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advertising services, we entered into an advertising revenue sharing agreement with Itui, our largest shareholder, and outsourced our advertising business to Itui in 2020. 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 is responsible for operating our advertising services and share a portion of revenue generated from placing advertisements on our PC websites and mobile platform. Our advertising revenue experienced further decline in 2021, primarily due to lower advertising placements starting from the second quarter of 2021 as a result of evolving regulations of the internet industry in China, which negatively affected our adverting business.
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
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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.
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 89143 co-location centers, and over one million third partythird-party servers and over 9,0003,180 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
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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, 2021, we were using 3,424 cloud servers and 4,788 cloud services provided by Ali Cloud through its 12 central nodes and 17 edge nodes.
AdvertisingShared cloud computing model for edge computing services
We 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 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.
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 provide advertising services primarily through various formslaunched ThunderChain, a high-performance blockchain infrastructure product, which can concurrently process millions of advertisements placedtransactions per second. Based on our websitesproprietary homogeneous multi-chain framework, ThunderChain is designed to realize confirmation and mobile platform. We had 399, 252interaction among homogeneous chains and 119 advertisersenable multiple transactions to be executed on different chains in 2013, 2014parallel. 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 striveEthereum 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 grownWe 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.
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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, 2015,2021, we had 44192 patents granted in the PRCChina and four patents granted in the United States, while another 19444 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, 2015,2021, we have applied to register 174had 482 trademarks of which we have received 153 registered trademarks in different applicable trademark categories including one trademark registered within the United States Patent and Trademark OfficePRC and one trademark registered with World Intellectual Property Organization.
We had applied for registration of 61 trademarks in China.
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 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 thesethird-party content providers going forward to ensure the effectiveness of our content protection measures, and (5) incorporate additional content protection measures to the extentprovide relevant contents that they are necessaryduly 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 protectionwebsites 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 notwe may still be ablesubject 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, asAs of the date of this annual report, the caseswe are awaiting decisions of first instance.For details, seeinvolved in 12 copyright lawsuits in China. 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 andand/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
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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.
The establishment and operations of wholly foreign-owned enterprises are mainly governed 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 and foreign-invested enterprises are subject to regulated by the CatalogueSpecial Management Measures (Negative List) for the GuidanceAccess of Foreign Investment Industry,(2021 Version), or the Catalogue, which wasNegative List (2021 Version), 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. TheMOFCOM in December, 2021 and effective on January 1, 2022, and the Catalogue divides industries into three categories:of Industries for Encouraging Foreign Investment (2020 Version), or Encouraging Catalogue (2020 Version)promulgated by the NDRC, in December 2020, and effective on January 27, 2021. Pursuant to the Encouraging Catalogue (2020 Version) and the Negative List (2021 Version), foreign-invested projects are categorized as encouraged, restricted and prohibited. IndustriesForeign-invested projects that are not listed in the CatalogueNegative list are permitted foreign invested projects.
Establishment of wholly foreign-owned enterprises is generally openallowed 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 specificallyequity 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.
Pursuantcategory 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, theprohibited 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)e-commerce, domestic multi-party communications, store-and-forward, and call center services). 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-ownedwholly owned PRC subsidiary,subsidiaries, and Shenzhen Xunlei, ourthe 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 Shenzhen Xunlei holds various operating subsidiaries that conduct a majority of our operations in China. Shenzhen Onething and one of its subsidiaries have obtained an updated VATS License to cover CDN service for our cloud computing business. Both of Giganology Shenzhen and Xunlei Computer, another wholly-ownedwholly 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.Negative List. Hence, these activities operated by Giganology Shenzhen and Xunlei Computer are deemed asto be permitted and open to foreign investment.
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 which 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.
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Regulation on telecommunications and internet information services
The telecommunications industry, including the internet sector, is highly regulated in the PRC. Regulations issued or implemented by the State Council, MIIT, and other relevant government authorities cover many aspects of operation of telecommunications and internet information services, including entry into the telecommunications industry, the scope of permissible business activities, licenses and permits for various business activities and foreign investment.
The principal regulations governing the telecommunications and internet information services we provide in the PRC include:
| Telecommunications regulations |
| Administrative measures on internet information services (2011, revised), or the Internet Measures. According to the Internet Measures, a commercial ICP service operator must obtain |
| Administrative measures for telecommunications business operating license |
| 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. |
| Regulations for administration of foreign-invested telecommunications enterprises |
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| investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. Under the FITE Regulations, a foreign entity is prohibited from owning more than 50% of the total equity interest in any value-added telecommunications service business in the PRC and the major foreign investor in any value-added telecommunications service business in the PRC shall have good and profitable records and operating experiences in such industry. |
| Circular on strengthening the administration of foreign investment in and operation of value-added telecommunications business (2006). Under this circular, a domestic PRC company that holds |
| ● | 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 anhold a VATS License covering its ICP Licenseservices expiring on April 30, 20202025 and another VATS License for theits provision of internet informationcould computing services and also a value-added telecommunication license for the provision ofincluding internet data center services and internet access services expiring on March 10, 2020,October 31, 2024, and ownsown 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:
| opposes the fundamental principles determined in the PRC’s Constitution; |
| compromises state security, divulges state secrets, subverts state power or damages national unity; |
| harms the dignity or interests of the State; |
| incites ethnic hatred or racial discrimination or damages inter-ethnic unity; |
| sabotages the PRC’s religious policy or propagates heretical teachings or feudal superstitions; |
| disseminates rumors, disturbs social order or disrupts social stability; |
| propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes; |
| insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or |
| includes other content prohibited by laws or administrative regulations. |
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The PRC government may shut down the websites of ICPVATS License holders that violate any of such content restrictions and requirement, revoke their ICPVATS 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.
Regulation on online transmission of audio-visual programs
On July 6, 2004, GAPPRFT promulgatedApril 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 2004Measures. Pursuant to these provisions, “audio-visual program services through private network and targeted communication” refer to television, mobile phones and other kinds of fixed and mobile electronic equipment as terminal recipients, and through setting up virtual private network through local networks and internet or with Internet A/V Measures applyand other information networks as targeted transmission channels, oriented to the public to provide audio-visual program service activities, relating to the opening, broadcasting, integration,such as radio and television programs conducted by such forms as Internet protocol television (IPTV), private network mobile TV, Internet TV, and other forms of content provision, integrated broadcast control, transmission or download of audio-visual programs via internet or other information network. An applicantand distribution activities. Any provider who engages in the business of transmitting audio-visual programsaforesaid service must apply forobtain a license issued by GAPPRFT in accordance with the categories of business, receiving terminals, transmission networks and other items. Foreign investedfrom GAPPRFT. Foreign-invested enterprises are not allowed to engage in the above business. On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non-State-owned Capital into the Cultural Industry.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.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-visualAudiovisual 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-visualAudiovisual 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,April 8, 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 31,30, 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 14,11, 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-visualAudiovisual Programs Received by Television Terminals.” On April 1, 2010, GAPPRFT issued theInternet Audio/Visual Program Services Categories (Provisional)
To comply with these laws and regulations, Henan Tourism Information Co., Ltd., or Henan Tourism, one of our operating subsidiaries in the Provisional Categories, which classified internet audio-visual programs into four categories. However, at this stage, the Provisional Categories do not include internet television or mobile television, and itPRC, currently is unclear as to how the categorization system under the newly adopted Provisional Categories will be enforced or how will it evolve. Shenzhen Xunlei’sholding a License for Online Transmission of Audio-visual Programs with an effective period from February 28, 2021 to February 28, 2024. However, neither Shenzhen Wangwenhua, the entity that operates a live streaming business, nor Shenzhen Xunlei, the entity that provides video content display services, is duea registered owner of the license for update butonline transmission of audio-visual programs. As a result, it is possible that relevant PRC government authorities could determine that these businesses are operating without sufficient license. In addition, we have not been ableare in the process of application for the registration in the National Internet Audio-Visual Platforms Information Management System under the requirement of Notice 78 for operating a live streaming business and providing video content display services. We may be required to obtain such update.additional licenses, permits, filings or approvals for the functions and services of our platform in the future. 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 businessbusinesses 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 and results of operations.��”
Regulations on Online Live Streaming
On November 4, 2016, the CAC promulgated the Regulations on the Administration of Online Live Streaming Services, or the Online Live streaming Regulations, which became effective on December 1, 2016.
The Online Live Streaming Regulations provide that online live streaming service providers and distributors must legally obtain the qualification for internet news information services before providing such services on the internet, and engage in online news information services only to the licensed extent. Online live streaming service providers must review all live internet news information and interactions before publishing them, and set up their “chief editor” position if they provide live streaming services of internet news information. The Online Live Streaming Regulations also stipulate that online live streaming service providers must carry out their subject responsibility, arrange professionals commensurate with its service size, establish and improve various management systems, and have the technical capability to immediately cut online live streaming, and its technical plans shall comply with relevant national standards. In addition, online live streaming service providers must conduct graded and categorized management according to the content category and user scale of online live streaming, and establish a credit rating management system for online live streaming distributors as well as a blacklist management system.
On August 1, 2018, the MIIT, the Ministry of Public Security of the PRC and other government agencies jointly issued the Notice on Strengthening the Administration of Internet Live Streaming Services, or the Online Live streaming Services Circular, which specifies respective duties of online live streaming service providers, network access service providers and application stores, aiming to prompt relevant internet-based enterprises to fulfill their responsibilities. The Online Live Streaming Services Circular provides that an online live streaming service provider must make a record filing with the competent telecommunications authority as an internet content provider (ICP). Online live streaming service providers are also required to apply for a permit with the local authorities if they engage in telecommunications business, livestreaming business for internet news information, online performance, and/or online visual-audio programs. Online live streaming service providers must make record filings with the local public security authorities within 30 days after live streaming services have been published on the internet. In addition, online live streaming service providers are required to implement a real name verification system for users, intensify administration of online anchors, establish a blacklist system for online anchors, optimize their system for watching and censoring livestreamed content for regulatory purposes, and improve measures to better respond to harmful content.
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On November 12, 2020, the NRTA issued the Notice on Strengthening the Management of Online Show Live streaming and E-commerce Live streaming, pursuant to which live streaming platforms for online shows are requested to strengthen positive value guidance and enable tasteful, meaningful, interesting and warm live streaming programs to have good traffic, and to prevent the spread of the trends of wealth flaunting, money worshiping and vulgarity. Notice 78 requests live streaming platforms for online shows and e-commerce to register with the National Internet Audio-Visual Platforms Information Management System. To date, we are still in process of making the application for such registration for our live streaming business. In addition, the number of content reviewers a platform is required to keep must in principle be no less than 1:50 of the number of live streaming rooms. Live streaming platforms for online shows need to manage the hosts and users making virtual gifting based on the real-name registration system, and users who have not registered with real names or who are minors are prohibited from virtual gifting. The live streaming platforms are required to implement real-name registration system by real-name verification, face recognition, manual review and other measures to prevent minors from virtual gifting. The platform shall limit the maximum amount of rewards each user may give per time, day and month. Live streaming platforms for e-commerce shall not illegally produce and broadcast, beyond their business scope of e-commerce, any commentary programs unrelated to sales of goods.
On February 9, 2021, the CAC and six other PRC governmental authorities jointly issued the Circular on Issuing the Guiding Opinions on Strengthening Standardized Management of Online Live Streaming, according to which live streaming platforms shall strictly abide by laws and regulations and relevant state provisions when providing live streaming information services; strictly fulfill their live online platform statutory duties and implement live webcast listing platform main body responsibility, control network broadcast industry main issues list to establish and strictly implement that the editor in chief is responsible for, content audit, user registration, post comments, emergency response, technology security, the host management, training, assessment, reporting acceptance of internal management system. Live streaming platforms that carry out commercial network performance activities must hold a Network Cultural Operation License and file for an ICP; A live broadcasting platform providing online audio-visual program services must hold the Permit for Spreading Audio-Visual Programs via Information Network (or complete registration in the National Information Registration and Management System for Online Audio-visual Platform) and put this on their ICP record. A live broadcast platform that provides Internet news and information service must hold an Internet News and Information Service License. A network live broadcasting platform shall go through the formalities of filing an enterprise with the local cyberspace and information authorities in a timely manner, and a platform that stops providing live broadcasting services shall cancel the filing in a timely manner.
Regulation on online cultural activities
On February 17, 2011, the MOC promulgated the newProvisional 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 theProvisional Measures on Administration of Internet Culture promulgated on May 10, 2003 and amended on July 1, 2004 as well as theNotice on Issues Relating to Implementing the Provisional Measures on Administration of Internet Culture issued on July 4, 2003.. The Internet Culture Measures apply toregulates entities that engageengaging in activities relatedrelating to “online cultural products.” “Online cultural products” are classifieddefined as cultural products produced, disseminated and circulated via internet which mainly include: (i) online cultural products particularly produced for the internet, such as online music entertainment, network games, network performance programs, online performing arts, online artworks and online animation features and cartoons; and (ii) online cultural products converted from music entertainment, games, performance programs, performing arts, artworks and animation features and cartoons, and disseminated via the internet. Pursuant to these measures, entities are required to obtain relevant Online Culture Operating Permits from the applicable provincial level culture administrative authority if they intend to commercially engage in any of the following types of activities:
| production, duplication, importation, distribution or broadcasting of online cultural products; |
| publication of online cultural products on the internet or transmission thereof via information networks such as the internet and the mobile networks to computers, fixed-line or mobile phones, television sets or gaming consoles for the purpose of browsing, reviewing, using or downloading such products by online users; or |
| exhibitions or contests related to online cultural products. |
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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 holdsobtained an Online Culture Operating Permit, which was last renewed in March 2016February 2022 with an effective period from March 16, 20162022 to March 15, 2019 for2025 to offer music entertainment product online, operate online performance business and online shows business, and engage in the operatingexhibition of online games (including issuance of virtual currency), music entertainmentculture products and animation and comic. Xunlei Gamescompetition activities. Shenzhen Wangwenhua obtained an Online Culture Operating Permit in July 2013 with an effective period from July 30, 2013November 11, 2020 to July 30, 2016 for the operating ofMay 1, 2023 to operate online games (including issuance of virtual currency). We planperformance 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 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, pursuantamended on December 15, 2017 and last repealed by the Decision of the Ministry of Culture and Tourism to Repealthe 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 contentProvisional 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, inIn 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, haveand Shenzhen Wangwenhua had obtained thean Online Culture Operating Permit respectively for operatingour operation of online games.
Further, the online publication of online games is subject to the regulation of GAPPRFTSAPPRFT, under theAdministrative MeasuresProvisions on Network PublicationOnline Publishing Services and ICP service operators must obtain the Network Publication ServiceInternet 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 screenedapproved 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-ownedforeign invested enterprises. The indirect functions such as contractual control and technology supply are also prohibited.
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.
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Our online gamesgame services are currently providedoperated by Shenzhen Xunlei.Wangwenhua, Shenzhen Xunlei holdsand Xunlei Games. Each of these online game operating subsidiaries has obtained a VATS License for operating our online games; and Shenzhen Xunlei, holding 100% of the equity interest in Shenzhen Wangwenhua and 70% of the equity interest in Xunlei Games, has obtained an Internet PublicationPublishing Services License for itsthe publication of online games. We also requireinternet games, with an expiry date of September 17, 2022. However, neither Shenzhen Wangwenhua nor Xunlei Games has obtained an Internet Publishing Services License. Given the developersuncertainties of certain online gamesinterpretation and implementation of relevant laws and regulations and the enforcement practices of relevant government authorities, we cannot assure you that Shenzhen Wangwenhua and Xunlei Games are not required to obtain Internet Publishing Services Licenses as well. For risks relating to the requisite approvals of relevant online games from GAPPRFT, and make the filings with MOC, for relevant online games. See “RiskInternet 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-licensepopular, 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.
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.
On February 4, 2015, the CAC promulgated the Administrative Provisions on Account Names of Internet Users, or the Account Names Provisions, which became effective as of March 1, 2015. The Account Name Provisions require internet service providers to authenticate registered users’ identity information and to commit to complying with the “seven basic requirements,” including, among other things, observing the laws and regulations, protecting state interests, as well as ensuring the authenticity of any information they provide. Relevant internet information service providers are responsible for protecting users’ privacy, the consistency between user information, such as account names, avatars, and the requirements set forth in the Account Names Provisions, making reports to the competent authorities regarding any violation of the Account Names Provisions, and taking appropriate measures to stop any such violations, such as, notifying the user to make corrections within a specified time and suspending or closing accounts in the event of continuing non-compliance.
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On August 22, 2019, the CAC issued the Regulation on Cyber Protection of Children’s Personal Information, effective on October 1, 2019. Pursuant to this, network operators are required to establish special policies and user agreements to protect children’s personal information, and to appoint special personnel in charge of protecting children’s personal information. Network operators who collect, use, transfer or disclose personal information of children are required to, in a prominent and clear way, notify and obtain consent from children’s guardians.
We have developedIn October 2019, NPPA issued theAnti-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 implemented an anti-fatigue and compulsorythe 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 ourfor players of online games and will cooperatetake effective measures to restrict underage players from using paid services that are inconsistent with their capacity for civil conduct.
On August 30, 2021, the NPPA issued the Notice on Further Strict Management to Prevent Minors from Indulging in Online Games, which requires all online game operators to provide services to minors only on any Friday, Saturday, Sunday and statutory holidays from 8:00 p.m. to 9:00 p.m., i.e. for one hour, and not to provide online games in any form to users who have not registered or logged in with their real names. In addition to the real-name registration system already in place, we have adjusted the systems in the games operated by us to comply with the National Citizen Identity Information Centerrequirements under this notice.
On October 26, 2021, the CAC issued draft Administrative Provisions on the Account Names of Internet Users, revising the Account Names Provisions. This draft provides that when registering an internet account, the user shall execute an agreement with the Internet user account services platform, provide authentic identity information, and obey the rules of the platform for content production and account management, the platform conventions and service agreement. Internet user account service platforms shall establish, improve and strictly implement, among others, account name information management system, information content security system, and personal information protection system. Internet user account service platforms should also establish an account name information dynamic check patrol system for the verification of real identity information, improve their technical measures for purposes of account information legal compliance, and support account name authenticity checks. When an Internet user account is in violation of the provisions of this draft, the Internet user account service platform shall suspend the service and inform the user to launchcorrect the identity verificationissue within a limited time; and if the user refuses to correct it, the account shall be terminated.
For the 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 orderOnline game operators or developers rely on the identify information provide by us to complyimplement 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 have completed in preparing application materials and 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 hoursface 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 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.
game business.”
Regulation on online game virtual currency
On February 15, 2007, MOC,According to 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,
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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 obtainedOn 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 PermitOperation 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 branchMOCT abolished the Provisional Measures on the Administration of MOCOnline 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.
Regulation on internet publication
GAPPRFTNPPA (formerly the SAPPRFT, 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 GAPPRFTSAPPRFT and the MIIT jointly issued theAdministrative Measures on Network PublicationPublication), 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 Servicean Internet Publishing Services License from GAPPRFTNPPA 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 Servicean 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 Services 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.
NPPA.
Shenzhen Xunlei holds anthe Internet PublicationPublishing Services 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 toand operate and sub-licensepopular, 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.”
Regulations on Algorithm Recommendations
On February 7, 2021, the Anti-Monopoly Commission of the State Council published the Anti-Monopoly Guidelines for the Internet Platform Economy Sector, which stipulates that online platform operators who use technological advantages, such as data and algorithms, to eliminate or restrict competition or impose price restrictions or exclusivity requirements on users, may be deemed as committing an abuse of dominant market position.
On September 17, 2021, the CAC, together with eight other governmental authorities, jointly issued the Guidelines on Strengthening the Comprehensive Regulation of Algorithms for Internet Information Services, which provides that daily monitoring of data use, application scenarios and effects of algorithms shall be carried out by the relevant regulators, and that security assessments of algorithms shall be conducted by the relevant regulators. The guidelines also provide that an algorithm filing system shall be established and classified security management of algorithms shall be promoted.
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On December 31, 2021, the CAC, together with the MIIT, the Ministry of Public Security and the SAMR, jointly issued the Administrative Provisions on Algorithm Recommendation of Internet Information Services, with effect from March 1, 2022, which provides that algorithm recommendation service providers are not allowed to use algorithms to register false user accounts, block information, give excessive recommendations, and that users should be given the option to easily turn off algorithm recommendation services.
We have taken several measures to comply these regulations, among others, providing an option for our users to turn off algorithm recommendation services. However, the Administrative Provisions on Algorithm Recommendation of Internet Information Services are relatively new thus uncertainties still exist as to its interpretation, and the potential impact on our business operations is still substantially uncertain. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by PRC regulations to limit the method and manner that the internet companies may apply when using algorithms.”
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 CongressSCNPC 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
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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.
On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the MIIT, 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 October, 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.
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, effective from November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose, in a method that has the least impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose to avoid the excessive collection of personal information. Different types of personal information and personal information processing will be subject to various rules on consent, transfer, and security. Entities handling personal information bear responsibilities for their personal information handling activities, and shall adopt necessary measures to safeguard the security of the personal information they handle. Otherwise, the entities handling personal information could be ordered to correct, or suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties. 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.
privacy, we also have adopted a risk detection mechanism for data security defects and vulnerabilities, and set up an emergency response mechanism for data security incidents. We also periodically review our privacy policies and amend as needed based on the development and changes of the personal information we will collect and process to ensure that we have comply with relevant, requirements including, among others, obtaining users’ prior consent to the collection and processing of their personal information before such collecting and processing. 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 certainShenzhen Xunlei has obtained a Medicine
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Information Service Qualification Certificate from Guangdong Food and Drug Administration for the provision of internet medical information regarding medicine or medical equipment on our platform,services with an expiry date of August 21, 2023. Shenzhen XunleiWangwenhua 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 November 26, 2018.
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.
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 withIn 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 aoutsourced 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 usplatform, and to ensure that such contentthe contents are truthful, accurate, and in full compliance with PRCrelevant 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 displaydisplayed 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 thesethe Measures for the Administration of Computer Information Network and International Networking Security Protection, which was issued by the State Council on January 8, 2011 and other relevant 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 sofurther 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:
| ● | certifying the identification information of the registered users; |
| ● | 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 |
| ● | 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 subjectvideo 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:
| ● | 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; |
| ● | 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; |
| ● | 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; |
| ● | 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 |
| ● | 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 providerproviders 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 liabilitythe law. The internet forum and certaincommunity 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 byincluding 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 MIITclose down the website, or revoke licenses or permits for their respective local counterparts. As Shenzhen Xunlei is an ICP operator, it isbusiness operations.
We are subject to the laws and regulations relating to information security and censorship. To comply with these laws and regulations, it haswe have completed the mandatory security filing procedures with the local public security authorities, and regularly updatesupdate its information security and content-filtering systems with newly issued content restrictions as required by the relevant laws and regulations.regulations, such as the Measures for the Administration of Computer Information Network and International Networking Security Protection. 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.”
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect on September 1, 2021. The Data Security Law establishes a classified and tiered system for data protection based on the level of importance of the data in the economic and social development, as well as the level of danger of the data imposed on national security, public interests, or the legal interests of individuals and organizations upon any manipulation, destruction, leakage, illegal acquisition or illegal usage. Furthermore, it is specified that the Cyber Security Law applies to the security administration of the cross-border transfer of important data collected and generated by operators of “critical information infrastructure” during their operations in China.
On November 14, 2021, the CAC published a discussion draft of Management Measures for Internet Date Security or the Draft Measures for Internet Data Security, which provides that data processors conducting the following activities shall apply for cybersecurity review: (i) merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests
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affects or may affect national security; (ii) listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; (iv) other data processing activities that affect or may affect national security. The Draft Measures for Internet Data Security also provide that operators of large Internet platforms that set up headquarters, operation centers or R&D centers overseas shall report to the national cyberspace administration and competent authorities.
In addition, the Draft Measures for Internet Data Security requires data processors processing over one million users’ personal information to comply with the regulations on important data processors, including, among others, appointing a person in charge of data security and establishing a data security management organization, filing with the competent authority within fifteen working days after identifying its important data, formulating data security training plans and organizing data security education and training for all staff every year, and that the education and training time of data security related technical and management personnel shall not be less than 20 hours per year. The Draft Measures for Internet Data Security also state that data processors processing important data or going public overseas shall conduct an annual data security assessment by themselves or entrust a data security service institution to do so, and submit the data security assessment report of the previous year to the local branch of CAC before January 31 of each year.
Further, the Draft Measures for Internet Data Security also require Internet platform operators to establish platform rules, privacy policies and algorithm strategies related to data, and solicit public comments on their official websites and personal information protection related sections for no less than 30 working days when they formulate platform rules or privacy policies or makes any amendments that may have a significant impact on users’ rights and interests. Further, platform rules and privacy policies formulated by operators of large Internet platforms with more than 100 million daily active users, or amendments to such rules or policies by operators of large Internet platforms with more than 100 million daily active users that may have significant impacts on users’ rights and interests shall be evaluated by a third-party organization designated by the CAC and reported to local branch of the CAC for approval. The CAC solicited comments on this draft, but there is no timetable as to when it will be enacted.
On December 28, 2021, the CAC, the NDRC, the MIIT, and several other authorities jointly promulgated the Cybersecurity Review Measures, or the Review Measures, which became effective on February 15, 2022. The Review Measures, upon effectiveness, will replace a previous version promulgated on April 13, 2020. According to the Review Measures, (i) when the purchase of network products and services by a critical information infrastructures operator or the data processing activities conducted by a network platform operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the Review Measures. The aforesaid operators shall file for a cybersecurity review with Cybersecurity Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for cybersecurity review shall be made by an issuer who is a network platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii) the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities determine that the issuer’s network products or services, or data processing activities affect or may affect national security. Cybersecurity reviews focus on assessing the following national security risks factors associated with relevant objects or circumstances: (i) the risk of illegal control, interference or destruction of critical information infrastructure, arising from the purchase and utilization of network products and services; (ii) the harm on the business continuity of critical information infrastructure incurring from a disruption of network products and services supply; (iii) the safety, openness, transparency, diversity of sources of network products and services; the reliability of suppliers; and the risk of supply disruption due to political, diplomatic, trade and other reasons; (iv) the level of compliance with the PRC laws, administrative regulations and ministry rules of the suppliers of network products and services; (v) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or illegally exited the country; (vi) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments and the network information security risk in relation to listing abroad; and (vii) other factors that may harm critical information infrastructure, cyber security and/or data security.
Regulation on torts
The Tort Law was promulgated by the Standing Committee of the National People’s CongressSCNPC on December 26, 2009 and became effective on July 1, 2010. In May 2020, the NPC promulgated the Civil Code of the PRC, which became effective on January 1, 2021 and replaced the
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Tort Law. Under this law,Civil Code of the PRC, internet users and internet service providers shall bear tortious liability in the event they infringe upon other people’s civil rights and interests through the internet. Where an internet user is infringing upon the civil rights or interests of another person via internet, the injured party shall have the right to demand the relevant internet service provider to take necessary measures such as deleting the infringing content, etc. by serving the internet service provider a notice. Where the internet service provider fails to take any necessary measures, it shall be jointly and severally liable with the internet user for any additional injury or damage incurred thereafter. Under the circumstance that the internet service provider is aware that an internet user is infringing upon the civil rights or interests of another person and fails to take necessary measures, the internet service provider shall be jointly liable for such infringement with such internet user.
Regulation on intellectual property rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.
Copyright law
Under the Copyright Law (1990), as revised in 2001, 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 29,30, 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:
| any ICP service provider, who provides automatic internet access service upon instructions of its users or provides automatic transmission service of works, performance and audio-visual products provided by its users, will not be required to assume the indemnification liabilities if (i) it has not chosen or altered the transmitted works, performance and audio-visual products; and (ii) it provides such works, performance and audio-visual products to the designated user and prevents any person other than such designated user from obtaining the access. |
| any ICP service provider who, for the sake of improving network transmission efficiency, automatically provides to its own users, based on the technical arrangement, the relevant works, performances and audio-visual products obtained from any other ICP service providers will not be required to assume the indemnification liabilities if (i) it has not altered any of the works, performance or |
| 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 |
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| works, performance and audio-visual products that are provided by the users; (iii) it is not aware of or has no reason to know the infringement of the works, performance and audio-visual products provided by the users; (iv) it has not directly derived any economic benefit from the provision of the works, performance and audio-visual products by its users; and (v) after receiving a notice from the right holder, it has deleted such works, performance and audio-visual products as alleged for infringement pursuant to such regulation. |
| any ICP service provider, who provides its users with search services or links, will not be required to assume the indemnification liabilities if, after receiving a notice from the rights holder, it has deleted the works, performance and audio-visual products as alleged for copyright infringement pursuant to this regulation. However, the ICP service provider shall be subject to joint liabilities for copyright infringement if it is aware of or has reason to know the infringement of the works, performance and audio-visual products to which it provides links. |
In December 2012, the Supreme People’s Court of China promulgated 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 releasedcontents 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 CongressNPC 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 PropertyPatent Office under the State CouncilCNIPA 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 orand a fifteen-year term in the case of a 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 asAs of December 31, 2015, 44 were granted2021, we had 192 registered patents in the PRC while another sevenand 444 patent applications arewere being examined by the State Intellectual PropertyPatent Office ofunder the PRC.CNIPA.
Trademark law
Registered trademarks are protected under the Trademark Law adopted in 1982 and amended in 1993, 2001 2013 and 20132019 and its implementation rules. The PRC Trademark Office of SAICCNIPA 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
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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, 2015,2021, we had applied for registration of 174482 trademarks of which we had received 153 registered trademarks in different applicable trademark categories including one trademark registered with the United States Patent and Trademark Officein China, and one trademark registered with World Intellectual Property Organization. We had applied for registration of 61 trademarks in China.
Regulation on domainDomain name
The domain names are protected under theAdministrative Measures on the Internet Domain Names promulgated by MIIT on November 5, 2004August 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 promulgatedissued theImplementationImplementing Rules of Registration ofNational Top-Level Domain NameNames 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 CNNICImplementing 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“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 ChinaNPC 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 theImplementation Rules to the PRC Enterprise Income Tax Law, or the Implementation Rules, which also became effective on January 1, 2008.2008 and last revised on April 23, 2019. 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-ownedwholly owned subsidiary in China and Shenzhen Xunlei, ourthe 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 taketook 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 Announcement on Relevant Policies for Deepening Value-Added Tax Reform, which became effective on April 1, 2019. According to the Announcement on Relevant Policies for Deepening Value-Added Tax Reform, 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%. AccordingIn 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 localtreaty benefits, the withholding agent shall withhold tax authorities are required before an enterprise can enjoypursuant to the relevantprovisions 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 thePRC 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, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Provident Funds employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
To comply with these laws and regulations, we have caused all of our full-time employees to enter into labor contracts and provide our employees with the proper welfare and employment benefits.
Regulation on foreign exchange control and administration
Foreign exchange regulation in the PRC is primarily governed by the following regulations:
| Foreign Exchange Administration Rules, or the Exchange Rules, promulgated by the State Council on January 29, 1996, which was amended on January 14, 1997 and on August 5, 2008 respectively; and |
| Administration Rules of the Settlement, Sale and Payment of Foreign Exchange, or the Administration Rules promulgated by the People’s Bank of The PRC on June 20, 1996. |
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
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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,In March 2015, the SAFE issued theSAFE Circular No. 19, which took effect on the Relevant Operating Issues Concerning the Improvement of the Administration of the PaymentJune 1, 2015 and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, orreplaced SAFE Circular No. 142. Pursuant to SAFE Circular No. 142,19, foreign-invested enterprises may either continue to follow the Renminbi capital fromcurrent payment-based foreign currency settlement system or elect to follow the settlement“conversion-at-will” regime of foreign currency capital ofsettlement. Where a foreign-invested enterprise must be used withinfollows 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 settlementconversion-at-will regime of foreign currency capital into Renminbi, including a business contract, must also be submitted forsettlement, it may convert part or all of the settlementamount of the foreign currency. In addition,currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE strengthenedCircular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its oversight of the flow and use of the RenminbiRMB registered capital converted from foreign currency registered capital of a foreign-invested company. The use ofcurrencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and the SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. SAFE 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. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not be altered withoutlimited to foreign currency capital and foreign debts) on discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the SAFE’s approval, and such Renminbiprinciple that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted RMB shall not be provided as loans to repay Renminbi loans if such loans haveits non-affiliated entities, or used for construction and purchase of non-self-used real estate (excluding real estate enterprises) or unless otherwise expressly provided in law, directly or indirectly used in securities investment or other financial management excluding the bank capital preservation products. As SAFE has not been used. Violations of the Circular No. 142 could result in severe monetary finesprovided detailed guidelines with respect to its interpretation or penalties.
implementation, it is uncertain how these rules will be interpreted and implemented.
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.
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
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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.
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
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failed to comply with the SAFE Circular No. 37 will continue to fall within the jurisdiction of the relevant local SAFE branches and must make their supplementary registration application with such local SAFE branches.
We have requested PRC residents holding direct or indirect interest in our company to our knowledge to make the necessary applications, filings and amendments as required under Circular No. 37 and other related rules. However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurances that these PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular No. 37 or other related rules. The failure or inability of our PRC resident shareholders to make any required registrations or comply with other requirements under Circular No. 37 and other related rules may subject such PRC residents or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to raise additional financing and contribute additional capital into or provide loans to (including using the proceeds from our initial public offering) our PRC subsidiaries, limit our PRC subsidiaries’ ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.
Regulation on employee share options
On December 25, 2006, the People’s Bank of China promulgated 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 Companiesissued 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 begrantees, 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 optioneesgrantees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC optioneesgrantees may be subject to fines and other legal sanctions. We may also face regulatory uncertainties that could restrict our ability to adopt additional optionshare 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 optionsawards 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.
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Regulation on dividend distributions
The principal regulations governingCompany 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, |
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-ownedan 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 generalstatutory common reserves until its cumulative total reserve funds reaches 50% of its registered capital. The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after tax profits to its employee welfare and bonus funds. These reserve funds, however, may not be distributed as cash dividends.
Regulation on overseas listings
On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, SAIC, CSRC and SAFE, jointly 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.
On 24 December 2021, the CSRC and the relevant departments under the State Council published the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Enterprises (Draft for Comments). Pursuant to such Draft, overseas offering and listing of domestic enterprises includes direct or indirect issue of securities overseas or listed for trading in overseas markets by domestic enterprises. Indirect offering and listing of domestic enterprises refer to the indirect issue of securities overseas by domestic enterprises or the listing of their securities for trading overseas, namely enterprises operating their main business domestically issue securities overseas or listing their securities for trading overseas based on equity, assets, gains or other similar interests of domestic enterprises in the name of overseas enterprises. The securities administration department of the State Council undertakes supervision and administration over the overseas offering and listing activities of domestic enterprises according to the law. The relevant competent authorities of the State Council undertake supervision and administration over domestic enterprises offering and listing overseas and securities service institutions providing relevant services in their respective scope of duties according to the law. For overseas offering and listing, domestic enterprises shall implement procedures for filing with the securities administration department of the State Council and report relevant information.
On 24 December 2021, the CSRC published the Administrative Measures for the Filing of Overseas Securities Offerings and Listings by Domestic Enterprises (Draft for Comments). Pursuit to this Administrative Measures, the filing of direct or indirect overseas offering and listing by domestic enterprises shall be conducted according to this Administrative Measures. In the event of indirect overseas offering and listing by domestic enterprises, the issuer shall designate a principal domestic operating entity to implement the filing procedures and report relevant information. Within 3 workings days after the overseas submission of the application document for initial public offering and listing, the issuer shall provide the CSRC with filing materials, including but not limited to (1) filing report and relevant commitments; (2) regulatory opinion, filing or approval and other documents issued by the competent authorities of the industry (if applicable); (3) opinion of security assessment and review issued by relevant departments (if applicable);(4) domestic legal opinion;(5) prospectus. For the offering of foreign listed securities after overseas listing, within 3 working days after the completion of offering, the issuer shall provide the CSRC with filing materials, including but not limited to (1) filing report
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and relevant commitments; and (2) domestic legal opinion. If the filing materials are complete and requirements are fulfilled, the CSRC will issue the notice for filing within 20 working days and publish the information for filing on website. After the filing by the issuer and before the completion of overseas offering and listing, in the event of any of the following significant events, the issuer shall promptly report to the CSRC and update filing materials within 3 workings days from the occurrence of relevant events: (1) material changes in principal business or licenses and qualifications of business; (2) material changes in equity structure or changes in control; (3) material adjustment of the offering and listing plan. In case of any of the following significant events after the overseas listing, the issuer shall report the details to the CSRC within 3 working days from the occurrence of relevant events: (1) changes in control; (2) investigations, penalties and other measures taken by overseas securities administrative authorities or relevant competent authorities; (3) voluntary termination of the listing or mandatory termination of the listing.
However, our PRC legal counsel has further advised usWhat’s more, uncertainties stillalso exist as to howwhether these draft measures to regulate direct or indirect overseas offering and listing would be further amended, revised or updated, their enactment timetable and final content. Given the M&A Rules willsubstantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot assure you that, if ever required, we would be interpretedable to complete the filings and implemented and its opinions summarized above are subject to anyfully comply with the relevant new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules.on a timely basis, if at all. 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.
Regulations on initial coin offerings
On September 4, 2017, the 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 approval. It is a suspected illegal offering of tokens, illegal offering of securities, illegal fundraising, financial fraud, or 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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On September 15, 2021, the People's Bank of China, the Office of the Central Cyberspace Affairs Commission, the Supreme People's Court, the Supreme People's Procuratorate, the MIIT, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange jointly promulgated the Circular on Further Preventing and Disposing of Risks in Virtual Currency Trading and Speculation to further strengthen the administration of the virtual currency trading. Pursuit to the Circular, virtual currencies do not have the same legal status as legal currencies and it is strictly prohibited and banned that virtual currency-related business activities are illegal financial activities, including carrying out exchange services between legal currencies and virtual currencies or between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency transactions, token issuance financing, virtual currency derivative transactions and other virtual currency-related business activities are suspected of illegal sale of tokens, unauthorized public issuance of securities, illegal operation of futures business, illegal fundraising and other illegal financial activities. Pursuant to the Circular, if related illegal financial activities constitute a crime, criminal liability shall be investigated in accordance with the law.
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
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integrated application of blockchain technology played an important role in new technological innovation and industrial transformation in China. On March 12, 2021, the National People's Congress (NPC) of the People’s Republic of China published Outline of the People’s Republic of China 14th Five-Year Plan for National Economic and Social Development and Long-Range Objectives for 2035, which states that PRC will accelerate the promotion of digital industrialization including blockchain and will promote the innovation of blockchain technology such as smart contracts, consensus algorithms, encryption algorithms, and distributed systems, focus on alliance chains to develop blockchain service platforms and application solutions in the fields of fintech, supply chain management, and government services, and improve supervision mechanisms.
On May 27, 2021, the MIIT and the CAC jointly issued Guiding Opinions on Accelerating the Application of Blockchain Technology and the Development of the Industry, which states, among others, that the management of blockchain-related intellectual property rights shall be strengthened and risk control mechanisms and technical prevention measures shall be improved. For example, it encourages enterprises to explore and establish a common intellectual property rights protection mechanism through blockchain patent pools, intellectual property rights alliances and other modes. The opinions also emphasize the importance of accelerate the application of blockchain technology and the overall development of the industry.
Regulations on Anti-Money Laundering
On October 31, 2006, the SCNPC issued the Anti-Money Laundering Law of the PRC, pursuant to which special non-financial institutions that are required by relevant regulations to perform the obligation of anti-money laundering shall, in accordance with law, perform their anti-money laundering obligation by adopting preventive and monitoring measures and establishing sound systems for distinguishing clients' identities, and preserving the data for clients' identities and records of transactions, and a report system for transactions involving large sums of money and for dubious transactions. The client ID data and transaction information acquired through performing the functions and duties of anti-money laundering according to law shall be kept confidential, and shall not be provided to any unit or individual unless otherwise prescribed by law. Any unit or individual that finds money laundering activities is entitled to report the same to the competent administrative authority of anti-money laundering or judicial organ, and the organs that accept the report shall keep confidential the reporter and the content reported. Advertising in the internet finance area and other publicity behaviors shall be carried out in a lawful, compliant, authentic, and accurate manner. No improper publicity of financial products or business may be carried out.
On June 1,2021, the People's Bank of China published the Circular of the People's Bank of China on Seeking Public Comments on the Anti-Money Laundering Law of the People's Republic of China (Revised Draft for Comment). Under this draft, enterprises and other market entities shall submit information on beneficial owners through the relevant information system of the market supervision and regulation department. Any enterprises, institutions, or individual that, for the purpose of providing commodities or services, receives and pays in cash instead of through financial institutions and the amount exceeds the prescribed amount shall report to China Anti-Money Laundering Monitoring and Analysis Center. The specific measures for the declaration of large cash receipts and payments shall be formulated by The State Council's anti-money laundering administrative department authorized by The State Council jointly with relevant departments. No enterprise, institution or individual may evade the obligation of reporting large cash receipts and payments by means of splitting cash transactions.
On April 12, 2016, General Office of the State Council issued a Circular of the General Office of the State Council on Issuing the Implementing Proposals for the Special Rectification of Internet Financial Risks, pursuant to which online P2P lending platforms or equity-based crowdfunding platforms shall not engage in asset management, claims or equity transfer, capital allocation in the high-risk securities market, or other financial business without approval. Internet enterprises that have not obtained the relevant financial business qualifications may not carry out the corresponding business by relying on the internet, and the nature of the business they carry out shall comply with the business qualifications obtained. Without approval of the relevant departments, no financial products of different categories that are privately placed may be offered to the public by packaging, splitting, or otherwise.
Furthermore, the People's Bank of China, China Banking and Insurance Regulatory Commission and China Securities Regulatory Commission jointly published the Administrative Measures for Anti-money Laundering and
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Counter-terrorism Financing by Internet Finance Service Agencies (for Trial Implementation), which became effective on January 1, 2019. Under these measures the specific scope of work on anti-money laundering and counter-terrorism financing in the internet finance industry shall be determined, adjusted and released by the People's Bank of China (“PBC”) in concert with relevant financial regulators of the State Council in accordance with laws, regulations and regulatory rules, including but not limited to the online payment, peer-to-peer lending, peer-to-peer lending information intermediary services, equity crowdfunding financing, internet fund sale, internet insurance, internet trust and internet consumption finance. The PBC will develop an online monitoring platform for anti-money laundering and counter-terrorism financing in the internet finance industry (hereinafter referred to as the “online monitoring platform”), and this online monitoring platform will be used to improve the online regulatory mechanism for anti-money laundering and strengthen information sharing. Service agencies other than financial institutions and non-banking payment institutions shall register the fulfillment of duties in anti-money laundering and counter-terrorism financing on the online monitoring platform. Where a single cash receipt or payment, or the aggregate cash receipts and payments, of a client on a single day, amount(s) to CNY50,000 or more or the equivalent value of USD10,000 or more, a service agency that is neither a financial institution nor a non-banking payment institution shall report the large-amount transaction within five working days of the occurrence of the transaction.
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C.Organizational Structure
The following diagram illustrates our corporate structure, including our subsidiaries andthe variable interest entity and theour principal subsidiaries and principal subsidiaries of ourthe variable interest entity, as of the date of this annual report on Form 20-F:
Note:
Notes:
| (1) | Shenzhen Xunlei is |
| (2) | The remaining 30% of the equity interest is owned by Mr. Hao Cheng. |
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Contractual arrangements with Shenzhen Xunlei
Agreements that provide us effective control over Shenzhen Xunlei
Business operation agreement
Pursuant to the business operation agreement among Giganology Shenzhen, Shenzhen Xunlei and the shareholders of Shenzhen Xunlei, as amended, Shenzhen Xunlei’s shareholders must appoint the candidates nominated by Giganology Shenzhen to be the directors on its board of directors in accordance with applicable laws and the articles of association of Shenzhen Xunlei, and must cause the persons recommended by Giganology Shenzhen to be appointed as its general manager, chief financial officer and other senior executives. Shenzhen Xunlei and its shareholders also agree to accept and strictly follow the guidance provided by Giganology Shenzhen from time to time relating to employment, termination of employment, daily operations and financial management. Moreover, Shenzhen Xunlei and its shareholders agree that Shenzhen Xunlei will not engage in any transactions that could materially affect its assets, business, personnel, liabilities, rights or operations, including but not limited to the amendment of Shenzhen Xunlei’s articles of association, without the prior consent of Giganology Shenzhen and Xunlei Limited or their respective designees. For instance, in May 2011, Shenzhen Xunlei sought and obtained consent from Giganology Shenzhen and Xunlei Limited to increase its registered capital by RMB20 million and to revise its articles of association accordingly. This agreement will expire in 2016 and may be extended at Giganology Shenzhen’s request prior to the expiration date.
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 expireexpired in March 2022 and at Giganology Shenzhen’s discretion, may bewas extended for an additional 10 years or for other time period as agreed by both Giganology Shenzhen and Shenzhen Xunlei.
Xunlei on March 1, 2022.
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 expireexpired in March 2022 and maywas automatically extended for an additional 10 years, and will be extended 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,TransAsia Lawyers, our PRC legal counsel:
| the ownership structures of |
| 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,TransAsia Lawyers, 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.”
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 SoftwareBay ECO-Technology Park, Ke Ji Zhong 2ndKeji South Road, Yuehai Street, Nanshan District, Shenzhen, the People’s Republic of China, which comprises approximately 7,0247,575 square meters of office space. In addition to otherOther than offices in Shenzhen, we also have offices in Beijing, Shanghai and Hong Kong and representativeBeijing. All offices in Xiamen and Guangzhou, respectively, totalinghave a total floor area of approximately 9,8009,510 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,May 2022, 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 completed the construction of our headquarters building, and we will relocate our principal executive offices to the new building after we complete the final inspection and government approval procedures.
Item 4A. Unresolved Staff Comments |
None.
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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 doesdo 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.
A.Operating Results
Overview
We operate a powerful internet platform in China based on cloud computingtechnology to enable our users to quickly access, store, manage and consume digital media content. We are increasingly extending intocontent 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 expandenlarge our user base and offer our users a wider range of access points.
In addition, we provide a portfolio of synergic products and services across cloud acceleration, shared cloud computing, blockchain and digital entertainment to enrich the lives of our internet users.
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 accelerationacceleration-based subscription services (delivered through products such asour 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 projectlive streaming services and online game. In July 2015, we completed the divesture of our entire stake in our online video streaming platform, Xunlei Kankan to Beijing Nesound International Media Corp., Ltd., an independent third party.
game services.
We generate revenues primarily through the following services:
| Subscription services. We provide cloud acceleration subscription services for subscribers to enable faster and more reliable access to digital media content. Revenues from subscription services contributed to |
| 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 |
| Cloud computing and other internet value-added services. Other internet value-added services |
| ● | 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 |
Our revenues increased from US$122.0181.3 million in 20132019 to US$135.8186.7 million in 20142020, and decreasedfurther increased to US$130.0239.6 million in 2015.2021. 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$13.253.2 million, US$13.8 million and a net income of US$1.2 million in 2015. We had net income attributable to2019, 2020 and 2021, respectively. Xunlei Limited’s common shareholdersKankan and web game business are accounted
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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 operationthose two businesses and our consolidated statements of comprehensive income/(loss) in this annual report separately classifiesclassify 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 capacitycomputing resources to us for our further allocation to internet content providers and other internet users. We pay users of our ZQB devicesdevice 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 capacitycomputing 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 capacitycrowdsourced capacities for our own subscription business from time to time, reducing our purchase of bandwidth from traditional third partythird-party carriers.
Our ability to further monetize our user base.
Our revenues and results of operations depend on our ability to further monetize our user base, to convert more users to subscribers and to increase the spending of our subscribers. With enhanced knowledge of user behavior and preferences, we offer a diverse range of premium services tailored to their individual needs. For example, our cloud
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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 projectservices 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 customers.
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 wouldto 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 headcountan 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.
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, includingwhich consist primarily of cloud computing services, online games services, and cloud computinglive 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, | ||||||||||
| | 2019 | | 2020 |
| 2021 | ||||||
|
| US$ |
| % |
| US$ |
| % |
| US$ |
| % |
| | (in thousands, except for percentages) | ||||||||||
Continuing operations |
|
|
|
|
|
|
|
| | | | |
Subscriptions |
| 81,532 |
| 45.0 |
| 84,299 |
| 45.1 | | 91,174 | | 38.1 |
Online advertising |
| 15,643 |
| 8.6 |
| 13,206 |
| 7.1 | | 12,267 | | 5.1 |
Product revenue |
| 8,269 |
| 4.6 |
| 1,412 |
| 0.8 | | 1,897 | | 0.8 |
Cloud computing and other internet value-added services |
| 75,823 |
| 41.8 |
| 87,766 |
| 47.0 | | 134,263 | | 56.0 |
Total |
| 181,267 |
| 100.0 |
| 186,683 |
| 100.0 | | 239,601 | | 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 | ||||||||||||||||||
SubscriptionsSubscriptions. . We introduced our cloud acceleration subscription services in March 2009 and we2009. We generate revenues from providing our users with exclusive services, such as access to high-speed online transmission, premium acceleration
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or access privileges, for a time-based subscription fee. The standard subscription fee is RMB10 (US$1.6) per month or RMB99 (US$15.9)15.4) per year, and we also offer premium subscription packages with prices at RMB15 (US$2.4)2.3) per month or RMB149 (US$23.9)23.1) per year or RMB30 (US$4.8)4.7) per month or RMB 288RMB288 (US$46.2)44.7) 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 %45.0% in 20132019 to 72.3%45.1% in 2014,2020 and but decreased to 63.4%38.1% in 2015.
2021.
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 281,000173,000 existing subscribers as of the end of 2015. Also see2021. 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 unablehave 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 placewere placed on our PC websites and mobile platform. A significantIn 2020, we entered into an advertising revenue sharing agreement with Itui, our largest shareholder, and outsourced our advertising business to Itui. Pursuant to the agreement, Itui was responsible for operating our advertising services and share a portion of revenue generated from placing advertisements on our PC websites and mobile platform. See “Item 4. Information on the Company—B. Business Overview—Our platform—Advertising services.”
The revenues from our mobile advertising decreased from US$13.2 million in 2020 to US$12.2 million in 2021, accounting for 99.99% and 99.47% of the online advertising revenues in 2020 and 2021, respectively. We expect the revenues from mobile advertising will account for the majority of our advertisers purchase our online advertising services through third-party advertising agencies. As is customaryrevenues in the advertising industry in China, we pay rebatesfuture with our on-going transition to third-party advertising agencies and recognize revenues net of these rebates.
In the first half of 2013, we discontinued delivering advertisements on Xunlei Accelerator to further improve user experience and enhance user engagement, andmobile internet. We do not expect to generate a significant advertising revenues from Xunlei Accelerator after 2014.We also do not expect to generate significantamount of other advertising revenues in the future onforeseeable future.
Product revenue. Product revenue represents the revenue we generate primarily from the sales of hardware devices and OneThing Cloud, in relation to our PC platform, if at all, sincecloud computing services. The product revenue increased from US$1.4 million in 2020 to US$1.9 million in 2021, primarily because we have sold Xunlei Kankan in July 2015. For detailswere gradually phasing out the sales of our sale of Xunlei Kankan, see “Item 4. Information on the Company — A. Historythis product while exploring alternative ways for developing distributed cloud computing nodes.
Cloud computing and Development of the Company.” In the fourth quarter of 2015, we achieved mobile advertising revenue for the first time.
Otherother 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 decreasedincreased from US$32.375.8 million in 20132019 to US$31.887.8 million in 20142020 and increasedfurther to US$42.8134.3 million in 2015.2021.
A significant portionRevenues of revenues ofcloud computing and other internet value-added services were generated primarily from our cloud computing services, live streaming services and online games.game services. For web games,cloud computing services, we had approximately 210,000, 283,000 and 397,000 paying users for the years ended December 31, 2013, 2014 and 2015, respectively. For the MMOGs,recognize revenue when 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 attributableprovide bandwidth 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 millioncustomers. We started to generate revenue from cloud computing services in 2015 representing 6.2%, 45.7%, 23.6%and the revenue from cloud computing services in 2021 accounted for 39.6% of our total revenues, representing an increase of 47.6% on a year-over-year basis, primarily due to an increased demand for our shared computing services. For live streaming services, users purchase virtual gifts from online games in 2013, 2014, 2015, respectively. The amount of revenue attributableus and send the gifts they purchase 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$23.6 million in 2015. In addition, our top five gamesbroadcasters while enjoying broadcasters’ performance. Revenue from live streaming service accounted for approximately 23.6%, 11.9% and 15.0%14.7% of our total revenues, representing an increase of 68.2% on a year-over-year basis, primarily driven by increased demand for new live streaming products we
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launched in 2013, 2014, 2015, respectively.the second half of 2021. Our online games business used to consist of web games, mobile games and PC-based MMOGs. In light of the overall decline in web game market and a shift of our strategy, we streamlined our business and disposed of our web game business in January 2018 and discontinued our PC-based MMOGs business in July 2018. In 2019, we started to operate web game business again under a business model different from our previous web game business. We expect the revenue from cloud computing and other internet value-added services to increase in the future.
Cost of revenues
Our cost of revenues consists primarily of (i) bandwidth costs, (ii) content costs,cost of inventories sold, (iii) payment handling fees,cost of live streaming services, (iv) depreciation of servers and other equipment, (v) payment handling charges, and (v) games revenue sharing(vi) other costs, and others.including write-down of inventory. The following table sets forth the components of our cost of revenues by amounts and percentages of our revenues for the periods presented:
| | | | | | | | | | | | |
|
| For the Year Ended December 31, | ||||||||||
| | 2019 | | 2020 |
| 2021 | ||||||
| | US$ | | % | | US$ | | % | | US$ | | % |
| | (in thousands, except for percentages) | ||||||||||
Continuing operations |
|
|
|
|
|
|
|
| | | | |
Bandwidth costs |
| 57,093 |
| 31.5 |
| 62,384 |
| 33.4 | | 80,720 | | 33.7 |
Cost of inventories sold |
| 7,181 |
| 4.0 |
| 1,660 |
| 0.9 | | 1,516 | | 0.6 |
Cost of live streaming services |
| 20,734 |
| 11.4 |
| 15,640 |
| 8.4 | | 26,506 | | 11.1 |
Depreciation of servers and other equipment |
| 5,198 |
| 2.9 |
| 6,247 |
| 3.3 | | 4,805 | | 2.0 |
Payment handling charges |
| 1,658 |
| 0.9 |
| 1,459 |
| 0.8 | | 3,066 | | 1.3 |
Other costs |
| 8,049 |
| 4.4 |
| 5,247 |
| 2.8 | | 1,990 | | 0.8 |
Total |
| 99,913 |
| 55.1 |
| 92,637 |
| 49.6 | | 118,603 | | 49.5 |
| 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 | ||||||||||||||||||
Bandwidth costs. Bandwidth costs areconsist 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 our total revenues. We expect our bandwidth costs to increase, on an absolute basis primarily due to an increased need for bandwidth to supportbut we expect the growthcosts as a percentage of our business. In 2015, a portion of the bandwidth we use for our acceleration services was supplied by uplink capacity crowdsourced through our cloud computing project, instead of buying such bandwidth from third parties. In addition,revenues would decline as we expect to increaserely 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 increase 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 feescharges. Payment handling feescharges 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 feescharges as a percentage of revenues to increase as we continuecooperated with more third-party payment service providers to growcollect our subscription-based and other paidlive streaming service offerings.fees.
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Depreciation of servers and other equipmentOther 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. TheseOther costs mainly represent the shareinclude fast bird service cost, which we pay to telecommunication service providers for accelerating service we provide for our subscribers’ internet access, and 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:
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|
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||
| | 2019 | | 2020 |
| 2021 | ||||||||||||||||||||||||||||||
|
| 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 |
| 68,571 |
| 37.8 |
| 55,463 |
| 29.7 | | 61,859 | | 25.8 | ||||||||||||||||||
| Sales and marketing expenses | 9,848 | 8.1 | 13,527 | 10.0 | 15,042 | 11.6 |
| 31,820 |
| 17.6 |
| 18,064 |
| 9.7 | | 24,569 | | 10.3 | ||||||||||||||||||
| General and administrative expenses | 18,663 | 15.3 | 26,945 | 19.8 | 28,774 | 22.1 |
| 38,930 |
| 21.5 |
| 33,910 |
| 18.2 | | 36,868 | | 15.4 | ||||||||||||||||||
Asset impairment loss, net of recoveries |
| (2,147) |
| (1.2) |
| 5,090 |
| 2.7 | | 1,206 | | 0.5 | ||||||||||||||||||||||||
| Total | 50,251 | 41.2 | 69,724 | 51.3 | 82,066 | 63.1 |
| 137,174 |
| 75.7 |
| 112,527 |
| 60.3 | | 124,502 | | 52.0 | ||||||||||||||||||
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 termfuture as we continue toexpand our research and development teamneed to retain talents to develop new products and updateimprove existing products, particularly as we plan to continue devoting resources in the development of our cloud computing projectservices, 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 termfuture 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 termfuture 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 2021 represents write-off of certain receivables and prepayments based on our assets impairment assessment.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. UnderThe 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 lawsnature 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 areexcept 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 noimpose withholding tax on dividends paid by us to our shareholders.dividend payments.
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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 tobecame effective on January 1, 2008, a favorable statutory25% 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 stipulatinga circular, which provides that entitiesan enterprise that is qualified foras the High and New Technology Enterprise, or HNTE, status shouldis entitled to apply with the relevant tax authorities to enjoy the reduced EITenterprise income tax rate of 15% provided under the EIT Law starting from the year when the HNTE certificate becomes effective.. In addition, an entity qualifiedJanuary 2016, relevant PRC government authorities further issued qualification criteria, application procedures and assessment processes for the qualification of HNTE. Each of Shenzhen Xunlei, Shenzhen Onething, Xunlei Computer and Shenzhen Wangwenhua currently possesses such HNTE status can continuecertificate. As a result, these four 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 of 2015, 2016 and 2017.
According to a policy of the PRC State tax bureau, enterprises that engage in research and development activities are entitled to claim 150% of the research and development expenses incurred in a year as tax deductible expenses in determining their tax assessable profits for that year, or Super Deduction. Shenzhen Xunlei has been claiming this Super Deduction in ascertaining its tax assessable profits and brought forward tax losses from 2009 onwards. In addition, following the approval by the relevant tax authority in July 2010, Shenzhen Xunlei was recognized as an enterprise engaged in software development activities. Accordingly, it is entitled to a tax holiday of 2-year Exemption and 3-year 50% Reduction from 2010 onwards. In December 2013, Shenzhen Xunlei obtained the certificate of the Key Software Enterprise for the years ended December 31, 2013 and 2014, which enables2021. The HNTE certificates possessed by Shenzhen Xunlei to enjoyand Shenzhen Wangwenhua will expire in December 2023, and the HNTE certificates possessed by Shenzhen Onething and Xunlei Computer will expire in December 2024.
In July 2020, Jiangxi Node was qualified for a preferential tax rate of 10% for the year of 201315% and 2014. As a result, the applicablestarted to apply this rate from then on. The 15% preferential tax rate is awarded to companies that are located in the western regions of Shenzhen XunleiChina and operate in certain encouraged industries. This qualification will need to be assessed on an annual basis. The tax rate assessed for Jiangxi Node was 15% for both 2020 and 2021.
Certain of our subsidiaries in China have been granted certain tax concessions to small scale entities by tax authorities in China whereby the years ended December 31, 2013, 2014 and 2015 were 10%, 10% and15%, respectively.
Pursuant tosubsidiaries operating in the relevant PRC regulations, Xunlei Computer isrespective region are entitled to tax concessions, the 2-year Exemption and 3-year 50% Reduction treatment. The first year of profitable operation of Xunlei Computer is 2013. Our otherremaining PRC subsidiaries and the VIE’s subsidiaries which were established after January 1, 2008, are subject to a 25% EIT at a rate of 25%.rate.
In addition, accordingAccording to the EIT Law and its implementation rules, foreign enterprises, which have no establishment or placecommercial 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, 2015,2020 and December 31, 2021, 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, 2021, our company has not accrued for PRC tax on such basis. Our company will continue to monitor its tax status.
Hong Kong
Our subsidiaries in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong.
Singapore
Our subsidiaries incorporated in Singapore were subject to 17% of their taxable income.
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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, | ||||||||||
| | 2019 | | 2020 |
| 2021 | ||||||
|
| US$ |
| % |
| US$ |
| % |
| US$ |
| % |
| | (in thousands, except for percentages) | ||||||||||
Total revenue, net of rebates and discounts |
| 181,267 |
| 100.0 |
| 186,683 |
| 100.0 | | 239,601 | | 100.0 |
Business taxes and surcharge |
| (602) |
| (0.3) |
| (312) |
| (0.2) | | (819) | | (0.3) |
Total net revenues |
| 180,665 |
| 99.7 |
| 186,371 |
| 99.8 | | 238,782 | | 99.7 |
Cost of revenues |
| (99,913) |
| (55.1) |
| (92,637) |
| (49.6) | | (118,603) | | (49.5) |
Gross profit |
| 80,752 |
| 44.6 |
| 93,734 |
| 50.2 | | 120,179 | | 50.2 |
Research and development expenses |
| (68,571) |
| (37.8) |
| (55,463) |
| (29.7) | | (61,859) | | (25.8) |
Sales and marketing expenses |
| (31,820) |
| (17.6) |
| (18,064) |
| (9.7) | | (24,569) | | (10.3) |
General and administrative expenses |
| (38,930) |
| (21.5) |
| (33,910) |
| (18.2) | | (36,868) | | (15.4) |
Asset impairment loss, net of recoveries |
| 2,147 |
| 1.2 |
| (5,090) |
| (2.7) | | (1,206) | | (0.5) |
Total operating expenses |
| (137,174) |
| (75.7) |
| (112,527) |
| (60.3) | | (124,502) | | (52.0) |
Operating loss |
| (56,422) |
| (31.1) |
| (18,793) |
| (10.1) | | (4,323) | | (1.8) |
Interest income |
| 1,897 |
| 1.1 |
| 1,471 |
| 0.8 | | 723 | | 0.3 |
Interest expense |
| (75) |
| (0.0) |
| (406) |
| (0.2) | | (95) | | — |
Other income, net |
| 5,861 |
| 3.2 |
| 4,737 |
| 2.5 | | 4,678 | | 2.0 |
(Loss)/income before income tax |
| (48,739) |
| (26.8) |
| (12,991) |
| (7.0) | | 983 | | 0.4 |
Income tax expenses/(benefits) |
| (4,676) |
| (2.6) |
| (1,149) |
| (0.6) | | 125 | | 0.1 |
Net (loss)/income for the year |
| (53,415) |
| (29.4) |
| (14,140) |
| (7.6) | | 1,108 | | 0.5 |
Less: Net loss attributable to the non-controlling interest |
| (246) |
| (0.1) |
| (300) |
| (0.2) | | (83) | | — |
Net (loss)/income attributable to Xunlei Limited |
| (53,169) |
| (29.3) |
| (13,840) |
| (7.4) | | 1,191 | | 0.5 |
| 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, 20152021 compared with year ended December 31, 2014.2020.
Revenues.Revenues. Our revenues decreasedincreased by 4.3%28.3% from US$135.8186.7 million in 20142020 to US$130.0239.6 million in 2015. The decrease was2021, primarily due to a decreasethe increases in subscription revenues.
Our revenues from subscription services decreased by 16.0% from US$98.2 million in 2014 to US$82.4 million in 2015. The decrease was mainly attributable to lower average revenue per subscriber due to the suspension of certain accounts in 2015. Our number of subscribers as of December 31, 2015 was 5.0 million, compared with 4.9 million as of December 31, 2014.
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.services and live streaming services.
| ● | Our revenue from subscription services increased by 8.2% from US$84.3 million in 2020 to US$91.2 million in 2021, primarily due to an increase in paying subscribers. |
| ● | Our online advertising revenues decreased by 7.1% from US$13.2 million in 2020 to US$12.3 million in 2021, primarily due to lower advertising placements starting from the second quarter of 2021 as a result of evolving regulations of the Chinese internet industry that negatively affected our adverting business. |
| ● | Revenues derived from cloud computing and other internet value-added services increased by 53.0% from US$87.8 million in 2020 to US$134.3 million in 2021, primarily due to an increased demand for our shared cloud computing services and live streaming services. |
| ● | Our product revenue increased by 34.3% from US$1.4 million in 2020 to US$1.9 million in 2021, primarily due to an increase in sales of OneThing Cloud as a result of an increased demand of OneThing Cloud from users. |
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Cost of revenues. Our cost of revenues increased by 7.7%28.0% from US$55.892.6 million in 20142020 to US$60.0118.6 million in 2015. The2021, primarily attributable to an increase in our costsales of revenues was primarily due to the increase in bandwidth costs associated with our cloud computing project.
products and revenue-sharing costs for our live streaming products.
Bandwidth costs. Our bandwidth costs increased by 10.9%29.4% from US$33.562.4 million in 20142020 to US$37.280.7 million in 2015,2021, primarily due to the increased bandwidth costs associated withsales of our cloud computing project.
services.
Payment handling feesCost of inventories sold. Our payment handling feescost of inventories sold decreased by 19.6%22.0% from US$11.31.7 million in 20142020 to US$9.11.5 million in 2015, driven2021, primarily due to a decrease in unit cost of OneThing Cloud hardware as it has been write-down to a lower net realizable value.
Cost of live streaming. Our cost of live streaming services increased by a change69.5% from US$15.6 million in 2020 to US$26.5 million in 2021, primarily due to an increase in revenue-sharing costs along with the combinationgrowth of payment channels used by our subscribers.
live-streaming services.
Depreciation of servers and other equipment. Depreciation of servers and other equipment decreased by 4.5%23.1% from US$5.16.2 million in 20142020 to US$4.94.8 million in 2015,2021, primarily due to the shiftour disposal of strategyservers, which we no longer use due to our cloud computing project.
product upgrade.
GamesPayment handling charges. Our payment handling charges increased by 110.1% from US$1.5 million in 2020 to US$3.1 million in 2021, primarily because we cooperated with more third-party payment service providers to collect fees for rendering live streaming service, the revenue sharingof which increased by 68.2% as compared to that of the previous year.
Other costs and others. These costs increaseddecreased by 4.8%59.9% from US$5.85.2 million in 20142020 to US$8.52.0 million in 2015,2021, primarily relateddue to the costless write-down of our inventory for OneThing Cloud hardware sold this year.device compared with that of 2020.
Gross profit.. As a result of the above, our gross profit decreasedincreased by 11.0%28.2% from US$78.293.7 million in 20142020 to US$69.6120.2 million in 2015. 2021.
Gross profit margin decreased from 57.6%remained stable at approximately 50.2% in 2014 to 53.5% in 2015, primarily due to an increase in bandwidth cost.both 2020 and 2021.
Operating expenses. Our operating expenses increased by 17.7%10.6% from US$69.7112.5 million in 20142020 to US$82.1124.5 million in 2015,2021, primarily due to expenses associated with the development and promotion(i) increased labor cost as a result of cloud computing andincreased headcounts; (ii) an increase of staff compensation expenses, including share-based compensation.
in marketing and promotional activities for Mobile Xunlei and our new live streaming products, which we launched in 2021, and (iii) increased amortization expense regarding newly awarded restricted share units during 2021.
Research and development expenses. Our research and development expenses increased by 30.8%11.5% from US$29.355.5 million in 20142020 to US$38.361.9 million in 2015. The increase in our research and development expenses was2021, primarily due to the riseincreased employee related cost as a result of an increase in staff compensation expenses, both due to the continued investments (including more headcounts and increased bonuses) and growth in our cloud computing project.
headcounts.
Sales and marketing expenses. Our sales and marketing expenses increased by 11.2%35.9% from US$13.518.1 million in 20142020 to US$15.024.6 million in 2015. The increase in our sales and marketing expenses was2021, primarily due to our increased spending onmore marketing and promotion associated withpromotional activities conducted in 2021 for Mobile Xunlei and our cloud computing project.
new live streaming products in 2021.
General and administrative expenses. Our general and administrative expenses increased by 6.8%8.7% from US$26.933.9 million in 20142020 to US$28.836.9 million in 2015.2021, primarily due to increased amortization expense related to newly awarded restricted share units.
Asset impairment loss, net of recoveries. We recorded a debit amount of US$1.2 million in 2021, compared to a debit amount of US$5.1 million in 2020. The increasedecrease was primarily due to write-off of certain receivables and prepayments in relation to our cloud computing business in 2020.
Interest income. Our interest income decreased by 50.9% from US$1.5 million in 2020 to US$0.7 million in 2021, primarily due to a decrease of time deposits in our general and administrative bank account.
125
Interest expense. Our interest expense decreased from US$0.4 million in 2020 to US$0.1 million in 2021, 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, net was US$4.7 million in 2021, same as the amount in the previous year.
Income tax (benefits)/expenses. We had income tax benefits of US$0.1 million in 2021, compared with an income tax expenses of US$1.1 million in 2020. We had income tax expenses in 2020 primarily due to the decrease of deferred tax assets.
Net (loss)/income. As a result of the above, there was a net income of US$1.1 million in 2021, as compared with a net loss of US$14.1 million in 2020. The change was primarily due to an increase in staff compensation expenses, including share-based compensation, both due to an increasegross profit in headcount and an increase in average salary and bonus levels.2021.
Interest Net (loss)/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 operationsLimited. 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 generatedUS$13.8 million in 2020 and a net income attributable to Xunlei Limited of US$10.81.2 million in 2014 but a net loss attributable to Xunlei Limited of US$13.2 million in 2015.
2021.
Year ended December 31, 20142020 compared with year ended December 31, 2013.2019.
Revenues. Our revenues increased by 11.3%3.0% from US$122.0181.3 million in 20132019 to US$135.8186.7 million in 2014. The increase was primarily due to a 13.2% increase in our revenues from subscription services.
Our revenues from subscription services increased by 13.2% from US$86.7 million in 2013 to US$98.2 million in 2014. The increase was mainly attributable to the increase in our subscriber numbers in the first three quarters of 2014, partially offset by a decline in subscriber numbers in the fourth quarter. The number of subscribers declined to 4.9 million as of December 31, 2014 due to the fact that our increased efforts in complying with stricter government regulation of internet content in China negatively affected user experience—part of our efforts included permitting a temporary suspension of our subscription services to approximately 350,000 existing subscribers in the fourth quarter of 2014.
Revenues derived from other internet value-added services decreased by 2.0% from US$32.3 million in 2013 to US$31.8 million in 2014,2020, primarily due to the increase in pay per viewincreases of revenues from US$2.0 million in 2013 to US$3.9 million in 2014.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. |
| ● | Our product revenue decreased by 82.9% from US$8.3 million in 2019 to US$1.4 million in 2020, primarily due to a decrease in sales of OneThing Cloud as a result of a decreased demand of OneThing Cloud from users. |
Cost of revenues. Our cost of revenues increaseddecreased by 11.0%7.3% from US$50.399.9 million in 20132019 to US$55.892.6 million in 2014. The increase2020, primarily attributable to a decline in our cost of revenues was primarily due to the increase in bandwidth costs associated with the expansionsales of our subscriptioncloud computing hardware products and other services and an increase in depreciation of servers and other equipment.
revenue-sharing costs for our live streaming products.
Bandwidth costs. Our bandwidth costs increased by 19.1%9.3% from US$28.257.1 million in 20132019 to US$33.562.4 million in 2014,2020, primarily due to the increased bandwidth needs to support our subscription services. Bandwidth costs associated with subscription services have grown in line with the expansionsales of our subscriptioncloud computing services.
Payment handling feesCost of inventories sold. . Our payment handling feescost of inventories sold decreased by 6.6%76.9% from US$12.17.2 million in 20132019 to US$11.31.7 million in 2014, driven2020, primarily due to a decrease in sales of OneThing Cloud products.
Cost of live streaming. Our cost of live streaming services decreased by 24.6% from US$20.7 million in 2019 to US$15.6 million in 2020, primarily due to a changedecline in the combinationrevenue-sharing costs as a result of payment channels used bya decrease of our subscribers.
live-streaming services.
Depreciation of servers and other equipment. Depreciation of servers and other equipment increased by 34.2%20.2% from US$3.85.2 million in 20132019 to US$5.16.2 million in 2014, as2020, primarily due to an increase in depreciation of our shared cloud computing servers that we acquiredinstalled to our newly established distributed edge computing node centers across China in 2020.
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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 sharingOther costs and others. These costs increaseddecreased by 13.3%34.8% from US$5.18.0 million in 20132019 to US$5.85.2 million in 2014, mainly because2020, 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 gamesdid 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$67.980.8 million in 20132019 to US$78.293.7 million in 2014. 2020.
Gross profit margin increased from 55.6%44.5% in 20132019 to 57.6%50.2% 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.
Operating expenses. Our operating expenses increaseddecreased by 38.8%18.0% from US$50.3137.2 million in 20132019 to US$69.7112.5 million in 2014,2020, primarily due to (i) decreased office lease expenses as a result of an increaseearly termination of staffcertain 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 increaseddecreased by 34.6%19.1% from US$21.768.6 million in 20132019 to US$29.355.5 million in 2014. The increase in our research and development expenses was2020, primarily due to the rise in staff compensation expenses, both due to an increase in headcountoptimization of organizational structure, employee benefits and an increase in average salary and bonus levels.
compensation.
Sales and marketing expenses. Our sales and marketing expenses increaseddecreased by 37.4%43.2% from US$9.831.8 million in 20132019 to US$13.518.1 million in 2014. The increase in our sales and marketing expenses was2020, primarily due to our increased spending onfewer marketing and promotion.
promotional activities and the optimization of organizational structure, benefits and compensation.
General and administrative expenses. Our general and administrative expenses increaseddecreased by 44.4%12.9% from US$18.738.9 million in 20132019 to US$26.933.9 million in 2014. The increase in our general and administrative expenses was2020, primarily due to an increase in staff compensationdecreased rental expenses including share-based compensation, both due to an increase in headcountas a result of consolidation of offices, decreased legal and an increase in average salaryprofessional fees and bonus levels.the optimization of organizational structure.
Interest incomeAsset impairment loss, net of recoveries. . Our interest income increased by 466.3% fromWe recorded a credit balance of US$1.25.1 million in 20132020, compared to US$6.72.1 million in 2014. The2019, the increase was primarily due to an increasewrite-off of certain receivables and prepayments in cash heldrelation to our cloud computing business during the year.
Interest income. Our interest income decreased by 22.5% from US$1.9 million in the form2019 to US$1.5 million in 2020, primarily due to a decrease of interest-bearingtime 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 anyOur interest expense 2013 but had an interest expense ofincreased from US$0.20.1 million in 2014, which represented2019 to US$0.4 million in 2020, primarily because increased interest expenseswas accrued for the long-term payables to certain shareholders resultingarising from the repurchase of shares in 2014.
Other income, net. Our other income increaseddecreased 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 20132019 to US$14.01.1 million in 2014,2020 primarily due to an increasebecause we had a write-down of US$6.5 millionShenzhen Xunlei’s deferred tax assets in fair value changes2019 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 milliondeferred 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.
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Net loss attributable to Xunlei Limited. As a result of the above, we generated a net income of US$23.0 million in 2013 but incurred a net loss of US$28.3 million in 2014.
Net loss from discontinued operations. Loss from discontinued operations was US$12.6 million in 2013 and US$18.4 million in 2014.
Net income attributable to Xunlei Limited. As a result of the above, we generated net income attributable to Xunlei Limited of US$10.753.2 million in 20132019 and of US$10.813.8 million in 2014.
2020.
Inflation
InflationTo 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, 20142019, 2020 and 20152021 were increases of 2.5%4.5%, 1.5%2.5% and 1.6%1.5%, respectively. Although we have not been materially affected by inflation in the past, we maycan 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, assetsthe 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 factorsassumptions that we believe to be relevant underreasonable, the circumstances. Since our financial reporting process inherently relies onresult of which form the usebasis for making judgments about the carrying values of estimatesassets and assumptions, our actualliabilities. 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
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 our obligation to transfer goods or services to a customer for which we have received consideration (or an amount of consideration is due) from the customer. Contract costs include incremental costs of obtaining a contract and costs to fulfil a contract. We generate revenues from various streams. Net revenues presented in the consolidated statements of (loss)/income represent revenues from service and product sales net off sales discount, value-added tax and related surcharges. Subscription revenues |
We operate a VIP subscriptionmembership program where subscribersVIP members 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. The terms of time-based subscriptions range from one to twelve months, with the subscribers having the option to renew the contracts. The receipt of subscription fees is initially recorded as deferred revenue and revenues are recognized ratably over the period of subscription as services are rendered. Unrecognized portion of the subscription fee beyond 12 months from balance sheet date is classified as non-current liability. We evaluated the principal versus agent criteria and determined that we are the principal in the transaction and accordingly record revenues on a gross basis. In determining whether to report revenues gross for the amount of subscription revenues, we assesses whether it maintains the principal relationship with the VIP subscribers, whether it bears the credit risk and whether it establishes prices for the end users. Payment handling fees levied by online system, fixed phone line and mobile payment channels are recorded as the cost of revenues in the same period as the revenues for the subscription fee are recognized.
Advertising revenues are derived principally from advertising arrangements where the advertisers pay to place their advertisements on our platform in different formats over a particular period of time. Such formats include but are not limited to videos, banners, links, logos and buttons.
Advertisements on our platform are charged on the basis of duration, and advertising contracts are signed to establish the fixed price and the advertising services to be provided. We enter into advertising contracts with third-party advertising agencies that represent advertisers, as well as directly with advertisers. A typical contract term would range from a few days to three months. Both third party advertising agencies and direct advertisers are billed at the end of the display period and payments are due usually within three months.
Where our customers purchase multiple advertising spaces with different display periods in the same contract, we allocate the total consideration to the various advertising elements based on their relative fair values and recognize revenues for the different elements over their respective display periods. We determine the fair values of different advertising elements based on the prices charged when these elements were sold on a standalone basis. We recognize revenues on the elements delivered and defer the recognition of revenues for the fair value of the undelivered elements until the remaining obligations have been satisfied. Where all of the elements within an arrangement are delivered uniformly over the contract period, revenues are recognized on a straight line basis over the contract period.
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:
We provide sales incentives in the forms of discounts and rebates to third party advertising agencies based on purchase amount. As the advertising agencies are viewed as the customers in these transactions, revenues are recognized based on the price charged to the agencies, net of sales rebates provided to the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted rebate rates and estimated sales amount based on historical experience.
We regularly monitor sales amount from each customer and adjust our estimated rebate at the end of each reporting period. Annual sales rebates are assessed on a quarterly basis based on the contracted rebate rates and the estimated sales amount for the full year, and actual sales to date and estimated sales for the rest of the year. Such rebates are adjusted at the year end based on actual sales amount achieved.
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.
Users play games through our platform free of charge and are charged for purchases of virtual items including consumable and perpetual items, which can be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specific user within a specified period of time. Perpetual items represent virtual items that are accessible to the users’ account over the life of the online game. Pursuant to contracts signed between us and the game developers, revenues from the sale of virtual items are shared based on a pre-agreed ratio for each game. We enter into both non-exclusive and exclusive licensing contracts with game developers.
The games under non-exclusive licensed contracts are maintained, hosted and updated by the game developers. We mainly provide access to our platform and limited after-sale services to the game players. The determination of whether to record these revenues using the gross or net method is based on an assessment of various factors; the primary factors are whether we act as the principal in offering services to the game players or as agent in the transactions, and the specific requirements of each contract. We have determined that for non-exclusive game licensed arrangements, the third party game developers are the principal given that the game developers design and develop the game services offered, have reasonable latitude to establish prices of virtual items, and are responsible for maintaining and upgrading the game content and virtual items. Accordingly, we record online game revenues, net of the portion remitted to the game developers.
Given that online games are managed and administered by the game developers for non-exclusive licensed games, we do not have access to the data on the consumption details and the types of virtual items purchased by the game players. However, we have data of when a particular user makes a purchase and logs into the game. We have adopted a policy to recognize revenues relating to both consumable and perpetual items, over the shorter of (1) estimated lives of the games and (2) the estimated lives of the user relationship with us, which were approximately two to six months for the periods presented.
Adjustments arising from the change of estimated lives of virtual items are applied prospectively as such change results from new information indicating a change in the game player behavioral patterns.
For exclusive licensed contracts with game developers, the games are maintained and hosted by us. Accordingly, where we are determined to be the principal, we record online game revenues on a gross basis, with the amount remitted to the game developers reported as cost of revenues. Payment handling fees are recognized as cost of revenues when the related revenues are recognized.
For exclusive licensed games which are maintained on our servers, we have access to the data on the consumption details and types of virtual items purchased by the game players. We do not maintain information on consumption details of virtual items, and only have limited information related to the frequency of log-ons. Given that a substantial portion of the virtual items purchased by the game players in exclusive licensed games are perpetual items, our management has determined that it would be most appropriate to recognize the related revenues over the shorter of (1) estimated lives of the games and (2) estimated life of the user relationship with us, which is approximately one to three months. Revenues relating to consumable items are recognized immediately upon consumption. Any changes in our estimates of lives of virtual items may result in our revenues being recognized on a basis different from prior periods and may cause our operating results to fluctuate.
For both non-exclusive and exclusive licensed games, we estimate the life of virtual items to be the shorter of the estimated lives of the games and the estimated lives of the user relationship.
The estimated user relationship period is based on data collected from those users who have purchased virtual items. To estimate the life of the user relationship, we maintain a software system that captures the following information for each user: the date of first log-in, the date of first purchase for a virtual item, the date of last purchase for a virtual item and the date the user ceases to play the game. We estimate the life of the user relationship to be the average period from the first purchase of a virtual item to the date the user ceases to play the game. The estimate of the life of the user relationship is based only on the data of those users who have purchased virtual items and is made on a game-by-game basis.
To estimate the date the user plays the game for the last time, we selected all paying users that logged on during a particular month and continue to track these users’ log-on behaviors over at least a six-month period to determine if each user is “active” or “inactive,” which is determined based on a review of the period of inactivity or idle period from the user’s last log-on. We observe the behaviors of these users to see whether they subsequently return to a game based on different inactive periods (e.g. not logging on) of one month, two months, three months and so forth. The percentage of users calculated that do not log back on is estimated to be the probability that users will not return to the game after a certain period of inactivity.
We consider a paying player to be inactive once he or she has reached a period of inactivity for which it is probable (defined as at least 80%) that a player will not return to a specific game. We believe that using an 80% threshold for the likelihood that a player will not return to a game is a reasonable estimate that achieves the magnitude of “probable” under the threshold described in ASC 450 Contingencies. We have consistently applied this threshold to our analysis. Based on our assessment, the inactive period ranges generally from one to three months depending on the games.
To estimate the life of the games, we consider both games that we operate as well as games in the market that are of a similar nature. We group these games by their nature, in categories such as simulation games, role playing games and others, which appeal to players belonging to different demographics. We estimate that the life of each group of the games to be the average period from the date of launch for such games to the date the games are expected to be removed from the website or terminated altogether. When we launch a new game, we estimate the life of the game and user relationship based on lives of other similar games in the market until the new game establishes its own history. We also consider the game’s profile, attributes, target audience, and its appeal to players of different demographic groups in estimating the user relationship period.
The consideration of user relationship with each online game is based on our best estimate that takes into account all known and relevant information at the time of assessment. Adjustments arising from the changes of estimated lives of virtual items are applied prospectively as such changes are resulted from new information indicating a change in the game player behavioral patterns. Any changes in our estimates of lives of virtual items may result in our revenues being recognized on a basis different from prior periods and may cause our operating results to fluctuate. We periodically assess the estimated lives of the virtual items and any changes from prior estimates are accounted for prospectively. Any adjustments arising from changes in user relationship as a result of new information will be accounted as a change in accounting estimate in accordance with ASC 250 Accounting Changes and Error Corrections.
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.
With copyright content that has been exclusively licensed to us, we have the right to sub-license the broadcasting rights on a recurring basis to third parties. We generate revenues from sub-licensing these broadcasting rights to third party customers, mainly video streaming internet platforms for cash, at a fixed rate for a fixed period of time that falls within the original exclusive license period. Revenues are recognized in full at the later of the delivery of the copy of the content with acceptance acknowledged by the customers and the commencement of the license period, as we are not obliged to provide any other services. We perform credit assessment of our customers prior to entering into contracts to ensure that collection of the arrangement fee is reasonably assured. We have no on-going obligation after delivery of the copy of the content.
We operate a pay per view program in which subscribers pay a monthly fee to watch and access a collection of movie contents. The subscription fee is time-based and is collected up-front from subscribers except in the cases where they elect to pay via their mobile operators. The subscription fee is collected when the subscribers pay for their monthly phone fees.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 paymentsubscription fee is initially recorded as deferred revenuecontract liabilities. We satisfy our 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. We evaluated the principal versus agent criteria and determined that we are 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, we assess 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, and mobile payment channels (“payment handling charges”) are recorded as the cost of revenues in the same period as the revenue for the subscription fee is recognized.
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Advertising revenues
We cooperate 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 our 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.
ViewersIn May 2020, we entered into a user traffic monetization agreement with Beijing Itui Online Network Technology Co., Ltd. (“Itui Online”), a company controlled by one of our principal shareholders. Since May 2020, Itui Online has been handling substantially all of our advertising resources, including matching the requirements of advertisers and dispatching the advertising content to our platforms. Itui Online is viewed as the customer and revenue is recognized monthly based on the data publicized on the platforms and pre-agreed sharing portion.
Live streaming revenue
We operate certain live streaming platforms where users can also payaccess the platform, view the live streaming content provided by performers, and purchase virtual gifts which they can grant to watch each individual movieperformers in the live streaming platform to show support for an unlimited numbertheir favorite performers. We are the principal in the provision of times. Revenues are recognizedthe live streaming content and experience, which is considered as the performance obligation of us. We recognize revenue from sales of virtual gifts to the viewers when the movie is broadcastedrelevant virtual gifts are presented to the viewers.performers or over the duration of stated period of the time-based item. We do not have further obligations to the 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 sales of virtual gifts.
We launched Project Crystal, our cloud computing uplink capacity crowdsourcing project in 2014. This is an ongoing technology innovation in crowd-sourcing of idle uplink capacity and potentially storage from our user base, by providing crowd-sourced uplink capacity either for our own use or by third parties. These services are mainly used in online game, online video and mobile application.
The core principle is to collect idle uplink capacity from individuals with compensation, and we target to commercialize to online video streamers, app stores and other third parties. internet value-added services
Revenues from cloud computing. On a monthly basis, we record the capacity thatbandwidth we deliver and recognize revenue from these online video streamerscustomers under contractual rates applied.applied (price per GB of bandwidth multiplies total GBs of bandwidth per month).
As partOnline game revenues. We enter into a series of technical cooperation agreements with third-party online game operators. Users access to our cloud computing services, sinceplatform and purchase in-game virtual items which can then be used in games provided by the second quarter of 2015, we began to sell ZQB,third-party online game operators. We provide the third-party online game operators with a hardwareportal which could work as a micro-computerthe online game operators can host the online games. We charge the online game operators based on Linux system. Revenuea 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 isthird-party online game operators are variable, which are contingent upon future events (future cash proceeds paid by game players), and are recognized when the itemcontingency is dispatched to customers.
Barter transactions
We also enter into agreements with third parties (mainly video streaming internet platform) to exchange content. The exchanged content provides rights for each respective party only to broadcast the content received on its own website; though, each party retains the right to continue broadcasting and or sub-license the rights to the content it surrendered in the exchange. These transactions are non-monetary transactions similar to barter transactions, and we follow ASC 845, Non-Monetary Transactions and ASC 360-10, Property, Plant, and Equipment.
Such barter transactions should be recorded at fair value of the surrendered assets in the transaction unless such fair valuemet provided that collectability 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.
reasonably assured.
Share-based compensation
Compensation
We awarded a number of share-based compensation optionsrestricted shares 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 noteNote 19 to our audited consolidated financial statements for the years ended December 31, 2013, 20142019, 2020 and 2015.2021.
Options are accounted for as equity-classified awards because there are no explicit repurchase rights specified in the award documents and the number of shares of our common shares issued under these awards are fixed and determined at the time of grants. All options are measuredWe measure share-based compensation based on the fair value of the award onstock price at the grant date and recognized asdate. As we have granted 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 forthamount of compensation cost recognized at any date is at least equal to the options granted that were outstanding asportion 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 fairgrant-date value of the optionsaward that is vested at the relevant grant dates were as follows:that date.
| 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:
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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:
| ||||||||||
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:
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:
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:
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) | — | — | — | — | — | |||||||||||||||
The major assumptions used in calculating the fair value of the series E warrants includes:
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:
Option-pricing method was used to allocate enterprise value to preferred and common shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation.” The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock. We applied the Black-Scholes option pricing model to calculate the fair value of the series D warrant on the valuation date.
The fair value per share of the series E preferred shares was determined to be US$ 3.56 on March 5, 2014. The issuance price of the series E convertible redeemable preferred shares was mutually negotiated at US$2.82. The price was agreed in consideration of 1) Xiaomi brand, which is considered to be a well-recognized smartphone vendor in the China market, and 2) the potential synergy that could be created from the two parties, strategic cooperation in the multi device environment.
Exchange of Xiaomi options for transfer restrictions
As part of the issuance of the series E preferred shares, Xiaomi Ventures and our founders and two other employees, or the Grantees, agreed that (i) Grantees will have the right to purchase certain number of restricted shares of Xiaomi Corporation with a total subscription consideration of not more than US$20 million at a subscription price per share that reflects the valuation of Xiaomi Corporation being US$10 billion, or Xiaomi Option; and (ii) the Grantees agreed to impose a transfer restriction on 39,934,162 common shares, 3,394,564 unvested restricted shares, and 360,000 vested and unvested share options owned by the Grantees, or the Transfer Restriction. The Transfer Restriction prohibits the Grantees from transferring their shares to another person/party until April 24, 2019 for one of founders or April 24, 2018 for the rest of the Grantees. The Xiaomi Option and the Transfer Restriction are not tied to the Grantees’ future employment with us.
The value of the Transfer Restriction was determined to be significantly greater than the value of Xiaomi Option. In determining the value of the Transfer Restriction, we were assisted by an independent valuation firm, based on data provided by us. The valuation of the Transfer Restriction is estimated to be US$43.3 million (refer to the valuation methodology below). For the valuation of the Xiaomi Option, we were only able to obtain limited financial information from Xiaomi, a private company, to perform a valuation analysis. This information includes high level 2013 revenue data and information of a third party investment transaction that valued the Xiaomi Corporation at US$10 billion in August 2013. Given the lack of financial information, we are unable to determine a more precise estimate of the fair value of the Xiaomi Option on the exchange date. If the fair value of the Xiaomi Option were worth USD43.3 million, the estimated value of the Transfer Restriction, Xiaomi Corporation itself would need to be estimated at a valuation in excess of US$30 billion on March 5, 2014. We do not expect the valuation of the Xiaomi Corporation to increase by 200% from US$10 billion in August 2013 to US$30 billion in March 2014. Hence, no incremental benefit was given to the Grantees and no compensation expense was recognized.
To determine the fair value of the Transfer Restriction, we valued the common shares with the Transfer Restriction and compared this value to the value of the common shares without the restriction. The difference was determined to be the value of the Transfer Restriction. A put option pricing model was used to determine the discount to be applied to the common shares to arrive at the value of common shares with the Transfer Restriction. Pursuant to that model, we used the cost of a put option, which can be used to hedge the price change before a share subject to transfer restriction can be sold, as the basis to determine the discount for transfer restrictions. A put option was used because it incorporates certain company-specific factors, including timing of the expected initial public offering or duration of the Transfer Restriction and the volatility of the share price companies engaged in the same industry.
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:
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) | — | — |
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:
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, indicatorGoodwill represents the excess of possible impairment was triggered by the significant declinepurchase 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, the revenues generated by one online game. InVIE and the fourth quartersubsidiaries of 2013, this online game only generated US$27,000 as compared to US$303,000 generated in the third quarter of 2013, which was significantly lower than our expectation. The impairment test was performed using a discounted cash flow analysis that requires certain assumptions and estimates regarding economic and future profitability. In 2013, this online game license had been providedVIE. 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 whenevermore frequently if events or changes in circumstances indicate that the carrying value of the asset may notit might be recoverable. According to ASC 350-20-35, an entity mayimpaired. 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 itsthe carrying amount, including goodwill. But we select to proceed directly to perform athe quantitative impairment test is performed.
In performing the two-step goodwillquantitative impairment test. Thetest, 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 thata 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 intest requires significant management judgment, including the carrying valueidentification of reporting units, allocation of assets, liabilities and goodwill overto reporting units, and determination of the implied fair value of goodwill. The judgmenteach reporting unit.
Starting in estimating2020, 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 rateswith 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. Changesreason for the change in these estimates and assumptions could materially affectaccounting principle upon transition. It is more likely that, by adopting simplified measurement which eliminates the determination ofStep 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%.
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No goodwill impairment losses were recognized forin 2019, 2020 and 2021 based on the year ended December 31, 2015. However, if we continue to incur losses, we may face an impairment of goodwill.
test performed by us.
Consolidation
The consolidated financial statements include the financial statements of Xunlei Limited, our subsidiaries, and ourthe VIE for which Xunlei Limited is the primary beneficiary.beneficiary and the subsidiaries of the VIE. All significant transactions and balances among our subsidiaries, our VIEthe variable interest entity 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, or 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 VIEvariable interest entity if the entity’s equity holders do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
We consolidate entities for which we are the primary beneficiary if the entity’s equity holders do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
In determining whether Xunlei Limited or its subsidiary is the primary beneficiary of a VIE, we considered whether we have the power to direct activities that are significant to the VIE’s economic performance, including the power to appoint senior management, right to direct company strategy, power to approve capital expenditure budgets, and power to establish and manage ordinary business operation procedures and internal regulations and systems.
Management has evaluated the contractual arrangements among Giganology Shenzhen, Shenzhen Xunlei and its shareholders and concluded that Giganology Shenzhen receives all of the economic benefits and absorbs all of the expected losses from Shenzhen Xunlei and has the power to direct the aforementioned activities that are significant to Shenzhen Xunlei’s economic performance, and is the primary beneficiary of Shenzhen Xunlei. Therefore, Shenzhen Xunlei and its subsidiaries’ results of operation, assets and liabilities have been included in our consolidated financial statements. We monitor the regulatory risk associated with these contractual arrangements. The details of how we manage the regulatory risk are described in “Certain risk and concentration” in note 27Note 28 to our audited consolidated financial statements for the years ended December 31, 2013, 20142019, 2020 and 2015.2021.
Business combinations
We account for acquisitions of entities that include inputs and processes and haveNon-controlling interests represent the ability to generate economic benefit as business combinations. We allocate the purchase priceportion of the acquisitionnet 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 basedshareholders of our company. Non-controlling interests in the results of our company is presented on their estimated fair values. The excessthe face of the purchase price over those fair values isconsolidated statements of comprehensive (loss)/income as an allocation of the total income or loss for the year between non-controlling shareholders and the shareholders of our company.
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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 servicesit 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 monitorwithin the recoverabilityscope of ASC Topic 326.
We assessed the credit loss for accounts receivable. We use specific identification method in providingreceivable 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 availablepast collection experience, consideration of current and is re-evaluatedfuture economic conditions and adjusted on a regular basis as additional information is received.
Some of the factors that we consider in determining whether we record a bad debt allowance on an individual customer are:
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 year9.3 million as of December 31, 2013, 20142020 and 2015.
US$1.8 million as of December 31, 2021.
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 judgementjudgments and estimates. Based on management'smanagement’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 cancannot be utilized prior to their respective expiration dates, no valuation allowance is recorded.dates.
On January 1, 2008, weWe adopted the guidanceASC 740 “Income Taxes” regarding uncertain tax positions. Management evaluatespositions 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.
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.ASC 740 “Income Taxes”. 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 in16% before April 1, 2019), our subscription revenue, live streaming revenue, cloud computing revenue, and online games revenue are now subject to VAT at a rate of 6%.
According to the years endedpolicy of the State Taxation Administration of the PRC, starting from April 1, 2019 to December 31, 2013, 20142021, enterprises that engage in postal services, telecommunication services and 2015.consumer services are entitled to
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claim 110% of the input tax incurred as tax credit in determining VAT payable. The policy has been extended to December 31, 2022 by the State Taxation Administration of the PRC on February 18, 2022.
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 regardsregard 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 lossbut 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 consultin 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 OperationsWe are involved in a number of cases pending in various courts. These cases are substantially related to alleged copyright infringement and Disclosuresroutine 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$2.0 million, US$1.0 million legal and litigation related expenses for 2019 and 2021, respectively, while we reversed US$1.2 million legal and litigation related expense for 2020.
As of the date of this annual report, we have 17 lawsuits pending against us with an aggregate amount of claimed damages of approximately RMB10.9 million (US$1.7 million) which occurred before December 31, 2021. Among these 17 pending lawsuits, nine of them were relating to the alleged copyright infringement in China. We have accrued for US$1.0 million litigation related expenses in “Accrued expenses and other liabilities” in the consolidated balance sheet as of December 31, 2021, which is requiredthe 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 17 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 entitiesremote, 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 guidancea reporting period for new disposals. The adoptionamounts in excess of this pronouncement does not have a significant impact onmanagement’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 endmaterially adversely affected.
Recent Accounting Pronouncements
See Item 18 of the period in which a performance target could be achievedPart III, “Financial Statements—Note 2—Summary of significant accounting policies—Recent accounting pronouncements.”
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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.
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
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.
To date, we have financed our operations primarily throughby using our existing internal cash generated from operationsreserves 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, 2015,2021, we had US$432.1239.0 million in cash and cash equivalents and short-term investments. As of the same date, we did not have anyalso had US$4.1 million restricted cash, which represents cash deposited in a bank account due to legal or contractual restrictions, and US$20.2 million outstanding bank loans.
loans for the construction of our headquarters building.
We historically generatedhave incurred accounts receivable from the sales of CDN and advertising revenue sharing with Itui. Thus, the financials of our customers purchasing CDN from us including Itui may affect our collection of accounts receivable. Any inability of CDN purchasers and Itui, especially those that accounted for a significant portionpercentage of our revenues from customersaccounts receivables in the advertising industry. Althoughpast, to pay us in a timely manner may adversely affect our general credit term for our customers is 90 days, we typically are willing to accept delayed repayment up to one year from the invoice date given the general practices we have with our customers in the advertising industry. Our practiceliquidity and collection history may continue to have an impact on our liquidity.
cash flows.
In the future, we may rely on dividends and other distributions on equity paid by our wholly-ownedwholly 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, VIEthe variable interest entity and VIE’sits 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, VIEvariable interest entity and VIE’sits 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 2015,2021, 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.
169.2 million.
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 ourthe 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 makemaking loans to our PRC subsidiaries and variable interest entity and its subsidiaries or to makemaking 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
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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.
Cash Flows
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, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | (in thousands of US$) | ||||
Net cash (used in)/generated from operating activities |
| (45,649) |
| (13,911) | | 19,480 |
Net cash generated from/(used in) investing activities |
| 79,260 |
| (20,756) | | (32,619) |
Net cash generated from/(used in) financing activities |
| 12,177 |
| 2,679 | | (223) |
Net increase/(decrease) in cash, cash equivalents and restricted cash |
| 45,788 |
| (31,988) | | (13,362) |
Cash, cash equivalents and restricted cash at the beginning of year |
| 122,930 |
| 165,448 | | 138,789 |
Effect of exchange rates on cash, cash equivalents, and restricted cash |
| (3,270) |
| 5,329 | | 2,009 |
Cash, cash equivalents and restricted cash at end of year |
| 165,448 |
| 138,789 | | 127,436 |
As of December 31, 2015,2021, we had cash or cash equivalents, including restricted cash, of US$361.8127.4 million in total,including RMB385.4RMB356.4 million (US$59.455.9 million) and US$6.530.9 million located within the PRC, of which RMB210.5RMB128.3 million (US$32.420.1 million) and US$0.6 million was held by ourthe VIE, Shenzhen Xunlei, and its subsidiaries. We also had cash or cash equivalents of RMB221.4RMB132.0 thousand (US$21.0 thousand), US$35.8 million, (US$34.1 million), US$261.7HK$1.4 million (US$0.2 million) and 0.9THB1.7 million Hong Kong dollars (US$0.1 million)51 thousand) located outside of the PRC as of December 31, 2015.
2021.
Operating activities
Net cash generated from operating activities amounted to US$13.819.5 million in 2015,2021, which was primarily attributable to a net lossincome of US$14.51.1 million, adjusted for certain non-cash expenses consisting principally of the depreciation of property and equipment of US$6.3 million, share-based compensation amortization expenses of US$17.86.2 million, share-based compensationamortization of US$9.71.9 million right-of-use assets, and a net change in working capital. The net change in working capital was primarily due to a decreasean increase in accounts receivable amountingof US$2.2 million, which was the in line with the increase of cloud computing revenues, an increase in due from related parties of US$8.5 million, mainly due to the increase of transaction amount with related parties, and an increase in accounts payable of US$1.45.2 million, which was in line with the decreaseincreased of our online advertising revenues, a decrease in accrued liabilities and other payable of US$1.1 million mainly attributable to the decrease in accrued payroll and employees benefit provision, and an decrease in prepayments and other current assets of US$3.2 million.
bandwidth cost.
Net cash generated fromused in operating activities amounted to US$48.213.9 million in 2014,2020, which was primarily attributable to a net incomeloss of US$9.914.1 million, adjusted for certain non-cash expenses consisting principally of the depreciation of property and amortization expensesequipment of US$45.29.3 million, share-based compensationallowance for doubtful accounts of US$7.65.3 million, a gain from warrants’ fair value changeimpairment of inventories 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 toof US$4.75.0 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 otheraccounts payable of US$4.84.9 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.
due to shorter payment term we made for our bandwidth purchases.
Net cash generated fromused in operating activities amounted to US$85.545.6 million in 2013,2019, which was primarily attributable to a net incomeloss of US$10.453.4 million, adjusted for certain non-cash expenses consisting principally of the depreciation of property and amortization expensesequipment of US$43.45.8 million, share-based compensation of US$2.15.4 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 the decrease an increase
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in accounts receivable amounting toof US$13.78.7 million, which was in line with the decreaseincrease of our advertisingcloud computing revenues, an increase in deferred revenue of US$12.6 million as a result of increase in our subscription fees prepaid by our subscribers, and the increase in accounts payable of US$5.92.1 million, primarily attributablewhich 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 increased procurementsale of bandwidth.
Onething Cloud hardware.
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, andacquisition of long-term investments, payments to purchase short-term investments such as equity interesttreasury products, and acquisition of constructions in limited partnerships that make venture capital investments on companiesprogress, 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$55.032.6 million in 2015,2021, primarily attributable to theproceeds from collection upon maturities of short-term investments of US$342.0million, which was partially offset by our purchase of short-term investments of US$222.2337.7 million purchaseand loan to related party of intangible assets in the amount of US$11.9 million, partially offset by proceeds from the sales and maturity of short-term investments, which amounted to US$175.520.0 million.
Net cash used in investing activities amounted to US$70.520.8 million in 2014,2020, primarily attributable to theproceeds from collection upon maturities of short-term investments of US$167.4 million, which was partially offset by our purchase of short-term investments of US$330.5177.1 million.
Net cash generated from investing activities amounted to US$79.3 million purchasein 2019, primarily attributable to proceeds from collection upon maturities of intangible assets in the amountshort-term investments of US$38.1450.7 million, and payments for the acquisition of businesses amounting to US$33.0 million,which was partially offset by proceeds from the sales and maturityour purchase of short-term investments which amounted toof US$341.8355.3 million.
Financing activities
Net cash used in investingfinancing activities amounted to US$78.40.2 million in 2013,2021, 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 disposalbank borrowings of short-term investmentsUS$2.2 million, repayment of bank borrowings of US$213.52.4 million.
Financing activities
Net cash generated from financing activities amounted to US$5.02.7 million in 2015,2020, primarily attributable to government grants receivedproceeds from bank borrowings of US$1.17.8 million, and the exercise of vested share options amounted US$ 5.0 million, partially offset by payments for the repurchase of shares in the amount of US$1.34.5 million.
Net cash generated from financing activities amounted to US$333.312.2 million in 2014,2019, primarily attributable to proceeds from our initial public offering in June 2014bank borrowings of US$93.9 million11.3 million.
Material Cash Requirements
Our material cash requirements mainly include capital expenditures, contractual obligations and our issuance of series E preferred shares prior to the initial public offering in the amount of US$310.0 million, partially offset by payments for the repurchase of shares in the amount of US$69.3 million.
Net cash generated from financing activities amounted to US$2.5 million in 2013 due to government grants received.
long-term debt obligations.
Capital Expendituresexpenditures
Our capital expenditures primarily consist of purchasing servers or other equipment for our business operations and payment for facility construction in progress. We made capital expenditures of US$7.4 million, US$7.8 million and US$13.814.7 million in 2019, US$13.6 million in 2020 and US$13.2 million in 2021. We will continue to make capital expenditures to meet the years endedexpected growth of our business.
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Contractual obligations
Our contractual obligations mainly include bandwidth lease obligations and capital obligations. The following table sets forth our contractual obligations as of December 31, 2013, 20142021:
| | | | | | | | | | |
|
| |
| Less than |
| |
| |
| Over 5 |
| | Total | | 1 year | | 1-3 years | | 3-5 years | | years |
| | (in thousands of US$) | ||||||||
Bandwidth lease obligations |
| 4,410 |
| 4,410 |
| — |
| — |
| — |
Capital obligations |
| 18,291 |
| 17,993 |
| 298 |
| — |
| — |
Total |
| 22,701 |
| 22,403 |
| 298 |
| — |
| — |
As of December 31, 2021, we had unconditional purchase obligations for switchboard, servers, office software and 2015, respectively. Inconstruction in progress that had not been recognized in the past,amount of US$18.3 million.
Long term debt obligations
Our long term debt obligations primarily consist of bank borrowings and estimated interest payments. Our long term loan is bank borrowing for the construction of our headquarters building, and the interest rate is calculated based on the Loan Prime Rate plus 15 basis points. The bank borrowings will be due according to the following schedule:
| | | | | | | | | | |
|
| |
| Less than 1 |
| |
| |
| Over 5 |
| | Total | | year | | 1-3 years | | 3-5 years | | years |
| | (in thousands of US$) | ||||||||
Bank borrowings obligations |
| 20,167 |
| 2,876 |
| 5,820 |
| 3,861 |
| 7,610 |
Estimated interest payment obligations |
| 3,630 |
| 949 |
| 1,622 |
| 1,035 |
| 24 |
Total |
| 23,797 |
| 3,825 |
| 7,442 |
| 4,896 |
| 7,634 |
We intend to fund our existing and future material cash requirements primarily with anticipated cash flows from operations, our existing cash balance and other financing alternatives. We will continue to make cash commitments, including capital expenditures, were primarily used to purchase serverssupport the growth of our business.
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We do not have retained or contingent interests in assets transferred. We have not entered into contractual arrangements that support the credit, liquidity or market risk for transferred assets. We do not have obligations that arise or could arise from variable interests held in an unconsolidated entity, or obligations related to derivative instruments that are both indexed to and classified in our own equity, or not reflected in the statement of financial position.
Other than as discussed above, we did not have any significant capital and other equipmentcommitments, long-term obligations or guarantees as of December 31, 2021.
Off-balance sheet arrangements
We do not have any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any guarantees, retained or contingent interest in assets transferred to an unconsolidated entity, contractual arrangements that support the credit, liquidity or market risk for our business. Our capital expenditures may increasetransferred assets; obligations that arise or could arise from variable interests held in the near term as our business continues to grow.an unconsolidated entity.
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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, 2015,2021, we had a team of 452401 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.
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:
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, 20152021 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.condition.
E.Critical Accounting Estimates
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 inprepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (‘‘U.S. GAAP’’), which requires our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical, as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Furthermore,See Item 18 of Part III, “Financial Statements—Note 2—Summary of significant accounting policies.”
Allowance for expected credit losses
For receivable with similar risk characteristics, we domake estimates of expected credit losses on a pool based upon assessment of various factors, including historical experience, the age of the accounts receivable balances, credit-worthiness of the customers, consideration of current and future economic conditions and changes in our collection trends and other factors that may affect its ability to collect from the customers. We also provide specific provisions for allowance when facts and circumstances indicate that the receivable is unlikely to be collected. Expected credit losses are recorded as assets impairment loss on the consolidated statements of comprehensive income. Changes in these estimates and assumptions could materially affect the credit losses.
For loans to and trade receivables due from Itui, our largest shareholder and its subsidiaries, we adopted a CECL model based on probability-of-default method. Our management estimates the allowance for credit losses on loans and interest receivable not have any retainedsharing similar risk characteristic on an individual basis. The key factors considered when determining the above allowances for credit losses include the age of the receivable balances, estimated collection schedule, discount rate, financial condition and performance data of Itui and its business development considering current and future economic conditions.
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Valuation allowance of deferred tax assets
We make estimates and apply judgment in determining the provision for income taxes for financial reporting purposes. We make these estimates and judgments primarily in the following areas: (i) the calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax reporting and financial statement purposes, as well as (iii) the calculation of interest and penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase or contingent interestdecrease to our tax provision, which would be recorded in the period in which the change occurs. Deferred tax assets transferredand liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. We record a valuation allowance to reduce deferred tax assets to an unconsolidated entityamount for which realization is more likely than not. To assess uncertain tax positions, we apply a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that servesit is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as credit, liquiditythe largest amount that is more than 50% likely of being realized upon settlement. This process is inherently subjective since it requires our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances, such as new regulations or market risk supportrecent judicial opinions, as well as the status of audit activities by taxing authorities. Changes in these estimates and assumptions could materially affect the tax position measurement and financial statement recognition. See Note 23 to the Consolidated Financial Statements for information regarding taxation.
Impairment of goodwill
Under U.S. GAAP, 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. Application of a goodwill impairment test requires significant management judgment. 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.
For fair value of the company, we use a discounted cash flow model derived from the long-term (five-year) cash flow projections to estimate the fair value, which requires the use of inputs such entity. Moreover, we do not have any variable interestas the forecasted future revenues, costs and operating expenses attributable to the company, terminal growth rate and the discount rate. Our estimates of these inputs require subjective management judgment and are inherently uncertain. Changes in any unconsolidated entity that provides financing, liquidity, market risk or credit supportour estimates of these inputs may cause us to us or engagesrecord impairment in leasing, hedging or research and development services with us.the future.
The following table sets forth our contractual obligations as ofNo goodwill impairment losses were recognized for the years ended December 31, 2015:2019, 2020 and 2021 based on the impairment test performed by us. See Note 13 to the consolidated financial statements for information regarding goodwill.
| Payment due by period | ||||||||||||||||||||
| (in thousands of US$) | Total | Less than 1 year | 1-3 | 3-5 | More than 5 years | |||||||||||||||
| Operating lease obligations(1) | 925 | 751 | 174 | — | — | |||||||||||||||
| Bandwidth lease obligations | 25,680 | 15,715 | 9,965 | — | — | |||||||||||||||
| Capital obligations | 5,844 | 5,844 | — | — | — | |||||||||||||||
| Total | 32,449 | 22,310 | 10,139 | — | — | |||||||||||||||
Impairment of long-lived assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues or expenses, present cash flow losses combined with a history of cash flow losses and a forecast that demonstrates significant continuing and significant negative expectation of economic growth. When a triggering event occurs, a test for recoverability is performed. We assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows we expect to receive from the use of the assets and their eventual disposition at the lowest level of identifiable cash flows. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value.
As of December 31, 2015, we had irrevocable purchase obligations for online game licenses that had not been recognizedInherent in the amountundiscounted future cash flows are assumptions and estimates derived from a review of US$ 5.8 million.business plan forecasts, expected growth rates, and market economy. Changes in assumptions or estimates can materially affect the fair value measurement.
See “Forward-Looking Statements.”
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Item 6.Directors, Senior Management and Employees
A.Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
Directors and Executive Officers | Age | Position/Title | |||
Jinbo Li | | 46 | | Chairman and Chief Executive Officer | |
Sean Shenglong Zou | | 50 | | Co-Founder and Director | |
Yubo Zhang | | 45 | | Director and President | |
Peng Shi | | 34 | | Director | |
Hui Duan | | 42 | | Director | |
Jenny Wenjie Wu | | 47 | | Independent Director | |
Ya Li | | 52 | | Independent Director | |
Naijiang (Eric) Zhou | | 59 | | ||
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-founderco-founders and has beenserved as our chief executive officer and chairman sincefrom 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 ChengYubo Zhang is our co-founder and has been serving as our directorpresident since our inceptionApril 2020. Prior to rejoining us in February 2005.April 2020, Mr. Cheng alsoZhang served as the chief executive directorofficer of Xunlei Games Development (Shenzhen) Co.Beijing Nesound International Media Corp, Ltd., or Nesound, from February 2010April 2015 to January 2016April 2020. During his tenure at Nesound, Mr. Zhang combined the respective advantages of live broadcasting and astraditional film & television businesses and built a multifaceted platform incorporating self-produced exclusive contents, star development plans and Internet services. Mr. Zhang joined our company for the general managerfirst time in August 2005 and was one of the samecore 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 February 2010August 2005 to January 2016. Prior to joining us,March 2015. Mr. Cheng managed the products, services, marketing and sales of the corporate search team at Baidu, Inc. Mr. ChengZhang received a master’s degree in computer science from Duke University in the U.S. in 1999 and ahis bachelor’s degree in mathematicsmechanical design and manufacturing from NankaiJilin University of Technology in China in 1997. In January 2016, Mr. Hao Cheng resigned from all executive positions at the company. He remains as a member of the board of directors of our company.
1999.
Mr. Qin LiuPeng Shi has been serving as a director of our company since September 2005.April 2020. Mr. Liu isShi 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.
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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, andApril 2020. Mr. Duan currently also serves as director in several non-public portfolio companiesthe 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 businessservices 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 publisherthe chief executive officer of The Bund, an upscale lifestyle weekly publication.a major subsidiary of Xunlei. Mr. LiuDuan received a master’shis 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.
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 servedbeen serving as our independent director since June 2014. Ms. Wu has been the chief strategy officer of Ctrip.com International, Ltd. or Ctrip, a Nasdaq-listed company, since November 2013. Prior to that, she served as Ctrip’s chief financial officer between May 20122014 and November 2013 and as a deputy chief financial officer between December 2011 and May 2012. Ms. Wu also serves asis currently an independent non-executive director of Kingsoft Corporation Limited (3888.HK) and an independent non-executive director of BlueCity Holdings Limited (NASDAQ: BLCT). 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.for three years. Ms. Wu holdshas a Ph.D. degree in financeFinance from the University of Hong Kong, a Master’smaster’s degree in philosophy in financeFinance from the Hong Kong University of Science and Technology, and both a Master’smaster’s degree and a Bachelor’sbachelor’s degree in economicsEconomics from Nan KaiNankai University, China. Ms. Wu ishas been a Chartered Financial Analyst (CFA).
since 2004.
Mr. Yongfu YuYa Li has servedbeen serving as our independent director since June 2014.March 2017. Mr. Yu isLi 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 wasserves as the chief executive officer of UCWeb Inc.,this company. Mr. Li currently is also a provider of mobile internet software technologyvisiting research fellow and services in China from the end of 2006master’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. HeLi served as an investment manager between 2001 to 2004 and as a vice president between 2004 and 2006. Mr. Yu received his bachelor’s degree in business management from the College of International Business, Nankai University in China in 1999.
Mr. Lei Chen has been our co-chief executive officer since November 2015. Prior to that, Mr. Chen has been our chief technology officer since November 2014. Prior to joining us, Mr. Chen was the chief executive officer of Tencent Cloud Computing (Beijing) Ltd., a wholly owned subsidiary of Tencent Holdings Limited, or Tencent, where he spearheaded Tencent’s cloud computing, open platform and social advertisement efforts. He joined Tencent in 2010. Before becomingYidian Zixun. From May 2006 to September 2017, Mr. Li served successively as the chief executiveoperating officer, the chief financial officer, the president, and a director of Phoenix New Media (NYSE: FENG). From 2004 to 2006, Mr. Li served as the chief operating officer and the chief financial officer of Tencent Cloud Computing (Beijing) Ltd.,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.
Mr. Naijiang (Eric) Zhou has been serving as our chief financial officer since September 2017. Mr. Zhou has extensive 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. Mr. Zhou served as a senior vice president of ChinaCache from September 2015 to June 2016. From February 2010 to December 2014, he served as managerthe vice president of Tencent’s cloud platform divisionfinance and deputy general manager of its open platformthe 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 holdsZhou obtained a bachelor of sciencebachelor’s degree with honors in computer science and technologyPetroleum Management Engineering from TsinghuaChina Petroleum University, and a master’s degreeboth MBA in computer scienceFinance and Ph.D. in Interdisciplinary Energy and Mineral Resources from the University of Texas at Austin.
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 asZhou 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.
B.Compensation
For the fiscal year ended December 31, 2015,2021, we paid an aggregate of approximately US$1.91.0 million in cash to our executive officers, and we paid approximately US$12,0000.9 million in cash compensation to twoour non-executive directors. In addition, we paid approximately US$94,0000.4 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.”
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Share Incentive PlansPlan
We have adopted (i) aOur 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 purpose2020 Plan, on June 30, 2020. Upon the termination of the plans is to attractExisting Plans, the awards that are granted and retainoutstanding under the best available personnel by linkingExisting Plans and the personal interestsevidencing original award agreements shall survive the termination of the membersExisting 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 totermination of the successExisting 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) 9,667,230 common shares of the Company underlying the 1,933,446 American depositary shares the Company repurchased pursuant to the repurchase programs authorized by the Company in December 2014 and January 2016, (ii) 10,150,313 common shares of the Company reserved for issuance under the 2020 Plan, representing 10,150,313 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) 10,889,429 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) 293,028 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 number2022, 25,184,475 restricted share units had been granted and outstanding under the 2020 Plan. As of 2,097,410 commonMarch 31, 2022, there were also 480,000 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 20102020 Plan.
Types of awards.The following briefly describe2020 Plan permits the principal featuresawards of option, restricted share, restricted share unit or other types of award approved by the various awards that may be granted undercommittee or the 2010 Plan.board.
Plan administration. Before our shares are listed on a stock exchange, the 2010The 2020 Plan shall be administered by ourthe 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 provisionscompensation committee members and terms and conditions of each grant.independent directors.
Award agreement.Options, restricted shares, or restricted share units granted under the 20102020 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 tocompensation 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.
EligibilityEligibility.. 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 awardawards shall be assigned, transferred, or otherwise disposed of other than by will or the laws of descent and distribution.
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TerminationTermination.. Unless terminated earlier, the 20102020 Plan will expire automatically in December 2020. With the approval of our board of directors, the plan administrators may, atJune 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 approval2020 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, 2016,2022, the outstanding optionsawards granted to our executive officers and directors and other individuals as a group under our 2010 Plan.
the 2020 plan.
|
| | | | | | | | ||||
| | Number of restricted | | Exercise price | | | | | ||||
Name | shares awarded (1) | (US$/share) | Date of grant | Date of expiration | ||||||||
Jinbo Li | 6,693,040 | — | | May 25,2021 | — | |||||||
Yubo Zhang | 6,693,040 | — | | May 25,2021 | — | |||||||
Naijiang (Eric) Zhou | | * | | — | | March 1, 2018 | | — | ||||
Jenny Wenjie Wu, | * | — | | April 29,2021 | — | |||||||
Ya Li | | * | | — | | April 29,2021 | | — | ||||
(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. |
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 certain2022, 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 onas 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 12,058,295 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 eventrestricted 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.
Termination. Unless terminated earlier, the 2013 Plan will expire automatically in November 2023. With the approval of our board of directors, the plan administrators may, at any time and from time to time, terminate, amend or modify the 2013 Plan. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law.
2014 Plan
Under the 2014 Plan, the maximum number of share awards that may be granted is 14,195,412 restricted shares, which are currently registered under the name of Leading Advice Holdings Limited for the purposes of administrating the awards according to the 2014 Plan. As of March 31, 2016, 7,587,000 restricted shares (excluding those forfeited) have been granted to certain executive officers and other employees under the 2014 Plan.
The following paragraphs summarize the terms of the 2014 Plan.
Plan administration. Before our shares are listed on a stock exchange, the 2014 Plan shall be administered by Leading Advice Holdings Limited or its designee. Leading Advice currently acts as an agent on behalf us to administer the 2014 Plan based on the instructions from us. The 2014 Plan is administered by our board of directors or the compensation committee of the board of directors (or a similar body) formed in accordance with applicable exchange rules. The administrator determines the grantees under the 2014 Plan.
Award agreement. Each award of restricted shares is evidenced by an award agreement that specifies the number of restricted shares so granted, the vesting schedule, the applicable provisions in the event the grantee’s employment or service terminates, and such other terms and conditions that the administrator shall determine in its sole discretion.
Eligibility. The restricted shares may be granted to members of our directors, senior management, employees, advisors and consultants of our company.
Vesting schedule. Each grant of restricted shares will be subject to a vesting schedule determined solely by the administrator. Once vested, the restricted shares will no longer be subject to forfeiture and other restrictions contained in the award agreement, unless otherwise specified therein.
Shareholder rights. Grantees of restricted shares will not be entitled to any shareholder rights (including the right to dividends) on unvested portions of the restricted shares. They will be entitled to dividends on the vested portions of the restricted shares. The administrator will hold all vested portions of share awards for the benefit of the grantees and exercise the voting rights with respect of those shares. Currently, Leading Advice exercises the voting power on behalf of the grantees regarding their vestedremain unvested. These restricted shares and it will solicit voting instructionrestricted 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.
Transfer restrictions. Except as otherwise provided by the plan administrators or the applicable shareholders agreement, no share award shall be assigned, transferred, or otherwise disposed of other than by will or the laws of descent and distribution.
Termination. Unless terminated earlier, the 2014 Plan will expire automatically in April 2024. With the approval of our board of directors, the plan administrators may, at any time and from time to time, terminate, amend or modify the 2014 Plan. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent necessary to comply with applicable law.
The following table summarizes, as of March 31,1, 2016 the number of restricted shares granted to our officers and other individuals as a group pursuant to our 2013 Plan and 2014 Plan.
through September 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.
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
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competitors, or engage in any competitor as a principal, partner, licensor or otherwise. The officer will not seek, directly or indirectly, by the offer of alternative employment or other inducement whatsoever, to solicit the services of any of our employees as at or after the date of the termination of such officer’s employment, or in the year preceding such termination.
C.Board Practices
Board of Directors
Our board of directors consists of nineseven 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.
Board Diversity Matrix
Subject to the Nasdaq Stock Market rules, the below table sets forth our board diversity matrix as of the date of this annual report.
| | | | | | | | | |
Board Diversity Matrix | |||||||||
Country of Principal Executive Offices | People’s Republic of China | | |||||||
Foreign Private Issuer | | Yes | | ||||||
Disclosure Prohibited Under Home Country Law | | No | | ||||||
Total Number of Directors | | 7 | | ||||||
| | Female |
| Male |
| Non-Binary |
| Did Not Disclose Gender | |
Part I: Gender Identity | | | | | | | | | |
Directors | | 1 | | 6 | | 0 | | 0 | |
Part II: Demographic Background | | | | | | | | | |
Underrepresented Individual in Home Country Jurisdiction | | 0 | | ||||||
LGBTQ | | 0 | | ||||||
Did Not Disclose Demographic Background | | 1 | | ||||||
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 YuYa 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; |
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| reviewing with the independent registered public accounting firm any significant matters or difficulties encountered by the external auditors during the course of their audits and management’s response; |
| reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; |
| discussing the annual audited financial statements with management and the independent registered public accounting firm; |
| reviewing significant matters as to the adequacy of our internal controls and any special procedures adopted by the external auditors in light of material control deficiencies; |
| annually reviewing and reassessing the adequacy of our audit committee charter; and |
| meeting separately and periodically with management and the independent registered public accounting |
Compensation Committee
committee
Our compensation committee consists of Ms. Jenny Wenjie Wu, Mr. Yongfu YuYa 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 YuYa 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 |
| approving and overseeing the total compensation package for our executives other than the |
| reviewing the compensation of our directors and making recommendations to the board with respect to it; and |
| 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 YuYa Li and Mr. Feng Hong,Yubo Zhang, and is chaired by Mr. Feng Hong.Yubo Zhang. Our board of directors has determined that each of Ms. Jenny Wenjie Wu and Mr. Yongfu YuYa 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; |
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| selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as of the corporate governance and nominating committee itself; |
| advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken; and |
| monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Duties of Directors
Under Cayman Islands law, our directors haveowe fiduciary duties to our company, including a fiduciaryduty 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.
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, 2015,2021, we had 1,014918 employees, including 139132 in general administration, 679650 in research and development and 196136 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
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.”
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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, 20162022 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 337,997,790337,427,946 total outstanding common shares as of March 31, 2016,2022, excluding (i) 16,519,14410,889,929 common shares issued toheld 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) 14,360,27520,559,830 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, 2016,2022, 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 | % | |||||
| | | | | |
| | Common Shares Beneficially Owned | | ||
|
| Number |
| %† |
|
Directors and executive officers**: | |
| |
|
|
Jinbo Li(1) |
| 136,364,999 |
| 40.0 | % |
Sean Shenglong Zou(2) |
| 22,931,611 |
| 6.8 | % |
Yubo Zhang |
| * |
| * | |
Peng Shi |
| — |
| — | |
Hui Duan |
| — |
| — | |
Jenny Wenjie Wu |
| * |
| * | |
Ya Li |
| * |
| * | |
Naijiang (Eric) Zhou |
| * |
| * | |
All directors and executive officers as group |
| 163,310,505 |
| 47.5 | % |
Principal shareholders: |
|
|
|
| |
Itui International Inc.(3) |
| 133,018,479 |
| 39.4 | % |
Sean Shenglong Zou(2) |
| 22,931,611 |
| 6.8 | % |
Notes:
* | Less than 1% of the total outstanding common shares. |
** | The business address of |
† | 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 |
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to acquire within 60 days of March 31, 2022, by the sum of (i) the total number of outstanding common shares as of March 31, 2022, 337,427,946, 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 March 31, 2022.
| (1) | 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 101,820,239 common shares and 6,239,648 ADSs of our company. In addition, there are 3,346,520 common shares issuable to Mr. Li upon the exercise of options within 60 days after March 31, 2022. By virtual of his controlling interest in Itui International Inc. and upon the |
| (2) | Represents (i) |
| (3) | Represents |
To our knowledge, as of March 31, 2016, 169,284,2362022, 257,537,789 of our outstanding common shares arewere held by fourtwo record holders in the United States including 134,837,645257,537,785 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 14,360,275include 20,559,830 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 theour 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
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 ourthe 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.”
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
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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 rightswe 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 offeringcertain 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.
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 terminateexpired 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.
AdvancesAdvance extended to certain directors
a director
We extended advancesan advance amounting to RMB60,000 to Mr. Shenglong Zou and RMB7,000 to Mr. Chuan Wang in 2014. These advances were used2014 for general business purposes to setof setting up certain companies in the PRC which we planChina to use to conductoperate a part of our business and consolidate the financial results of such business into the financial statements of our company in the future.company. As of the December 31, 2015,2021, the advancesadvance to Mr. Shenglong Zou and Mr. Chuan Wang remainremained outstanding.
Game sharing arrangement with Zhuhai Qianyou Technology, Co., Ltd.
In November 2011, we obtained an exclusive game operation right from Zhuhai Qianyou Technology, Co., Ltd., or Zhuhai Qianyou, our equity investee, which is specialized in developing online games. According to the agreement in relation to such game operation right that we entered into with Zhuhai Qianyou, we need to share revenues derived by the licensed games with Zhuhai Qianyou. For the years ended December 31, 2013, 2014 and 2015, game sharing cost paid and payable to Zhuhai Qianyou was US$1.8 million, US$0.4 million and US$0.1 million, respectively. As of December 31, 2013, 2014 and 2015, US$0.2 million,US$0.1 million and less than US$0.1 million, respectively, of the game sharing cost we owe to Zhuhai Qianyou remained unpaid and outstanding.
Intellectual property framework agreement between Shenzhen Xunlei and Xunlei Computer
On December 24, 2013, Shenzhen Xunlei and Xunlei Computer entered into a technology development and software license framework agreement. The term of the agreement is two years from the date of its execution.
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
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Shenzhen has agreed to the execution of these agreements and the relevant services and licenses between Xunlei Computer and Shenzhen Xunlei.
As ofFor the years ended December 31, 2015,2019, 2020 and 2021, 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 RMB4.7US$6.5 million, (US$0.8 million).US$6.4 million and US$7.2 million, respectively.
Pre-installing Services AgreementsTransactions 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-installationMillet 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 suchshareholders, 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 willwould be pre-installed with our mobile acceleration applications and Xiaomi phone users willwould 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 2021, we renewed the supplemental agreement of the pre-installing services agreement, with another Xiaomi group company, Shenzhen Xiaomi Information Service Co.Ltd., or Shenzhen Xiaomi. Pursuant to the renewed supplemental agreement, Shenzhen Xiaomi replaced Guangzhou Millet under the pre-services agreement. The renewed supplemental agreement has a term of two years from mid-June 2021 to mid-June 2023. In 2021, we recognized a revenue of US$2.6 million from Guangzhou Millet and Shenzhen Xiaomi. As of December 31, 2021, the amount of outstanding revenue from Shenzhen Xiaomi was US$1.5 million.
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 2021, our total cloud computing revenue was US$2.8 million from Xiaomi Technology. As of December 31, 2021, the amount of outstanding cloud computing revenue was US$0.8 million from Xiaomi Technology.
Advertising Services Agreement. We entered into an agreement with Shenzhen Xiaomi to provide advertising service on its advertising platform. We are entitled to receive a mutually agreed sharing of net advertising revenue. In 2021, our total advertising revenue from Shenzhen Xiaomi was US$0.4 million and the amounts of outstanding advertising revenue was US$30 thousands.
Transactions with Itui International Inc.
Advertising services Agreement. In May 2020, we entered into a user traffic monetization agreement with Itui. Pursuant to the agreement, Itui will be responsible for operating our advertising services and share a portion of revenue generated from placing advertisements on our PC websites and mobile platform. The agreement has a term of one year and there is no fee chargedwas renewed for the pre-installation. We have entered into other pre-installing agreements with other unrelated parties at no charge. Our mobile acceleration software has been officially adopted by Xiaomi’s operating systems, MIUI6 and MIUI7, and installed on Xiaomi phones, including both pre-installations on new phone shipments and installationsanother one year from upgrades on existing Xiaomi phones. We received technology servicemid-May 2021 to mid-May 2022. In 2021, we recognized a net revenue of US0.3$US$11.6 million from Beijing Xiaomi in 2015.
In 2015, we received sales orders from Xiaomi Technology to provide online advertising servicesplacing advertisements on our website. Our total advertising revenuePC websites and mobile platform from those orders was less than US$0.1 million.Itui. As of December 31, 2015,2021, the amount of outstanding advertising services revenue from Itui was US$12.5 million.
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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 and July 2021. The renewed agreement has a term of one year. In 2021, we did not have anygenerated cloud computing revenue of US$0.8 million from Itui. As of December 31, 2021, the amount of outstanding receivablecloud computing revenue from Xiaomi Technology.Itui was US$0.9 million.
Term Loan Agreement. In September 2021, we approved to provide a term loan in the amount of US$20 million to Chizz (HK) Limited, a company controlled by Itui, our largest shareholder. The loan has a term of two years and the interest of the loan is 3% per annum. The Audit Committee of our company had also approved the transaction. As of March 31, 2022, the term loan remained unpaid.
Acquisition of Yunwang Wulian
In September 2020, Xunlei Wangwenhua entered into a share purchase agreement with the shareholders of Shenzhen Yunwang Wulian Technology Co., Ltd., or Yunwang Wulian, formerly known as Shenzhen Qianhai Shanxian Daojia Technology Co., Ltd. to acquire 100% equity interests of Yunwang Wulian for nil cash consideration. Mr. Weimin Luo, currently a strategy consultant of our company, was a shareholder of Yunwang Wulian controlling 60% of all equity interests of Yunwang Wulian before the transaction. When Yunwang Wulian was acquired, it had a net debt of approximately RMB5.4 million. Yunwang Wulian was a company principally operating an internet platform for food delivery services. The purpose of this acquisition is to acquire the skilled talents of Yunwang Wulian.
C.Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A.Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
We have been involved in legal proceedings related to our business from time to time and expect to continue to be involved in such proceedings in the future. Internet services and content providers such as ours are frequently involved in litigation based on intellectual property-related claims. See “Item 3. Key Information—D. Risk factors—Risks related to our business—We face and expect to continue to face copyright infringement claims and other related claims, including claims based on content available through our services, which could be time-consuming and costly to defend and may result in damage awards, injunctive relief and/or court orders, divert our management’s attention and financial resources and adversely impact our business.”
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 were 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 alleged 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 sought 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
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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 futurefuture. 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. OurIn 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 underlying common shares represented by 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
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
Item 9. The Offer and Listing
A.Offering and Listing Details
Our ADSs have been listed on The NASDAQ Global Select Market since June 24, 2014. Our ADSs currently trade on The NASDAQ Global Select Market under the symbol “XNET.” One ADS represented five common shares.
The following table provides the high and low trading prices for our ADSs on NASDAQ for the time periods indicated.
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 | ||||||
Not applicable.
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C.Markets
Our ADSs have been listed on NASDAQ Global Select Market since June 24, 2014 under the symbol “XNET.”
D.Selling Shareholders
Not applicable.
E.Dilution
Not applicable.
F.Expenses of the Issues
Not applicable.
Item 10. Additional Information
A.Share Capital
Not applicable.
Not applicable.
Not applicable.
B.Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our eighth amended and restated memorandum and seventh amended and restated articles of association contained in our F-1 registration statement (File No. 333-196221), initially filed with the SEC on June 12, 2014. The eighth amended and restated memorandum and seventh amended and restated articles of association were adopted by our shareholders by special resolutions passed on June 11, 2014, and became effective immediately upon completion of our initial public offering of our common shares represented by ADSs.
C.Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.
D.Exchange Controls
See “Item 4.B.4. Information on the Company—Business Overview—Regulation—Regulations Relating to Foreign Exchange. Regulation on foreign exchange control and administration.”
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 Governmentgovernment 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.
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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).
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 threefive 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.
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
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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 698Public 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 698Public Notice 37 and SAT Circular 7, and we may be required to expend valuable resources to comply with SAT Circular 698Public Notice 37 and SAT Circular 7 or to establish that we should not be taxed under SAT Circular 698Public Notice 37 and SAT Circular 7 in the future.
United States Federal Income Tax Considerations
The following discussion is a summary of the United States federal income tax considerations relating to the ownership and disposition of our ADSs or common shares by a U.S. Holder (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 fromThere 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.
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”)“PFIC” for United States federal income tax purposes for the taxable year ended December 31, 2015,2021, and we will very likely be classified as a PFIC for our current taxable year ending December 31, 20162022 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”,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, 2015,2021, and we will very likely be classified as a PFIC for our current taxable year ending December 31, 2016.2022. Each non-corporate U.S. Holder is advised to consult theirits 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.purposes, which will generally limit the availability of foreign tax credits. 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
As described in “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation,” if we are deemed to be a PRC resident enterprise under the event that gainEIT Law, gains from the disposition of the ADSs or commonordinary shares ismay be subject to PRC income tax inand will generally be U.S.-source, which may limit the PRC,ability to receive a foreign tax credit. If a U.S. Holder that is eligible for the benefits of the U.S.-PRC income tax treaty between the United States and the PRC(the “Treaty”), such holder may be able to elect to treat thesuch gain as PRC-source income under the Treaty. Pursuant to recently issued U.S. Treasury Regulations, however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty, then such holder may not be able to claim a foreign tax credit arising from any PRC source income.tax imposed on the disposition of the ADSs or ordinary shares. The rules regarding foreign tax credits and deduction of foreign taxes are complex. U.S. Holders are advised toshould consult itstheir 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 thea foreign tax credit underor deduction in light of their particular circumstances.
circumstances, including their eligibility for benefits under the Treaty, and the potential impact of the recently issued U.S. Treasury Regulations.
Passive Foreign Investment Company Rules
As mentioned above, we believe that we were a PFIC for the taxable year ended December 31, 2015,2021, and we will very likely be classified as a PFIC for our current taxable year ending December 31, 2016.2022. 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. |
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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 entitiesvariable interest entity 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 VIEvariable interest entities.
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 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 cannot technically 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.
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F.Dividends and Paying Agents
Not applicable.
G.Statement by Experts
Not applicable.
H.Documents on Display
We previously filed with the SEC our registration statement on Form F-1, as amended and prospectus under the Securities Act of 1933, with respect to our common shares. We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at http://ir.xunlei.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I.Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk |
Foreign exchange risk
Our financing activities arewere denominated mainly in U.S. dollars. Thedollars while interest bearing loan we borrowed 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 VIEvariable interest entity 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.
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The conversion of RMB into foreign currencies, including U.S. dollars, has beenis 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 ofSince 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 fluctuatedat 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.
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 RenminbiRMB would have a negative effect on the U.S. dollar amounts available to us.
As of December 31, 2021, we had RMB-denominated cash and cash equivalents, and short-term investments of RMB96.2 million, HKD-denominated cash and cash equivalents, restricted cash and short-term investments of HKD1.4 million, THB-denominated cash and cash equivalents, restricted cash and short-term investments of THB1.7 million and U.S. dollar-denominated cash, cash equivalents and short-term investments of US$129.0 million. We also had RMB-denominated restricted cash of RMB26.0 million. Assuming we had converted RMB696.2 million into U.S. dollars at the exchange rate of RMB6.3757 for US$1.00 on December 31, 2021 released by the State Administration of Foreign Exchange of the PRC, our U.S. dollar cash balance would have had a US$109.2 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$99.3 million increase instead. Assuming we had converted US$129.0 million into RMB at the exchange rate of RMB6.3757 for US$1.00 on December 31, 2021 released by the State Administration of Foreign Exchange of the PRC, our RMB cash balance would have had a RMB0.8 billion increase. If the RMB had depreciated by 10% against the U.S. dollar, our RMB cash balance would have had a RMB0.9 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. Further, our interest-bearing bank loan for the Xunlei headquarters building is in Renminbi with a flexible interest rate. We have not used derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.
Item 12.Description of Securities Other than Equity Securities
A.Debt Securities
Not applicable.
B.Warrants and Rights
Not applicable.
C.Other Securities
Not applicable.
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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 | |
$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 |
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 fromIn addition, the depositary in 2015 in connection withhas agreed to waive the establishment of our ADS facility.
None.
The following “Use of Proceeds” information relates to our initial public offering of 7,315,000issuance 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 accountissued (i) in connection with our initial public offering, includingfollow-on equity offerings, (ii) to our founders and senior management, and (iii) in connection with our employee incentive plans. In 2021, we received approximately US$0.2 million (after withholding tax) from the over-allotment option, were approximately US$11.3 million, including underwriting discountsdepositary.
PART II
Item 13.Defaults, Dividend Arrearages and commissionsDelinquencies
None.
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Item 14.Material Modifications to the directors, officers, general partnersRights of our company or their associates, persons owning 10% or moreSecurity 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:
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.
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, 2015,2021, 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.
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'scompany’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'scompany’s receipts and expenditures are being made only in accordance with authorizations of a company'scompany’s management and directors, and (3)(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company'scompany’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, 20152021 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, our 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 identifiedwas effective as of December 31, 2014 and had not been remediated as2021.
Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP, has audited the effectiveness of December 31, 2015. The material weakness is related to a lack of accounting resources in U.S. GAAP and SEC reporting requirements.
Because of the material weakness described above, our management has concluded that we did not maintain effectivecompany’s internal control over financial reporting as of December 31, 2015, based2021, as stated in its report, which appears on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.page F-1 of this annual report on Form 20-F.
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Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of the company’sOur independent registered public accounting firm, becausePricewaterhouseCoopers Zhong Tian LLP, has audited the company qualified as an “emerging growth company” as defined under the JOBS Acteffectiveness of our internal control over financial reporting as of December 31, 2015.2021 as stated in its report, which appears on page F-2 of this annual report on Form 20-F.
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.
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.Audit Committee Financial Expert |
Our board of directors has determined that each of Ms. Jenny Wenjie Wu anand Mr. Ya Li, our independent directordirectors (under the standards set forth in Rule 5605(a)(2) of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act of 1934) and chairman of our audit committee, is an audit committee financial expert.
| Item 16B.Code of Ethics |
Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers and employees, including certain provisions that specifically apply to our chief executive officer, chief financial officer, other executive officers as defined under Rule 405 under the Securities Act of 1933, as amended, senior finance officer, controller, senior vice presidents and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 to our registration statement on Form F-1 (File Number 333-196221), as amended, initially filed with the SEC on May 23, 2014. The code is also available on our official website under the corporate governance section at our investor relations website http://ir.xunlei.com.
We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.
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 40.0% of our outstanding share capital as of March 31, 2022. 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.
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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.
| 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$ | — | |||||
| | | | | | |
| | 2019 | | 2020 |
| 2021 |
| | (in US$) | ||||
Audit fees(1) |
| 905,356 |
| 1,019,720 | | 1,019,496 |
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 |
| (2) | “Audit-related fees” represents the aggregate fees billed for |
| (3) | “All other fees” |
The policy of our audit committee is to preapprovepre-approve all audit and non-audit services provided by our independent auditors,auditor, including audit services, audit-related services and taxother 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, 2015.2021.
Item 16D.Exemptions from the Listing Standards for Audit Committees |
Not applicable.
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
In December 2014, our board of directors authorized a share repurchase program, or the Repurchase Program, whereby our company may repurchase up to US$20 million of our common shares or ADSs from December 22, 2014 to December 31, 2015. The share repurchases may be madeNot applicable.
Item 16F.Change 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.Registrant’s Certifying Accountant
Not applicable.
The following table is a summary of the shares repurchased by us during 2015 under the Repurchase Program. No shares were repurchased during 2015 except during the month indicated and all shares were purchased from our employees pursuant to the Repurchase Program.
Period | 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 | — | ||||||||||||
(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.
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.
PwC HK’s reports on our consolidated financial statements as of and for the years ended December 31, 2012 and 2013 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During fiscal years ended December 31, 2012 and 2013 and the subsequent interim period through October 30, 2014, (i) there were no disagreements with PwC HK on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC HK, would have caused PwC HK to make references thereto in their reports on the financial statements for such periods and (ii) there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F except for a lack of accounting resources in U.S. GAAP and SEC reporting requirements, which is a material weakness the details of which can be found in “Item 15. Control and Procedures—Changes in internal control over financial reporting.”
We provided PwC HK with a copy of the foregoing disclosure, and requested that PwC HK furnish us with a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. We have received the requested letter from PwC HK, a copy of which is included as Exhibit 16.1 attached herein.
During the fiscal years ended December 31, 2012 and 2013 and the subsequent interim period through October 30, 2014, we did not consult PwC China regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements (and no written report was provided to us or oral advice was provided that PwC China concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue); or (ii) any matter that was either the subject of a disagreement pursuant to Item 16F(a)(1)(iv) of the instructions to Form 20-F, or a reportable event pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F.
| 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
164
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 memberthree-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. Yubo Zhang and our corporate governance and nominating committee is not composed solely of independent directors.
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 WangJinbo 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.Mine Safety Disclosure |
Not applicable.
PART III
| Item 17.Financial Statements |
We have elected to provide financial statements pursuant to Item 18.
Item 18.Financial Statements |
The consolidated financial statements of Xunlei Limited, its subsidiaries and its variable interest entity and its subsidiaries are included at the end of this annual report.
165
Item 19.Exhibits
Exhibit | Description of | |
1.1 | ||
2.1 | ||
Registrant’s specimen American depositary receipt (included in Exhibit 2.3) | ||
2.2 | ||
2.3 | ||
Deposit agreement among the Registrant, the depositary and holders of American depositary receipts, dated June 23, 2014 (incorporated by reference to Exhibit | ||
2.4* | Description of securities | |
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | | |
4.9 | ||
4.10 | ||
4.11 | ||
4.12 | ||
4.13 | ||
166
4.14 | ||
4.15 | ||
4.16 | ||
4.17 | ||
4.18 | ||
4.19 | ||
4.20 | ||
4.21 | ||
4.22 | ||
4.23 | ||
4.24 | ||
4.25 | ||
4.26 | ||
4.27 | ||
4.28 |
167
4.29 | ||
4.30 | ||
4.31 | ||
4.32 | ||
4.33 | ||
4.34 | ||
4.35 | ||
4.36 | ||
4.37 | ||
4.38 | ||
4.39 | ||
4.40 | ||
4.41* | | English translation of the Credit Agreement dated December 2, 2021 between Shenzhen Xunlei Networking Technologies Co., Ltd. and China Merchants Bank Shenzhen Branch |
4.42* | | English translation of the Agreement on Financing Amount dated November 14, 2021 between Shenzhen Xunlei Networking Technologies Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd., Shenzhen Branch |
168
4.43* | | English translation of the Maximum Mortgage Contract dated November 14, 2021 between Shenzhen Xunlei Networking Technologies Co., Ltd. and Shanghai Pudong Development Bank Co., Ltd., Shenzhen Branch |
4.44* | | |
4.45* | | English translation of the Supplementary Agreement to Proprietary Technology License Agreement dated March 1, 2022 between Giganology (Shenzhen) Ltd. and Shenzhen Xunlei Networking Technologies Co., Ltd. |
4.46* | | English translation of Power of Attorney between Giganology Shenzhen and Shenglong Zou, dated May 11, 2021 |
4.47* | | English translation of Power of Attorney between Giganology Shenzhen and Hao Cheng, dated May 10, 2021 |
4.48* | | English translation of Power of Attorney between Giganology Shenzhen and Fang Wang, dated May 10, 2021 |
4.49* | | English translation of Power of Attorney between Giganology Shenzhen and Jianming Shi, dated May 10, 2021 |
4.50* | | English translation of Power of Attorney between Giganology Shenzhen and Guangzhou Shulian Information Investment Co., Ltd., dated May 10, 2021 |
4.51* | | |
8.1* | List of | |
11.1 | ||
12.1* | ||
12.2* | ||
13.1** | ||
13.2** | ||
15.1* | ||
15.2* | ||
15.3* | ||
Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent registered public accounting firm | ||
|
| |
101.SCH* | ||
Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL* | ||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF* | ||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB* | ||
Inline XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE* | ||
Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
*Filed herewith
**Furnished herewith
169
SIGNATURES
The registrant herebyhere 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 | ||||
By: | /s/ Jinbo Li | |||
Name: | Jinbo Li | |||
Title: | Chairman of the Board and Chief Executive Officer | |||
Date: April 28, 2022
170
Index to consolidated financial statements
Page | ||
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1424) | | F-1 |
| ||
| Consolidated Balance Sheets as of December 31, | | F-4 |
| ||
| F-6 | |
| ||
| F-8 | |
| ||
| F-9 | |
| ||
| F-10 |
Report of independent registered public accounting firmIndependent 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, 2021 and 2020, and the related consolidated statements of comprehensive income/(loss),/income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of Xunlei Limited and its subsidiaries (collectively, the “Group”) forthree years in the yearperiod ended December 31, 20132021 in conformity with accounting principles generally accepted in the United States of America. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, 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 responsibilityfor 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 opinionopinions on thesethe 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 statementsaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, 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 supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. 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 providesaudits provide a reasonable basis for our opinion.opinions.
F-1
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.
/s/ PricewaterhouseCoopersBecause 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.
PricewaterhouseCoopersCritical Audit Matters
Hong Kong
March 21, 2014, except forThe critical audit matter communicated below is a matter arising from the effectscurrent period audit of discontinued operations discussed in Note 3the 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(k) and 13 to the dateconsolidated financial statements, the Company’s consolidated goodwill balance was US$23.1 million as of December 31, 2021. 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 April 21, 2016
Report of independent registered public accounting firm
Toestimated by management using the Board of Directorsdiscounted 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 Shareholders of Xunlei Limited:
In our opinion,assumptions relating to revenue forecast, operating margins, the accompanying consolidated balance sheetsdiscount rate, and the related consolidated statements of comprehensive income/(loss), of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Xunlei Limited and its subsidiaries (collectively, the ‘‘Group’’) at December 31, 2015 and 2014, and the results of their operations and their cash flows for eachterminal growth rate. As a result of the two years inimpairment test, management determined that the periodestimated fair value of the reporting unit exceeded its carrying value and therefore no goodwill impairment losses were recognized for the year ended December 31, 20152021.
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 conformityperforming 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 accounting principles generally acceptedspecialized skill and knowledge.
F-2
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 United Statesmodel; and (iv) evaluating the reasonableness of America. These financial statements aresignificant assumptions used by management, related to revenue forecast, operating margins, the responsibilitydiscount 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 Group’s management. Our responsibility isaudit. Professionals with specialized skill and knowledge were used to express an opinion on these financial statements based on our audit. We conducted our audit of these statementsassist in accordance with the standardsevaluation of the Public Company Accounting Oversight Board (United States). Those standards require that we planappropriateness of the Company’s discounted cash flow model and performreasonableness of certain significant assumptions, including the audit to obtain reasonable assurance about whetherdiscount rate and 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.terminal growth rate.
/s/ PricewaterhouseCoopers Zhong Tian LLP
PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
April 21, 201628, 2022
We have served as the Company’s auditor since 2014.
F-3
Xunlei Limited
Consolidated Balance Sheets
| | | | | | |
(Amounts expressed in thousands of United States dollars (“USD”), | | | | As of | | As of |
except for number of shares and per share data) |
| Note |
| December 31, 2020 |
| December 31, 2021 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents |
| 4 |
| 137,248 | | 123,358 |
Short-term investments |
| 5 |
| 117,821 | | 115,652 |
Accounts receivable, net (Allowance for current expected credit losses of USD9,329 and USD1,764 as of December 31, 2020 and 2021, respectively) |
| 6 |
| 22,983 | | 26,135 |
Inventories |
| 7 |
| 1,726 | | 1,363 |
Due from related parties (Allowance for current expected credit losses of NaN and USD339 as of December 31, 2020 and 2021, respectively) | | 25 |
| 10,970 | | 15,578 |
Prepayments and other current assets (Allowance for current expected credit losses of USD10,283 and USD10,364 as of December 31, 2020 and 2021, respectively) |
| 8 |
| 11,534 | | 11,842 |
Total current assets | | |
| 302,282 | | 293,928 |
| | | | | | |
Non-current assets: |
|
|
|
| | |
Restricted cash | | 2(e) | | 1,541 | | 4,078 |
Long-term investments |
| 9 |
| 26,734 | | 31,495 |
Property and equipment, net |
| 10 |
| 50,725 | | 57,657 |
Right-of-use assets | | 11 | | 1,954 | | 27 |
Intangible assets, net |
| 12 |
| 8,857 | | 8,299 |
Goodwill | | 2(k), 13 |
| 22,607 | | 23,136 |
Due from a related party, non-current portion (Allowance for current expected credit losses of NaN and USD689 as of December 31, 2020 and 2021, respectively) | | 25 | | — | | 19,311 |
Long-term prepayments and other assets |
| 8 |
| 905 | | 2,787 |
Total assets | | |
| 415,605 | | 440,718 |
| | | | | | |
Liabilities |
|
|
|
| | |
Current liabilities: |
|
|
|
| | |
Accounts payable (including accounts payable of the consolidated variable interest entity (“VIE”) without recourse to the Company of USD20,588 and USD23,789 as of December 31, 2020 and 2021, respectively) |
| |
| 20,644 | | 26,407 |
Due to related parties (including due to related parties of the consolidated VIE without recourse to the Company of USD55 and USD91 as of December 31, 2020 and 2021, respectively) |
| 25 |
| 5,389 | | 1,597 |
Contract liabilities and deferred income, current portion (including contract liabilities and deferred income, current portion of the consolidated VIE without recourse to the Company of USD34,040 and USD36,740 as of December 31, 2020 and 2021, respectively) |
| 14 |
| 34,040 | | 36,892 |
Income tax payable (including income tax payable of the consolidated VIE without recourse to the Company of USD2,500 and USD2,451 as of December 31, 2020 and 2021, respectively) |
| |
| 2,553 | | 2,531 |
Accrued liabilities and other payables (including accrued liabilities and other payables of the consolidated VIE without recourse to the Company of USD33,361 and USD42,449 as of December 31, 2020 and 2021, respectively ) |
| 15 |
| 38,689 | | 49,557 |
Bank borrowings (including bank borrowings of the consolidated VIE without recourse to the Company of NaN and USD2,876 as of December 31, 2020 and 2021, respectively) | | 16 |
| — | | 2,876 |
Lease liabilities (including lease liabilities, current portion of the consolidated VIE without recourse to the Company of USD1,912 and USD18 as of December 31, 2020 and 2021, respectively) | | 11 | | 1,961 | | 18 |
Total current liabilities. | | |
| 103,276 | | 119,878 |
F-4
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 | — | |||||||||
Xunlei Limited
Consolidated Balance Sheets (Continued)
| | | | | | |
(Amounts expressed in thousands of United States dollars |
| |
| As of |
| As of |
(“USD”), except for number of shares and per share data) | | Note | | December 31, 2020 | | December 31, 2021 |
Non-current liabilities: | | | | | | |
Contract liabilities and deferred income, non-current portion (including contract liabilities and deferred income, non-current portion of the consolidated VIE without recourse to the Company of USD920 and USD845 as of December 31, 2020 and 2021, respectively) |
| 14 | | 920 | | 845 |
Deferred tax liabilities, non-current portion (including deferred tax liabilities of the consolidated VIE without recourse to the Company of USD1,085 and USD930 as of December 31, 2020 and 2021, respectively) |
| 23 | | 1,085 | | 930 |
Bank borrowings, non-current portion (including bank borrowings of the consolidated VIE without recourse to the Company of USD19,924 and USD17,291 as of December 31, 2020 and 2021, respectively) | | 16 | | 19,924 | | 17,291 |
Lease liabilities, non-current portion (including lease liabilities, non-current portion of the consolidated VIE without recourse to the Company of USD27 and USD7 as of December 31, 2020 and 2021, respectively) | | 11 | | 27 | | 7 |
Total liabilities | | | | 125,232 | | 138,951 |
Commitments and contingencies |
| 27 | | | | |
Equity |
|
| | | | |
Common shares (368,877,205 shares issued and 334,401,981 shares outstanding as of December 31, 2020; 368,877,205 shares issued and 337,257,946 shares outstanding as of December 31, 2021) |
| 17 | | 84 | | 84 |
Additional paid-in-capital | | | | 469,887 | | 476,057 |
Accumulated other comprehensive (loss)/income | | | | (2,144) | | 1,988 |
Statutory reserves | | | | 5,414 | | 6,155 |
Treasury shares (34,475,224 shares and 31,619,259 shares as of December 31, 2020 and 2021, respectively) | | | | 8 | | 8 |
Accumulated deficits | | | | (181,095) | | (180,645) |
Total Xunlei Limited’s shareholders’ equity | | | | 292,154 | | 303,647 |
Non-controlling interests |
| 20 | | (1,781) | | (1,880) |
Total liabilities and shareholders’ equity | | | | 415,605 | | 440,718 |
| (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
Consolidated Statements of Comprehensive Income/(Loss)(Loss)/Income
| | | | | | | | |
(Amounts expressed in thousands of USD, |
| | | Years ended December 31, | ||||
except for number of shares and per share data) |
| Note |
| 2019 |
| 2020 |
| 2021 |
Net revenues | | | | | | | | |
Total revenues, net of rebates and discounts |
| 2(p), 2(x) |
| 181,267 |
| 186,683 |
| 239,601 |
Business taxes and surcharges |
|
|
| (602) |
| (312) |
| (819) |
Net revenues |
|
|
| 180,665 |
| 186,371 |
| 238,782 |
Costs of revenues |
| 21 |
| (99,913) |
| (92,637) |
| (118,603) |
Gross profit |
|
|
| 80,752 |
| 93,734 |
| 120,179 |
Operating expenses |
|
|
| |
| |
| |
Research and development expenses |
|
|
| (68,571) |
| (55,463) |
| (61,859) |
Sales and marketing expenses |
|
|
| (31,820) |
| (18,064) |
| (24,569) |
General and administrative expenses |
|
|
| (38,930) |
| (33,910) |
| (36,868) |
Asset impairment gain/(loss), net of recoveries |
|
|
| 2,147 |
| (5,090) |
| (1,206) |
Total operating expenses |
|
|
| (137,174) |
| (112,527) |
| (124,502) |
Operating loss |
|
|
| (56,422) |
| (18,793) |
| (4,323) |
Interest income |
|
|
| 1,897 |
| 1,471 |
| 723 |
Interest expense |
|
|
| (75) |
| (406) |
| (95) |
Other income, net |
| 22 |
| 5,861 |
| 4,737 |
| 4,678 |
(Loss)/income before income tax |
|
|
| (48,739) |
| (12,991) |
| 983 |
Income tax (expenses)/benefits |
| 23 |
| (4,676) |
| (1,149) |
| 125 |
Net (loss)/income for the year |
|
|
| (53,415) |
| (14,140) |
| 1,108 |
Less: net loss attributable to the non-controlling interests |
|
|
| (246) |
| (300) |
| (83) |
Net (loss)/income attributable to Xunlei Limited |
|
|
| (53,169) |
| (13,840) |
| 1,191 |
| (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 | ||||||||||||
F-6
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 |
| 2019 |
| 2020 |
| 2021 |
| | | | | | | | |
Net (loss)/income for the year | | |
| (53,415) |
| (14,140) |
| 1,108 |
Other comprehensive (loss)/income: Currency translation adjustments, net of tax | | |
| (650) |
| 11,135 |
| 4,116 |
Comprehensive (loss)/income | | |
| (54,065) |
| (3,005) |
| 5,224 |
Less: comprehensive loss attributable to non-controlling interests | | |
| (219) |
| (446) |
| (99) |
Comprehensive (loss)/income attributable to Xunlei Limited | | |
| (53,846) |
| (2,559) |
| 5,323 |
| | | | | | | | |
(Loss)/income per share for common shares |
|
|
| |
| |
| |
Basic | | 24 | | (0.1574) | | (0.0410) | | 0.0036 |
Diluted | | 24 | | (0.1574) | | (0.0410) | | 0.0035 |
| | | | | | | | |
Weighted average number of common shares used in calculating |
|
|
| |
| |
| |
Basic |
| 24 |
| 337,845,675 |
| 337,429,601 |
| 334,707,559 |
Diluted |
| 24 |
| 337,845,675 |
| 337,429,601 |
| 335,969,780 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Consolidated statementsStatements of changesChanges in shareholders’ equityShareholders’ 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)/income |
| equity |
| interest |
| equity |
Balance at January 1, 2019 |
| 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 |
| | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation | | — | | — | | — | | — | | 6,170 | | — | | — | | — | | 6,170 | | — | | 6,170 |
Restricted shares vested | | 2,855,965 | | — | | (2,855,965) | | — | | — | | — | | — | | — | | — | | — | | — |
Appropriation of statutory reserves | | — | | — | | — | | — | | — | | (741) | | 741 | | — | | — | | — | | — |
Net income | | — | | — | | — | | — | | — | | 1,191 | | — | | — | | 1,191 | | (83) | | 1,108 |
Currency translation adjustments | | — | | — | | — | | — | | — | | — | | — | | 4,132 | | 4,132 | | (16) | | 4,116 |
Balance at December 31, 2021 | | 337,257,946 | | 84 | | 31,619,259 | | 8 | | 476,057 | | (180,645) | | 6,155 | | 1,988 | | 303,647 | | (1,880) | | 301,767 |
| (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 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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 Cash Flows
| | | | | | |
(Amounts expressed in thousands of USD except for | | Years ended December 31, | ||||
number of shares and per share data) |
| 2019 |
| 2020 |
| 2021 |
Cash flows from operating activities | | | | | | |
Net (loss)/income for the year |
| (53,415) |
| (14,140) | | 1,108 |
Adjustments to reconcile net (loss)/income to net cash (used in)/generated from operating activities |
| |
| | | |
—Depreciation of property and equipment |
| 5,824 |
| 9,277 | | 6,319 |
—Amortization of intangible assets |
| 1,200 |
| 1,216 | | 1,129 |
—Amortization of the right-of-use assets | | 5,634 | | 3,685 | | 1,934 |
—Allowance for doubtful accounts |
| (2,128) |
| 5,305 | | 1,213 |
—Loss/(gain) on disposal of property and equipment |
| 144 |
| (55) | | 31 |
—Share-based compensation |
| 5,428 |
| 2,310 | | 6,170 |
—Investment income from short-term investments |
| (1,708) |
| (664) | | (404) |
—Impairment of inventories |
| 3,578 |
| 3,283 | | 429 |
—Impairment of long-term investments |
| 19,831 |
| 794 | | — |
—Net unrealized gains on long-term investments |
| (10,907) |
| (794) | | — |
—Investment income on disposal of long-term investments | | (579) | | (214) | | (42) |
—Interest expense accrued on due to related parties |
| 75 |
| 406 | | 95 |
—Deferred taxes |
| 4,361 |
| 966 | | (178) |
—Deferred government grants |
| (1,735) |
| (865) | | (169) |
Changes in operating assets and liabilities: |
| |
| | | |
—Accounts receivable |
| (8,739) |
| 5,048 | | (2,168) |
—Prepayments and other assets |
| 772 |
| (1,263) | | (2,319) |
—Due from/to related parties |
| (684) |
| (8,598) | | (8,507) |
—Accounts payable |
| 2,086 |
| (4,938) | | 5,238 |
—Inventories |
| 3,435 |
| 643 | | (36) |
—Contract liabilities |
| (664) |
| 289 | | 2,112 |
—Income tax payable |
| 98 |
| (163) | | (77) |
—Accrued liabilities and other payables |
| (12,580) |
| (11,707) | | 9,605 |
—Lease liabilities | | (4,976) | | (3,732) | | (2,003) |
Net cash (used in)/generated from operating activities |
| (45,649) |
| (13,911) | | 19,480 |
| | | | | | |
Cash flows from investing activities |
| |
| | | |
Purchase of short-term investments |
| (355,294) |
| (177,075) | | (337,738) |
Proceeds from collection upon maturities of short-term investments |
| 450,687 |
| 167,439 | | 341,960 |
Proceeds from disposal of property and equipment |
| 576 |
| 721 | | 207 |
Proceeds from disposal of long-term investments |
| 528 |
| 1,076 | | 42 |
Purchase of intangible assets |
| (433) |
| (59) | | (84) |
Acquisition of long-term investments |
| (2,838) |
| — | | (3,627) |
Repayment/(payment) of loans to employees |
| 711 |
| 696 | | (177) |
Acquisition of property and equipment |
| (3,084) |
| (134) | | (5,821) |
Loan to a related party | | — | | — | | (20,000) |
Payment for construction in progress |
| (11,593) |
| (13,420) | | (7,381) |
Net cash generated from/(used in) investing activities |
| 79,260 |
| (20,756) | | (32,619) |
| | | | | | |
Cash flows from financing activities |
| |
| | | |
Repurchase of shares |
| — |
| (4,475) | | — |
Governments grants received |
| 853 |
| — | | — |
Proceeds from bank borrowings | | 11,324 | | 7,816 | | 2,196 |
Repayment of bank borrowings | | — | | — | | (2,419) |
Repayment of loans due to a related party arising from a business combination | | — | | (662) | | — |
Net cash generated from/(used in) financing activities |
| 12,177 |
| 2,679 | | (223) |
| | | | | | |
Net increase/(decrease) in cash, cash equivalents and restricted cash |
| 45,788 |
| (31,988) | | (13,362) |
Effect of exchange rates on cash and cash equivalents, and restricted cash |
| (3,270) |
| 5,329 | | 2,009 |
Cash and cash equivalents at beginning of year | | 122,930 | | 162,465 | | 137,248 |
Restricted cash at beginning of year | | — | | 2,983 | | 1,541 |
Cash, cash equivalents and restricted cash at beginning of year | | 122,930 | | 165,448 | | 138,789 |
Cash and cash equivalents at end of year | | 162,465 | | 137,248 | | 123,358 |
Restricted cash at end of year | | 2,983 | | 1,541 | | 4,078 |
Cash, cash equivalents and restricted cash at end of year |
| 165,448 |
| 138,789 | | 127,436 |
| | | | | | |
Supplemental disclosure of cash flow information | | | | | | |
Income tax paid |
| (142) |
| (356) | | (66) |
Non-cash investing and financing activities | | | | | | |
—Acquisition of property and equipment in form of other payables |
| (321) |
| (5,217) | | (568) |
—Acquisition of right-of-use assets and lease liabilities, net off impact from lease modification |
| 2,723 |
| (3,325) | | (10) |
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
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 | |||||||||
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 | — | |||||||||
The accompanying notes are an integral part of theseNotes to the consolidated financial statements.
statements
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Xunlei Limited, previously known as Giganology Limited, (the “Company””Company”) was incorporated under the law of the Cayman Islands (“Cayman”) as a limited liability company on February 3, 2005. The accompanyingCompany completed its initial public offering 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, 2021, 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., | People’s Republic of China (“PRC”) | January 2003 | VIE | 100 | % | Development of software, provision of online advertising and | ||||||
| | |||||||||||
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.”) (“ | PRC | December 2005 | VIE’s subsidiary | 100 | % | Development of computer software, | ||||||
| | |||||||||||
Xunlei | Games Development | |||||||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
PRC | February 2010 | VIE’s subsidiary | 70 | % | Development of online game and computer software | |||||||
| | | | | | | | | | | ||
Xunlei Network Technologies Limited (“Xunlei BVI”) | British Virgin Islands | February 2011 | Subsidiary | 100 | % | Investment holding company | ||||||
| ||||||||||||
Xunlei Network Technologies Limited (“Xunlei HK”) | Hong Kong | March 2011 | Subsidiary | 100 | % | Investment holding company and development of computer software | ||||||
| ||||||||||||
Xunlei Computer (Shenzhen) Co., | PRC | November 2011 | Subsidiary | 100 | % | Development of computer software and provision of information technology services | ||||||
| ||||||||||||
Shenzhen Onething Technologies Co., | PRC | September 2013 | VIE’s subsidiary | 100 | % | Development of cloud computing technology and provision of related 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-10
Xunlei Limited
Notes to 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 |
Henan Tourism Information Co., Ltd. (“Henan Tourism”) | PRC | June 2018 | VIE’s Subsidiary | 80 | % | Software development, tourism consulting, ticket agent and | ||||
| | |||||||||
Jiangxi Node Technology Service Co., Ltd. (“Jiangxi Node”) | PRC | July 2020 | VIE’s subsidiary | 100 | % | Development of | ||||
| | | | | | | | | | |
FUNI. PTE. LTD. (“FUNI”) | | Singapore | | April 2021 | | Subsidiary | | 100 | % | Operation of live streaming platform |
Note: 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 online advertising services on its websites, premium downloading services to its members, and online gamesales of bandwidth, platforms for game developerslive streaming services, advertising services and users.
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 companyCompany conducts its business through Shenzhen Xunlei, its consolidatedthe 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 as the primary beneficiary received all of the economic benefits and residual interest and absorbed all of the risks and expected losses from Shenzhen Xunlei.
F-11
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 9RMB9 million to the legal shareholders of Shenzhen Xunlei for them to make contributions as registered capital into Shenzhen Xunlei. The termterms 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 RMB30 million. The term of this agreement lastlasts 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—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,The agreement became expired 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 accordinghas been extended to the requirement of the WFOE (i.e. primary beneficiary of the VIE), as contemplated in the original terms of the VIE arrangements.
November 2026.
—Equity Pledge Agreement between Giganology Shenzhen and the legal shareholders of Shenzhen Xunlei—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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
—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 May 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. The agreement expired in May 2021 and has been extended to May 2031.
F-12
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—Xunlei — Under various service agreements, Giganology Shenzhen will provide services including technical support, training, as well as consulting services to Shenzhen Xunlei in exchange for a service fee. These service agreements include the Exclusive Technology Support and Services Agreement, the Exclusive Technology Consulting and Training Agreement and the Software and Proprietary Technology License Contract. Giganology Shenzhen is entitled to service fees equal to 20%, 20% and 40% of the pre-tax operating profit of Shenzhen Xunlei according to the terms and provisions of these agreements, respectively (in aggregate 80% of pre-tax operating profit of Shenzhen Xunlei). In addition, these agreements also allow both parties to review and adjust the above mentioned percentage every six months according to the business operation and income of Shenzhen Xunlei so as to enable Giganology Shenzhen to extract substantially all the after tax operating profit of Shenzhen Xunlei. The amount of service fees payable from Shenzhen Xunlei to Giganology Shenzhen for the years ended December 31, 2013, 2014 and 2015 was USD nil, USD 1,228 thousand and USD 1,235 thousand, respectively.
For the Exclusive Technology Support and Services Agreement and the Exclusive Technology Consulting and Training Agreement, the term of these agreements will expire in 2025 and may be extended with Giganology Shenzhen’s written confirmation prior to the expiration date. Giganology Shenzhen is entitled to terminate the agreement at any time by providing 30 days’ prior written notice to Shenzhen Xunlei.
For the Proprietary Technology License Contract, the term of this contract will expirebecame expired in March 2022 and may behas been extended with Giganology Shenzhen’s written confirmation priorShenzhen to the expiration date.March 2032. 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.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 expirebecame expired in March 2022 and may behad been automatically extended for an additional 10 years at Giganology Shenzhen’s discretion.
discretion to March 2032.
—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 1RMB1 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-13
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
VIE-related risks
It is possible that the Group’s operation of certain of its operations and businesses through VIEsVIE could be found by PRC authorities to be in violation of PRC lawlaws 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 lawlaws 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 VIEsVIE 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.”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 VIEsVIE 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
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 make clear how “control” wouldexplicitly 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 VIE structure as a whole and each of the agreements comprising VIE will not be determinedaffected by the 2018 Draft Foreign Investment Law. It leaves leeway for such purpose,government’s future regulation of the variable interest entity structure. According to the deliberation and voting results from the final session of the 13th 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 silentpossible that future laws, administrative regulations, or provisions of the State Council may recognize the variable interest entity structure as to what typea form of enforcement action might be taken against existing VIEsforeign investment but at the same time impose additional requirements/restrictions on the contractual arrangements. It is also possible that operate in restricted industries and are not controlled by entities organized under PRC lawfurther laws, administrative regulations, or individuals who are PRC citizens. provisions of the State Council may explicitly exclude the variable interest entity structure as a form of foreign investment.
If a finding werewas made by PRC authorities under existing lawlaws and regulations or under the Draft FIE Law if itand becomes effective, that the Group’s operation of certain of its operations and businesses through VIEs,VIE, 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 VIEsVIE and shareholders of its VIEsVIE 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.VIE. 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 VIEsVIE 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-14
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies
Initial public offering
(a) Basis of presentation and use of estimates
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.
The accompanying 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 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,credit losses, 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
F-15
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)
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 25note 28 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 (loss)/income as an allocation of the total income or loss for the year/periodyear between non-controlling shareholders and the shareholders of the Company.
(c)Business combinations
When disposalsThe Group accounts for acquisitions of entities that represent a strategic shift that has (or will have) a major effect oninclude inputs and processes and have the entity’s results and operations would qualifyability to generate economic benefit 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, frombusiness combinations. The Group allocates the restpurchase price of the entity is classified as held for disposal or has been disposed of, ifacquisition to the component either (1) represents a strategic shift or (2) have a major impacttangible assets and identifiable intangible assets acquired based on an entity’s financial results and operations. Examples include a disposal of a major geographical location, line of business, or other significant parttheir estimated fair values. The excess of the entity, or disposal of a major equity method investment. In the consolidated income statement, result from discontinued operationspurchase price over those fair values is reported separately from the income and expenses from continuing operations and prior periodsrecorded as goodwill. Acquisition-related costs 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.expensed as incurred.
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (d) Foreign currency translation |
The Company’s reporting and functional currency is the United States Dollar (‘‘USD’’). Xunlei BVI and Xunlei HK’sThe functional currency of Onething Co., Ltd. (Thailand) (“Thailand Onething”) is the USD. TheThai Baht (“THB”), the functional currency of other subsidiaries, VIE and itsVIE’s subsidiaries located in the PRCMainland China is the Renminbi (‘‘RMB’’), and the functional currency of other subsidiaries located outside the Mainland China is the USD, 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“Other income, (loss)net” within the consolidated statements of comprehensive (loss)/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-16 Xunlei Limited Notes to the consolidated financial statements (Amounts in US dollars unless otherwise stated) 2. Summary of significant accounting policies (Continued) (e) 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 as required by the court for ongoing litigations.
(f) Short-term investments |
Short-term investments include deposits placed with banks with original maturities of more than three months but less thanwithin one year and investments in financial instruments with a variable interest rate indexed to the performance of underlying assets. In accordance withASC 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 (loss)/income. Interest generated from short term investments are recorded when interest payments are received at the maturity date. It is recorded as “other income”“Other income, net” on the statement of comprehensive (loss)/income and measured based on the actual amount of interest the Group received.
(g) Allowance for expected credit losses
The Group’sEffective 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 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,assets held at amortized cost with the exception of short-term investments (see note 2 (e)), approximates their fair value duecumulative-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 and short term natureexpected credit losses (“CECL”) methodology, which will result in more timely recognition of these balances.
Accounts receivable are presented netcredit losses. The CECL methodology requires that the full amount of allowanceexpected credit losses for doubtful accounts. The Group evaluates the creditworthinesslifetime of each customerthe financial instrument be recorded at the time when servicesit 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 rendered and continuously monitorwithin the recoverabilityscope of the accounts receivable.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
ASC Topic 326.
The Group uses specific identification method in providingassessed the credit loss for bad debts when facts and circumstances indicate that collection is doubtful andaccounts receivable with similar risk characteristics on a pool basis. The credit 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 allowanceassessment for doubtful accounts iseach pool was mainly based on past collection experience, consideration of current and future economic conditions and changes in 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.
Group’s collection trends.
The credit allowances provided for Accounts Receivable from continuing operationsaccounts receivable as of December 31, 20142020 and 20152021 were USD 0.1 millionUSD9,329,000 and USD 0.1 million,USD1,764,000, 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.
| (h) 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.
F-17
An allowance is recorded for excess inventory and obsolescence based onXunlei Limited
Notes to the lowerconsolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of cost or net realizable value.significant accounting policies (Continued)
| (i) Long-term investments |
The Group holds investments in privately held companies. TheOn January 1, 2018, the Group accounts for theseadopted ASU 2016-01, Financial Instruments, and started to measure long-term equity investments, over which it has significant influence but does not own a majority equity interest or otherwise control using theother than equity method of accounting.investments, at fair value through earnings. For those investments in an investee over which the Group does not have significant influence and of which the investee has nowithout 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 carriedelected to record these investments at cost, should recognize income when dividendsless 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 received fromobservable price changes in orderly transactions for the distributionidentical or similar investment of the investee’s earnings. The Group assesses itssame issuer.
Management regularly evaluates the impairment of long-term equity investments for other-than-temporary impairment by considering factors including,based on performance and financial position of the investee as well as other evidence of market value. Such evaluation includes, but not limited to, current economicreviewing the investee’s cash position, recent financing, projected and market conditions, operatinghistorical financial performance, cash flow forecasts and financing needs. An impairment loss recognised equal to the excess of the companies, including current earnings trends and undiscounted cash flows, and other company-specific information.investment costs over its fair value at the end of each reporting period for which the assessment is made. 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 affectwould then become the calculationnew cost basis of the fair value of the investments and determination of whether any identified impairment is other-than-temporary. investment.
During the years ended December 31, 20132019, 2020 and 2014,2021 the Group did not impair any of its long-term investments. In 2015, the Group recognisedrecognized an impairment of USD 0.8 million.USD19,831,000, USD794,000 and NaN, and share of loss of equity investees of NaN, NaN and NaN from equity method investments, respectively.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (j) 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, | 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 disposition,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 operations.comprehensive (loss)/income. The cost and related accumulated depreciation are removed from the consolidated balance sheets.
F-18
Xunlei Limited
Notes to the consolidated financial statements.statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued) (k) Goodwill |
Goodwill represents the excess of the purchase priceconsideration over the amounts assigned to the fair value of the identifiable tangible and intangible assets acquired and the liabilities assumed from the acquired entity as a result of an acquired business.
Impairmentthe Company’s acquisitions of goodwill assessmentinterests in its subsidiaries, VIE and VIE’s subsidiaries. Goodwill is performednot amortized but is tested for impairment on at least an annual basis, on December 31 or whenevermore frequently if events or changes in circumstances indicate that the carrying value of the asset may notit might be recoverable. According to ASC 350-20-35, an entity may assessimpaired. 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 is, a likelihood of more than 50 percent) that the fair value of aeach reporting unit is less than itsthe carrying amount, including goodwill. But the Group selects proceed directly to perform aquantitative impairment test is performed.
In performing the two-step goodwillquantitative impairment test. Thetest, 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 thata 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 intest requires significant management judgment, including the carrying valueidentification of reporting units, allocation of assets, liabilities and goodwill overto reporting units, and determination of the implied fair value of goodwill. The judgmenteach reporting unit.
Starting in estimating2020, 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 includes estimating future cash flows, determining appropriate discount rateswith 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. Changesreason for the change in these estimates and assumptions could materially affectaccounting principle upon transition. It is more likely that, by adopting simplified measurement which eliminates the determination ofStep 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. NoThe 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 yearyears ended December 31, 2015.2019, 2020 and 2021 based on the impairment test performed by the Group.
F-19
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
Licensed copyrights of movies, TV series(l) Intangible assets
Intangible assets, which include land use rights, acquired computer software 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 theaudio-visual 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 with no residual value and impairment loss, if any.
The Group has two types Amortization of Content Copyrights, 1) non- exclusive Content Copyrights and 2) exclusive Content Copyrights. With non-exclusive Content Copyrights,intangible assets is computed using 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 amortizationstraight-line 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.assets as follows:
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.
| | |
| Estimated useful lives | |
Land use rights | 30 years | |
Acquired computer software | 5 years | |
Audio-visual license | 9 years |
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (m) Impairment of long-lived assets |
The Group evaluates the program usefulness of non-exclusive Content Copyrights and exclusive Content Copyrights pursuant to the guidance inASC 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (n) 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 regardsregard 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.
F-20
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
(o) Operating leases
On January 1, 2019, the Group adopted ASC Topic 842 Leases in which(“ASC 842”) to revise the accounting for leases. The adoption of new lease standard requires a significant portionlessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the risks and rewards of ownership are retained bylease payments, in its balance sheet.
Lessees shall follow the lessor are classifiedrequirements to classify most leases as either financing or operating leases. Payments made under operatingusing principles similar to previous lease are charged toaccounting. In the statementsstatement of comprehensive (loss)/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 operations.
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 lease.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 11 for additional disclosures on operating lease arrangements.
(p) Revenue recognition
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. 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 purchaseNet revenues presented in the consolidated statements 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(loss)/income represent revenues from customers”service and upon consumption, they are recognized as membership subscriptionproduct sales net off sales discount, value-added tax and online game revenue accordingrelated surcharges.
F-21
Xunlei Limited
Notes to the respective prescribed revenue recognition policies addressed below.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
(p) 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.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 deferred revenuecontract liabilities. The Group satisfies its various performance obligations by providing services throughout the subscription period and revenue is recognized ratablyrateably 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 recordrecords 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’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 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
The Group cooperates with advertising platforms such as Guangdiantong and Baidu, 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 andwhich, the advertising services to be provided. The Group enters into advertising contracts with third party advertising agencies that representsplatforms are responsible for matching the requirements of advertisers as well as directly with advertisers. A typical contract term would range from a few days to 3 months. Both third partyor advertising agencies and direct advertisersdispatching the advertising content to Xunlei’s platforms by certain analysis systematically. As the advertising platforms are generally billed at the end of the display period and payments are due usually within 3 months.
Where the Group’sviewed as 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 recognizesthese transactions, revenue for the different elements over their respective display periods. The Group determines the fair values of different advertising elementsis recognized monthly based on the prices charged when these elements were solddata publicized on the platforms and pre-agreed sharing portion.
In May 2020, the Group entered into a standalone basis.user traffic monetization agreement with Beijing Itui Online Network Technology Co., Ltd. (“Itui Online”), a company controlled by the Company’s principal shareholder. Since May 2020, Itui Online has been handling substantially all of the Group’s advertising resources, including matching the requirements of advertisers and dispatching the advertising content to Xunlei’s platforms. Itui Online 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 revenues
The Group operates certain live streaming platforms where users can access the platform, view the live streaming content provided by 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 recognizes revenue onfrom sales of virtual gifts to the elements delivered and defersviewers when the recognitionrelevant virtual gifts are presented to the performers or over the duration of revenue for the fair valuestated period of the undelivered elements untiltime-based item. The Group does not have further obligations to the remaining obligations have been satisfied. Where allviewers 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 sales 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.virtual gifts.
F-22
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
Transactions with third party advertising agencies(p) Revenue recognition (Continued)
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(IV) Cloud computing 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 withASC 250 Accounting Changes and Error Corrections.
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
| (i) Revenues from |
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
|
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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). service
On a monthly basis, the Group records the bandwidth it delivers and recognizerecognizes revenue from these online video streamerscustomers 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.
(ii) Revenues from online games
The Group also enters into a series of technical cooperation 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 rightsonline game operators. Users access to the content it surrenderedGroup’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 exchange. These transactions are non-monetary transactions similarprovision of games to barter transactions,users 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 ofprovides the surrendered assets inrelevant platform to the transaction unless such fair valuegame operators, therefore, the game operators 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 recordedviewed 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.
customers in these transactions.
The Group generated net gains amounted to USD 137 thousand (2013:USD1,020 thousand, 2014: USD1,556 thousand)service fees receivable from barter transactions,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 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)met provided that collectability is reasonably assured.
(q) Sales and business tax and surcharge of USD 25 thousand (2013:USD124 thousand, 2014: USD266 thousand).
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 thousandUSD20,974,000, USD11,026,000 and USD 8,089 thousandUSD15,052,000 for the years ended December 31, 2013, 20142019, 2020 and 2015,2021, respectively.
| (r) General and administrative expenses |
General and administrative expenses consist primarily of salarysalaries and benefits (including related share-based compensation), professional service fees, legal expenses and other administrative expenses.
F-23
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
(s) Research and development costs |
The Group incurred research and development costs to develop its downloading software.software, live streaming platforms 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, live streaming platforms 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.
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 beenwere immaterial for the periods presented.
| (t) 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'smanagement’s estimated future taxable income, management concluded that it is more likely than not that the net operating losses carried forward cancannot be utilized prior to their respective expiration dates. On January 1, 2007, theThe Group adopted the guidanceASC 740 “Income Taxes” 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.ASC 740 “Income Taxes”. 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 BusinessValue-added 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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, inIn addition to the product revenues currently subject to VAT at a rate of 13% (16% before April 1, 2019), the Group’s advertising and content sub-licensing revenues, subscription revenue, live streaming revenue, cloud computing service revenue, online gameadvertising revenue and pay per view subscriptiononline games revenue are in the scope of the Pilot Program and 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. The policy has been extended to December 31, 2022 by the PRC State Tax Bureau on February 18, 2022.
F-24 Xunlei Limited Notes to the consolidated financial statements (Amounts in US dollars unless otherwise stated) |
Full-time employees of the Company’s subsidiaries, consolidated VIE and itsVIE’s 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, VIE and VIEsVIE’s subsidiaries 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 operations for such employee benefits, which are expensed as incurred, were USD3,243 thousand , USD3,818 thousandUSD12,337,000, USD7,949,000 and USD 5,481 thousandUSD12,411,000 for the years ended December 31, 2013 , 20142019, 2020 and 2015,2021, respectively.
| (v) Share-based compensation |
The Group measures share-based compensation based on the stock price at the grant date based on the fair value of the award determined using the Black-Scholes option pricing model.date. 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 linestraight-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.
| (w) 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.
| (x) 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, costrevenues, costs and expenses that does not distinguish between segments, and reports costs and expenseexpenses 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 over 95%of its online media platform. All revenues of the Group arewere derived from mainland China.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
An analysis of the different types of revenues for the years ended December 31, 2013, 20142019, 2020 and 20152021 are summarized as follows:
| | | | | | |
Revenue from operations | | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Subscription revenue |
| 81,532 |
| 84,299 |
| 91,174 |
Live streaming revenue |
| 26,920 |
| 20,866 |
| 35,102 |
Advertising revenue |
| 15,643 |
| 13,206 |
| 12,267 |
Product revenue (note a) |
| 8,269 |
| 1,412 |
| 1,897 |
Cloud computing service and other internet value-added services (note b) |
| 48,903 |
| 66,900 |
| 99,161 |
Total |
| 181,267 |
| 186,683 |
| 239,601 |
| 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 | |||||||||
F-25
Xunlei Limited Notes to the consolidated financial statements (Amounts in US dollars unless otherwise stated) 2. Summary of significant accounting policies (Continued) (x) Segment reporting(Continued) Notes: (a) Product revenue comprised sales of OneThing Cloud devices and hard disks. (b) Other internet value-added services mainly comprised provision of technical services. (y) Net (loss)/income |
Net basic (loss)/income / (loss) per share is computed by dividing net (loss)/income / (loss) attributable to holders of common shares by the weighted-average number of common shares outstanding during the year using the two classtwo-class method. Using the two classtwo-class method, net (loss)/income / (loss) is allocated between common shares and other participating securities based on their participating rights.
Net diluted (loss)/income / (loss) per share is calculated by dividing net (loss)/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 (loss)/income / (loss) per share if their effects would be anti-dilutive. Common share equivalents consist ofare included for 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 theunvested stock options, usingunder the treasury stock method.
| (z) 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.adjustments.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (aa) Profit appropriation and statutory reserves |
The Group’s subsidiaries, consolidated VIE and itsVIE’s 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).
| (bb) Dividends |
Dividends are recognized when declared. NoNaN dividends were declared for the years ended December 31, 2013, 20142019, 2020 and 2015, respectively.2021. 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-26
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2. Summary of significant accounting policies (Continued)
(cc) Recent accounting pronouncements |
In April 2014,January 2021, the FASB issued ASU 2014-08, “Reporting Discontinued OperationsNo. 2021-01, Reference rate reform (Topic 848): ASU 2021-01 is to clarify that the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and Disclosuresexceptions in Topic 848 and that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of Disposalsthe swap do not have the same repricing intervals and dates as a result of Componentsreference rate reform. ASU 2021-01 is effective on the issuance date of an Entity”January 7, 2021 through December 31, 2022.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which changes the threshold for reporting discontinued operationsclarifies that an acquirer of a business should recognize and adds new disclosures. The new guidance definesmeasure contract assets and contract liabilities in 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 entitiescombination 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 contractsaccordance 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, theThe new 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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, 2016,2022, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted asto business combinations occurring on or after the effective date of the beginning of an interim or annual reporting period. Theamendments, with early adoption of this ASU is not expected to have significant impact to the Group’s consolidated financial statements.
permitted.
In November 2015,2021, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet ClassificationNo. 2021-10, Government Assistance (Topic 832): ASU 2021-10 is issuing the update to increase the transparency of Deferred Taxes. ASU 2015-17 simplifiesgovernment assistance including the presentationdisclosure of deferred income taxes, which require(1) the deferred tax liabilitiestypes of assistance, (2) an entity’s accounting for the assistance, and assets be classified as noncurrent(3) the effect of the assistance on an entity’s financial statements. The amendments in a classified statement of financial position. ASU 2015-17 isthis Update are effective for fiscal years and interimall entities within their scope for financial statements issued for annual periods within those years beginning after December 15, 2016. .2021 and early application of the amendments is permitted. The Group believes that this ASU will have an impact onCompany is currently evaluating the Group’s consolidated balance sheet and related disclosures.
In January 2016,effect of 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.2021-10.
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 ASU2016-02of the new guidance as stated above and does not expect that the adoption of those guidance will have a material impact on the consolidated financial statements.
3. Business combination
In September 2020, the Group consolidated balance sheet, resultsentered into a share purchase agreement to acquire 100% equity interests of operations, cash flowsShenzhen Yunwang Wulian Technology Co., Ltd. (“Yunwang Wulian”), formerly known as Shenzhen Qianhai Shanxian Daojia Technology Co., Ltd. from Weimin Luo, a director 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 aspectsChief Operating Officer of the Company (see note 25), and a third party individual at NaN consideration while taking up the net liabilities of Yunwang Wulian. The allocation of the purchase price at the date of acquisition is as follows:
| | |
USD (In thousands) | As of acquisition date | |
Property and equipment | 17 | |
Accrued liabilities and other payables | (798) | |
Goodwill | 781 | |
Total | — |
Yunwang Wulian is a company principally operating an internet platform for daily services. The purpose of this acquisition is to acquire the skilled talents of Yunwang Wulian 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.
F-27
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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
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 | |||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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, 20142020 and 20152021 primarily consist of the following currencies:
| | | | | | | | |
| | December 31, 2020 | | December 31, 2021 | ||||
|
| |
| USD |
| |
| USD |
(In thousands) | | Amount | | equivalent | | Amount | | equivalent |
RMB |
| 312,581 |
| 47,906 |
| 356,535 |
| 55,922 |
USD |
| 89,050 |
| 89,050 |
| 66,650 |
| 66,650 |
SGD | | — | | — | | 739 | | 547 |
Hong Kong Dollar |
| 1,737 |
| 224 |
| 1,413 |
| 181 |
THB |
| 2,052 |
| 68 |
| 1,709 |
| 51 |
Indonesian Rupiah | | — | | — | | 101,762 | | 7 |
Total |
| |
| 137,248 |
| |
| 123,358 |
| 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 | ||||||||||||||
TimeAs of December 31, 2020 and 2021, included in the cash and cash equivalents are time deposits with original maturities of three months or less as of December 31, 2014USD27,200,000 and 2015 primarily consist of the following currencies:USD31,050,000, respectively.
5. Short-term investments
| December 31, 2014 | December 31, 2015 | |||||||||||||||||||
| | | | | ||||||||||||||||
| (In thousands) | Amount | USD equivalent | Amount | USD equivalent |
| December 31, 2020 |
| December 31, 2021 | ||||||||||||
| RMB | 156,749 | 25,617 | 349,099 | 53,760 | ||||||||||||||||
| USD | 5,500 | 5,500 | 260,597 | 260,597 | ||||||||||||||||
Time deposits |
| 68,828 |
| 62,379 | ||||||||||||||||
Investments in financial instruments (note) |
| 48,993 |
| 53,273 | ||||||||||||||||
| Total | 31,117 | 314,357 |
| 117,821 |
| 115,652 | ||||||||||||||
Note: |
| (In thousands) | December 31, 2014 | December 31, 2015 | ||||||
| Investments in financial instruments (note) | 29,427 | 70,328 | ||||||
The investments were issued by commercial banks in |
Time deposits and investments in financial instruments are stated on the balance sheetsheets at the principal amount plus accrued interest. Interest income is recorded in “other income”“Other income, net” in the statementconsolidated statements of comprehensive (loss)/income.
6. Accounts receivable, net
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Accounts receivable |
| 32,312 |
| 27,899 |
Less: Allowance for credit losses |
| (9,329) |
| (1,764) |
Accounts receivable, net |
| 22,983 |
| 26,135 |
F-28
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| 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.
net (Continued)
The following table presents movement in the allowance for doubtful accounts:expected credit loss:
| | | | | | |
(In thousands) |
| December 31, 2019 |
| December 31, 2020 |
| December 31, 2021 |
Balance at beginning of the year |
| 7,709 |
| 7,604 |
| 9,329 |
Additions |
| 19 |
| 1,137 |
| 72 |
Reversals | | — | | — | | (481) |
Write-off | | — | | — | | (7,375) |
Exchange difference |
| (124) |
| 588 |
| 219 |
Balance at end of the year |
| 7,604 |
| 9,329 |
| 1,764 |
| (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%65% and 39%86% of accounts receivable as of December 31, 20142020 and 2015,2021, respectively.
7. Inventories
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Hardware devices (note) |
| 4,830 |
| 1,595 |
Others |
| 324 |
| 238 |
Less: Impairment |
| (3,428) |
| (470) |
Total |
| 1,726 |
| 1,363 |
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 USD3,283,000 and USD429,000 for the years ended December 31, 2020 and 2021, respectively.
8. Prepayments and other assets
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Current portion: | | | | |
Deposit related to an ongoing litigation (note a) | | 4,751 | | 4,862 |
Advances to suppliers (note b) |
| 1,997 |
| 2,088 |
Loans to employees (note c) | | 1,896 | | 1,614 |
Rental and other deposits |
| 1,670 |
| 1,159 |
Others |
| 1,220 |
| 2,119 |
Total of prepayments and other current assets |
| 11,534 |
| 11,842 |
Non-current portion: |
| |
| |
Loans to employees, non-current portion (note c) | | 905 | | 1,473 |
Advances to suppliers, non-current portion (note b) | | — | | 1,314 |
Total of long-term prepayments and other assets |
| 905 |
| 2,787 |
Notes:
| (a) |
| (b) | Advances to suppliers primarily include prepayments to bandwidth suppliers, prepayments for the construction of Xunlei Tower and other |
| (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 | ||||||
| prepaid expenses. |
F-29
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
8. Prepayments and other assets (Continued)
| (c) |
| The Group had entered into loan contracts with certain employees as | |
9. Long-term investments
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Equity interests without a readily determinable fair value: |
| | | |
Balance at beginning of the year |
| 26,365 | | 26,734 |
Additions |
| 0 | | 4,627 |
Net unrealized gains on investments held |
| 794 |
| — |
Exchange difference |
| 369 |
| 134 |
Less: Impairment loss on long-term investments |
| (794) |
| — |
Balance at end of the year |
| 26,734 |
| 31,495 |
Details of the Group’s ownership of the long-term investments are as follows:
| | | | | |
| | | | | |
| | Percentage of ownership of |
| ||
| | shares as of December 31, |
| ||
Investee |
| 2020 |
| 2021 |
|
Equity method investments: | | | | | |
Zhuhai Qianyou Technology Co., Ltd. (“Zhuhai Qianyou”) (note a) |
| 19.00 | % | — | |
Shenzhen Mojingou Information Services Co., Ltd. |
| 28.77 | % | 28.77 | % |
Equity interests without a readily determinable fair value: |
| | | | |
Guangzhou Yuechuan Network Technology Co., Ltd. |
| 9.30 | % | 9.30 | % |
Chengdu Diting Technology Co., Ltd. |
| 12.74 | % | 12.74 | % |
Shanghai Guozhi Electronic Technology Co., Ltd. |
| 16.80 | % | 16.80 | % |
Guangzhou Hongsi Network Technology Co., Ltd. |
| 19.90 | % | 19.90 | % |
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 | % |
Lexiang Technology Co., Ltd. (formerly named as “Shanghai Lexiang Technology Co., Ltd.") ("Lexiang") (note b) | | 7.81 | % | 6.93 | % |
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 Interative Technology Co., Ltd.”) |
| 8.73 | % | 8.73 | % |
Beijing Cloudin Technology Co., Ltd. |
| 4.12 | % | 4.12 | % |
Quanxun Huiju Networking Technology (Beijing) Co., Ltd. ("Quanxun Huiju") | | 5.40 | % | 5.40 | % |
Blue Bayread Limited (“Blue Bayread”) (note c) |
| — | | 1.63 | % |
Clapper Media Group Inc. (“Clapper”) (note d) | | — | | 10.00 | % |
Beijing Yunshang Hemei Culture Media Co., Ltd. (“Yunshang Hemei”) (note e) | | — | | 10.00 | % |
F-30
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
9. Long-term investments (Continued)
Notes :
| (a) | In May 2021, the equity interest in Zhuhai Qianyou was disposed by the Group at a consideration of USD298. |
| In October 2020, the Group disposed 4.82% of the equity interest in Lexiang, for which full impairment have been provided in December 2019, at a consideration of USD268,000. The remaining equity interest in Lexiang was remeasured based on this observable price change from the disposal, a fair value gain of USD794,000 was recognized accordingly. |
The Group recognized impairment against this investment of USD794,000 as of December 31, 2020, after considering Shanghai Lexiang’s operation performance, financial and liquidity position after the above transaction.
In September 2021, the Group’s interest in Lexiang was diluted to 6.93% as additional shares were issued by Lexiang, no changes in the carrying value in Lexiang was made as the related transactions did not provide observable price changes to the Group.
| (c) | In December |
| (d) | In October 2021, the Group made an equity investment of USD1,000,000 to |
| (e) | In December |
10. Property and equipment, net
Property and equipment consist of the following:
| | | | | ||||||||
| (In thousands) | December 31, 2014 | December 31, 2015 |
| December 31, 2020 |
| December 31, 2021 | ||||||
| Servers and network equipment | 32,109 | 37,332 |
| 35,827 |
| 15,522 | ||||||
| Computer equipment | 1,947 | 1,544 |
| 1,565 |
| 1,737 | ||||||
| Furniture, fixtures and office equipment | 651 | 856 |
| 836 |
| 857 | ||||||
| Motor vehicles | 339 | 320 |
| 481 |
| 492 | ||||||
| Leasehold improvements | 1,692 | 2,504 |
| 6,604 |
| 7,428 | ||||||
| Total original costs | 36,738 | 42,556 |
| 45,313 |
| 26,036 | ||||||
| Less: Accumulated depreciation | (20,330 | ) | (24,534 | ) |
| (33,006) |
| (18,638) | ||||
Less: Accumulated impairment |
| (3) |
| (2) | ||||||||
Sub-total |
| 12,304 |
| 7,396 | ||||||||
| Construction in progress | — | 14 |
| 38,421 |
| 50,261 | ||||||
| Total | 16,408 | 18,036 |
| 50,725 |
| 57,657 | ||||||
F-31
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
10. Property and equipment, net (Continued)
NaN impairment loss was recognized for the years ended December 31, 2019, 2020 and 2021.
Depreciation expense recognized for the years ended December 31, 2013, 20142019, 2020 and 20152021 are summarized as follows:
| | | | | | | ||||||||||||
| | Years ended December 31, | ||||||||||||||||
| (In thousands) | December 31, 2013 | December 31, 2014 | December 31, 2015 |
| 2019 |
| 2020 |
| 2021 | |||||||||
| Cost of revenues | 4,317 | 5,652 | 5,003 |
| 5,198 |
| 6,247 |
| 4,805 | |||||||||
Research and development expenses |
| 300 |
| 529 |
| 436 | ||||||||||||
| General and administrative expenses | 690 | 715 | 628 |
| 317 |
| 2,492 |
| 1,068 | |||||||||
| Sales and marketing expenses | 105 | 133 | 15 |
| 9 |
| 9 |
| 10 | |||||||||
| Total | 5,112 | 6,500 | 5,646 |
| 5,824 |
| 9,277 |
| 6,319 | |||||||||
No impairment loss had been
11. Right-of-use assets and lease liabilities
The right-of-use assets represented the leased office lease of 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 | |
Net book amount as of January 1, 2020 | | 8,747 |
Additions | | 500 |
Modification of operating lease | | (3,825) |
Amortization | | (3,685) |
Effect of foreign currency exchange differences | | 217 |
Net book amount as of December 31, 2020 | 1,954 | |
Additions | 25 | |
Modification of operating lease | (43) | |
Amortization | (1,934) | |
Effect of foreign currency exchange differences | 25 | |
Net book amount as of December 31, 2021 | | 27 |
During the years ended December 31, 2019, 2020 and 2021, the general and administrative expenses for long-term operating lease were USD6,077,000, USD3,762,000 and USD1,934,000, respectively. A charge of USD301,000, USD291,000 and USD786,000 were recognized in relation to short-term lease for the years ended December 31, 2013, 20142019, 2020 and 2015.2021. The future minimum payments under non-cancellable short-term operating leases of office rental will be USD1,322,000 in 2022. The weighted average discount rate related to operating lease was 5.5%, 5.4% and 5.4%, respectively, as of December 31, 2019, 2020 and 2021, and the weighted average remaining lease term were 2 years, 1 year and 1 year as of December 31, 2019, 2020 and 2021, respectively.
The total cash payments in respect of operating lease were USD5,149,000, USD3,797,000 and USD2,003,000 for the years ended December 31, 2019, 2020 and 2021, respectively.
F-32
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
The undiscounted cash payments 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 |
11. Right-of-use assets and lease liabilities (Continued)
The following table presentsundiscounted cash payments for each of the movement in intangible assets:next five years as of December 31, 2021 is:
| 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 | |||||||||||||||||||||
| | |
(In thousands) |
|
|
2022 |
| 19 |
2023 |
| 7 |
Total undiscounted payments |
| 26 |
Less: effect of discounting |
| (1) |
Discounted lease liabilities |
| 25 |
12. Intangible assets, net
| | | | | | | | | | | | |
| | December 31, | ||||||||||
| | 2020 | | 2021 | ||||||||
| | | | | | Net book | | | | | | Net book |
(In thousands) |
| Cost |
| Amortization |
| value |
| Cost |
| Amortization |
| value |
Land use rights |
| 5,099 |
| (1,258) |
| 3,841 |
| 5,218 |
| (1,461) |
| 3,757 |
Acquired computer software |
| 3,530 |
| (2,853) |
| 677 |
| 3,875 |
| (3,053) |
| 822 |
Audio-visual license |
| 6,010 |
| (1,671) |
| 4,339 |
| 6,151 |
| (2,431) |
| 3,720 |
|
| 14,639 |
| (5,782) |
| 8,857 |
| 15,244 |
| (6,945) |
| 8,299 |
Amortization expense recognized for the years ended December 31, 2013, 20142019, 2020 and 20152021 are summarized as follows:
| Years ended December 31 | ||||||||||||||||||
| | | | | | | ||||||||||||
| | Years ended December 31 | ||||||||||||||||
| (In thousands) | 2013 | 2014 | 2015 |
| 2019 |
| 2020 |
| 2021 | |||||||||
| Cost of Revenue | 1,369 | 1,141 | 693 | |||||||||||||||
Cost of revenues |
| 5 |
| — |
| 10 | ||||||||||||
| General and administrative expenses | 269 | 372 | 386 |
| 1,136 |
| 1,210 |
| 1,113 | |||||||||
| Research and development expenses | — | 542 | 1,589 |
| 59 |
| 6 |
| 6 | |||||||||
| Total | 1,638 | 2,055 | 2,668 |
| 1,200 |
| 1,216 |
| 1,129 | |||||||||
The estimated aggregate amortization expense for each of the next five years as of December 31, 20152021 is:
| (In thousands) | Intangible assets | |||
| 2016 | 2,234 | |||
| 2017 | 2,002 | |||
| 2018 | 1,688 | |||
| 2019 | 1,321 | |||
| 2020 and thereafter | 6,188 | |||
| | |
(In thousands) |
| Intangible assets |
2022 |
| 1,153 |
2023 |
| 1,140 |
2024 |
| 1,071 |
2025 |
| 974 |
2026 and thereafter |
| 3,961 |
F-33
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
12. Intangible assets, net (Continued)
The weighted average amortization periods of intangible assets as atof December 31, 20142020 and 20152021 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 | ||||||
| | | | |
(In year) |
| December 31, 2020 |
| December 31, 2021 |
Land use rights |
| 30 |
| 30 |
Acquired computer software |
| 5 |
| 5 |
Audio-visual license |
| 9 |
| 9 |
Total weighted average amortization periods |
| 10 |
| 10 |
(i) Copyrights related to content and domain name are
13. Goodwill
| | | | |
|
| December 31, |
| December 31, |
(In thousands) | | 2020 | | 2021 |
Beginning balance |
| 20,382 |
| 22,607 |
Addition (note) |
| 815 |
| — |
Foreign currency translation adjustment |
| 1,410 |
| 529 |
Ending balance |
| 22,607 |
| 23,136 |
Note: The addition of goodwill in 2020 was related to the discontinued operation.acquisition of Yunwang Wulian, please refer to note 3 for the acquisition.
NaN impairment loss was recognized for the years ended December 31, 2019, 2020 and 2021.
14. Contract liabilities and deferred income
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Contract liabilities (note a) | | | | |
Membership subscription |
| 31,981 |
| 35,490 |
Others |
| 2,513 |
| 2,075 |
Deferred income |
| |
| |
Government grants |
| 466 |
| 172 |
Total |
| 34,960 |
| 37,737 |
Less: non-current portion (note b) |
| (920) |
| (845) |
Contract liabilities and deferred income, current portion |
| 34,040 |
| 36,892 |
Notes:
| (a) |
| (b) |
15. Accrued liabilities and other payables
F-34
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (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 | % | |||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (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 | ||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| (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 | ||||||
| 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.
Series D convertible redeemable preferred shares
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Payroll and welfare |
| 12,871 |
| 18,618 |
Tax levies |
| 3,394 |
| 2,397 |
Payables related to Kankan | | 2,581 | | 2,642 |
Payables for advertisement | | 1,895 | | 3,821 |
Legal and litigation related expenses (note 27) |
| 1,640 |
| 973 |
Professional service fees |
| 2,106 |
| 2,175 |
Agency commissions and rebates—online advertising |
| 2,696 |
| 2,759 |
Payables for construction in progress |
| 5,291 |
| 9,750 |
Tax surcharges |
| 1,095 |
| — |
Others |
| 5,120 |
| 6,422 |
Total |
| 38,689 |
| 49,557 |
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.
16. Bank borrowings
| | | | |
|
| December 31, |
| December 31, |
(In thousands) | | 2020 | | 2021 |
Bank borrowings, current portion | | — |
| 2,876 |
Bank borrowings, non-current portion | | 19,924 | | 17,291 |
Total | | 19,924 | | 20,167 |
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Series D convertible redeemable preferred shares (Continued)
The key termsbank borrowings were borrowed by Shenzhen Xunlei for the construction of Xunlei Tower, which was pledged by the Series D preferred shares were as follows:
Dividendland use rights
of Xunlei Tower and the building under construction. The interest expense of USD470,000, USD890,000 and USD1,000,000 has been capitalized for the years ended December 31, 2019, 2020 and 2021, respectively.
The holders of the Series D preferred shares were entitled to participatebank borrowings are denominated 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Series D convertible redeemable preferred shares (Continued)
Redemption Right
The Series D preferred shares were redeemable at any time after the 4th anniversary of the initial closing of February 6, 2012 to request the Company to purchase all Series D preferred shares and shares issuable upon the conversion or exercise of the Series D warrants if an initial public offering is not consummated. This redemption right expires after the 5th anniversary of the initial closing of the transaction. The redemption price shall be equal to the aggregate amount of price paid at USD3.544, plus all declared but unpaid dividends up to the date of redemption plus interest of 8% per annum compounded annually from the closing of the Series D preferred shares investment(“Initial Closing”) up to and including the date of redemption.
The Company had determined that the Series D preferred shares should be classified as mezzanine equity. The Series D warrant is initially measured at its fair valueRMB, and the initial carrying value for Series D preference sharesinterest rate is allocatedcalculated based on a residualLoan Prime Rate plus 15 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.points.
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, 2013,2021, the fair value of Series D warrants was USD 2,186 thousand. For the year ended on December 31, 2012 and 2013, the fair value (loss) / gain recorded were USD 710 thousand and USD 1,531 thousand, respectively.
Exchange of Series D warrants and the issuance of Series E warrants
The warrants to purchase 1,952,663 and 266,272 Series D preferred shares at USD3.38 per share expired on February 6, 2014 and March 1, 2014, respectively. On the date of the expiration, the warrant was measured at a fair value of USD2,414 thousand. It was agreed that upon issuance of the Series E preferred shares on March 5, 2014, the Company would issuebank borrowings will be due according 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
following schedule:
| | |
(In thousands) | Principal amounts | |
Within 1 year | | 2,876 |
Between 1 to 2 years | | 3,207 |
Between 2 to 3 years | | 2,613 |
Between 3 to 4 years | | 2,128 |
Between 4 to 5 years | | 1,733 |
Beyond 5 years | | 7,610 |
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) | — | — | ||||||
The major assumptions used in calculating the fair value of the Series E warrants include:
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 | — | ||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Series E convertible redeemable preferred shares
On March 5, 2014, the Company entered into an agreement to issue Series E preferred shares (the ‘‘Series E Tranche 1 Preferred Shares’’) and warrants to a third-party investor (‘‘Series E Tranche 1 Investor’’) for a total consideration of USD 200 million. Pursuant to the agreement, the Company issued 70,975,491 Series E Tranche 1 Preferred Shares at USD 2.82 per share; and warrants to purchase 17,743,873 Series E preferred shares at USD 2.82 per share at the option of the holders. In addition, within 3 months after the closing, the Series E Tranche 1 Investor shall have the right (‘‘Subscription Rights’’) to purchase, or designate any other person/party to purchase from the Company an additional 35,487,746 Series E preferred shares, at a price equal to USD 2.82 per share.
The key terms of the Series E preferred shares were as follows:
Dividend rights
The holders of the Series E preferred shares were entitled to participate in any dividend pari passu with common shareholders of the Company on an as-converted basis.
Liquidation preferences
Before any distribution or payment shall be made to the holders of Series A, Series A-1, Series B, Series C and D preferred shares, an amount shall be paid to Series E holders with respect to each Series E preferred share held by the Series E holder equal to 100% of the applicable original issue price.
Voting rights
The holders of the Series E preferred shares shall be entitled to such number of votes equal to the whole number of common shares into which such Series E preferred shares are convertible.
Conversion rights
Each of the Series E preferred shares was convertible at the option of the holder, at any time after the issuance of such shares, and each share could be converted into one common share of the Company. The conversion was subject to adjustments for certain events, including but not limited to additional equity securities issuance, reorganization, mergers, share dividends, distribution, subdivisions, redemptions, combinations, or consolidation of common shares. The conversion price was also subject to adjustment in the event the Company issues additional common shares at a price per share that was less than such conversion price. In such case, the conversion price shall be reduced to adjust for dilution on a weighted average basis.
In addition, each of the Series E preferred shares would automatically be converted into common shares of the Company (i) upon the closing of an initial public offering of the Company’s shares or (ii) upon written notice to convert given to the Company by the holders of a majority of Series E preferred shareholders.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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:
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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) | — | — | ||||||
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Liquidation preferences (Continued)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 USD0.00025USD 0.00025 par value per common share as of December 31, 2015.2021. Each common share is entitled to one1 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, 20142020 and 2015,2021, there were 327,611,487334,401,981 and 339,319,115337,257,946 common shares outstanding, respectively.
F-35
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
18. 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 USD20 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.
The following table is a summary of the shares repurchased by the Company during 2015 under the RepurchaseShare Buyback Program. NoAll shares were purchased 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 USD4,475,000 under the Share Buyback Program. NaN shares were repurchased during 2015 except during the month indicatedyears ended December 31, 2019 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):2021.
Xunlei Limited19. Share-based compensation
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| 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 | ||||||||||||
Non-controlling interest includes the interest owned by a shareholder of the Company in a subsidiary of the consolidated VIE.
In February 2010 Shenzhen Xunlei set up a new subsidiary named Xunlei Games Development (Shenzhen) Co., Ltd (“Xunlei Games”) and holds 70% of its equity interest. A shareholder of the Company contributed RMB 3,000 thousand (equivalent to USD439 thousand) and holds 30% equity interest in Xunlei Games, which was accounted for as a non-controlling interest of the Group.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2010share incentive plan
During the years presented, the Company granted share options to employees, officers and directors of the Group.
These options were granted with exercise prices denominated in the USD, which is the functional currency of the Company. The maximum term of any issued stock option is seven or ten years from the grant date. Stock options granted to employees and officers vest over a four-year schedule as stated below:
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 OptionIncentive Plan (“the 2010(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 amountnumber of shares available for such grants was nil as of December 31, 2015 is 5,847,465.
On June 11, 2014, our board of directors decided to extended the contractual life for certain vested share options to June 11, 2015, because the maturity date of these options was from June to December in 2014, whereas, the lock-up period for the2021, as such shares was 6 months from the IPO closing date, i.e. June 24, 2014, which would result in the expiration of these options before the exercise. The incremental share-based compensation of USD768 thousand is recognized at the time of modification.
In the business combination of personal cloud storage business completed on September 5, 2014, the Group granted share options under the 2010 Plan to replace the unvested awards owned by the employees who arehave been 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 allocated2020 share incentive plan since its adoption in June 2020, please refer to the consideration, whiledetails below.
The maximum term of any issued share option is seven or ten years from the portion attributegrant date. Share options granted to post-combination serviceemployees 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). |
Share options granted to directors were subject to a vesting schedule of USD44 thousand was recorded as shareapproximately 32 months.
All share-based payments to employees are measured based compensationon their grant-date fair values. Compensation expense is recognized on a straight-line basis over the remaining vestingrequisite service period.
On December 1, 2014, our board of directors approved the conversion of certain vested and unvested share options with relatively high exercise price into restricted shares. In this conversion, 3,776,711 share options were cancelled and 1,505,787 restricted shares were granted. The incremental share-based compensation of USD 2,214 thousand is recorded over the remaining vesting period of 2 to 4.5 years.
In November 2014 and January 2015, the Company issued to athe depositary bank for American Depositary Shares,of 10,000,000 common shares and 10,991,120 common shares, respectively, which were reserved for the future exercise of share options or vesting of restricted shares.
F-36
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2010share incentive plan (Continued)
The following table summarizes the share option activityactivities for the years ended December 31, 2013, 20142019, 2020 and 2015:2021:
| 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 | |||||||||||||||
| | | | | | | | | | |
| | |
| |
| |
| 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, 2019 |
| 16,500 |
| 3.97 |
| — |
| 1.37 |
| 0 |
Vested and expected to vest as of January 1, 2019 |
| 16,500 |
| 3.97 |
| 1.56 |
| 1.37 |
| 0 |
Exercisable as of January 1, 2019 |
| 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 as of December 31, 2019 |
| 10,000 |
| 3.97 |
| 1.01 |
| 1.16 |
| 0 |
Exercisable as of 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 as of December 31, 2020 and 2021 |
| — |
| — |
| — | | — | | 0 |
As of December 31, 2020 and 2021, there were 0 unrecognized share-based compensation costs related to share options of 2010 Plan.
As of December 31, 2021, 10,770,520 restricted shares (2020: 10,770,520), excluding those converted from share options, were granted to employees and officers under 2010 Plan and the outstanding unvested restricted shares granted to employees and officers vest as follows:
(1) | 330,000 of these restricted shares shall be vested within 2022. |
(2) | 320,000 of these restricted shares shall be vested within 2023. |
F-37
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
19. 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, 20152019, 2020 and 2021 is presented below:
| | | | |
| | | | Weighted-average |
| | Number of | | grant-date fair |
|
| restricted shares |
| value(USD) |
Unvested as of January 1, 2019 |
| 6,652,040 |
|
|
Expected to vest as of January 1, 2019 | | 5,654,234 |
|
|
Granted |
| 800,000 |
| 0.81 |
Vested |
| (1,296,540) |
|
|
Forfeited |
| (971,000) |
|
|
Unvested as of December 31, 2019 |
| 5,184,500 |
|
|
Expected to vest as of December 31, 2019 |
| 4,406,825 |
| |
Vested |
| (965,500) |
| |
Forfeited |
| (2,959,000) |
| |
Unvested as of December 31, 2020 |
| 1,260,000 |
| |
Expected to vest at December 31, 2020 |
| 1,071,000 |
| |
Vested |
| (400,000) |
| |
Forfeited |
| (210,000) |
| |
Unvested as of December 31, 2021 |
| 650,000 |
| |
Expected to vest as of December 31, 2021 |
| 552,500 |
| |
| 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 | |||||||
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%15% for employees and nil for directors and advisors.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2010share incentive plan (Continued)
The aggregate intrinsic value in the table above represents the difference between the estimated fair value of the Company’s common shares as of December 31, 2014 and 2015 and the exercise price.
Total fair values of share options vested as of December 31, 2014 and 2015 were USD 7,923 thousand and USD 6,297 thousand, respectively.
As of December 31, 20142020 and 2015, there were USD 1,462 thousand2021, total unrecognized compensation expense relating to the restricted shares was USD2,000,000 and USD 1,147 thousand of unrecognized share-based compensation costs related to share options, which were expected to be recognized over a weighted-average vesting period of 2.84 and 4.03 years,USD1,031,340, respectively. To the extent the actual forfeiture rate is different from the Company’s estimate, the actual share-based compensation related to these awards may be different from the expectation.
The Black-Scholes option pricing model is used to determine the fair value of the stock options granted to employees. The fair values of stock options granted during the years ended December 31, 2013 2014 and 2015 were estimated using the following assumptions:
Options granted to employees
| Years ended December 31, | 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 | |||||||||
2013share incentive plan
In November 2013, the Group adopted a share incentive plan, which is referred to as the 2013 Share Incentive Plan (“the 2013(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 managementofficers 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
20. Share-based compensation (Continued)
2013share 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 The number of shares available for such grants was nil as of December 31, 2015, 7,987,4352021, as such shares have been transferred to the 2020 share incentive plan since its adoption in June 2020, please refer to the details below.
The vesting schedule of the restricted shares were grantedunder the 2013 Plan are determined by the directors of the Company.
F-38
Xunlei Limited
Notes to a few senior officers.
Xunlei Limited
Notes tothe consolidated financial statements
(Amounts in US dollars unless otherwise stated)
2013share incentive plan (Continued)
A summary of the restricted shares activities under the 2013 Plan for the years ended December 31, 2013, 2014and 20152019, 2020 and 2021 is presented below:
| | |
| Number of | |
| | restricted shares |
Unvested as of January 1, 2019 |
| 34,175 |
Vested | (27,475) | |
Forfeited | (6,700) | |
Unvested as of December 31, 2019 | — | |
Expected to vest as of December 31, 2019 | — |
| 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, 2015,2020 and 2021, total unrecognized compensation expense relating to the restricted shares was USD 13,866 thousand. No restricted shares were issued to non-employees.both NaN.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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.VIE and VIE’s subsidiaries. The companyCompany issued 14,195,412 common shares to Leading Advice Holdings Limited, a company owned by the Group’s chairman and chief executive officer. The issuance of common shares wasco-founder, to facilitate the administration of the 2014 plan.Plan. The number of shares available for such grants was NaN as of December 31, 2021, as such shares have been transferred to the 2020 share incentive plan since its adoption in June 2020, please refer to the details below.
F-39
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
19. Share-based compensation (Continued)
2014 share incentive plan (Continued)
A summary of the restricted shares activities under the 2014 Plan was administered byfor the Company’s compensation committee.years ended December 31, 2019, 2020 and 2021 is presented below:
| | |
| Number of | |
| | restricted |
| | shares |
Unvested as of January 1, 2019 |
| 3,476,650 |
Vested | (1,318,450) | |
Forfeited | (837,000) | |
Unvested as of December 31, 2019 | 1,321,200 | |
Expected to vest as of December 31, 2019 | 1,123,020 | |
Unvested as of January 1, 2020 | 1,321,200 | |
Vested | (228,200) | |
Forfeited | (1,067,000) | |
Unvested as of December 31, 2020 | 26,000 | |
Expected to vest as of December 31, 2020 | 22,100 | |
Unvested as of January 1, 2021 | 26,000 | |
Vested | (26,000) | |
Unvested as of December 31, 2021 | — | |
Expected to vest as of December 31, 2021 | — |
As of December 31, 2015, 6,620,5002021, the total unrecognized compensation expense relating to the restricted shares werewas NaN (2020: USD12,000).
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, among which 21,039,742 common shares reserved under the Existing Plans and had not been granted as of the termination of the Existing Plans, 9,667,230 common shares repurchased pursuant to the repurchase programs authorized by the Company in December 2014 and January 2016, and 293,028 common shares reserved for issuance under the 2020 Plan. The number of shares available for such grants as of December 31, 2021 is 2,685,660.
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, 2021, the restricted shares units granted to certainemployees and officers and employees of the Group:
(excluding those forfeited) vest as follows:
| (1) |
| (2) | 90,000 of these restricted shares will vest over a three-year schedule in which one-third of the restricted shares shall be vested upon the first, second and third anniversary of the grant day, respectively. Among which, 30,000 shares were vested in an accelerated manner in December 2021. |
F-40
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
19.Share-based compensation (Continued)
2020 share incentive plan (Continued)
| (3) | 12,665,000 of these restricted shares will vest over a three-year schedule in which two-third of the restricted shares shall be vested upon the second anniversary and one-third of the restricted shares shall be vested upon the third anniversary of the grant day, respectively. Among which, 2,299,965 shares were vested in an accelerated manner in December 2021. |
| (4) | 500,000 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 |
A summary of the restricted shares activities under the 20142020 Plan for the yearsyear ended December 31, 20152021 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 | |||||||||||
| | | | | ||||||||
| | | | Weighted-average | ||||||||
|
| Number of |
| grant-date fair | ||||||||
| | restricted shares | | value (USD) | ||||||||
Unvested as of January 1,2021 |
| — |
|
| ||||||||
| Granted | 3,890,500 | 1.53 |
| 31,091,840 |
| 0.83 | ||||||
| Vested | (859,100 | ) |
| (2,429,965) |
|
| ||||||
| Forfeited | (1,166,500 | ) |
| (2,777,500) |
|
| ||||||
| Unvested at December 31, 2015 | 5,761,400 | |||||||||||
| Vested and expected to vest at December 31, 2015 | 4,897,100 | |||||||||||
Unvested as of December 31, 2021 |
| 25,884,375 |
|
| ||||||||
Expected to vest as of December 31, 2021 |
| 19,413,281 |
|
| ||||||||
Forfeitures areBased upon the Company’s historical and expected forfeitures for restricted share units granted, the directors of the Company estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates.that its future forfeiture rate would be 25% for employees and directors.
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, 2015,2021, the total unrecognized compensation expense relating to the restricted shares was USD 9,683 thousand. No restricted shares were issued to non-employees.
USD18,147,328 (2020: NaN).
Total compensation costs recognized for the years ended December 31, 2013, 2014and 20152019, 2020 and 2021 are as follows:
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Sales and marketing expenses |
| 381 |
| 185 |
| 59 |
General and administrative expenses |
| 2,453 |
| 1,209 |
| 4,682 |
Research and development expenses |
| 2,594 |
| 916 |
| 1,429 |
Total |
| 5,428 |
| 2,310 |
| 6,170 |
| 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 | |||||||||
Xunlei Limited
Notes20. 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, Henan Tourism and Shanghai Anunachi Information Technology Co., Ltd.
F-41
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
21. Costs of revenues
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Bandwidth costs |
| 57,093 |
| 62,384 |
| 80,720 |
Cost of inventories sold |
| 7,181 |
| 1,660 |
| 1,516 |
Revenue-sharing from live streaming business |
| 20,734 |
| 15,640 |
| 26,506 |
Depreciation of servers and other equipment |
| 5,198 |
| 6,247 |
| 4,805 |
Payment handling charges |
| 1,658 |
| 1,459 |
| 3,066 |
Other costs (note) |
| 8,049 |
| 5,247 |
| 1,990 |
Total |
| 99,913 |
| 92,637 |
| 118,603 |
Note: Other costs mainly included technical service costs and write-down of inventories.
22. Other income, net
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Government subsidy income |
| 2,061 |
| 2,287 |
| 3,206 |
Investment income from short-term investments |
| 4,020 |
| 2,943 |
| 2,486 |
Net unrealized gains arising from long-term investments |
| 10,907 |
| 794 |
| — |
Investment income on disposal of long-term investments |
| 579 |
| 214 |
| 42 |
Impairment of long-term investments |
| (19,831) |
| (794) |
| — |
Exchange loss, net |
| (402) |
| (2,948) |
| (1,205) |
Settlement income | | 1,531 | | — | | — |
Gains from disposal of LinkToken program |
| 6,630 |
| — |
| — |
VAT deduction | | 427 | | 1,361 | | 818 |
Others |
| (61) |
| 880 |
| (669) |
Total |
| 5,861 |
| 4,737 |
| 4,678 |
23. Taxation
| (i) |
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 | ) | ||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 | |||||||||
The table below sets forth the related parties and their relationships with the Group:
During the years ended December 31, 2013, 2014 and 2015, significant 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 to the agreement, the Company will share revenues derived by the licensed games with Zhuhai Qianyou.
note b – In 2014, the Group repurchased 3,860,733 common shares from Aiden & Jasmine Limited (Co founder’s company) for USD10,879 thousand and 10,334,679 common shares from Vantage Point Global Limited (Founder’s company) for USD29,121 thousand. According to the repurchase contract, the Company was entitled to an amount (the “Withheld Price”) to withhold any taxes with respect to this repurchase as required under the applicable laws. If the Seller has not been specifically required by the applicable governmental or regulatory authority to pay any taxes as required under the applicable laws in connection with the repurchase, after the fifth anniversary of the Closing Date, the Company will pay to the Seller the Withheld Price with a simple interest thereon at the rate of five percent (5%) per annum (the “repayment price”) from the Closing Date. Therefore, the Withheld Price for Aiden & Jasmine Limited and Vantage Point Global Limited
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
was USD 1,125 thousand (including interest of USD 37 thousand) and USD 3,012 thousand (including interest of USD 100 thousand) respectively. The interest accrued in 2015 was USD 54 thousand and 146 thousand for Aiden & Lasmine Limited and Vantage Point Global Limited respectively.
As of December 31, 2013, 2014 and 2015, the amounts due to / from related parties were as follows:
| (In thousands) | 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 | |||||||||
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, no0 Cayman Islands withholding tax will be imposed.
Subsidiaries in the BVI are exempted from income tax on its foreign-derived income in the BVI. There are 0 withholding taxes in the BVI.
Subsidiaries in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong.
Subsidiaries incorporated in Singapore were subject to 17% of their taxable income.
F-42
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23. Taxation (Continued)
| (v) | PRC Enterprise Income Tax (“EIT”) |
Giganology Shenzhen,The EIT is calculated based on the VIE and its subsidiaries which were established in the Shenzhen Special Economic Zone oftaxable income determined under the PRC were alllaws and accounting standards.
Under the EIT Law, foreign invested enterprises and domestic enterprises are 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,accordance with the Newimplementation rules of the EIT Law, also provides a five-year transitional period startingqualified “High and New Technology Enterprise” (“HNTE”) is eligible for a preferential tax rate of 15%, a “Software Enterprise” (“SE”) is entitled exemption 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 Policiestaxation 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 forfirst two years, commencingcounting from itsthe first profitable year, of profitable operation after offsetting prior years’ tax losses, followedand reduction by a 50% reductionhalf for the next three years, (“2-year Exemption and 3-year 50% Reduction”a certified National Key Software Enterprise (“NKSE”) is entitled a preferential tax rate of 10%.
Shenzhen Xunlei, Onething, Wangwenhua and Xunlei Computer have been recognized as a software enterprise. The first yearHNTE and entitled to preferential tax rate 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Accordingly, the applicable EIT rates for Giganology Shenzhen were 25%, 25% and 25% 15%for the years ended December 31, 2013, 20142019, 2020 and 2015, respectively.
On April 14, 2008, relevant governmental regulatory2021. In addition, Onething was established in Qianhai Shenzhen Hongkong Modern Service Industry Cooperation Zone and met the requirements set out by the local 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 entitiesaccordingly it’s also entitled to a favorable statutorypreferential tax rate of 15%.
for years ended December 31, 2019, 2020 and 2021.
In April 2009, the State Administration for Taxation (“SAT”) issued Circular Guoshuihan [2009] No. 203 (“Circular 203”) stipulating that entities whichJuly 2020, Jiangxi Node was qualified for the HNTE status should apply with in-chargea preferential tax authorities to enjoy the reduced EIT rate of 15% provided underand started to apply this rate from then on. The preferential tax rate is awarded to companies which are located in the NewWest Regions of China and operate in certain encouraged industries. This qualification will need to be assessed on an annual basis. For the years ended December 31, 2020 and 2021, the tax rate assessed for Jiangxi Node was 15% and 15%, respectively.
Certain subsidiaries of the Group in the PRC have been granted certain tax concessions to small scale entities by tax authorities in the PRC whereby the subsidiaries operating in the respective region are entitled to tax concessions, the remaining PRC subsidiaries and VIE’s subsidiaries are subject to a 25% 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.
rate.
According to a policy promulgated by the State tax bureau of the PRC and effective from 2008 onwards,State Tax Bureau, enterprises that engage in research and development activities are entitled to claim 150%175% of the research and development expenses so incurred in a year as tax deductible expenses in determining itstheir 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 byaccording to 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 ExemptionEIT Law 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,its implementation rules, foreign enterprises, 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 2011have no establishment or place in the Shenzhen Special Economic Zone, the PRC. As approved by the relevant tax authority in June 2013, Xunlei Computer was further exemptedPRC but derive dividends, interest, rents, royalties and other income (including capital gains) 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 Onethingwas established in 2013sources 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%.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| PRC |
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 isor WHT, at 10%, unless a foreign investor’s tax jurisdiction has a (a further reduced WHT rate may be available according to the applicable double 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.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 these two companiesGiganology Shenzhen and Xunlei Computer derived after January 1, 2008. Up to December 31, 2015,2021, both Giganology Shenzhen and Xunlei Computer did not declare any dividend to the parent company and have determined that it hasthey 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, no0 withholding income tax was accrued or required to be accrued as offor the years ended December 31, 20142019, 2020 and 2015. The undistributed earnings from the Group’s PRC entities as of December 31, 2014 and 2015 amounted to USD38,393 thousand and USD 34,313 thousand, respectively. An estimated foreign withholding taxes of USD3,839 thousand and USD 3,431 thousand would be due if these earnings were remitted as dividends as of December 31, 2014 and 2015, respectively.
2021.
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 TaxEIT at the rate of 25% on its worldwide income for the period after January 1, 2008. As of December 31, 2015,2020 and 2021, the Company has not accrued for PRC tax on such basis. The Company will continue to monitor its tax status.
F-43
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23. Taxation (Continued)
The current and deferred portions of income tax expense included in the consolidated statements of operations are as follows:
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Current income tax expenses |
| 315 |
| 183 |
| 53 |
Deferred income tax expenses/(benefits) |
| 4,361 |
| 966 |
| (178) |
Income tax expenses/(benefits) |
| 4,676 |
| 1,149 |
| (125) |
| 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 holidayholidays and concession are as follows:
| Years ended December 31, | ||||||||||||||||||
| 2013 | 2014 | 2015 | ||||||||||||||||
| | | | | | | ||||||||||||
| | Years ended December 31, | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | ||||||||||||
| Aggregate dollar effect(in thousands) | 4,638 | 2,784 | (830 | ) |
| (3,856) |
| 197 |
| 4,100 | ||||||||
| Per share effect—basic | 0.08 | 0.01 | 0.00 |
| (0.01) |
| (0.00) |
| 0.01 | |||||||||
| Per share effect—diluted | 0.06 | 0.01 | 0.00 |
| (0.01) |
| (0.00) |
| 0.01 | |||||||||
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
The reconciliation of total tax expense/(benefit)expenses/(benefits) computed by applying the respective statutory income tax rates to pre-tax income/(loss)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 | ) | ||||||||
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Income tax (benefits)/expenses at PRC statutory rate (based on statutory tax rate applicable to enterprises in China) |
| (11,886) |
| (3,736) | | 246 |
Effects of differences in tax rates in different jurisdictions applicable to entities of the Group outside of the PRC |
| 788 |
| 787 | | 2,571 |
Non-deductible expenses |
| 228 |
| 101 | | 47 |
Effect of Super Deduction |
| (1,920) |
| (733) | | (2,262) |
Effect of tax holidays and tax concessions |
| 3,856 |
| (197) | | (4,100) |
Change in valuation allowance of deferred tax assets |
| 13,180 |
| 4,704 | | 3,507 |
Expiration of tax loss |
| 400 |
| 84 | | — |
Others |
| 30 |
| 139 | | (134) |
Income tax expenses/(benefits) |
| 4,676 |
| 1,149 | | (125) |
F-44
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
23. Taxation (Continued)
The tax effects of temporary differences that give rise to the deferred tax assetassets and liabilityliabilities balances atof December 31, 20142020 and 20152021 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 | ) | ||||
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Deferred tax assets: |
|
|
|
|
Net operating losses carried forward (note a) |
| 32,458 |
| 39,188 |
Impairment of long-term equity investments |
| 4,233 |
| 4,245 |
Impairment of other receivables |
| 1,858 |
| 1,536 |
Impairment of accounts receivable |
| 1,451 |
| 402 |
Impairment of inventories |
| 540 |
| 70 |
Allowance for advances to suppliers |
| 369 |
| 137 |
Impairment of property and equipment |
| 15 |
| 2 |
Valuation allowance |
| (40,924) |
| (45,580) |
Deferred tax assets, net (note b) |
| 0 |
| 0 |
| | | | |
Deferred tax liabilities: |
| |
| |
Deferred credit arising from an asset acquisition |
| (1,085) |
| (930) |
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Notes:
(a) |
As of December 31, |
| (In thousands) | ||||
| 2016 | 1,398 | |||
| 2017 | 889 | |||
| 2018 | 6,191 | |||
| 2019 | 3,647 | |||
| 2020 and thereafter | 41,036 | |||
| 53,161 | ||||
(b) | As of |
Deferred tax liabilities
| | | | |
(In thousands) |
| 2020 |
| 2021 |
Within one year |
| 176 |
| 180 |
After one year |
| 909 |
| 750 |
|
| 1,085 |
| 930 |
Movement of valuation allowance is as follows:
| Years ended December 31, | ||||||||||||||||||
| | | | | | | ||||||||||||
| | Years ended December 31, | ||||||||||||||||
| (In thousands) | 2013 | 2014 | 2015 |
| 2019 |
| 2020 |
| 2021 | |||||||||
| Beginning balance | (43 | ) | — | (291 | ) |
| 20,181 |
| 34,257 |
| 40,924 | |||||||
| Additions | — | (291 | ) | (4,268 | ) |
| 13,180 |
| 4,704 |
| 3,507 | |||||||
| Write-off | 43 | — | — | |||||||||||||||
Exchange difference | | 896 | | 1,963 | | 1,149 | ||||||||||||
| Ending balance | — | (291 | ) | (4,559 | ) |
| 34,257 |
| 40,924 |
| 45,580 | |||||||
Valuation allowanceshad been provided againstFor 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,years ended December 31, 2019, 2020 and 2021, valuation allowance was provided for net operating loss carry forward of Onethingcarryforwards certain subsidiaries, VIE and VIE’s subsidiaries because it was more likely than not that such deferred tax assets will not be realized based on the Group'sGroup’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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
of those companies.
As of December 31, 2015,2021, the tax returns of the Group’s subsidiaries, VIE and itsVIE’s subsidiaries since their respective dates of incorporation are still open to examination.
F-45
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
24. Basic and diluted net (loss)/income per share
Basic and diluted net (loss)/income per share for the years ended December 31, 2019, 2020 and 2021 are calculated as follows:
| | | | | | |
| | | | | | |
(Amounts expressed in thousands of USD, except | | Years ended December 31, | ||||
for number of shares and per share data) |
| 2019 |
| 2020 |
| 2021 |
Numerator: |
|
|
|
|
|
|
Net (loss)/income |
| (53,415) |
| (14,140) |
| 1,108 |
Less: Net loss attributable to the non-controlling interest |
| (246) |
| (300) |
| (83) |
Net (loss)/income attributable to Xunlei Limited’s common shareholders |
| (53,169) |
| (13,840) |
| 1,191 |
Numerator of basic net (loss)/income per share |
| (53,169) |
| (13,840) |
| 1,191 |
Numerator for diluted net (loss)/income per share |
| (53,169) |
| (13,840) |
| 1,191 |
Denominator: |
| |
| |
| |
Denominator for basic net (loss)/income per share ‑ weighted average shares outstanding |
| 337,845,675 |
| 337,429,601 |
| 334,707,559 |
Denominator for diluted net (loss)/income per share |
| 337,845,675 |
| 337,429,601 |
| 335,969,780 |
Basic net( loss)/ income per share |
| (0.1574) |
| (0.0410) |
| 0.0036 |
Diluted net (loss)/income per share |
| (0.1574) |
| (0.0410) |
| 0.0035 |
All potentially dilutive securities were not included in the calculation of dilutive net (loss)/income per share for the years ended December 31, 2019 and 2020 as their effects would be anti-dilutive.
F-46
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
25. Related party transactions
The table below sets forth the related parties and their relationships with the Group:
Related party | 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 (note i) |
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 Technology Co., Ltd. (“Beijing Itui”) | | Company owned by the principal shareholder of the Company (note iii) |
Itui Online | | Company owned by the principal shareholder of the Company (note iii) |
Chizz (HK) Limited (“Chizz”) | | Company owned by the principal shareholder of the Company (note iii) |
F-47
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
25. Related party transactions (Continued)
Notes:
| (i) | Chuan Wang has resigned from the board on April 2, 2020, and Weimin Luo resigned from the board and resigned as the Chief Operating Officer on May 19, 2021 and June 1, 2021, respectively. |
| (ii) | Prior to April 2, 2020, these companies were related companies to the Company as they were affiliated companies of a shareholder of the Company, 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 when Itui became the principal shareholder of the Company. |
During the years ended December 31, 2019, 2020 and 2021, significant related party transactions were as follows:
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Bandwidth revenue from Beijing Xiaomi Mobile Software (note a) |
| 1,815 |
| — |
| — |
Bandwidth revenue from Xiaomi Technology (note a) |
| 875 |
| 2,211 |
| 2,798 |
Advertisement revenue from Guangzhou Millet |
| 19 |
| — |
| — |
Bandwidth revenue from Beijing Itui (note b) |
| — |
| 1,119 |
| 821 |
Advertisement revenue from Itui Online (note c) |
| — |
| 7,269 |
| 11,648 |
Advertisement revenue from Shenzhen Xiaomi (note d) |
| — |
| 53 |
| 380 |
Technology service revenue from Guangzhou Millet (note e) |
| 2,460 |
| 2,466 |
| 1,245 |
Technology service revenue from Shenzhen Xiaomi (note e) | | — | | — | | 1,392 |
Interest income from Chizz | | — | | — | | 176 |
Bandwidth cost from Quanxun Huiju (note f) | | — | | 594 | | 730 |
Forum service fees paid and payable to Xiaomi Technology | | 13 | | — | | — |
Interest accrued to Vantage Point Global Limited (note g) | | 46 | | 243 | | — |
Interest accrued to Aiden & Jasmine Limited (note g) | | 17 | | 91 | | 55 |
Repayment of loans to Weimin Luo arising from a business combination (note 3) | | — | | 662 | | — |
F-48
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
25. 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 entered into a sales contract with Beijing Itui for provision of bandwidth at a price benchmarking against market price and charged based on actual usage since July 2019. The contract was extended for one year from July 2021 to June 2022 based on the same term. |
| (c) | In May 2020, a user traffic monetization agreement was entered into with Itui Online, according to which Xunlei is entitled to receive a mutually agreed sharing of net advertising revenue covering a period from mid-May 2020 to mid-May 2021. The contract was extended for one year from mid-May 2021 to mid-May 2022 based on the same term. |
| (d) | In July 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. |
| (e) | 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. A similar contract was entered into with Shenzhen Xiaomi in July 2021, covering a period of two years. |
| (f) | In July 2020, Onething entered into the contract with Quanxun Huiju, for the provision of bandwidth to Onething at a price benchmarking against market price, based on actual usage. The contract was extended for one year from July 2021 to June 2022 based on the same term. |
| (g) | In 2014, the Group repurchased 3,860,733 common shares from Aiden & Jasmine Limited (Co founder’s company) for USD10,879,000 and 10,334,679 common shares from Vantage Point Global Limited for 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 from the Closing Date. Therefore, the Withheld Price for Aiden & Jasmine Limited and Vantage Point Global Limited was USD1,451,000 (including interest of USD363,000) and USD3,883,000 (including interest of USD971,000) respectively. The Group has repaid USD3,883,000 to Vantage Point Global Limited in January 2021. |
The interest accrued for the year ended December 31, 2021 was USD55,000 for Aiden & Jasmine Limited.
F-49
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
25. Related party transactions (Continued)
As of December 31, 2020 and 2021, the amounts due from/to related parties were as follows:
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Amounts due from related parties -current |
|
|
|
|
Accounts receivable due from Guangzhou Millet |
| 1,456 |
| — |
Accounts receivable due from Xiaomi Technology | | 576 | | 831 |
Accounts receivable due from Itui Online | | 7,689 | | 12,156 |
Accounts receivable due from Beijing Itui | | 1,153 | | 857 |
Accounts receivable due from Shenzhen Xiaomi | | 60 | | 1,520 |
Other receivable due from Chizz (note) | | — | | 176 |
Other receivable due from Xiaomi Technology |
| 15 |
| 16 |
Other receivable due from Shenzhen Crystal |
| 6 |
| 7 |
Other receivable due from Shenglong Zou |
| 9 |
| 9 |
Other receivable due from Chuan Wang |
| 6 | | 6 |
Amounts due from a related party - non-current | | | | |
Other receivable due from Chizz | | — | | 19,311 |
Note: In September 2021, Xunlei Network provided a loan amounted to USD20 million to Chizz at an interest rate of 3% per annum for a term of 2 years.
| | | | |
(In thousands) |
| December 31, 2020 |
| December 31, 2021 |
Amounts due to related parties |
|
|
|
|
Accounts payable due to Quanxun Huiju |
| 55 |
| 91 |
Other payable due to Vantage Point Global Limited |
| 3,883 |
| 0 |
Other payable due to Aiden & Jasmine Limited | | 1,451 | | 1,506 |
26. 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—1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2—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—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-50
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
The following table sets forth the financial instruments, measured at fair value, by level within the fair value hierarchy as of December 31, 20142020 and 2015.2021.
| 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 of 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 structured deposits and wealth management products |
| 48,993 |
| — |
| 48,993 |
| — |
|
| 48,993 |
| — |
| 48,993 |
| — |
| 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 | — | |||||||||||||
| | | | | | | | |
| | Fair value measurements as of December 31, 2021 | ||||||
| | | | 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 structured deposits and wealth management products |
| 53,273 |
| — |
| 53,273 |
| — |
|
| 53,273 |
| — |
| 53,273 |
| — |
| 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 | ||||||||||
Xunlei LimitedInvestments 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.
Notes to consolidated financial statements
27. Commitments and contingencies
(Amounts in US dollars unless otherwise stated)
RentalBandwidth purchase commitments
The Group leases facilitiespurchase bandwidth in the PRC under non-cancellable operating leasescontract expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periodspurchase 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 endedAs of 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.
Future2021, future minimum payments under non-cancellable bandwidth leasescontracts consist of the following asfollowing:
| | |
(In thousands) |
| December 31, 2021 |
2022 | | 4,410 |
Capital commitments
As of December 31, 2015:
| (In thousands) | ||||
| 2016 | 15,715 | |||
| 2017 | 9,965 | |||
| 25,680 | ||||
Capital commitments
As at December 31, 2015,2021, the Group had irrevocablehas unconditional purchase obligations for certain copyrightsoffice software and online game licensesconstruction in progress that had not been recognized in the amount of USD nilUSD18,291,000.
| | |
(In thousands) |
| December 31, 2021 |
2022 |
| 17,993 |
2023 and after |
| 298 |
|
| 18,291 |
F-51
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
27. Commitments and USD 5,844 thousand, respectively.contingencies (Continued)
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 thousandUSD1,955,000 and USD 3,307 thousandUSD997,000 legal and litigation related expenses for the years ended December 31, 2013, 20142019 and 2015, respectively.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Litigation (Continued)
The2021, respectively, while 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 thousandreversed USD1,217,000 legal and litigation related expensesexpense for the yearsyear ended December 31, 2013, 2014 and 2015, respectively.
2020.
Up toApril 21, 2016,28, 2022, which is the date when the consolidated financial statements were issued, the Group had 6517 lawsuits pending against the Group with an aggregate amount of claimed damages of approximately RMB 6.96RMB10.9 million (USD 1.07(USD1.7 million) which occurred before December 31, 2015.2021 (2020: RMB13.3 million (USD1.9 million)). Of the 6517 pending lawsuits, 539 lawsuits were relating to the alleged copyright infringement in the PRC. The Group had accrued for USD 2,601 thousandUSD973,000 litigation related expenses in ‘‘Accrued expenses“Accrued liabilities and other liabilities’’payables” in the consolidated balance sheet as of December 31, 2015,2021 (2020: USD1,640,000), 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 counsel.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 6517 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, ifIf 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,NaN putative shareholder class action lawsuits were filed in the Group entered into a content protection agreement withUnited States District Courts for the Motion Picture AssociationSouthern District 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 lawsuitsNew York against the Group with an aggregate amountCompany and certain current and former officers and directors of claimed damagesthe Company. Purporting to sue on behalf of RMB 8.40 million (USD 1.37 million)all investors who purchased or acquired Xunlei stock from October 10, 2017 to January 11, 2018, plaintiffs alleged 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 sought 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 cases are awaiting trial asmotion of April 21, 2016. Asdismiss 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 litigations remain in their preliminary stages, the Group is unable to express any opinion on the likelihood of an unfavorable outcome or any estimateplaintiffs within 60 days after entry of the amount or rangecourt’s motion, therefore the class action was dismissed in November 2019.
F-52
Table of any potential loss. SubsequentContents
Xunlei Limited
Notes 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
28. 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 videoadvertising services and online advertising services.live streaming service. 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.entered. 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 itsVIE’s 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 itsVIE’s 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’tdid not meet the recognition criteria set in ASC 350-30-25. The licenses stated above primarily consist of licenses that grant the VIE and itsVIE’s subsidiaries the right to produce and broadcast internet, radio, and television programs. One of them is the ICP licenses as described in note 1.
F-53
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
28. Certain risks and concentration (Continued)
PRC regulations (Continued)
As of December 31, 2015,2021, 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 and also patent application is being reviewed by the United States Patent and Trademark Office.
PRC.
As of December 31, 2015,2021, 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
PRC regulations (Continued)
The following consolidated financial information of the Group’sconsolidated VIE (including VIE and its subsidiaries from continuing operationsVIE’s subsidiaries) 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) |
| 2020 |
| 2021 |
Current assets: | | | | |
Cash and cash equivalents |
| 14,284 |
| 16,645 |
Short-term investments |
| — |
| 6,373 |
Accounts receivable, net |
| 22,983 |
| 26,003 |
Amount due from group companies | | 15,168 | | 3,102 |
Due from related parties |
| 10,955 |
| 15,387 |
Inventories |
| 1,726 |
| 1,363 |
Prepayments and other current assets |
| 10,046 |
| 7,142 |
Total current assets |
| 75,162 |
| 76,015 |
Non-current assets: |
| |
| |
Long-term investments |
| 5,706 |
| 6,467 |
Property and equipment, net |
| 50,532 |
| 57,417 |
Intangible assets, net |
| 8,857 |
| 8,299 |
Goodwill |
| 22,607 |
| 23,136 |
Long-term prepayments and other assets |
| 905 |
| 2,684 |
Right-of-use assets | | 1,915 | | 27 |
Restricted cash | | 1,541 | | 4,078 |
Total assets |
| 167,225 |
| 178,123 |
Current liabilities: |
| |
| |
Accounts payable |
| 20,588 |
| 23,789 |
Amount due to group companies | | 106,240 | | 146,732 |
Due to related parties |
| 55 |
| 91 |
Bank borrowings | | — | | 2,876 |
Contract liabilities and deferred income |
| 34,040 |
| 36,740 |
Income tax payable |
| 2,500 |
| 2,451 |
Accrued liabilities and other payables | | 33,361 | | 42,449 |
Lease liabilities, current portion | | 1,912 | | 18 |
Total current liabilities | | 198,696 | | 255,146 |
Non-current liabilities: | | | | |
Contract liabilities and deferred income, non-current portion | | 920 | | 845 |
Deferred tax liabilities | | 1,085 | | 930 |
Amount due to group companies, non-current portion |
| 76,810 |
| 31,369 |
Bank borrowings, non-current portion |
| 19,924 |
| 17,291 |
Lease liabilities, non-current portion | | 27 | | 7 |
Total liabilities |
| 297,462 |
| 305,588 |
| 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 | ||||||
28. Certain risks and concentration (Continued)
| 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 | ) | ||||||||
PRC regulations (Continued)
F-54
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Third-party revenues |
| 178,070 |
| 186,679 |
| 228,736 |
Third-party costs of revenues | | (99,781) | | (92,388) | | (109,722) |
Inter-company operating expenses | | (7,302) | | (7,177) | | (8,032) |
Third-party operating expenses | | (117,714) | | (101,421) | | (110,367) |
Net (loss)/income attributable to Xunlei Limited |
| (56,328) |
| (10,673) |
| 2,913 |
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Purchases of goods and services from group companies | | (11,941) | | — | | — |
Other operating activities with external parties | | (21,720) | | (13,423) | | 24,945 |
Net cash (used in)/generated from operating activities | | (33,661) |
| (13,423) |
| 24,945 |
Loans to group companies | | (3,369) | | (6,329) | | — |
Repayment of loans from group companies | | 485 | | 502 | | — |
Other investing activities with external parties | | (5,001) | | (9,160) | | (19,417) |
Net cash used in investing activities | | (7,885) |
| (14,987) |
| (19,417) |
Loans from group companies | | 31,467 | | 2,542 | | 23,527 |
Repayment of loans to group companies | | (10,969) | | (4,300) | | (24,425) |
Other financing activities with external parties | | 11,707 | | 7,154 | | (223) |
Net cash generated from/(used in) financing activities | | 32,205 |
| 5,396 |
| (1,121) |
|
| (9,341) |
| (23,014) |
| 4,407 |
PRC regulationsAmounts previously reported for 2020 and 2019 have been revised, which the revisions, in the opinion of management, are immaterial. The impact of the revisions was eliminated in consolidation. There is no impact on the previously reported consolidated financial position, results of operations or cash flows.
Certain long-term cash advances were provided to the consolidated VIE by group companies and previously reported in current payables in 2020. The amount due to group companies of the Group’s consolidated VIE as of December 31, 2020 have been revised to reflect an adjustment with a decrease of USD76.8 million in current payables and an increase of USD76.8 million in non-current payables.
Certain cash advances provided to group companies by the consolidated VIE or vice versa, which were of investing or financing nature, were previously reported as operating activities in 2019 and 2020. The amounts of cash flow activities of the Group’s consolidated VIE have been revised to reflect an adjustment with an increase of USD17.6 million and a decrease of USD7.6 million in the net cash used in operating activities, an increase of USD2.9 million and USD5.8 million in the net cash used in investing activities and an increase of USD20.5 million and a decrease of USD1.8 million in the net cash generated from financing activities for the year ended December 31, 2019 and 2020, respectively.
F-55
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
28. Certain risks and concentration (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 itsVIE’s 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%31%, 16%38% and 26%35% of the net revenues for the years ended December 31, 2013, 20142019, 2020 and 2015,2021, 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, 20142020 and 2015,2021, substantially all of the Group’s cash and cash equivalents, restricted 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.
equivalents, restricted cash and short-term investments.
Prior to entering into sales agreements, the Group performs ongoing credit assessments of its customers, to assess thetaking into account their financial position, credit history of its customers.and other factors such as current market conditions. Further, the Group has not experienced any significant bad debts with respect to its accounts receivable.receivable for the years ended December 31, 2020 and 2021.
Restricted shares grant
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 March 2016, 1,018,500 restricted shares had been granted to certain executive officers or employeesevaluating the collectability 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.
Xunlei Limited
Notes to consolidated financial statements
(Amounts in US dollars unless otherwise stated)
Investments
In March 2016,balances, the Group paid USD 12.7 million asconsidered various factors, including the consideration to acquired 10% equity interests in Shanghai Lexiang Technologies Co., Ltd (Lexiang), a company in Shanghai,related parties and third parties’ repayment history and their credit-worthiness. An allowance for credit losses is made when collection of the PRC which invests in research and development of virtual reality. This acquisition was closed in March, 2016.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(cc)note 2(aa)) 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 thousandUSD169,235,000 as of December 31, 2014 and 2015, respectively.2021, or 56% 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.
F-56
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
28. Certain risks and concentration (Continued) Restricted net assets (Continued) Furthermore, cash transfers from the Company’s PRC subsidiaries to their parent companies outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency at the time of requesting such conversion may temporarily delay the ability of the PRC subsidiaries, VIE and VIE’s subsidiaries to remit sufficient foreign currency to pay dividends or other payments to the Company, or otherwise satisfy their foreign currency denominated obligations. 29. Subsequent events On March 31, 2022, the board of directors of the Company authorized a share buyback program, under which the Company may repurchase up to USD20 million of its shares over the next 12 months. 30. Additional information: condensed financial statements of the Company |
Regulation S-X requirerequires condensed financial information as to financial position, changes in financial positionstatements 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”“Investments in subsidiaries and consolidated VIE”.
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-57
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
30. 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, 2015.2021.
Condensed balance sheetsBalance Sheets
| | | | | ||||||||
| (In thousands) | December 31, 2014 | December 31, 2015 |
| December 31, 2020 |
| December 31, 2021 | ||||||
| Assets | | | | | ||||||||
| Current assets: | | | | | ||||||||
| Cash and cash equivalents | 309,457 | 292,175 |
| 57,585 |
| 32,015 | ||||||
| Due from subsidiaries and consolidated VIEs | 67,397 | 92,864 | ||||||||||
Short-term investments | | 47,525 | | 40,972 | ||||||||
Due from group companies |
| 3,323 |
| 107,484 | ||||||||
| Prepayments and other current assets | 6,709 | 1,090 |
| 860 |
| 183 | ||||||
| Total current assets | 383,563 | 386,129 |
| 109,293 |
| 180,654 | ||||||
| Non-current assets: |
| |
| | ||||||||
| Intangible assets, net | 394 | — | ||||||||||
| Investments in subsidiaries and consolidated VIEs | 82,360 | 68,481 | ||||||||||
Due from group companies, non-current portion |
| 175,720 |
| 92,917 | ||||||||
Investments in subsidiaries and consolidated VIE | | 20,064 | | 36,324 | ||||||||
| Total assets | 466,317 | 454,610 |
| 305,077 |
| 309,895 | ||||||
| Liabilities |
| |
| | ||||||||
| Current liabilities: |
| |
| | ||||||||
| Accounts payable | 101 | 101 |
| 55 |
| 55 | ||||||
| Deferred revenue and income, current portion | 211 | 211 | ||||||||||
Due to subsidiaries and consolidated VIE |
| 10,750 |
| 2,546 | ||||||||
Due to related parties | | — | | 1,506 | ||||||||
Contract liabilities and deferred income |
| 1 |
| — | ||||||||
| Accrued liabilities and other payables | 2,328 | 1,735 |
| 2,118 |
| 2,141 | ||||||
| Total current liabilities | 2,640 | 2,047 |
| 12,924 |
| 6,248 | ||||||
| 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 |
| 12,924 |
| 6,248 | ||||||
| Commitments and contingencies |
| |
| | ||||||||
| Shareholders’ equity |
| |
| | ||||||||
| Common shares | 82 | 85 |
| 84 |
| 84 | ||||||
| Treasury shares 30,274,602 shares as at December 31, 2014 and 29,558,094 shares as at December 31, 2015 | 7 | 7 | ||||||||||
Treasury shares (34,475,224 shares and 31,619,259 shares as of December 31, 2020 and 2021, respectively) |
| 8 |
| 8 | ||||||||
| Other shareholders’ equity | 457,802 | 446,657 |
| 292,061 |
| 303,555 | ||||||
| Total Xunlei Limited’s shareholders’ equity | 457,891 | 446,749 |
| 292,153 |
| 303,647 | ||||||
| Total liabilities, mezzanine equity and shareholders’ equity | 466,317 | 454,610 | ||||||||||
Total liabilities and shareholders’ equity |
| 305,077 |
| 309,895 | ||||||||
F-58
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
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 | ) | ||||||||
the Company (Continued)
Condensed statementStatements of Operations
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Operating expenses |
|
|
|
|
|
|
Sales and marketing expenses |
| (1) |
| 0 |
| 0 |
General and administrative expenses |
| (1,247) |
| (1,438) |
| (3,302) |
Total operating expenses |
| (1,248) |
| (1,438) |
| (3,302) |
Operating loss |
| (1,248) |
| (1,438) |
| (3,302) |
Interest income |
| 1,496 |
| 2 |
| 107 |
Interest expense |
| (75) |
| (399) |
| (95) |
Other income, net |
| 4,712 |
| 2,455 |
| 585 |
(Loss)/income from subsidiaries and consolidated VIE |
| (57,787) |
| (14,361) |
| 3,935 |
(Loss)/income before income tax |
| (52,902) |
| (13,741) |
| 1,230 |
Income tax expenses |
| (267) |
| (99) |
| (39) |
Net (loss)/income |
| (53,169) |
| (13,840) |
| 1,191 |
Net (loss)/income attributable to Xunlei Limited’s common shareholders |
| (53,169) |
| (13,840) |
| 1,191 |
Condensed Statements of Cash Flows
| | | | | | |
| | Years ended December 31, | ||||
(In thousands) |
| 2019 |
| 2020 |
| 2021 |
Other operating activities with external parties |
| 3,854 |
| 649 |
| (5,732) |
Net cash generated from/(used in) operating activities | | 3,854 |
| 649 |
| (5,732) |
Capital contribution to group companies | | (100,000) | | — | | — |
Loans to group companies | | (25,750) | | (1,802) | | (26,391) |
Repayment of loans from group companies | | 2,459 | | 500 | | — |
Other investing activities with external parties |
| 79,339 |
| 55,030 |
| 6,553 |
Net cash (used in)/generated from investing activities | | (43,952) |
| 53,728 |
| (19,838) |
Other financing activities with external parties | | — |
| (4,475) |
| — |
Net cash used in financing activities | | — |
| (4,475) |
| — |
Net (decrease)/increase in cash and cash equivalents | | (40,098) |
| 49,902 |
| (25,570) |
Cash and cash equivalents at beginning of year | | 47,781 |
| 7,683 |
| 57,585 |
Effect of exchange rates on cash and cash equivalents | | 0 |
| 0 |
| 0 |
Cash and cash equivalents at end of year | | 7,683 |
| 57,585 |
| 32,015 |
Amounts previously reported for 2020 and 2019 have been revised, which revisions, in the opinion of management, are immaterial. The impact of the revisions was eliminated in consolidation. There is no impact on the previously reported consolidated financial position, results of operations or cash flows.
The Company provided certain long-term cash advances to its subsidiaries and consolidated VIE which were previously reported as due from group companies under current receivables. The current portion of due from group companies, the non-current portion of due from group companies and investments in subsidiaries and consolidated VIE of the Company have been revised to reflect an adjustment with a decrease of USD275.7 million, an increase of USD175.7 million and USD100.0 million as of December 31, 2020, respectively.
F-59
Xunlei Limited
Notes to the consolidated financial statements
(Amounts in US dollars unless otherwise stated)
30. Additional information: condensed financial statements of the Company (Continued)
The cash advances provided to group companies, which were of investing nature, were previously reported as operating activities. The short-term investments at beginning of year were previously reported as cash and cash equivalents at beginning of year and the purchases and maturities of short-term investments were previously excluded from investing activities, and the amount of movements in investments in subsidiaries and consolidated VIE was previously reported as investing activities in 2019 and 2020. To properly reflect the condensed statements of cash flows, the amounts of cash flow activities of the Company have been revised to reflect an adjustment with an increase of USD175.7 million and USD13.4 million in the net cash generated from operating activities, an increase of USD96.3 million and a decrease of USD41.7 million in the net cash used in investing activities, and a decrease of USD181.9 million and USD102.6 million in the cash and cash equivalents at beginning of year for the year ended December 31, 2019 and 2020, respectively.
| 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-60