The following is a summary of the principal governmental laws and regulations that are or may be applicable to companies such as ours in China. The scope and enforcement of many of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws. For a description of the regulatory risks related to our business, see Item 3.D. “Risk Factors—Risks Related to Our Business—Changes Complexity, uncertainties and changes in government policies or regulations of Internet industry may have a material and adverse effect on our business, financial condition, and results of operations and prospects.,” “—Risks Related to Our Corporate Structure” and “—Risks Related to Doing Business in China.”
On September 25, 2000, the State Council promulgated the Telecommunications Regulations, or the Telecom Regulations. The Telecom Regulations draw a distinction between “basic telecommunication services” and “value-added telecommunication services.” Internet content provision services, or ICP services, is a subcategory of value-added telecommunications businesses. Under the Telecom Regulations, commercial operators of value-added telecommunications services must first obtain an operating license from the MIIT or its provincial level counterparts.
On September 25, 2000, the State Council issued the Administrative Measures on Internet Information Services, or the Internet Measures. According to the Internet Measures, commercial ICP service operators must obtain an ICP license from the relevant government authorities before engaging in any commercial ICP operations within the PRC.in China. In November 2000, the MIIT promulgated the Administrative Measures on Internet Electronic Messaging Services, or the BBS Measures. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms.
On December 26, 2001, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating License, or the Telecom License Measures. On March 1, 2009, the MIIT issued the revised Telecom License Measures, which took effectbecame effective on April 10, 2009. The Telecom License Measures set forth the types of licenses required to operate value-added telecommunications services and the qualifications and procedures for obtaining such licenses. For example, an ICP service operator providing value-added services in multiple provinces is required to obtain an inter-regional license, whereas an ICP service operator providing the same services in one province is required to obtain a local license.
National security considerations are an important factor in the regulation of Internet content in China. The National People’s Congress, the PRC’s national legislature of the PRC, has enacted laws with respect to maintaining the security of Internet operation and Internet content. According to these laws, as well as the Internet Measures, violators may be subject to penalties, including criminal sanctions, for Internet content that:
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On May 28, 2010, we sold all of our 51% interest in Huayi Music to Huayi Brothers Media Corporation and recognized gain of $4.5 million from disposal of discontinued operations.
On August 17, 2010, we sold our WVAS and recorded music businesses to Shanda Interactive. As the transaction was treated as a transaction between entities under common control, no gain or loss was recognized. The difference of $13.6 million between the consideration received of $37.2 million and the carrying amount of the assets and liabilities of WVAS and recorded music business of $23.7 million and the corresponding cumulative translation difference of $10.3 million were accounted for as contribution by Shanda Interactive in additional paid-in capital in 2010.
According to Accounting Standards Codification, or ASC, 205, the reclassification of discontinued operations of WVAS and recorded music businesses for the year ended December 31, 2009 and the eight months ended August 31, 2010 has been accounted for retroactively. Results from these discontinued operations, net of tax, in 2009, 2010, 2011 and 20112012 were a loss of $21.6 million, an income of $1.1 million (including a gain of $4.5 million from the disposal of our 51% interest in Huayi Music), nil, and an income of nil, respectively.
Disposal of Interest in Online Audio Business
The acquisition of Yisheng’s online audio business from Shanda Interactive in 2010 was accounted for as a common control transaction as we were considered to be under the control of Shanda Interactive at the time of the acquisition. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since August 31, 2009, the date of inception of common control, which is the date on which we were consolidated into Shanda Interactive’s consolidated financial statements. Therefore total assets and liabilities as well as the non-controlling interests of Yisheng were recorded at their carrying amount as capital contribution from Shanda Interactive in the consolidated statements of changes in equity. The effect of accounting for the acquisition under common control has increased the net loss for the year ended December 31, 2009 by $0.7 million, which representsrepresented the net loss of this business from August 31, 2009 through December 31, 2009. The $12.5 million fair value of the 415,384,615 ordinary shares that we issued to Shanda Interactive was recorded through equity as a deemed distribution to Shanda Interactive in 2010.
The issuance of 138,461,539 ordinary shares to the 25% non-controlling shareholders of Yisheng in August 2010 was accounted for as an equity transaction in 2010 and the difference between fair value of the ordinary shares issued and carrying amount of the non-controlling interest was recognized as a decrease in additional paid-in capital attributable to us in accordance with ASC 810.
On
In August 11, 2011, we disposed of a significant interest in Yisheng as a result of management’s review of our business strategies. After the disposal, our company ceases to control Yisheng and only retains a 20% interest in Yisheng. This disposal gain was recognized as an increase in additional paid-in capital for the year ended December 31, 2011. From January to August 2011, Yisheng generated net revenue of $0.5 million and incurred net loss of $3.5 million.
Factors Affecting Our Results of Operations
Our business, financial condition and results of operations have been and will continue to be subject to general conditions affecting the online video and online advertising industries in China. These conditions, among others, include the stability and growth of China’s economy, the growth of the Internet penetration rate in China, and the increasing acceptance of online video advertising by the advertisers. In addition, our business, financial condition and results of operations are affected by a number of company-specific factors including our ability to:
·maintain and expand our user base;
·obtain and produce popular video content cost-effectively;
·procure Internet bandwidth cost-effectively;
·provide effective advertising services;
·control sales and marketing expenses; and
·maintain leading brand and market position.
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Description of Certain Statement of Operations Items
Net Revenues
Net Revenues
We currently derive substantially all of our net revenues from online advertising services. Historically, we derived these revenues primarily from various third-party advertising agencies. Beginning in the second quarter ofIn April 2011, we have relied onentered into an advertising agency agreement with Shengyue, an affiliate wholly owned by Shanda Interactive, pursuant to which Shengyue agreed to act as our exclusive advertising agency for our standard media resources and as our non-exclusive advertising agency for our highly interactive advertising resources. Since then, we have relied on Shengyue as our sole advertising agency, which manages our sales to, and collection ofcollects payments from, a majoritysubstantially all of our advertisers. Advertisers broadcast their online advertising through the AA system supplied by Shengyue. WeShengyue using performance advertising, where advertisers are able to measure advertising results.
Pursuant to the advertising agency agreement with Shengyue, Shengyue generates advertising revenues for us by selling our advertising capacity and resources directly to advertising customers at a price it determines. Shengyue guarantees to us a minimum amount of revenues for each quarter. In return, we guarantee a certain amount of web traffic for our webpage on which Shengyue posts advertisements. If the advertising revenues from Shengyue exceed the minimum guaranteed amount, we are required to pay theShengyue a progressive commission fee exceptbased upon increasing percentages for the commission free period andadditional tiers of revenue in the form of direct-deductionexcess of the guaranteed amount. We settle the advertising revenue to the related party advertising agencyrevenues net of commission fees with Shengyue on a periodic basis and recognize revenues net of the commission fee. The initial term of this advertising agency agreement expired on December 31, 2012. In January 2013, we amended and restated this agreement with Shengyue and extended its term to December 31, 2013. For the years ended December 31, 2011 and 2012, we generated advertising revenues of $8.1 million and $12.5 million from Shengyue. Since the commencement of the arrangement, we have been able to satisfy the web traffic requirements under the advertising agency agreement. As we enjoyed a commission-free trial period in 2011 under the agreement, and the advertising revenues in 2012 did not exceed the minimum amount guaranteed by Shengyue, we incurred nil and nil commission fees payable to Shengyue in 2011 and 2012, respectively. To the extent that future advertising sales by Shengyue to our advertisers increase significantly and exceed the minimum guaranteed amounts, progressively higher commission fees would be incurred, which may negatively affect our profit margin. We expect that revenues from online advertising services will continue to be the primary source of our revenues in the foreseeable future.
We believe the most significant factors that directly or indirectly affect our advertising service revenues include the following:
·the number of advertising customers;
·the effectiveness of the sales and marketing efforts of Shengyue;
·the number of users visiting our website and the amount of time they spend on our website;
·the prices of our performance advertising;advertising (as negotiated by Shengyue with our advertisers);
·the progressive commission fee for Shengyue;fees on revenues in excess of the guaranteed minimum amount; and
·the perceived effectiveness by advertisers of online video advertising as compared to advertising in more traditional media, particularly television.
The number of advertising customers during any period is affected by our services, ourthe sales and marketing efforts of Shengyue, and influenced by our market position and advertisers’ perception of the effectiveness of our online advertising services. The size of our advertising customer base is also driven by customer-specific factors such as the timing of the introduction of new advertising campaigns, our ability to maintain favorable demographic user base, seasonality of advertising customers’ operations and growth of business sectors in which our advertising customers operate.
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Cost of Revenues
Our cost of revenues consist of Internet bandwidth costs, amortization and write-down of licensed video copyrights, payroll costs associated with the platform operation and content, depreciation expenses, in-house developed content costs, and other costs. Our total cost of revenues amounted to $30.8$14.6 million for the year ended December 31, 2011.2012.
| | | | Year ended December 31, | | | Year ended December 31, | |
| | | 2009 | | 2010 | | 2011 | | | 2010 | | 2011 | | 2012 | |
| | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
Internet bandwidth costs | | | 534 | | | 10,279 | | | 9,025 | | | 10,279 | | 9,025 | | 7,790 | |
Termination of long-form videos | | | — | | | — | | | 5,267 | | | — | | 5,267 | | — | |
Payroll costs | | | — | | | 6,167 | | | 4,734 | | | 6,167 | | 4,734 | | 2,806 | |
Depreciation of servers and other equipments | | | — | | | 2,503 | | | 2,528 | | |
Depreciation of servers and other equipment | | | 2,503 | | 2,528 | | 1,425 | |
Amortization of licensed video copyrights cost | | | — | | | 8,012 | | | 2,201 | | | 8,012 | | 2,201 | | — | |
Impairment write-down of licensed video copyrights cost | | | — | | | 7,740 | | | 1,521 | | | 7,740 | | 1,521 | | — | |
In-house developed content costs | | | — | | | 1,596 | | | 845 | | | 1,596 | | 845 | | — | |
Other costs(1) | | | 23 | | | 4,162 | | | 4,759 | | |
| | | | | | | | | |
Other costs(1) | | | 4,162 | | 4,759 | | 2,582 | |
Total costs | | | 557 | | | 40,459 | | | 30,880 | | | 40,459 | | 30,880 | | 14,603 | |
| | | | | | | | | |
(1) | Include primarily advertisement production costs and outside service fees and UGC costs. |
(1)Include primarily advertisement production costs, platform operation costs, and outside service fees and UGC costs.
Internet bandwidth costs. Internet bandwidth costs are the fees we pay to telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their Internet data centers. Bandwidth is a significant component of our cost of revenues and therefore an important factor affecting our profitability. The bandwidth costs as a percentage of our net revenues decreasedincreased from 62.1% for the year ended December 31, 2010 to 47.0% for the year ended December 31, 2011. This2011 to 55.1% for the year ended December 31, 2012, primarily due to a decrease was consistent with historical trendsin our revenues. We plan to provide video services based on cloud infrastructure, or our video cloud strategy, and continue to improve the user experience, both of decreasing unit cost of data hosting and transmission services.which will require relatively more bandwidth. As a result, we expect Internet bandwidth costs to increase in the future.
Termination of long-form videos.As a result of the termination of licensing contracts with certain content providers, we charged a one-time termination penalty of $5.3 million in 2011.
Payroll costs. Payroll costs consist of salaries and benefits for our platform operation and content personnel. As the change in business strategy in 2011 improved our cost structure and our operating efficiency, theThe payroll costs decreased from $6.2 million for the year ended December 31, 2010 to $4.7 million for the year ended December 31, 2011.2011 to $2.8 million for the year ended December 31, 2012. We intend to recruit more talents in connection with our video cloud strategy and to upgrade the search and recommendation engines on our websites, both of which we expect the payroll costs to increase significantly in the future.
Depreciation of servers and other equipment. We include depreciation expense for servers and other equipment that are directly related to our business operations and technical support in our cost of revenues. Our depreciation expense increaseddecreased significantly from nil in 2009 to $2.5 million in 2010 and $2.5 million in 2011 as we made substantial investmentsto $1.4 million in building up our CDN infrastructure2012 primarily due to the disposal of network equipment in 2010 after our acquisitionrelation to technological upgrades in the second half of Ku6 Holding.2011 and improvement in efficiency of server utilization in 2012. We may invest in additionalintend to engage cloud computing service providers to use their servers and other equipment in the future, as part of their services instead of purchasing new servers and other equipment on large scale. As a result, of whichwe expect our depreciation expense may continue to increase.generally remain stable.
Amortization and write-down of licensed video copyrights. The licensed video copyrights are carried at the lower of unamortized cost or net realizable value and are amortized over their respective licensing periods as there is no limit ofover the showings of the licensed videos and we cannot reliably estimate the future number of showings for the licensed videos. We estimate the expected cash inflows that are directly attributed to the contents licensed under the net realizable value approach. We write down the carrying value of the licensed content to net realizable value if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying value. Amortization and write-down expenses were $8.0 million and $7.77.7 million, respectively, for the year ended December 31, 2010, and $2.2 million and $1.5 million, respectively, for the year ended December 31, 2011.2011, and nil and nil, respectively, for the year ended December 31, 2012. As of each of December 31, 2010, 2011 and 2011,2012, the carrying value of licensed video copyrights was written down to nil. The decrease in the amortization and write-down of licensed video copyrights was primarily a result ofdue to the change in our business focus from long-form videos to UGC.
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In-house developed content costs.costs. In-house developed content costs represent costs related to the production of our news, reports and interactive entertainment programs, but do not include any salaries and benefits paid to our employees. Video production (which mainly include direct production costs and production overhead) costs are capitalized, if meeting the capitalization criteria. During the year ended December 31, 2011, the2012, we did not incur any video production costs, did not meet the criteria for capitalization and as a result all the video production costs have been expensed as incurred. The decrease in in-house developed content costswhich was consistent with our cost structure under the new business model.
Operating Expenses
The following table sets forth certain historical consolidated operating expenses data, in terms of amount of our total revenues, for the periods indicated:
| | | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2009 | | | 2010 | | | 2011 | | | 2010 | | 2011 | | 2012 | |
| | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
Operating Expenses | | | | | | | | | | | | | |
Product development | | | — | | | | — | | | | 2,693 | | | — | | 2,693 | | 1,973 | |
Selling and marketing | | | 665 | | | | 16,196 | | | | 11,817 | | | 16,196 | | 11,817 | | 1,689 | |
General and administrative | | | 6,465 | | | | 13,507 | | | | 23,402 | | | 13,507 | | 23,402 | | 6,820 | |
| | | | | | | | | | |
Total operating expenses | | | 7,130 | | | | 29,703 | | | | 37,912 | | | 29,703 | | 37,912 | | 10,482 | |
| | | | | | | | | | |
Product Development Expenses. Product development expenses consist primarily of salaries and benefits for product development personnel, including share-based compensation costs.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of sales and marketing personnel payroll compensation and related employee costs, advertising and market promotion expenses, and other overhead expenses incurred by our sales and marketing personnel.
General and Administrative Expenses. General and administrative expenses consist primarily of salary and benefits for general management, finance and administrative personnel, bad debt provision, litigation accrual, depreciation, amortization and impairment of intangible assets, professional service fees, share-based compensation, office rental fees, and other expenses.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We have summarized our accounting policies below that we believe are both important to an understanding of our financial results and involve the need to make estimates about the effect of matters that are inherently uncertain. We also have other policies that we consider to be key accounting policies. However, these policies do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.
Business Combinations and Non-controlling Interests
We account for our business combinations using the purchase method of accounting. This method requires that the acquisition cost to be allocated to the assets, including separately identifiable intangible assets, and liabilities we acquired based on their estimated fair values. Any non-controlling interest was reflected at historical cost. Where the consideration in an acquisition includes contingent consideration the payment of which depends on the achievement of certain specified conditions post-acquisition, contingent consideration was not recorded until the contingency was resolved.
From January 1, 2009, we adopted ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”). Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
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The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
Revenue Recognition
In accordance with ASC 605, “Revenue Recognition,” we recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.
Our revenues are derived principally from online brand advertising arrangements, where the advertisers (including third parties and related parties) pay to place their advertisements on our online video platform in different formats. Such formats generally include banners, buttons, links, pre-roll or post-roll video advertisements.
Advertising contracts are signed to establish the price and advertising services to be provided. Advertisements are charged either based on the agreed measurement numbers, including but not limited to impressions and clicks, or fixed during a determined period of time. In the former case, the delivery of service occurs when those measurement numbers are achieved. In the latter case, the delivery is not linked to advertisement displays, but occurs over time.
Under the arrangements with advertisers where the advertisement placement includes different formats to be delivered over different periods of time, our revenue is accounted for using the guidance under ASC 605-25 “Multiple Element Arrangements” as such revenue arrangements involve multiple deliverables to the advertisers. We sell the advertising services over a broad price range. We use our best estimate of the selling price of each component of bundled advertising arrangements for separate units of accounting.
Under the arrangements with
For our advertising agency Shengyue, an affiliate wholly owned by Shanda Interactive, components of the arrangement include an arrangement fora guaranteed amount of advertising revenue and an arrangement forthe sharing of excess advertising revenues afterby deducting commission fees earned by Shengyue based upon increasing percentagepercentages for additional tiers of revenue.revenue in excess of the guaranteed amount. The revenues, including the guaranteed advertisingamount and any excess revenues, are recognized net of commission fees. The revenues are recognized ratably over varying service periods as governed by the specific agreements with Shengyue. Any excessShengyue, as we are able to timely obtain information regarding historical advertising revenues realized from these arrangements, which arein order to prepare our financial statements. We enjoyed a commission-free trial period in 2011 under the agreement, and the advertising revenues in 2012 did not subject to any refundabilityexceed the minimum amount guaranteed by Shengyue. As a result, there were no commission fees or contingency provisions from us to Shengyue, would be recognized ratably over the remaining service periods when a reliable estimateprogressive sharing of excess revenues above the minimum guarantee is established. in 2011 and 2012 under our arrangement with Shengyue.
We report the revenues earned from both Shengyue and third-party advertising agencies based on the net amount after considering the indicators to record revenues gross versus net as set forth in ASC 605-45.
We make credit assessments of customers to assess the collectability of contract amounts prior to entering into contracts. For those contracts for which collectability was assessed as not reasonably assured, we recognize revenue only when cash is received and all revenue recognition criteria are met.
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For revenue arrangements contracted with third-party advertising agencies, we provide cash incentives in the form of rebates based on volume and performance, and account for such incentives as a reduction of revenue in accordance with ASC 605-50-25. The cash incentives to third-party advertising agencies in the year ended December 31, 2010, 2011 and 20112012 were $5.4 million, and $1.4 million and $0.1 million, respectively. The consistent decrease in cash incentives to third-party advertising agencies was primarily due to the decrease in revenues from such agencies as a result of the transition to performance advertising in the second quarter of 2011.
Allowances for Doubtful Accounts
We determine the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account an aging analysis of the accounts receivable balances, historical bad debt records, repayment patterns in the prior year and other factors such as the policies of operators and financial condition of the customer. During the years ended December 31, 2009, 2010 and 2011, we recorded allowances for doubtful accounts of $3.8 million, $1.5 million and $3.5 million, respectively. For the year ended December 31, 2012, we reversed allowances for doubtful accounts of $2.3 million due to the collection of accounts receivable that were previously written down. As of December 31, 2011,2012, the balance of our allowance for doubtful accounts was $4.4$2.2 million.
Video Production and Acquisition Costs
Following the guidance under ASC 926-20-25, video production (which mainly include direct production costs and production overhead) and acquisition costs are capitalized, if meeting the capitalization criteria, and stated at the lower of unamortized cost or estimated fair value.
With respect to production and acquisition costs, until we can establish estimates of secondary market revenues, capitalized costs for each video produced are limited to the amount of revenues contracted for that video. The costs in excess of revenues contracted for that video are expensed as incurred on an actual basis, and are not restored as assets in subsequent periods. Once we can establish estimates of secondary market revenues in accordance with ASC 926-20-35-5(b), we capitalize subsequent film costs.
Capitalized video production and acquisition costs are amortized in accordance with the guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. We estimate total revenues to be earned, or ultimate revenues, throughout the life of a video. Ultimate revenue estimates for the produced videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self-produced content are based upon assumptions about future demand and market conditions. The capitalized costs are subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than its unamortized costs. During the year ended December 31, 2011, video production and acquisition costs did not meet the criteria for capitalization and as a result all the video production costs have been expensed as incurred.
Licensed Video Copyrights
The licensed video copyrights are amortized over their respective licensing periods. The amortization period of the licensed video copyrights mainly ranged from one year to three years for all periods presented.
The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, we determine the expected cash inflows that are directly attributed to the premium content category, which comprises the expected revenues directly attributable to the content category less the direct costs to deliver the content to derive the net realizable value of the asset. We write down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount. As of December 31, 2012, the carrying value of licensed video copyrights has been written down to nil.
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Goodwill and Intangible Assets Impairment
We test goodwill for impairment by performing a two-step goodwill impairment test, which can be preceded by an optional qualitative assessment to determine if the two-step goodwill impairment test needs to be followed. The optional qualitative assessment relies upon qualitative factors to determine if is it “more likely than not” that the fair value of a reporting unit is less than the carrying value of the reporting unit. We did not apply the qualitative assessment and proceeded directly to the two-step test. The first step compares the calculated fair value of a reporting unit to its carrying amount, including goodwill. If and only if the carrying amount of a reporting unit exceeds its fair value as per step one, the second step is executed to compare the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. When available, we use observable market data, including pricing on recent closed market transactions, to determine the fair value of the reporting units and compare with carrying amount of the reporting units to assess any goodwill impairment. The fair value of reporting units was determined based on the market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, we measure the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach includes using financial metrics and ratios of comparable public companies. When the goodwill was determined to be impaired, we use income approach including discounted cash flow model for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the risk profile of the relating industry to determine the amount of any impairment.
We measure impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we assess impairment by comparing the carrying value of the intangible assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the intangible assets. We measure the fair value of intangible assets based on an in-use premise using the discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the risk profile of the relating industry. If different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different.
During the second quarter of 2009, we performed impairment testing for the music business due to significantly lower than expected performance as a result of the continued challenging business conditions, reduction in number of concerts and other music events. This resulted in an impairment charge for acquired intangible assets of $3.5 million and goodwill of $3.0 million. During the annual goodwill impairment test on December 31, 2009, we also determined that our music segment was impaired due to the continued operation losses, thus necessitating a charge of $0.6 million. The impairment provided in 2009 relating to recorded music businesses have been included in the discontinued operations.
During the annual goodwill impairment test on December 31, 2010, we performed an impairment test at the reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, 2010.
During the second quarter of 2011, we performed impairment testing for the online video operations due to a change in our business strategy. This resulted in an impairment charge for acquired intangible assets of $1.4 million. During the annual impairment test on December 31, 2011, we performed an impairment test at reporting unit level relating to acquired intangible assets and goodwill and concluded that there was no additional impairment required as to the carrying value of intangible assets and goodwill as of December 31, 2011.
During the annual impairment test on December 31, 2012, we performed an impairment test at the reporting unit level relating to goodwill and compared the market value of our publicly trade equity to the carrying value of our equity and concluded that there was no impairment required as of December 31, 2012. As we incurred net losses in each of the fiscal year from 2007 to 2012, we assessed impairment by comparing the carrying value of the intangible assets to the estimated undiscounted future cash flows and concluded there was no impairment required goodwill as of December 31, 2012.
BusinessTurnover Tax and Related Surcharges
Our subsidiaries and consolidated affiliated entities are subject to business tax and related surcharges andor value-added tax, as the case may be, on the revenues earned for services provided in China. These business tax and related surcharges or value-added tax are deducted from gross revenues to arrive at net revenues.
In 2012, the PRC.relevant PRC authorities introduced a turnover tax reform pilot program (the “Pilot Program”) in selected pilot cities in China for selected industries to gradually expand the scope of VAT. The applicablePilot Program was implemented in Beijing and Tianjin, in which our advertising revenues are sourced, effective September 1 and December 1, 2012, respectively. Prior to the implementation of the Pilot Program, the business tax rate foron our advertising business issales was 5% based on the gross advertising revenue before deducting advertising agencies’ rebate. After the implementation of the Pilot Program, our advertising agencies rebate. In the accompanying consolidated statementsbusiness has become subject to value-added tax at a rate of operations, business tax and related surcharges for advertising revenues are deducted from gross revenues to arrive at net revenues when incurred.6%.
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Share-based Compensation
We apply ASCAccounting Standards Codification Topic 718 “Stock Compensation,” (formerly referred to as Statement of Financial Accounting Standard 123(R), or SFAS123(R),ASC 718, which requires all share-based payments to employees and directors, including grants of employee stock options and restricted shares, to be recognized as compensation expense in the financial statements over the vesting period of the award based on the fair value of the award determined at the grant date. The valuation provisions of ASC 718 apply to new awards, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. Under ASC 718, the number of share-based awards for which the service is not expected to be rendered for the requisite period should be estimated, and the related compensation cost not recorded for that number of awards.
In accordance with ASC 718, we have recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions.
We grant equity incentive awards to our employees. We recorded share-based compensation expenses of $1.9 million, $1.8 million and $1.8$0.5 million in 2010, 2011 and 2011,2012, respectively. The share-based compensation expensesexpense in 2010 included one-time compensation expensesexpense of $1.3 million relating to incremental value of the ordinary shares issued by us to replace the options issued by Ku6 Holding before its acquisition by us. The share-based compensation expensesexpense in 2011 included one-time compensation expensesexpense of $0.5 million relating to the 20% interest in Yisheng that we gavecontributed to a former employee whichwho is now the chief executive officer of Yisheng. The decrease in share-based compensation expense in 2012 compared to 2011 was primarily attributable to changes in the likelihood of achieving performance targets related to profitability for performance-based stock option awards (which resulted in a reversal of compensation expense recorded in previous periods of $0.5 million) and personnel turnover in 2012 which caused actual forfeitures to be in excess of previously estimated forfeitures (resulting in a reversal of compensation expense recorded in previous periods of $0.7 million). Our share-based compensation expenses are included in our operating expenses as well as cost of revenue.
Income Taxes and Valuation allowances
Current income taxes are provided for on the taxable income of each subsidiary on the separate tax return basis in accordance with the relevant tax laws. Our PRC subsidiaries and consolidated affiliated entities are generally subject to a corporate income tax rate of 25% under the EIT Law. We are not subject to income tax under the Cayman Islands law.
Deferred income taxes are provided using the liability method in accordance with ASCAccounting Standards Codification Topic 740 (formerly referred to as SFAS No. 109, “Income Taxes,”). or ASC 740. Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC
Accounting Standards Codification Topic 740-10-25 (formerly referred to as Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of ASC 740-10-25 did not result in a cumulative adjustment to the opening balance of retained earnings as of January 1, 2007. We do not have any liabilities for unrecognized tax benefits as of December 31, 2010, 2011 or 2011.2012. Were we to have such liabilities, interest and penalties would be recognized for the tax purpose.
Contingency
Contingency
We are subject to contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters in the normal course of our business. 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 by us. As of December 31, 2011,2012, we estimated and accrued $2.7 million$2.1million for liabilities arising from alleged copyright infringements.
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Going Concern
We operate withhave incurred significant net losses and negative cash flows from operations in recent years. As of December 31, 2011,2012, our cash and cash equivalents balance was $13.1 million. Our net operating cash outflow for the year ended December 31, 2012 was $8.1 million, which represented a significant reduction from our net operating cash outflow for the year ended December 31, 2011. In addition, as of December 31, 2012, our accumulated deficit was $132.4$141.9 million and our networking capital (the excess of current assets were $21.2over current liabilities) was $6.4 million. On April 1, 2011, we entered into agreements with Shanda Media, pursuantThis working capital included $10.5 million of accounts receivable and other receivables due from related parties and $3.8 million of other amounts payable to which werelated parties.
Our forecasted revenue in 2013 is primarily derived from Shengyue and cash collection from this revenue source depends on the contractual credit terms agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share) and $50,000,000 aggregate principal amount of senior convertible bonds at face value. Since mid-2011, we have adjusted our business strategy by substantially reducing our sales force and ceasing to purchase long-form videos. with this agency.
Based on the implementation result ofanticipated cash flow related to operating activities, our adjusted strategy in the second half of 2011, we anticipated that thepresent cash outflow from both operationsbalances and investment would likely be substantially reduced in 2012. Based on our anticipated working capital position, and taking into consideration our potential future financing activities from time to time, we redeemed the convertible bonds on September 30, 2011. We believe that we have sufficient cash and capital resources to fund our operations and capital expenditures for at least the next 12 months. Accordingly, our consolidated financial statements have been prepared on a going-concern basis.
Results of Operations
As mentioned above in the section of “Critical Accounting Policies,” the financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control on August 31, 2009 and the operating results of WVAS and recorded music were presented as “Results of Discontinued Operations” in the income statements for the years ended December 31, 2009, 2010, 2011 and 2011.2012.
The following discussion of our results of operations for the years ended December 31, 2009, 2010, 2011 and 20112012 is based upon our audited consolidated financial statements included elsewhere in this annual report on Form 20-F. However, since the results for the year ended December 31, 2009 did not include the results of our online video business and included only the results of our online audio business from August 31, 2009 to December 31, 2009, the results for the year ended December 31, 2010 included the results of our audio business for the full year and the results of our online video business from January 18, 2010 to December 31, 2010, and the results for the year ended December 31, 2011 included the results of our online video business for the entire year and the results of our online audio business from January 1, 2011 to August 2011 when we began to account for our retained portion of this business under the equity method, and the results for the year ended December 31, 2012 included the results of our online video business for the entire year, the following discussion may not be meaningful for you to understand the trends of our continuing operations. See “—Unaudited Consolidated Pro Forma Statements
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net Revenues. Net revenues decreased by 26.6% to $14.1 million in 2012 from $19.2 million in 2011. This decrease was primarily due to a decrease in revenues from third-party advertisers, partially offset by a growth in revenues generated from performance advertising with Shengyue, an affiliated advertising agency. We began to generate revenues from performance advertising in the second quarter of Operations”2011, which contributed approximately 38.3% and 88.4% of our total net revenues in 2011 and 2012, respectively. Net revenues for the year ended December 31, 2012 consisted of revenues generated from our online video business for the entire year. Net revenues for the year ended December 31, 2011 consisted of revenues generated from our online video business for the entire year and revenues generated from our online audio business from January to August 2011 of $0.5 million when we began to account for our retained portion of this business under the equity method.
Cost of Revenues. Cost of revenues decreased by 52.7% to $14.6 million in 2012 from $30.9 million in 2011. This decrease was mainly attributable to (i) a supplemental comparisonone-time charge of 2009$5.3 million in termination of long-form videos in 2011 due to the change in our business strategy, (ii) a decrease of $3.7 million in amortization and 2010 results onwrite-down of licensed video copyrights as we shifted our focus from long-form videos to UGC in the second half of 2011, (iii) a pro forma basis.decrease of $1.9 million in payroll costs as the change in business strategy in the second half of 2011 improved our cost structure and our operating efficiency, (iv) a decrease of $1.2 million in Internet bandwidth costs in 2012 compared to 2011 as a result of the transition to UGC, (v) a decrease of $1.1 million in depreciation of servers and other equipment due to the disposal of network equipment in relation to technological upgrades in the second half of 2011, and (vi) a decrease of $2.2 million in platform operation cost, outside service fee and other cost related to content generating.
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Gross Loss. As a result of the foregoing, our gross loss decreased by 95.8% to $0.5 million in 2012 from $11.7 million in 2011.
Operating Expenses. Operating expenses decreased by 72.4% to $10.5 million in 2012 from $37.9 million in 2011, as a result of a decrease in our product development expenses, selling and marketing expenses and general and administrative expenses.
·Product Development Expenses. Product development expenses were $2.0 million in 2012 compared to 2.7 million in 2011. This decrease was primarily due to a decrease in payroll costs of $1.8 million for research and development personnel in 2012 from $2.2 million in 2011 as a result of a change in our business strategy in 2011 that improved our cost structure and operating efficiency by, in part, trimming the research and development headcount.
·Selling and Marketing Expenses. Selling and marketing expenses decreased by 85.7% to $1.7 million in 2012 from $11.8 million in 2011. This decrease was primarily attributable to a decrease of $5.9 million in salaries and benefits for sales and marketing personnel, a decrease of $1.9 million in marketing promotion and a decrease of $0.9 million in severance costs due to the one-off severance payments in 2011 in connection with the restructuring of our sales department.
·General and Administrative Expenses. General and administrative expenses decreased by 70.9% to $6.8 million in 2012 from $23.4 million in 2011. This decrease was primarily attributable to (i) a $2.4 million loss from disposal of network equipment in 2011 due to technological upgrades, (ii) a decrease of $5.5 million in bad debt provision in 2012 due to collection of accounts receivable previously written down, (iii) a decrease of $2.1 million in provisions for copyright lawsuits in 2012 due to a decrease in the number of new copyright lawsuits filed in 2012 and a reversal of previously provided amounts of $1.0 million based upon favorable lawsuit resolution experience, (iv) a decrease of $1.4 million in impairment due to abandonment of intangible assets in 2011 resulting from the change in our business strategy, (v) a decrease of $1.2 million in annual bonus accrued in 2012 as compared to 2011 and (vi) a net decrease in other miscellaneous expenses due to improvement in cost structure and operating efficiency in 2012.
Operating Loss from Continuing Operations. As a result of the foregoing, operating loss from continuing operations decreased by 77.9% to $11.0 million in 2012 from $49.6 million in 2011.
Interest Income. Interest income increased to $0.6 million in 2012 from $0.2 million 2011 primarily due to higher interest rates on loans provided to Shanda Games Limited and increased interest income from bank deposits as a result of improvement in our cash management.
Interest Expense. Interest expense decreased to $0.6 million in 2012 from $1.1 million in 2011 primarily due to the interest on the senior convertible notes accrued in 2011 from the issuance date in June 2011 to the redemption date in September 2011 and the repayment of interest-bearing loans due from related parties in 2012.
Other Income, Net. Other net income increased to $1.7 million in 2012 from $1.3 million in 2011, primarily due to an increase in government subsidies from $1.3 million in 2011 to $1.5 million in 2012. Such government subsidies were granted by the local government to encourage development of certain enterprises in the local special economic region.
Income Tax Benefit. Income tax benefit decreased to nil in 2012 compared to $0.1 million in 2011.
Equity in Loss of Affiliated Company, Net of Tax. Equity in loss of affiliated company, net of tax, was $0.2 million as a result of our share of losses in Yisheng in 2012 compared to $0.3 million in 2011. This loss was attributable to our disposal of an 80% interest in Yisheng in August 2011. We accounted for the retained 20% interest under the equity method as we determined that we do not have a controlling financial interest in, but rather possess significant influence on Yisheng. As of December 31, 2012, the investment in Yisheng was reduced to nil as a result of our equity share of losses in 2012.
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Loss from Continuing Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd. Net loss from continuing operations attributable to our company decreased by 80.8% to $9.5 million in 2012 from $49.3 million in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Net Revenues.Net revenues increased by 16.1% to $19.2 million in 2011 from $16.6 million in 2010. This increase was primarily due to a growth in revenues generated from performance advertising. We began to generate revenuerevenues from performance advertising in the second quarter of 2011, which contributed approximately 38% of our total net revenues in 2011. Net revenues for the year ended December 31, 2011 consisted of revenues generated from our online video business for the entire year and revenues generated from our online audio business from January 1, 2011 to August 2011 of $0.5 million when we began to account for our retained portion of this business under the equity method. Net revenues for the year ended December 31, 2010 consisted of revenues generated from our online video business since January 18, 2010 and revenues generated from our online audio business for the entire year.
Cost of Revenues. Cost of revenues decreased by 23.7% to $30.9 million in 2011 from $40.5 million in 2010. This decrease was mainly attributable to (i) a decrease of $12.0 million in amortization and write-down of licensed video copyrights as we shifted our focus from long-form videos to UGC, (ii) a decrease of $1.4 million in payroll costs as the change in business strategy in 2011 improved our cost structure and our operating efficiency, and (iii) a decrease of $1.3 million in Internet bandwidth costs in 2011 compared to 2010. These were partially offset by a one-time charge of $5.3 million in termination of long-form videos in 2011 due to our change in our business strategy.
Gross Loss.As a result of the foregoing, our gross loss decreased by 51.2% to $11.7 million in 2011 from $23.9 million in 2010.
Operating Expenses.Operating expenses increased by 27.6% to $37.9 million in 2011 from $29.7 million in 2010. This increase was attributable to increases in general and administrative expenses and product development expenses, partially offset by a decrease in selling and marketing expenses.
| • | | Product Development Expenses.·Product Development Expenses. Product development expenses were $2.7 million in 2011 compared to nil in 2010. This increase was primarily due to payroll costs of $2.2 million for our research and development department newly established in 2011.
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| • | | Selling and Marketing Expenses.·Selling and Marketing Expenses. Selling and marketing expenses decreased by 27.0% to $11.8 million in 2011 from $16.2 million in 2010. This decrease was primarily attributable to a decrease of $3.6 million in marketing commission and a decrease of $1.2 million in salaries and benefits of sales and marketing staff, partially offset by an increase due to the one-off severance payments of $0.9 million, both as a result of the restructuring of our sales department.
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| • | | General and Administrative Expenses. General and administrative expenses increased by 73.3% to $23.4 million in 2011 from $13.5 million in 2010. This increase was primarily attributable to (i) a $2.4 million loss from disposal of network equipment due to technological upgrades, (ii) an increase of $2.1 million in provision for copyright lawsuits, (iii) increases of $1.4 million in bad debt provision and $1.4 million in impairment due to abandonment of intangible assets resulting from our changes in business strategies, and (iv) an increase of $1.2 million in annual bonus in 2011 compared to 2010.
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·General and Administrative Expenses. General and administrative expenses increased by 73.3% to $23.4 million in 2011 from $13.5 million in 2010. This increase was primarily attributable to (i) a $2.4 million loss from disposal of network equipment due to technological upgrades, (ii) an increase of $2.1 million in provision for copyright lawsuits, (iii) increases of $1.4 million in bad debt provision and $1.4 million in impairment due to abandonment of intangible assets resulting from our changes in business strategies, and (iv) an increase of $1.2 million in annual bonus in 2011 compared to 2010.
Operating Loss from Continuing Operations.As a result of the foregoing, operating loss from continuing operations decreased by 7.5% to $49.6 million in 2011 from $53.6 million in 2010.
Interest Income.Interest income increased to $0.2 million in 2011 from $0.1 million 2010 primarily due to a larger amount of interest-bearing loans provided to Shanda Games Limited in 2011.
Interest Expense.Interest expense increased significantly to $1.1 million in 2011 from $31,134 in 2010 primarily due to the interest on the senior convertible notes accrued from the issuance date in June 2011 to the redemption date in September 2011 and a larger amount of interest-bearing loans from related parties in 2011.
Other Income, Net.Other net income increased significantly to $1.3 million in 2011 from $3 in 2010. We received government subsidies of $1.3 million in the form of cash subsidies in 2011, which were granted by the local government to encourage development of certain enterprises in the local special economic region.
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Income Tax Benefit.Income tax benefit increased to $0.1 million in 2011 from $41,172 in 2010. These amounts represented the deferred income tax benefit from continuing operations.
Equity in Loss of Affiliated Company,Net of Tax. Equity in loss of affiliated company, net of tax, was $0.3 million in 2011 compared to nil in 2010. This loss was attributable to our disposal of an 80% interest in Yisheng in August 2011. We accounted for the retained 20% interest under the equity method as we determined that we do not have a controlling financial interest in, but rather possess significant influence on, Yisheng.
Loss from Continuing Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd.Net loss from continuing operations attributable to our company decreased by 6.6% to $49.3 million in 2011 from $52.9 million in 2010.
Income from Discontinued Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd.Net income from discontinued operations attributable to our company was nil in 2011 as we disposed of the discontinued WVAS and recorded music businesses in August 2010. In 2010, we had net income from discontinued operations attributable to our company of $1.3 million due to a net gain from disposal of Huayi Music of $4.5 million, partially offset by a net loss from operations of $3.4 million from the WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the net loss attributable to the non-controlling interests and redeemable non-controlling interests of $0.2 million in 2010.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Revenues. Net revenues increased significantly to $16.6 million in 2010 from $1.0 million in 2009. The increase was primarily attributable to our acquisition of the online video business of Ku6 Holding in January 2010. Revenues for the year ended December 31, 2010 consisted of revenues generated by our online video business since January 18, 2010B. Liquidity and revenues generated by our online audio business for the entire year. Revenues for the year ended December 31, 2009 consisted of revenues generated by our online audio business since August 31, 2009.Capital Resources
Cost of Revenues. Our cost of revenues increased significantly to $40.5 million in 2010 from $0.6 million in 2009. This increase was primarily the result of our acquisition of Ku6 Holding. The cost of revenues in 2010 consisted mainly of Internet bandwidth cost of $10.3 million, amortization and write-down of licensed video copyrights of $15.6 million, and payroll cost relating to platform operation and content of $6.2 million. The cost of revenues in 2009 consisted mainly of Internet bandwidth cost.
Gross Loss. As a result of the foregoing, we had a gross loss of $23.9 million in 2010, compared to a gross profit of $0.5 million in 2009.
Operating Expenses. Operating expenses increased significantly to $29.7 million in 2010 from $7.1 million in 2009. Operating expenses for the year ended December 31, 2010 consisted of operating expenses associated with our online video business since January 18, 2010 and operating expenses associated with our online audio business for the entire year. Operating expenses for the year ended December 31, 2009 consisted of operating expenses associated with our online audio business since August 31, 2009.
| • | | Selling and Marketing Expenses. Selling and marketing expenses increased significantly to $16.2 million in 2010 from $0.7 million in 2009. This increase was primarily attributable to Ku6 Holding’s higher advertising and marketing expenses, salaries and benefits of sales and marketing staff, sales commission to the sales team, and travelling and entertainment expenses.
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| • | | General and Administrative Expenses. General and administrative expenses increased significantly to $13.5 million in 2010 from $6.5 million in 2009. This increase was primarily attributable to (i) an increase of $1.7 million in amortization of intangible assets arising from the acquisition of Ku6 Holding, (ii) an increase of $1.6 million in bad debt provision due to the expansion of our advertising business as a result of our acquisition of Ku6 Holding, (iii) an increase of $1.6 million in business tax for intercompany transactions, and (iv) an increase of $1.5 million in share-based compensation expenses primarily as a result of the one-time compensation expense of $1.3 million relating to the incremental value of the ordinary shares issued by us to replace the options issued by Ku6 Holding before its acquisition by us, partially offset by a decrease of $2.5 million in consulting and legal expenses which were incurred in 2009 mainly for the tender offer by Shanda Interactive.
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Operating Loss from Continuing Operations. As a result of the foregoing, operating loss from continuing operations increased significantly to $53.6 million in 2010 from $6.6 million in 2009.
Loss from Continuing Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd. Net loss from continuing operations attributable to our company was $52.9 million in 2010 compared to $6.0 million in 2009.
Income (Loss) from Discontinued Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd. We had a net income from discontinued operations attributable to our company of $1.3 million in 2010 due to a net gain from disposal of Huayi Music of $4.5 million, partially offset by a net loss from operations of $3.4 million from the WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the net loss attributable to the non-controlling interests and redeemable non-controlling interests of $0.2 million in 2010. In 2009, we had a net loss from discontinued operations attributable to our company of $17.4 million mainly due to a net loss from operations of $21.8 million from the WVAS and recorded music businesses, of which $4.2 million was attributable to the non-controlling interests and redeemable non-controlling interests.
Unaudited Consolidated Pro Forma Statements of Operations
The unaudited consolidated pro forma statements of operations for the years ended December 31, 2009 and December 31, 2010 present our consolidated results of operations giving pro forma effect to the Ku6 Holding and Yisheng acquisitions as if such transactions occurred on January 1, 2009, and after giving effect to purchase accounting adjustments. The unaudited consolidated pro forma financial information is included for informational purposes only and should not be relied upon as being indicative of our results of operations or financial condition had the Ku6 Holding and Yisheng acquisitions occurred on the date assumed. The unaudited consolidated pro forma financial information also does not project the results of operations or financial position for any future period or date.
The following table shows the pro forma statements of operations for the years ended December 31, 2009 and 2010:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2009 | |
| | | Ku6 Media
Co., Ltd. | | | Ku6 Holding | | | Yisheng(1) | | | Pro Forma
Adjustments(2) | | | Pro Forma
Consolidation | |
| | | (in thousands of U.S. dollars, except for share and per share data) | |
Total net revenues | | | 1,037 | | | | 6,225 | | | | 985 | | | | — | | | | 8,247 | |
Total cost of revenues | | | (557 | ) | | | (10,018 | ) | | | (428 | ) | | | — | | | | (11,003 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross profit (loss) | | | 480 | | | | (3,793 | ) | | | 557 | | | | — | | | | (2,756 | ) |
Total operating expenses | | | (7,130 | ) | | | (6,374 | ) | | | (1,203 | ) | | | (1,962 | ) | | | (16,669 | ) |
| | | | | | | | | | | | | | | | | | | | |
Operating loss from continuing operations | | | (6,650 | ) | | | (10,167 | ) | | | (646 | ) | | | (1,962 | ) | | | (19,425 | ) |
Interest income | | | 356 | | | | 8 | | | | — | | | | — | | | | 364 | |
Interest expense | | | — | | | | (40 | ) | | | (1 | ) | | | — | | | | (41 | ) |
Other income, net | | | 2 | | | | 2 | | | | 39 | | | | — | | | | 43 | |
Foreigin exchange loss | | | — | | | | — | | | | — | | | | — | | | | — | |
Fair value changes in warrant liabilities | | | — | | | | 186 | | | | — | | | | — | | | | 186 | |
| | | | | | | | | | | | | | | | | | | | |
Loss before income tax benefit from continuing operations | | | (6,292 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (18,873 | ) |
Income tax benefit | | | 14 | | | | — | | | | — | | | | — | | | | 14 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations, net of tax | | | (6,278 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (18,859 | ) |
| | | | | | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | | | | |
Loss from operations of discontinued operations, net of tax | | | (21,778 | ) | | | — | | | | — | | | | — | | | | (21,778 | ) |
Gain from disposal of discontinued operations | | | 222 | | | | — | | | | — | | | | — | | | | 222 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from discontinued operations, net of tax | | | (21,556 | ) | | | — | | | | — | | | | — | | | | (21,556 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing and discontinued operations, net of tax | | | (27,834 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (40,415 | ) |
| | | | | | | | | | | | | | | | | | | | |
Less: Net loss attributable to the non-controlling interests from continuing operations | | | 256 | | | | — | | | | — | | | | — | | | | 256 | |
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations | | | 4,183 | | | | — | | | | — | | | | — | | | | 4,183 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (23,395 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (35,976 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | (6,022 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (18,603 | ) |
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | (17,373 | ) | | | — | | | | — | | | | — | | | | (17,373 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (23,395 | ) | | | (10,011 | ) | | | (608 | ) | | | (1,962 | ) | | | (35,976 | ) |
| | | | | | | | | | | | | | | | | | | | |
(1) | The above financial information of Yisheng reflects its results of operations for the period from January 1, 2009 to August 31, 2009, as its results of operations from September 1, 2009 have already been included in the consolidated results of Ku6 Media Co., Ltd. |
(2) | Represents the incremental amortization expense for the intangible assets resulting from the Ku6 Holding acquisition. |
| | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2010 | |
| | | Ku6 Media
Co., Ltd. | | | Ku6 Holding (1) | | | Pro Forma
Adjustments(2) | | | Pro Forma
Consolidation | |
Total net revenues | | | 16,556 | | | | 232 | | | | — | | | | 16,788 | |
Total cost of revenues | | | (40,459 | ) | | | (3,956 | ) | | | — | | | | (44,415 | ) |
| | | | | | | | | | | | | | | | |
Gross loss | | | (23,903 | ) | | | (3,724 | ) | | | — | | | | (27,627 | ) |
Total operating expenses | | | (29,703 | ) | | | (641 | ) | | | (154 | ) | | | (30,498 | ) |
| | | | | | | | | | | | | | | | |
Operating loss from continuing operations | | | (53,606 | ) | | | (4,365 | ) | | | (154 | ) | | | (58,125 | ) |
Interest income | | | 57 | | | | — | | | | — | | | | 57 | |
Interest expense | | | (31 | ) | | | — | | | | — | | | | (31 | ) |
Other income, net | | | — | | | | — | | | | — | | | | — | |
Foreigin exchange loss | | | — | | | | (4 | ) | | | — | | | | (4 | ) |
Fair value changes in warrant liabilities | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Loss before income tax benefit from continuing operations | | | (53,580 | ) | | | (4,369 | ) | | | (154 | ) | | | (58,103 | ) |
Income tax benefit | | | 41 | | | | — | | | | — | | | | 41 | |
| | | | | | | | | | | | | | | | |
Loss from continuing operations, net of tax | | | (53,539 | ) | | | (4,369 | ) | | | (154 | ) | | | (58,062 | ) |
Discontinued operations: | | | | | | | | | | | | | | | | |
Loss from operations of discontinued operations, net of tax | | | (3,382 | ) | | | — | | | | — | | | | (3,382 | ) |
Gain from disposal of discontinued operations | | | 4,486 | | | | — | | | | — | | | | 4,486 | |
| | | | | | | | | | | | | | | | |
Loss from discontinued operations, net of tax | | | 1,104 | | | | — | | | | — | | | | 1,104 | |
| | | | | | | | | | | | | | | | |
Loss from continuing and discontinued operations, net of tax | | | (52,435 | ) | | | (4,369 | ) | | | (154 | ) | | | (56,958 | ) |
Less: Net loss attributable to the non-controlling interests from continuing operations | | | 681 | | | | — | | | | — | | | | 681 | |
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations | | | 244 | | | | — | | | | — | | | | 244 | |
| | | | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (51,510 | ) | | | (4,369 | ) | | | (154 | ) | | | (56,033 | ) |
| | | | | | | | | | | | | | | | |
Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | (52,858 | ) | | | (4,369 | ) | | | (154 | ) | | | (57,381 | ) |
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | 1,348 | | | | — | | | | — | | | | 1,348 | |
| | | | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (51,510 | ) | | | (4,369 | ) | | | (154 | ) | | | (56,033 | ) |
| | | | | | | | | | | | | | | | |
(1) | The above financial information of Ku6 Holding reflects its results of operations for the period from January 1, 2010 to January 17, 2010, as the Ku6 Holding acquisition was completed on January 18, 2010. |
(2) | Represents the incremental amortization expense for the intangible assets resulting from the Ku6 Holding acquisition. |
Year Ended December 31, 2010 (pro forma) Compared to Year Ended December 31, 2009 (pro forma)
Net Revenues. Our pro forma net revenues increased 104% to $16.8 million in 2010 from $8.2 million in 2009. The increase in pro forma net revenues was largely attributable to the growth of our advertising business in 2010, as a result of our marketing efforts, including offering a variety of integrated marketing package to brand advertisers, with the continuous expansion of user base.
Cost of Revenues. Our pro forma cost of revenues increased to $44.4 million in 2010 from $11.0 million in 2009.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2009
(in thousands) | | | Year ended December 31, 2010
(in thousands) | |
| | | Actual | | | Pro forma
Adjustments | | | Pro forma | | | Actual | | | Pro forma
Adjustments | | | Pro forma | |
Internet bandwidth costs | | | 534 | | | | 4,137 | | | | 4,671 | | | | 10,279 | | | | 497 | | | | 10,776 | |
Amortization and write-down of purchased video copyright cost | | | — | | | | 1,747 | | | | 1,747 | | | | 15,619 | | | | 2,852 | | | | 18,471 | |
Payroll cost | | | — | | | | 2,506 | | | | 2,506 | | | | 6,167 | | | | 350 | | | | 6,517 | |
In-house developed content costs | | | — | | | | — | | | | — | | | | 1,596 | | | | — | | | | 1,596 | |
Depreciation of servers and other equipments | | | — | | | | 1,278 | | | | 1,278 | | | | 2,503 | | | | 109 | | | | 2,612 | |
Other costs(1) | | | 23 | | | | 778 | | | | 801 | | | | 4,295 | | | | 148 | | | | 4,443 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total costs | | | 557 | | | | 10,446 | | | | 11,003 | | | | 40,459 | | | | 3,956 | | | | 44,415 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes primarily advertisement production costs and outside service fees and UGC costs. |
The $33.4 million increase in our pro forma cost of revenues from 2009 to 2010 was mainly due to (i) an increase from $1.7 million in 2009 to $18.5 million in 2010 of amortization and write-down of purchased video copyright costs, as a result of our significantly increased investment in professional content in 2010 compared to 2009, including licensed video copyrights related to the 2010 FIFA World Cup, the 2010 Asian Games and movies, TV series and other entertainment programs. As of December 31, 2010, the carrying value of our licensed video copyrights was written down to zero. Also, our pro forma bandwidth costs increased 154% from $4.2 million in 2009 to $10.8 million in 2010, due to the growth in our traffic volume as a result of our large content library established in 2010.
Gross Loss. We had a pro forma gross loss of $27.6 million in 2010, compared to a pro forma gross loss of $2.8 million in 2009. This increase in gross loss was largely due to our increases in costs related to both platform operation and content, including Internet bandwidth leasing costs, depreciation expenses, amortization and write-down of licensed video copyrights, in-house developed content costs and related employee costs.
Operating Expenses. Pro forma operating expenses were $30.5 million in 2010, representing an increase of 82.6% from $16.7 million in 2009.
| • | | Selling and Marketing Expenses. Our pro forma selling and marketing expenses increased to $16.8 million in 2010 from $5.0 million in 2009. The increase in pro forma selling and marketing expenses was the result of higher sales commissions to our sales team tied to sales performance and more marketing promotion activities in 2010 to enhance the reputation of our Ku6.com website.
|
| • | | General and Administrative Expenses. Our pro forma general and administrative expenses increased to $13.7 million in 2010 from $11.6 million in 2009 mainly due to the increase of $1.4 million in share-based compensation expenses including one-time compensation expenses of $1.3 million relating to the fair value of ordinary shares issued by us to replace the options issued by Ku6 Holding over the acquisition date fair value of those options attributable to the pre-combination portion in connection with the acquisition of Ku6 Holding. Also the increase of bad debt expenses of $1.6 million due to expansion of our advertising business, business tax of $1.7 million for the intercompany transactions within the group and rental and management expenses of $0.6 million due to relocation and expansion of our office building, was partially offset by the decrease of the consulting and legal expenses for the Shanda tender offer of $2.5 million.
|
Operating Loss from Continuing Operations. As a result of the foregoing, pro forma operating loss from operations was $58.1 million for the year ended December 31, 2010 compared to $19.4 million for the year ended December 31, 2009.
Loss from Continuing Operations attributable to Ku6 Media Co., Ltd. Loss from continuing operations attributable to Ku6 Media Co., Ltd. was $57.4 million for 2010 compared to a net loss of $18.6 million for 2009.
Income (Loss) from Discontinued Operations attributable to Ku6 Media Co., Ltd. Income from discontinued operations attributable to us was $1.3 million for 2010 due to a gain of $4.5 million from the disposal of Huayi Music, offset by a loss of $3.4 million from operations of our WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the loss attributable to the non-controlling and redeemable non-controlling interests of $0.2 million for 2010. Loss from discontinued operations attributable to us was $17.4 million for 2009 mainly due to loss of $21.8 million from operations of our WVAS and recorded music businesses for the full year of 2009, of which $4.2 million was attributable to the non-controlling and redeemable non-controlling interests.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Working Capital
Our online video business requires significant upfront capital expenditures as well as continuous, substantial investment in content, technology, talent and infrastructure. In order to implement our development strategies to expand our infrastructure and optimize our services across Internet-enabled devices, and further expand and diversify our revenue sources, we may incur additional capital needs in the future. We may require additionalwill also need to fund our research and development activities in order to remain competitive on cost and technology. If our cash resources due to the cost of running our online video business or due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sourcesbalance and cash inflow from advertising sales are insufficient to satisfy our cash requirements, we may seek to issue debt securities or additional equity or to obtain bank borrowings. The issue of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict our operations and the placement of liens over some or all of our assets. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment, which may have a material effect upon our liquidity and capital resources. Based upon anticipated cash flow related to operating activities, and our present cash balances and working capital position, as well as taking into consideration our potential future financing activities from time to time, we expectbelieve that we will have sufficient sources of cash and capital resources to fund our needsoperations and capital expenditures for at least the next 12 months. See Item 5.A. “Operating Results—Critical Accounting Policies—Going Concern.”
As of December 31, 2011,2012, we had cash and cash equivalents of $26.8$13.1 million. Our principal sources of liquidity have been our cash flows from operations and financing activities. The following table sets forth our cash flows with respect to operating activities, investing activities and financing activities for the periods indicated:
| | | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2009 | | 2010 | | 2011 | | | 2010 | | 2011 | | 2012 | |
| | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
Net cash used in operating activities | | | (2,092 | ) | | | (29,570 | ) | | | (39,175 | ) | | (29,570 | ) | (39,175 | ) | (8,087 | ) |
Net cash (used in) provided by investing activities | | | (8,931 | ) | | | 2,168 | | | | (25,712 | ) | |
Net cash provided by financing activities | | | 1,448 | | | | 4,616 | | | | 63,328 | | |
Net cash provided by (used in) investing activities | | | 2,168 | | (25,712 | ) | 15,641 | |
Net cash provided by (used in) financing activities | | | 4,616 | | 63,328 | | (21,222 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | (154 | ) | | | 337 | | | | 1,014 | | | 337 | | 1,014 | | (11 | ) |
Net decrease in cash and cash equivalents | | | (9,729 | ) | | | (22,449 | ) | | | (545 | ) | | (22,449 | ) | (545 | ) | (13,679 | ) |
Operating Activities
Our net cash used in operating activities in 2012 was $8.1 million. This was primarily attributable to (i) our net loss of $9.5 million, (ii) a reversal of $2.3 million in bad debt provision due to collection of accounts receivable previously written down, (iii) an increase of $1.7 million in amounts due from related parties resulting from the delayed receipt of receivables (subsequently collected after December 31, 2012) related to advertising revenues from Shengyue, (iv) a decrease of $1.5 million in accounts payable due to more settlement of cash incentives to advertising agencies in 2012, which were adjusted by (i) non-cash expenses of $3.5 million in depreciation and amortization and $0.5 million in share-based compensation, and (ii) a decrease of $3.0 million in accounts receivable as a result of increased collection of advertising revenues from third parties in 2012.
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Our net cash used in operating activities in 2011 was $39.2 million. This was primarily attributable to (i) our net loss of $49.4 million, (ii) a decrease of $7.9 million in accounts payable due to more settlement of internetInternet bandwidth costs and cash incentives to advertising agencies in 2011, and (iii) an increase of $3.9 million in the amount due from related parties under common control by Shanda Interactive, which were adjusted by (i) non-cash expenses of $5.2 million in depreciation and amortization, $3.7 million in amortization and write-down of licensed video copyrights, $3.5 million in bad debt provision due to changes in business strategy, and $3.0 million in loss from disposal of property and equipment due to technological upgrades, and (ii) a decrease of $3.8 million in accounts receivable as a result of the increased collection of advertising revenue in 2011.
Our net cash used in operating activities in 2010 was $29.6 million. This was primarily attributable to (i) our net loss of $52.4 million and (ii) an increase of $8.7 million in accounts receivable mainly due to the advertising revenue generated in the last quarter of 2010 not received, most of which was still within the normal credit terms, which were adjusted by (i) non-cash expenses of $15.8 million in amortization and write-down of licensed video copyrights, $5.3 million in depreciation and amortization, $1.9 million in share-based compensation cost, and $1.5 million in bad debt provision, (ii) an increase of $8.8 million in accounts payable due to certain payables in connection with Internet bandwidth and cash incentives to advertising agencies not paid as of December 31, 2010, and (iii) an increase of $6.0 million in accrued expenses and other current liabilities mainly due to the business tax and salesman commission not paid as a result of the increase of the advertising revenue in 2010.
Investing Activities
Our net cash used in operatingprovided by investing activities in 2009 was $2.1$15.6 million. This was primarily attributable to our net loss(i) the repayments by Shanda Games Limited of $27.8interest-bearing loans with an aggregate amount of $14.0 million whichin 2012, and (ii) a release of restricted cash of $3.6 million that was adjustedpreviously pledged to secure a bank loan, partially offset by (i) non-cash expensesa $1.3 million payment for purchase of $3.8property and equipment and (ii) an interest bearing-loan of $0.5 million to Shanda Capital Limited in bad debt provision, $3.6 million in impairment of goodwill, and $1.8 million in depreciation and amortization, (ii) a decrease of $5.9 million in accounts receivable mainly due to the proceeds received from telecom operators, (iii) a decrease of $2.7 million in prepaid expenses and other current assets primarily due to the collection of miscellaneous receivables due from employees or artists and relating items expensed according to the beneficial period, and (iv) an increase of $2.3 million in accrued expenses and other current liabilities due to certain accrued liabilities not paid as of December 31, 2009.2012.
Investing Activities
Our net cash used in investing activities was $25.7 million in 2011. This consisted mainly of (i) the interest-bearing loans with an aggregate amount of $14.1 million provided to Shanda Games Limited in 2011, (ii) $5.5 million used in payment for licensed video copyrights, (iii) our pledge of $3.6 million cash as collateral for the bank loan, and (iv) payment of $2.4 million for the purchases of property and equipment.
Our net cash provided by investing activities was $2.2 million in 2010. This was primarily attributable to (i) net cash of $12.3 million received from the disposal of the WVAS and recorded music businesses, (ii) a decrease of $10.0 million in short-term investments in connection with the maturity of time deposits, and (iii) net proceeds of $4.4 million from the disposal of Huayi Music, partially offset by (i) $15.0 million used in payment for licensed video copyrights, (ii) $6.6 million used in the purchase of property and equipment, and (iii) a $3.2 million loan paid to related parties under common control by Shanda Interactive.
Financing Activities
Our net cash used in investingfinancing activities was $8.9$21.2 million in 2009.2012. This was primarily attributableconsisted mainly of (i) the repayments to (i)Shanda Games Limited of interest-bearing loans with an increaseaggregate amount of $10.0$9.9 million, in short-term investments in the form(ii) repurchase of time deposits and (ii) paymentordinary shares with an aggregate amount of $0.9$8.2 million, for the purchase of fixed assets, partially offset by (i) net cash of $1.0 million received from the acquisition of Seed Music, (ii) net cash of $0.6 million received from the acquisition of Yisheng, and (iii) net proceedsthe repayment of $0.3bank borrowings of RMB20.0 million from the disposal of a subsidiary.
($3.1 million).Financing Activities
Our net cash provided by financing activities was $63.3 million in 2011. This consisted mainly of (i) proceeds of $50.0 million from the issuance of ordinary shares to Shanda Media and $50.0 million from the issuance of senior convertible bonds to Shanda Media, (ii) net borrowings of $10.1 million from certain affiliates, and (iii) a domestic bank borrowing of RMB20.0 million ($3.2 million), partially offset by the full redemption of the $50.0 million senior convertible bonds based on our working capital position.
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Our net cash provided by financing activities was $4.6 million in 2010. This consisted mainly of borrowings of $4.6 million from related parties under common control by Shanda Interactive.
Our net cash provided by financing activities was $1.4 million in 2009. This consisted mainly of capital injection of $1.4 million into Yisheng by Shanda Interactive and Yisheng’s non-controlling shareholder.
Restrictions on Cash Transfers to our Company
We are a holding company and our operations are principally conducted through our PRC subsidiaries and our consolidated affiliated entities. As a result, the ability of our company to pay dividends and to finance debts depends upon service fees paid by our consolidated affiliated entities to our PRC subsidiaries and dividends and other distributions paid by our PRC subsidiaries to our company. If any of our subsidiaries or consolidated affiliated entities incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay service fees or dividends directly or indirectly to our company.
In addition, under PRC laws and regulations, our PRC subsidiaries and our consolidated affiliated entities may pay dividends only out of their retained earnings as determined in accordance with PRC accounting standards and regulations. There is no significant difference between retained earnings as determined in accordance with PRC accounting standards and in accordance with U.S. GAAP. In addition, our PRC subsidiaries and our consolidated affiliated entities are required to set aside at least 10% of their after-tax net income each year, if any, to fund certain statutory reserves, which are not distributable as cash dividends, until the aggregate amount of such funds reaches 50% of their respective registered capital. As a result of these and other restrictions under PRC laws and regulations, our PRC subsidiaries and consolidated affiliated entities are restricted in their ability to transfer a portion of their net assets to our company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $59.4$52.7 million, or 116.7%157.0% of our company’s total consolidated net assets as of December 31, 2011.2012. In addition, our PRC subsidiaries and our consolidated affiliated entities may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These staff welfare and bonus funds are not distributable as cash dividends. See note 21 to our audited consolidated financial statements and Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure—We rely on our PRC subsidiaries and our consolidated affiliated entities to fund our cash and financing requirements. Any limitation on the ability of our PRC subsidiaries and our consolidated affiliated entities to transfer funds to us could have a material adverse effect on our ability to grow or otherwise fund our cash and financing requirements.”
Cash transfers from our PRC subsidiaries to our offshore subsidiary and our company are also subject to restrictions imposed by the PRC government’s currency conversion policy. See Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure—Restrictions on currency exchange may limit our ability to utilize our revenues effectively.”
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSESResearch and Development, Patents and Licenses
See Item 4.B. “Information on the Company—Business“Business Overview—Technology and Infrastructure” and “—Intellectual Property.”
Our research and development expenditures were nil, nil and $2.7 million and $2.0 million in 2009, 2010, 2011 and 2011,2012, respectively.
D. TREND INFORMATIONTrend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2010 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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F. CONTRACTUAL OBLIGATIONSContractual Obligations
The following table sets forth certain information with respect to our contractual obligations as of December 31, 2011:2012:
| | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Total | | | Less than 1
year | | | 1-3 years | | | 3-5 years |
| | | (in thousands of U.S. dollars) |
Operating lease commitments | | | 6,562 | | | | 6,132 | | | | 430 | | | |
|
| Payments Due by Period |
|
|
| Total |
| Less than 1
year |
| 1-3 years |
| 3-5 years |
|
|
| (in thousands of U.S. dollars) |
|
Operating lease commitments | | 3,003 | | 1,210 | | 1,793 | | | |
We did not have any long-term debt obligations as of December 31, 2011.2012.
On September 29, 2011, Tianjin WFOE obtained a bank loan from Shanghai Pudong Development Bank in the amount of RMB20.0 million ($3.2 million) for one year until September 28, 2012 at an interest rate of 6.888% per annum. The loan is pledged by an offshore deposit of $3.6 million.
We had other payables due to related parties in the amount of $13.6$3.8 million as of December 31, 2011.2012. All of these amounts were payable within one year. See Item 7.B., “Related Party Transactions—Other Related Party Transactions.”
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The names of our current directors and executive officers, their ages as of February 29, 2012,28, 2013, and the principal positions with us held by them are as follows:
Name |
| Age |
| Position |
|
Name
| | Age
| | Position
|
Bruno Wu(2)(3) | | 4546 | | Independent Director and Chairman of the Board of Directors | |
Tianqiao Chen(1)(2) | | 3839 | | Director | |
Danian Chen(1) | | 3334 | | Director | |
Grace Wu(1)(2) | | 4142 | | Director | |
Haifa Zhu(2) | | 3940 | | Director | |
Haibin QuTuoc Luong(2) | | 3751 | | Director | |
Tongyu Zhou(3) | | 4344 | | Independent Director | |
Wenwen Niu(3) | | 4546 | | Independent Director | |
Yu Shi | | 3435 | | Chief Executive Officer and Acting Chief Editor | |
Tony ShenFrank Feng | | 4439 | | Acting Chief Financial Officer | |
Kelvin Wenbo Liu | | 57 | | President | |
Jian Lu | | 50 | | Chief Technology Officer | |
(1) | Member of the compensation and leadership development committee |
(2) | Member of the corporate development and finance committee |
(3) | Member of the audit committee |
(1)Member of the compensation and leadership development committee
(2)Member of the corporate development and finance committee
(3)Member of the audit committee
Biographical Information
Bruno Wu. Mr. Wu has served as an independent director on our board of directors since September 1, 2009 and has been Chairman of the board of directors since August 17, 2010. Mr. Wu also has served as a director of Shanda Interactive from October 2006 to August 2009. Mr. Wu is the co-founder and chairman of The Sun Media Investment HoldingRed Rock Group of Companies, one of China’s largest privately held media groups. Mr. Wu served as co-chairman of SINA Corporation from 2001 to 2002 and as the chief operating officer of ATV, one of the two free-to-air networks in Hong Kong, from June 1998 until February 1999. Mr. Wu received a doctorate degree in international politics from Fudan University in 2001, a master of arts degree in international affairs from Washington University in Missouri in 1993, a bachelor of science degree in business administration-finance from Culver-Stockton College in Missouri in December 1990, and a diploma of studies in French civilization from the University of Savoie in France in 1987.
Tianqiao Chen. Mr. Chen has served on our board of directors since July 24, 2009 and was Chairman of the board of directors from July 24, 2009 to August 17, 2010. Mr. Tianqiao Chen is one of the co-founders of Shanda Interactive and has served as the chairman of the board of directors and the chief executive officer of Shanda Interactive since its inception in December 1999. Mr. Chen also serves as a member of the board of directors of SinoMedia Holding Ltd., which is listed on the Hong Kong Stock Exchange, and Shanda Games Limited. Mr. Chen received a bachelor’s degree in economics from Fudan University. Mr. Tianqiao Chen is the brother of Mr. Danian Chen, one of our directors.
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Danian Chen. Mr. Danian Chen has served on our board of directors since January 19, 2010. Mr. Danian Chen is one of the co-founders of Shanda Interactive. Mr. Danian Chen has served in various capacities at Shanda Interactive, mostly recently as the chief operating officer beginning in April 2008.from 2008 to 2012. Mr. Chen is also a member of the board of directors of Shanda Interactive, a position which he has held since its inception in 1999, and a member of the board of directors of Shanda Games Limited. Mr. Danian Chen is Mr. Tianqiao Chen’s brother.
Grace Wu. Ms. Wu has served on our board of directors since July 24, 2009. Ms. Wu has served as Shanda Interactive’s senior vice president since April 2008 and chief financial officer since November 2007. Ms. Wu previously served as a director of Shanda Interactive from December 2007 to February 2012, vice president from November 2007 to March 2008, and vice president of strategic investments from October 2007 to November 2007. Prior to joining Shanda Interactive, Ms. Wu spent five years with AU Optronics Corp., where she was responsible for financial planning and analysis, investor relations and capital markets activities. Prior to that, Ms. Wu worked at Goldman Sachs and Lehman Brothers where she divided her responsibilities between the equity capital markets and investment banking divisions. Ms. Wu received a master of international affairs degree in international banking and finance from Columbia University and a bachelor’s degree from National Taiwan University.
Haifa Zhu.HaifaZhu. Mr. Zhu has served on our board of directors since July 24, 2009. Mr. Zhu also served as our Acting Chief Executive Officer from March 14, 2011 to August 1, 2011. Mr. Zhu has served as chief investment officer and senior vice president of Shanda Interactive since April 2008. Mr. Zhu previously served as Shanda Interactive’s assistant vice president of investments, director of platform operations, director of central user platform and deputy director of new business center. Prior to joining Shanda Interactive, Mr. Zhu was responsible for investments at Nuovo Assets Investment Ltd. from 2001 to 2004. Prior to joining Nuovo Assets Investment Ltd., Mr. Zhu worked in technology management for the Shanghai Academy of Science from 1996 to 2001. Mr. Zhu received a master’s degree in business administration and a bachelor’s degree from Fudan University.
Haibin Qu.Tuoc Luong. Mr. QuLuong has served on our board of directors since July 24, 2009.May 7, 2012. Mr. Qu hasTuoc Luong is currently the chief executive officer of Shanda Online Holdings Limited and Head of Shanda Innovations, United States. Prior to that, Mr. Luong served as Shanda Interactive’s senior executive vice president since August 2005. Mr. Qu previously served as Shanda Interactive’sthe global senior vice president of Yahoo! Inc., or Yahoo, from July 20032007 to August 2005, vice president2010, where he led the search division and was responsible for Yahoo’s search products worldwide. Before joining Yahoo, Mr. Luong held various management positions at Inter Active Corp (IAC), Ask Jeeves Inc., Microsoft Corporation, Oracle Corporation and several other hi-tech companies. In addition, Mr. Luong was an entrepreneur having founded and worked at multiple successful startup companies in Silicon Valley. Mr. Luong received a master’s degree in engineering management from September 2002 to June 2003Santa Clara University and director of business development from February 2000 to August 2002. Prior to joining Shanda Interactive, Mr. Qu served as a vice president of Shanghai Fuwei Technology Development Co., Ltd. from September 1996 to December 1999. Mr. Qu received a bachelor’s degree in mechanicscomputer science from Fudan University.the University of California at Berkeley.
Tongyu Zhou. Ms. Zhou has served as an independent director on our board of directors since September 1, 2009. Ms. Zhou is the founder and chairman of Shanghai Weida Hi-Tech Group Co., Ltd. Ms. Zhou is a member of the national committee of CPPCC and Chinese National Youth Union, vice president of the Chinese Young Entrepreneurs’ Association and Shanghai Chamber of Commerce. Ms. Zhou is a member of Standing Committee of All-China Federation of Industry and Commerce since November 2012. Ms. Zhou received a doctorate degree in economics from Fudan University in 2008 and a master’s degree in business administration from China Europe International Business School in 2002.
Wenwen Niu. Mr. Niu has served as an independent director on our board of directors since July 31, 2009. Mr. Niu is the publisher and creator of “The Founder” magazine and a professional industry commentator. Mr. Niu joined Economic Daily Group in 1991 and was awarded “China News Prize” three times in two consecutive years. In 1999, Mr. Niu was the editor-in-chief of China Entrepreneur Magazine and he was also one of the adjudicators for “Top 10 Economic Leaders” of CCTV. In addition, Mr. Niu received a master’s degree in economics and completed the Executive MBA program at Cheung Kong Graduate School of Business.
Yu Shi.Mr. Yu Shi has served as our Chief Executive Officer since August 1, 2011 and our Acting Chief Editor since July 2011. Mr. Shi previously served as Shanda Interactive’s senior director of strategy and integration from 2009 to July 2011. Prior to joining Shanda Interactive, Mr. Shi worked at Juneyao Group as deputy general manager of strategy planning and capital markets from September 2006 to July 2009 and at Arthur Andersen and KPMG Consulting from September 2000 to August 2006. Mr. Shi received a bachelor’s degree in telecommunications from Shanghai Jiao Tong University.
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Tony ShenFrank Feng. Mr. ShenFeng has served as our Acting Chief Financial Officer since May 16, 2012. He joined us as our Vice President of Finance and financial controller in July 2011. Mr. Feng previously served as finance vice president of Taomee Holdings Limited in 2010 and finance director of Renesola Ltd. from 2008 to 2009. Before joining Renesola Ltd., Mr. Feng worked in the audit departments of Deloitte, PwC and KPMG for 12 years. Mr. Feng became a member of the Chinese Institute of the Certified Public Accountant in 1999 and received a bachelor’s degree from Shanghai Jiaotong University in 1996.
Kelvin Wenbo Liu. Mr. Liu has served as our President since March 30, 2013. Mr. Liu has also served as chief executive officer of Shanda Interactive’s Grand Cloud business unit since 2012. Prior to that, Mr. Liu served as an engineering manager of Google Inc. from 2004 to 2012. Prior to joining Google, Mr. Liu served in various software companies in the United States, including Autodesk, Inc., Microsoft Corporation and Ask Jeeves Inc. He also founded or helped to found various start-up companies in Silicon Valley, including Savvion, Octopus and Silk Valley. Mr. Liu graduated from Tsinghua University with a bachelor degree in computer science and received a doctoral degree in computer science from Rensselaer Polytechnic Institute.
Jian Lu. Mr. Lu has served as our Chief FinancialTechnology Officer since September 27,March 30, 2013. Mr. Lu has also served as Head of Multimedia Technology Division of Shanda Innovations since 2010. Prior to that, Mr. Shen hasLu was a co-founder and chief technology officer of Vobile, Inc. and led the development of VideoDNATM. Mr. Lu also worked at Apple Inc. for more than 15eight years and led the technical development of experienceQuickTime compression and streaming. Mr. Lu graduated from Zhejiang University with a bachelor’s degree in financemechanical engineering and management. Most recently, he served at China BAK Battery, Inc., as chief financial officer, treasurer, and secretary from August 2007 to April 2010, and as vice president of strategic development from May 2007 to August 2007. He was acting chief financial officer of eLong Inc., from July 2006 to April 2007. Mr. Shen received a master’s degree in business administration in finance from Columbia Business School and a bachelor of engineeringdoctoral degree in electrical engineering from Tsinghua University.Dartmouth College.
Terms of Directors and Executive Officers
Each of our directors shall be re-elected annually by our shareholders at a general meeting and until his or her successor is duly elected and qualified, or until his or her earlier removal, or earlier vacation of office. Our executive officers are appointed by and serve at the discretion of our board of directors.
Employment Agreements
We have entered into employment agreements with each of our executive officers. The initial term of these employment agreements is generally two to three years. Under these agreements, we may terminate the employment of an executive officer for cause at any time in case of certain acts by the executive officer. An executive officer may terminate the employment at any time upon thirty days to six months’ prior written notice.
Each executive officer has agreed to hold, both during and subsequent to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except to our other employees who have a need to know such information in connection with our business or except as required in the performance of his or her duties in connection with the employment. In addition, each executive officer has agreed to be bound by non competitionnon-competition restrictions during the term of the employment agreement and for a certain period after the termination of his or her employment.
B. Compensation
Compensation of Directors and Executive Officers
For the year ended December 31, 2011,2012, we paid aggregate compensation of $1.3$1.1 million to our directors and officers, including former officers and directors who resigned in 2011,2012, namely, Shanyou Li, former director and Chief Executive Officer, Feng Chen,Tony Shen, former Chief Editor and Vice President, and Liang Zhao, former Chief TechnologyFinancial Officer. For the year ended December 31, 2011,2012, we granted options to purchase an aggregate of 157,000,000285,000 ordinary shares with various exercise prices from $0.0188 to $0.03092of $1.16 per shareADS and expiration dates at various times through 2017,2018, to our directors and officers. Other than share options granted under our 2010 Equity Compensation Plan, as well as fees paid to our independent directors for board services rendered, we only paid compensation to those directors who also served as executive officers in 2011.2012. We also maintain director and executive officer insurance for our directors and executive officers.
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Summary of Stock Plans
2010 Equity Compensation Plan
Our board of directors adopted the 2010 Equity Compensation Plan, or the 2010 Plan, which became effective in December 2010. A total of 698,381,300 ordinary shares of our company are reserved for issuance under the 2010 Plan. A general description of the terms of the 2010 Plan is set forth below:
Plan Administration. Our board of directors or one or more committees appointed by our board acts as of the administrator of the 2010 Plan.
Types of Awards. The principal features of the various awards that may be granted under the 2010 Plan are as follows:
| • | | ·OptionsOptions. Options provide for the right to purchase a specified number of our ordinary shares at a specified exercise price subject to vesting. |
| • | | ·Share Appreciation RightsShare Appreciation Rights. Share appreciation rights provide for the right to receive a payment, in cash or ordinary shares, equal to the excess of the fair market value of a specified number of our ordinary shares on the date the share appreciation right is exercised over the base price as set forth in the award document. |
| • | | ·Restricted Shares.Restricted Shares. Restricted shares are ordinary shares that are generally subject to restrictions on transfer and to vesting terms. |
| • | | ·Restricted Share UnitsRestricted Share Units. Restricted share units represent the right to receive a specified number of our ordinary shares, subject to vesting. Restricted share units will be settled upon vesting, subject to the terms of the award agreement, either by our delivery to the holder of the number of ordinary shares represented by the vested restricted share units or by a cash payment to the holder that equals the then fair market value of the underlying ordinary shares. |
Award Document. Awards granted under the 2010 Plan are evidenced by an award document that sets forth the terms and conditions applicable to each of these awards, as determined by the administrator in its sole discretion.
Termination of the 2010 Plan. Without further action by our board of directors, the 2010 Plan will terminate in December 2020. Our board of directors may amend, suspend or terminate the 2010 Plan at any time, provided, however, that our board of directors must first seek the approval of the participants of the 2010 Plan if such amendment, suspension or termination would materially adversely affect the rights of participants with respect to any of their existing awards.
The table below sets forth the options that had been granted to our directors and executive officers pursuant to the 2010 Plan as of March 31, 2013.
Name |
| Number of Ordinary
Shares to be Issued
Upon Exercise of
Options |
| Exercise Price per
Ordinary Share |
| Date of Grant |
| Date of Expiration |
|
|
|
|
| ($) |
|
|
|
|
|
Bruno Wu | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
Tianqiao Chen | | — | | — | | — | | — | |
Danian Chen | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
| | * | | 0.0392 | | February 24, 2011 | | February 24, 2017 | |
Grace Wu | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
| | * | | 0.0392 | | February 24, 2011 | | February 24, 2017 | |
| | * | | 0.0227 | | August 23, 2011 | | August 23, 2017 | |
Haifa Zhu | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
| | * | | 0.0392 | | February 24, 2011 | | February 24, 2017 | |
| | * | | 0.0227 | | August 23, 2011 | | August 23, 2017 | |
Haibin Qu(1) | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
Tuoc Luong | | — | | — | | — | | — | |
Tongyu Zhou | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
Wenwen Niu | | * | | 0.0568 | | December 4, 2010 | | December 4, 2016 | |
Yu Shi | | * | | 0.0392 | | February 24, 2011 | | February 24, 2018 | |
| | * | | 0.0227 | | August 23, 2011 | | August 23, 2018 | |
Frank Feng | | * | | 0.0227 | | August 23, 2011 | | August 23, 2018 | |
Tony Shen(2) | | * | | 0.0568 | | December 4, 2010 | | December 4, 2017 | |
Kelvin Wenbo Liu | | — | | — | | — | | — | |
Jian Lu | | — | | — | | — | | — | |
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*Upon exercise of all vested options, this person would beneficially own less than 1% of our outstanding ordinary shares as of March 31, 2013.
(1)Haibin Qu resigned as our director, with effect from May 7, 2012.
(2)Tony Shen resigned as our chief financial officer, with effect from May 16, 2012.
C. Board Practices
Our board of directors currently consists of eight members. Our board of directors includes three independent directors who satisfy the “independence” requirements of the NasdaqNASDAQ Stock Market Rules and meet the criteria for “independence” under Rule
10A-3 under the Exchange Act. This home country practice of ours was established by our board of directors by reference to similarly situated issuers and differs from the NasdaqNASDAQ Stock Market Rules that require the board to be comprised of a majority of independent directors.
There are, however, no specific requirements under Cayman Islands law that the board must be comprised of a majority of independent directors.
We do not have regularly scheduled meetings at which only independent directors are present, or executive sessions. This home country practice of ours was established by our board of directors by reference to similarly situated issuers and differs from the NasdaqNASDAQ Stock Market Rules that require the company to have regularly scheduled executive sessions at which only independent directors are present. There are, however, no specific requirements under Cayman Islands law on executive sessions.
We have established three committees under our board of directors: an audit committee, a compensation and leadership development committee and a corporate development and finance committee. We have adopted a charter for each of the three committees. Each committee’s composition and functions are described below.
The members of the audit committees are Bruno Wu, Tongyu Zhou and Wenwen Niu, all of whom satisfy the “independence” requirements of the NasdaqNASDAQ Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. In addition, our board of directors has determined that Bruno Wu qualifies as an audit committee financial expert under the applicable SEC rules and as a financially sophisticated audit committee member under Rule 5605(c)(2)(A) of the NasdaqNASDAQ Stock Market Rules. The audit committee will be responsible for, among other things, overseeing the accounting and financial reporting processes of our company, including the appointment, compensation and oversight of the work of our independent auditors, monitoring compliance with our accounting and financial policies and evaluating management’s procedures and policies relating to the adequacy of our internal accounting controls, and overseeing the performance of our internal audit function.
The members of the compensation and leadership development committee are Tianqiao Chen, Danian Chen and Grace Wu. The compensation and leadership development committee is responsible for, among other things, reviewing and making recommendations to our board of directors regarding our compensation policies and all forms of compensation to be provided to our executive officers and directors, and identifying potential candidates for, and selecting members of our senior management team.
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The members of the corporate development and finance committee are Tianqiao Chen, BrunoTuoc Luong, Grace Wu and Grace Wu.Haifa Zhu. The corporate development and finance committee is responsible for, among other things, reviewing and approving any proposed issues of debt including public and private debt, credit facilities with banks and others, and other credit arrangements such as capital and operating leases, and reviewing and approving any contract between us and Shanda Interactive or any affiliate of Shanda Interactive.
None of our directors have service contracts that provide for benefits upon termination of employment.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
·convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
·declaring dividends and distributions;
·appointing officers and determining the term of office of officers; and
·exercising the borrowing powers of our company and mortgaging the property of our company.
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is interested,provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that matter.
D. Employees
As of December 31, 2009, 2010, 2011 and 2011,2012, we had 230, 816, 232 and 232211 full-time employees, respectively. None of our personnel are represented under collective bargaining agreements.
E. Share Ownership
The following table sets forth certain information known to us with respect to the beneficial ownership of our ordinary shares as of February 29, 2012March 31, 2013 by:
·all persons who are beneficial owners of five percent or more of our ordinary shares; and
·our current executive officers and directors; anddirectors.
all current directors and executive officers as a group.
AsPercentage of February 29, 2012, 5,019,786,036 of ourbeneficial ownership is based on 4,732,446,560 ordinary shares were outstanding.outstanding as of December 31, 2012. The amounts and percentages of ordinary shares beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares power to direct the voting or the disposition of the security or to receive the economic benefit of ownership of the security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. These securities, however, are not included in the computation of the percentage ownership of any other person. Under these rules, more than one person may be deemed a beneficial owner of securities as to which such person has no economic interest. Unless otherwise indicated in the footnotes that follow, the parties named below have sole voting and dispositive powers over the shares beneficially owned by them.
| | | | | | | | |
| | | Number of Shares | |
| | | Beneficially Owned | |
Name | | Number | | | Percentage | |
5% and Above Shareholders | | | | | | | | |
Shanda Interactive Entertainment Limited(1) | | | 3,334,694,602 | | | | 66.4 | % |
Shanyou Li(2) | | | 274,077,076 | | | | 5.5 | % |
| | |
Executive Officers and Directors | | | | | | | | |
Bruno Wu | | | * | | | | * | |
Tianqiao Chen | | | — | | | | — | |
Danian Chen | | | * | | | | * | |
Grace Wu | | | * | | | | * | |
Haifa Zhu | | | * | | | | * | |
Haibin Qu | | | * | | | | * | |
Tongyu Zhou | | | * | | | | * | |
Wenwen Niu | | | * | | | | * | |
Yu Shi | | | * | | | | * | |
Tony Shen | | | * | | | | * | |
All current directors and executive officers as a group | | | * | | | | * | |
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| | Shares Beneficially Owned | |
Name | | Number | | Percentage | |
5% or More Beneficial Owner | | | | | |
Shanda Interactive Entertainment Limited(1) | | 3,334,694,602 | | 70.5 | % |
| | | | | |
Executive Officers and Directors | | | | | |
Bruno Wu | | * | | * | |
Tianqiao Chen | | — | | — | |
Danian Chen | | * | | * | |
Grace Wu | | * | | * | |
Haifa Zhu | | * | | * | |
Tuoc Luong | | * | | * | |
Tongyu Zhou | | * | | * | |
Wenwen Niu | | * | | * | |
Yu Shi | | * | | * | |
Frank Feng | | * | | * | |
Kelvin Wenbo Liu | | — | | — | |
Jian Lu | | — | | — | |
*Upon exercise of all vested options, this person would beneficially own less than 1% of our outstanding ordinary shares as of March 31, 2013.
* | Upon exercise of all options, this person would beneficially own less than 1% of our outstanding ordinary shares. |
(1) | Shanda Interactive’s beneficial ownership of our ordinary shares consists of (i) 1,155,045,300 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media, in connection with the tender offer completed in July 2009, (ii) 78,116,292 ordinary shares, including ordinary shares represented by ADSs, acquired by Shanda Media from certain selling shareholders in private transactions in September 2009, (iii) 47,389,700 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media under a 10b5-1 trading plan during the period from October 2009 to October 2010, (iv) 83,076,923 ordinary shares acquired by Shanda Media from Chris Anjun Chen in August 2010, (v) 17,220,214 ordinary shares acquired by Shanda Media from ITOCHU Corporation in September 2010, (vi) 415,384,615 ordinary shares issued to Shanda Interactive in connection with our acquisition from Shanda Interactive of its 75% interest in Yisheng in August 2010, and (vii) 1,538,461,538 ordinary shares issued to Shanda Media pursuant to a share purchase agreement dated April 1, 2011 between us and Shanda Media. |
(2) | Shanyou Li was our former Chief Executive Officer and a former director of our company. According to the Schedule 13G(1)According to the amendment to the Schedule 13D filed with the SEC on January 28, 2010, Shanyou Li held 16,970,900 ordinary shares, including ordinary shares represented by our ADSs, and may be deemed to beneficially own 257,106,176 ordinary shares held by Kumella Holdings Limited, a British Virgin Islands company, as of January 18, 2010. Shanyou Li held approximately 88.3% of the equity interest of Kumella Holdings Limited and served as its sole director. He disclaims beneficial interest of those 257,106,176 ordinary shares except to the extent of his pecuniary interest in those shares. We do not have any further information with respect to any changes in Shanyou Li’s beneficial ownership of our ordinary shares. |
As of February 29, 2012, based on public filings with the SEC there are no major shareholders holding 5% or moreon March 18, 2013, Shanda Media Group Limited, a wholly owned subsidiary of Shanda Interactive, which is in turn wholly owned by Premium Lead Company Limited, beneficially owned 3,334,694,602 of our ordinary shares, including shares represented by our ADSs, as of December 31, 2012. According to the Schedule 13D and its amendments filed with the SEC on or ADSs representingprior to March 18, 2013, Shanda Media Group Limited, which was then wholly owned by Shanda Interactive, beneficially owned 66.4%, 55.9%, 66.4%, 51.4%, 50.6% and 50.1% of our ordinary shares except as described above.of July 7, 2011, April 20, 2011, April 1, 2011, September 30, 2010, August 6, 2010 and June 23, 2010, respectively. We do not have further information with respect to any changes in Shanda Interactive’s beneficial ownership of our shares subsequent to December 31, 2012.
As of February 29, 2012,March 31, 2013, approximately 2,430,983,200 of our2,425 million ordinary shares were held in the U.S.form of ADSs by 105 holdersthe nominee of record, excluding shares held by our ADS depositary bank, Citibank N.A., on behalf of our ADS holders.holders and approximately 1 million ordinary shares were held by six holders of record in the United States. Citibank N.A. has advised us that as of that date 14,044,121approximately 14.61 million ADSs, representing 1,404,412,100approximately 1,461 million ordinary shares, were held of record by Cede & Co.the nominee of DTC on behalf of DTC participants and approximately 9.63 million ADSs, representing approximately 963 million ordinary shares, were held of record by Shanda Interactive and 101 other registered holders, most of whom are outside the United States. We have no further information as to ordinary shares or ADSs held, or beneficially owned, by U.S. persons.
Our company’s major shareholders do not have different voting rights from each other or other shareholders of our company. To our knowledge, there are no arrangements the operation of which may at a subsequent date result in our undergoing a change in control.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to Item 6.E. “Directors, Senior Management and Employees—Share Ownership.”
B. Related Party Transactions
Contractual Arrangements with Respect to Our Consolidated Affiliated Entities
We conduct our operations in China principally through contractual arrangements among our PRC subsidiaries, (Beijing WFOE, Tianjin WFOE and Tianjin Ku6 Network WFOE), our consolidated affiliated entities in the PRC (Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and Tianjin Ku6 Network),China, and their respective shareholders. See Item 4.C. “Information on the Company—Organizational“Organizational Structure.”
The principal terms of the agreements with respect to our consolidated affiliated entities are described as follows.
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Loan Agreements:Each of our PRC subsidiaries entered into loan agreements with the shareholders of the relevant PRC consolidated affiliated entities (Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network), pursuant to which our PRC subsidiaries granted interest-free loans to these shareholders to fund their capital contributions to the consolidated affiliated entities. The total amount of these loans as of December 31, 20112012 was RMB20.0RMB31.0 million ($3.25.0 million). The initial termEach of the loans is 10 years (in respect of loans to the shareholders of Ku6 Information Technology and Ku6 Cultural) or 20 years (in respectCultural has an unspecified term and will be repayable upon demand. Each of the loans to the shareholders of Tianjin Ku6 Network), with the earliest expiration date being April 11, 2017.Network has an initial term of 20 years expiring in December 2031, which can be extended upon written agreement. The loans are repayable on demand, but the shareholders of ourthese consolidated affiliated entities may not repay all or any part of the loans without the prior written consent of our PRC subsidiaries.
Exclusive Business Cooperation Agreements: Certain Tianjin WFOE, one of our PRC subsidiaries, (Beijing WFOE and Tianjin WFOE) entered into an exclusive business cooperation agreementsagreement with the relevantTianjin Ku6 Zheng Yuan, one of our consolidated affiliated entities, (Ku6 Information Technology andpursuant to which Tianjin Ku6 Zheng Yuan), pursuant to which these consolidated affiliated entitiesYuan agreed to respectively appoint our PRC subsidiariesTianjin WFOE as theirits exclusive providers of technical, consulting and other services for service fees equal to 100% of the net income of the consolidated affiliated entities. Our PRC subsidiaries areTianjin Ku6 Zheng Yuan. Tianjin WFOE is entitled to exclusive and proprietary rights and interests in any intellectual properties arising out of or created during the performance of these agreements. These agreements havethis agreement. This agreement has an initial term of 10 years with the earliest expiration date being June 23 2018,expiring in March 2019, and will be renewable upon the request of our PRC subsidiaries. Our PRC subsidiaries haveTianjin WFOE. Tianjin WFOE has the right to terminate the agreementsagreement at any time upon giving prior written notice, but none of the consolidated affiliated entitiesneither Tianjin Ku6 Zheng Yuan or theirits shareholders may terminate the agreementsagreement prior to expiration.
Exclusive Consulting and Service Agreements:Agreements or Exclusive Technology Consulting and Service Framework Agreement: Certain of our PRC subsidiaries (Tianjin(Beijing WFOE, Tianjin WFOE and Tianjin Ku6 Network WFOE) entered into exclusive consulting and service agreements with the relevant consolidated affiliated entities (Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network), pursuant to which these consolidated affiliated entities agreed to respectively engage our PRC subsidiaries as their exclusive provider of consultconsulting and other services. The amount of service fees payable by these consolidated affiliated entities to our PRC subsidiaries shall be agreed upon by the parties based on the scope and complexity of the technologies involved, the content and duration of the services provided, and the prevailing market price for similar services. Our PRC subsidiaries will exclusively own any intellectual property arising from the performance of these agreements. Unless terminated earlier by our PRC subsidiaries, these agreements have an initial term of 20 years with the earliest expiration date being May 27, 2030,expiring in December 2031, and will be renewable upon the request of our PRC subsidiaries. Our consolidated affiliated entities may not terminate these agreements without cause unless they compensate our PRC subsidiaries for all losses caused by such early termination.
Business Operation Agreements: Certain of our PRC subsidiaries (Tianjin(Beijing WFOE, Tianjin WFOE and Tianjin Ku6 Network WFOE) entered into business operation agreements with the relevant consolidated affiliated entities (Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network) and their respective shareholders, which set forth the rights of these PRC subsidiaries to control the actions of these consolidated affiliated entities and their shareholders, including the rights to manage the daily operations of these consolidated affiliated entities and to appoint and remove the directors of these consolidated affiliated entities. In addition, the consolidated affiliated entities may not engage in any transactions that could materially affect their assets, liabilities, rights or operations without the prior consent of our PRC subsidiaries. These agreements have an initial term of 20 years with the earliest expiration date being May 27, 2030,expiring in December 2031, and will be renewable upon the request of our PRC subsidiaries. Our PRC subsidiaries have the right to terminate the agreements at any time upon giving prior written notice, but none of the consolidated affiliated entities or their shareholders may terminate the agreements prior to expiration.
Equity Pledge Agreements:Each of our PRC subsidiaries entered into equity pledge agreements with the shareholders of our consolidated affiliated entities (and, in some cases, together with our consolidated affiliated entities), pursuant to which these shareholders pledged their respective equity interests in our consolidated affiliated entities to our PRC subsidiaries as collateral to secure the obligations of these consolidated affiliated entities under the loan agreements, exclusive business cooperation agreements, exclusive consulting and service agreements, business operation agreements and equity disposition agreements, as applicable. The pledges shall remain effective until all obligations under the applicable agreements have been fully performed. During the term of the pledges, our consolidated affiliated entities are entitled to any dividends in respect of the equity interests pledged. The shareholders may not transfer their equity interests without the prior consent of our PRC subsidiaries. In case of any event of default, our PRC subsidiaries will be entitled to dispose of the equity interests pledged and use the proceeds to make any payments due under the applicable agreements.
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Powers of Attorney: Each of the shareholders of our consolidated affiliated entities entered into a power of attorney to irrevocably authorize the relevant PRC subsidiary as his, her or its agent and attorney on all matters pertaining to the relevant consolidated affiliated entity and to exercise all of his, her or its rights as a shareholder of such consolidated affiliated entity, including the right to attend shareholders’ meetings, to exercise voting rights and to appoint directors and other senior management of such consolidated affiliated entity. The power of attorney is irrevocable and will continue to be effective, (i) in the case of the shareholder of Ku6 Information Technology or Ku6 Cultural, as long as such shareholder continues to be its shareholder; (ii) in the case of the shareholder of Tianjin Ku6 Zheng Yuan, until the equity interest purchase option as set forth in the exclusive option agreement has been fully exercised; and (iii) in the case of the shareholder of Ku6 Cultural or Tianjin Ku6 Network, for a term of 20 years, renewable upon the request of the relevant PRC subsidiary.
Exclusive Option Agreements or Equity Disposition Agreements: Each of our PRC subsidiaries entered into exclusive option agreements or equity disposition agreements with the relevant consolidated affiliated entities and their respective shareholders, pursuant to which our PRC subsidiaries or their designees are entitled to an exclusive right, exercisable at any time during the term of the agreements, to the extent permitted under PRC laws and regulations, to purchase from the shareholders of these consolidated affiliated entities all or any part of their equity interests in the consolidated affiliated entities. The purchase price shall equal to the amount of the registered capital of the consolidated affiliated entities (in respect of Ku6 Information Technology and Tianjin Ku6 Zheng Yuan) or the lowest price permissible by the then-applicable PRC laws and regulations (in respect of Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network). Without the prior written consent of our PRC subsidiaries, none of the consolidated affiliated entities or their shareholders may take actions that could materially affect the assets, liabilities, operations or equity of the consolidated affiliated entities, including distribution of dividends, transfer or mortgage of assets, incurrence or guarantee of any indebtedness, or merger or consolidation, and none of the shareholders may dispose of or allow any security interest to be encumbered on their equity interests in the consolidated affiliated entities except as otherwise agreed upon with our PRC subsidiaries. The initial term of these agreements is 10 years (in respect of Ku6 Information Technology and Tianjin Ku6 Zheng Yuan) or 20 years (in respect of Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network), with the earliest expiration date being March 21, 2019. These agreements will be renewable upon the request of our PRC subsidiaries.
Exclusive Intellectual Property Option Agreement: Beijing WFOE entered into an exclusive intellectual property option agreement with Ku6 Information Technology, pursuant to which Ku6 Information Technology irrevocably granted to Beijing WFOE or its designee an exclusive right, exercisable at any time during the term of this agreement, to purchase from Ku6 Information Technology, in accordance with the price agreed upon by the parties and to the extent permitted under PRC laws and regulations, certain intellectual property rights. Without Beijing WFOE’s prior consent, Ku6 Information Technology may not transfer any of these intellectual property rights to any third party. This agreement has an initial term of 10 years expiring in June 2018 and will be automatically renewed for another 10 years unless terminated by Beijing WFOE.
Advertising Agency Agreement with Shengyue
In April 2011, we entered into an advertising agency agreement with Shengyue, an affiliate wholly owned by Shanda Interactive, pursuant to which Shengyue agreed to act as our exclusive advertising agency for our standard media resources and as our non-exclusive advertising agency for our highly interactive advertising resources and to generate advertising revenue for us by using the AA system. The initial term of our advertising agency agreement with Shengyue expired on December 31, 2012. In January 2013, we amended and restated this agreement with Shengyue and extended its term to December 31, 2013.
Pursuant to the advertising agency agreement, Shengyue guarantees to us a minimum amount of revenues for each quarter. In return, we guarantee a certain amount of web traffic for our webpage on which Shengyue posts advertisements. If the advertising revenues from Shengyue exceed the minimum guaranteed amount, we are required to pay Shengyue a progressive commission fee based upon increasing percentages for additional tiers of revenue in excess of the guaranteed amount. We negotiated these terms with Shengyue based on pricing information obtained from competing third parties and an internal assessment of the value of our revenue-generating media resources.
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For the years ended December 31, 2011 and 2012, we generated advertising revenues of $8.1 million and $12.5 million from Shengyue. Since the commencement of the arrangement, we have been able to satisfy the web traffic requirements under the advertising agency agreement. As we enjoyed a commission-free trial period in 2011 under the agreement, and the advertising revenues in 2012 did not exceed the minimum amount guaranteed by Shengyue, we incurred nil and nil commission fees payable to Shengyue in 2011 and 2012, respectively. To the extent that future advertising sales by Shengyue to our advertisers increase significantly and exceed the minimum guaranteed amounts, progressively higher commission fees would be incurred, which may negatively affect our profit margin.
Our Asset Transactions with Shanda Interactive
On June 1, 2010, we entered into a master transaction agreement with Shanda Interactive, pursuant to which we agreed to acquire certain online audio assets from Shanda Interactive in exchange for 415,384,615 newly issued ordinary shares in us and, concurrently, Shanda Interactive agreed to acquire our WVAS and recorded music businesses in exchange for an aggregate of $36,944,267 in cash, subject to adjustment based on the May 31, 2010 cash balances of the businesses being transferred to Shanda Interactive. On August 17, 2010, we and Shanda Interactive completed the asset transactions contemplated under the master transaction agreement. We issued 415,384,615 ordinary shares to Shanda Interactive in exchange for its 75% interest in an online audio business and issued 138,461,539 ordinary shares to the non-controlling shareholder in exchange for the remaining 25% interest in the online audio business. Shanda Interactive acquired our WVAS and recorded music businesses in exchange for an aggregate of $37,243,904 in cash.
Share Purchase Agreement with Shanda Media
On April 1, 2011, we entered into a share purchase agreement with Shanda Media, pursuant to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share). Our shareholders approved the issuance of these ordinary shares at our extraordinary general meeting on June 24, 2011. We issued these ordinary shares to Shanda Media on June 29, 2011.
Convertible Bond Purchase Agreement with Shanda Media
On April 1, 2011, we entered into a convertible bond purchase agreement with Shanda Media, pursuant to which we agreed to sell to Shanda Media $50,000,000 aggregate principal amount of 3% senior convertible bond at face value. The convertible bonds were to mature in three years after issuance and bear interest at a rate of 3% per annum, payable semi-annually in arrears on June 30 and December 31 of each year, commencing December 31, 2011. Beginning six months after issuance and at any time before maturity, the convertible bonds would be convertible into our ordinary shares at a price of $0.03925 per ordinary share (or $3.925 per ADS). Our shareholders approved the issuance of these convertible bonds at our extraordinary general meeting on June 24, 2011, and we issued the convertible bonds on June 29, 2011. Based on our working capital position, we entered into a redemption agreement with Shanda Media on September 30, 2011, pursuant to which we agreed to redeem the entire $50,000,000 convertible bonds at face value plus accrued but unpaid interest. We redeemed the convertible bonds and paid the full redemption price to Shanda Media on September 30, 2011.
Proposed Acquisition of Pipi
On April 20, 2011, we entered into an equity purchase agreement with the shareholders of Hangzhou Soushi Networking Co., Ltd., or Pipi, a limited liability company established under the laws of the PRC, pursuant to which we agreed to acquire the equity interests in Pipi from its current shareholders in exchange for an aggregate of 2,212,114,257 of our ordinary shares. Shanghai Shanda Networking Co., Ltd., or Shanda Networking, a company established under the laws of the PRC and controlled by Shanda Interactive, holds 32% of the equity interest in Pipi. Pursuant to the equity purchase agreement, Shanda Networking agreed to transfer its 32% equity interest in Pipi to us or one or more of our designees, and in exchange, we agreed to issue 707,876,562 ordinary shares to Shanda Media. However, our shareholders did not approve this transaction at our extraordinary general meeting on June 24, 2011. As the closing of this transaction was conditional upon, among other things, the approval of our shareholders, this transaction was not consummated and the equity purchase agreement was terminated on July 5, 2011.
Disposal of Interest in Online Audio Business
In August 2011, we terminated our contractual arrangements with respect to the control of Yisheng, our online audio business operating entity, as a result of management’s review of our business strategies. After the completion of certain equity transfer and increase in registered capital by Beijing Sunshine Culture Communication Co., Ltd., or Sunshine, and Beijing Huaying Shengshi Cultural Communication Co., Ltd., both of which are subsidiaries of Shanda Interactive and limited liability companies established under the laws of the PRC, we hold a 20% economic interest, down from 100%, in Yisheng and have ceased to control Yisheng as a consolidated affiliated entity. All local government registrations relating to the above changes in the registered capital and shareholding of Yisheng were completed on August 11, 2011.
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OtherLoans to and from Related Party TransactionsParties
In December 2010, Ku6 Information Technology borrowed RMB20.0 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in June 2011. The term of the loan was subsequently extended to December 2011 and the interest rate was revised to 5.68%. This loan was fully repaid in December 2011.
In February 2011, Ku6 Information Technology borrowed RMB40.0 million ($6.4 million) on an unsecured basis from Shanghai Shulong Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in August 2011. We repaid RMB250,000 ($39,721)39,271) and the term of the loan with respect to the remaining amount of RMB39.8 million ($6.3 million) was subsequently extended to February 2012. The interest rate was revised to 6.71% per year. In February 2012, we repaid RMB19.8 million ($3.13. 2 million). We extended the term of the loan with respect to the remaining amount of RMB20.0 million ($3.2 million) to August 2012 and the interest rate remained at 6.71% per year. In August 2012, the RMB20.0 million ($3.2 million) was further extended to February 2013 with interest rate of 6.71% per year. This loan was fully repaid in January 2013.
In June 2011, Ku6 Information Technology borrowed RMB43.0 million ($6.86.8 million) on an unsecured basis from Shanghai Shulong Computer Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carries an interest rate of 6.31% per year and iswas due in June 2012. This loan was fully repaid in June 2012.
In December 2010, Ku6 Media Co., Ltd.our company provided a $3.2 million unsecured loan to Shanda Games Limited, a company controlled by Shanda Interactive, which carried an interest rate of 0.6% per year and was originally due in July 2011. The term of the loan was subsequently extended to August 2012 with an interest rate of 0.6% per year before December 31, 2011 and an interest rate of 3% per year after that. In January 2011, Ku6 Media Co., Ltd.our company provided a $6.7 million unsecured loan to Shanda Games Limited, which carried an interest rate of 0.6% per year and was originally due in July 2011. The termsterm of this loan was subsequently extended to August 2012. The interest rate for 50% of the principal amount was revised to 0.6% per year before February 14, 2012 and 3% per year after that. The interest rate for the remaining 50% of the principal amount was revised to 0.6% per year before March 1, 2012 and 1.8% per year after that. Shanda Games Limited repaid a total of $6.6 million of the principal amount under these loans are in May 2012. With respect to the processremaining principal amount of being extended. $3.3 million, the term was extended to February 2013 with an interest rate of 3% per year. The loan was repaid in full in February 2013.
In June 2011, Ku6 Media Co., Ltd.our company provided a $7.3 million unsecured loan to Shanda Games Limited, which carries an interest rate of 1.37% per year and iswas due in May 2012. The term of the loan was subsequently extended to June 20, 2012 with respect to $3.0 million of the principal amount and to December 20, 2012 with respect to the remaining balance. The interest rate was revised to 1.37% per year before June 20, 2012 and 3% per year after that. This loan was fully repaid in December 2012.
On April 1, 2011, we entered into an advertising agency agreement with Shengyue, an affiliate wholly owned
In March 2012, our company provided a $0.5 million unsecured loan to Shanda Capital Limited, a company controlled by Shanda Interactive, pursuant to which Shengyue agreed to act as our advertising agencycarries an interest rate of 3% per year and was due on March 25, 2013. The term of this loan is in respectthe process of our website advertising space on www.ku6.com and generate advertising revenue for us by using the AA system. We agreed to pay Shengyue certain commission fee accordingly. For the year ended December 31, 2011, we received revenues of $8.1 million from Shengyue and paid nil commission fee to Shengyue as the commission fee was either not required or waived during the period from April 1, 2011 to December 31, 2011.
being extended.Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18. “Financial Statements” for our audited consolidated financial statements filed as part of this annual report on Form 20-F.
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Legal Proceedings
From time to time, we have been involved in litigation relating to copyright infringement and other matters in the ordinary course of our business. We had an accrued litigation provision balance of $2.7$2.1 million as of December 31, 2011.2012. The accrual was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 20112012 but related to alleged copyright infringement arising before December 31, 2011.2012. The accrual was based upon management’s best estimation according to the historical actual compensation amount per video of Ku6 Holding for the similar legal actions and the advice from PRC counsel. We are in the process of appealing certain judgments for which the loss has been accrued.
Our video content library may contain content in which others may claim to own copyrights or image rights or which others may claim to be defamatory or objectionable. Adverse results in legal proceedings against us may include awards of damages and may also result in, or even compel, a change in our business practices, which could impact our future financial results. Regardless of the outcome, however, any litigation can result in substantial costs and diversion of management resources and attention.
Although we have implemented and strengthened standard procedures to delete video content, especially our UGC, that allegedly infringes on intellectual property rights of third parties, we have limited control over the nature or types of the content posted by our users. The infringement of intellectual property rights by our users may result in litigation against us and harm our business and reputation. See Item 3.D. “Risk Factors—Risks Related to Our Business—We have been and expect we willto continue to be exposed to intellectual property infringement and other claims, including claims based on content posted on our website, which could be time-consuming and costly to defend and may result in substantial damage awards and/or court orders that may prevent us from continuing to provide certain of our existing services.website.”
Dividend Policy
We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and for the expansion of our business. Payments of dividends by our PRC subsidiaries to our company are subject to restrictions including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. There are no such similar foreign exchange restrictions in the Cayman Islands.
B. Significant Changes
None.
Item 9. The Offer and Listing
Not applicable except for Item 9.A.4. and Item 9.C.
American Depositary Shares, or ADSs, each representing 100 of our ordinary shares, have been listed on the NasdaqNASDAQ Global Market since February 4, 2005. Our ADSs were traded under the symbol “HRAY” until August 16, 2010. On August 17, 2010, we changed our name to “Ku6 Media Co., Ltd.” and changed our trading symbol on the NasdaqNASDAQ Global Market from “HRAY” to “KUTV.”
The following table provides the high and low prices for our ADSs on the NasdaqNASDAQ Global Market for (1) the five most recent full financial years, (2) each full financial quarter in the two most recent full financial years and the subsequent period, and (3) each of the most recent six months.
| | | | | | | | |
| | | Sales Price | |
| | | High | | | Low | |
| | | (in U.S. dollars) | |
Annual highs and lows | | | | | | | | |
2007 | | | 6.53 | | | | 3.05 | |
2008 | | | 4.21 | | | | 1.08 | |
2009 | | | 7.16 | | | | 0.93 | |
2010 | | | 8.40 | | | | 2.22 | |
2011 | | | 8.12 | | | | 0.75 | |
Quarterly highs and lows | | | | | | | | |
First quarter 2010 | | | 4.50 | | | | 2.22 | |
Second quarter 2010 | | | 3.84 | | | | 2.45 | |
Third quarter 2010 | | | 5.19 | | | | 2.36 | |
Fourth quarter 2010 | | | 8.40 | | | | 4.14 | |
First quarter 2011 | | | 5.25 | | | | 2.59 | |
Second quarter 2011 | | | 8.12 | | | | 2.83 | |
Third quarter 2011 | | | 3.68 | | | | 1.70 | |
Fourth quarter 2011 | | | 2.10 | | | | 0.75 | |
Monthly highs and lows | | | | | | | | |
September 2011 | | | 2.15 | | | | 1.73 | |
October 2011 | | | 2.10 | | | | 1.69 | |
November 2011 | | | 1.88 | | | | 1.12 | |
December 2011 | | | 1.39 | | | | 0.75 | |
January 2012 | | | 4.04 | | | | 1.03 | |
February 2012 | | | 2.30 | | | | 1.75 | |
March 2012 (through March 26, 2012) | | | 2.80 | | | | 1.93 | |
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| | Sales Price | |
| | High | | Low | |
| | (in U.S. dollars) | |
Annual highs and lows | | | | | |
2008 | | 4.21 | | 1.08 | |
2009 | | 7.16 | | 0.93 | |
2010 | | 8.40 | | 2.22 | |
2011 | | 8.12 | | 0.75 | |
2012 | | 4.04 | | 0.90 | |
Quarterly highs and lows | | | | | |
First quarter 2011 | | 5.25 | | 2.59 | |
Second quarter 2011 | | 8.12 | | 2.83 | |
Third quarter 2011 | | 3.68 | | 1.70 | |
Fourth quarter 2011 | | 2.10 | | 0.75 | |
First quarter 2012 | | 4.04 | | 1.03 | |
Second quarter 2012 | | 2.18 | | 1.10 | |
Third quarter 2012 | | 1.40 | | 0.90 | |
Fourth quarter 2012 | | 1.25 | | 0.90 | |
First quarter 2013 | | 1.30 | | 0.95 | |
Monthly highs and lows | | | | | |
October 2012 | | 1.05 | | 0.90 | |
November 2012 | | 1.25 | | 0.98 | |
December 2012 | | 1.15 | | 0.91 | |
January 2013 | | 1.20 | | 1.04 | |
February 2013 | | 1.30 | | 0.96 | |
March 2013 | | 1.20 | | 0.95 | |
April 2013 (through April 18, 2013) | | 1.05 | | 0.97 | |
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following are summaries of material terms and provisions of our current memorandum and articles of association, as well as certain provisions of the Cayman Companies Law insofar as they relate to the material terms of our ordinary shares. This summary is not complete and some of the terms in our memorandum and articles of association are subject to other rights, restrictions and obligations set out therein, and you should read in full our memorandum and articles of association, which was included as Exhibit 3.1 to our registration statement on Form F-1 (File No. 333-121987) filed with the SEC on January 12, 2005, as amended by the amendment passed by our shareholders by way of a special resolution on October 16, 2009, which was included as Exhibit 1.2 to our annual report on Form 20-F for the year ended December 31, 2009 (File No. 000-51116) filed with the SEC on April 30, 2010, and further amended by the amendment passed by our shareholders by way of a special resolution on June 24, 2011, which was included as Exhibit 1.3 to our annual report on Form 20-F for the year ended December 31, 2010 (File No. 000-51116) filed with the SEC on June 28, 2011.2011, and the amendment passed by our shareholders by way of a special resolution on July 12, 2012, which was included as Exhibit 1.4 to this Form 20-F.
General
We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association, the Cayman Companies Law and 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 that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities law as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in the federal courts of the United States.
The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs.
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Directors
Interested Transactions. A director may vote in respect of any contract or transaction in which he or she is interested,provided, however, that the nature of the interest of any director in any such contract or transaction shall be disclosed by him or her at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure, and after such general notice it shall not be necessary to give special notice relating to any particular transaction.
Remuneration and Borrowing. The directors may determine remuneration to be paid to the directors. The directors may exercise all the powers of our company to borrow money and to mortgage or charge our undertaking, property and uncalled capital or any part thereof, and to issue debentures, debenture stock and other securities whether outright or as security for any of our debts, liabilities, or obligations or those of any third party.
Qualifications. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting.
Rights, Preferences and Restrictions of our Ordinary Shares
General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing our ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors.
Voting Rights. On a poll (if demanded), each ordinary share is entitled to one vote on all matters upon which our ordinary shares are entitled to vote, including the election of directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by our Chairman or any other shareholder present in person or by proxy. A quorum required for a meeting of shareholders consists of shareholders who hold at least one-third of our outstanding shares entitled to vote at the meeting present in person or by proxy.
Any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes attaching to our ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to our ordinary shares. A special resolution is required for matters such as a change of name. Holders of our ordinary shares may, by ordinary resolution, among other things, elect directors, appoint auditors, and increase our authorized share capital.
Liquidation. Without prejudice to the rights of holders of our shares issued upon special terms and conditions, if in a winding up, the assets available for distribution among our shareholders are insufficient to repay all of the paid-up capital, such assets will be distributed so that, as nearly as may be, the losses are borne by our shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. If in a winding up, the assets available for distribution among our shareholders is more than sufficient to repay all of the paid-up capital at the commencement of the winding up, the excess will be distributed among our shareholders in proportion to the capital paid up at the commencement of the winding up on our shares held by them respectively.
Calls on our Ordinary Shares and Forfeiture of our Ordinary Shares. Our board of directors may from time to time make calls upon shareholders in respect of any moneys unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Our ordinary shares that have been called upon and remain unpaid may be subject to forfeiture.
Redemption and Repurchase of our Ordinary Shares. The Cayman Companies Law provides that a company limited by shares may, if so authorized by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder. In addition, such a company may, if authorized to do so by its articles of association, purchase its own shares, including any redeemable shares. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any member of the company holding shares other than shares held as treasury shares. Under our memorandum of association, we may issue shares that are, or at our option or at the option of the holders are, subject to redemption on such terms and in such manner as we may, before the issue of the shares, determine by special resolution. We may also purchase our own shares, including any redeemable shares, provided that the manner of purchase has been authorized in a general meeting.
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A Cayman Islands company may redeem or purchase its own shares out of profits, out of its share premium account, out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase or, provided the company will remain solvent, out of capital. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless, immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business. If and to the extent that a premium is to be paid on the redemption or purchase of a company’s shares, the premium must have been provided for out of either or both of the profits of the company or out of the company’s share premium account before or at the time the shares are redeemed or purchased, or, subject to the same solvency test, out of capital.
Shares that have been purchased or redeemed by a Cayman Islands company or surrendered to the company pursuant to the Cayman Companies Law shall not be treated as cancelled but shall be classified as treasury shares if the memorandum and articles of association of the company do not prohibit it from holding treasury shares, the relevant provisions of the memorandum and articles of association (if any) are complied with, and the company is authorized in accordance with the its articles of association or by a resolution of the directors to hold such shares in the name of the company as treasury shares prior to the purchase, redemption or surrender of such shares. Shares held by a company as treasury shares shall continue to be classified as such until such shares are either cancelled or transferred pursuant to the Cayman Companies Law. The company shall not be treated as a member for any purpose and shall not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void. A treasury share shall not be voted, directly or indirectly, at any meeting of the company and shall not be counted as issued shares at any given time, whether for the purposes of the company’s articles of association or the Cayman Companies Law. No dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share.
Shares with Preferred Rights
Our memorandum and articles of association provide for the authorization of issuance of shares with preferred rights. Subject to any direction that may be given by us in general meetings, and without prejudice to any special rights previously conferred on the holders of existing shares, our directors may allot, issue, grant options over or otherwise dispose of shares of our company, with or without preferred rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper. We have no immediate plans to issue any shares with preferred rights. The issuance of any of our shares with preferred rights could provide needed flexibility in connection with possible acquisitions and other corporate purposes. However, the issuance could also make it more difficult for a third party to acquire a majority of our outstanding voting shares or discourage an attempt to gain control of us. In addition, the board of directors, without shareholder approval, can issue shares with preferred rights with voting and conversion rights which could adversely affect the voting power and other rights of the holders of ordinary shares. These shares with preferred rights may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions. The listing maintenance requirements of the Nasdaq NationalNASDAQ Global Market, which apply so long as our ADSs are quoted on that market, require shareholder approval of certain issuances of our securities equal to or exceeding 20% of the then outstanding voting power of all our securities or the then outstanding number of our ordinary shares.
Variations of Rights of Shares
All or any of the special rights attached to any class of shares maybe varied, either with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
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General Meetings of Shareholders
The directors may, whenever they think fit, and shall, on the requisition of our shareholders holding at the date of the deposit of the requisition not less than one-tenth of our paid-up capital, which as at the date of the deposit carries the right of voting at our general meetings, proceed to convene a general meeting of our company. If the directors do not, within 21 days from the date of the deposit of the requisition, duly proceed to convene a general meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of such 21 days.
At least five days’ notice shall be given of an annual general meeting or other general meeting. Every notice shall be exclusive of the day on which its given, or deemed to be given, and of the day for which it is given.
Limitations on the Right to Own Shares
There are no limitations on the right to own our shares, provided that we are prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of our securities.
Limitations on Transfer of Shares
There are no provisions in our memorandum or articles of association that would have an effect of delaying, deferring or preventing a change in control and that would operate only with respect to a merger, acquisition or corporate restructuring.
Disclosure of Shareholder Ownership
There are no provisions in our memorandum or articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Changes in Capital
We may, from time to time by ordinary resolution, increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe. The new shares shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. We may by ordinary resolution:
| (a) | consolidate and divide all or any of our share capital into shares of larger amount than our existing shares; |
(a)consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;
| (b) | subdivide our existing shares, or any of them, into shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to the provisions of Section 13 of the Cayman Companies Law; or |
(b)subdivide our existing shares, or any of them, into shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to the provisions of Section 13 of the Cayman Companies Law; or
| (c) | cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person. |
(c)cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person.
We may, by special resolution, reduce our share capital and any capital redemption reserve fund in any manner authorized by the Cayman Companies Law.
Differences in Corporate Law
The company law of the Cayman Islands is historically derived, for the most part, from the laws of England, and comprises the provisions of the Cayman Companies Law, many of which are drawn from pre-1948 Companies Acts of the United Kingdom. Other provisions are original Cayman Islands provisions, some of which relate to a certain class of companies, which are commonly used for the conduct of international business from the Cayman Islands. These provisions create the concept of the “exempted” company, which is a special corporate vehicle, the business and operation of which are required to be conducted mainly outside the Cayman Islands. Decisions of the superior courts of England constitute persuasive authority in the Cayman Islands courts. The Cayman Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
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Scheme of Arrangements, Compulsory Acquisition and Merger and Consolidation.
Schemes of arrangement are governed by specific statutory provisions under the Cayman Companies Law, whereby such arrangements may be approved by a majority in number representing 75% in value of members or creditors, depending on the circumstances, as are present at a meeting called for such purpose and thereafter sanctioned by the courts. While a dissenting member would have the right to express to the court his view that the transaction for which approval is being sought would not provide the members with a fair value for their shares, the courts are unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management; and if the transaction were approved and consummated, the dissenting member would have no rights comparable to the appraisal rights (i.e., the right to receive payment in cash for the judicially determined value of their shares) ordinarily available, for example, to dissenting members of a United States corporation.
Where an offer is made by a company for the shares of another company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer accept, the offeror may at any time within two months after the expiration of the said four months, by notice, require the dissenting members to transfer their shares on the terms of the offer. A dissenting member may apply to the court of the Cayman Islands within one month of the notice objecting to the transfer. The burden is on the dissenting member to show that the court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion, as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority members.
Two or more companies limited by shares and incorporated under the Cayman Companies Law, may, subject to any express provisions to the contrary in the memorandum and articles of association of any of such companies as well as certain requirements under the Cayman Companies Law, merge or consolidate. One or more companies incorporated under the Cayman Companies Law may also merge or consolidate with one or more overseas companies, subject to certain requirements. The directors of each constituent company that proposes to participate in a merger or consolidation are required, on behalf of the constituent company of which they are directors, to approve a written plan of merger or consolidation. A plan of merger or consolidation shall give particulars of matters as set forth in the Cayman Companies Law, and be authorized by each constituent company by way of: (a) a special resolution of the members of each such constituent company; and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The consent of each holder of a fixed or floating security interest of a constituent company in a proposed merger or consolidation will be required, or as determined by the Grand Court of the Cayman Islands. A dissenting member is required to give to the constituent company written objection before the vote on the merger or consolidation, and is entitled to payment of the fair value of his shares as determined in accordance with the procedures set forth under the Cayman Companies Law. Such objection shall include a statement that the member proposes to demand payment for his or her shares if the merger or consolidation is authorized by the vote.
Indemnification. Cayman Islands law does not (other than as set forth hereafter) limit the extent to which a company’s organizational documents may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own willful neglect or default.
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,” and Item 7.B., “Related Party Transactions,” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
Foreign currency exchange regulation in China is primarily governed by the following rules:
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·Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies;
·Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules;
·Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules; and
·the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142.
Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is subject to the approval of or registration with SAFE.
Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by MOFCOM, SAFE and the National Development and Reform Commission of the PRC.
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which took effectbecame effective as of November 1, 2005, and which was supplemented by an implementing notice issued on November 1,24, 2005. Notice 75 supersedes prior SAFE regulations promulgated in January and April of 2005. In May 2007,Subsequently, SAFE issued a series of implementation rules and guidance, including the Notice of the State Administration of Foreign Exchange on Operating Procedures Concerning Notice on IssuesImplementing Rules Relating to the Administration of Foreign Exchange in Fund-raisingFund-Raising and ReturnRound-trip Investment Activities of the Domestic Residents Conducted via Offshore Special Purpose Companies, orwhich became effective as of July 1, 2011, and Notice 106. Notices 75 and 106 requireon Further Adjustments to Measures for the Administration of Foreign Exchange for Direct Investment, which became effective on December 17, 2012.
Under these regulations, PRC residents is required to register with the relevant local SAFE branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them and direct investment through such an offshore entity in the PRC.China. The term “PRC residents,” as used in Notice 75,these regulations, includes not only PRC citizens but also other persons who habitually reside in the PRCChina for economic benefit. Such PRC residents are required to register with the relevant SAFE branch before establishing or taking control of such an offshore entity and complete amended registrations with the relevant SAFE branch upon: (i) injection of equity interests or assets of an onshore enterprise into the offshore entity; (ii) subsequent overseas equity financing by such offshore entity; or (iii) any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. The PRC residents who have already incorporated or gained control of offshore entities that had completed onshore investments in the PRCChina before NoticeCircular 75 took effect must register with the relevant local SAFE branch on or before March 31, 2006. In addition, such PRC residents are required to repatriate into the PRCChina all of their dividend profits or capital gains from their shareholdings in the offshore entity within 180 days of their receipt of such profits or gains.
The registration and amendment procedures set forth by Notices 75 and 106 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investment or shareholders’ loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction.
A number of terms and provisions in Notices 75 and 106these regulations remain unclear. Because of uncertainty over how Notices 75 and 106these regulations will be interpreted and implemented, we cannot predict how they will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as remitting dividends and foreign currency-denominated borrowings, may be subject to compliance with requirements of Notices 75 and 106these regulations by the PRC resident holders of our ordinary shares and ADSs. Despite our effort to fully comply with the SAFE regulations, we cannot assure you that we will obtain, or receive waivers from, any necessary approvals or not be found in violation of the SAFE regulations or any other related foreign exchange regulations. In particular, we cannot assure you that we will be able to cause all the present or prospective PRC resident holders of our ordinary shares or ADSs to comply with all SAFE regulations. A failure by the PRC resident holders of our ordinary shares or ADSs to comply with Notices 75these regulations and 106its implementation rules or our inability to secure required approvals or registrations may subject us to fines or legal sanctions, limit our subsidiaries’ ability to make distributions or pay dividends, restrict our overseas or cross-border investment activities or affect our ownership structure, any of which could affect our business and prospects.
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Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.
In addition, we may, directly or indirectly, hold equity interests in subsidiaries or other entities which are PFICs or (“Lower-tier PFICs.PFICs”). Under attribution rules, if we are a PFIC, U.S. Holders will be deemed to own their proportionate shares of Lower-tier PFICs and will be subject to U.S. federal income tax according to the rules described below on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though holders have not received the proceeds of those distributions or dispositions directly.
If we are a PFIC for any taxable year during which a U.S. Holder holds ordinary shares or ADSs, we will generally continue to be treated as a PFIC with respect to those ordinary shares or ADSs for all succeeding years during which such U.S. Holder holds them, regardless of whether we actually continue to be a PFIC. Because we believe that we were a PFIC for taxable years 2006, 2007, 2008 and 2009, if you held ordinary shares or ADSs during any of those taxable years (or during the 2011 taxable year if we were a PFIC for that year), we would continue to be treated as a PFIC with respect to those ordinary shares or ADSs for all succeeding years during which you hold them. Similarly, if you first acquired ordinary shares or ADSs in 20102012 and we became a PFIC in a subsequent year, we would be treated as a PFIC with respect to those ordinary shares or ADSs for all succeeding years during which you hold them. You may terminate this deemedcontinued PFIC status by electing to recognize gain (which will be taxed under the default PFIC rules discussed below) as if your ordinary shares or ADSs had been sold on the last day of the last taxable year for which we were a PFIC.
If we are treated as a PFIC with respect to the ordinary shares or ADSs that you hold, the U.S. federal income tax consequences to you of the ownership and disposition of ordinary shares or ADSs will depend on whether you make a mark-to-market election. If you owned or own ordinary shares or ADSs while we were or are a PFIC and have not made a mark-to-market election, you will be referred to in this summary as a “Non-Electing U.S. Holder.”
If you are a Non-Electing U.S. Holder, you will be subject to the default PFIC rules with respect to:
·any “excess distribution” paid on ordinary shares or ADSs (or by a Lower-tier PFIC to its shareholders that is deemed to be received by a U.S. Holder), which means the excess (if any) of the total distributions received (or deemed received) by you during the current taxable year over 125% of the average distributions received (or deemed received) by you during the three preceding taxable years (or during the portion of your holding period for the ordinary shares or ADSs prior to the current taxable year, if shorter); and
·any gain realized on the sale or other disposition (including a pledge) of ordinary shares or ADSs (or on an indirect disposition of shares of a Lower-tier PFIC).
Under these default tax rules:
·any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares or ADSs;
·the amount allocated to the taxable year of receipt of proceeds from the excess distribution or disposition and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the taxable year to which it is allocated;
·the amount allocated to each other taxable year will be treated as ordinary income and taxed at the highest applicable tax rate for individuals or corporations, as applicable, in effect for that year; and
·the resulting tax liability from any such other taxable years will be subject to the interest charge applicable to underpayments of tax.
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If the ordinary shares or ADSs are “regularly traded” on a “qualified exchange,” a U.S. Holder of ordinary shares or ADSs may make a mark-to-market election that would result in tax treatment different from the default PFIC rules described above. The ordinary shares or ADSs will be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of the ordinary shares or ADSs are traded on a qualified exchange on at least 15 days during each calendar quarter. NASDAQ, on which the ordinary shares or ADSs are listed, is a qualified exchange for this purpose. U.S. Holders should consult their tax advisors regarding the availability and advisability of making a mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market election with respect to their ordinary shares or ADSs, given that the election may not be available with respect to any Lower-tier PFICs.
If a U.S. Holder makes the mark-to-market election, the holder generally will recognize as ordinary income any excess of the fair market value of the ordinary shares or ADSs at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the holder’s tax basis in the ordinary shares or ADSs will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares or ADSs in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). Distributions paid on ordinary shares or ADSs will be treated as discussed below under “Distributions on Ordinary Shares or ADSs.”
We do not intend to provide information necessary for U.S. Holders to make a qualified electing fund election, which, if available, could result in a materially different tax treatment of the ownership and disposition of ordinary shares or ADSs to an electing U.S. Holder.
Furthermore, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or the prior year, the reduced dividendtax rates with respectapplicable to the dividends paid to certain non-corporate U.S. Holders, as discussed below, would not apply.
If we were a PFIC for any taxable year during which a U.S. Holder held ordinary shares or ADSs, such U.S. Holder may be required to file a report containing such information as the U.S. Treasury may require.
Because the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ADSs.
Distributions on Ordinary Shares or ADSs
Subject to the discussion in “Passive Foreign Investment Company” above, if you actually or constructively receive a distribution on ordinary shares or ADSs (other than certain pro rata distributions of ordinary shares), you must include the distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the depositary’s) receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign tax withheld. Dividends paid by us will not be eligible for the dividends-receiveddividends received deduction allowed to corporations with respect to dividends received from certain domestic corporations and may not be eligible for the reduced tax rates on dividends received by certain non-corporate U.S. Holders.
To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the ordinary shares or ADSs, and thereafter as capital gain. Preferential tax rates for long-term capital gain may be applicable to dividends received by non-corporate U.S. Holders. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported to U.S. Holders as a dividend, even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
The amount of any dividend paid in Renminbi or any other foreign currency will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or in the case of ADSs, the depositary’s) receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
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As discussed above in “—PRC Taxation” above,“PRC Taxation,” dividends paid with respect to our ordinary shares or ADSs may be subject to PRC withholding tax, and the amount of a dividend will include any amounts withheld in respect of PRC taxes. The amount of the dividend will be treated as foreign-sourcedforeign-source dividend income to U.S. Holders. Subject to applicable limitations, some of which vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, PRC income taxes withheld from dividends on ordinary shares or ADSs at a rate not exceeding the rate provided by the Treaty will be creditable against the U.S. Holder’s U.S. federal income tax liability. PRC taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances.
Dispositions of Ordinary Shares or ADSs
Subject to the discussion in “Passive Foreign Investment Company” above, you generally will realize taxable gain or loss on the sale or other disposition of ordinary shares or ADSs equal to the difference between the U.S. dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the ordinary shares or ADSs disposed of. Such gain or loss will be capital gain or loss.
If you have held the ordinary shares or ADSs for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for taxable years beginning before January 1, 2013) will apply to non-corporate U.S. Holders. If you have held the ordinary shares or ADSs for one year or less, such capital gain or loss will be short-term capital gain or loss, taxable as ordinary income at your marginal income tax rate. The deductibility of capital losses is subject to limitations.
As discussed above in “—PRC Taxation” above,“PRC Taxation,” gains realized on the disposition of our ordinary shares or ADSs could be subject to PRC tax. Any gain or loss recognized by a U.S. Holder on a disposition of our ordinary shares or ADSs will generally be treated as U.S.-source income or loss for foreign tax credit limitation purposes. A U.S. Holder that is eligible for the benefits of the Treaty may be able to elect to treat disposition gain that is subject to PRC taxation as foreign-source gain and claim a credit in respect of the tax. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances.
You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the disposition of ordinary shares or ADSs.
Information Reporting and Backup Withholding
Generally, information reporting requirements will apply to distributions on ordinary shares or ADSs or proceeds from the disposition of ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt recipient. Furthermore, backup withholding (currently at 28%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements. A U.S. Holder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
Certain U.S. Holders who are individuals may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). Certain U.S. Holders who are entities may be subject to similar rules in the future. U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to the ordinary shares or ADSs.
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F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have filed this annual report, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report.
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. 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. Our annual reports and other information so filed can be inspected and copied at the public reference facility maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility. Our SEC filings will also be available to the public on the SEC’s Internet Web site at http://www.sec.gov.
Our financial statements have been prepared in accordance with US GAAP.
We will make available to our shareholders annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with US GAAP.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits in banks. We have not used derivative financial instruments in our investment portfolio. Interest-earning instruments and floating rate debt carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. Our future interest income may fluctuate in line with changes in interest rates. However, the risk associated with fluctuating interest rates is principally confined to our cash deposits in banks, and, therefore, our exposure to interest rate risk is minimal and immaterial.
Foreign Exchange Risk
While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and costs are denominated in Renminbi and substantially all of our assets (other than the proceeds from our initial public offering) and liabilities are denominated in Renminbi. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in U.S. dollars in our financial statements will decline. We may also be exposed to foreign exchange risk in the event we hold other currencies in an effort to hedge against potential depreciation of the U.S. dollar or otherwise.
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If the Renminbi had been 1% and 5% less valuable against the U.S. dollar than the actual rate as of December 31, 20112012 which was used in preparing our audited financial statements as of and for the year ended December 31, 2011,2012, our net asset value, as presented in U.S. dollars, would have been increased by $0.2$0.3 million and $1.0$1.4 million, respectively. Conversely, if the Renminbi had been 1% and 5% more valuable against the U.S. dollar as of that date, then our net asset value would have reduced by $0.2$0.3 million and $1.1$1.6 million, respectively.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China decreased by 0.7% in 2009 and increased by 3.3%, 5.4% and 5.4%2.6% in 2010, 2011 and 2011,2012, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
Item 12. Description of Securities Other thanThan Equity Securities
D. American Depositary Shares
Citibank, N.A. is the depositary of our ADSs. The depositary’s office is located at 111 Wall Street, New York, NY 10043, U.S.A. Each of our ADSs, evidenced by American depositary receipts, or ADRs, represents 100 ordinary shares, par value $0.00005 per share.
ADR Fees Payable by Investors
The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary 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 deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
| | |
Persons depositing or withdrawing shares must pay: |
| For: |
A fee not in excess of $5.00 per 100 ADSs | | •·Issuance of ADSs, including issuances resulting from a distribution of ordinary shares or rights or other property
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| | •·Cancellation or withdrawals of ADSs
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| | •·Distributions of securities other than ADSs or rights to purchase additional ADSs
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A fee not in excess of $2.00 per 100 ADSs | | •·Distributions of cash dividends or other cash distributions to holders of ADRs
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| | •·Annual depositary services, except to the extent of any cash dividend fee(s) charged
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A fee not in excess of $1.50 per ADR | | •·Transfers of ADRs
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Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or ordinary shares underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | | •·As necessary
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Any charges, fees or expenses incurred by the depositary or its agents for servicing the deposited securities | | •·As necessary
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Payments Received
For the year ended December 31, 2011,2012, the Depositary made payments on our behalf to third parties of approximately $39,521$29,103.49 (approximately $2,829$337.5 for legal expenses, $9,410$2,300 for account maintenance and $27,282$14,793.77 for proxy expenses), which is deducted from the amount of reimbursements made by the Depositary to us.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Use of Proceeds
The following “Use of Proceeds” information relates to our registration statement on Form F-1 (File No. 333-121987) for our initial public offering of 6,880,000 ADSs, which were sold by us and certain selling shareholders for an aggregate offering price of $70.5 million. This registration statement was declared effective by the SEC on February 3, 2005.Not Applicable.
We received net proceeds of approximately $59.4 million from our initial public offering (taking into account underwriting discounts of approximately $4.9 million, transaction expenses of approximately $3.8 million and payments to selling shareholders of approximately $2.4 million), all of which have been used to acquire certain businesses and fund expenses, primarily for general corporate purposes, product development, software and technology infrastructure products and other capital expenditures. None of the net proceeds were paid, directly or indirectly, to, and none of the transaction expenses included payments to, any director or officer of our company or their associates, persons owning 10% or more of our equity securities or our affiliates.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report on Form 20-F, our Chief Executive Officer and Acting Chief Financial Officer and Vice President of Finance and Controller have performed an evaluation of the effectiveness of our disclosure controls and procedures as defined and required under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon this evaluation, our Chief Executive Officer and Acting Chief Financial Officer and Vice President of Finance and Controller concluded our company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. 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 for external purposes in accordance with U.S. GAAP. 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 transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are made only in accordance with authorizations of management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, and Vice President of Finance and Controller, we conducted an assessment of the effectiveness of our internal control over financial reporting based upon criteria established by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework. Based on this assessment, management determined that our internal control over financial reporting was effective as of December 31, 2011.2012.
The effectiveness of our internal control over financial reporting as of December 31, 20112012 has been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, our independent registered public accounting firm, as stated in its report included on page F-2.
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Changes in Internal Control over Financial Reporting
In 2011, we shifted our content focus from long-form videos to short-form videos. In order to encourage more users to upload UGC to our website, we have purchased
During the licensing rights to some popular UGC, and have also started to share advertising revenues with individual users whose numbers of video uploads exceed certain thresholds.
In connection with the business process changes resulting from this advertising revenue sharing program, as well as the generation of advertising revenues through an arrangement with Shengyue, an affiliate wholly owned by Shanda Interactive, we implemented further enhancements to the design and documentation of our internal control processes in the form of comprehensive process documentation, coupled with testing of the operating effectiveness of controls, to help ensure the effectiveness of internal controls over financial reporting.
Thereyear ended December 31, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described above.reporting.
Remediation of Material Weaknesses Reported in Prior Year
Based on management’s assessment of internal control over financial reporting in the prior year, management determined that our internal control over financial reporting was not effective as of December 31, 2010 due to a lack of sufficient competent accounting personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and prepare financial statements and related disclosures under U.S. GAAP.
During the year ended December 31, 2011, our management took remediation measures which included but were not limited to the following: (a) we hired an Associate Director of Finance who is a member of the American Institute of Certified Public Accountants and a licensed CPA with appropriate knowledge and experience in U.S. GAAP; (b) we hired a Vice President of Finance and Controller who worked at PricewaterhouseCoopers Zhong Tian CPAs Limited Company and KPMG Huazhen CPAs Limited Company for a combined total of over 12 years with appropriate knowledge and experience in U.S. GAAP; (c) our Chief Financial Officer attended specific relevant training courses; (d) we provided in-depth training on U.S. GAAP to accounting and other relevant personnel; and (e) we hired an Associate Director of Internal Audit who is a Certified Internal Auditor with appropriate knowledge and experience in U.S. GAAP.
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Bruno Wu qualifies as an audit committee financial expert in accordance with the terms of Item 16A of Form 20-F. Mr. Wu satisfies the “independence” requirements of the NASDAQ Stock Market Rules and meets the criteria for “independence” under Rule 10A-3 under the Exchange Act.
Item 16B. Code of Ethics
We have adopted a Code of Business Conduct which applies to our employees, officers and non-employee directors, including our Chief Executive Officer and Acting Chief Financial Officer, Vice President of Finance and Controller, and persons performing similar functions. This code is intended to qualify as a “code of ethics” within the meaning of the applicable rules of the SEC.
The Code of Business Conduct is available on our investor relations website at http://www.mzcan.com/us/KUTV/irwebsite. To the extent required by law, any amendments to, or waivers from, any provision of the Code of Business Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be provided to any shareholder upon written request to: Legal Counsel, Building 6, Zhengtongchuangyi Centre, No. 18, Xibahe Xili, Chaoyang District, Beijing 100020,100028, People’s Republic of China.
Item 16C. Principal Accountant Fees and Services
Disclosure of Fees Charged by Independent Accountants
The following table summarizes the fees charged by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, our independent accountants, for certain services rendered to our company during 20102011 and 2011.2012.
| | | | For the year ended
December 31, | | | For the year ended
December 31, | |
| | | 2010 | | | 2011 | | | 2011 | | 2012 | |
| | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
Audit fees(1) | | | 1,027 | | | | 873 | | | 873 | | 808 | |
Audit-related fees(2) | | | — | | | | — | | | — | | — | |
Tax fees(3) | | | 30 | | | | — | | | — | | — | |
All other fees(4) | | | — | | | | 4 | | | 4 | | 57 | |
(1) | “Audit fees” means the aggregate fees incurred in each of the fiscal years listed for our calendar year audits and reviews of financial statements. |
(2) | “Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for professional services related to the audit of our financial statements that are not reported under “Audit fees” and consultation on accounting standards or transactions. |
(3) | “Tax fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered for tax compliance, tax advice and tax planning. |
(4) | “All other fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered other than those reported under “Audit fees,” “Audit-related fees,” and “Tax fees.” |
(1)“Audit fees” means the aggregate fees incurred in each of the fiscal years listed for our calendar year audits and reviews of financial statements.
(2)“Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for professional services related to the audit of our financial statements that are not reported under “Audit fees” and consultation on accounting standards or transactions.
(3)“Tax fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered for tax compliance, tax advice and tax planning.
(4)“All other fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered other than those reported under “Audit fees,” “Audit-related fees,” and “Tax fees.”
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Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and non-audit services to be provided by PricewaterhouseCoopers Zhong Tian CPAs Limited Company before it is retained for such services. The pre-approval procedures are as follows:
·Any audit or non-audit service to be provided to us by the independent accountant must be submitted to the audit committee for review and approval, with a description of the services to be performed and the fees to be charged.
·The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through written resolutions or in the minutes of meetings, as the case may be.
Item 16D. Exemptions from the Listing Standards for Audit Committees
We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On
In December 30, 2011, we approved a share repurchase program to repurchasepurchase up to an aggregate of $3.2 million of our outstanding ADSs from time to time based on market conditions. AnyThe repurchases may be effected through open market purchasestransactions or block trades, including the use of derivative instruments, and will be financed with our cash balance. As of February 29,December 31, 2012, we had not made any repurchasesrepurchased a total of approximately 0.1 million ADSs for an aggregate consideration of $0.1 million from the open market under this share repurchase program.
In July 2012, we repurchased an aggregate of 269,409,276 ordinary shares from certain former officers, Mr. Shanyou Li, Mr. Zhizhong Hao and Ms. Xingye Zeng, and Kumella Holdings Limited, a company controlled by Mr. Shanyou Li, at a price of $0.0291 per share, and repurchased 79,717 ADSs from Mr. Shanyou Li at a price of $2.91 per ADS. Our board of directors deemed it to be in the best interest and for the benefit of our company and our shareholders to enter into this share repurchase. Our board of directors had approved this transaction, taking into consideration a number of factors, including but not limited to the following: (i) the nature and timing of such share repurchase, (ii) the repurchase price of those ordinary shares and ADSs, (iii) the possible impact of such share repurchase on our ADS price, (iv) the price movements and liquidity of our ADSs and the stock market environment, (v) our financial condition, and (vi) our plans and alternative uses of our capital resources. Our board of directors had received a fairness opinion from an independent financial advisor and concluded that the repurchase price of those ordinary shares and ADSs was within a reasonable indicative range of fair value. Given the high volatility of our ADS price, which ranged from $0.90 per ADS to $3.30 per ADS based upon quoted closing prices during 2012, coupled with the thinly traded volume, it was not possible to rely solely upon past or current quoted market prices at the time to establish an appropriate indicative range of fair value. Therefore, the fairness opinion considered a range of valuation techniques, coupled with our historical and projected financial results, to establish a reasonable indicative range of fair value, which, based upon the facts and circumstances that existed at the time, supported the repurchase price as was approved by our board of directors. This repurchase was approved by our shareholders at our annual general meeting of shareholders on July 12, 2012 and consummated on July 13, 2012. All the repurchased shares were cancelled upon repurchase.
The table below sets forth the details of our purchases of our own equity securities during the year ended December 31, 2012.
| | (a) Total Number
of ADS
Purchased | | (b) Average
Price Paid per
ADS(1) | | (c) Total Number of
ADS Purchased as Part
of Publicly Announced
Plan | | (d) Maximum
Approximate U.S.
dollar Value of ADS
that May Yet Be
Purchased Under the
Plan | |
| | | | ($) | | | | ($) | |
Period | | | | | | | | | |
July 1 — July 31, 2012 | | 2,773,810 | (2) | 2.91 | | 2,773,810 | | N/A | |
September 1 — September 30, 2012 | | 11,100 | | 0.99 | | 111,00 | | 3,188,982 | |
October 1 — October 31, 2012 | | 674,00 | | 0.98 | | 674,00 | | 3,122,996 | |
November 1 —November 30, 2012 | | 365 | | 1.00 | | 365 | | 3,122,630 | |
December 1 —December 31, 2012 | | 20,720 | | 0.98 | | 20,720 | | 3,102,305 | |
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(1)Average price paid per ADS repurchased is the execution price, excluding commissions paid to brokers.
(2)Represented the repurchase of ordinary shares and ADSs from Mr. Shanyou Li, Mr. Zhizhong Hao, Ms. Xingye Zeng and Kumella Holdings Limited.
Item 16F. Changes in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Pursuant to the NASDAQ Stock Market Rules, foreign private issuers such as our company may follow home-country practice in lieu of certain NASDAQ corporate governance requirements. We have notified NASDAQ that a majority of our directors do not qualify as independent directors, we do not have a nominations committee, nor is independent director involvement required in the selection of director nominees or in the determination of executive compensation. Issuances of securities in connection with equity-based compensation of officers, directors, employees or consultants will be permitted without obtaining prior shareholder approval and we will post our annual reports to shareholders in lieu of mailing physical copies to record holders and beneficial owners of our ADSs and ordinary shares. This home-country practice of ours differs from Rules 5605(b), (d) and (e), 5635(c) and 5615(a)(3) of the NASDAQ Stock Market Rules, because there are no specific requirements under Cayman Islands law on director independence or on the establishment of a nominations committee, and neither are there any requirements on independent directors’ involvement in the selection of director nominees nor in the determination of executive compensation.
Item 16H. Mine Safety Disclosure
Not applicable.
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
The consolidated financial statements for Ku6 Media Co., Ltd. and its subsidiaries are included at the end of this annual report on Form 20-F.
Item 19. Exhibits
Exhibit Number |
| Document |
Exhibit
Number1.1
| | Document
|
| |
1.1 | | Amended and Restated Memorandum and Articles of Association of our company (incorporated herein by reference to Exhibit 3.1 to our registration statement on Form F-1 (File No. 333-121987) filed with the SEC on January 12, 2005). |
1.2 | |
1.2 | | Amendment to the Amended and Restated Memorandum and Articles of Association of our company adopted on October 16, 2009 (incorporated herein by reference to Exhibit 1.2 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on April 30, 2010). |
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Exhibit Number |
| Document |
1.3 | |
1.3 | | Amendment to the Amended and Restated Memorandum and Articles of Association of our company as adopted on June 24, 2011 (incorporated herein by reference to Exhibit 1.3 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
1.4* | | Amendment to the Amended and Restated Articles of Association of our company as adopted on July 12, 2012. |
2.12.1* | | Specimen Share Certificate. |
2.2 | |
2.2 | | Specimen American Depositary Receipt of Ku6 Media Co., Ltd. (incorporated herein by reference to Exhibit 2.1 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28,18, 2011). |
2.3 | |
2.3 | | Form of Deposit Agreement among us, Citibank N.A. and holders of the American Depositary Receipts issued thereunder (incorporated by reference to Exhibit 3(a) to our registration statement on Form F-6 (Registration No. 333-122004) filed with the SEC on January 13, 2005). |
4.1 | |
4.1 | | 2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 4.41 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.2 | |
4.2 | | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (File No. 333-121987) filed with the SEC on January 12, 2005). |
| |
4.3 | | Form of Employment Agreement. |
| |
4.4 | | English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Shanyou Li dated April 11, 2007 (incorporated herein by reference to Exhibit 4.84.3 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011)March 29, 2012). |
4.3 | |
4.5 | | English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Shanyou Li dated June 23, 2008 (incorporated herein by reference to Exhibit 4.9 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.6 | | English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Hailong Han dated April 11, 2007 (incorporated herein by reference to Exhibit 4.10 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.7 | | English translation of Exclusive Business Cooperation Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.11 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.8 | | English translation of Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd dated July 8, 2009 (incorporated herein by reference to Exhibit 4.12 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.9 | | English translation of Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated April 11, 2007 (incorporated herein by reference to Exhibit 4.13 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.10 | | English translation of Supplementary Agreement to the Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.14 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| | |
| |
4.11 | | English translation of Power of Attorney by Shanyou Li dated July 8, 2009 (incorporated herein by reference to Exhibit 4.15 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.12 | | English translation of Power of Attorney by Hailong Han dated June 23, 2008 (incorporated herein by reference to Exhibit 4.16 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.13 | | English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd dated July 8, 2009 (incorporated herein by reference to Exhibit 4.17 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.14 | | English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated April 11, 2007 (incorporated herein by reference to Exhibit 4.18 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.15 | | English translation of Supplementary Agreement to the Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.20 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.16 | | English translation of Exclusive Intellectual Property Option Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.19 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.4* | | English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Yingfeng Zhang dated August 1, 2012. |
4.174.5* | | English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Mingfeng Chen dated August 1, 2012. |
4.6* | | English translation of Amended and Restated Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Yingfeng Zhang dated August 30, 2012. |
4.7* | | English translation of Amended and Restated Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Mingfeng Chen dated August 30, 2012. |
4.8* | | English translation of Exclusive Technology Consulting and Services Framework Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd. dated August 1, 2012. |
4.9* | | English translation of Business Operation Agreement among Ku6 (Beijing) Technology Co., Ltd., Yingfeng Zhang, Mingfeng Chen and Ku6 (Beijing) Information Technology Co., Ltd. dated August 1, 2012. |
4.10* | | English translation of Power of Attorney by Mingfeng Chen dated August 1, 2012. |
4.11* | | English translation of Power of Attorney by Yingfeng Zhang dated August 1, 2012. |
4.12* | | English translation of Amended and Restated Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Yingfeng Zhang and Mingfeng Chen dated August 30, 2012. |
4.13* | | English translation of Amended and Restated Exclusive Call Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Yingfeng Zhang, Mingfeng Chen and Ku6 (Beijing) Information Technology Co., Ltd. dated August 30, 2012. |
4.14* | | English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li Yingfeng Zhang dated May 27, 2010 (incorporated herein by reference to Exhibit 4.21 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).August 1, 2012. |
4.15* | |
4.18 | | English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye ZengMingfeng Chen dated May 27, 2010 (incorporated herein by reference to August 1, 2012. |
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Table of Contents
Exhibit 4.22 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).Number |
| Document |
4.16* | | English translation of Share Pledge Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Yingfeng Zhang and Mingfeng Chen dated August 1, 2012. |
4.194.17* | | English translation of Exclusive Call Option Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Yingfeng Zhang, Mingfeng Chen and Ku6 (Beijing) Cultural Media Co., Ltd. dated August 1, 2012. |
4.18* | | English translation of Exclusive Technology Consulting And Serviceand Services Framework Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Ku6 (Beijing) Cultural Media Co., LtdLtd. dated May 27, 2010 (incorporated herein by reference to Exhibit 4.23 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).August 1, 2012. |
4.19* | |
4.20 | | English translation of Business Operation Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Cultural Media Co., Ltd., Shanyou Li and Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.24 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.21 | | English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li dated May 27, 2010 (incorporated herein by reference to Exhibit 4.27 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.22 | | English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.28 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.23 | | English translation of Power of Attorney by Shanyou Li dated May 27, 2010 (incorporated herein by reference to Exhibit 4.25 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.24 | | English translation of Power of Attorney by Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.26 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.25 | | English translation of Equity Disposition Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Shanyou Li, Xingye ZengYingfeng Zhang, Mingfeng Chen and Ku6 (Beijing) Cultural Media Co., Ltd. dated May 27, 2010 (incorporated herein by reference to Exhibit 4.29 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
August 1, 2012. | | |
4.20* | |
4.26 | | English translation of Exclusive Business Cooperation Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd., and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd.Power of Attorney by Yingfeng Zhang dated March 21, 2009 (incorporated herein by reference to Exhibit 4.38 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).August 1, 2012. |
4.21* | | English translation of Power of Attorney by Mingfeng Chen dated August 1, 2012. |
4.274.22 | | English translation of Equity Interest Pledge Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009 (incorporated herein by reference to Exhibit 4.39 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.23 | |
4.28 | | English translation of Power of Attorney by Ku6 (Beijing) Information Technology Co., Ltd dated March 21, 2009 (incorporated herein by reference to Exhibit 4.40 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
| |
4.29 | | English translation of Exclusive Option Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009 (incorporated herein by reference to Exhibit 4.37 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.24 | | English translation of Exclusive Business Cooperation Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd., and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009 (incorporated herein by reference to Exhibit 4.38 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.304.25 | | English translation of Power of Attorney by Ku6 (Beijing) Information Technology Co., Ltd dated March 21, 2009 (incorporated herein by reference to Exhibit 4.40 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.26 | | English translation of Loan Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Dongxu Wang dated December 14, 2011. |
2011 (incorporated herein by reference to Exhibit 4.30 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). | | |
Exhibit
Number4.27
| | Document
|
| |
4.31 | | English translation of Loan Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Qing Zhang dated December 14, 2011.2011 (incorporated herein by reference to Exhibit 4.31 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.28 | | English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Dongxu Wang dated December 14, 2011 (incorporated herein by reference to Exhibit 4.34 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.324.29 | | English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Qing Zhang dated December 14, 2011 (incorporated herein by reference to Exhibit 4.35 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
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Exhibit Number |
| Document |
4.30 | | English translation of Equity Disposition Agreement among Kusheng (Tianjin) Technology Co., Ltd., Dongxu Wang, Qing Zhang and Tianjin Ku6 Network Communication Technology Co., Ltd. dated December 14, 2011 (incorporated herein by reference to Exhibit 4.38 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.31 | | English translation of Exclusive Consulting and Services Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Tianjin Ku6 Network Communication Technology Co., Ltd. dated December 14, 2011.2011 (incorporated herein by reference to Exhibit 4.32 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.32 | |
4.33 | | English translation of Business Operation Agreement among Kusheng (Tianjin) Technology Co., Ltd., Tianjin Ku6 Network Communication Technology Co., Ltd., Dongxu Wang and Qing Zhang dated December 14, 2011. |
| |
4.34 | | English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Dongxu Wang dated December 14, 2011. |
| |
4.35 | | English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Qing Zhang dated December 14, 2011. |
| |
4.36 | | English translation of Power of Attorney by Dongxu Wang dated December 14, 2011. |
| |
4.37 | | English translation of Power of Attorney by Qing Zhang dated December 14, 2011. |
| |
4.38 | | English translation of Equity Disposition Agreement among Kusheng (Tianjin) Technology Co., Ltd., Dongxu Wang, Qing Zhang and Tianjin Ku6 Network Communication Technology Co., Ltd. dated December 14, 2011. |
| |
4.39 | | English translation of Equity Transfer Agreement dated May 17, 2010, between Hurray! Digital Media Technology Co., Ltd. and Huayi Brothers Media Corporation relating to the equity interest in Beijing Huayi Brothers Music Co., Ltd.2011 (incorporated herein by reference to Exhibit 4.14.33 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011)March 29, 2012). |
4.33 | |
4.40 | | Master Transaction Agreement between Shanda Interactive Entertainment Limited and Hurray! Holding Co., Ltd.,English translation of Power of Attorney by Dongxu Wang dated June 1, 2010December 14, 2011 (incorporated herein by reference to Exhibit 99.24.36 to our press releaseannual report on Form 6-K20-F (File No. 000-51116) furnishedfiled with the SEC on June 2, 2010)March 29, 2012). |
4.34 | | English translation of Power of Attorney by Qing Zhang dated December 14, 2011 (incorporated herein by reference to Exhibit 4.37 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.414.35 | | Share PurchaseRedemption Agreement between Ku6 Media Co., Ltd. and Shanda Media Group Limited dated April 1,September 30, 2011 (incorporated herein by reference to Exhibit 4.43 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011)March 29, 2012). |
4.36 † | |
4.42 | | Senior Convertible Bond PurchaseEnglish Translation of Advertising Agency Agreement between Ku6 MediaShanghai Shengyue Advertising Co., Ltd. and Shanda Media Group LimitedKu6 (Beijing) Information Technology Co., Ltd. dated April 1, 2011 (incorporated herein by reference to Exhibit 4.44 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011)March 29, 2012). |
| |
4.43 | | Redemption Agreement between Ku6 Media Co., Ltd. and Shanda Media Group Limited dated September 30, 2011. |
| | |
Exhibit
Number4.37*
| | Document
|
| |
4.44* | | English Translation of Ku6Amended and Restated Advertising Agency Agreement dated April 1, 2011 between Shanghai Shengyue Advertising Co., Ltd. and Tianjin Ku6 (Beijing) InformationNetwork Communication Technology Co., Ltd. dated January 1, 2013 |
4.38 | |
4.45 | | English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated December 27, 2010 (incorporated herein by reference to Exhibit 4.6 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.39* | | Supplemental Agreement to the Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated August 31, 2012. |
4.464.40 | | English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated January 25, 2011 (incorporated herein by reference to Exhibit 4.7 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.41* | | Loan Renewal Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated April 10, 2012. |
4.474.42 | | English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated June 8, 2011 (incorporated herein by reference to Exhibit 4.49 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.43* | | Loan Renewal Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated June 1, 2012. |
4.484.44 | | English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated February 10, 2011 (incorporated herein by reference to Exhibit 4.5 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
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Exhibit Number |
| Document |
4.45 | |
4.49 | | English Translation of Loan Renewal Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated August 14, 2011.2011 (incorporated herein by reference to Exhibit 4.49 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.46 | |
4.50 | | English Translation of Loan Renewal Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated March 6, 2012.2012 (incorporated herein by reference to Exhibit 4.50 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on March 29, 2012). |
4.47* | | English Translation of Loan Renewal Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated August 11, 2012. |
4.514.48 | | English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Co., Ltd. dated June 16, 2011 (incorporated herein by reference to Exhibit 4.48 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011). |
4.49* | | Loan Agreement between Ku6 Media Co., Ltd. and Shanda Capital Limited dated March 26, 2012. |
8.14.50* | | Share Repurchase Agreement among Ku6 Media Co., Ltd., Kumella Holdings Limited, Shanyou Li, Xingye Zeng and Zhizhong Hao dated June 20, 2012. |
8.1* | | List of Significant Subsidiaries and Affiliates. |
11.1 | |
11.1 | | Code of Business Conduct (incorporated by reference to Exhibit 11.1 of our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 15, 2006). |
12.1* | |
12.1 | | Certification of Chief Executive Officer Required by Rule 13a-14(a). |
12.2* | |
12.2 | | Certification of Acting Chief Financial Officer Required by Rule 13a-14(a). |
13.1* | |
12.3 | | Certification of Vice President of Finance and Controller Required by Rule 13a-14(a). |
| |
13.1 | | Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
13.2* | |
13.2 | | Certification of Acting Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
15.1* | |
15.1 | | Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company, Independent Registered Public Accounting Firm. |
101.INS*‡ | | XBRL Instance Document. |
101.SCH*‡ | | XBRL Taxonomy Extension Schema Document. |
101.CAL*‡ | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF*‡ | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB*‡ | | XBRL Taxonomy Extension Labels Linkbase Document. |
101.PRE*‡ | | XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Confidential treatment has been requested for portions of this exhibit. |
*Filed or furnished herewith
†Confidential treatment has been requested for portions of this exhibit.
‡This Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
98
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | | | |
KU6 MEDIA CO., LTD. |
| |
By: | By: | /s/ Yu Shi |
| | Name: | | Yu Shi |
| | Title: | | Chief Executive Officer |
Date: March 29, 2012
April 19, 201399
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
INDEX TO FINANCIAL STATEMENTS
| | | | Page |
| | Page | |
|
|
Report of Independent Registered Public Accounting Firm | | | F-2 | |
| |
Consolidated Balance Sheets as of December 31, 20102011 and 20112012 | | | F-3 | |
| |
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2009, 2010, 2011 and 20112012 | | | F-4 | |
| |
Consolidated Statements of Changes in Equity for the years ended December 31, 2009, 2010, 2011 and 20112012 | | | F-6 | |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2010, 2011 and 20112012 | | | F-7 | |
| |
Notes to the Consolidated Financial Statements | | | F-9 | F-8 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.):
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Ku6 Media Co., Ltd. (the “Company”) and its subsidiaries at December 31, 20112012 and 2010,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20112012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2012, based on criteria established in Internal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting.Reporting appearing under Item 15 of Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. 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 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 audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, the People’s Republic of China
March 29, 2012
April 19, 2013F-2
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED BALANCE SHEETS
| | | | Note | | December 31, 2010 | | December 31, 2011 | | | Note | | December 31, 2011 | | December 31, 2012 | |
| | | | (in U.S. dollars, except number of shares) | | | | | (in U.S. dollars, except number of shares) | |
Assets | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | 2(8) | | | 27,294,819 | | | | 26,750,427 | | | 2(8) | | 26,750,427 | | 13,070,987 | |
Restricted cash | | 2(9), 11 | | | — | | | | 3,600,000 | | | 2(9), 11 | | 3,600,000 | | — | |
Accounts receivable, net of allowance for doubtful accounts | | 18(2) | | | 8,135,195 | | | | 777,393 | | | 19(2) | | 777,393 | | 67,086 | |
Accounts receivable due from related parties | | 13 | | | 325,757 | | | | 2,740,179 | | | 13 | | 2,740,179 | | 4,399,037 | |
Prepaid expenses and other current assets | | 5 | | | 3,487,327 | | | | 884,344 | | | 5 | | 884,344 | | 523,381 | |
Other receivables due from related parties | | 13 | | | 5,532,248 | | | | 19,539,269 | | | 13 | | 19,539,269 | | 6,096,783 | |
Inventories | | | | | 31,038 | | | | — | | |
| | | | | | | | | |
Total current assets | | | | | 44,806,384 | | | | 54,291,612 | | | | | 54,291,612 | | 24,157,274 | |
| | | | | | | | | |
Property and equipment, net | | 6 | | | 8,003,474 | | | | 3,592,745 | | | 6 | | 3,592,745 | | 2,918,112 | |
Acquired intangible assets, net | | 7 | | | 27,264,283 | | | | 24,111,111 | | | 7 | | 24,111,111 | | 22,552,124 | |
Investment in equity affiliate | | 8 | | | — | | | | 255,281 | | |
Investment in affiliates | | | 8 | | 255,281 | | — | |
Goodwill | | 9 | | | 6,896,340 | | | | 6,232,770 | | | 9 | | 6,232,770 | | 6,232,770 | |
Deposits and other non-current assets | | | | | — | | | | 306,741 | | | | | 306,741 | | 309,882 | |
| | | | | | | | | |
Total assets | | | | | 86,970,481 | | | | 88,790,260 | | | | | 88,790,260 | | 56,170,162 | |
| | | | | | | | | |
| | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | |
Short-term borrowings | | 11 | | | — | | | | 3,177,680 | | | 11 | | 3,177,680 | | — | |
Accounts payable | | | | | 15,502,901 | | | | 6,364,753 | | | | | 6,364,763 | | 4,644,576 | |
Accounts payable due to related parties | | | | | 1,664,570 | | | | 10 | | |
Accrued expenses and other current liabilities | | 12 | | | 11,462,241 | | | | 10,016,650 | | | 12 | | 10,016,650 | | 9,353,484 | |
Other payables due to related parties | | 13 | | | 7,776,698 | | | | 13,552,080 | | | 13 | | 13,552,080 | | 3,779,497 | |
| | | | | | | | | |
Total current liabilities | | | | | 36,406,410 | | | | 33,111,173 | | | | | 33,111,173 | | 17,777,557 | |
| | | | | | | | | |
Non-current deferred tax liabilities | | 2(26), 14 | | | 4,925,538 | | | | 4,826,059 | | | 2(25), 14 | | 4,826,059 | | 4,826,059 | |
| | | | | | | | | |
Total liabilities | | | | | 41,331,948 | | | | 37,937,232 | | | | | 37,937,232 | | 22,603,616 | |
| | | | | | | | | | | | | | | |
Commitments and contingencies | | 20 | | | | | | 21 | | | | | |
| | | | | | | | | |
Equity: | | | | | | | | | | | | | |
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2010 and 2011, respectively) | | | | | 174,008 | | | | 250,939 | | |
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 5,019,786,036 and 4,732,446,560 shares issued and outstanding as of December 31, 2011 and 2012, respectively) | | | | | 250,939 | | 236,575 | |
Additional paid-in capital | | | | | 130,100,153 | | | | 184,874,259 | | | | | 184,874,259 | | 177,182,895 | |
Accumulated deficits | | | | | (83,105,464 | ) | | | (132,449,371 | ) | |
Accumulated deficit | | | | | (132,449,371 | ) | (141,940,509 | ) |
Accumulated other comprehensive loss | | | | | (1,422,414 | ) | | | (1,822,799 | ) | | | | (1,822,799 | ) | (1,912,415 | ) |
Total Ku6 Media Co., Ltd. shareholders’ equity | | | | | 50,853,028 | | 33,566,546 | |
| | | | | | | | | | | | | | | |
Total Ku6 Media Co., Ltd. shareholders’ equity | | | | | 45,746,283 | | | | 50,853,028 | | |
Non-controlling interests | | | | | (107,750 | ) | | | — | | | | | — | | — | |
| | | | | | | | | |
Total equity | | | | | 45,638,533 | | | | 50,853,028 | | | | | 50,853,028 | | 33,566,546 | |
| | | | | | | | | |
Total liabilities and shareholders’ equity | | | | | 86,970,481 | | | | 88,790,260 | | |
| | | | | | | | | |
Total liabilities and equity | | | | | 88,790,260 | | 56,170,162 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | | | Note | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | |
| | | | (Adjusted) (Note 2(1)) | | | | | | | Note | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | | (in U.S. dollars, except number of shares) | | | | | (in U.S. dollars, except number of shares) | |
Net revenues: | | 2(19) | | | | | | | | 2(18) | | | | | | | |
Advertising | | | | | | | | | |
Third parties | | | | | 757,723 | | | | 15,853,948 | | | | 11,145,833 | | | | | 15,853,948 | | 11,145,833 | | 1,632,876 | |
Related parties | | | | | 279,341 | | | | 701,732 | | | | 8,076,155 | | | | | 701,732 | | 8,076,155 | | 12,481,927 | |
| | | | | | | | | | | | |
Total net revenues | | | | | 1,037,064 | | | | 16,555,680 | | | | 19,221,988 | | | | | 16,555,680 | | 19,221,988 | | 14,114,803 | |
| | | | | | | | | | | | |
Cost of revenues: | | 2(15) | | | | | | | | 2(18) | | | | | | | |
Advertising | | | | | | | | | |
Third parties | | | | | (556,639 | ) | | | (40,082,758 | ) | | | (30,500,596 | ) | | | | (40,082,758 | ) | (30,500,596 | ) | (14,602,208 | ) |
Related parties | | | | | — | | | | (376,302 | ) | | | (379,465 | ) | | | | (376,302 | ) | (379,465 | ) | — | |
| | | | | | | | | | | | |
Total cost of revenues | | | | | (556,639 | ) | | | (40,459,060 | ) | | | (30,880,061 | ) | | | | (40,459,060 | ) | (30,880,061 | ) | (14,602,208 | ) |
| | | | | | | | | | | | |
Gross profit/(loss) | | | | | 480,425 | | | | (23,903,380 | ) | | | (11,658,073 | ) | |
| | | | | | | | | | | | |
Gross loss | | | | | (23,903,380 | ) | (11,658,073 | ) | (487,405 | ) |
Operating expenses: | | | | | | | | | | | | | | | | | |
Product development | | 2(20) | | | — | | | | — | | | | (2,692,884 | ) | | 2(19) | | — | | (2,692,884 | ) | (1,972,160 | ) |
Selling and marketing | | 2(22) | | | (665,131 | ) | | | (16,195,539 | ) | | | (11,817,758 | ) | | 2(21) | | (16,195,539 | ) | (11,817,758 | ) | (1,688,740 | ) |
General and administrative | | 2(21) | | | (6,465,080 | ) | | | (13,507,701 | ) | | | (23,401,769 | ) | | 2(20) | | (13,507,701 | ) | (23,401,769 | ) | (6,819,998 | ) |
| | | | | | | | | | | | |
Total operating expenses | | | | | (7,130,211 | ) | | | (29,703,240 | ) | | | (37,912,411 | ) | | | | (29,703,240 | ) | (37,912,411 | ) | (10,480,898 | ) |
| | | | | | | | | | | | |
Operating loss from continuing operations | | | | | (6,649,786 | ) | | | (53,606,620 | ) | | | (49,570,484 | ) | | | | (53,606,620 | ) | (49,570,484 | ) | (10,968,303 | ) |
| | | | | | | | | | | | |
Interest income | | | | | 356,167 | | | | 57,464 | | | | 169,854 | | |
Interest expense | | 13 | | | — | | | | (31,134 | ) | | | (1,119,429 | ) | |
Interest income: | | | | | | | | | | |
Third parties | | | | | 57,464 | | 61,835 | | 362,963 | |
Related parties | | | | | — | | 108,019 | | 256,753 | |
Total interest income | | | | | 57,464 | | 169,854 | | 619,716 | |
Interest expenses: | | | | | | | | | | |
Third parties | | | | | (31,134 | ) | (430,477 | ) | (170,493 | ) |
Related parties | | | | | — | | (688,952 | ) | (448,011 | ) |
Total interst expenses | | | | | (31,134 | ) | (1,119,429 | ) | (618,504 | ) |
Other income, net | | 2(32) | | | 1,783 | | | | 3 | | | | 1,294,135 | | | 2(31) | | 3 | | 1,294,135 | | 1,728,538 | |
| | | | | | | | | | | | |
Loss before income tax benefit from continuing operations | | | | | (6,291,836 | ) | | | (53,580,287 | ) | | | (49,225,924 | ) | |
Income tax benefit | | 2(26), 14 | | | 13,721 | | | | 41,172 | | | | 99,479 | | |
Equity in loss of affiliated company, net of tax | | 8 | | | — | | | | — | | | | (263,313 | ) | |
| | | | | | | | | | | | |
Loss before income tax benefits from continuing operations | | | | | (53,580,287 | ) | (49,225,924 | ) | (9,238,553 | ) |
Income tax benefits | | | 2(25), 14 | | 41,172 | | 99,479 | | — | |
Equity in losses of affiliated company, net of tax | | | 8 | | — | | (263,313 | ) | (252,585 | ) |
Loss from continuing operations, net of tax | | | | | (6,278,115 | ) | | | (53,539,115 | ) | | | (49,389,758 | ) | | | | (53,539,115 | ) | (49,389,758 | ) | (9,491,138 | ) |
| | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | |
Loss from operations of discontinued operations, net of tax | | 4 | | | (21,778,174 | ) | | | (3,382,438 | ) | | | — | | |
Gain from disposal of discontinued operations, net of tax | | | | | 221,899 | | | | 4,486,786 | | | | — | | |
| | | | | | | | | | | | |
(Loss) income from discontinued operations, net of tax | | | | | (21,556,275 | ) | | | 1,104,348 | | | | — | | |
Loss from operations of discontinued operations, net of tax benefits of $25,584 | | | 4 | | (3,382,438 | ) | — | | — | |
Gain from disposal of discontinued operations, net of tax of nil | | | 4 | | 4,486,786 | | — | | — | |
Income from discontinued operations, net of tax | | | | | 1,104,348 | | — | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | (27,834,390 | ) | | | (52,434,767 | ) | | | (49,389,758 | ) | | | | (52,434,767 | ) | (49,389,758 | ) | (9,491,138 | ) |
Less: Net loss attributable to non-controlling interests from continuing operations | | | | | 256,654 | | | | 680,837 | | | | 45,851 | | |
Less: Net loss attributable to non-controlling interests and redeemable non-controlling interests from discontinued operations | | | | | 4,182,875 | | | | 243,666 | | | | — | | |
Less: Net loss attributable to the non-controlling interests from continuing operations | | | | | 680,837 | | 45,851 | | — | |
Less: Net loss attributable to the non-controlling interests from discontinued operations | | | | | 243,666 | | — | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. | | | | | (23,394,861 | ) | | | (51,510,264 | ) | | | (49,343,907 | ) | | | | (51,510,264 | ) | (49,343,907 | ) | (9,491,138 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | | | (6,021,461 | ) | | | (52,858,278 | ) | | | (49,343,907 | ) | | | | (52,858,278 | ) | (49,343,907 | ) | (9,491,138 | ) |
(Loss) income from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | | | (17,373,400 | ) | | | 1,348,014 | | | | — | | |
| | | | | | | | | | | | |
Income from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd. | | | | | 1,348,014 | | — | | — | |
Net loss attributable to Ku6 Media Co., Ltd. | | | | | (23,394,861 | ) | | | (51,510,264 | ) | | | (49,343,907 | ) | | | | (51,510,264 | ) | (49,343,907 | ) | (9,491,138 | ) |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | | | Note (cont’d) | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | |
| | | | | (Adjusted) (Note 2(1)) | | | | | | | Note
(cont’d) | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31,2012 | |
| | | | | (in U.S. dollars, except number of shares) | | | | | (in U.S. dollars, except number of shares) | |
Net loss | | | | | (27,834,390 | ) | | | (52,434,767 | ) | | | (49,389,758 | ) | | | | (52,434,767 | ) | (49,389,758 | ) | (9,491,138 | ) |
Other comprehensive loss: | | | | | | | | | |
Other comprehensive loss, net of tax: | | | | | | | | | | |
Currency translation adjustments of subsidiaries | | | | | (36,057 | ) | | | (809,654 | ) | | | (624,595 | ) | | | | (809,654 | ) | (624,595 | ) | (89,616 | ) |
| | | | | | | | | | | | |
Comprehensive loss | | | | | (27,870,447 | ) | | | (53,244,421 | ) | | | (50,014,353 | ) | | | | (53,244,421 | ) | (50,014,353 | ) | (9,580,754 | ) |
Comprehensive loss attributable to non-controlling interests and redeemable non-controlling interests | | | | | 4,443,959 | | | | 921,701 | | | | 49,390 | | |
| | | | | | | | | | | | |
Comprehensive loss attributable to non-controlling interests | | | | | 921,701 | | 49,390 | | — | |
Comprehensive loss attributable to Ku6 Media Co., Ltd. | | | | | (23,426,488 | ) | | | (52,322,720 | ) | | | (49,964,963 | ) | | | | (52,322,720 | ) | (49,964,963 | ) | (9,580,754 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss per share-basic and diluted | | 17 | | | | | | | | 18 | | | | | | | |
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (0.00 | ) | | | (0.02 | ) | | | (0.01 | ) | | | | (0.02 | ) | (0.01 | ) | (0.00 | ) |
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (0.01 | ) | | | 0.00 | | | | — | | |
| | | | | | | | | | | | |
Income from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | 0.00 | | — | | — | |
Net loss attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (0.01 | ) | | | (0.02 | ) | | | (0.01 | ) | | | | (0.02 | ) | (0.01 | ) | (0.00 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares used in per share calculation-basic and diluted | | | | | 2,196,291,947 | | | | 3,096,421,097 | | | | 4,265,277,638 | | | | | 3,096,421,097 | | 4,265,277,638 | | 4,901,279,176 | |
| | | | | | | | | | | | | | | | | | | | |
Loss per ADS-basic and diluted (1ADS = 100 shares): | | 17 | | | | | | | | 18 | | | | | | | |
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (0.27 | ) | | | (1.71 | ) | | | (1.16 | ) | | | | (1.71 | ) | (1.16 | ) | (0.19 | ) |
(Loss) income from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (0.79 | ) | | | 0.04 | | | | — | | |
| | | | | | | | | | | | |
Income from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders | | | | | 0.04 | | — | | — | |
Net loss attributable to Ku6 Media Co., Ltd. common shareholders | | | | | (1.06 | ) | | | (1.67 | ) | | | (1.16 | ) | | | | (1.67 | ) | (1.16 | ) | (0.19 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted average ADS used in per ADS calculation-basic and diluted | | | | | 21,962,919 | | | | 30,964,211 | | | | 42,652,776 | | | | | 30,964,211 | | 42,652,776 | | 49,012,792 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | xx | | | | xx | | | | xx | | | | xx | | | | xx | | | | xx | | | | xx | | | | xx | | | | xx | | | Ordinary shares
($0.00005 par value) | | Additional
paid-in | | Statutory | | Accumulated | | Accumulated
other
comprehensive | | Total Ku6 Media
Co., Ltd.
shareholders’ | | Non-controlling | | Total | |
| | | Ordinary shares
($0.00005 par value) | | Additional
paid-in
capital | | | Statutory
reserves | | | Accumulated
deficits | | | Accumulated
other
comprehensive
income / (loss) | | | Total Ku6 Media
Co., Ltd.
shareholders’
equity | | | Non-controlling
interests | | | Total
equity | | | Shares | | Amount | | capital | | reserves | | deficits | | income/(loss) | | equity | | interests | | equity | |
| | | Shares | | Amount | | | (in U.S. dollars, except shares data) | |
| | | (in U.S. dollars, except shares data) | | |
Balance as of December 31, 2008 | | | 2,193,343,740 | | | | 109,617 | | | | 75,012,693 | | | | 1,791,324 | | | | (9,991,663 | ) | | | 9,987,314 | | | | 76,909,285 | | | | 4,783,209 | | | | 81,692,494 | | |
Stock-based compensation expense | | | 6,500,300 | | | | 324 | | | | 168,986 | | | | — | | | | — | | | | — | | | | 169,310 | | | | — | | | | 169,310 | | |
Exercise of stock options | | | 350,000 | | | | 18 | | | | 8,732 | | | | — | | | | — | | | | — | | | | 8,750 | | | | — | | | | 8,750 | | |
Online audio business (“Yisheng”) contributed by Shanda Interactive Entertainment Limited (“Shanda”) | | | — | | | | — | | | | 1,415,547 | | | | — | | | | — | | | | — | | | | 1,415,547 | | | | (43,533 | ) | | | 1,372,014 | | |
Capital contribution to Yisheng by non-controlling shareholders | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 362,773 | | | | 362,773 | | |
Cumulative currency translation adjustments of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | (31,627 | ) | | | (31,627 | ) | | | (4,430 | ) | | | (36,057 | ) | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (23,394,861 | ) | | | — | | | | (23,394,861 | ) | | | (3,240,927 | ) | | | (26,635,788 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2009 (Adjusted (Note 2(1))) | | | 2,200,194,040 | | | | 109,959 | | | | 76,605,958 | | | | 1,791,324 | | | | (33,386,524 | ) | | | 9,955,687 | | | | 55,076,404 | | | | 1,857,092 | | | | 56,933,496 | | | 2,200,194,040 | | 109,959 | | 76,605,958 | | 1,791,324 | | (33,386,524 | ) | 9,955,687 | | 55,076,404 | | 1,857,092 | | 56,933,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | | | 3,000,100 | | | | 150 | | | | 607,014 | | | | — | | | | — | | | | — | | | | 607,164 | | | | — | | | | 607,164 | | | 3,000,100 | | 150 | | 607,014 | | — | | — | | — | | 607,164 | | — | | 607,164 | |
Exercise of stock options | | | 450,000 | | | | 22 | | | | 20,328 | | | | — | | | | — | | | | — | | | | 20,350 | | | | — | | | | 20,350 | | | 450,000 | | 22 | | 20,328 | | — | | — | | — | | 20,350 | | — | | 20,350 | |
Issuance of ordinary shares related to acquisitions of Ku6 Holding Limited | | | 723,684,204 | | | | 36,185 | | | | 28,838,816 | | | | — | | | | — | | | | — | | | | 28,875,001 | | | | — | | | | 28,875,001 | | | 723,684,204 | | 36,185 | | 28,838,816 | | — | | — | | — | | 28,875,001 | | — | | 28,875,001 | |
Disposal of Huayi Brothers Music Co., Ltd. | | | — | | | | — | | | | — | | | | (74,246 | ) | | | 74,246 | | | | (221,315 | ) | | | (221,315 | ) | | | (209,736 | ) | | | (431,051 | ) | | — | | — | | — | | (74,246 | ) | 74,246 | | (221,315 | ) | (221,315 | ) | (209,736 | ) | (431,051 | ) |
Contribution by Shanda related to Yisheng | | | — | | | | — | | | | 663,570 | | | | — | | | | — | | | | — | | | | 663,570 | | | | — | | | | 663,570 | | | — | | — | | 663,570 | | — | | — | | — | | 663,570 | | — | | 663,570 | |
Issuance of ordinary shares for Yisheng to Shanda | | | 415,384,615 | | | | 20,769 | | | | 12,440,769 | | | | — | | | | — | | | | — | | | | 12,461,538 | | | | — | | | | 12,461,538 | | | 415,384,615 | | 20,769 | | 12,440,769 | | — | | — | | — | | 12,461,538 | | — | | 12,461,538 | |
Deemed distribution to Shanda related to Yisheng | | | — | | | | — | | | | (12,461,538 | ) | | | — | | | | — | | | | — | | | | (12,461,538 | ) | | | — | | | | (12,461,538 | ) | | — | | — | | (12,461,538 | ) | — | | — | | — | | (12,461,538 | ) | — | | (12,461,538 | ) |
Purchase of additional equity interests of Yisheng from non-controlling shareholders | | | 138,461,539 | | | | 6,923 | | | | (520,181 | ) | | | — | | | | — | | | | — | | | | (513,258 | ) | | | 513,258 | | | | — | | |
Purchase of additional equity interests of Yisheng from non-controlling shareholders | | | 138,461,539 | | 6,923 | | (520,181 | ) | — | | — | | — | | (513,258 | ) | 513,258 | | — | |
Disposal of WVAS and recorded music businesses to Shanda | | | — | | | | — | | | | 23,905,417 | | | | (1,717,078 | ) | | | 1,717,078 | | | | (10,344,330 | ) | | | 13,561,087 | | | | (1,464,169 | ) | | | 12,096,918 | | | — | | — | | 23,905,417 | | (1,717,078 | ) | 1,717,078 | | (10,344,330 | ) | 13,561,087 | | (1,464,169 | ) | 12,096,918 | |
Cumulative currency translation adjustments of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | (812,456 | ) | | | (812,456 | ) | | | 2,802 | | | | (809,654 | ) | |
Currency translation adjustments of subsidiaries | | | — | | — | | — | | — | | — | | (812,456 | ) | (812,456 | ) | 2,802 | | (809,654 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (51,510,264 | ) | | | — | | | | (51,510,264 | ) | | | (806,997 | ) | | | (52,317,261 | ) | | — | | — | | — | | — | | (51,510,264 | ) | — | | (51,510,264 | ) | (806,997 | ) | (52,317,261 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2010 | | | 3,481,174,498 | | | | 174,008 | | | | 130,100,153 | | | | — | | | | (83,105,464 | ) | | | (1,422,414 | ) | | | 45,746,283 | | | | (107,750 | ) | | | 45,638,533 | | | 3,481,174,498 | | 174,008 | | 130,100,153 | | — | | (83,105,464 | ) | (1,422,414 | ) | 45,746,283 | | (107,750 | ) | 45,638,533 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of ordinary shares to Shanda | | | 1,538,461,538 | | | | 76,924 | | | | 49,923,076 | | | | — | | | | — | | | | — | | | | 50,000,000 | | | | — | | | | 50,000,000 | | | 1,538,461,538 | | 76,924 | | 49,923,076 | | — | | — | | — | | 50,000,000 | | — | | 50,000,000 | |
Exercise of stock options | | | 150,000 | | | | 7 | | | | 3,743 | | | | — | | | | — | | | | — | | | | 3,750 | | | | — | | | | 3,750 | | | 150,000 | | 7 | | 3,743 | | — | | — | | — | | 3,750 | | — | | 3,750 | |
Stock-based compensation expense (Note 2(1)(a), 15) | | | — | | | | — | | | | 1,754,170 | | | | — | | | | — | | | | — | | | | 1,754,170 | | | | — | | | | 1,754,170 | | |
Stock-based compensation expense (Note 2(1)(a), 16) | | | — | | — | | 1,754,170 | | — | | — | | — | | 1,754,170 | | — | | 1,754,170 | |
Disposition of equity interests in Yisheng (Note 2(1)(a)) | | | — | | | | — | | | | 1,373,190 | | | | — | | | | — | | | | 220,671 | | | | 1,593,861 | | | | 157,140 | | | | 1,751,001 | | | — | | — | | 1,373,190 | | — | | — | | 220,671 | | 1,593,861 | | 157,140 | | 1,751,001 | |
Liabilities waived by Shanda (Note 13) | | | — | | | | — | | | | 1,719,927 | | | | — | | | | — | | | | — | | | | 1,719,927 | | | | — | | | | 1,719,927 | | |
Liabilities waived by Shanda | | | — | | — | | 1,719,927 | | — | | — | | — | | 1,719,927 | | — | | 1,719,927 | |
Currency translation adjustments of subsidiaries | | | — | | | | — | | | | — | | | | — | | | | — | | | | (621,056 | ) | | | (621,056 | ) | | | (3,539 | ) | | | (624,595 | ) | | — | | — | | — | | — | | — | | (621,056 | ) | (621,056 | ) | (3,539 | ) | (624,595 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (49,343,907 | ) | | | — | | | | (49,343,907 | ) | | | (45,851 | ) | | | (49,389,758 | ) | | — | | — | | — | | — | | (49,343,907 | ) | — | | (49,343,907 | ) | (45,851 | ) | (49,389,758 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2011 | | | 5,019,786,036 | | | | 250,939 | | | | 184,874,259 | | | | — | | | | (132,449,371 | ) | | | (1,822,799 | ) | | | 50,853,028 | | | | — | | | | 50,853,028 | | | 5,019,786,036 | | 250,939 | | 184,874,259 | | — | | (132,449,371 | ) | (1,822,799 | ) | 50,853,028 | | — | | 50,853,028 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share repurchase (Note 15) | | | (287,339,476 | ) | (14,364 | ) | (8,155,117 | ) | — | | — | | — | | (8,169,481 | ) | — | | (8,169,481 | ) |
Stock-based compensation expense (Note 16) | | | — | | — | | 463,753 | | — | | — | | — | | 463,753 | | — | | 463,753 | |
Currency translation adjustments of subsidiaries | | | — | | — | | — | | — | | — | | (89,616 | ) | (89,616 | ) | — | | (89,616 | ) |
Net loss | | | — | | — | | — | | — | | (9,491,138 | ) | — | | (9,491,138 | ) | — | | (9,491,138 | ) |
Balance as of December 31, 2012 | | | 4,732,446,560 | | 236,575 | | 177,182,895 | | — | | (141,940,509 | ) | (1,912,415 | ) | 33,566,546 | | — | | 33,566,546 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | |
| | | (Adjusted) (Note 2(1)) | | | | | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | | | (in U.S. dollars) | | | | | | | (in U.S. dollars) | | | |
Net loss | | | (27,834,390 | ) | | | (52,434,767 | ) | | | (49,389,758 | ) | | (52,434,767 | ) | (49,389,758 | ) | (9,491,138 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | |
Share-based compensation | | | 169,310 | | | | 607,164 | | | | 1,231,919 | | | 607,164 | | 1,231,919 | | 463,753 | |
Share-based compensation cost in relation to disposition of Yisheng | | | — | | | | — | | | | 522,251 | | | — | | 522,251 | | — | |
Share based compensation cost in relation to acquisition of Ku6 | | | — | | | | 1,284,766 | | | | — | | |
Share based compensation cost in relation to acquisition of Ku6 Holding Limited | | | 1,284,766 | | — | | — | |
Depreciation and amortization | | | 1,798,396 | | | | 5,266,212 | | | | 5,197,444 | | | 5,266,212 | | 5,197,444 | | 3,500,748 | |
Amortization and write-down of licensed video copyrights | | | — | | | | 15,751,814 | | | | 3,721,696 | | | 15,751,814 | | 3,721,696 | | — | |
Impairment for goodwill | | | 3,592,933 | | | | — | | | | — | | |
Impairment for investment in affiliated company | | | 209,848 | | | | — | | | | — | | |
Impairment for intangible assets | | | 3,542,071 | | | | — | | | | 1,365,376 | | | — | | 1,365,376 | | — | |
Bad debt provision | | | 3,819,894 | | | | 1,474,568 | | | | 3,459,826 | | |
Bad debt provision (reversal) | | | 1,474,568 | | 3,459,826 | | (2,255,301 | ) |
Inventory provision | | | 238,370 | | | | 84,481 | | | | — | | | 84,481 | | — | | — | |
Exchange loss (gains) | | | 17,198 | | | | (898,682 | ) | | | 292,296 | | | (898,682 | ) | 292,296 | | (224,332 | ) |
Equity in losses of affiliated companies | | | 704,224 | | | | — | | | | 263,313 | | | — | | 263,313 | | 252,585 | |
Gain from disposal of subsidiary | | | (221,899 | ) | | | (4,486,786 | ) | | | — | | | (4,486,786 | ) | — | | — | |
Losses (gain) on disposal of property and equipment | | | (5,843 | ) | | | 196,969 | | | | 2,977,098 | | |
Change in fair value of contingent consideration | | | (352,217 | ) | | | — | | | | — | | |
Losses on disposal of property and equipment | | | 196,969 | | 2,977,098 | | 27,719 | |
Changes in assets and liabilities, net of acquisitions and dispositions: | | | | | | | | | | | | | |
Accounts receivable | | | 5,883,070 | | | | (8,678,575 | ) | | | 3,815,524 | | | (8,678,575 | ) | 3,815,524 | | 2,954,041 | |
Prepaid expenses and other current assets | | | 2,737,066 | | | | (796,237 | ) | | | (1,519,380 | ) | | (796,237 | ) | (1,519,380 | ) | 360,963 | |
Amount due from related parties | | | 732,563 | | | | (2,836,461 | ) | | | (3,913,409 | ) | | (2,836,461 | ) | (3,913,409 | ) | (1,658,858 | ) |
Deposits and other non-current assets | | | 439,859 | | | | (414 | ) | | | (306,741 | ) | | (414 | ) | (306,741 | ) | — | |
Inventories | | | (130,333 | ) | | | (94,101 | ) | | | 31,038 | | | (94,101 | ) | 31,038 | | — | |
Deferred taxes | | | (530,190 | ) | | | (72,985 | ) | | | (99,479 | ) | | (72,985 | ) | (99,479 | ) | — | |
Accounts payable | | | 579,864 | | | | 8,753,566 | | | | (7,906,294 | ) | | 8,753,566 | | (7,906,294 | ) | (1,485,189 | ) |
Notes payable | | | 22,901 | | | | (54,218 | ) | | | — | | | (54,218 | ) | — | | — | |
Accrued expenses and other current liabilities | | | 2,283,336 | | | | 5,976,116 | | | | 621,237 | | | 5,976,116 | | 621,237 | | (663,166 | ) |
Amount due to related parties | | | (78,307 | ) | | | 1,408,305 | | | | 461,247 | | | 1,408,305 | | 461,247 | | 132,037 | |
Income tax payable | | | 290,670 | | | | (20,633 | ) | | | — | | | (20,633 | ) | — | | — | |
| | | | | | | | | | |
Net cash used in operating activities | | | (2,091,606 | ) | | | (29,569,898 | ) | | | (39,174,796 | ) | | (29,569,898 | ) | (39,174,796 | ) | (8,086,138 | ) |
| | | | | | | | | | |
Investing activities: | | | | | | | | | | | | | |
(Increase)/decrease of short-term investments | | | (10,000,000 | ) | | | 10,000,000 | | | | — | | |
Decrease of short-term investments | | | 10,000,000 | | — | | — | |
Purchases of property and equipment | | | (867,061 | ) | | | (6,586,819 | ) | | | (2,362,785 | ) | | (6,586,819 | ) | (2,362,785 | ) | (1,277,455 | ) |
Proceeds from disposal of property and equipment | | | 80,498 | | | | — | | | | — | | | — | | — | | 24,054 | |
Purchase of intangible assets | | | (66,258 | ) | | | — | | | | — | | |
Payment for licensed video copyright | | | — | | | | (15,046,257 | ) | | | (5,529,949 | ) | | (15,046,257 | ) | (5,529,949 | ) | (236,360 | ) |
Proceeds (cash-out) from disposal of subsidiaries, net of cash disposed (nil, $669,705 and $111,597 for the years ended December 31, 2009, 2010 and 2011, respectively) | | | 254,102 | | | | 4,376,048 | | | | (111,597 | ) | |
Acquisition of subsidiaries, net of cash acquired ($1,034,308, $329,743 and nil for the years ended December 31, 2009, 2010 and 2011, respectively) | | | 1,034,308 | | | | 329,743 | | | | — | | |
Cash received upon consolidation of a subsidiary contributed by Shanda | | | 633,424 | | | | — | | | | — | | |
Proceeds (cash-out) from disposal of subsidiaries, net of cash disposed ($669,705, $111,597 and nil for the years ended December 31, 2010, 2011 and 2012, respectively) | | | 4,376,048 | | (111,597 | ) | — | |
Acquisition of subsidiaries, net of cash acquired ($329,743, nil and nil for the years ended December 31, 2010, 2011 and 2012, respectively) | | | 329,743 | | — | | — | |
Proceeds from disposal of wireless value-added service and recorded music businesses to Shanda, net of cash disposed ($24,948,577 for the year ended December 31, 2010) | | | — | | | | 12,295,323 | | | | — | | | 12,295,323 | | — | | — | |
Restricted cash for pledge of bank loans | | | — | | | | — | | | | (3,600,000 | ) | | — | | (3,600,000 | ) | 3,600,000 | |
Loan to related parties under common control by Shanda | | | — | | | | (3,200,000 | ) | | | (14,108,019 | ) | |
| | | | | | | | | | |
Repayment of loans to related parties under common control of Shanda (Note 13) | | | — | | — | | 14,000,000 | |
Loan to related parties under common control of Shanda (Note 13) | | | (3,200,000 | ) | (14,108,019 | ) | (470,000 | ) |
Net cash provided by (used in) investing activities | | | (8,930,987 | ) | | | 2,168,038 | | | | (25,712,350 | ) | | 2,168,038 | | (25,712,350 | ) | 15,640,239 | |
| | | | | | | | | | | | | | | | |
Financing activities: | | | | | | | | |
Proceeds from exercise of stock options | | | 20,350 | | 3,750 | | — | |
Proceeds from issuance of ordinary shares to Shanda (Note 13) | | | — | | 50,000,000 | | — | |
Proceeds from issuance of Convertible Bond to Shanda (Note 13) | | | — | | 50,000,000 | | — | |
Cash paid for redemption of Convertible Bond to Shanda (Note 13) | | | — | | (50,000,000 | ) | — | |
Repurchase of ordinary shares | | | — | | — | | (8,169,481 | ) |
Borrowings from bank | | | — | | 3,177,680 | | — | |
Repayment of loans from bank | | | — | | — | | (3,148,120 | ) |
Borrowings from related parties under common control by Shanda (Note 13) | | | 4,596,001 | | 13,335,896 | | — | |
Repayment of borrowings from related parties under common control of Shanda (Note 13) | | | — | | (3,189,527 | ) | (9,904,620 | ) |
Net cash provided by (used in) financing activities | | | 4,616,351 | | 63,327,799 | | (21,222,221 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | 336,394 | | 1,014,955 | | (11,320 | ) |
Net decrease in cash and cash equivalents | | | (22,449,115 | ) | (544,392 | ) | (13,679,440 | ) |
Cash and cash equivalents, beginning of year | | | 49,743,934 | | 27,294,819 | | 26,750,427 | |
Cash and cash equivalents, end of year | | | 27,294,819 | | 26,750,427 | | 13,070,987 | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Loan interest paid | | | 30,903 | | 703,108 | | 453,657 | |
Income taxes paid | | | 23,047 | | — | | — | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
Accounts payable related to purchase of property and equipment | | | 2,045,032 | | — | | 3,195 | |
Accounts payable related to licensed video copyright | | | 2,946,304 | | 1,108,057 | | — | |
Issuance of ordinary shares to Shanda for Yisheng | | | 12,461,538 | | — | | — | |
Purchase of additional equity interests of Yisheng from non-controlling shareholders | | | 4,153,846 | | — | | — | |
Issuance of ordinary shares related to acquisition of Ku6 Holding Limited | | | 28,875,001 | | — | | — | |
| | | | | | | | | | | | |
| | | Year ended
December 31, 2009 | | | Year ended
December 31, 2010 | | | Year ended
December 31, 2011 | |
| | | (Adjusted) (Note 2(1)) | | | | | | | |
| | | (in U.S. dollars) | |
Financing activities: | | | | | | | | | | | | |
Proceeds from exercise of stock options | | | 2,500 | | | | 20,350 | | | | 3,750 | |
Proceeds from issuance of ordinary shares to Shanda | | | — | | | | — | | | | 50,000,000 | |
Proceeds from issuance of convertible bond to Shanda | | | — | | | | — | | | | 50,000,000 | |
Cash paid for redemption of convertible bond to Shanda | | | — | | | | — | | | | (50,000,000 | ) |
Cash injection into VIE subsidiary by Shanda | | | 1,083,057 | | | | — | | | | — | |
Borrowings from bank | | | — | | | | — | | | | 3,177,680 | |
Borrowings from related parties under common control by Shanda | | | — | | | | 4,596,001 | | | | 13,335,896 | |
Repayment for loans from related parties under common control of Shanda | | | — | | | | — | | | | (3,189,527 | ) |
Cash injection in VIE subsidiary by non-controlling shareholders | | | 362,773 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 1,448,330 | | | | 4,616,351 | | | | 63,327,799 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (154,506 | ) | | | 336,394 | | | | 1,014,955 | |
| | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | | (9,728,769 | ) | | | (22,449,115 | ) | | | (544,392 | ) |
Cash and cash equivalents, beginning of year | | | 59,472,703 | | | | 49,743,934 | | | | 27,294,819 | |
| | | | | | | | | | | | |
Cash and cash equivalents, end of the year | | | 49,743,934 | | | | 27,294,819 | | | | 26,750,427 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Loan interest paid | | | — | | | | 30,903 | | | | 703,108 | |
Income taxes paid | | | 465,696 | | | | 23,047 | | | | — | |
| | | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
Accounts payable related to purchase of property and equipment | | | — | | | | 2,045,032 | | | | — | |
Accounts payable related to licensed video copyright | | | — | | | | 2,946,304 | | | | 1,108,057 | |
Issuance of ordinary shares to Shanda for Yisheng | | | — | | | | 12,461,538 | | | | — | |
Purchase of additional equity interests of Yisheng from non-controlling shareholders | | | — | | | | 4,153,846 | | | | — | |
Issuance of ordinary shares related to acquisition of Ku6 Holding Limited | | | — | | | | 28,875,000 | | | | — | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements
F-7
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Ku6 Media Co., Ltd. (formerly(the “Company”), formerly known as Hurray! Holding Co., Ltd., “Hurray!(“Hurray!” or the “Company”), a Cayman Islands corporation, originally provided wireless value-added services (“WVAS”) to mobile phone users delivered over the wireless networks of the three telecommunication operators in the People’s Republic of China (“PRC”) and also engaged in music production and distribution in the PRC and Taiwan through its consolidated subsidiaries, its variable interest entities (“VIEs”) and an equity affiliateassociate before August, 2010. Following certain acquisition and disposition transactions and the 2010 Reorganization described below, the Company primarily provides online advertising services on its online video sharing platform, www.ku6.com, namely through its subsidiaries and VIEs in China (together with the Company, collectively referred to as the “Group”) further described within this note.
As of December 31, 2011,2012, the Group’s ownership structure is summarized as follows.
| | | | | | |
NamesName of Major Subsidiaries, Variable Interest Entities and Affiliate
| |
| Date of
incorporation
|
| Percentage of
ownership
|
|
Subsidiaries |
|
|
|
| |
|
Ku6 (Beijing) Technology Co., Ltd. (“Beijing Technology”) | | March 5, 2007 | | 100 | 100 | % |
Wei Mo San Yi (Tianjin) Science and Technology Co., Ltd. (“Tianjin Technology”) | | December 23, 2008 | | 100 | 100 | % |
Kusheng (Tianjin) Technology Co., Ltd. (“Kusheng”) | | August 26, 2011 | | 100 | 100 | % |
Variable Interest Entities (“VIEs”) | | | | | | |
Ku6 (Beijing) Information Technology Co., Ltd. (“Ku6 Beijing Information”) | | April 20, 2006 | | N/A | N/A | |
Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. (“Tianjin Information”) | | March 20, 2009 | | N/A | N/A | |
Tianjin Ku6 Network Communication Technology Co., Ltd. (“Ku6 Network”) | | December14, 2011 | | N/A | N/A | |
AffiliateBeijing Ku6 Culture Media Co., Ltd. (“Ku6 Culture”)
| | June 22, 2010 | | N/A | |
Affiliates | | | | | |
Shanghai Yisheng Network Technology Co., Ltd. (“Yisheng”) | | November 22, 2007 | | 20 | 20 | % |
In July 2009, Shanda Interactive Entertainment Limited (“Shanda”), a leading interactive entertainment media company in China, and Shanda Music Group Limited (“Shanda Music”), a wholly owned subsidiary of Shanda, announced its completion of a tender offer of totaling $46.2 million for 1,155,045,300 ordinary shares, par value $0.00005 per ordinary share (“Shares”), of the Company (then known as Hurray!), including Shares represented by American Depositary Shares (“ADSs,” each representing 100 Shares) at a purchase price of $0.04 per Share (equivalent to $4.00 per ADS) in cash, without interest and subject to any applicable withholding taxes. Immediately after giving effect to the acquisition of Shares (including Shares represented by ADSs) in the tender offer, Shanda held approximately 51% of the Company’s total outstanding Shares calculated on a fully-diluted basis as of December 31, 2009.
In January 2010, the Company completed the acquisition of 100% of the equity interests of Ku6 Holding Limited (“Ku6 Holding”), a leading online video portal in China, pursuant to thea share purchase agreement entered into by and among Hurray!, Ku6 Holding and the shareholders of Ku6 Holding dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares. After the closing of the acquisition of Ku6 Holding, Shanda’s equity interest in the Company was diluted to 41.97%.
In May 2010, the Company sold all of its 51% equity interest in Beijing Huayi Brothers Music Co., Ltd. including its wholly owned subsidiary of Beijing Huayi Brothers Music Broker Co., Ltd. (collectively referred to as “Huayi Music”) to Huayi Brothers Media CorporationCorporation. (“Huayi Media”) for aggregate consideration of RMB 34,450,000 (equivalent to $5,045,754).
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
In August 2010, the Company completed (1) the disposal of all of its subsidiaries and VIEs related to WVAS and recorded music businesses as well as the equity investment in an affiliated company to Shanda for $37,243,904 in cash and (2) acquisition of 75% of the equity interest of Yisheng, an online audio business, from Shanda in exchange for 415,384,615 newly issued ordinary shares (collectively the “2010“2010 Reorganization”). In connection with the acquisition of 75% of the equity interests in Yisheng from Shanda, the Company issued 138,461,539 ordinary shares to acquire the remaining 25% of equity interests in Yisheng from the non-controlling shareholders in August 2010. The 2010 Reorganization was approved by a committee comprised of three independent directors after receiving a fairness opinion on the proposed transaction from its independent financial advisor. Following the 2010 Reorganization, the Company changed its name to Ku6 Media Co., Ltd. and changed its trading symbol on the Nasdaq Global Market from HRAY to KUTV. At December 31, 2010, Shanda’s equity interest in the Company was 51.65%.
In April 2011, the Company entered into agreements with Shanda Media Group Ltd., a wholly owned subsidiary of Shanda, pursuant to which the Company issued 1,538,461,538 ordinary shares for an aggregate purchase price of $50 million and $50 million aggregate principal amount of senior convertible bond at face value (“Convertible Bond”). The Convertible Bond would mature in three years after issuance and would bear an interest of 3% per annum. The closing date of the ordinaryoridinary shares and Convertible Bond issuance was June 29, 2011. Based on the Company’s working capital position, the Company redeemed the Convertible Bond in September 2011 at its issue price.
In August 2011, the Company disposed of a significant interest in80% of the equity interests of Yisheng to the related entities andparties, including a then employee of Ku6.the Company. After the disposal, the Company retainscompany retained a 20% interest in Yisheng. This transaction is further described in Note 2(1)(a).
At
At December 31, 2011,2012, Shanda’s equity interest in the Company was 66.43%.70.46% following a repurchase of shares described in Note 15.
The Group has adjusted its business strategy in 2011. The adjustments primarily refer to 1) the appointment of Shanghai Shengyue Advertising Ltd (“Shengyue”), a wholly owned subsidiary of Shanda, as itsthe Group’s primary agency of thefor online advertising services, and 2) thea change in business focus from purchasing the long-form licensed video contents to relying more on the user generated contents and short-form video contents. Shengyue operates thean advertising system ofknown as Application Advertisement (“AA”) and charges the advertisement fees fromto its end customers based on the advertising effects, including but not limited to views, clicks, responses, and etc., (“performance advertisement”). After the appointment of Shengyue as its primary sales agency, the Group primarily relies on Shengyue to sell the online advertising service,services; therefore, the Group significantly reduced its sales forcesforce and recorded the severance payments of $0.9 million through the general and administrative expenses ($0.15 million) and selling expenses ($0.75 million) in 2011. TheA customer list intangible asset of the customer list of $1.46 million, representing the customer relationships under the original business model, has also beenwas abandoned in 2011 and recordedwritten off through the general and administrative expenses in 2011 (Note 7). In relation to the ceasecessation of purchasing theactivity for long-form licensed video copyrights, the Group has exited two long-term licensed contents purchase agreements in 2011 with the content providers by paying a one-time termination feefees of $5.3 million, which waswere recorded into the cost of revenues.
The business strategy has continued in 2012 since then.F-9
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Basis of presentation
The accompanying consolidated financial statements of the CompanyGroup have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
As a result of the disposal of Huayi Music in May 2010 and the 2010 Reorganization, the Company adjusted its consolidated financial statements for the yearsyear ended December 31, 2009 and 2010 for the above mentioned transactions to presentreflect the WVAS and recorded music businesses as discontinued operations and to reflect the Yisheng merger as a common control transaction.
(a)Acquisition under common control
The acquisition of Yisheng’s online audio business from Shanda was accounted for as a common control transaction as Hurray! was under the control of Shanda since the Company was acquired by Shanda in July 2009. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control, which is the date that the Company (formerly known as Hurray!) was consolidated into Shanda’s consolidated financial statements on August 31, 2009. Therefore, total assets and liabilities, as well as the non-controlling interests of Yisheng, were recorded at the carrying amount as capital contribution from Shanda in the consolidated statements of changes in equity at the inception of common control. The effect of accounting for the acquisition under common control increased the net loss for the year ended December 31, 2009 by $736,969, which represented the net loss of this business from August 31, 2009 through December 31, 2009.equity. The fair value of the 415,384,615 ordinary shares issued by the Company amounting to $12,461,538 was recorded through equity as a deemed distribution to Shanda in 2010.
In connection with the acquisition of 75% of the equity interests in Yisheng from Shanda, the Company issued 138,461,539 ordinary shares to acquire the remaining 25% of the equity interests in Yisheng from non-controlling shareholders in August 2010. This transaction was accounted for as an equity transaction in 2010 and the difference between the fair value of the ordinary shares issued amounting to $4,153,846 and carrying amount of the non-controlling interest was recognized as a decrease in additional paid-in capital attributable to the Company in accordance with ASCAccounting Standards Codification (“ASC”) 810.
In August 2011, the Company disposed of 80% of its (previously 100%) equity interest in Yisheng by contributing a 60% stake in Yisheng to affiliates of Shanda. A remaining 20% stake, to arrive at the 80% disposed, was granted to a then-employee of Ku6 (20%). The Company’s remaining interest in Yisheng was 20% as at December 31, 2011.2011 and 2012. As a result of the previous capital transaction related to Yisheng and the loss of a controlling financial interest, the Company deconsolidated Yisheng and recorded its remaining interest in Yisheng as an investment subject to the equity method of accounting (Note 8).
Given the presence of common control from parent Shanda, the disposition of the 60% to the related Shanda entities was accounted for as a common control transaction. Therefore, the gain on deconsolidation of Yisheng amounting to $1,373,190 (a gain due to the de-recognition of the net liabilities of the Yisheng business) was recorded in stockholders’ equity as a contribution from Shanda in 2011. At the time of deconsolidation, a Shanda affiliate receiving a portion of the contributed stake also made a capital investment of cash in Yisheng resulting in a higher equity fair value ascribed to Yisheng immediately prior to the deconsolidation. The 20% equity interest in Yisheng transferred to the then-employee of Ku6 was recorded as a compensation charge of $522,251 based on Yisheng’s equity fair value subsequent to the injection of capital from a Shanda affiliate, and was included in general and administrative expenses.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(b) Disposal of WVAS and recorded music businesses
As mentioned above, the Company completed the disposal of Huayi Music to Huayi Media for RMB 34,450,000 (equivalent to $5,045,754) in cash in May, 2010 and the corresponding disposal gain of Huayi Music recognized in 2010 was $4,486,786. The disposal of WVAS and recorded music businesses under common control was consummated in August, 2010. The difference of $13,561,087 between the cash consideration received from Shanda of $37,243,904 and the carrying amount of the assets, liabilities and non-controlling interests and redeemable non-controlling interest of WVAS and recorded music business of $23,682,817 and the corresponding cumulative translation difference of $10,344,330 was accounted for as a contribution by Shanda in additional paid in capital in 2010. No gain or loss was recognized in 2010.
A summary of the major financial information for the discontinued operations of the WVAS and recorded music businesses for the year ended December 31, 2009 and the eight month period ended August 31, 2010 is set out below:
| | | | | | | | |
| | | Year ended December 31, 2009 | | | Eight months ended August 31, 2010 | |
Net revenues: | | | | | | | | |
Wireless value added services revenue | | | 20,169,110 | | | | 5,385,985 | |
Recorded music revenue | | | 14,473,185 | | | | 9,458,423 | |
| | | | | | | | |
Total net revenues | | | 34,642,295 | | | | 14,844,408 | |
| | | | | | | | |
Wireless value added services cost | | | (15,331,675 | ) | | | (3,799,581 | ) |
Recorded music cost | | | (12,625,139 | ) | | | (6,118,305 | ) |
| | | | | | | | |
Total cost of revenues | | | (27,956,814 | ) | | | (9,917,886 | ) |
| | | | | | | | |
Gross profit | | | 6,685,481 | | | | 4,926,522 | |
Product development | | | (466,543 | ) | | | (444,581 | ) |
Selling and marketing | | | (6,211,334 | ) | | | (3,397,797 | ) |
General and administrative | | | (17,469,445 | ) | | | (4,544,460 | ) |
Goodwill impairment | | | (3,592,933 | ) | | | — | |
| | | | | | | | |
Total operating expenses | | | (27,740,255 | ) | | | (8,386,838 | ) |
| | | | | | | | |
Loss from operations | | | (21,054,774 | ) | | | (3,460,316 | ) |
Interest income | | | 98,770 | | | | 42,627 | |
Interest expense | | | (13,681 | ) | | | — | |
Other income | | | 339,869 | | | | 9,667 | |
| | | | | | | | |
Loss before income tax benefit (expense), equity in (loss) earnings of affiliated company, impairment for investment in affiliated company | | | (20,629,816 | ) | | | (3,408,022 | ) |
Income tax benefit (expense) | | | (234,286 | ) | | | 25,584 | |
Equity in loss and impairment of affiliated company | | | (914,072 | ) | | | — | |
Impairment for investment in affiliated company | | | — | | | | — | |
| | | | | | | | |
Net loss | | | (21,778,174 | ) | | | (3,382,438 | ) |
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest | | | 4,182,875 | | | | 243,666 | |
| | | | | | | | |
Net loss from discontinued operations, net of tax | | | (17,595,299 | ) | | | (3,138,772 | ) |
Gain from disposal of Huayi Music, net of tax | | | — | | | | 4,486,786 | |
| | | | | | | | |
Total net (loss) income from discontinued operations | | | (17,595,299 | ) | | | 1,348,014 | |
| | | | | | | | |
|
| Eight months
ended August 31,
2010 |
|
Net revenues: | | | |
Wireless value added services revenue | | 5,385,985 | |
Recorded music revenue | | 9,458,423 | |
Total net revenues | | 14,844,408 | |
Wireless value added services cost | | (3,799,581 | ) |
Recorded music cost | | (6,118,305 | ) |
Total cost of revenues | | (9,917,886 | ) |
Gross profit | | 4,926,522 | |
Product development | | (444,581 | ) |
Selling and marketing | | (3,397,797 | ) |
General and administrative | | (4,544,460 | ) |
Goodwill impairment | | — | |
Total operating expenses | | (8,386,838 | ) |
Loss from operations | | (3,460,316 | ) |
Interest income | | 42,627 | |
Interest expense | | — | |
Other income | | 9,667 | |
Loss before income tax benefit (expense), equity in (loss) earnings of affiliated company, impairment for investment in affiliated company | | (3,408,022 | ) |
Income tax benefit (expense) | | 25,584 | |
Equity in loss and impairment of affiliated company | | — | |
Impairment for investment in affiliated company | | — | |
Net loss | | (3,382,438 | ) |
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest | | 243,666 | |
Net loss from discontinued operations, net of tax | | (3,138,772 | ) |
Gain from disposal of Huayi Music, net of tax | | 4,486,786 | |
| | | |
Total net income from discontinued operations, net of tax | | 1,348,014 | |
According to ASC 205, Discontinued Operations, the effect of discontinued operations has been accounted for retroactively in the consolidated statement of operations and comprehensive loss for loss.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all the periods presented.
amounts in U.S. dollars (US$) unless otherwise stated)(c) Liquidity
The Company has a short operating history in a new and unproven market, which makes it difficult to evaluate future prospects and may increase the risk that the Company will not be successful if the market does not develop as expected. The Company entered the online video business in January 2010 with the acquisition of Ku6 Holding. The Company subsequently disposed of the WVAS and recorded music businesses in August 2010 and an 80% interest in the online audio business in August 2011. Accordingly, the Company is currently operating the online video business as its principal business and generates substantially all of its revenues from online advertising. This short operating history makes it difficult to effectively assess Ku6’s future prospects.
The CompanyGroup has incurred significant net losses and negative cash flows from operations in recent years. As of December 31, 2012, the Group’s cash and cash equivalents balance was $13,070,987; for the year then ended, the Group’s net operating cash outflow was $8,086,138, which represented a significant reduction from 2011 net operating cash outflow. Also, at December 31, 2012, the Group’s accumulated deficit of the Company was ($132,449,371)141,940,509) and the excess of current assets over current liabilities (working capital) was $21,180,439. In April 2011, the Company entered into agreements with Shanda Media to issue 1,538,461,538 ordinary shares for an aggregate purchase price of $50 million and $50 million of convertible debt (Note 1). Based on the Company’s$6,379,717. This working capital position, the Company redeemed the debt in September 2011. included $10,495,820 of accounts receivable and other receivables due from related parties and $3,779,497 of other amounts payable to related parties (Note 13).
The Company has in the past obtained significant financing from its parent, Shanda, and may do so again in the future. As mentioned in Note 13, the Company’sGroup’s forecasted revenue in 20122013 is primarily derived from its primarya related party advertising agency (Note 13) and cash collection from this revenue source is primarily dependingdepends on the contractual credit terms agreed to with this agency.
The CompanyGroup believes that there is sufficient cash and capital resources to findfund operations and capital expenditures for at least the next 12 months, considering various changes in strategy and cost reduction measures that were adopted in 2011.months. Accordingly, the consolidated financial statements have been prepared on a going-concern basis.
(2) Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Significant accounting estimates reflected in the Company’s financial statements include accrual for sales rebates, allowances for doubtful accounts, assessment of impairment for long-lived assets and goodwill, assessment of the net realizable value of licensed video copyrights, the useful lives for intangible assets and property and equipment, share-based compensation expense, the recognition and measurement of deferred taxes, and loss contingencies. Actual amounts may differ from these estimates under different assumptions or conditions.
(3) Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs. All inter-company transactions and balances have been eliminated upon consolidation. Affiliated companycompanies in which the Company has partial ownership and controls more than 20% but less than 50% of the investment isare accounted for using the equity method of accounting. The Company’s share of earning (loss)earnings (losses) of such equity investment isinvestments are included in the accompanying consolidated statements of operations and comprehensive loss.
The Company follows the guidance relating to the consolidation of VIEs in Accounting Standards Codification (“ASC”)ASC 810-10, which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity 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.
Pre-2010 Reorganization
Pre-2010 Reorganization
Prior to the 2010 Reorganization, to comply with PRC laws and regulations that restrict direct foreign ownership of telecommunication service businesses in the PRC, the Company conducted substantially all of its WVAS and recorded music businesses through several VIEs. The VIEs had entered into various agreements with one of Hurray!’s subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a wholly owned PRC subsidiary, Beijing Hurray! Times Technology Co., Ltd. (“Beijing Hurray! Times”), was the exclusive provider of technical and consulting services to the VIEs. In return, the VIEs were required to pay Beijing Hurray! Times’ service fees for the technical and consulting services received. The technical and consulting service fees could be, and were, adjusted at Hurray!’s discretion depending on the level of service provided. Beijing Hurray! Times was entitled to receive service fees in an amount up to all of the net income of the VIEs. In addition, Beijing Hurray! Times had been assigned all voting rights by the direct and indirect owners of the VIEs through agreements which were valid for ten years and were renewable indefinitely and could not be amended or terminated except by written consent of all parties. Finally, Beijing Hurray! Times had the option to acquire the equity interests of the VIEs if and when legal to do so under PRC laws and regulations. The Company also had extended loans without interest to the registered shareholders to finance their investments in the VIEs. Each of the registered shareholders was a related party of the Company acting as de facto agent for the Company. The direct equity interests in these entities had been pledged as collateral for the loans and when permitted under Chinese laws, the loans were to be repaid by transferring the direct equity interest in these entities to the Company. Therefore, no minority interest was recorded for the registered capital from the registered shareholders.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Hurray! was the considered the primary beneficiary of the VIEs of the WVAS and recorded music businesses because of all the variable interests held by Hurray! and the Company had the power to direct the activities of the VIEs. Therefore the Company consolidated the results of operations of the VIEs of the WVAS and recorded music businesses before they were disposed in 2010.
Post-2010 Reorganization
Post-2010 Reorganization
After the 2010 Reorganization, to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide advertising services and hold Internet Content Provider (“ICP”) licenses and/or Licenses for Transmission of Audio-Visual Programs through the Internet (“the Licenses”), the Company conducts substantially all of its advertising business through its VIEs.VIEs. The paid-in capitals of the Ku6 Beijing Information and Ku6 Network were funded by the Company through loans extended to the authorized individuals (“nominee shareholders”) and Tianjin Information was incorporated by theKu6 Beijing Information.
The Company has various agreements with its VIEs, through which the Company holds all the variable interests of the VIEs and has the power to direct the activities of the VIEs. Consequently the Company is the primary beneficiary of these VIEs. Details of certain key agreements with the VIEs are as follows:
Loan Agreements: Beijing Technology, Kusheng and KushengTianjin Technology have granted interest-free loans to the nominee shareholders with the sole purpose of providing funds necessary for the capital injection of theKu6 Beijing Information, Ku6 Network and Ku6 Network.Culture. The portions of the loans for subsequent capital injection are eliminated with the capital of theKu6 Beijing Information, and Ku6 Network and Tianjin Technology during consolidation. The interest-free loans to the nominee shareholders of the Beijing Information, Ku6 Network and Ku6 NetworkCulture as of December 31, 20112012 were RMB9RMB20 million, RMB10 million and RMB10RMB1 million, respectively. Beijing Technology, Kusheng and KushengKu6 Cluture are able to require the nominee shareholders to settle the loan amount through the entire equity interest of theKu6 Beijing Information, Ku6 Network and Ku6 NetworkCulture and nominate someone else to hold the shares on Beijing Technology, Kusheng and Kusheng’sKu6 Culture’s behalf.
Proxy Agreement: The nominee shareholders of the VIEs irrevocably appointed the Subsidiaries’ officers to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in the VIEs, making all the operational, financial decisions and the appointment of the directors, general managers and other senior management of the VIEs.
Equity Interest Pledge Agreements: The nominee shareholders of the VIEs have pledged their respective equity interests in the VIEs as collateral to secure the nominee shareholders’ obligations under other agreements and for the payment by the VIEs under the exclusive technical consulting and services agreements and the loan agreements. The Pledge Agreements have been registered with the applicable local branches of the State Administration for Industry and Commerce. The nominee shareholders of the VIEs cannot sell or pledge their equity interests to others without the approval from the Subsidiaries, and the nominee shareholders of the VIEs cannot receive any dividends without the approval of Subsidiaries.
Exclusive Call Option Agreements: The nominee shareholders of the VIEs granted the Subsidiaries the exclusive and irrevocable right to purchase from the nominee shareholders, to the extent permitted under PRC laws and regulations or at the request of the Company, all of the equity interests in these entities for a purchase price equal to the amount of the registered capital or at the lowest price permitted by PRC laws and regulations. The Subsidiaries may exercise such options at any time. In addition, the VIEs and their nominee shareholders agreed that without the Subsidiaries’ prior written consent, they will not transfer or otherwise dispose of the equity interests or declare any dividends.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Exclusive Business Cooperation Agreements: The Subsidiaries are the exclusive provider of the technical, consulting and related services and information of the VIEs. Under these arrangements, the Subsidiaries have the unilateral right to charge service fees to the VIEs to recover substantially all of the VIEs’ profits.
As a result of the above contractual agreements, the Company determined that it has the power to control the economic activities most significant to the VIEs and is the primary recipient of the economic rewards or risks, as the case may be. As such, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) 810-10, Consolidation).
At December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011, the summarized financial information of the VIEs is as follows:ASC 810-10.
| | | | | | | | |
| | | December 31, 2010 | | | December 31, 2011 | |
Total assets | | | 14,021,798 | | | | 8,159,494 | |
Total liabilities | | | 26,520,629 | | | | 47,309,685 | |
Deficits | | | 12,498,831 | | | | 39,150,191 | |
| | | | | | | | | | | | |
| | | Year ended
December 31, 2009 | | | Year ended
December 31, 2010 | | | Year ended
December 31, 2011 | |
Net Revenue | | | 1,037,064 | | | | 41,570,566 | | | | 18,744,535 | |
Net loss | | | 6,278,115 | | | | 8,037,455 | | | | 25,011,099 | |
As of December 31, 2011 and 2012, the total assets of the consolidated VIEsVIE subsidiaries were $8.2 million (2010: $14.0 million), mainly comprising cash and cash equivalents, accounts receivable, other receivable, fixed assets, and other long term assets. as below:
| | December 31, 2011 | | December 31, 2012 | |
| | | | | |
Cash and cash equivalents | | 193,740 | | 1,617,258 | |
Accounts receivable | | 3,509,168 | | 4,412,326 | |
Other receivables | | 3,083,527 | | — | |
Property and equipment | | 1,084,908 | | 421,571 | |
Deposits and other non-current assets | | 288,151 | | 291,102 | |
Total assets | | 8,159,494 | | 6,742,257 | |
These balances are reflected in Company’sthe Group’s consolidated financial statements with intercompany transactions eliminated. Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs, and can have assets freely transferred out of the VIEs without any restrictions.VIEs. Therefore, the Company considers that there is no asset in any of its consolidated VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC additional paid-in capital of the VIEs in the amount of $3.3$4.9 million as of December 31, 2011 (2010: $4.02012 (2011: $3.3 million).
As all the consolidated VIEsVIE subsidiaries are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEsthereof do not have recourse to the general credit of the CompanyGroup for any of the liabilities of the consolidated VIEs.VIE subsidiaries. As of December 31, 2011 and 2012, the total liabilities of the consolidated VIEsVIE subsidiaries were $47.3 million (2010: $26.5 million), mainly comprising accounts payable of $24.0 million (2010: $15.7 million), tax payables of $1.0 million (2010: $2.1 million), other payables and other accrued liabilities of $9.3 million (2010: $2.7 million) and long term borrowings from the intra-group entities and related parties of $13.1 million (2010: $6.1 million). as below:
| | December 31, 2011 | | December 31, 2012 | |
| | | | | |
Accounts payable | | 23,953,679 | | 25,704,847 | |
Accrued expenses and other current liabilities | | 10,178,926 | | 16,812,895 | |
Other payables due to related parties | | 13,177,080 | | 3,404,497 | |
Total liabilities | | 47,309,685 | | 45,922,239 | |
As of December 31, 2011,2012, the total deficitsdeficit of the consolidated VIEs wereVIE subsidiaries was $39.2 million (2010: $12.5(2011: $39.2 million).
For the year ended December 31, 2011, the total net revenue and net loss of the consolidated VIEs were $18.8 million and $25.0 million respectively. For the yearyears ended December 31, 2010, 2011, and 2012, the total net revenue and net losssummarized operations of the consolidated VIEVIEs were $41.6 million and $8.0 million respectively. For the year ended Decemberas below:
| | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | | | | | |
Net revenue | | 41,570,566 | | 18,744,535 | | 13,956,477 | |
Net loss | | 8,037,455 | | 25,011,099 | | 1,331,497 | |
F-14
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, the total net revenue and net loss of the consolidated VIE were $1.0 million and $6.3 million, respectively.2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Currently there is no contractual arrangement that requires the Company to provide additional financial support to the VIEs. However, as the Company is conducting the online advertising business substantially through the VIEs, the Company has, in the past, provided and will continue to provide financial support to the VIEs considering the business requirements of the VIEs and the Company’s own business objectives in the future, which could expose the Company to a loss.
Please refer to “Contingencies” under Note 2021 for the risks relating to the VIE arrangements.
(4) Significant risks and uncertainties
The CompanyGroup participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations or cash flows: i) changes in the overall demand for services and products; ii) changes in business offerings; iii) competitive pressures due to new entrants; iv) advances and new trends in new technologies and industry standards; v) changes in bandwidth suppliers; vi) relying on Shengyue as the primary advertisement agency; vii) regulatory considerations; viii) copyright regulations; and ix) risks associated with the Company’s ability to attract and retain employees necessary to support its growth.
(5) Fair value
The CompanyGroup follows Accounting Standards Codification (“ASC”)ASC Topic 820, “Fair“Fair Value Measurements and Disclosures”Disclosures”. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under US GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value.
The Company measures the financial
Financial assets and liabilities are to be measured and disclosed using inputs from the following three levels of the fair value hierarchy. The three levels are as follows:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect management’s judgments about the assumptions that market participants would use in pricing the assets or liabilities. Management develops these inputs based on the best information available, including their own data.
(6) Business combinations and non-controlling interests
The CompanyGroup accounts for its business combinations using the purchase method of accounting. This method requires that the acquisition cost be allocated to the assets, including separately identifiable intangible assets, and liabilities the Company acquired based on their estimated fair values.
The CompanyGroup follows ASC Topic 805, “Business Combinations,” with respect to business combinations. Pursuant thereto, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest(s) in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although the CompanyGroup believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
The CompanyGroup follows guidance in ASC Topic 810 “Consolidation,” regarding non-controlling interests. Non-controlling interests are classified as a separate component within equity except for any redeemable securities that are subject to the guidance in ASCAccounting Series Release (“ASR”) Topic 268, regarding redeemable securities.Redeemable Preferred Stock. Consolidated net income on a total enterprise basis is adjusted within the statement of operations and comprehensive loss for net income attributed to non-controlling interests and consolidated comprehensive income is adjusted to for comprehensive income attributed to non-controlling interests.
(7) Foreign currency translation
The functional currency and reporting currency of the parent company is the United States dollar (“U.S. dollar”). The Company’s subsidiaries and VIEs use Renminbi (“RMB”) as their functional currency.
Assets and liabilities of the Company’s subsidiaries and VIEs are translated at the current exchange rates quoted by the Federal Reserve Bank of New York in effect at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period to USD. the U.S. dollar. Translation adjustments resulting from foreign currency translation to reporting currency are reported as cumulative translation adjustments and recorded in accumulated other comprehensive income (loss) in the consolidated statements of changes in equity for the years presented.
Transactions denominated in currencies other than the Company’s or its subsidiaries’ or VIEs’ functional currencies are translatedremeasured into the functional currencies at the exchange rates quoted by the People’s Bank of China prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive loss. Monetary assets and liabilities denominated in foreign currencies are translatedremeasured into the applicable functional currencies using the applicable exchange rates quoted by the People’s Bank of China at the balance sheet dates. All such exchange gains and losses are included in the statements of operations and comprehensive loss.
Pursuant to the People’s Republic of China State Administration of Foreign Exchange (“SAFE”), the conversion of United StatesU.S. dollars to RenminbiRMB is governed as to amount and a uniform exchange rate is set by the People’s Bank of China on a daily basis pegged to a basket of major currencies. Correspondingly, RenminbiRMB to USDU.S. dollar conversion does not carry the same ease as conversion may with other major currencies. The rates of exchange for the U.S. dollar quoted by the Federal Reserve Bank of New York were RMB 6.6000 on December 31, 2010 and RMB 6.2939 on December 30, 2011 respectively.and RMB 6.2301 on December 31, 2012.
(8) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid investments placed with bank or other financial institutions with no restriction to withdrawal or use, which have original maturities of three months or less.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Included in the cash and cash equivalents are cash balances denominated in Renminbi (“RMB”)RMB of approximately RMB137,735,942RMB20,780,927 and RMB34,714,100RMB137,735,942 (equivalent to approximately $21,884,037$3,335,569 and $5,259,707)$21,884,037) as of December 31, 2012 and 2011, and 2010, respectively.
(9) Restricted cash
Restricted cash mainly represents cash that is pledged for the loan borrowed from a PRC bank (Note 11), and the pledge period iswas the same as the loan period.
(10) Allowances for doubtful accounts
The Company determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account an aging analysis of the accounts receivable balances, historical bad debt records, repayment patterns in the prior year, and other factors such as the policies of operators and financial condition of the customer.
(11) Inventories
Inventories represent music compact discs (“CDs”(11) and related music products and are stated at the lower of cost, determined using the first-in, first-out method, or market price. The Company provided an estimated inventory allowance for excess, slow moving and/or obsolete inventories, as well as inventory whose carrying value is in excess of net realizable value.
(12) Investments in affiliated companiesaffiliates
Affiliated companies (partially owned affiliates) are entities over which the Company has significant influence, but which it does not control. Investments in affiliated companies are accounted for by the equity method of accounting. Under this method, the Company’s share of the post-acquisition profits or losses of affiliated companies is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Company and its affiliated companies are eliminated to the extent of the Company’s interest in the affiliated companies; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in an affiliated company equals or exceeds its interest in the affiliated company, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the affiliated company.company (no such obligations or payments have been undertaken or made for the periods presented).
The Company continually reviews its investments in affiliated companies to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry specific or investee specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the investment is written down to fair value. There were no impairments of such investments duringfor the three year periodyears ended December 31, 2011.2010, 2011 and 2012.
(13)(12) Property and equipment, net
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:
| | | | |
Furniture and office equipment | | | 3 years | |
Telecommunications equipment | | | 3 years | |
Leasehold improvements | | | Lesser of original lease term or estimated useful life | |
Expenditures for maintenance and repairs are expensed as incurred. 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.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(13) Acquired intangible assets, net
An intangible asset is required to be recognized separately from goodwill based on its estimated fair value if such asset arises from contractual or legal right or if it is separable as defined by ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”, (“SFAS No. 141(R)”)).805. Acquired intangible assets consist of intangible assets with finite lives, as detailed in Note 7, acquired through direct purchases and various business acquisitions and are amortized on a straight-line basis over their estimated useful economic lives.
The estimated useful economic lives by major intangible asset category used by the Company are as follows.
| | | | |
Trademark | | | 20 years | |
Technology | | | 7 years | |
Customer List | | | 5 years | |
Software technology | | | 5 years | |
(15)(14) Video production and acquisition costs and licensed video copyrights
The Company contracts third parties for the production of, self produces and self-generates video copyrights for content to exhibit on its websites, and also licenses copyrights from other parties for content distribution on its websites ku6.com.
Video production and acquisition costs
Following the guidance under ASC 926-20-25, video production (which mainly includesinclude direct production costs and production overhead) and acquisition costs are capitalized, if the capitalization criteria are met, and are stated at the lower of unamortized cost or estimated fair value.
With respect to production and acquisition costs, the Company has established capitalization criteria whereby until the Company can establish estimates of secondary market revenues, associated with a video, capitalized costs for each video produced are limited to the amount of revenues specifically contracted for that video. Revenues contracted for a video consist of advertising revenues specifically associated with particular videos. The costs in excess of revenues contracted for that video are expensed as incurred on an actual basis, and are not restored as assets in subsequent periods. Once the Company can establish estimates of secondary market revenues in accordance with ASC 926-20-35-5(b), it capitalizes subsequent film costs.
Capitalized video production costs are amortized in accordance with the guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. The Company estimates total revenues to be earned (“ultimate revenues”) throughout the life of a video. Ultimate revenue estimates for the produced or acquired videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self produced content are based upon assumptions about future demand and market conditions. The capitalized costs are subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than unamortized cost.
During each of the three years ended December 31, 2011,2012, video production and acquisition costs did not meet the criteria for capitalization (defined in the second paragraph above regarding capitalization limited to the amount of revenues contracted for a video) and as a result all the video production costs were expensed as incurred.
Licensed video copyrights
The licensed video copyrights are amortized over their respective licensing periods, which range from 1 to 3 years for all periods presented.
The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, the Company determines the expected cash inflows that are directly attributed to the content category which comprise of the expected revenues directly attributable to the content category less the direct costs to deliver the content to derive the net realizable value of the asset. The Company writes down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Amortization and write-down expenses for the year ended December 31, 20112012 were $2,200,535 (2010: $8,012,252)nil (2011: $2,200,535) and $1,521,161 (2010: $7,739,562)nil (2011: $1,521,161), respectively.
(15) Goodwill
(16) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed as a result of the Company’sGroup’s acquisitions. The Group’s goodwill is associated with the Group’s single reporting unit as of December 31, 2012.
The CompanyGroup tests goodwill for impairment by performing a two-step goodwill impairment test, which can be preceded by an optional qualitative assessment to determine if the two-step goodwill impairment test needs to be followed. The optional qualitative assessment relies upon qualitative factors to determine if it is “more likely than not” (more than 50% probable) that the fair value of a reporting unit is less than the carrying value of the reporting unit. The Group did not apply the qualitative assessment and proceeded directly to the two-step test. The first step compares the calculated fair value of a reporting unit to its carrying amount, including goodwill. If, and only if, the carrying amount of a reporting unit exceeds its fair value as per step one, the second step is executed to compare the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
An impairment provision relating to goodwill amounting to approximately $3.6 million was recognized in discontinued operations (Note 2(1))
For each year in the year three-year period ended December 31, 2009. No goodwill2012, fair value exceeded carrying value for the Group’s reporting unit and no further impairment evaluation was recognized in the years ended December 31, 2010 and 2011.necessary
(17)(16) Impairment of long-lived assets
The CompanyGroup reviews 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. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company uses estimates and judgments in its impairment tests and if different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different. An impairment provision relating to intangible assets amounting to approximately $3.5 million was recognized in the year ended December 31, 2009, included in discontinued operations. No impairment provision was recognized duringin the year ended December 31, 2010; impairment of $1.4 million for a customer list intangible asset was recognized in the year ended December 31, 2011 as further discussed in Note 7.
7; no impairment was recognized in the year ended December 31, 2012.(18)(17) Financial instruments
Financial instruments include cash and cash equivalents, accounts receivable, prepayments and other current assets, amounts due from/to related parties, short-term borrowings, accounts payable, and accrued expenses and other current liabilities. As of December 31, 20102011 and 2011,2012, their carrying values approximated their fair values because of their generally short maturities. There were no other financial assets or liabilities that are beingwere measured at fair value at December 31, 20102011 or December 31, 2011, except for the contingent consideration in relation to the acquisition of Seed Music (Note 3) in January 2009 which was disposed of in full along with contingent consideration obligations in August 2010 (Note 2(1)). This contingent consideration was recorded at fair value and was classified within Level 3 of the fair value hierarchy.2012.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(18) Revenue recognition and cost of revenues
In accordance with ASC Topic 605, “Revenue Recognition,” the Company recognizes revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.
Online advertising services (post-2010 (post-2010 Reorganization business model)
The Company’sGroup’s revenues are derived principally from online advertising services, where the advertisers (including third parties and related parties) pay to place their advertisements on the Company’s online video platform in different formats. Such formats include but are not limited to banners, buttons, links, pre-roll or post-roll video advertisements.
Advertising contracts are signed to establish the price and advertising services to be provided. Advertisements are charged either based on the agreed measurement numbers, including but not limited to impressions and clicks, or fixed during a determined period of time. In the former case, the delivery of service occurs when those measurement numbers are achieved. In the latter case, the delivery is not linked to advertisement displays but occurs over the lapse of time.
Under arrangements with the arrangements with advertisers where the advertisement placementthat includes different formats to be delivered over different periods of time, the Company’sGroup’s revenue is accounted for using the guidance under ASC 605-25, “Multiple“Multiple Element Arrangements”Arrangement,” as such revenue arrangements involve multiple deliverables to the advertisers.deliverables. The CompanyGroup sells the advertising services over a broad price range. The CompanyGroup uses its best estimate of the selling price of each component of a bundled advertising arrangements forto allocate the arrangement consideration to the separate units of accounting.accounting (deliverables).
Under thean arrangement with thea related party advertising agency (Note 1 & 13), components of the arrangement include an arrangement for guaranteed advertising revenuerevenues and an arrangement for sharing of excess advertising revenues after deducting commission fees earned by the related party advertising agency based upon increasing percentages for additional tiers (layers) of revenue.revenues in excess of the guaranteed amount. There were no commission fees incurred for any historical periods, as the Group enjoyed a commission-free period in 2011 and earned minimum guaranteed revenues in 2012. The guaranteed advertising revenues and any excess advertising revenues net of commission fees are recognized ratably over varying service periods as governed by the specific agreements with the affiliated advertising agency. Further, any excessagency, as the Group is able to timely obtain information to determine historical advertising revenues realized from these arrangements, which are not subject to any refundability or contingency provisions from the Company to the affiliated advertising agency, would be recognized ratably over the remaining service periods whenas a reliable estimate of excess revenues above the minimum guarantee is established. basis for preparing financial statements.
The Company reports the revenue earned from both related and third party ad agencies based on the net amount after considering the indicators to record revenue gross versus set forth in ASC 605-45.605-45, “Principal Agent Considerations.”
The Company makes credit assessments of customers to assess the collectability of contract amounts prior to entering into contracts. For those contracts for which the collectability is assessed as not reasonably assured, the Company recognizes revenue only when cash is received and all revenue recognition criteria are met.
For revenue arrangements contracted with third-party advertising agencies, the Company provides cash incentives in the form of rebates based on volume and performance, and accounts for such incentives as a reduction of revenue in accordance with ASC 605-50-25. The cash incentives to third-party advertising agencies in the years ended December 31, 20102011 and 20112012 were $5,440,054$1,374,030 and $1,374,030,$72,464, respectively.
Costs of advertising revenues consist primarily of employee costs associated with platform operationsoperation and share basedshare-based compensation, depreciation expense,expenses, internet bandwidth leasing costs, video production costs, and amortization and write-downwrite-downs of licensed video copyrights.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Wireless value-added services (pre-2010 Reorganization—(pre-2010 Reorganization - discontinued operations (Note 2(1))
Wireless value-added service revenues were derived from providing personalized media, games, entertainment and communication services to mobile phone and personal handy phone (collectively “mobile phones”) customers of the various subsidiaries of the three major Chinese operators of telecommunication networks, China United Telecommunications Corporation (“China Unicom”), China Mobile Communications Corporation (“China Mobile”) and China Telecommunications Corporation (collectively, the “Telecom Operators”). Fees for these services, negotiated by network service agreements with the Telecom Operators and indicated in the messages received on mobile phones, were charged on a per-use basis or on a monthly subscription basis, and varied according to the type of services delivered.
The Company contractedcontracted with the Telecom Operators for the transmission of wireless services as well as for billing and collection services. The Telecom Operators provided the Company with monthly statements that represented the principal evidence that service had been delivered and triggered revenue recognition for a substantial portion of the Company’s revenue. In certain instances, when a statement was not received within a reasonable period of time, the Company made an estimate of the revenues and cost of services earned during the period covered by the statement based on its internally generated information, historical experience and/or other assumptions that were believed to be reasonable under the circumstances.
The Company measuredmeasured its revenues based on the total amount paid by mobile phone customers, for which the Telecom Operators billed and collected on the Company’s behalf. Accordingly, the service fees paid to the Telecom Operators were included in the cost of revenues. In addition, in respect of 2G services, the Telecom Operators charged the Company network fees based on a per message fee, which varied depending on the volume of messages sent in the relevant month, multiplied by the excess of messages sent over messages received. These network fees were likewise retained by the Telecom Operators and were reflected as cost of revenues. The cost of revenues also included fees paid to content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.
The Company evaluatedevaluated its cooperation arrangements with the Telecom Operators to determine whether to recognize the Company’s revenues on a gross basis or net of the service fees and net transmission charges paid to the Telecom Operators. The Company’s determination was based upon an assessment of whether it acted as a principal or agent when providing its services. The Company concluded that it acted as a principal in each of the arrangements. Factors that support the Company’s conclusion mainly included:
·the Company was the primary obligor in the arrangement;
·the Company was able to establish prices within price caps prescribed by the telecommunications operators to reflect or react to changes in the market;
·the Company determined the service specifications of the services it will be rendering;
·the Company was able to control the selection of its content suppliers; and
·The Telecom Operators usually would not pay the Company if users could not be billed or if users did not pay the Telecom Operators for services delivered and, as a result, the Company bore the delivery and billing risks for the revenues generated with respect to its services.
Based on these factors, the Company believedbelieved that recognizing revenues on a gross basis was appropriate. However, as noted above, the Company’s reported revenues were net of bad debt charges that had been deducted by the Telecom Operators.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Recorded Music (pre-2010 Reorganization—(pre-2010 Reorganization - discontinued operations (Note 2(1))
The Company was in the business of artist development, music production, offline music distribution, and online distribution through WVAS and the Internet. Recorded music revenues were derived from live performances, corporate sponsorship and advertising, online and wireless sales, and offline CD sales.
The Company generatedgenerated revenues from the sale of CDs either by providing the CD master to a distributor or by directly arranging for the volume production and subsequent wholesale of the CDs. In the former case, the Company received a fixed fee, had no further obligations and recognized the fee as revenue when the master CD was provided. In the latter case, the Company shipped the produced CDs to retail distributors and recognized wholesale revenues at the time of shipment less a provision for future estimated returns.
The Company recognizedrecognized artist performance fees and corporate sponsorship or marketing event fees once the performance or the service had been completed. In accordance with the relevant accounting standards for revenue recognition, corporate sponsorship arrangements involving multiple deliverables are broken into single-element arrangements using residual method for revenue recognition purpose. The Company recognized revenue on the service elements delivered and deferred the recognition of revenue for larger of the contractual cash holdback or the fair value of the undelivered service elements until the remaining obligations had been satisfied. The Company determined the fair value of undelivered service elements based on the price charged for the similar performance or marketing events on a standalone basis. Where the Company acted as the primary obligor in the transaction, revenues were recorded on a gross basis. Where the Company was considered an agent or where the artists separately contract with the event organizer, revenues were recorded on a net basis.
The Company licensedlicensed its music to third parties for guaranteed minimum royalty payments and normally received non-refundable upfront licensing fees. In such cases the Company recognized revenue on a straight-line basis over the license period and unrecognized revenues were included in liabilities. When the contract provided for additional payments if revenues exceed the minimum amount guaranteed, such amounts were included in revenues when the Company was notified of its entitlement to additional payments.
The Company incurredincurred costs in producing CD masters, volume CD production, artist and songwriter royalties based on certain percentage of the revenue, and royalties payable to other parties for the use of their work. The cost of record masters, volume CD productions, and royalties paid in advance were recorded in prepaid expenses and other current assets when the sales of the recording were expected to recover the cost and amortized as expenses over the revenue generating period, typically within one year. The decision to capitalize an advance to an artist, songwriter or other party required significant judgment as to the recoverability of these advances. Advances for royalties and other capitalized costs were regularly assessed for recoverability. The costs of ongoing royalties relating to the live performance, corporate sponsorship and advertising, online and wireless sales and offline CD sales to retail distributors were recognized as incurred.
Business taxTurnover taxes and related surcharges
The Company’sChina subsidiaries and VIEs are subject to business tax or value added tax (“VAT”) and related surcharges and value-added tax on the revenues earned for services providedprovided.
Relevant PRC authorities introduced, a turnover tax reform pilot program (the “Pilot Program”) in selected pilot cities in China for selected industries in 2012, to gradually expand the PRC.scope of VAT. The applicable businessturnover tax rate varies from 3%reform pilot program was first implemented in Shanghai effective 1 January 2012. According to 5% forCircular Caishui [2012] No.71 (“Circular 71”), the WVASPilot Program was expanded to Beijing (effective September 1, 2012) and recorded music services except forTianjin (effective December 1, 2012) where the offline CD distribution andGroup’sadvertising revenues are generated. Prior to the rateimplementation of value added tax is 13% on revenues from offline CD distribution. The applicablethe Pilot Program, the Group’s business tax rate for advertising business issales was 5% based on the gross advertising revenue before deducting the advertising agenciesagencies’ rebate. InAfter the accompanying consolidated statementsimplementation of operations,the Pilot Program in Beijing and Tianjin, the advertising business is now subject VAT rate at 6%. VAT payable on revenues generated 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. If any of the Company’s subsidiaries is recognized as a small-scale VAT payer, the applicable VAT rate shall be 3%, and no creditable input VAT can be recognized. Business tax and related surcharges for revenues derived from WVAS and recorded music revenues and advertising revenuesor VAT, as the case may be, are deducted from gross revenues to arrive at net revenues when incurred.revenues.
(20)F-22
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(19) Product development expenses
Product development expenses consist primarily of salaries and benefits for product development personnel, including share-based compensation costs. These costs are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. To date, the Company has essentially completed its development concurrently with the establishment of technological feasibility, and, accordingly, no costs have been capitalized. Product development expenses began to be incurred in 2011 with the changes in the Company’s business strategy which drove development efforts towards new technologies.
(21)(20) General and administrative expenses
General and administrative expenses consist primarily of salarysalaries and benefits for general management, finance and administrative personnel, bad debt provision, litigation accrual, depreciation, amortization and impairment of intangible assets, professional service fees, share-based compensation, office rental fees, and other expenses.
(22)(21) Sales and marketing
Sales and marketing expenses consist primarily of sales and marketing personnel payroll compensation and related employee costs, advertising and market promotion expenses, and other overhead expenses incurred by the Company’sGroup’s sales and marketing personnel.
(23)(22) Advertising costs
The Company Group expenses advertising costs as incurred. Total advertising expenses were $4,191,045 and $210,987 for the years ended December 31 2009 and 2010 pertaining to discontinued operations, respectively, and have been included in selling and marketing expenses and cost of revenues in discontinued operations. Total advertising expenses related to continuing operations were $153,633, $6,086,030, $2,493,901 and $2,493,901$553,380 for the years ended December 31, 2009, 2010, 2011 and 2011,2012, respectively, and have beenwere included in selling and marketing expenses within continuing operations.
(24) Stock-based(23) Share-based compensation
The CompanyGroup applies ASC Topic 718, which requires all share-based payments to employees and directors, including grants of employee stock options and restricted shares, to be recognized as compensation expense in the financial statements over the vesting periods of the awards based on the fair values of the awards determined at the grant date. The valuation provisions of ASC 718 apply to awards granted after the adoption of ASC 718, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period(s) if actual forfeitures differ from initial estimates.
In accordance with ASC 718, the CompanyGroup has recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions. See Note 1516 for further information on stock-based compensation.
(25)(24) Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Other leases, meaning those meeting the capitalization criteria in ASC Topic 840, “Leases,”“Leases”, are accounted for as capital leases. Payments made under operating leases, net of any incentives received by the Company from the leasing company, are charged to the consolidated statement of operations and comprehensive loss on a straight-line basis over the lease periods, as specified in the lease agreements, with reference to the actual number of users of the leased assets, as appropriate.
(26)F-23
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(25) Taxation
Current income taxes are provided for on the taxable income of each subsidiary on the separate tax return basis in accordance with the relevant tax laws.
Deferred income taxes are provided using the liability method in accordance with ASC Topic 740, “Income Taxes.“Income Taxes”. Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company does not have any liabilities for unrecognized tax benefits as of December 31, 20102011 or 2011.2012. Were the Company to have such liabilities, interest and penalties would be recognized in tax expense.
expenses.(27)(26) Statutory reserves
The Company’s subsidiaries incorporated in the PRC and the VIEs 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”).
The Company’s subsidiaries must make appropriations to (i) general reserve and (ii) enterprise expansion fund in accordance with the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the company’s registered capital; enterprise expansion fund appropriation is at the PRC subsidiaries’ directors’ discretion. The Company’s VIEs, in accordance with the China Company Laws, must make appropriations to a (i) statutory reserve fund and (ii) discretionary surplus fund. The statutory reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the company’s registered capital; other fund appropriation is at the VIEs’ directors’ discretion.
The general reserve fund and statutory reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. The enterprise expansion fund was mainlycan be used to expand the production and operation;operations; it also may be used for increasing the registered capital.
Appropriations to these funds are classified in the consolidated balance sheets as statutory reserves. No appropriations were made during the years ended December 31, 2009, 20102010, 2011 and 2011.2012. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company does not do so.
(27) Contingencies
(28) Contingencies
In the normal course of business, the Company 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. See Note 20.21.
(29) LossF-24
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(28) Earnings (loss) per share
Basic net lossearnings (loss) attributable to the Company’s ordinary shareholders per share is computed by dividing net lossearnings (loss) attributable to the Company’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted net lossearnings (loss) attributable to the Company’s ordinary shareholders’ per share is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the year. Potential ordinary shares consist of shares issuable upon the conversion of convertible debt (using the “if-converted method”) and upon the exercise of stock options for the purchase of ordinary shares and the settlement of restricted share units (using the “treasury stock method”). Potential ordinary shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
For each of the three years in the period ended December 31, 2011,2012, the dilutive effect of potential ordinary shares was not factored into the calculation of diluted earnings per share as a consolidated net loss was incurred in each period.
(30)(29) Comprehensive loss
Comprehensive loss is defined as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive loss, as presented on the accompanying consolidated balance sheets, consists of cumulative foreign currency translation adjustments.
adjustments included in other comprehensive income (loss), which are presented net of tax.(31)F-25
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
(30) Recent accounting pronouncements
In May 2011, the FASB issued Accounting Standards Update 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” Key provisions of the amendments in ASU 2011-04 include: (1) a prohibition on grouping financial instruments for purposes of determining fair value, except in limited cases; (2) an extension of the prohibition against the use of a blockage factor to all fair value measurements; and (3) a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. For items not carried at fair value but for which fair value is disclosed, entities will beare required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. This Accounting Standards Update is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt this ASU for the fiscal year commencing2011 and was adopted effective January 1, 2012 and does2012. The adoption of this guidance did not anticipate any changes as a result thereof givenhave an impact on the nature and extent ofconsolidated financial statements other than minimal additional qualitative disclosures in the Company’s assets and liabilities subject tofootnote regarding fair value measurement principles.measurements.
In June 2011 the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income: Presentation of Comprehensive Income”. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued Accounting Standards Update 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income.” This guidance isUpdate indefinitely deferred only the specific requirement in ASU 2011-05 to present reclassification adjustments for each component of other comprehensive income on the face of the financial statements. ASU 2011-05 and ASU 2011-12 were effective retrospectively for interim periods and annual periods beginning after December 15, 2011. While2011 and were adopted by the Company will be subjectgroup effective January 1, 2012. In February 2013, the FASB issued Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which closed the indefinite deferral. Specifically, ASU 2013-02, which is effective, with only prospective disclosure required, for public companies for interim and annual periods beginning after December 15, 2012, provides reporting entities the option to present the guidanceeffect of reclassification adjustments either parenthetically on the face of the financial statements or in accordance witha separate dedicated footnote. The adoption of ASU 2011-05 did not impact the transition provisions, there will be no changes as a result of adoptionconsolidated financial statements as the CompanyGroup already reports items of comprehensive income (loss) inpresented, and presents, a continuous statement of operations and comprehensive loss for all periods and plansincome (loss). The adoption of ASU 2013-02 (beginning January 1, 2013) is expected to do so prospectively. Further,have minimal impact as the component of the issued standard regarding detailed presentation reclassifications from other comprehensive income to net income has been subject to indefinite deferral by the FASB.Group does not experience recurring reclassifications.
In September 2011, the FASB issued Accounting Standards Update 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08). Under the revised guidance, entities testing for goodwill impairment have an option of performing a qualitative assessment before calculating the fair value for the reporting unit, (i.e., Step 1 of the traditional goodwill impairment test). If an entity determines, on a basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the first step of the two-step impairment test would be required. If it is not more likely than not that the fair value of the reporting unit is less than the carrying value, then goodwill is not considered to be impaired. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill at least annually for impairment. This ASU is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted.and the Company adopted the guidance effective January 1, 2012. The Company early-adopted this guidance for its annual goodwill impairment test performed as of December 31, 2011. The early adoption of this guidance did not change, nor would it be expected to change, the conclusions reached in periodic impairment evaluations for goodwill; moreover, the impairment evaluationCompany utilized the traditional two-step quantitative approach for goodwill, which is further describedits single reporting unit.
F-26
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in the Goodwill footnote to the financial statements.
U.S. dollars (US$) unless otherwise stated)(32) (31) Government Subsidies
Government subsidies represent discretionary cash subsidies granted by the local governments to encourage the development of certain enterprises that are established in the local special economic region.regions. The cash subsidies may be received in the form of (i) a fixed cash amount determined and provided by thea municipal government to an operating subsidiary for product and service innovation, or (ii) an amount determined as a percentage of the income tax and business tax actually paid by an operating subsidiary.
Cash subsidies have no defined rules and regulations to govern the criteria necessary for companies to enjoy the benefits and are recognized as other income when received.
For the years ended December 31, 2009, 2010, 2011 and 2011,2012, cash subsidies of $1,783, $58,025, $1,265,182 and $1,265,182$1,514,570 were recognized as other income, respectively.
(33) (32)Segment reporting
Based on the criteria established by ASC 280, (formerly referredthe authoritative accounting guidance for segment reporting, prior to as SFAS No. 131, “Disclosures about Segments of an Enterprisethe 2010 Reorganization, the Company operated and Related Information”),managed two principal operating segments, “WVAS” and “Recorded Music”; post 2010 Reorganization, the Company currently operates and manages its business as a single operating segment—online advertising. As the Company generates its revenues primarily from customerssegment “Online Advertising” (Note 17).
F-27
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in the PRC, no geographical segments are presented.
U.S. dollars (US$) unless otherwise stated)3. BUSINESS COMBINATIONS
2010 acquisitions
(a) 2010 acquisition
On January 18, 2010, the Companypredecessor entity Hurray! completed the acquisition of Ku6 Holding and its subsidiaries and VIEs, a leading online video portal in China, pursuant to the share purchase agreement entered into by and among Hurray!, Ku6 Holding and the shareholders of Ku6 Holding dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares, of which 44,438,100 replaced the options issued by Ku6 Holding and immediately vested without substantive future service requirements. After the completion of this acquisition, the Company owned 100% of the equity interests of Ku6 Holding and its subsidiaries and VIEs. The total fair value of the shares issued approximated $28.9 million based on the share price on the closing date and the difference amounting to $1,284,766 between the fair value of the 44,438,100 shares issued and the fair value of options issued by Ku6 Holding at acquisition date attributable to the pre-combination portion was recorded as share basedshare-based compensation expense in the consolidated statement of operations and comprehensive loss. Since the Company has unilateral control of Ku6, the Company started to consolidate the financial statements of Ku6 from February 1, 2010.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the purchase price allocation.
| | | | |
Total purchase price: |
|
| |
|
Ordinary shares issued to acquiredacquire all of the outstanding shares of Ku6 Holding | | 27,101,920 | 27,101,920 | |
Ordinary shares issued to replace the options issued by Ku6 Holding | | 1,773,080 | 1,773,080 | |
Share based compensation related to post combination portion | | (1,284,766 | (1,284,766 | ) |
| | | | |
| | | 27,590,234 | |
| | | | |
|
|
|
| | | | | |
| | | | | Amortization period |
|
Aggregate purchase price allocation –Ku6:–Ku6 Holding: |
|
| | | | | | |
Cash and cash equivalents | | 329,743 | 329,743 | | | | | |
Accounts receivable | | 3,264,513 | 3,264,513 | | | | | |
Other current assets | | 811,845 | 811,845 | | | | | |
Acquired intangible assets: | | | | | | | | |
Trademark | | 24,901,940 | 24,901,940 | | | | 20 years | |
Software technology | | 2,197,230 | 2,197,230 | | | | 7 years | |
Customer base | | 1,464,820 | 1,464,820 | | | | 5 years | |
Non-current deferred tax liability | | (4,826,059 | (4,826,059) | ) | | | | |
Goodwill | | 6,232,770 | 6,232,770 | | | | | |
Property and equipment, net | | 3,652,599 | 3,652,599 | | | | | |
Other non-current assets | | | 937,485 | | | | | |
Current liabilities
| | | (11,376,652 | ) | | | | |
| 937,485 | | | |
Current liabilities | | (11,376,652 | ) | | |
Total | | | 27,590,234 | | | | | |
| | | | | | | | |
Total identifiable intangible assets acquired upon consolidation mainly included trademark(s), software technology, and customer base, which have a weighted average amortization period of 18.2 years.
Goodwill primarily represented the expected synergies from combining operations of the Company and Ku6 Holding, which are complementary in a way to each other, and any other intangible benefits that do not qualify for separate recognition. Such goodwill is not deductible for tax purposes. The fair value of intangible assets was measured primarily by the income approach taking into consideration historical financial performance and estimates of future performance of Ku6’sKu6 Holding’s business.
F-28
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Ku6 Holding is subject to claims and litigation which may arise in the normal course of business. As of and subsequent to the acquisition date on January 18, 2010, Ku6 Holding was involved in a number of cases in various courts and arbitrations. These cases are substantially related to alleged copyright infringement arising before the acquisition. Accordingly, liabilities from contingencies assumed of $1,631,359 in relation to those cases have beenwere recognized in the current liabilities upon acquisition. The compensation amount was based on judgments handed down by the court and out-of-court settlements or management’s best estimation based on the historical actual compensation amount in recent years and the advice from PRC counsel. There are no accruals for any additional losses related to unasserted claims as there was no manifestation of claims and the amount cannot be reasonably estimated.
The Company completed its acquisition of Ku6 Holding on January 18, 2010 and began to consolidate the financial statements of Ku6 Holding upon unilateral control from February 1, 2010. The amount of Ku6’sKu6 Holding’s consolidated revenue and net loss for the eleven months ended December 31, 2010 included in the statements of operations and comprehensive loss was $14,101,171 and $45,165,985.
The following unaudited pro forma consolidated financial information reflects the results of operations for the years ended December 31, 2009 and 2010, as if the acquisition of Ku6 Holding had occurred as of January 1, 20092010 and after giving effect to purchase accounting adjustments primarily relating to the amortization of intangibles. The following pro forma financial information has been prepared for comparative purpose only and is not necessarily indicative of the results that would have been had the acquisitions been completed at the beginning of the period presented, nor is it indicative of future operating results.
| | | | | | | | |
| | | Year Ended
December 31, 2009 | | | Year Ended
December 31, 2010 | |
| | | (unaudited) | | | (unaudited) | |
Net revenues | | | 7,261,708 | | | | 16,787,493 | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (35,258,520 | ) | | | (56,033,640 | ) |
Loss per ADS- Basic and Diluted: | | | (1.61 | ) | | | (1.81 | ) |
|
| Year ended
December 31, 2010 |
|
|
| (unaudited) |
|
Net revenues | | 16,787,493 | |
Net loss attributable to Ku6 Media Co., Ltd. | | (56,033,640 | ) |
Loss per ADS- basic and diluted: | | (1.81 | ) |
The pro forma net lossesloss for the yearsyear ended December 31, 2009 and 2010 include $1,851,951 and $1,851,951, respectively,includes $1,851,951 for the amortization of identifiable intangible assets arising from the acquisition of Ku6.
(b) 2009 acquisitionKu6 Holding.
Acquisition of Seed Music Group Limited (disposed in August 2010 and presented in discontinued operations (Note 2(1))
In September 2008, the Company entered into a definitive agreement to acquire, through Hurray! Media Co., Ltd, a controlling stake in Seed Music Group Limited (“Seed Music”) and its subsidiaries including Seed Music Co., Ltd., Profita Publishing Limited and Leguan Seed (Beijing) Culture Consulting Co., Ltd. (collectively referred to as “Seed Music Group”), a Taiwan based company that focuses on artist development, music production and offline music distribution in Asia Pacific, especially in China. The Company paid an advance of $1,907,400 to the selling shareholders to acquire an approximately 47.58% equity interest of Seed Music in 2008 and such payment was recorded as prepaid acquisition cost as of December 31, 2008 as this transaction had not closed as of that date. Concurrent with this transaction, the Company subscribed for an additional 7,813 shares, representing a 13.5% ownership interest, from Seed Music for $600,038 in 2008, which was recorded as an investment at cost at December 31, 2008, as that portion of the transaction had been consummated by that date. The acquisition of the 47.58% equity interest was completed and the Company began to consolidate Seed Music on January 1, 2009. The Company’s total ownership in Seed Music was 61.08% after the closing of the acquisition and subscription of Seed Music shares.
According to the agreements, there were further contingent payments based on Seed Music’s operating performance. The contingent payments were to be paid in cash if Seed Music exceeded the performance target. If not, the selling holders were obligated to transfer certain Seed Music shares or make cash payments to the Company. Such contingent payments were recorded as contingent consideration based on the fair value of $352,217, which was classified within Level 3 of the fair value hierarchy and was measured on a recurring basis (Note 10). The contingent consideration was settled by June 30, 2010. As the actual performance of Seed Music did not meet the specified earnings objectives, the Company was not required to make any further payments.
The non-controlling shareholders had options to sell their shares to the Company at a price based on a formula which included Seed Music’s operating performance. Therefore, from the date of consolidation to the derecognition on disposal, the non-controlling interests were presented as redeemable non-controlling interests on the balance sheet and such amounts were accreted to the redemption value if the redemption was probable. Since the operating performance of Seed Music did not meet the specified target, the Company considered the redemption was not probable. In addition, the non-controlling shareholders granted call options to the Company to subscribe for all or part of their remaining shares in Seed Music. The embedded put and call options were not derivatives that required bifurcation as separate financial instruments and were accounted for together with the non-controlling interest.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation was finalized.
| | | | |
Total purchase price:
F-29
| | | | |
Cash consideration
| | | 2,507,438 | |
Contingent consideration (Note 10)
| | | 352,217 | |
Fair value of redeemable non-controlling interests
| | | 1,569,808 | |
| | | | |
| | | 4,429,463 | |
| | | | |
| | | | | | | | |
| | | | | Amortization period | |
Aggregate purchase price allocation –Seed Music:
| | | | | | | | |
Cash and cash equivalents
| | | 1,034,308 | | | | | |
Inventory
| | | 53,504 | | | | | |
Other current assets
| | | 891,723 | | | | | |
Acquired intangible assets:
| | | | | | | | |
Artist contracts
| | | 1,717,846 | | | | 7.1~9.0 years | |
Trademarks
| | | 1,569,808 | | | | 20 years | |
Non-compete agreement
| | | 183,218 | | | | 4.5 years | |
Copyrights
| | | 5,863 | | | | 0.4 years | |
Non-current deferred tax liability
| | | (869,184 | ) | | | | |
Goodwill (allocated to music segment)
| | | 2,535,523 | | | | | |
Property and equipment, net
| | | 50,084 | | | | | |
Other non-current assets
| | | 51,526 | | | | | |
Current liabilities
| | | (2,216,292 | ) | | | | |
Other non-current liabilities
| | | (578,464 | ) | | | | |
| | | | | | | | |
Total
| | | 4,429,463 | | | | | |
| | | | | | | | |
Goodwill primarily represented the expected synergies from combining operations of the Company and Seed Music, which were complementaryKU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in a way to each other, and any other intangible benefits that did not qualify for separate recognition. Such goodwill was not deductible for tax purposes. The fair value of intangible assets was measured primarily by the income approach taking into consideration historical financial performance and estimates of future performance of Seed Music’s business.
U.S. dollars (US$) unless otherwise stated)The fair value of redeemable non-controlling interests was determined using the income approach including discounted cash flow modeling and unobservable inputs including assumptions of projected revenue, expenses, capital spending, other costs and a discount rate with regards to the non-controlling discount in recent share transactions made at arm’s length close to the acquisition date, taking into consideration other factors, as appropriate. The net fair value of the embedded call and put options was not material.
The Company completed its acquisition of Seed Music on January 1, 2009 and began to consolidate Seed Music Group’s consolidated financial statements from then on. The amount of Seed Music Group’s revenue and net loss for the year ended December 31, 2009 included in the statements of operations and comprehensive loss was approximately $6.7 million and $1.0 million. Total net loss attributable to redeemable non-controlling interests was $1,198,591. As of December 31, 2009, the balance of redeemable of non-controlling interests was reduced to $370,870 as a result of share of loss and after giving effect to the impact of foreign currency translation.
4. DISCONTINUED OPERATIONS
Disposal of WVAS and recorded music businesses (2010 Reorganization)
In May 2010, the Company disposed of Huayi Music to Huayi Media for RMB 34,450,000 (equivalent to $5,045,754) in cash and in August 2010, the Company disposed all of its WVAS and remaining recorded music businesses to Shanda for $37,243,904 in cash. See Note 2(1).
A summary of the major financial information for the discontinued operations of WVAS and recorded music businesses as of August 31, 2010 and for the year ended December 31, 2009 and eight monthsmonth period ended August 31, 2010 is set out below:
|
| | | |
| | August 31, 2010 |
|
Current assets: |
|
| |
|
Cash | | 24,948,577 | 24,948,577 | |
Accounts receivable, net of allowance | | 5,402,738 | 5,402,738 | |
Prepaid expenses and other current assets | | 2,610,863 | 2,610,863 | |
| | 32,962,178 | |
Non-current assets: | | | |
| | | 32,962,178 | |
| | | | |
Non-current assets:
| | | | |
Property and equipment, net | | 943,258 | 943,258 | |
Intangible assets | | 766,847 | 766,847 | |
Goodwill | | 1,998,821 | 1,998,821 | |
Other non-current assets | | 300,532 | 300,532 | |
| | 4,009,458 | |
Current liabilities: | | | |
| | | 4,009,458 | |
| | | | |
Current liabilities:
| | | | |
Accounts payable | | 4,337,542 | 4,337,542 | |
Accrued expenses and other current liabilities | | 7,034,894 | 7,034,894 | |
| | | | |
| | | 11,372,436 | |
| | | | |
Non-current liabilities: |
|
| |
|
Non-current deferred tax liabilities | | 186,528 | 186,528 | |
Other non-current liabilities | | 12,322 | 12,322 | |
| | 198,850 | |
| | | |
Non-controlling interests: | | 1,717,533 | 198,850 |
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
|
| Eight months ended
August 31, 2010 |
|
| | | | |
Non-controlling interests and redeemable non-controlling interests:Total net revenues
| | 14,844,408 | 1,717,533 | |
Loss from operations | | (3,460,316 | ) |
Income tax benefit (expense) | | 25,584 | |
Net loss | | (3,382,438 | ) |
| | | |
Less: Net loss attributable to non-controlling interests | | 243,666 | |
Net loss from discontinued operations, net of tax | | (3,138,772 | ) |
Gain from disposal of Huayi Music, net of tax | | 4,486,786 | |
| | | |
Total net income from discontinued operations, net of tax | | 1,348,014 | |
| | | | | | | | |
| | | Year ended December 31, 2009 | | | Eight months ended
August 31, 2010 | |
Total net revenues | | | 34,642,295 | | | | 14,844,408 | |
Loss from operations | | | (21,054,774 | ) | | | (3,460,316 | ) |
Income tax benefit (expense) | | | (234,286 | ) | | | 25,584 | |
Net loss | | | (21,778,174 | ) | | | (3,382,438 | ) |
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests | | | 4,182,875 | | | | 243,666 | |
| | | | | | | | |
Net loss from discontinued operations, net of tax | | | (17,595,299 | ) | | | (3,138,772 | ) |
Gain from disposal of Huayi Music, net of tax | | | — | | | | 4,486,786 | |
| | | | | | | | |
Total net (loss) income from discontinued operations | | | (17,595,299 | ) | | | 1,348,014 | |
| | | | | | | | |
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of:
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | December 31, 2010 | | | December 31, 2011 | | | | | | |
Prepaid expenses | | | 282,290 | | | | 431,560 | | | 431,560 | | 309,503 | |
Advances to suppliers | | | 454,273 | | | | 242,932 | | | 242,932 | | 158,825 | |
Staff advances and other receivables | | | 1,028,156 | | | | 209,852 | | | 209,852 | | 55,053 | |
Prepaid licensing fee of video copyright | | | 1,722,608 | | | | — | | |
| | | | | | | | 884,344 | | 523,381 | |
| | | 3,487,327 | | | | 884,344 | | |
| | | | | | | |
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of:
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | December 31, 2010 | | December 31, 2011 | | | | | | |
Furniture and office equipment | | | 1,208,434 | | | | 1,055,377 | | | 1,055,377 | | 696,780 | |
Telecommunications equipment | | | 10,627,167 | | | | 3,450,208 | | | 3,450,208 | | 4,699,800 | |
Leasehold improvements | | | 1,368,677 | | | | 1,230,327 | | | 1,230,327 | | 1,344,800 | |
| | | | | | | | 5,735,912 | | 6,741,380 | |
Less: Accumulated depreciation and amortization | | | (2,143,167 | ) | (3,823,268 | ) |
| | | 13,204,278 | | | | 5,735,912 | | | 3,592,745 | | 2,918,112 | |
Less: accumulated depreciation and amortization | | | (5,200,804 | ) | | | (2,143,167 | ) | |
| | | | | | | |
| | | 8,003,474 | | | | 3,592,745 | | |
| | | | | | | |
Depreciation expense for the years ended December 31, 2009, 2010, 2011 and 20112012 was $881,633, $3,265,975, $3,409,647 and $3,409,647$1,941,761, respectively.
The Company acquired $2,428,694$1,231,013 in additional property plant, and equipment in 2012 (2011: $2,428,694).
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in support of business strategy changes.U.S. dollars (US$) unless otherwise stated)
Total equipment disposal loss in 2011 was $3,043,006 (zero proceeds less remaining net book value), which was mainly comprised of computers and servers in relation to technological upgrades and replacements following the Company’s business strategy adjustment. The Company has recorded the disposal loss in general and administrative expenses.
7. ACQUIRED INTANGIBLE ASSETS, NET
| | | | | | | | | | December 31, 2011 | |
| | | December 31, 2011 | | | Gross carrying
amount | | Accumulated
amortization | | Intangible assets
abandonment
(Note 2(16)) | | Net carrying
amount | |
| | | Gross carrying
amount | | | Accumulated
amortization | | Intangible assets
impairment
(Note 2(17)) | | Net carrying
amount | | | | | | | | | | |
Online advertising segment: | | | | | | | | | |
Trademark | | | 24,901,940 | | | | (2,386,436 | ) | | | — | | | | 22,515,504 | | | 24,901,940 | | (2,386,436 | ) | — | | 22,515,504 | |
Technology | | | 2,197,230 | | | | (601,623 | ) | | | — | | | | 1,595,607 | | | 2,197,230 | | (601,623 | ) | — | | 1,595,607 | |
Customer list | | | 1,464,820 | | | | (415,032 | ) | | | (1,049,788 | ) | | | — | | | 1,464,820 | | (415,032 | ) | (1,049,788 | ) | — | |
Software technology | | | 823,273 | | | | (507,685 | ) | | | (315,588 | ) | | | — | | | 823,273 | | (507,685 | ) | (315,588 | ) | — | |
| | | | | | | | | | | | | | 29,387,263 | | (3,910,776 | ) | (1,365,376 | ) | 24,111,111 | |
| | | 29,387,263 | | | | (3,910,776 | ) | | | (1,365,376 | ) | | | 24,111,111 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, 2010 | |
| | | Gross carrying
amount | | | Accumulated
amortization | | | Net carrying
amount | |
Online advertising segment: | | | | | | | | | | | | |
Trademark | | | 24,901,940 | | | | (1,141,339 | ) | | | 23,760,601 | |
Technology | | | 2,197,230 | | | | (287,733 | ) | | | 1,909,497 | |
Customer list | | | 1,464,820 | | | | (268,550 | ) | | | 1,196,270 | |
Software technology | | | 823,273 | | | | (425,358 | ) | | | 397,915 | |
| | | | | | | | | | | | |
| | | 29,387,263 | | | | (2,122,980 | ) | | | 27,264,283 | |
| | | | | | | | | | | | |
| | December 31, 2012 | |
| | Gross carrying
amount | | Accumulated
amortization | | Net carrying
amount | |
| | | | | | | |
Trademark | | 24,901,940 | | (3,631,533 | ) | 21,270,407 | |
Technology | | 2,197,230 | | (915,513 | ) | 1,281,717 | |
| | 27,099,170 | | (4,547,046 | ) | 22,552,124 | |
Amortization expenses for the years ended December 31, 2009, 2010, 2011 and 20112012 were $916,763, $2,000,237, $1,787,796 and $1,787,796,$1,558,987, respectively.
Following the Company’s business strategy adjustment during the year 2011, the Company appointed Shengyue as its primary agency of thefor online advertising services.sales. As a result, the customer list intangible asset associated with the original business model was no longer of use toabandoned by the Company; thereforeCompany, and the unamortised balance of the customer list was recorded as an impairment withinwritten off through general and administrative expense.expenses.
In relation to the deconsolidationdisposition of 80% of the equity interests in Yisheng (Note 2(1)(a)), during 2011, the software technology intangible assets related to Yisheng werewas fully impaired. The unamortised balance of the software technology was recordedwritten off through general and administrative expense in 2011.expenses.
Assuming no subsequent impairment of the identified intangible assets recorded as of December 31, 2011,2012, amortization expenses for the net carrying amount of intangible assets are expected to be as follows in future years. If the Company acquires additional intangible assets in the future, the operating expenses or cost of revenue will be increased by the amortization of those assets.
| 2012 | | | 1,558,992 | | |
2013 | | | 1,558,992 | | | 1,558,987 | |
2014 | | | 1,558,992 | | | 1,558,987 | |
2015 | | | 1,558,992 | | | 1,558,987 | |
2016 and later | | | 17,875,143 | | |
2016 | | | 1,558,987 | |
2017 and later | | | 16,316,176 | |
| | | | | 22,552,124 | |
| | | 24,111,111 | | |
| | | | |
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
8. INVESTMENTS IN EQUITY AFFILIATES
In April 2007, the Company acquired a 30% equity interest in Beijing New Run Entertainment Development Co., Ltd. (“New Run”), an independent record label in China, and it was accounted for using the equity method from April 1, 2007 forward. The total acquisition cost was $2,483,277 in cash, including transaction costs. No impairment charges were recorded for the New Run investment during the year ended December 31, 2009. As of December 31, 2009, the investment in New Run had been reduced to nil as a result of equity share of losses and impairment charges and after giving effect to the impact of foreign currency translation. The investment in New Run was also disposed of in August 2010 as part of the 2010 Reorganization (Note 1).
In August 2011, the Company disposed of an 80% equity interest to related parties and a then-employeethen employee of the Company, and retained a 20% equity interest in the Yisheng online audio business (see Note(Note 2(1)(a) for further details)). The Company evaluated its remaining interest in Yisheng under relevant guidance in ASC 810 and ASC 323, pertaining to consolidation and equity method accounting, respectively. The Company determined that it does not have a controlling financial interest in the investee, but rather possesses significant influence. Accordingly, the Company has accounted for this investment under the equity method. The investment was recorded based on the interest percentage of Yisheng'sYisheng’s equity fair value after reflecting a capital contribution by an affiliate of Shanda to Yisheng. As of December 31, 2012, the investment in Yisheng had been reduced to nil as a result of the Group’s equity share of losses and after giving effect to the impact of foreign currency translation.
| | | | | | | | | | | | | | | | | | | | |
| | | Balance at
December 31, 2010 | | | Equity
investment | | | Share of
loss | | | Translation
Difference | | | Balance at
December 31, 2011 | |
Equity interest in Yisheng | | | — | | | | 522,252 | | | | (263,313 | ) | | | (3,658 | ) | | | 255,281 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2010 | | Equity
Investment | | Share
of loss | | Foreign
currency
translation | | December 31, 2011 | |
| | | | | | | | | | | |
Equity interest in Yisheng | | — | | 522,252 | | (263,313 | ) | (3,658 | ) | 255,281 | |
| | December 31, 2011 | | Share of loss | | Foreign currency
translation | | December 31, 2012 | |
| | | | | | | | | |
Equity interest in Yisheng | | 255,281 | | (252,585 | ) | (2,696 | ) | — | |
9. GOODWILL
The following table portrays gross balances and accumulated amortization or impairmentschanges in the carrying amount of goodwill for the Company’s reportable segments. Pre-2010 Reorganization, reportable segments included WVAS and Recorded Music. Post-2010 Reorganization, the Company’s single reportable segment is Online Advertising.from significant acquisitions are as follows.
| | | | | | | | | | | | | | | | |
| Gross amount of goodwill | | WVAS | | | Recorded
Music | | | Online
Advertising | | | Total | |
Balance as of January 1, 2010 | | | 41,890,391 | | | | 7,848,655 | | | | — | | | | 49,739,046 | |
| | | | |
Goodwill arising from acquisitions | | | — | | | | — | | | | 6,232,770 | | | | 6,232,770 | |
Goodwill contributed by Shanda | | | — | | | | — | | | | 663,570 | | | | 663,570 | |
Goodwill transferred out due to disposal | | | (42,148,288 | ) | | | (7,848,655 | ) | | | — | | | | (49,996,943 | ) |
Effect of exchange rate changes | | | 257,897 | | | | — | | | | — | | | | 257,897 | |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2010 | | | — | | | | — | | | | 6,896,340 | | | | 6,896,340 | |
| | | | |
Goodwill distributed to Shanda due to disposal | | | — | | | | — | | | | (663,570 | ) | | | (663,570 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2011 | | | — | | | | — | | | | 6,232,770 | | | | 6,232,770 | |
| | | | | | | | | | | | | | | | |
| | | | |
| Accumulated goodwill impairment | | WVAS | | | Recorded
Music | | | Online
Advertising | | | Total | |
Balance as of January 1, 2010 | | | (41,890,391 | ) | | | (5,749,365 | ) | | | — | | | | (47,639,756 | ) |
| | | | |
Impairment transferred out due to disposal | | | 42,148,288 | | | | 5,749,365 | | | | — | | | | 47,897,653 | |
Effect of exchange rate changes | | | (257,897 | ) | | | — | | | | — | | | | (257,897 | ) |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2010 | | | — | | | | — | | | | — | | | | — | |
| | | | |
Impairment | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2011 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net carrying amount as of December 31, 2010 | | | — | | | | — | | | | 6,896,340 | | | | 6,896,340 | |
| | | | | | | | | | | | | | | | |
Net carrying amount as of December 31, 2011 | | | — | | | | — | | | | 6,232,770 | | | | 6,232,770 | |
| | | | | | | | | | | | | | | | |
January 1, 2011 | | 6,896,340 | |
Goodwill transferred out due to disposal of Yisheng | | (663,570 | ) |
December 31, 2011 | | 6,232,770 | |
Changes in goodwill | | — | |
December 31, 2012 | | 6,232,770 | |
Goodwill arising from the business combinations completed in 2010 has been allocated to the single reporting unit of the Company.
ASC Topic 350 requires that the goodwill impairment assessment be performed at the reporting unit level.
The Company performed an impairment test at the reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, 2010, 2011 and 2011.
2012.When available, the Company uses observable market data, including pricing on recent closed market transactions, to determine the fair value of its reporting unit(s) and compares such data with carrying amounts of its reporting unit(s) to assess any potential goodwill impairment. The fair value of reporting units was determined based on the market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, the Company measures the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach included using financial metrics and ratios of comparable public companies. When the goodwill is determined to be impaired, the Company uses an income approach including discounted cash flow modeling for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the related industry to determine the amount of any impairment.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
10. FAIR VALUE MEASUREMENTS
As of December 31, 20102011 and December 31, 2011,2012, the carrying amount of the Company’s cash and restricted cash approximatesequivalents, accounts receivable, prepayments and other current assets, amounts due from/to related parties, short-term borrowings, accounts payable and accrued expenses and other current liabilities approximated fair value due to their short maturities. Accounts receivable, prepayments and other current assets, amounts due from/to related parties, accounts payable, and accrued expenses and other current liabilities, which are measured at carrying value, would represent Level 3 fair value measurement if carried at fair value due to the short maturitypresence of these instruments. The carrying value ofsignificant unobservable inputs. In a similar fashion, the Company’s various receivablecash and payable balances approximate their market value based on theircash equivalents and short-term maturities. Thereborrowings would represent Level 2 measurements due to the presence of significant observable inputs such as interest rates.There are no other financial assets or liabilities that are being measured at fair value on a recurring basis at December 31, 20102011 or December 31, 2011. As described in2012.
On a non-recurring basis, the Discontinued Operations footnote, the level 3-classified contingent consideration liability arising out of the acquisition of Seed Music in 2009, which was $352,217 at December 31, 2009, was extinguished by June 30, 2010.
The CompanyGroup tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The Company measures the fair value of long-lived assets based using discounted cash flow modelling and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile.profile of the online video industry. During the years ended December 31, 2010, 2011 and 2012, the Group recognized impairment losses of nil, $1.4 million and nil for its intangible assets, respectively. The Group has not presented tabular disclosures or further qualitative information regarding fair value for these level 3-classified assets because the related assets have been fully written off in 2011; accordingly, the related fair values are zero since then. See Note 7 to the Consolidated Financial Statements for additional information of the impairment provision relating to the acquired intangible assets.
11. SHORT-TERM BORROWINGS
On September 28, 2011, the Company entered into an agreement with a PRC bank to borrow RMB20 million ($3,177,680) for the period from September 29, 2011 to September 28, 2012. InterestThe interest rate iswas 6.89% per annum. The loan iswas pledged by a certificate of deposit of $3.6 million.million reflected as restricted cash. The Company repaid this short-term borrowing in 2012.
12.12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of:
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | December 31, 2010 | | | December 31, 2011 | | | | | | |
Accrued litigation provision | | | 748,299 | | | | 2,683,968 | | | 2,683,968 | | 2,077,753 | |
Accrued payroll | | | 2,127,951 | | | | 2,675,282 | | | 2,675,282 | | 1,951,347 | |
Accrued professional service fees | | | 978,602 | | 1,766,673 | |
Accrued welfare benefits | | | 1,731,403 | | | | 1,297,147 | | | 1,297,147 | | 1,367,536 | |
Accrued professional service fees | | | 1,524,890 | | | | 978,602 | | |
Advances from customers | | | 609,442 | | | | 722,553 | | | 722,553 | | 415,475 | |
Business tax payable | | | 472,534 | | 287,365 | |
Value-added tax payable | | | — | | 158,292 | |
Other accrued expenses | | | 2,278,758 | | | | 713,719 | | | 713,719 | | 891,605 | |
Other taxes payable | | | 718,668 | | | | 472,845 | | | 472,845 | | 437,438 | |
Business tax payable | | | 1,722,830 | | | | 472,534 | | |
| | | | | | | | 10,016,650 | | 9,353,484 | |
| | | 11,462,241 | | | | 10,016,650 | | |
| | | | | | | |
F-34
13.Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
13. RELATED PARTY TRANSACTIONS AND BALANCES
Related Parties of Ku6 Media Co., Ltd. (both pre- and post-2010 Reorganization)
| | |
Entity |
| Relationship to Ku6 Media Co., Ltd. |
Shanda Interactive Entertainment Limited (“Shanda”) | | Controlling shareholder |
Shanda Computer (Shanghai) Co., Ltd. (“Shanda Computer”) | | Wholly owned affiliate of Shanda |
Shanghai Shulong Computer Technology Co., Ltd. (“Shanghai Shulong Computer”) | | Wholly ownedConsolidated affiliate of Shanda Games Limited |
Shanghai Shulong Technology Co., Ltd. (“Shanghai Shulong”) | | Wholly ownedConsolidated affiliate of Shanda Games Limited |
Chengdu Jisheng Technology Co., Ltd. (“Chengdu Jisheng”) | | Wholly owned affiliate of Shanda |
Shanghai Shengyue Advertising Co., Ltd. (“Shengyue”) | | Wholly owned affiliate of Shanda |
Shanda Media Group Ltd. (“Shanda Media”) | | Wholly owned affiliate of Shanda |
Shanda Capital Limited. (“Shanda Capital”) | | Wholly owned affiliate of Shanda |
Shanda Games Ltd. (“Shanda Games”) | | Affiliate under common control of Shanda |
Hurray! Media Co., Ltd. | | Wholly owned affiliate of Shanda |
Seed Music Group Limited | | Wholly owned affiliate of Shanda |
Hurray! Solutions Ltd. | | Wholly owned affiliate of Shanda |
Post-2010 Reorganization Related Party ActivityActivities
Following the Reorga2010 Reorganization in August 2010, the Company providesGroup receives advertising businessrevenues from and pays promotional service fees to and receives promotional services from companies under common control by Shanda. Accordingly, certain revenues from the sale of advertising businessresources to sister entities, and related party costs of revenue, are separately classified in the consolidated statement of operations and comprehensive loss. From time to time, the Group also lends cash resources to (or borrows cash resources from) other companies under common control by Shanda based upon its U.S. or RMB-denominated cash resource positions and the related resources and needs of other companies under common control by Shanda. These lending (borrowing) transactions are reflected as investing (financing) activities, respectively, in the consolidated statement of cash flows and are reflected in the consolidated balance sheet (and below in this Note) as other receivables due from, or other payables due to, related parties. A detailed discussion of related party activity pre-dating the 2010 Reorganization is not included herein as such activity relates to operations which have been divested (Note 4).
Pre-2010 Reorganization Related Party ActivityF-35
Table of Contents
As a result of the acquisition of Huayi Music, Hurray! Freeland Digital Music Technology Co.
KU6 MEDIA CO., Ltd. (“Freeland Music”LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) and New Run, which were disposed in August 2010 and presented in discontinued operations (Note 2(1)), the Company agreed to use the existing distribution and CD manufacturing operations, where appropriate, owned by the other shareholders, or their related parties, of these music companies. In addition, these parties were able to use the music or artists of these companies and made royalty and other payments to Huayi Music, Freeland Music or New Run. These agreements were for durations of one year but were extendable by the mutual agreement of both parties.unless otherwise stated)
Annual Related Party ActivityActivities
During the years ended December 31, 2009, 2010, 2011 and 2011,2012 significant related party transactions occurring during the annual periods were as follows.
| | | | | | | | | | | | |
| | Year Ended
December 31, 2009 | | | Year Ended
December 31, 2010 | | | Year Ended
December 31, 2011 | |
Related party transactions in discontinued operations:
| | | | | | | | | | | | |
Consulting, production and marketing service fee from Huayi Brothers Times Culture Broker Co., Ltd.
| | | 281,580 | | | | — | | | | — | |
CD distribution revenue from Beijing Century Freeland Film Media Co., Ltd.
| | | 52,248 | | | | — | | | | — | |
| | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
Related party transactions in continuing operations: | | | | | | | |
Advertising revenue received from companies under common control by Shanda | | 701,732 | | 8,076,155 | | 12,481,927 | |
Promotion service fee paid to companies under common control by Shanda | | 376,302 | | 379,465 | | — | |
Loan borrowing from Shanghai Shulong Computer Technology Co., Ltd. | | — | | 6,832,012 | | — | |
Loan borrowing from Shanghai Shulong Technology Co., Ltd. | | 3,030,711 | | 6,503,884 | | — | |
Loan borrowing from Shanda Computer (Shanghai) Co., Ltd. * | | 1,565,290 | | — | | — | |
Loan repayment from Shanda Games Limited | | — | | — | | 13,900,000 | |
Loan repayment to Shanghai Shulong Computer Technology Co., Ltd. | | — | | — | | 6,769,544 | |
Loan repayment to Shanghai Shulong Technology Co., Ltd. | | — | | 3,189,527 | | 3,135,076 | |
Loan to Shanda Games Limited | | 3,200,000 | | 14,000,000 | | — | |
Loan to Shanda Capital Limited | | — | | — | | 470,000 | |
Loan interest income from Shanda Games Limited | | — | | 108,019 | | 246,178 | |
Loan interest income from Shanda Capital Limited | | — | | — | | 10,575 | |
Convertible Bond issued to Shanda Media (Note 1) | | — | | 50,000,000 | | — | |
Convertible Bond redeemed from Shanda Media (Note 1) | | — | | 50,000,000 | | — | |
Interest expense for loan from companies under common control by Shanda | | — | | 688,952 | | 448,011 | |
Interest expense of Convertible Bond issued to Shanda Media (Note 1) | | — | | 375,000 | | — | |
*Borrowing is not reflected in “other payables due to related parties” as the liability was incurred by the Company’s formerly consolidated subsidiary Yisheng, which was deconsolidated in 2011 (Note 8). The loan was assumed by the acquiring parties of Yisheng and de-recognized upon deconsolidation.
| | | | | | | | | | | | |
| | | Year Ended
December 31, 2009 | | | Year Ended
December 31, 2010 | | | Year Ended
December 31, 2011 | |
Related party transactions in continuing operations: | | | | | | | | | | | | |
Advertising revenue received from companies under common control by Shanda | | | 279,341 | | | | 701,732 | | | | 8,076,155 | |
Promotion service fee paid to companies under common control by Shanda | | | — | | | | 376,302 | | | | 379,465 | |
Loan payable to Shanda Computer (Shanghai) Co., Ltd. | | | — | | | | 1,565,290 | | | | — | |
Loan payable to Shanghai Shulong Computer Technology Co., Ltd. | | | — | | | | — | | | | 6,832,012 | |
Loan payable to Shanghai Shulong Technology Co., Ltd. | | | — | | | | 3,030,711 | | | | 6,503,884 | |
Loan repayment to Shanghai Shulong Technology Co., Ltd. | | | — | | | | — | | | | 3,189,527 | |
Loan receivable from Shanda Games Limited | | | — | | | | 3,200,000 | | | | 14,108,019 | |
Convertible Bond issued to Shanda Media (Note 1) | | | — | | | | — | | | | 50,000,000 | |
Convertible Bond redeemed from Shanda Media (Note 1) | | | — | | | | — | | | | 50,000,000 | |
Interest expense of Convertible Bond issued to Shanda Media (Note 1) | | | — | | | | — | | | | 375,000 | |
Interest expense for loan from companies under common control by Shanda | | | — | | | | — | | | | 688,952 | |
The Company entered into a cooperative agreement with Shengyue, a wholly owned subsidiary of Shanda in 2011. Under this agreement, Shengyue was appointed as Ku6’sthe Company’s primary agency to secure advertisementsadvertisement from various end advertisers. Ku6 will provideThe Company provides advertising spacecapacity/spots (i.e. headlines, banners, short video, etc) to Shengyue on its online video portal. This cooperative agreement coverscoversed a period of 1 year and 9 months commencing April 1, 2011. During the testing period from April 1, 2011 to June 30, 2011, Shengyue did not guarantee a minimum revenue stream to Ku6,the Company, nor is Ku6was the Company obligated for any commission fee. Following the testing period, the “commission free period” ranstarted from July 1, 2011 toand ended on December 31, 2011;2011, and during thisthe period Shengyue guaranteed a minimum advertising revenue for each fiscal quarter to Ku6,the Company; however, the commission fee was waived in this period. Commencing January 1, 2012, in addition to the guaranteed minimum revenue, Ku6 isthe Company was obligated for commission fees to Shengyue based on certain tiered percentages which gradually increase with additional incremental tiers (layers)of the advertising revenue volume. There were no commission fees incurred for any historical periods, as the Group enjoyed the commission-free period in 2011 and earned minimum guaranteed revenues in 2012.
In March 2012, the Company provided a $0.5 million unsecured loan to Shanda Capital Limited, a company controlled by Shanda Interactive, which carries an interest rate of 3% per year and was due on March 25, 2013; its terms are in the process of being extended.
F-36
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Year-End Related Party Balances
At December 31, 20102011 and December 31, 2011,2012, the amounts receivable from and payable to related parties included in the consolidated balance sheet mainly represent the outstanding amounts arising from the transactions described in the preceding section, except for the payable for licensed video copyrights amounting to $1,664,570 due to a related party at December 31, 2010.section.
Accounts receivableReceivable balances due from related parties are mainly as follows:
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | December 31, 2010 | | | December 31, 2011 | | | | | | |
Shanghai Shengyue Advertising Co., Ltd. | | | — | | | | 2,649,385 | | | 2,649,385 | | 4,333,797 | |
Chengdu Jisheng Technology Co., Ltd. | | | 219,697 | | | | — | | |
Other companies under common control by Shanda | | | 106,060 | | | | 90,794 | | | 90,794 | | 65,240 | |
| | | | | | | | 2,740,179 | | 4,399,037 | |
| | | 325,757 | | | | 2,740,179 | | |
| | | | | | | |
Other balances with related parties are mainly as follows:
| | | | December 31, 2010 | | | December 31, 2011 | | | December 31, 2011 | | December 31, 2012 | |
Other receivables due from related parties | | | | | | | | | |
Shanda Games Limited | | | 3,200,000 | | | | 17,308,019 | | | 17,308,019 | | 3,389,567 | |
Hurray! Media Co., Ltd. | | | 1,246,641 | | | | 1,246,641 | | | 1,246,641 | | 1,246,641 | |
Seed Music Group Limited | | | 980,000 | | | | 980,000 | | | 980,000 | | 980,000 | |
Shanda Capital Limited | | | — | | 480,575 | |
Other companies under common control by Shanda | | | 105,607 | | | | 4,609 | | | 4,609 | | — | |
| | | | | | | | 19,539,269 | | 6,096,783 | |
| | | 5,532,248 | | | | 19,539,269 | | |
| | | | | | | |
In December 2010, Ku6 Media Co., Ltd. provided a $3.2 million unsecured loan to Shanda Games Limited, a company controlled by Shanda Interactive, which carried an interest rate of 0.6% per year and was originally due in July 2011. In January 2011, Ku6 Media Co., Ltd. provided another $6.7 million unsecured loan to Shanda Games Limited, which carried an interest rate of 0.6% per year and was originally due in July 2011. The terms of these loans are in the process of being extended. In June 2011, Ku6 Media Co., Ltd. provided a further $7.3 million unsecured loan to Shanda Games Limited, which carries an interest rate of 1.37% per year and is due in May 2012.
All amounts due from related parties are non-interest bearing, unsecured and receivable on demand except for the receivables due from Shanda Games Limited described aboveand Shanda Capital Limited with an annual interest rate of 3% and from Seed Music Group Limited with an annual interest rate of 0.6%.
| | | | December 31, 2010 | | | December 31, 2011 | | | December 31, 2011 | | December 31, 2012 | |
Other payables due to related parties | | | | | | | | | |
Shanghai Shulong Technology Co. Ltd | | | 6,345,068 | | 3,404,497 | |
Shanghai Shulong Computer Technology Co., Ltd | | | — | | | | 6,832,012 | | | 6,832,012 | | — | |
Shanghai Shulong Technology Co. Ltd | | | 3,030,711 | | | | 6,345,068 | | |
Shanda Computer (Shanghai) Co., Ltd. | | | 3,030,300 | | | | — | | |
Hurray! Solutions Ltd. | | | 1,586,899 | | | | — | | |
Other related parties | | | 128,788 | | | | 375,000 | | |
Other related party | | | 375,000 | | 375,000 | |
| | | | | | | | 13,552,080 | | 3,779,497 | |
| | | 7,776,698 | | | | 13,552,080 | | |
| | | | | | | |
In June 2011, Ku6 Information Technology borrowed $6.8 million on an unsecured basis from Shanghai Shulong Computer Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carries an interest rate of 6.31% per year and is due in June 2012.
In December 2010, Ku6 Information Technology borrowed $3.0 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in June 2011. The term of the loan was subsequently extended to December 2011 and the interest rate was revised to 5.68%. This loan was fully repaid in December 2011.
In February 2011, Ku6 Information Technology borrowed $6.4 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in August 2011. Ku6 Information Technology repaid $39,721 in 2011 and the term of the loan with respect to the remaining amount of $6.3 million was subsequently extended to February 2012. The interest rate was revised to 6.71% per year. In February 2012, $3.1 million was repaid. The term of the loan with respect to the remaining amount of $3.2 million was extended to August 2012 and the interest rate remained at 6.71% per year.
AmountsAll amounts due to related parties are non-interest bearing, unsecured and payable on demand (except as mentioned in the preceding paragraphs for specific borrowings) with annual interest rates ranging from 5.05% to 6.71%.
The payables to Hurray! Solutions Ltd. and other related parties amounting to $1,719,927 were waived and recorded as additional paid-in capital
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in 2011 as part of common control transactions involving parent Shanda.
U.S. dollars (US$) unless otherwise stated)14.14. INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands. The subsidiaries or VIEs in the PRC are subject to PRC Enterprise Income Tax at a corporate income tax rate of 25%.
Basic and diluted earnings from continuing operations per share effects of tax holidays and preferential There are no reduced tax rates forafforded to the years ended December 31, 2009, 2010 and 2011 are nil for each year.Group’s PRC entities.
Provision (credit)(benefit) for income taxes is comprised as follows for each annual period.
| | | | | | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31,2012 | |
| | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31,2011 | | | | | | | | |
Current income taxes from discontinued operations | | | 750,705 | | | | 6,229 | | | | — | | | 6,229 | | — | | — | |
Deferred income taxes from discontinued operations | | | (516,419 | ) | | | (31,813 | ) | | | — | | | (31,813 | ) | — | | — | |
Current income taxes from continuing operations | | | — | | | | — | | | | — | | | — | | — | | — | |
Deferred income taxes from continuing operations | | | (13,721 | ) | | | (41,172 | ) | | | (99,479 | ) | | (41,172 | ) | (99,479 | ) | — | |
| | | | | | | | | | | (66,756 | ) | (99,479 | ) | — | |
| | | 220,565 | | | | (66,756 | ) | | | (99,479 | ) | |
| | | | | | | | | | |
The principal components of deferred tax assets and liabilities are as follows:
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | December 31, 2010 | | December 31, 2011 | | |
Current deferred taxes: | | | | | |
Current deferred tax assets (liabilities): | | | | | | |
Cost and expense accruals | | | 4,714,262 | | | | 2,810,508 | | | 2,810,508 | | 1,754,349 | |
Revenue recognition | | | (1,217,957 | ) | | | (173,502 | ) | | (173,502 | ) | 771,061 | |
Less: valuation allowance | | | (3,496,305 | ) | | | (2,637,006 | ) | | (2,637,006 | ) | (2,525,410 | ) |
Current deferred tax assets, net | | | — | | — | |
| | | | | | | | | | | |
Current deferred tax assets | | | — | | | | — | | |
| | | | | | | |
Non-current deferred taxes: | | | | | |
Non-current deferred tax assets (liabilities): | | | | | | |
Depreciation and amortization | | | 1,899,375 | | | | 1,748,889 | | | 1,748,889 | | 631,747 | |
Net operating loss carry forwards | | | 13,727,221 | | | | 18,450,814 | | | 18,450,814 | | 21,146,362 | |
Less: valuation allowance | | | (15,626,596 | ) | | | (20,199,703 | ) | | (20,199,703 | ) | (21,778,109 | ) |
| | | | | | | |
Non-current deferred tax assets | | | — | | | | — | | |
Non-current deferred tax assets, net | | | — | | — | |
| | | | | | | | | | | |
Intangible assets | | | (4,925,538 | ) | | | (4,826,059 | ) | | (4,826,059 | ) | (4,826,059 | ) |
| | | | | | | |
Non-current deferred tax liabilities | | | (4,925,538 | ) | | | (4,826,059 | ) | | (4,826,059 | ) | (4,826,059 | ) |
| | | | | | | |
A reconciliation between the PRC statutory income tax rate of 25% and the Company’s effective tax rate is as follows. The primary driver of the Company’s effective tax rate in each annual period are adjustments to the valuation allowance for deferred tax assets that are, as assessed under ASC Topic 740, more likely than not to not be realized.realized in the foreseeable future.
| | | | | | | | | | | | |
| | | Year ended | | | Year ended | | | Year ended | |
| | | |
| | | December 31, 2009 | | | December 31, 2010 | | | December 31, 2011 | |
Statutory tax rate | | | 25.0 | % | | | 25.0 | % | | | 25.0 | % |
Differential statutory tax rates | | | 0.2 | % | | | (3.3 | %) | | | (7.9 | %) |
Non-deductible expenses | | | (6.2 | %) | | | 0.4 | % | | | (7.9 | %) |
Non-taxable income | | | — | | | | — | | | | — | |
Change in enterprise income tax rate | | | — | | | | — | | | | — | |
Change in valuation allowance | | | (19.8 | %) | | | (22.0 | %) | | | (9.0 | %) |
| | | | | | | | | | | | |
Effective tax rate | | | (0.8 | %) | | | 0.1 | % | | | 0.2 | % |
| | | | | | | | | | | | |
F-38
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
| | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended December
31, 2012 | |
| | | | | | | |
Statutory tax rate | | 25.0 | % | 25.0 | % | 25.0 | % |
Differential statutory tax rates | | (3.3 | )% | (7.9 | )% | (4.7 | )% |
Non-deductible expenses | | 0.4 | % | (7.9 | )% | (1.5 | )% |
Change in valuation allowance | | (22.0 | )% | (9.0 | )% | (18.8 | )% |
Effective tax rate | | 0.1 | % | 0.2 | % | 0.0 | % |
The movement of valuation allowances were as follows:
| | | | | | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | December 31, 2009 | | December 31, 2010 | | December 31, 2011 | | | | | | | | |
At beginning of year | | | (7,772,515 | ) | | | (8,309,621 | ) | | | (19,122,901 | ) | | (8,309,621 | ) | (19,122,901 | ) | (22,836,709 | ) |
Acquisition of Ku6 | | | — | | | | (6,123,900 | ) | | | — | | | (6,123,900 | ) | — | | — | |
Acquisition of Yisheng | | | (167,418 | ) | | | — | | | | — | | |
Current year additions | | | (1,029,311 | ) | | | (14,292,925 | ) | | | (4,452,155 | ) | | (14,292,925 | ) | (4,452,155 | ) | (1,415,765 | ) |
Current year reversals | | | 655,761 | | | | 1,404,205 | | | | 1,591,018 | | | 1,404,205 | | 1,591,018 | | 180,965 | |
Transferred out due to disposal of WVAS and recorded music businesses | | | — | | | | 8,433,935 | | | | — | | | 8,433,935 | | — | | — | |
Effect of exchange rate changes | | | 3,862 | | | | (234,595 | ) | | | (852,671 | ) | | (234,595 | ) | (852,671 | ) | (232,009 | ) |
| | | | | | | | | | | (19,122,901 | ) | (22,836,709 | ) | (24,303,518 | ) |
| | | (8,309,621 | ) | | | (19,122,901 | ) | | | (22,836,709 | ) | |
| | | | | | | | | | |
At December 31, 20102011 and 2011,2012, tax loss carry forwards (on a gross basis prior to measurement via the tax rate) amounted to approximately $54.9$73.8 million and $73.8$84.6 million, respectively, which will expire by various years through 2016.2017. The Company’s tax loss carry forwards exist only in the PRC, where the carry forward period is limited to five years. The Company determines whether or not a valuation allowance is required at the level of each taxable entity within a tax jurisdiction. A valuation allowance of $19,122,901$22,836,709 and $22,836,709$24,303,518 has been established as of December 31, 20102011 and 2011,2012, respectively, in respect of certainall deferred tax assets as it is considered more likely than not that the relevant deferred tax assets will not be realized in the foreseeable future. At both December 31, 2010, 2011 and 2011,2012, all of the Company’s net deferred tax assets excluding the impact of non-current deferred tax liabilities associated with intangible assets which have indefinite reversal patterns, were fully reserved through valuation allowances.
As noted in Note 2(26)2(25), the Company accounts for the financial statement effects of uncertain tax positions under the provisions of ASC 740-10. At December 31, 20102011 and 2011,2012, there were no liabilities for unrecognized tax benefits as the Company did not have any significant uncertain tax positions requiring recognition and measurement under ASC 740-10.
In accordance with the PRC EIT Law, dividends which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1, 2008, are subject to a 10% withholding income tax if and when remitted. In addition, under tax treaties between the PRC and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident, the applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less than 25% in the FIE.
Since there are no undistributed earnings of the Company’s subsidiaries located in the PRC that are available for distribution at December 31, 20102011 and 20112012 given the accumulated loss positions of the Company’s subsidiaries, no provision has been made for withholding taxes. Further, the Company does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business in the PRC.
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15.Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
15. REPURCHASE OF SHARES
Pursuant to a share repurchase program announced December 30, 2011, the Company’s Board of Directors authorized the Company to repurchase up to US$3.2 million of its outstanding ADSs from time to time, based on market conditions. In 2012, the Company repurchased and immediately retired a total of 99,585 ADS for aggregate consideration of $97,695 from unrelated third parties, at a weighted average price of $0.98 per ADS.
In a separate transaction distinct from the Company’s ongoing share repurchase program, as authorized by the Company’s Board of Directors, the Company repurchased and immediately retired in July 2012 a total of 269,409,276 ordinary shares and 79,717 ADSs (each ADS representing 100 ordinary shares) formerly held by several former senior members of management and an investment entity controlled by one of those individuals, at a price of $0.0291 per share (US$2.91 per ADS) for a total of $8,071,786. The Board of Directors had approved this transaction, taking into consideration a number of factors, including but not limited to the following: (i) the nature and timing of such share repurchase, (ii) the repurchase price of those ordinary shares and ADSs, (iii) the possible impact of such share repurchase on the ADS price, (iv) the price movements and liquidity of the Company’s ADSs and the stock market environment, (v) the Company’s financial condition, and (vi) the Company’s plans and alternative uses of its capital resources. The Board of Directors had received a fairness opinion from an independent financial advisor and concluded that the repurchase price of those ordinary shares and ADSs was within a reasonable indicative range of fair value. Given the high volatility of the Company’s ADS price, which ranged from $0.90 per ADS to $3.30 per ADS during 2012 (based upon quoted closing prices), coupled with the thinly traded volume, it was not possible to rely solely upon past or current quoted market prices at the time to establish an appropriate indicative range of fair value. Therefore, the fairness opinion considered a range of valuation techniques, coupled with the Company’s historical and projected financial results, to establish a reasonable indicative range of fair value, which, based upon the facts and circumstances that existed at the time, supported the repurchase price as was approved by the Board of Directors. This repurchase was approved by shareholders at the annual general meeting of shareholders on July 12, 2012 and consummated on July 13, 2012. All the repurchased shares were cancelled upon repurchase.
The excess of the repurchase price above par value for all repurchase transactions was recorded as a charge to additional paid in capital.
16. EQUITY COMPENSATION PLANS
2004 Share Incentive Plan
Stock options
Ku6 Media’s 2004 Share Incentive Plan (“2004 Plan”) allows the Company to offer incentive awards to employees, directors, consultants or external service advisors of the Company. Under the terms of the Plan, options arewere generally granted at prices equal to or greater than the fair market value on the grant date, expire 10 years from the date of grant, and generally vest over 3-4 years.
Stock options under these plans were all granted prior to 2006 and as of January 1, 2006 all granted stock options were vested. There were 44,584,70043,746,700 and 43,746,70034,669,372 options outstanding as of December 31, 20102011 and 2011,2012, respectively. Pursuant to the resolution of the Company’s Boardboard on December 3, 2010, the 185,550,800 remaining ordinary shares available for future grants under the 2004 Plan were terminated and unavailable for future use.
The movements in stock options under the 2004 Share Incentive Plan as of and for the years ended December 31, 2009, 2010, 2011 and 20112012 are set out below:
| | | | | | | | | | Options
Outstanding | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Life | | Aggregate
Intrinsic
Value | |
| | | Options
Outstanding | | Weighted
Average
Exercise Price | | | Weighted
Average
Remaining
Contractual Life | | | Aggregate
Intrinsic Value | | | | | $ | | | | $ | |
| | | | | $ | | | | | | $ | | |
Outstanding at December 1, 2009 | | | 47,367,700 | | | | 0.080 | | | | — | | | | — | | |
Outstanding at January 1, 2010 | | | 45,582,700 | | 0.080 | | 3.63 | | 147,478 | |
Granted | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Exercised | | | (350,000 | ) | | | 0.025 | | | | — | | | | — | | | (450,000 | ) | 0.045 | | — | | — | |
Cancelled or Expired | | | (1,435,000 | ) | | | 0.115 | | | | — | | | | — | | | (548,000 | ) | 0.113 | | — | | — | |
| | | | | | | | | | |
Outstanding at December 31, 2009 | | | 45,582,700 | | | | 0.080 | | | | 3.63 | | | | 147,478 | | |
Outstanding at December 31, 2010 | | | 44,584,700 | | 0.080 | | 2.63 | | 226,985 | |
Granted | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Exercised | | | (450,000 | ) | | | 0.045 | | | | — | | | | — | | | (150,000 | ) | 0.025 | | — | | — | |
Cancelled or Expired | | | (548,000 | ) | | | 0.113 | | | | — | | | | — | | | (688,000 | ) | 0.096 | | — | | — | |
| | | | | | | | | | |
Outstanding at December 31, 2010 | | | 44,584,700 | | | | 0.080 | | | | 2.63 | | | | 226,985 | | |
Outstanding at December 31, 2011 | | | 43,746,700 | | 0.079 | | 1.62 | | — | |
Granted | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Exercised | | | (150,000 | ) | | | 0.025 | | | | — | | | | — | | | — | | — | | — | | — | |
Cancelled or Expired | | | (688,000 | ) | | | 0.096 | | | | — | | | | — | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 43,746,700 | | | | 0.079 | | | | 1.62 | | | | — | | |
| | | | | | | | | | | | | |
Vested and expected to vest at December 31, 2011 | | | 43,746,700 | | | | 0.079 | | | | 1.62 | | | | — | | |
| | | | | | | | | | | | | |
Vested and exercisable at December 31, 2011 | | | 43,746,700 | | | | 0.079 | | | | 1.62 | | | | — | | |
| | | | | | | | | | | | | |
Forfeited | | | (9,077,328 | ) | 0.025 | | — | | — | |
Outstanding at December 31, 2012 | | | 34,669,372 | | 0.094 | | 0.89 | | — | |
Vested and expected to vest at December 31, 2012 | | | 34,669,372 | | 0.094 | | 0.89 | | — | |
Vested and exercisable at December 31, 2012 | | | 34,669,372 | | 0.094 | | 0.89 | | — | |
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
The aggregate intrinsic values are calculated as the differences between the market value of $0.0405, $0.0495, $0.0120 and $0.0120$0.0106 of ordinary shares as of December 31, 2009, 2010, 2011 and 2011,2012, respectively, and the exercise prices of the shares. The total intrinsic value of options exercised during the years ended December 31, 2009, 2010, 2011 and 20112012 was approximately $0.5 million, nil and nil, respectively.
Non-vested sharesnil.
Since 2006, the Company has granted restricted purchase share awards, in lieu of stock options, under the 2004 Share Incentive Plan to certain officers and senior management.
Share-based compensation expense related to non-vested stock units granted by the Company under the 2004 Plan amounted to $169,310, $84,233 and nil for the years ended December 31, 2009, 2010 and 2011.
There are no outstanding non-vested stock units as of December 31, 2011 and 2010.
A summary of non-vested stock unit activity as of December 31, 2009, 2010 and 2011 is presented below:
| | | | | | | | |
| | | Number
outstanding | | | Weighted
average grant
date fair value | |
| Non-vested stock units | | | | | $ | |
Outstanding at January 1, 2009 | | | 13,500,300 | | | | 0.0406 | |
Granted | | | — | | | | — | |
Vested | | | (6,500,300 | ) | | | 0.0313 | |
Forfeited | | | (3,999,900 | ) | | | 0.0507 | |
| | | | | | | | |
Outstanding at December 31, 2009 | | | 3,000,100 | | | | 0.0313 | |
Granted | | | — | | | | — | |
Vested | | | (3,000,100 | ) | | | 0.0313 | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Outstanding at December 31, 2010 | | | — | | | | — | |
Granted | | | — | | | | — | |
Vested | | | — | | | | — | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Outstanding at December 31, 2011 | | | — | | | | — | |
| | | | | | | | |
2010 Equity Compensation Plan
In December 2010, the Company authorized an equity compensation plan (“2010 Equity Compensation Plan”) that provides for issuance of options to purchase up to 698,381,300 ordinary shares of the Company. Under the 2010 Equity Compensation Plan, the directors may, at their discretion, grant any officers (including directors) and employees of the Company and/or its subsidiaries, and individual consultantsconsultant or advisorsadvisor (i) options to subscribe for ordinary shares, (ii) share appreciation rights to receive payment, in cash and/or the Company’ ordinary shares, equals to the excess of the fair market value of the Company’ ordinary shares, or (iii) other types of compensation based on the performance of the Company’ ordinary shares.
On December 4, 2010, the Company granted stock options to purchase up to 516,750,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0568 per share equivalent to the average market value in the previous fifteen trading days of the grant dates to its employees, senior management and directors. Of all the stock options granted, 272,850,000 were granted to senior management and 243,900,000 were granted to directors and employees. The contract term of the options granted to the directors and employees is six years and the contract term of the options granted to senior management is seven years.
On February 24, 2011, the Company granted stock options to purchase up to 62,000,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0392 per share to its employees, senior management and directors. Of all the stock options granted, 9,000,000 ordinary shares were granted to directors of the Companycompany and 53,000,000 were granted to the senior management and employees of Shanda. The contract term of the options is six years.
On July 6, 2011, the Company granted stock options to purchase up to 147,643,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.03083 per share to its employees. The contract term of the options is six years.
On August 23, 2011, the Company granted stock options to purchase up to 162,500,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0227 per share to its employees, senior management and directors. Of all the stock options granted, 112,000,000 were granted to senior management of the Company,company, 15,000,000 were granted to directors of the Company,company, and 35,500,000 were granted to the senior management and employees of Shanda. The contractual term of the options is six years.
On October 14, 2011, the Company granted stock options to purchase up to 21,000,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0188 per share to its senior management. The contract term of the options is six years.
On August 28, 2012, the Company granted stock options to purchase up to 28,500,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0116 per share to its employees. The contract term of the options is six years.
F-41
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
As of December 31, 2011, 295,555,3002012, 393,125,300 ordinary shares were available for future grants under the 2010 Equity Compensation Plan.
The options granted to directors and employees vest over a four year period, with 25% of the options to vest on each of the first, second, third and fourth anniversaries of the grant date as stipulated in the stock option agreements.
The options granted to senior management vest in 16 instalments. The first 2 of 16 instalments—instalments - options earned in the first two quarters after the grant date—date - shall vest and become exercisable at the first anniversary of the grant date. There are no performance conditions attached to the first 2 instalments. For each quarter during the four-year period after the grant date (the “Performance Period Start Date”), one 1/16th instalment of the total options have the opportunity to be earned for each quarter contingent on the achievement of positive quarterly operating income for the quarter, provided the aggregate number of options earned in the Performance Period shall not exceed 14 of the 16 instalments comprising the total options granted. On each of the first, fourth, eighth and twelfth quarter earnings release dates from the first quarter of the Performance Period, all of the earned options during the four quarters preceding such earnings release date shall vest and become exercisable, in each case, provided that the employment with the Company remains on such vesting date.
In relation to the business strategy adjustments in 2011 (Note 1), the Company significantly reduced its sales forces, and certain directors, senior management and employees resigned from the Company. Accordingly, the options granted to such directors, senior managements and employees were forfeited. Accordingly, in the fourth quarter of 2011, the Company recorded a $1.0 million reversal of amounts previously recorded in the first three quarters of 2011 in stock-based compensation expense to adjust the estimated forfeiture rate to the much higher actual forfeiture rate.
In accordance with ASC Topic 718, the Company recognizes share-based compensation expense for the options granted to directors and employees as well as the options to senior management vested only based on passage of time and continued employment with the Company, net of a forfeiture rate, using the straight-line method. For the options granted to senior management earned contingent on the achievement of quarterly performance target, the Company recognized share-based compensation expenses for the options earned in each quarter during the Performance Period using the graded-vesting attribution method when the Company concludedconcludes that it is probable that the performance targets will be achieved, net of a forfeiture rate.
Share-based compensation expense related to the stock options granted by the Company to its employees, senior management and directors under the 2010 Equity Compensation Plan amounted to $522,931$1,231,919 and $1,231,919$463,753 for the year ended December 31, 20102011 and 2011,2012, respectively. Share-based compensation expense related to the option awards granted by the Company to the directors, senior management and employees of Shanda under the 2010 Equity Compensation Plan amounted to nil$257,230 and $257,230$350,761 for the year ended December 31, 20102011 and 2011,2012, respectively, which was recognized as a dividend distributed to Shanda.
The movements in stock options under the 2010 Equity Compensation Plan as of and for the yearyears ended December 31, 2010, 2011 and 2012 are set out below.
| | | | Options
Outstanding | | Weighted
Average
Exercise Price | | | Weighted
Average
Remaining
Contractual Life | | | Aggregate
Intrinsic Value | | | Options
Outstanding | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Life | | Aggregate
Intrinsic
Value | |
| | | | | $ | | | | | | $ | | | | | $ | | | | $ | |
Outstanding at January 1, 2010 | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Granted | | | 516,750,000 | | | | 0.0568 | | | | — | | | | — | | | 516,750,000 | | 0.0568 | | — | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Cancelled or Expired | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 516,750,000 | | | | 0.0568 | | | | 6.46 | | | | — | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 516,750,000 | | 0.0568 | | 6.46 | | — | |
Granted | | | 393,143,000 | | | | 0.0281 | | | | — | | | | — | | | 393,143,000 | | 0.0281 | | — | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | | | — | | — | | — | | — | |
Cancelled or Expired | | | (507,067,000 | ) | | | 0.0517 | | | | — | | | | — | | | (507,067,000 | ) | 0.0517 | | — | | — | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 402,826,000 | | | | 0.0352 | | | | 5.47 | | | | — | | |
| | | | | | | | | | | | | |
Vested and expected to vest at December 31, 2011 | | | 373,995,600 | | | | 0.0342 | | | | 5.49 | | | | — | | |
| | | | | | | | | | | | | |
Vested and exercisable at December 31, 2011 | | | 18,742,500 | | | | 0.0568 | | | | 5.00 | | | | — | | |
| | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 402,826,000 | | 0.0352 | | 5.47 | | — | |
Granted | | | 28,500,000 | | 0.0116 | | — | | — | |
Exercised | | | — | | — | | — | | — | |
Forfeited | | | (126,070,000 | ) | 0.0367 | | — | | — | |
Outstanding at December 31, 2012 | | | 305,256,000 | | 0.0324 | | 4.57 | | — | |
Vested and expected to vest at December 31, 2012 | | | 278,013,600 | | 0.0314 | | 4.61 | | — | |
Vested and exercisable at December 31, 2012 | | | 76,314,000 | | 0.0324 | | 4.57 | | — | |
F-42
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
The intrinsic value as of December 31, 2010, 2011 and 20112012 is calculated as the difference between the market value of $0.0495$0.0495, $0.0120 and $0.0120$0.0106 of ordinary shares as of December 31, 2010, 2011 and 20112012 and the exercise prices of the options.
The weighted average grant-date fair value of options granted during the year ended December 31, 2010, 2011 and 2011 was $0.04832012 were $0.0483, $0.0151 and $0.0151,$0.0076, respectively. Options vested during the yearyears ended December 31, 20102011 and 2011 was nil2012 were 27,142,500 and 27,142,500,51,464,000, respectively.
As of December 31, 2010 and 2011,2012, there was $15.4$1.87 million and $5.43 million, respectively, of unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options granted by the Company to its employees, senior management and directors under the 2010 Equity Compensation Plan. This cost is expected to be recognized over a weighted average period of 4.2 and 3.42.5 years. Total compensation cost may be adjusted for future changes in estimated forfeitures and the probability of the achievement of performance conditions. As of December 31, 2010 and 2011,2012, there was nil and $1.21$0.92 million respectively, of unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options granted by the Company to the employees of Shanda under the 2010 Equity Compensation Plan, which will be recognized as a dividend distributed to Shanda.Shanda upon the completion of vesting.
The Black-Scholes option pricing model is used to determine the fair value of the stock options granted under the 2010 Equity Compensation Plan. The Black-Scholes model requires the input of highly subjective assumptions.assumptions, including the expected stock price volatility and the sub-optimal early exercise factor. The risk-free rate for periods within the contractual lives of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The fair values of stock options were estimated using the following weighted-average assumptions:
| | | | | | | | |
| | | Options Granted
in 2010 | | | Options Granted
in 2011 | |
Fair value of ordinary shares ($) | | | 0.0800 | | | | 0.0186~0.0367 | |
Exercise price ($) | | | 0.0568 | | | | 0.0188~0.0392 | |
Expected volatility (%) (4) | | | 60%~65% | | | | 75%~82% | |
Expected dividend yield (%) (3) | | | 0% | | | | 0% | |
Expected term (years) (2) | | | 4~5 | | | | 3.5~5 | |
Risk-free interest rate (per annum) (%) (1) | | | 1.9407%~2.6565% | | | | 1.2680%~1.9933% | |
(1) | The risk-free interest rate for periods within the contractual life of the share option is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards. |
(2) | The expected term of stock options granted is developed giving consideration to vesting period, contractual term and historical exercise pattern of options granted by the Company. |
(3) | The Company has no history or expectation of paying dividends on its common stock. |
(4) | Expected volatility is estimated based on the historical volatility of comparable companies’ stocks and of the Company’s common stock for a period equal to the expected term preceding the grant date. |
| | Options Granted
in 2010 | | Options Granted
in 2011 | | Options Granted
in 2012 |
Fair value of ordinary shares ($) | | 0.0800 | | 0.0186~0.0367 | | 0.0116 |
Exercise price ($) | | 0.0568 | | 0.0188~0.0392 | | 0.0116 |
Expected volatility (%) | | 60%~65% | | 75%~82% | | 100% |
Expected dividend yield (%) | | 0% | | 0% | | 0% |
Expected term (years) | | 4~5 | | 3.5~5 | | 3.5 |
Risk-free interest rate (per annum) (%) | | 1.9407%~2.6565% | | 1.2680%~1.9933% | | 1.2425% |
(1) The risk-free interest rate for periods within the contractual life of the share option is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards.
(2) The expected term of stock options granted is developed giving consideration to vesting period, contractual term and historical exercise pattern of options granted by the Company.
(3) The Company has no history or expectation of paying dividends on its common stock.
(4) Expected volatility is estimated based on the historical volatility of comparable companies’ stocks and of the Company’s common stock for a period equal to the expected term preceding the grant date.
16.F-43
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
17. SEGMENT INFORMATION
The Company follows the provisions of ASC 280,Segment Reporting,which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
Pre-2010 Reorganization
The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Prior to the disposal of the WVAS and recorded music businesses in August 2010 (Note 2(1)), which have been presented as discontinued operations for all the periods presented herein, the Company operated and managed two principal operating segments (each of which were reportable segments), WVAS and Recorded Music. The WVAS were delivered through the 2.5G mobile networks, which comprise Wireless Application Protocol (“WAP”) services, Multimedia Messaging Services (“MMS”), Java™ services, and WEB, and through 2G technology platforms, which comprise Short Messaging Services (“SMS”), Interactive Voice Response services (“IVR”), and Color Ring Back Tones (“CRBT”). Recorded Music services were delivered through the Company’s majority-controlled music companies and their parent company, Hurray Digital Media Technology Co., Ltd., which contracted with music artists and composers to perform and produce music. Corporate assets are related to the bank balances of overseas companies that are not directly attributable to the reportable segments. The Company uses gross profit as the key performance measure of each reportable segment. Corporate expenses are not allocated to each segment.
The financial information for the business segments which were disposed of in 2010 (Note 2(1)) and included in discontinued operations reflects that information which is specifically identifiable or which is allocated based on an internal allocation method. Selected financial information by reportable segments is as follows.
| | | | | | | | |
| Total assets by reportable segment | | December 31, 2009 | | | December 31, 2010 | |
WVAS | | | 24,400,482 | | | | — | |
Recorded music | | | 9,863,363 | | | | — | |
Corporate assets | | | 33,904,432 | | | | — | |
| | | | | | | | |
Total assets | | | 68,168,277 | | | | — | |
| | | | | | | | |
| | |
| Capital expenditures for additions to long-lived assets by reportable segment | | Year ended
December 31, 2009 | | | Year ended
December 31, 2010 | |
WVAS | | | 599,254 | | | | 402,710 | |
Recorded music | | | 79,028 | | | | 84,613 | |
| | | | | | | | |
Total capital expenditures | | | 678,282 | | | | 487,323 | |
| | | | | | | | |
| | |
| Revenues, cost of revenues, and gross profit by reportable segment | | Year ended
December 31, 2009 | | | Year ended
December 31, 2010 | |
Revenues | | | | | | | | |
WVAS | | | 20,169,110 | | | | 5,385,985 | |
Recorded music | | | 14,473,185 | | | | 9,458,423 | |
| | | | | | | | |
Total revenues | | | 34,642,295 | | | | 14,844,408 | |
| | | | | | | | |
Cost of revenues | | | | | | | | |
WVAS | | | 15,331,675 | | | | 3,799,581 | |
Recorded music | | | 12,625,139 | | | | 6,118,305 | |
| | | | | | | | |
Total cost of revenues | | | 27,956,814 | | | | 9,917,886 | |
| | | | | | | | |
Gross profit | | | | | | | | |
WVAS | | | 4,837,435 | | | | 1,586,404 | |
Recorded music | | | 1,848,046 | | | | 3,340,118 | |
| | | | | | | | |
Total gross profit | | | 6,685,481 | | | | 4,926,522 | |
| | | | | | | | |
Revenues from the WVAS segment by product and service are shown in the table below:
| | | | | | | | |
| | | Year ended
December 31, 2009 | | | Year ended
December 31, 2010 | |
Revenues | | | | | | | | |
SMS | | | 5,307,435 | | | | 456,968 | |
IVR | | | 3,943,733 | | | | 545,890 | |
RBT | | | 4,447,918 | | | | 2,493,929 | |
| | | | | | | | |
2G revenues | | | 13,699,086 | | | | 3,496,787 | |
| | | | | | | | |
WAP | | | 3,145,885 | | | | 565,205 | |
MMS | | | 1,692,585 | | | | 170,281 | |
JAVA | | | 1,541,618 | | | | 902,194 | |
WEB | | | 11,794 | | | | — | |
| | | | | | | | |
2.5G revenues | | | 6,391,882 | | | | 1,637,680 | |
| | | | | | | | |
Other revenues | | | 78,142 | | | | 251,518 | |
| | | | | | | | |
Total WVAS revenue | | | 20,169,110 | | | | 5,385,985 | |
| | | | | | | | |
Recorded music revenue | | | 14,473,185 | | | | 9,458,423 | |
| | | | | | | | |
Total revenues | | | 34,642,295 | | | | 14,844,408 | |
| | | | | | | | |
For recorded music revenue included in discontinued operations, the Company cannot break down the revenue by service or product line without undue costs.
Post-2010 Reorganization
Following the 2010 Reorganization (the disposal of the WVAS and recorded music businesses (Note 2(1)) in August 2010 presented in discontinued operations for all the periods presented herein), the Company has only one operating segment (and reportable segment) made up of Ku6’s online advertising business (“Online Advertising”), which is presented in the continuing operations section of our consolidated statement of operations.The Group has not disclosed segment information prior to the 2010 Reorganization for the former WVAS and Recorded Music segments due to the disposal thereof; such segment information has no relevance to the Group’s current and future results.
Geographic Information
The Company primarily operates in the PRC and derives all of its revenues from the PRC; all of the Company’s long-lived assets are located in the PRC. Accordingly, enterprise-wide disclosures are not necessary.
17.F-44
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
18. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share (1 ADS = 100 Shares):
| | | | | | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | | | | | | | |
Numerator: | | | | | | | | | | | | | |
Net loss attributable to Ku6 Media Co., Ltd. ordinary shareholders from continuing operations | | | (6,021,461 | ) | | | (52,858,278 | ) | | | (49,343,907 | ) | | (52,858,278 | ) | (49,343,907 | ) | (9,491,138 | ) |
Net income (loss) attributable to Ku6 Media Co., Ltd. ordinary shareholders from discontinued operations | | | (17,373,400 | ) | | | 1,348,014 | | | | — | | |
| | | | | | | | | | |
Net income attributable to Ku6 Media Co., Ltd. ordinary shareholders from discontinued operations | | | 1,348,014 | | — | | — | |
Net loss attributable to Ku6 Media Co., Ltd. | | | (23,394,861 | ) | | | (51,510,264 | ) | | | (49,343,907 | ) | | (51,510,264 | ) | (49,343,907 | ) | (9,491,138 | ) |
| | | | | | | | | | |
Denominator: | | | | | | | | | | | | | |
Weighted-average ordinary shares outstanding for basic calculation | | | 2,196,291,947 | | | | 3,096,421,097 | | | | 4,265,277,638 | | | 3,096,421,097 | | 4,265,277,638 | | 4,901,279,176 | |
Dilutive effect of restricted shares, convertible debt, and stock options | | | — | | | | — | | | | — | | |
| | | | | | | | | | |
Dilutive effect of potential ordinary shares | | | — | | — | | — | |
Weighted average ordinary shares outstanding for diluted calculation | | | 2,196,291,947 | | | | 3,096,421,097 | | | | 4,265,277,638 | | | 3,096,421,097 | | 4,265,277,638 | | 4,901,279,176 | |
| | | | | | | | | | | | | | | | |
Weighted-average ADS used in per basic ADS calculations | | | 21,962,919 | | | | 30,964,211 | | | | 42,652,776 | | | 30,964,211 | | 42,652,776 | | 49,012,792 | |
Dilutive effect of restricted shares, convertible debt, and stock options | | | — | | | | — | | | | — | | |
| | | | | | | | | | |
Dilutive effect of potential ordinary shares | | | — | | — | | — | |
Weighted-average ADS used in per diluted ADS calculations | | | 21,962,919 | | | | 30,964,211 | | | | 42,652,776 | | | 30,964,211 | | 42,652,776 | | 49,012,792 | |
| | | | | | | | | | | | | | | | |
Loss per share – basic and diluted | | | | | | | |
Loss per share — basic and diluted | | | | | | | | |
Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted | | | (0.00 | ) | | | (0.02 | ) | | | (0.01 | ) | | (0.02 | ) | (0.01 | ) | (0.00 | ) |
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted | | | (0.01 | ) | | | 0.00 | | | | — | | |
| | | | | | | | | | |
Income from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted | | | 0.00 | | — | | — | |
Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted | | | (0.01 | ) | | | (0.02 | ) | | | (0.01 | ) | | (0.02 | ) | (0.01 | ) | (0.00 | ) |
| | | | | | | | | | | | | | | | |
Loss per ADS – basic and diluted | | | | | | | |
Loss per ADS — basic and diluted | | | | | | | | |
Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted | | | (0.27 | ) | | | (1.71 | ) | | | (1.16 | ) | | (1.71 | ) | (1.16 | ) | (0.19 | ) |
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted | | | (0.79 | ) | | | 0.04 | | | | — | | |
| | | | | | | | | | |
Income from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted | | | 0.04 | | — | | — | |
Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted | | | (1.06 | ) | | | (1.67 | ) | | | (1.16 | ) | | (1.67 | ) | (1.16 | ) | (0.19 | ) |
| | | | | | | �� | | | |
F-45
Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
Incremental ordinary shares with dilutive effect are calculated using the treasury stock method with respect to restricted shares andfor stock options. Under the treasury stock method, the proceeds from the assumed conversion of options and non-vested shares are used to repurchase outstanding ordinary shares using the average share pricefair value for the period. For incremental ordinary shares associated with convertible debt, dilution is calculated (if necessary) using the if-converted method, which assumes conversion at the beginning of the annual period (or date of issuance of the related debt, if later).
For all periods presented, all potentially dilutive securities associated with the Company’s convertible bond which was issued in Q2 2011 and extinguished in Q3 2011 (Note 1) and all stock options (Note 15)16) have not been reflected in the dilutive calculations pursuant to ASC 260, “Earnings“Earnings Per Share,” due to the presence of a net loss in each period as the inclusion of such potential common shares would be anti-dilutive.
18. CONCENTRATIONS
19. CONCENTRATIONS
(1) Dependence on related party revenue
The Company entered into a cooperative agreement with Shengyue, a wholly owned subsidiary of Shanda in 2011. Under this agreement, Shengyue iswas appointed as Ku6’sthe Company’s primary agency to secure advertisement sales from various end advertisers. In 2011 and 2012, 38% and 88% of net revenues, respectively, were derived from Shengyue and the Company expects that this percentage will increase in 2012.Shengyue. If the relationship with Shengyue is terminated or scaled-back, or if Shengyue alteralters the agency agreement in a way that is adverse to the Company, the Company’s revenue would be adversely affected.
(2)(2) Credit risk
As of December 31, 20102011 and 2011,2012, accounts receivable of the online advertising business are typically unsecured and are derived from revenue earned from customers and agencies in China. The risk with respect to accounts receivablereceivables is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances. No individual customer accounted for more than 10% of net advertising revenues, or related receivables, during the year ended and as of December 31, 2010. Shengyue accounted for 38% and 75% of net revenues and net account receivables during the year ended and as of December 31, 2011 (Note 13).
| | | | | | December 31, 2011 | | December 31, 2012 | |
| | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | | | | | |
Accounts receivable | | | 10,572,374 | | | | 5,194,099 | | | 5,194,099 | | 2,240,058 | |
Allowance for doubtful accounts | | | (2,437,179 | ) | | | (4,416,706 | ) | | (4,416,706 | ) | (2,172,972 | ) |
| | | | | | | |
Accounts receivable, net of allowance for doubtful accounts | | | 8,135,195 | | | | 777,393 | | | 777,393 | | 67,086 | |
| | | | | | | |
The Company generally does not require collateral for its accounts receivable. The movements of the allowance for doubtful accounts were as follows:
MovementMovement of allowance for doubtful accounts
The Company has not presented movements in the allowance for doubtful accounts for 2009 in the below table as such activity relates solely to discontinued operations for which there are no remaining receivable or allowance amounts.
| | | | | | Year ended
December 31,
2010 | | Year ended
December 31,
2011 | | Year ended
December 31,
2012 | |
| | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | | | | | | | |
Balance at beginning of the year | | | 4,015,145 | | | | 2,437,179 | | | 4,015,145 | | 2,437,179 | | 4,416,706 | |
Acquisition of Ku6 | | | 101,484 | | | | — | | | 101,484 | | — | | — | |
Provisions | | | 1,976,053 | | | | 3,637,147 | | | 1,976,053 | | 3,637,147 | | — | |
Reversed | | | (501,485 | ) | | | (177,321 | ) | | (501,485 | ) | (177,321 | ) | (2,255,301 | ) |
Written off | | | (53,563 | ) | | | — | | | (53,563 | ) | — | | — | |
Transferred out due to disposal of WVAS and recorded music businesses | | | (3,100,455 | ) | | | — | | | (3,100,455 | ) | — | | — | |
Transferred out due to disposal of Yisheng | | | — | | | | (1,480,299 | ) | | — | | (1,480,299 | ) | — | |
| | | | | | | |
Translation difference | | | — | | — | | 11,567 | |
Balance at the end of the year | | | 2,437,179 | | | | 4,416,706 | | | 2,437,179 | | 4,416,706 | | 2,172,972 | |
| | | | | | | |
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
As part of the Group’sCompany’s change in the business strategy (Note 1), the Company laid off majority ofsignificantly reduced its sales force and appointed Shengyue as its primary advertisement agency.agency in 2011. As a result of this change, the relationshiprelationships with some of the Group’s previous advertisement customers waswere terminated and the GroupCompany provided additional allowance for doubtful accounts to reflect the expected uncollectibilty.uncollectibility in 2011. In 2012, based on continued collections efforts on the doubtful receivables, $2.3 million of amounts previously written down were collected; accordingly, a reversal adjustment was recorded.
Account receivable from Shengyue (Note 13) are unsecured and subject to similar credit risks as accounts receivable related to the external advertising revenue. The Company has been closely evaluating the credit status and payment cycle of Shengyue. As of December 31, 2011 and 2012, no allowance for the accounts receivable from Shengyue was provided.
19.20. MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Company 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 the Company to accrue for these benefits based on certain percentages of the employees’ salaries. The total amounts charged to the statements of operations and comprehensive loss for such employee benefits were $2,692,679, $3,660,438, $2,554,561 and $2,554,561$1,609,711 for the years ended December 31, 2009, 2010, 2011 and 2011,2012, respectively.
20.21. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company entered into leasing arrangements relating to office area and internet bandwidth in 2009, 2010, 2011 and 2011.2012. Leasing expenses for the years ended December 31, 2009, 2010, 2011 and 20112012 were $2,768,340, $11,785,743, $10,614,276 and $10,614,276,$9,095,530, respectively.
Future minimum lease payments under non-cancellable operating lease agreements are as follows:
| | | | |
Within 1 year | | 1,210,094 | 6,132,154 | |
Between 1 and 2 years | | 1,352,190 | 429,706 | |
Between 2 and 3 years | | 440,649 | — | |
Between 3 and 4 years | | | — | |
| | | — | |
Total | | | 6,561,860 | |
| | 3,002,933 | | |
Litigation
The Company is subject to claims and litigation, which may arise in the normal course of business. The Company is involved in a number of cases pending in various courts and arbitration as of December 31, 2011.2012. These cases are substantially related to alleged copyright infringement. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a change in the Company’s business practices, which could impact the Company’s future financial results.
The Company has recorded an accrual balance of $2,683,968$2,077,753 in “Accrued expenses and other liabilities” in the consolidated balance sheet as of December 31, 20112012 (Note 12). The accrual was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 20112012 but related to alleged copyright infringement arising before December 31, 2011.2012. The accrual was based upon management’s best estimation according to the historical actual compensation amount per video of Ku6the Company for the similar legal actions in the past and the advice from PRC counsel. The Company is in the process of appealing certain judgments for which the loss has been accrued.
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
There are no accruals for any additional losses related to unasserted claims or any other amounts.
Contingencies
The Company accounts for loss contingencies in accordance with ASC 450, “Contingencies,“Contingencies”, and other related guidance. Set forth below is a description of certain loss contingencies as well as the opinion of management as to the likelihood of loss.
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in Internet business, including the provision of online video and online advertising services. Specifically, foreign ownership in an Internet content provider or other value-added telecommunication service providers may not exceed 50%. Since the Company is incorporated in the Cayman Islands, neither the Company nor its PRC subsidiary is eligible to engage in Internet business. To comply with PRC laws and regulations, the Company conducts its operations in China through a series of contractual arrangements entered into among its wholly owned PRC subsidiaries, Beijing Technology, Tianjin Technology and Kusheng. (collectively “wholly owned PRC subsidiaries”), and the consolidated affiliated entities in the PRC, namely Ku6 Beijing Information, Tianjin Information, Ku6 (Beijing) Cultural Media Co., Ltd. (“Ku6 Cultural”), Yisheng and Ku6 Network (collectively “consolidated affiliated entities in the PRC”) and their respective shareholders.
Under the equity pledge agreements among our PRC subsidiaries, certain of our consolidated affiliated entities and the shareholders of our consolidated affiliated entities, the shareholders of our consolidated affiliated entities have pledged all of their equity interests in these entities to our relevant subsidiaries by recording the pledge on the shareholder registers of the respective entities. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, a pledge is not valid unless it is registered with the relevant local administration for industry and commerce. Ku6 Information Technology and Tianjin Ku6 Network have completed the registration of equity pledgespledge on November 13, 2008 and January 20,further on November 12, 2012 respectively.after an increase of the registered capital. Tianjin Ku6 Network, Ku6 Cultural, and Tianjin information are in the processcompleted their registration of registering the relevant equity pledges with the local administration for industryon January 20, 2012, October 10, 2012, and commerce for the benefit of our PRC subsidiaries.February 20, 2013, respectively.
Ku6 Beijing Information, Tianjin Information, Ku6 Cultural Yisheng and Ku6 Network hold the licenses and permits necessary to conduct our online video, online advertising and related businesses in China. In the opinion of management, (i) the ownership structure of the Company, its wholly owned PRC subsidiaries and the consolidated affiliated entities in the PRC are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the consolidated affiliated entities in the PRC are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Company’s business operations are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and its contractual arrangements with the consolidated affiliated entities in the PRC were found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations.
Under PRC Ministry of Commerce (“MOFCOM”) security review rules promulgated in September 2011, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investment, leases, loans, control through contractual arrangements, or offshore transactions. Management has concluded there is no need to submit the existing contractual arrangements with the consolidated affiliated entities in the PRC and their shareholders to the MOFCOM for national security review based upon analysis of the rules. However, there are substantial uncertainties regarding the interpretation and application of the MOFCOM security review rules, and any new laws, rules, regulations or detailed implementation measures in any form relating to such rules. Therefore, the Company cannot be assured that the relevant PRC regulatory authorities, such as the MOFCOM, would not ultimately take a contrary view to the opinion of management and the Company’s PRC legal counsel. If the MOFCOM or other PRC regulatory authority determines that the Company needs to submit the existing contractual arrangements with the consolidated affiliated entities in the PRC and their shareholders for national security review, the Company may face sanctions by the MOFCOM or other PRC regulatory authority, which may include, among others, requiring the Company to restructure its ownership structure, discontinuation or restriction of operations in the PRC, or invalidation of the agreements that the wholly owned PRC subsidiaries have entered into with the consolidated affiliated entities in the PRC and their shareholders.
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
In such case, the Company may not be able to operate or control business in the same manner as it currently does, and therefore, may not be able to consolidate the affiliated entities in the PRC. In addition, the relevant regulatory authorities would have broad discretion in dealing with such violations which may adversely impact the financial statements, operations and cash flows of the Company (including restrictions on the Company to carry out business).
If the consolidated affiliated entities in the PRC and their shareholders fail to perform their respective obligations under the current contractual arrangements, the Company may have to incur substantial costs and expend significant resources to enforce those arrangements and rely on legal remedies under PRC laws. The PRC laws, rules and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations involve substantial uncertainties. These uncertainties may impede the ability of the Company to enforce these contractual arrangements, or suffer significant delay or other obstacles in the process of enforcing these contractual arrangements and may materially and adversely affect the results of operations and the financial position of the Company.
In the opinion of management, the likelihood of loss in respect of the Company’s current ownership structure or the contractual arrangements with the consolidated affiliated entities in the PRC is remote.
21.22. RESTRICTED NET ASSETS
Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s VIE subsidiaries can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to statutory reserves. The statutory general reserve fund requires annual appropriations of 10% of net after-tax income to be set aside prior to payment of any dividends. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and affiliates are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $56.1$52.7 million, or 110.3%157.0% of the Company’s total consolidated net assets as of December 31, 2011.2012. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and affiliates for working capital and other funding purposes as all business is principally conducted inside the PRC, the Company may in the future require additional cash resources from our PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely to declare and pay dividends to or distributions to the Company’s ordinary shareholders. Accordingly, the Company has included Schedule I in accordance with Regulation S-X promulgated by the United States Securities and Exchange Commission.
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KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
BALANCE SHEET
| | December 31, 2011 | | December 31, 2012 | |
| | (in U.S. dollars, except number of shares) | |
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | 7,754,457 | | 5,219,295 | |
Prepaid expenses and other current assets | | 434,230 | | 312,174 | |
Amount due from subsidiaries and variable interest entities | | — | | 3,003,202 | |
Amount due from related parties | | 19,534,641 | | 6,096,800 | |
Total current assets | | 27,723,328 | | 14,631,471 | |
Investments in subsidiaries | | 27,155,056 | | 21,046,640 | |
Total assets | | 54,878,384 | | 35,678,111 | |
| | | | | |
Liabilities and shareholders’ equity | | | | | |
Accrued expenses and other current liabilities | | 942,423 | | 664,896 | |
Amounts due to subsidiaries and variable interest entities | | 2,707,933 | | 1,071,669 | |
Amount due to related parties | | 375,000 | | 375,000 | |
Total current liabilities | | 4,025,356 | | 2,111,565 | |
| | | | | |
Shareholders’ equity: | | | | | |
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 5,019,786,036 and 4,732,446,560 shares issued and outstanding as of December 31, 2011 and 2012, respectively) | | 250,939 | | 236,575 | |
Additional paid-in capital | | 184,874,259 | | 177,182,895 | |
Accumulated deficit | | (132,449,371 | ) | (141,940,509 | ) |
Accumulated other comprehensive loss | | (1,822,799 | ) | (1,912,415 | ) |
Total shareholders’ equity | | 50,853,028 | | 33,566,546 | |
Total liabilities and shareholders’ equity | | 54,878,384 | | 35,678,111 | |
BALANCE SHEETF-50
Table of Contents
| | | | | | | | |
| | | December 31, 2010 | | | December 31, 2011 | |
| | | (in U.S. dollars, except number of shares) | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | | 11,048,500 | | | | 7,754,457 | |
Prepaid expenses and other current assets | | | 241,017 | | | | 434,230 | |
Amount due from related parties | | | 3,841,766 | | | | 19,534,641 | |
| | | | | | | | |
Total current assets | | | 15,131,283 | | | | 27,723,328 | |
Investments in subsidiaries and variable interest entities | | | 31,959,213 | | | | 27,155,056 | |
| | | | | | | | |
Total assets | | | 47,090,496 | | | | 54,878,384 | |
| | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | |
Accrued expenses and other current liabilities | | | 1,266,380 | | | | 942,423 | |
Amounts due to subsidiaries and variable interest entities | | | 77,833 | | | | 2,707,933 | |
Amount due to related parties | | | — | | | | 375,000 | |
| | | | | | | | |
Total current liabilities | | | 1,344,213 | | | | 4,025,356 | |
| | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2010 and 2011, respectively) | | | 174,008 | | | | 250,939 | |
Additional paid-in capital | | | 130,100,153 | | | | 184,874,259 | |
Accumulated deficit | | | (83,105,464 | ) | | | (132,449,371 | ) |
Accumulated other comprehensive income (loss) | | | (1,422,414 | ) | | | (1,822,799 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 45,746,283 | | | | 50,853,028 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | | 47,090,496 | | | | 54,878,384 | |
| | | | | | | | |
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
STATEMENT OF OPERATIONS
| | | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | (in U.S. dollars, except number of shares) | | | (in U.S. dollars, except number of shares) | |
Operating expenses: | | | | | | | | | | | | | |
Product development | | | — | | | | 150,584 | | | | 603,879 | | | 150,584 | | 603,879 | | 278,168 | |
Selling and marketing | | | 118,521 | | | | 160,231 | | | | (31,880 | ) | | 160,231 | | (31,880 | ) | 30,773 | |
General and administrative | | | 5,520,453 | | | | 4,072,134 | | | | 2,433,905 | | | 4,072,134 | | 2,433,905 | | 1,119,757 | |
| | | | | | | | | | |
Total operating expenses | | | 5,638,974 | | | | 4,382,949 | | | | 3,005,904 | | | 4,382,949 | | 3,005,904 | | 1,428,698 | |
| | | | | | | | | | |
Loss from operations | | | (5,638,974 | ) | | | (4,382,949 | ) | | | (3,005,904 | ) | | (4,382,949 | ) | (3,005,904 | ) | (1,428,698 | ) |
Interest income | | | 355,616 | | | | 9,404 | | | | 112,416 | | | 9,404 | | 112,416 | | 349,525 | |
Interest expense | | | — | | | | — | | | | (375,000 | ) | | — | | (375,000 | ) | — | |
Other income | | | — | | | | 205,043 | | | | — | | | 205,043 | | — | | — | |
Foreign exchange loss (gain) | | | 1,085 | | | | (38,767 | ) | | | (9 | ) | |
Gain from disposal of subsidiary | | | 221,899 | | | | — | | | | — | | |
Equity in loss of subsidiaries, VIEs and affiliate | | | (18,334,487 | ) | | | (47,302,995 | ) | | | (46,075,410 | ) | |
| | | | | | | | | | |
Foreign exchange loss | | | (38,767 | ) | (9 | ) | (15,589 | ) |
Equity in losses of subsidiaries | | | (47,302,995 | ) | (46,075,410 | ) | (8,396,376 | ) |
Net loss | | | (23,394,861 | ) | | | (51,510,264 | ) | | | (49,343,907 | ) | | (51,510,264 | ) | (49,343,907 | ) | (9,491,138 | ) |
| | | | | | | | | | |
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
STATEMENTS OF CASH FLOWS
| | | | Year ended
December 31, 2009 | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | | Year ended
December 31, 2010 | | Year ended
December 31, 2011 | | Year ended
December 31, 2012 | |
| | | (In U.S. dollars) | | | (in U.S. dollars, except number of shares)) | |
Operating activities: | | | | | | | | | | | | | |
Net loss | | | (23,394,861 | ) | | | (51,510,264 | ) | | | (49,343,907 | ) | | (51,510,264 | ) | (49,343,907 | ) | (9,491,138 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | |
Stock-based compensation | | | 169,310 | | | | 1,891,931 | | | | 1,231,919 | | |
Stock-based compensation cost in relation to disposition of Yisheng | | | — | | | | — | | | | 522,251 | | |
Equity in profit of subsidiary companies | | | 18,334,487 | | | | 47,302,995 | | | | 46,075,410 | | |
Gain from disposal of subsidiary | | | (221,899 | ) | | | — | | | | — | | |
Share-based compensation | | | 1,891,931 | | 1,231,919 | | 463,753 | |
Share-based compensation cost in relation to disposition of Yisheng | | | — | | 522,251 | | — | |
Equity in losses of subsidiaries | | | 47,302,995 | | 46,075,410 | | 8,396,376 | |
Prepaid expenses and other current assets | | | 40,047 | | | | (106,581 | ) | | | (193,214 | ) | | (106,581 | ) | (193,214 | ) | 122,056 | |
Amounts due from subsidiaries and variable interest entities | | | — | | — | | (1,645 | ) |
Amount due from related parties | | | — | | | | (942,919 | ) | | | (1,692,875 | ) | | (942,919 | ) | (1,692,875 | ) | (92,159 | ) |
Other payables and accruals | | | 1,008,149 | | | | 4,738 | | | | (323,957 | ) | | 4,738 | | (323,956 | ) | (277,527 | ) |
Amounts due to subsidiaries and variable interest entities | | | 34,929 | | | | 2,381 | | | | (77,833 | ) | | 2,381 | | (77,833 | ) | (4,013,840 | ) |
Amounts due to related parties | | | — | | | | — | | | | 375,000 | | | — | | 375,000 | | — | |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (4,029,838 | ) | | | (3,357,719 | ) | | | (3,427,206 | ) | |
Net cash used in operating activities | | | (3,357,719 | ) | (3,427,205 | ) | (4,894,124 | ) |
| | | | | | | | | | | | | | | | |
Investing activities: | | | | | | | | | | | | | |
Decrease/(Increase) of short-term investments | | | (10,000,000 | ) | | | 10,000,000 | | | | — | | |
Decrease of short-term investments | | | 10,000,000 | | — | | — | |
Proceeds from disposal of subsidiary | | | 268,759 | | | | 37,243,901 | | | | — | | | 37,243,901 | | — | | — | |
Loan to subsidiaries | | | — | | | | (53,418,876 | ) | | | (5,762,569 | ) | | (53,418,876 | ) | (5,762,569 | ) | (3,001,557 | ) |
Loan to related parties | | | — | | | | (3,200,000 | ) | | | (14,108,019 | ) | | (3,200,000 | ) | (14,108,019 | ) | (470,000 | ) |
Repayment of loans to related parties under common control of Shanda | | | — | | — | | 14,000,000 | |
Investment in subsidiary | | | (2,000,000 | ) | | | — | | | | (30,000,000 | ) | | — | | (30,000,000 | ) | — | |
Purchase of equity affiliate | | | — | | | | — | | | | — | | |
| | | | | | | | | | |
Net cash used in investing activities | | | (11,731,241 | ) | | | (9,374,975 | ) | | | (49,870,588 | ) | |
Net cash provided by (used in) investing activities | | | (9,374,975 | ) | (49,870,588 | ) | 10,528,443 | |
| | | | | | | | | | | | | | | | |
Financing activities: | | | | | | | | | | | | | |
Proceeds from exercise of options | | | 2,500 | | | | 20,350 | | | | 3,750 | | | 20,350 | | 3,750 | | — | |
Proceeds from issuance of ordinary shares to Shanda | | | — | | | | — | | | | 50,000,000 | | | — | | 50,000,000 | | — | |
Proceeds from issuance of Convertible Bond to Shanda | | | — | | | | — | | | | 50,000,000 | | | — | | 50,000,000 | | — | |
Cash paid for redemption of Convertible Bond to Shanda | | | — | | | | — | | | | (50,000,000 | ) | | — | | (50,000,000 | ) | — | |
| | | | | | | | | | |
Net cash provided by financing activities | | | 2,500 | | | | 20,350 | | | | 50,003,750 | | |
| | | | | | | | | | |
Repuchase of ordinary shares | | | — | | — | | (8,169,481 | ) |
Net cash provided by (used in) financing activities | | | 20,350 | | 50,003,750 | | (8,169,481 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | — | | | | — | | | | — | | | — | | — | | — | |
Net decrease in cash and cash equivalents | | | (15,758,579 | ) | | | (12,712,344 | ) | | | (3,294,043 | ) | | (12,712,344 | ) | (3,294,043 | ) | (2,535,162 | ) |
Cash and cash equivalents, beginning of year | | | 39,519,423 | | | | 23,760,844 | | | | 11,048,500 | | | 23,760,844 | | 11,048,500 | | 7,754,457 | |
| | | | | | | | | | |
Cash and cash equivalents, end of the year | | | 23,760,844 | | | | 11,048,500 | | | | 7,754,457 | | |
| | | | | | | | | | |
Cash and cash equivalents, end of year | | | 11,048,500 | | 7,754,457 | | 5,219,295 | |
Note
Basis for Preparation
The condensed financial statements of the Company have been prepared in accordance with SEC Regulation S-X Rule 5-04 and Rule 12-04.
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Table of Contents
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2011 AND 2012
(all amounts in U.S. dollars (US$) unless otherwise stated)
The Financial Information of the Parent Company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the Company has usedrecords its investment in subsidiaries under the equity method of accounting. Such investment and long-term loans to account for its investmentsubsidiaries are presented on the balance sheet as “Investment in itssubsidiaries” and the profit of the subsidiaries and its variable interest entities.
is presented as “Equity in losses of subsidiaries” on the statement of operations.
F-60These statements should be read in conjunction with the notes to the consolidated financial statements of the Group. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
F-53
is of significant importance to the success of our business. Since the online video market is highly competitive, a well-recognized brand is critical to increasing our user base and, in turn, enhancing our attractiveness to advertisers. We believe that the importance of brand recognition will increase as the number of Internet users in China grows. In order to attract and retain Internet users and advertisers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing our brand, as well as our ability to remain competitive, will also depend on our success in offering high-quality content, features and functionality. If we fail to promote our brand successfully or if visitors to our website or advertisers do not perceive our content and services to be of high quality, we may not be able to continue growing our business and attracting users and advertisers.
” and “酷6” are registered trademarks in China. We have also applied to register additional trademarks.
