Indicate the number of outstanding shares
of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2016, 60,285,087 ordinary
shares, par value US$0.0005 per share, were issued and outstanding.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes
¨
No
x
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statement included in this filing:
If "Other" has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17
¨
Item 18
¨
If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Except where the context otherwise requires
and for purposes of this annual report only:
All references to "CDTV Holding,"
"we," "us" or "our" include China Digital TV Holding Co., Ltd. and its subsidiaries.
This annual report contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our business, operating results and financial
condition as well as our current expectations, assumptions, estimates and projections about our industry. All statements other
than statements of historical fact in this annual report are forward-looking statements. These forward-looking statements can be
identified by words or phrases such as the words "anticipate," "believe," "estimate," "expect,"
"intend," "plan," "may," "is/are likely to," "should," "will" and similar
expressions. These forward-looking statements include, without limitation, statements relating to:
These forward-looking statements involve
various risks and uncertainties. These forward-looking statements reflect our current views with respect to future events and are
not a guarantee of future performance. Actual results may differ materially from the information contained in the forward-looking
statements as a result of a number of factors, including, without limitation, the risk factors set forth in "Item 3. Key Information—D.
Risk Factors" and the following:
Due to these risks, uncertainties and
assumptions, the forward-looking events and circumstances discussed in this annual report may not occur in the way we expect, or
at all. Accordingly, you should not place undue reliance on any for
w
ard-looking
information. The forward-looking statements made in this annual report relate only to events or information as of the date on which
the statements are made in this annual report. We undertake no obligation to update or otherwise revise the forward-looking statements
in this annual report, whether as a result of new information, future events or otherwise.
PART I
|
Item 1.
|
Identity of Directors,
Senior Management and Advisors
|
Not Applicable.
|
Item 2.
|
Offer Statistics and Expected
Timetable
|
Not Applicable.
|
A.
|
Selected Financial Data
|
Our Selected Consolidated
Financial Data
The following selected consolidated
financial data should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and our
audited consolidated financial statements and the notes thereto included elsewhere in this annual report on Form 20-F. The
selected consolidated statement of operations data for the years ended December 31, 2014, 2015 and 2016, and the selected
consolidated balance sheet data as of December 31, 2015 and 2016 set forth below are derived from our audited consolidated
financial statements included elsewhere in this annual report. Due to the deconsolidation of Beijing Super TV Co., Ltd., or
Beijing Super TV, which we ceased to control on December 29, 2016, the selected consolidated statement of operations data for
the years ended December 31, 2012 and 2013 and the selected historical consolidated balance sheet data as of December 31,
2012, 2013 and 2014 set forth below which are derived from our unaudited consolidated financial statements have reflected the
impact of retrospective adjustments for discontinued operations.
Our historical consolidated financial
statements have been prepared and presented in accordance with U.S. GAAP.
Our historical results for any prior period
do not necessarily indicate our results to be expected for any future period.
|
|
For the years ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
( in thousands of U.S. dollars, except share and per share data )
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,604
|
|
|
|
2,680
|
|
|
|
1,915
|
|
|
|
1,920
|
|
|
|
4,228
|
|
Cost of revenues
|
|
|
3,093
|
|
|
|
2,378
|
|
|
|
2,344
|
|
|
|
1,380
|
|
|
|
1,517
|
|
Gross profit/(loss)
|
|
|
511
|
|
|
|
302
|
|
|
|
(429
|
)
|
|
|
540
|
|
|
|
2,711
|
|
Total operating expenses
|
|
|
11,585
|
|
|
|
9,718
|
|
|
|
17,197
|
|
|
|
16,132
|
|
|
|
12,141
|
|
Loss from continuing operations
|
|
|
(11,074
|
)
|
|
|
(9,416
|
)
|
|
|
(17,626
|
)
|
|
|
(15,592
|
)
|
|
|
(9,430
|
)
|
Interest income
|
|
|
1,234
|
|
|
|
226
|
|
|
|
205
|
|
|
|
104
|
|
|
|
105
|
|
Interest expense
|
|
|
(739
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss from forward contract
|
|
|
(690
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cost method investment impairment
|
|
|
(4,487
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain from disposal of an equity method investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
Other income/(expense)
|
|
|
885
|
|
|
|
28
|
|
|
|
(50
|
)
|
|
|
354
|
|
|
|
1,088
|
|
Loss from continuing operations before income tax expenses
|
|
|
(14,871
|
)
|
|
|
(9,162
|
)
|
|
|
(17,471
|
)
|
|
|
(15,134
|
)
|
|
|
(8,142
|
)
|
Income tax expenses
|
|
|
336
|
|
|
|
206
|
|
|
|
81
|
|
|
|
292
|
|
|
|
114
|
|
Net loss from continuing operations before share of loss on equity method investments
|
|
|
(15,207
|
)
|
|
|
(9,368
|
)
|
|
|
(17,552
|
)
|
|
|
(15,426
|
)
|
|
|
(8,256
|
)
|
Share of loss on equity method investments, net of nil income taxes
|
|
|
(578
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(101
|
)
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(15,785
|
)
|
|
|
(9,368
|
)
|
|
|
(17,552
|
)
|
|
|
(15,527
|
)
|
|
|
(8,256
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from the operations of discontinued operations, net of income taxes
|
|
|
21,323
|
|
|
|
31,944
|
|
|
|
36,717
|
|
|
|
16,155
|
|
|
|
10,445
|
|
Gain from disposal of discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,190
|
|
Income from discontinued operations, net of income taxes
|
|
|
21,323
|
|
|
|
31,944
|
|
|
|
36,717
|
|
|
|
16,155
|
|
|
|
53,635
|
|
Net income
|
|
|
5,538
|
|
|
|
22,576
|
|
|
|
19,165
|
|
|
|
628
|
|
|
|
45,379
|
|
Less: Net loss attributable to noncontrolling interest
|
|
|
(1,389
|
)
|
|
|
(1,832
|
)
|
|
|
(1,725
|
)
|
|
|
(900
|
)
|
|
|
(39
|
)
|
Net loss from continuing operations attributable to China Digital TV Holding Co., Ltd.
|
|
|
(14,396
|
)
|
|
|
(7,536
|
)
|
|
|
(15,827
|
)
|
|
|
(14,627
|
)
|
|
|
(7,226
|
)
|
Net income from discontinued operations attributable to China Digital TV Holding Co., Ltd.
|
|
|
21,323
|
|
|
|
31,944
|
|
|
|
36,717
|
|
|
|
16,155
|
|
|
|
52,644
|
|
Net income attributable to China Digital TV Holding Co., Ltd.
|
|
$
|
6,927
|
|
|
$
|
24,408
|
|
|
$
|
20,890
|
|
|
$
|
1,528
|
|
|
$
|
45,418
|
|
Earnings/(loss) per share data – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations attributable to ordinary shareholders of China Digital TV Holding Co., Ltd.:
|
|
$
|
(0.24
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.12
|
)
|
Net income per share from discontinued operations attributable to ordinary shareholders of China Digital TV Holding Co., Ltd.:
|
|
|
0.36
|
|
|
|
0.54
|
|
|
|
0.62
|
|
|
|
0.27
|
|
|
|
0.87
|
|
Net income per share attributable to ordinary shareholders of China Digital TV Holding Co., Ltd.:
|
|
$
|
0.12
|
|
|
$
|
0.41
|
|
|
$
|
0.35
|
|
|
$
|
0.03
|
|
|
$
|
0.75
|
|
Cash dividends declared per share
|
|
$
|
2.30
|
|
|
$
|
-
|
|
|
$
|
0.50
|
|
|
$
|
-
|
|
|
$
|
0.20
|
|
Weighted average shares outstanding, basic and diluted:
|
|
|
59,011,396
|
|
|
|
59,111,594
|
|
|
|
59,369,708
|
|
|
|
59,968,346
|
|
|
|
60,199,096
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
184,321
|
|
|
$
|
139,953
|
|
|
$
|
130,154
|
|
|
$
|
121,873
|
|
|
$
|
126,585
|
|
Total assets
|
|
|
193,565
|
|
|
|
148,806
|
|
|
|
139,111
|
|
|
|
130,750
|
|
|
|
127,971
|
|
Total liabilities
|
|
|
110,402
|
|
|
|
37,834
|
|
|
|
37,084
|
|
|
|
28,944
|
|
|
|
4,900
|
|
Total China Digital TV Holding Co., Ltd. shareholders' equity
|
|
|
80,458
|
|
|
|
110,036
|
|
|
|
101,462
|
|
|
|
101,480
|
|
|
|
119,610
|
|
Noncontrolling interest
|
|
|
2,705
|
|
|
|
936
|
|
|
|
565
|
|
|
|
326
|
|
|
|
3,461
|
|
Total liabilities and equity
|
|
$
|
193,565
|
|
|
$
|
148,806
|
|
|
$
|
139,111
|
|
|
$
|
130,750
|
|
|
$
|
127,971
|
|
Exchange Rate Information
Our business is primarily conducted in
China and substantially all of our revenues are denominated in Renminbi. We present our historical consolidated financial statements
in U.S. dollars. In addition, solely for the convenience of the reader, this annual report contains translations of certain Renminbi
amounts into U.S. dollars at specific rates. For January 1, 2012 and all later dates and periods, the exchange rate refers to the
exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise indicated, conversions
of Renminbi into U.S. dollars in this annual report are based on the exchange rate on December 31, 2016. We make no representation
that any Renminbi amounts could have been, or could be, converted into U.S. dollars or vice versa, as the case may be, at any particular
rate, the rates stated below, or at all. For a detailed explanation of the risk of currency rate fluctuations, please see "Item
3. Key Information—D. Risk Factors—Risks Relating to the People's Republic of China—Fluctuations in exchange
rates could result in foreign currency exchange losses." The PRC government imposes controls over its foreign currency reserves
in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.
On April 14, 2017, the daily exchange
rate reported by the Federal Reserve Board was RMB 6.8835 to US$1.00.The following table sets forth additional information concerning
exchange rates between Renminbi and U.S. dollars for the periods indicated. These rates are provided solely for your convenience
and are not necessarily the exchange rates that we use in this annual report or will use in the preparation of our future periodic
reports or any other information to be provided to you.
|
|
RMB per US$1.00
|
|
|
|
High
|
|
|
Low
|
|
October 2016
|
|
|
6.7819
|
|
|
|
6.6685
|
|
November 2016
|
|
|
6.9195
|
|
|
|
6.7534
|
|
December 2016
|
|
|
6.9580
|
|
|
|
6.8771
|
|
January 2017
|
|
|
6.9575
|
|
|
|
6.8360
|
|
February 2017
|
|
|
6.8821
|
|
|
|
6.8517
|
|
March 2017
|
|
|
6.9132
|
|
|
|
6.8687
|
|
April 2017 (through April 14, 2017)
|
|
|
6.8988
|
|
|
|
6.8832
|
|
The following table sets forth the average
exchange rates between Renminbi and U.S. dollars for each of 2012, 2013, 2014, 2015 and 2016 calculated by averaging the exchange
rates on the last day of each month during each of the relevant years.
Average Exchange Rate
|
|
RMB per
US$ 1.00
|
|
2012
|
|
|
6.2990
|
|
2013
|
|
|
6.1412
|
|
2014
|
|
|
6.1704
|
|
2015
|
|
|
6.2869
|
|
2016
|
|
|
6.6549
|
|
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not Applicable.
You should carefully consider all of
the information in this annual report, including the risks and uncertainties described below, before deciding to invest in our
ADSs. The trading price of our ADSs could decline due to any of these risks and uncertainties, and you may lose all or part of
your investment.
Risks Relating to Our Business and
Industry
We depend, and expect to continue
to depend, on a limited number of customers for a significant portion of our revenues in any single period. If one customer defers
or cancels its orders, our revenues and net income could decline significantly.
The revenues for continuing operations
generated by our top three customers for a particular year as a percentage of our total revenues increased from 58.9% in 2014 to
63.6% in 2016. We currently still derive, and we expect to continue to derive, a significant portion of our revenues from a limited
number of customers, although the particular customers may vary from period to period. As cloud-based application platforms, or
cloud platforms, are still at the developing stage in the PRC, our major clients are large television and telecommunication network
operators who are launching cloud services and need to establish their networks based on our platforms. If a customer terminates
its relationship with us, our revenues and net income could decline significantly and, as a result, our financial condition and
results of operations could be materially and adversely affected.
CA and CA-related business represented
a substantial portion of our former business, therefore our business will be substantially different following its sale.
Beijing Super TV and its wholly owned
subsidiary, Beijing Novel-Super Digital TV Technology Co., Ltd., or N-S Digital TV, or collectively Super TV, which operate
our discontinued CA and CA-related businesses, represented a substantial portion of our business until the sale of all the
equity interest in Beijing Super TV then held by our subsidiary, Golden Benefit Technology Limited, or Golden Benefit, for
RMB610 million, or the Super TV Disposition, under a definitive equity transfer agreement, or the Equity Transfer Agreement,
entered into between Golden Benefit and Changxing Bao Li Rui Xin Technology Co., Limited, or Bao Li, in December 2016. Our
continuing business, substantially all of which are performed by Beijing Cyber Cloud Co., Ltd., or Cyber Cloud, constituted
only a small part of our former business. In 2016, revenues from Super TV were US$48.0 million, whereas revenues from Cyber
Cloud were US$3.7 million. In 2014, 2015 and 2016, Cyber Cloud generated net losses in the amount of US$3.0 million, US$3.4
million and US$2.5 million, respectively.
Given that Cyber Cloud has only a short
operating history, and we have no substantial experience of cooperating with television network operators or other third parties
in providing new solutions and products, we may not be successful in doing so, and Cyber Cloud may not become profitable in the
foreseeable future, or at all.
We may also seek to maximize our profitability
through further reducing corporate overhead costs. Because our business will be significantly smaller following the Super TV Disposition,
we believe that there will be certain ways in which corporate overhead costs may be significantly reduced. However, if we are not
successful in fully implementing such cost reductions, our ability to increase our profitability in this manner may be impaired.
As a result, our operating results for
any particular period may not be indicative of our future operating results.
We have a limited operating history
in providing cloud computing-based services, which makes it difficult to predict our future operating results.
We introduced our first cloud computing-based
service in 2012. As a result of our limited operating history, our ability to forecast our future operating results is limited
and subject to a number of uncertainties, including our ability to plan for and model future growth. We face risks and uncertainties
frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein.
If our assumptions regarding these risks and uncertainties (which we use to plan our business) are incorrect or change due to changes
in our markets, or if we do not address these risks successfully, our business could suffer and our operating and financial results
could differ materially from our expectations.
Our operating results may fluctuate
significantly from quarter to quarter, which could materially and adversely affect the price of our ADSs.
Our quarterly operating results have varied
significantly in the past and are likely to continue to vary significantly in the future. Our quarterly revenues may fluctuate
as a result of a number of factors, many of which are outside of our control. Our cost of revenues and operating expenses may also
fluctuate from quarter to quarter. As a result, you may not be able to rely on period-to-period comparisons of our operating results
as an indication of our future performance. In addition, our actual quarterly results may differ from market expectations, which
may cause the price of our ADSs to decline significantly.
The cloud computing market is subject
to rapid technological changes, and we depend on new product and service introductions in order to maintain and grow our business.
Cloud computing solutions and services
is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced
products, and continuing and rapid technological advancement. To compete successfully in this emerging market, we must continue
to design, develop, manufacture, and sell new and enhanced cloud software products and services that provide increasingly higher
levels of performance and reliability at lower costs.
If we breach
any representations, warranties, covenants or other obligations, the Equity Transfer Agreement may expose us to potential liabilities.
Golden Benefit has made certain representations,
warranties and covenants under the Equity Transfer Agreement, for the Super TV Disposition. If there is any breach by Golden Benefit
of any such representation, warranty, covenant or other obligation under the Equity Transfer Agreement, Golden Benefit may be liable,
either before or after the closing of the Super TV Disposition. For a detailed explanation of the Equity Transfer Agreement, see
"Item 4. Information on the Company—A. History and Development of the Company."
If Bao Li's
creditors lay claim on the deposit for the period the purchase consideration is deposited in the co-owned bank account, we may
not be able to receive the payment we are entitled to under the Equity Transfer Agreement in full or at all.
In accordance
with the Equity Transfer Agreement for the Super TV Disposition and the supplemental agreement thereto, the purchase
consideration of Renminbi 552 million, net of withholding income tax and stamp duties of Renminbi 58 million, was paid by Bao
Li to our bank account on December 27, 2016. Once Bao Li completes all necessary administrative procedures for foreign
currency exchange, the purchase consideration will be deposited to a bank account jointly opened and owned by Golden Benefit
and Bao Li for a stipulated period of time, during which Bao Li exchanges the Renminbi purchase consideration into U.S.
dollars and remit the payment in U.S. dollars to Golden Benefit's offshore bank account, unless otherwise instructed by
Golden Benefit. However, if any of Bao Li's creditors lay claim on the deposit in the co-owned account, Golden Benefit might
not be able to receive the payment in full or at all, which would in turn have a material adverse effect on our financial
condition. Moreover, as the purchase consideration is denominated in Renminbi, the possible future depreciation in value of
the Renminbi against the U.S. dollar may also affect the value of payment we receive in U.S. dollars under the Super TV
Disposition.
For as long as we remain a public
company, we will continue to incur the expenses of complying with public company reporting requirements.
Our reporting obligations as a SEC registrant
will not be affected as a result of completing the Super TV Disposition. For as long as we remain as such, we have an obligation
to continue to comply with the applicable reporting requirements of the Exchange Act, which includes the filing with the SEC of
periodic reports and other documents relating to our business, financial condition and other matters, even though compliance with
such reporting requirements is economically burdensome.
We may be deemed an investment company
and subject to related requirements and restrictions under the U.S. Investment Company Act of 1940
The regulatory scope of the U.S. Investment
Company Act of 1940, as amended, or the Investment Company Act, which was enacted principally for the purpose of regulating vehicles
for pooled investments in securities, generally extends to companies engaged primarily in the business of investing, reinvesting,
owning, holding or trading in securities. However, the Investment Company Act may also apply to a company that does not hold itself
out to be an investment company but that, due to the nature of its holdings, may be deemed to fall within the definition of an
investment company under such Act. China Digital TV will hold the proceeds from the Super TV Disposition. If China Digital TV is
deemed to be an investment company, it will become subject to certain restrictions relating to its activities, including restrictions
on the nature of its operations and the issuance of securities. In addition, the Investment Company Act imposes certain requirements
on companies deemed to be within its regulatory scope, including registration as an investment company.
However, as we intend to, and our Board
of Directors has authorized us to, take actions so that we will be engaged primarily, as soon as reasonably possible and in any
event before the first anniversary of the consummation of the Super TV Disposition, or the Rule 3a-2 period, in a business other
than that of investing, reinvesting, owning, holding or trading in securities, we intend to rely upon Rule 3a-2 under the Investment
Company Act to avoid being deemed an investment company during the Rule 3a-2 period.
In the event that it is determined that
we are unable to rely on Rule 3a-2 under the Investment Company Act or that we are unable to be engaged primarily in a business
other than that of investing, reinvesting, owning, holding or trading in securities prior to the first anniversary of the consummation
of the Super TV Disposition, compliance with the requirements and restrictions of the Investment Company Act would likely have
a material adverse effect on us.
Following the Super TV Disposition,
our business is significantly smaller, and we may fail to satisfy the continued listing criteria of the NYSE. If we are unable
to satisfy the continued listing criteria of the NYSE, our ADSs may be delisted from that market.
In order to continue to be listed on the
NYSE, we must meet the requirements as set forth in Sections 802.01A to 802.01C of the NYSE-listed Companies Manual, which require,
among other things: (i) average monthly trading volume of no less than 100,000 shares; (ii) average global market capitalization
over a consecutive 30 trading-day period of no less than US$50 million and, at the same time, stockholders’ equity of no
less than US$50 million; and (iii) average closing price of a security as reported on the consolidated tape of no less than US$1.00
over a consecutive 30 trading-day period. On April 19, 2017, our board declared a special dividend of US$1.50 per ordinary share.
Substantially all of the proceeds from the Super TV Disposition will be paid as special dividend. Such dividend payment will reduce
our shareholders’ equity and is expected to reduce our market capitalization. And it will significantly increase our risk
of failure to meeting these requirements. Additionally, because Super TV represented a significant portion of our operating assets
prior to its sale, our ADSs may be subject to delisting by the NYSE under Section 802.01D of the NYSE-listed Companies Manual,
which provides that the NYSE may in its sole discretion initiate delisting procedures against a company if such company’s
operating assets have been or are to be substantially reduced such as by sale.
Any delisting of our ADSs from the NYSE
could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding ADSs, reduce our flexibility
to raise additional capital, reduce the trading price of our ADSs, and increase the transaction costs inherent in trading such
shares with overall negative effects for our shareholders. In addition, delisting of our ADSs could deter broker-dealers from making
a market in or otherwise seeking or generating interest in our ADSs, and might deter certain institutions and persons from investing
in our securities at all. For these reasons and others, delisting could adversely affect the price of our ADSs and our business,
financial condition and results of operations.
We depend upon key personnel, including
our senior executives and technical and engineering staff, and our business and prospects would greatly suffer if we lose their
services.
Our future success depends heavily on
the continued service of our key executives. In particular, we rely on the expertise and experience of our management team in our
business operations and technology development efforts, and on their relationships with the regulatory authorities, our customers,
our suppliers and our employees. If any of them becomes unable or unwilling to continue in their present positions, or if they
join a competitor or form a competing company, we may not be able to replace them easily, our business may be significantly disrupted
and our business, financial condition and results of operations may be materially and adversely affected. We do not currently maintain
key-man insurance for any of our key personnel. Furthermore, our future success depends heavily upon our ability to recruit and
retain experienced technical and engineering staff. There is substantial competition for qualified technical personnel from other
companies in our industry as well as from businesses outside our industry, and we may not be successful in retaining technical
and engineering employees and recruiting new ones. If we are unsuccessful in our recruitment and retention efforts, our business
and prospects may be materially and adversely affected.
We may face difficulties implementing
our acquisition strategy, including identifying suitable opportunities and integrating acquired businesses and assets with our
existing operations.
Our ability to implement our acquisition
strategy will depend on our ability to identify suitable acquisition candidates, our ability to compete effectively to attract
and reach agreement with acquisition candidates on commercially reasonable terms and the availability of financing to complete
larger acquisitions, as well as our ability to obtain any required shareholder or government approvals. In addition, any particular
acquisition may not produce the intended benefits. For example, we may not be successful in integrating acquisitions with our existing
operations and personnel, and the process of integration may cause unforeseen operating difficulties and expenditures and may divert
significant attention of our management that would otherwise be available for the ongoing development of our business. If we make
future acquisitions, we may issue new shares that dilute the interests of our other shareholders, expend cash, incur debt, assume
contingent liabilities or create additional expenses related to the impairment of goodwill or the amortization of other intangible
assets with estimable useful lives.
Our business could be harmed if
a defect in our software, technology or services interferes with, or causes any failure in, our customers' systems.
A defect, error or performance problem
with our software or technology could interfere with, or cause a critical component of, one or more of our customers' systems to
fail for a period of time. Any negligence or error of our employees in the course of their performance of system integration, upgrade
or maintenance services for our customers may also cause malfunctioning, suspension or failure of our customers' systems. Occurrence
of such incidents could result in claims for substantial damages against us, regardless of whether we are responsible for such
failure. Any claim brought against us could be expensive to defend and require the expenditure of a significant amount of resources,
regardless of whether we prevail. In addition, we do not currently maintain any product or business liability insurance. Although
we have not experienced any such material interference or failure in the past, our potential exposure to this risk may increase
as sales of our products and customer demand for our upgrade or maintenance services grow. Any future problem in this area could
cause severe customer service problems and reputational damage.
If we fail to protect our intellectual
property rights, it could harm our business and competitive position.
We are required to continually improve
our products and services to stay competitive in the marketplace, and as a result intellectual property is critical to our continued
success. We rely on a combination of patent, trademark and copyright laws, trade secrets, confidentiality procedures and contractual
provisions to protect our intellectual property rights and the obligations we have to third parties from whom we license intellectual
property rights. Nevertheless, these afford only limited protection and policing unauthorized use of proprietary technology can
be difficult and expensive. In addition, intellectual property rights historically have not been enforced in the PRC to the same
extent as in the United States, and intellectual property theft presents a serious risk in doing business in the PRC. We may not
be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights and this could have
a material adverse effect on our business, financial condition and results of operations.
We may be exposed to infringement
or misappropriation claims by our suppliers and third parties that, if determined adversely to us, could require us to pay significant
damage awards.
Our success depends largely on our ability
to use and develop our technology and know-how, and to provide services based on the contents from our suppliers without infringing
the intellectual property rights of third parties and content suppliers. The validity and scope of any claims relating to our technology
patents would involve complex technological, legal and factual questions and analyses and, as a result, the outcome of such claims
would be highly uncertain. The services our cloud platforms provide rely heavily on our content suppliers, especially the game
developers. We may be subject to litigation involving claims of violation of intellectual property rights of third parties if our
contents are not from legal copyright sources. We may also be subject to litigation involving claims violation of intellectual
property rights of our contents providers, if our application of the contents exceeds the scope we agreed upon with the contents
providers. We may be subject to litigation involving claims of patent infringement or violation of other intellectual property
rights of third parties. The defense of such claims would be costly and time-consuming, and could significantly divert the efforts
and resources of our management and technical personnel. An adverse determination in any such litigation or proceedings to which
we may become a party could subject us to significant liability to third parties and/or suppliers, require us to seek licenses
from the right holders, pay ongoing royalties or redesign our products, or subject us to injunctions prohibiting the manufacture
and sale of our products or the use of our technologies. Protracted litigation could also result in our customers or potential
customers deferring or limiting their purchase or use of our products until resolution of such litigation. In addition, we could
face disruptions to our business and damage to our reputation, and our financial condition and results of operations could be materially
adversely affected.
We rely on a single facility for
most of our business operations. Any destruction of, or significant disruption to, this facility could severely affect our ability
to conduct normal business operations.
Most of our business operations, all our
research and development activities and our corporate headquarters are concentrated within a single facility that we lease in Beijing,
PRC. As we do not maintain back-up facilities, we rely on this facility for the continued operation of our business. In addition,
we currently do not maintain any business disruption or similar insurance coverage. A major earthquake, fire or other catastrophic
event that results in the destruction of or significant disruption to, the facility could severely affect our ability to complete
sales or conduct other normal business operations, which would materially reduce our revenues and net income.
We have identified a material weakness
in our internal controls over financial reporting which could, if not remedied, result in material misstatements in our financial
statements.
We are subject to the Sarbanes-Oxley Act
of 2002, or the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires that we include a report of management on our
internal controls over financial reporting in our annual report on Form 20-F.
Although we have concluded that our consolidated
financial statements as of and for the year ended December 31, 2016 present fairly, in all material respects, the financial position,
results of operations and cash flows of our company and its subsidiaries in conformity with generally accepted accounting principles,
we and our independent registered public accounting firm identified one material weakness relating to insufficient accounting personnel
with appropriate U.S. GAAP knowledge for accounting, presentation and disclosure of complex unusual transactions. See “Item 15.
Controls and Procedures” for further details. Under standards established by the Public Company Accounting Oversight Board,
a material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis.
We plan to take measures to address the
material weakness identified above. We will design and implement more robust financial reporting and management controls for complex
and unusual transactions going forward. In addition, we will engage external accounting experts for such transactions in the future,
if we assess it is necessary. If our remedial measures are insufficient to address the material weakness, or if additional material
weaknesses in our internal controls over financial reporting are discovered or occur in the future, our consolidated financial
statements may contain material misstatements, and we could be required to restate our consolidated financial statements. This
could cause investors to lose confidence in our reported financial information, harm our results of operations and lead to a significant
decline in the trading price of our ADSs. Furthermore, ineffective internal controls over financial reporting could expose us to
increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we
list, regulatory investigations and sanctions.
We may need additional capital and
we may not be able to obtain it.
In order for us to grow, remain competitive,
develop new products and services, expand our customer base and carry out acquisitions, we may seek to obtain additional capital
in the future through selling additional equity or debt securities or obtaining a credit facility. Our ability to obtain additional
capital in the future is subject to a variety of uncertainties, including:
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our future financial condition, results of operations and cash flows;
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conditions in the United States and other capital markets in which we may seek to raise funds;
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investors' perception of, and demand for, securities of digital television components and related companies; and
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economic, political and other conditions in the PRC and elsewhere.
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We may be unable to obtain additional
capital in a timely manner or on acceptable terms or at all. Furthermore, the additional issuances of equity securities may result
in significant dilution to our shareholders. The incurrence of debt would result in increased interest expense and could require
us to agree to operating and financial covenants that would restrict our operations.
We believe that we were classified
as a passive foreign investment company, or PFIC, in 2016, and we believe we had been classified as a PFIC in certain prior years,
which could result in adverse United States federal income tax consequences to U.S. holders of our ADSs and may result in additional
adverse United States federal income tax consequences to such holders in subsequent years.
Based on the market price of our ADSs
and the composition of our assets, including the retention of a substantial amount of cash, we believe that we were a PFIC for
United States federal income tax purposes for our taxable year ended December 31, 2016, and there is a significant risk that we
will be a PFIC for our current taxable year ending December 31, 2017 unless the market price of our ADSs increases and/or we invest
a substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active
income. In addition, it is possible that one or more of our subsidiaries may be or become classified as a PFIC for United States
federal income tax purposes. It should be noted that we believe that we have been treated as a PFIC with respect to certain, but
not all, prior taxable years. Unless certain elections are made, a U.S. holder, as defined in "Item 10. Additional Information—E.
Taxation—United States Federal Income Taxation", that owns stock in a corporation treated as a PFIC will continue to
be treated as owning stock in a PFIC even if the corporation is no longer treated as a PFIC with respect to a particular taxable
year. If a U.S. holder acquired ADSs in a year when we were not treated as a PFIC but continues to own such ADSs in a year when
we were treated as a PFIC, such U.S. holder would generally be treated as owning stock in a PFIC for such later year and all future
years unless certain elections are made.
We will be classified as a PFIC in any
taxable year if either: (1) the average percentage value of our gross assets during the taxable year (determined on a quarterly
basis) that produce passive income or are held for the production of passive income is at least 50% of the value of our total gross
assets; or (2) 75% or more of our gross income for the taxable year is passive income. If we hold substantial cash, cash equivalents
and other passive assets, as we currently do, a significant decrease in the market price of our outstanding shares, among other
changes, would increase the risk of us becoming a PFIC.
In any taxable year in which we are classified
as a PFIC or you are treated as owning stock in a PFIC, and you are a U.S. holder of our ADSs or shares, unless you make a mark-to-market
election, you will generally be taxed at higher ordinary income rates, rather than lower capital gain rates, if you dispose of
our ADSs or shares for a gain, even if we are not a PFIC in the year of disposition. In addition, a portion of the tax imposed
on your gain would be increased by an interest charge if you dispose of our ADSs or shares in a year after the first year in which
we were treated as a PFIC that you hold our ADSs or shares. Similar treatment would apply if you receive distributions from us
that are characterized as "excess distributions." Moreover, you will not be able to benefit from any preferential tax
rate with respect to any dividend distribution that you may receive from us in a year in which we are a PFIC or in the following
year. Finally, you will also be subject to special United States federal income tax reporting requirements. For more information
on the United States federal income tax consequences to you that would result from our classification as a PFIC, including the
consequences of making a mark-to-market election, see "Item 10. Additional Information—E. Taxation—United States
Federal Income Taxation—PFIC Rules." You should consult your tax advisor regarding the application of the PFIC rules
to your investment in our ADSs or shares.
Our bank accounts are not fully
insured or similarly protected against loss.
As of December 31, 2016, approximately
94.5% of our bank deposits were placed with two commercial banks in the PRC
.
Applicable PRC laws did not require that banks
provide deposit insurance or similar protections to depositors in the PRC until the State Council promulgated the Regulations on
Deposit Insurance in February 2015, which became effective on May 1, 2015. The maximum reimbursement limit for all the principal
and interest of the deposits in all the insured deposit accounts opened by one depositor with one insured bank is currently set
at RMB500,000, which amount may be adjusted by the competent government authorities. As a result, our bank accounts with deposits
in excess of RMB500,000 are not fully insured or similarly protected. If a commercial bank with which we have placed our cash deposits
becomes insolvent, or if we are otherwise unable to withdraw funds, we may be unable to recover the cash on deposit with that bank
for amounts in excess of RMB500,000. As a result, our liquidity and cash flows, as well as financial condition and results of operations,
could be materially and adversely affected.
Certain of our existing shareholders
have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.
As of March 31, 2017, our two largest
shareholders and key executives, namely Dr. Zengxiang Lu and Jianhua Zhu, beneficially owned a total of approximately 34.59% of
our outstanding shares. Accordingly, they will have significant influence in determining the outcome of any corporate transaction
or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate actions. They will also have the power to prevent or cause
a change in control. In addition, without the consent of these shareholders, we could be prevented from entering into transactions
that could be beneficial to us. These shareholders may cause us to take actions that are opposed by other shareholders as the interests
of these shareholders may differ from the interests of our other shareholders. See "Item 7. Major Shareholders and Related
Party Transactions" for more information regarding the share ownership of our officers, directors and significant shareholders.
Risks Relating to the People's Republic
of China
Our operations may be materially
and adversely affected by changes in the economic, political and social conditions of the PRC.
Substantially all of our non-cash assets
are located in, and substantially all of our revenue is sourced from, the PRC. Accordingly, our business, financial condition,
results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the
PRC generally and by continued economic growth in the PRC as a whole.
The PRC economy differs from the economies
of most developed countries in many respects, including the extent of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth over the past
three decades, growth has been uneven across different regions and among various economic sectors. The PRC government has implemented
various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely
affected by government control over capital investments or changes in tax regulations that are applicable to us. We cannot predict
the possible impact of any future economic policies of the PRC government on our business and operations.
The PRC is facing a continued slowdown
in economic growth. China's annual gross domestic product growth rate in 2016 was 6.7%, compared to 6.9% in 2015 and 7.4% in 2014.
This slowdown could cause a slowdown or decline in investment in cable television networks, which, in turn, may result in a reduction
of demand for our products and services and thus materially reduce our revenues and profitability.
Uncertainties in the interpretation
and enforcement of PRC laws, rules and regulations could limit the legal protections available to you and us.
The PRC legal system is a civil law system
based on written statutes. Unlike common law systems, it is a system in which legal decisions have limited value as precedents.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms
of foreign or private-sector investment in the PRC. Cyber Cloud is a foreign-invested enterprise and is subject to laws, rules
and regulations applicable to foreign investment in the PRC as well as laws, rules and regulations applicable to foreign-invested
enterprises. These laws, rules and regulations change frequently, and their interpretation and enforcement involve uncertainties.
For example, we may have to resort to administrative and court proceedings to enforce the legal protections that we enjoy either
by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the
level of legal protection we enjoy than in more developed legal systems. These uncertainties may also impede our ability to enforce
the contracts we have entered into, and materially impair our business and operations.
The approval of the China Securities
Regulatory Commission might be required in connection with our initial public offering under certain PRC regulation; failure to
obtain this approval, if required, could have a material adverse effect on our business, financial condition, results of operations
and reputation as well as the trading price of our ADSs.
On August 8, 2006, six PRC regulatory
agencies, including the Ministry of Commerce, or the MOFCOM, the State-owned Assets Supervision and Administration Commission,
or the SASAC, the State Administration for Taxation, or the SAT, the State Administration for Industry and Commerce, or the SAIC,
the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or the SAFE, jointly
adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
, or the M&A Rules,
which became effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, include provisions
that purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities in
a PRC company obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle's securities on
an overseas stock exchange.
We completed the initial listing and trading
of our ADSs on the NYSE on October 11, 2007. We did not seek CSRC approval in connection with our initial public offering. Our
PRC counsel, Han Kun, advised us that, based on their understanding of the current PRC laws, regulations and rules, because we
completed our restructuring in 2004 in connection with an equity investment in our company by a private equity investor more than
two years prior to the promulgation of the M&A Rules, we were not and are not required by the M&A Rules to apply to the
CSRC for approval of our initial public offering unless we are clearly required to do so by any rules promulgated in the future.
See "Item 4. Information on the Company—B. Business Overview—Regulations—Regulations of Overseas Listings."
However, the application of the M&A Rules remains unclear. If the CSRC or another PRC regulatory agency subsequently determines
that the CSRC's approval was required for our initial public offering, we may face sanctions by the CSRC or another PRC regulatory
agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our privileges
in the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations
and prospects, as well as the trading price of our ADSs.
PRC regulations relating to offshore
investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that
could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make
any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could
expose us and our PRC-resident shareholders to liability under PRC law.
The SAFE has promulgated several regulations,
including the
Notice on Issues Relating to the Administration of Foreign Exchange in Overseas Investment, Fund-Raising and Round-Trip
Investment Activities of Domestic Residents via Offshore Special Purpose Vehicles
, or SAFE Notice 37, and its implementation
rules and guidance, that require PRC residents (including PRC individuals and corporate entities) to register with and obtain approvals
from relevant PRC government authorities (or qualified banks designated by them) in connection with such PRC residents' direct
or indirect offshore investment activities. These regulations may apply to our shareholders who are PRC residents in connection
with our prior and any future offshore acquisitions.
Under SAFE Notice 37, a "special
purpose vehicle" refers to an offshore entity directly established or indirectly controlled by PRC residents for the purpose
of seeking offshore equity financing or making offshore investment, using legitimate domestic or offshore assets or interests owned
by such PRC residents, while "round trip investment" refers to the direct investment in China by such PRC residents through
the "special purpose vehicles," including, without limitation, establishing foreign-invested enterprises and using such
foreign-invested enterprises to purchase or control onshore assets through contractual arrangements. SAFE Notice 37 and the
Notice
on Further Simplifying and Improving Foreign Exchange Policy on Direct Investment
, or SAFE Notice 13, effective as of June
1, 2015, require that, before making a contribution into a "special purpose vehicle," PRC residents are required to complete
a foreign exchange registration with qualified banks for their overseas investments. In addition, PRC residents are required to
update their previously filed registrations with respect to such special purpose vehicles to reflect any material change, such
as any change of basic information (including change of such PRC residents, name and operation term), increases or decreases in
investment amounts, transfers or exchanges of shares, and mergers or divisions. The qualified banks, under the supervision of the
SAFE, will directly examine the applications and conduct the registration. If a PRC resident fails to make the required SAFE registration
or update the previously filed registration, the PRC subsidiaries of such offshore parent company may be prohibited from making
distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC law for foreign exchange evasion.
We have notified holders of our ordinary
shares who we know to be PRC residents to register with the qualified banks and update their registrations as required by the relevant
SAFE regulations described above. However, we cannot assure you that all of our shareholders who are PRC residents will comply
with our request to make or obtain any registrations or approvals or update their previously filed registrations as required under
these regulations or other related legislation. If any existing shareholder transfers any of our shares or ADSs to another PRC
resident, it is unclear whether such new shareholder is also required to make the SAFE registration. Furthermore, as the interpretations
and practice in implementing these SAFE regulations have been constantly evolving, it is unclear how these regulations, and any
future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
government authorities. The failure or inability of our PRC resident shareholders to obtain any required approvals or make any
required registrations may subject us to fines and legal sanctions, restrict our cross-border investment activities or obtaining
of shareholders loans, and prevent us from being able to make distributions or pay dividends, as a result of which our business
as well as our ability to distribute profits to you could be materially and adversely affected.
We may be subject to fines and legal
sanctions if we or our employees who are domestic individuals fail to comply with the PRC regulations relating to employee share
options granted by overseas-listed companies to domestic individuals.
In February 2012, the SAFE promulgated
the
Notice relating to Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed
Companies
, or SAFE Notice 7, which superseded the
Application Procedures of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Holding Plans or Stock Option Plans of Overseas-Listed Companies
, or SAFE Notice
78, promulgated by the SAFE in March 2007. SAFE Notice 7 is applicable to directors, supervisors, senior management personnel and
other employees of an overseas-listed company incorporated in the PRC, PRC subsidiaries or branches of an overseas-listed company,
and any PRC entities which are directly or indirectly controlled by an overseas-listed company, or, collectively, Domestic Companies,
including PRC citizens (including Hong Kong, Macau and Taiwan) and foreign citizens who have resided in the PRC for one year or
longer, or, collectively, Domestic Individuals. Under SAFE Notice 7, Domestic Individuals who participate in a stock incentive
plan of an overseas-listed company are required, through a Domestic Company or a PRC entity designated by a Domestic Company, or
the Domestic Agent, to register with the SAFE or its authorized local counterparts and complete certain other procedures. As we
are an overseas-listed company, we and our employees who are Domestic Individuals and have been granted share options or any other
share-related rights and benefits under our stock incentive plans are subject to SAFE Notice 7. We have registered ourselves and
on behalf of our employees with the relevant local SAFE branch pursuant to SAFE Notice 7. However, there exist significant uncertainties
in practice with respect to the interpretation and implementation of SAFE Notice 7 and we cannot assure you that we or our employees
who are Domestic Individuals will be in full compliance with SAFE Notice 7. If the SAFE or other PRC government authorities determine
that we or our employees who are Domestic Individuals fail to comply with the provisions of SAFE Notice 7, we or they may be subject
to fines and legal sanctions. See "Item 4. Information on the Company—B. Business Overview—Regulations—Stock
Incentive Plans."
We may rely on dividends and other
distributions on equity paid by our operating subsidiary to fund cash and financing requirements and limitations on the ability
of our operating subsidiary to pay dividends to us could materially restrict our ability to conduct our business.
We, as a holding company, may rely on
dividends and other distributions on equity paid by our operating subsidiaries for our cash and financing requirements, including
the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our
operating expenses. If our operating subsidiaries incur debt on their own behalf in the future, the instruments governing the debt
may restrict their ability to pay dividends or make other distributions to us. Furthermore, relevant PRC laws, rules and regulations
permit payments of dividends by our operating subsidiaries in China only out of their retained earnings, if any, determined in
accordance with PRC accounting standards and regulations. Under applicable PRC laws, rules and regulations, each of our PRC subsidiaries
is required to set aside 10% of its after-tax profits, if any, each year to fund a statutory reserve until the accumulated amount
of such reserve has exceeded 50% of its registered capital. This reserve is not distributable as cash dividends to equity owners.
As a result of these PRC laws, rules and regulations, our PRC subsidiaries are restricted in their ability to transfer a portion
of their net assets to us in the form of dividends. Limitations on the ability of our subsidiaries to pay dividends to us could
materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses,
pay dividends, or otherwise fund and conduct our business.
Restrictions on currency exchange
may limit our ability to effectively utilize our revenues as well as the ability of our PRC subsidiaries to obtain debt or equity
financing from financial institutions or investors outside the PRC, including us.
A significant portion of our operating
revenues have been denominated in Renminbi. The Renminbi is currently convertible under the "current account," which
includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account," which
includes foreign direct investment and loans. Currently, our subsidiaries in China may purchase foreign exchange for settlement
of "current account transactions," including payment of dividends to us, without the approval of the SAFE by complying
with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase
foreign currencies in the future for current account transactions. Since a significant amount of our future revenues will be denominated
in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi
to fund our business activities outside the PRC denominated in foreign currencies or pay dividends in foreign currencies to our
shareholders, including holders of our ADSs.
In addition, certain foreign exchange
transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE
(or qualified banks designated by it) and other relevant PRC government authorities. In particular, any loans to Cyber Cloud or
its subsidiaries are subject to PRC regulations and approvals. For example, loans by us to Cyber Cloud, a foreign-invested enterprise,
cannot exceed statutory limits and must be registered with the SAFE or its local counterpart.
This could affect our subsidiaries' ability
to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions from us.
Fluctuations in exchange rates could
result in foreign currency exchange losses.
As a significant portion of our operating
revenues are denominated in Renminbi and the net proceeds from our initial public offering are denominated in U.S. dollars, fluctuations
in exchange rates between U.S. dollars and Renminbi will affect the relative purchasing power of these proceeds and our balance
sheet and earnings per share in U.S. dollars. Appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business,
financial condition or results of operations. Since July 2005, the Renminbi is no longer pegged solely to the U.S. dollar. Instead,
the Renminbi is reported to be pegged against a basket of currencies, determined by the People's Bank of China, against which it
can rise or fall by as much as 0.3% each day. This permitted floating range was increased to 0.5% in May 2007 and was further increased
to 2.0% in March 2014. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term,
depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter
into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar.
Fluctuations in the exchange rate will also affect the relative value of dividends, if any, payable on our ordinary shares in U.S.
dollar terms and the value of any U.S. dollar-denominated investments we make in the future. In addition, since substantially all
of our operating revenues and cost of revenues are denominated in Renminbi, fluctuations in the exchange rate could also impact
our financial condition and results of operations.
Very limited hedging transactions are
available in the PRC to reduce our exposure to exchange rate fluctuations. We did not enter into any hedging transactions in 2014,
2015 or 2016.
While we may decide to enter into hedging transactions in the future, the availability and effectiveness of
hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign
currency.
The discontinuation of any of the
preferential tax treatments or the financial incentives currently available to us in the PRC could materially and adversely affect
our business, financial condition, results of operations and prospects.
The PRC government has provided various
incentives to our PRC subsidiaries. These incentives include reduced enterprise income tax rates and value-added tax refunds. For
example, Cyber Cloud obtained its high-and-new technology enterprise certificate and qualified for a preferential tax rate of 15%
for three years from 2014 to 2016. Furthermore, for certain software-related products that are qualified as "software products"
by PRC tax authorities, we received tax refunds which effectively reduce the applicable value-added tax rate from 17% to 3%.
Cyber Cloud must meet a number of financial
and non-financial criteria in order to continue to qualify for the above tax incentives. For example, in order to be able to enjoy
the preferential income tax rate of 15%, Cyber Cloud must be qualified as "high-and-new technology enterprises strongly supported
by the State" under the PRC Enterprise Income Tax Law, or the 2008 EIT Law, which took effect on January 1, 2008. Moreover,
the PRC government could determine at any time to eliminate or reduce the scale of such preferential tax policies. See "Item
5. Operating and Financial Review and Prospects—A. Operating Results—Taxes and Incentives—PRC."
Any increase in Cyber Cloud's enterprise
income tax rate or discontinuation or reduction of any of the preferential tax treatments or financial incentives currently enjoyed
by Cyber Cloud could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be subject to PRC income
tax on our global income, or dividends we receive from our PRC subsidiary may be subject to PRC withholding tax, depending on whether
we are recognized as a resident enterprise in the PRC.
Pursuant to the 2008 EIT Law and Enterprise
Income Tax Law Implementation Rules, or the Implementation Rules, enacted by the State Council on December 6, 2007 and which became
effective on January 1, 2008, an enterprise established under the laws of a foreign country or region whose "de facto management
body" is located within the PRC territory is considered a resident enterprise and will generally be subject to the enterprise
income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. According to the
Implementation Rules, "de facto management body" refers to a managing body that exercises, in substance, overall management
and control over the production and business, personnel, accounting and assets of an enterprise. The SAT issued the Notice on Issues
Relating to Determination of Chinese-Controlled Offshore Enterprises as PRC Resident Enterprises by Applying the "De Facto
Management Body" Test, or SAT Notice 82, on April 22, 2009, which was amended in January 2014. SAT Notice 82 provides for
certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore enterprise
is located in the PRC. In addition, on July 27, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled
Offshore Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide guidance on
the implementation of SAT Notice 82. SAT Bulletin 45 clarifies certain issues relating to: (i) the determination procedures of
PRC resident enterprise status; and (ii) tax registration and other related procedures for PRC resident enterprises. SAT Bulletin
45 also provides that if an offshore PRC resident enterprise presents a copy of the PRC tax resident determination certificate
issued by the competent tax authorities to a payer of PRC-sourced dividends, interest, royalties and other income, such payer shall
not withhold income tax on these payments to the offshore PRC resident enterprise. Although each of SAT Notice 82 and SAT Bulletin
45 provides that it only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals,
like our company, it is generally believed that the determining criteria set forth therein very likely reflect the SAT's general
position as to how the "de facto management body" test should be applied to determine the tax residency of all offshore
enterprises, regardless of whether they are controlled by PRC enterprises or individuals. With reference to the criteria set forth
in SAT Notice 82, we believe that we are not a PRC resident enterprise. However, if we were considered a PRC resident enterprise,
although dividends we receive from our PRC operating subsidiary would be exempt from PRC withholding tax, we would be subject to
the enterprise income tax at the rate of 25% on our global income as well as PRC enterprise income tax reporting obligations. In
such case, our profitability and cash flow would be materially reduced as a result of our global income being taxed under the 2008
EIT Law.
If we are considered as a non-resident
enterprise under the 2008 EIT Law, we will not be subject to the enterprise income tax at the rate of 25% on our global income.
In such case, however, dividends we receive from our PRC subsidiary will be subject to a PRC withholding tax, the standard rate
of which is 10% and may be reduced by an applicable tax treaty, under the 2008 EIT Law. According to the Arrangement for Avoidance
of Double Taxation on Income and Prevention of Tax Evasion entered into between the PRC and Hong Kong in August 2006, as amended,
dividends paid by a PRC foreign-invested enterprise to its shareholder in Hong Kong are generally subject to a 5% PRC withholding
tax, subject to satisfaction of certain conditions and requirements, compared to the standard 10% PRC withholding tax under the
2008 EIT Law. However, on October 27, 2009, the SAT issued the Notice on How to Recognize "Beneficial Owners" under Relevant
Tax Treaties, or SAT Notice 601, which provides that only the enterprises with active operations may be recognized as "beneficial
owners" under relevant tax treaties that are entitled to enjoy the corresponding tax benefits. SAT Notice 601 further provides
that those enterprises that are established solely for the purposes of benefiting from favorable tax treatment under the relevant
tax treaties should not be recognized as "beneficial owners" and therefore may not enjoy favorable tax treatment. On
June 29, 2012, the SAT issued the Announcement of the SAT Regarding Recognition of Beneficial Owners under Tax Treaties, or the
SAT Announcement 30, which provides that a comprehensive analysis based on all the factors listed in SAT Notice 601 should be made
to determine the "beneficial owner" status. Currently we indirectly hold the equity interest of our PRC subsidiaries
through China Super Media Holdings Limited, or CSM Holdings, a wholly owned subsidiary incorporated in Hong Kong. As a result,
to the extent we are considered as a non-resident enterprise and CSM Holdings is not recognized as a qualified beneficial owner
under the relevant tax treaty, dividends we receive from our PRC subsidiaries, if any, will be subject to the standard rate of
10%. Such withholding tax will increase our tax burden and reduced the amount of cash available to our Company.
Dividends payable by us to our non-PRC
shareholders and ADS holders, and gains on the sales of our ordinary shares or ADSs, may be subject to withholding taxes under
PRC tax laws, which may materially reduce the value of your investment.
The 2008 EIT Law and the Implementation
Rules, both of which became effective on January 1, 2008, provide that an income tax rate of 10% (which may be reduced by the relevant
tax treaties between the PRC and other jurisdictions) will generally be applicable to dividends payable to non-resident enterprises,
which do not have an establishment or place of business in the PRC or whose establishment or place of business in the PRC has no
connection with the dividends, to the extent such dividends are derived from sources within the PRC and paid out of distributable
profits accumulated on or after January 1, 2008. In addition, any gain realized on the transfer of shares by non-resident enterprises
is also subject to the 10% income tax if such gain is regarded as income derived from sources within the PRC, unless the applicable
tax treaties provide for an alternative withholding arrangement. Furthermore, dividends payable to non-PRC individual investors
and any gain realized on the transfer of our ADSs or ordinary shares by such non-PRC individual investors may be subject to PRC
income tax at a rate of 20% (which may be reduced or exempted by the relevant tax treaties between the PRC and other jurisdictions).
If we are considered as a PRC resident
enterprise, our dividends payable to our non-PRC shareholders and ADS holders, and any gain realized from the transfer of our ordinary
shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC tax. If
dividends payable to our non-PRC shareholders and ADS holders are subject to PRC tax, or if non-PRC shareholders and ADS holders
are required to pay PRC tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares
or ADSs may be materially reduced.
We face uncertainties with respect
to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. Enhanced scrutiny over
acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
Pursuant to the
Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises
, or Circular 698, issued by the
State Administration of Taxation, which became effective retroactively as of January 1, 2008, where a non-resident enterprise investor
transfers equity interests in a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding
company, the non-resident enterprise investor, being the transferor, may be subject to PRC enterprise income tax, if the indirect
transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived
from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise
may be required to provide necessary assistance to support the enforcement of Circular 698.
On February 3, 2015, the State Administration
of Tax issued a
Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident
Enterprises
, or Public Notice 7. Public Notice 7 has introduced a new tax regime that is significantly different from that
under Circular 698. Public Notice 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but
also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company.
In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has
introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market.
Public Notice 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for
the transfer) of the taxable assets. Where a non-resident enterprise conducts an "indirect transfer" by transferring
the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise
being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax
authority such indirect transfer. Using a "substance over form" principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the
transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at
a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be
subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties on the reporting
and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of
shares in our company by investors that are non-PRC resident enterprises, or sale or purchase of shares in other non-PRC resident
companies or other taxable assets by us. We and our non-resident enterprises may be subject to filing obligations or being taxed
if we and our non-resident enterprises are transferors in such transactions, and may be subject to withholding obligations if we
and our non-resident enterprises are transferees in such transactions, under Circular 698 and Public Notice 7. For the transfer
of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in
the filing under Circular 698 and Public Notice 7. As a result, we may be required to expend valuable resources to comply with
Circular 698 and Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these
circulars, or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a
material adverse effect on our financial condition and results of operations.
The PRC tax authorities have the discretion
under Circular 698 and Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair
value of the taxable assets transferred and the cost of investment. If we are considered a non-resident enterprise under the 2008
EIT Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under Circular 698 and Public
Notice 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect
on our financial condition and results of operations.
The M&A Rules and other recent
PRC laws, rules and regulations have established more complex procedures for acquisitions conducted by foreign investors, which
could make it more difficult for us to pursue growth through acquisitions.
The M&A Rules established certain
procedures and requirements that could make mergers and acquisitions by foreign investors in China more time-consuming and complex.
In addition, PRC
national security review rules
, which became effective on September 1, 2011, subject acquisitions by foreign
investors of PRC companies that conduct business in military-related or certain other industries that are crucial to national security
to a security review before the consummation of any such acquisition. Furthermore, the PRC Antitrust Law, which became effective
on August 1, 2008, requires, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in
which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if
certain thresholds set forth in the
Provisions on Thresholds for Prior Notification of Concentrations of Undertakings
issued
by the State Council on August 3, 2008 are triggered.
We may grow our business in part by pursuing
potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these
PRC laws, rules and regulations to complete such acquisitions could be time-consuming, and any required approval procedures, including
obtaining approvals from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability
to expand our business or maintain our market position.
Natural disasters and health hazards
in the PRC may severely disrupt our business and operations and may have a material adverse effect on our financial condition and
results of operations.
From time to time, certain parts of China
have experienced devastating natural disasters and health hazards causing tens of thousands of deaths and widespread injuries.
In addition, parts of Mainland China, in particular its southern, central and eastern regions, have in the past experienced what
was reportedly the most severe winter weather in the country in half a century, which resulted in significant and extensive damage
to factories, power lines, homes, automobiles, crops and other properties, blackouts, transportation and communications disruptions
and other losses in the affected areas. Moreover, certain countries and regions, including China, have encountered incidents of
the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, and the outbreak of influenza
(H7N9). We are unable to predict the effect, if any, that any future natural disasters and health and public security hazards may
have on our business. Any future natural disasters and health and public security hazards may, among other things, significantly
disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, such natural disasters
and health and public security hazards may severely restrict the level of business activity in affected areas, which may, in turn,
materially and adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have
a material adverse effect on our financial condition and results of operations.
The implementation of the PRC Labor
Contract Law may increase our operating expenses and adversely affect our business and results of operations.
The PRC Labor Contract Law, as amended,
and its implementation rules formalize workers' rights concerning overtime hours, pensions, layoffs, employment contracts and the
role of trade unions and provide for specific standards and procedures for the termination of an employment contract. In addition,
the Labor Contract Law requires the payment of a statutory severance pay upon the termination of an employment contract in most
cases, including in cases of the expiration of a fixed-term employment contract. As there has been little guidance as to how the
Labor Contract Law will be interpreted and enforced by the relevant PRC authorities, there remains substantial uncertainty as to
its potential impact on our business and results of operations. The implementation of the Labor Contract Law may increase our operating
expenses, in particular our personnel expenses and labor service expenses. In the event that we decide to significantly reduce
the number of our employees or otherwise change our employment or labor practices, the Labor Contract Law may also limit our ability
to effect these changes in a manner that we believe to be cost-effective or desirable, which could materially and adversely affect
our business, financial condition and results of operations.
Our independent registered public
accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation
requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain
reports with the SEC, which may lead to the delisting of our stock.
We have substantially all of our operations
in China. Like many NYSE-listed companies with significant operations in China, our independent registered public accounting firm
is located in China.
On January 22, 2014, Judge Cameron Elliot,
an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of the "Big Four" accounting
firms, including our independent registered public accounting firm, from practicing before the SEC for six months. In February
2014, the initial decision was appealed. While under appeal and in February 2015, the Chinese member firms of the "Big Four"
accounting firms reached a settlement with the SEC. As part of the settlement, each of the Chinese member firms of "Big Four"
accounting firms agreed to settlement terms that include a censure, undertakings to make a payment to the SEC, procedures and undertakings
as to future requests for documents by the SEC, and possible additional proceedings and remedies should those undertakings not
be adhered to.
If the settlement terms are not adhered
to, our independent registered public accounting firm may be suspended from practicing before the SEC which could in turn delay
the timely filing of our financial statements with the SEC. In addition, it could be difficult for us to timely identify and engage
another qualified independent registered public accounting firm to replace our current one. A delinquency in our filings with the
SEC may result in NYSE initiating procedures, which could adversely harm our reputation and have other material adverse effects
on our overall growth and prospects.
Our independent registered public
accounting firm's audit documentation related to its audit report included in our annual report includes audit documentation located
in China. The Public Company Accounting Oversight Board currently cannot inspect audit documentation located in China and, as such,
you may be deprived of the benefits of such inspection.
As an auditor of companies
that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the
PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers
located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without
the approval of the PRC authorities.
Inspections of certain other firms that
the PCAOB has conducted outside of China have identified deficiencies in those firms' audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable
to inspect an auditor's audit work and audit documentation in China. As a result, our investors may be deprived of the benefits
of the PCAOB's oversight of auditors that are located in China through such inspections.
The inability of the PCAOB to conduct
inspections of an auditor's work papers in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures
or quality control procedures that are located in China as compared with auditors outside of China that are subject to PCAOB inspections.
Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial
statements.
Risks Relating
to the ADSs
The trading price of our ADSs has
been and may continue to be volatile, which could result in substantial losses to you.
The trading price of our ADSs has been
volatile and subject to wide fluctuations. Since October 5, 2007, the closing prices of our ADSs on the NYSE have ranged from
US$1.12 to US$51.08 per ADS and the last reported sale price on April 19, 2017 was US$1.27.
Our ADSs may continue to fluctuate in response to various factors beyond our control. The financial
markets in general, and the market prices for many other PRC companies listed on stock exchanges in the United States in particular,
have experienced extreme volatility. These broad market and industry factors may significantly affect the market price and volatility
of our ADSs, regardless of our actual operating performance.
In addition to market and industry factors,
the price and trading volume for our ADSs may be highly volatile for specific business reasons. In particular, factors such as
variations in our revenues, earnings and cash flow, announcements of new investments and cooperation arrangements, acquisitions
or disposition could cause the market price for our ADSs to change substantially. Any of these factors may result in large and
sudden changes in the volume and trading price of our ADSs. In the past, following periods of volatility in the market price of
a company's securities, shareholders have often instituted securities class action litigation against that company. If we were
involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, have a material
adverse effect on our financial condition and results of operations.
The sale or availability for sale
of substantial amounts of our ADSs could adversely affect their trading price and could materially impair our future ability to
raise capital through offerings of our ADSs.
Sales of substantial amounts of our ADSs
in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could
materially impair our future ability to raise capital through offerings of our ADSs.
As of March 31, 2017, we had 60,297,192
ordinary shares outstanding (excluding 3,825,900 ordinary shares that were issued and held for our account in preparation for the
exercise of share options by option holders under our employee stock incentive plans), including 39,933,095 ordinary shares represented
by 39,933,095 ADSs (excluding the 3,825,900 ADSs that were held for our account in preparation for exercise of share options by
option holders under our employee stock incentive plans). All ADSs are freely transferable without restriction or additional registration
under the Securities Act. The remaining ordinary shares outstanding have been available for sale, subject to volume and other restrictions
that may be applicable under Rule 144 and Rule 701 under the Securities Act. In addition, we have filed registration statements
on Form S-8 to register the ordinary shares to be issued to the share option holders under our employee stock incentive plans.
The ordinary shares to be received by such share option holders who are not affiliated with us may be resold freely to the public
market. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder
or the availability of these securities for future sale will have on the market price of our ADSs.
Your interest in our ADSs will be
diluted as a result of our stock incentive plans or other share option grants.
As of March 31, 2017, options to purchase
an aggregate of 3,918,869 ordinary shares had been granted and were outstanding under the 2005 Stock Incentive Plan, the 2008 Stock
Incentive Plan, the 2010 Stock Incentive Plan and the 2012 Stock Incentive Plan. For a description of these plans, see "Item
6. Directors, Senior Management and Employees—B. Compensation of Directors and Senior Officers—Share Options."
The exercise of those options would result in a reduction in the percentage of ownership of the holders of ordinary shares and
of ADSs, and therefore would result in a dilution in the earnings per ordinary share and per ADS.
You may face difficulties in protecting
your interest, and your ability to protect your rights through the United States federal courts may be limited, because we are
incorporated under Cayman Islands law.
Our corporate affairs are governed by
our Second Amended and Restated Memorandum and Articles of Association, the Cayman Islands Companies Act and the common law of
the Cayman Islands. The rights of shareholders to take action against the directors and actions by minority shareholders are to
a large extent governed by the common law of the Cayman Islands. Cayman Islands law in this area may not be as established and
may differ from provisions under statutes or judicial precedent in existence in the United States. As a result, our public shareholders
may face different considerations in protecting their interests in actions against our management or directors than would shareholders
of a corporation incorporated in a jurisdiction within the United States.
The rights of shareholders and the responsibilities
of management and members of the board of directors under Cayman Islands law, such as in the areas of fiduciary duties, are different
from those applicable to a company incorporated in a jurisdiction of the United States. For example, the Cayman Islands courts
are unlikely:
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to recognize or enforce against us judgments of courts of the United States based on the civil liability provisions of United
States federal securities laws; and
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in original actions brought in the Cayman Islands, to impose liabilities against us based on the civil liability provisions
of United States federal securities laws that are penal in nature.
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As a result, our public shareholders may
have more difficulty in protecting their interests in connection with actions taken by our management or members of our board of
directors than they would as public shareholders of a company incorporated in the United States.
Certain judgments obtained against
us by our shareholders may not be enforceable.
We are a Cayman Islands company and substantially
all of our assets are located outside the United States. Substantially all of our current operations are conducted in the PRC.
In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial
portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for
you to bring an action against us or against these individuals in the United States in the event that you believe that your rights
have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action
of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the
assets of our directors and officers.
Your voting rights as a holder of
our ADSs are limited by the terms of the deposit agreement.
You may exercise your voting rights with
respect to the ordinary shares underlying your ADSs only in accordance with the provisions of the deposit agreement. Upon receipt
of voting instructions from you in the manner set forth in the deposit agreement, the depositary for our ADSs will endeavor to
vote your underlying ordinary shares in accordance with these instructions. Under our Second Amended and Restated Memorandum and
Articles of Association and Cayman Islands law, the minimum notice period required for convening a general meeting is 15 days.
When a general meeting is convened, you may not receive sufficient notice of a shareholders' meeting to permit you to withdraw
your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary
and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We
will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive
the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and
its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast
or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if
your ordinary shares are not voted as you requested.
The depositary for our ADSs will
give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders' meetings, except
in limited circumstances, which could adversely affect your interests.
Under the deposit agreement for our ADSs,
the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders' meetings if
you do not vote, unless:
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we have failed to timely provide the depositary with our notice of meeting and related voting materials;
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we have instructed the depositary that we do not wish a discretionary proxy to be given;
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we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
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voting at the meeting is made on a show of hands.
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The effect of this discretionary proxy
is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and
it may make it more difficult for shareholders to influence the management of our company.
You may not receive distributions
on our ordinary shares or any value for them if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed
to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of
our ordinary shares that your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make
a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if
it consists of securities that require registration under the Securities Act but that are not properly registered or distributed
pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to
any holders of ADSs if any government approval or registration required for such distribution cannot be obtained after reasonable
efforts made by the depositary. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary
shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary
shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have
a material and adverse effect on the value of your ADSs.
You may not be able to participate
in rights offerings and may experience dilution of your holdings.
We may, from time to time, distribute
rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute
rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either
exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of
the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and
may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are
under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have
a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings
and may experience dilution of their holdings as a result.
You may be subject to limitations
on transfer of your ADSs.
Your ADSs represented by ADRs are transferable
on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient
in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons,
including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an
exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on
weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our
books or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because
of any requirement of law or any government or governmental body, or under any provision of the deposit agreement, or for any other
reason.
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Item 4
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Information on the Company
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A.
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History and Development of the Company
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Our holding company, China Digital TV
Holding Co., Ltd., was incorporated as an exempted limited liability company on April 19, 2007 under the laws of the Cayman Islands.
We are headquartered in Beijing, China, and provide cable TV technologies that enable China's Internet Protocol Television, or
IPTV, and over-the-top, or OTT, markets to offer diversified TV content services. We conduct substantially all of our business
through our operating subsidiary in the PRC, Cyber Cloud.
Our principal executive office is located
at Jingmeng High-Tech Building B, 4th Floor, No. 5 Shangdi East Road, Haidian District, Beijing 100085, PRC. Our telephone number
is (8610) 6297 1199. Information contained on our website does not constitute a part of this annual report. Our agent for service
of process is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011, U.S.A.
N-T Information Engineering was established
as a limited liability company under the PRC law by Tsinghua Enterprise Group, a company affiliated with Tsinghua University, and
Hong Kong-based Tsinghua Novel Hi-Tech Investment Holding Ltd. in July 1998, and initially focused on developing, producing and
selling digital data broadcasting equipment for cable television operators. In December 2002, N-T Information Engineering completed
its acquisition of the CA systems-related assets of Tsinghua Tongfang Co., Ltd., or Tsinghua Tongfang. In March 2004, China Digital
TV Technology Co., Ltd., or CDTV BVI, was incorporated as a holding company in the British Virgin Islands, or BVI. Following the
establishment of CDTV BVI, we restructured our operations, in connection with an investment by SAIF, by establishing Beijing Super
TV, a limited liability company under the PRC law and a wholly owned subsidiary of CDTV BVI, on May 31, 2004. On the same day,
N-T Information Engineering and Li Yang, a PRC citizen then employed by SAIF, established N-S Digital TV. In June 2004, N-S Digital
TV acquired from N-T Information Engineering its smart card and CA systems business and, in August 2006, N-S Digital TV acquired
from N-T Information Engineering its set-top box design business. In April 2007, a new holding company, CDTV Holding, was established
in the Cayman Islands. In May 2007, CDTV BVI executed a 40-for-1 share split of its ordinary shares and Series A preferred shares.
Following this share split, the shareholders of CDTV BVI exchanged all of their shares of CDTV BVI for shares of CDTV Holding in
proportion to their percentage interest in CDTV BVI, as a result of which CDTV BVI became a wholly owned subsidiary of CDTV Holding.
In August 2007, with our consent, Ms. Yang transferred her entire equity interest in N-S Digital TV to Wei Gao, a PRC citizen employed
by an affiliated company of SAIF.
In October 2007, we completed the initial
public offering of our ADSs representing our ordinary shares and listed the ADSs on the NYSE.
In order to benefit from certain beneficial
tax arrangements between the PRC and Hong Kong, in December 2007, CDTV BVI acquired Golden Benefit, a company incorporated in Hong
Kong, for a nominal consideration, and transferred its 100% equity interest in Beijing Super TV to Golden Benefit. See "Item
3. Key Information—D. Risk Factors—Risks Relating to the People's Republic of China—We may be subject to PRC
income tax on our global income, or dividends we receive from our PRC subsidiary may be subject to PRC withholding tax, depending
on whether we are recognized as a resident enterprise in the PRC" and "Item 5. Operating and Financial Review and Prospects—A.
Operating Results—Taxes and Incentives—PRC."
Since December 2007, new entities have
been established or acquired in the PRC to offer new solutions and products, including Beijing Novel-Super Media Investment Co.,
Ltd., or N-S Media Investment, Cyber Cloud, Beijing Joysee Technology Co., Ltd., or Joysee, Beijing Super Movie Technology Co.,
Ltd., or Super Movie, Beijing Shibo Movie Technology Co., Ltd., or Shibo Movie and Beijing Xinsi Yijia Technology Co., Ltd., or
Xinsi Yijia. Super Movie later dissolved in November 2013.
To facilitate the sale of our products
in the overseas market, CSM Holdings was established in Hong Kong in February 2010.
In June 2008, Ms. Gao transferred all
of her equity interests in N-S Digital TV to Junming Wu, who is a PRC citizen and is currently our employee. In November 2008,
N-T Information Engineering transferred all of its equity interest in N-S Digital TV to Lei Zhang and Shizhou Shen, both of whom
are PRC citizens and were then our employees. In July 2011, Junming Wu transferred all of his equity interests in N-S Digital TV
to Tianxing Wang, who is a PRC citizen and was then our employee. In addition, in July 2011, Tianxing Wang, Lei Zhang and Wenjun
Wang, who is a PRC citizen and was then our employee, each contributed cash to increase the registered capital of N-S Digital TV
to RMB150 million using the loan proceeds from Beijing Super TV. As a result of these transactions, Tianxing Wang, Lei Zhang, Shizhou
Shen and Wenjun Wang in aggregate owned all of the equity interest of N-S Digital TV.
N-S Digital Technology Co., Ltd., or N-S
Digital Technology, and N-S Investment Holdings Co., Ltd., or N-S Investment Holdings, were incorporated in the PRC as wholly owned
subsidiaries of our company in April and July 2010, respectively. In March 2011, N-S Digital Technology was dissolved. In June
2014, N-S Investment Holdings was renamed Beijing N-S Information Technology Co., Ltd., or N-S Information Technology, and Beijing
Super TV transferred its equity interest in N-S Information Technology to CSM Holdings.
In June 2014, we conducted an internal
reorganization, as a result of which we obtained legal ownership of N-S Digital TV, the variable interest entity, or VIE, that
we controlled through contractual agreements in China, or VIE structure, and adjusted our senior management team. Specifically,
we terminated the series of contractual agreements underlying the VIE structure between the nominee shareholders of N-S Digital
TV, namely Tianxing Wang, Lei Zhang, Shizhou Shen and Wenjun Wang, and Beijing Super TV, and transferred the 100% equity interest
of N-S Digital TV held by these nominee shareholders to Beijing Super TV. As a result, N-S Digital TV became an indirectly wholly
owned subsidiary of the Company.
In May 2016, certain key employees made
a cash investment in Beijing Super TV in return for 9.91% of the outstanding equity interest in Beijing Super TV. As a result,
the equity interest of Beijing Super TV held by the Company was diluted to 90.09%.
On November 7, 2016, Golden Benefit, our
wholly-owned subsidiary, reached the Equity Transfer Agreement with Bao Li, a newly established limited liability company collectively
owned by several buyer parties, for the sale of all of the 90.09% equity interest in Beijing Super TV held by Golden Benefit for
RMB610 million. A supplemental agreement to the Equity Transfer Agreement dated December 26, 2016 was entered among, Golden Benefit,
Bao Li and Beijing Super TV, according to which, Bao Li is required to proceed with the procedures for exchanging RMB610 million
into U.S. Dollar and paying U.S. Dollar to an offshore bank account designated by Golden Benefit as soon as possible but in any
event no later than September 30, 2017. Bao Li paid the consideration in Renminbi to a PRC subsidiary of the Company on December
27, 2016 and Beijing Super TV completed the legal registration update of its shareholder information with the relevant PRC governmental
authorities on December 29, 2016. As a result, from December 29, 2016, the Company no longer retained power of control over Beijing
Super TV.
Our Investments and Acquisitions
In August 2006, N-S Digital TV entered
into an asset transfer agreement to purchase from N-T Information Engineering its set-top box design business for an initial purchase
price of RMB29.4 million (US$3.8 million), subject to certain post-closing downward adjustments. As an adjustment to the initial
purchase price, N-T Information Engineering refunded RMB12.1 million (US$1.5 million) to N-S Digital TV in April 2007.
In August 2006, N-S Digital TV entered
into an equity transfer agreement to purchase from N-T Information Engineering its 51% equity interest in Foshan Nanhai Guokai
Digital TV Technology Co., Ltd., or Guokai, for a cash consideration of RMB2.4 million (US$0.3 million). The parties entered into
a new agreement in March 2007 to reduce the consideration to RMB2.3 million (US$0.3 million). Guokai was a company primarily engaged
in the research, development and sale of digital TV-related systems, software and products. A Japanese multinational company held
the remaining 49% equity interest in Guokai. This transaction was completed on July 27, 2007. In June 2013, Guokai was dissolved.
In March 2007, N-S Digital TV and Jiangsu
Qingda Technology Co. Ltd., or Jiangsu Qingda, one of our customers, entered into an agreement to set up a joint venture in Nanjing
of Jiangsu Province mainly engaging in digital television technology development and services, Nanjing Qingda Yongxin Culture &
Media Co. Ltd., or Qingda Yongxin. N-S Digital TV contributed RMB0.8 million (US$0.1 million) in cash, representing 40% of the
equity interest in the joint venture. Jiangsu Qingda contributed RMB1.2 million (US$0.2 million) in cash, representing 60% of the
equity interest in the joint venture. N-S Digital TV had an option to purchase up to an additional 30% of the equity interest of
Qingda Yongxin, which expired in 2010 without being exercised. Since N-S Digital TV is a wholly owned subsidiary of Beijing Super
TV, the investment in Qingda Yongxin was sold as part of the Super TV Disposition in December 2016.
In June 2008, N-S Digital TV and Xitao
Lai, a PRC citizen, established Dongguan SuperTV Video Info Co., Ltd., or Dongguan Super TV, a joint venture in Dongguan, Guangdong
Province, mainly to provide value-added services to television viewers. N-S Digital TV and Mr. Lai each contributed RMB5.0 million
(US$0.7 million) in cash, representing 50% of the equity interest in the joint venture. In September 2008, N-S Digital TV exercised
an option to purchase an additional 10% equity interest in the joint venture from Mr. Lai. In July 2009, N-S Digital TV sold its
20% equity interest in Dongguan Super TV to a new investor, Guangdong Jiacai Digital Technology Co., Ltd., or Guangdong Jiacai.
In August 2010, N-S Digital TV entered into an equity transfer agreement with Guangdong Jiacai to repurchase the 20% equity interest
in Dongguan Super TV from Guangdong Jiacai. After those transactions, the equity interest of Dongguan Super TV held by N-S Digital
TV increased to 60% and N-S Digital TV became entitled to 70% of shareholders' voting rights and appointing three out of the five
members of the board of directors of Dongguan Super TV. In November 2011, Dongguan Super TV transferred all of its high-definition
interactive television services-related assets to the Dongguan branch of the Guangdong Broadcasting TV Network Co., Ltd. In December
2011, N-S Digital TV transferred its entire equity interest in Dongguan Super TV to a third-party for a total consideration of
RMB6.6 million (US$1.0 million).
In August 2008, Beijing Super TV acquired
from N-T Information Engineering all of its intellectual property rights relating to digital watermarking and image tracing technologies,
including one issued patent and five then pending patent applications in the PRC. All of these five pending patents were later
issued to Beijing Super TV. For details of these acquisitions, see "Item 4. Information on the Company—B. Business Overview—Intellectual
Property."
On January 4, 2010, we entered into a
share purchase agreement with OpenV China Holdings Company, or OpenV, a PRC online video company, and several other parties to
make a strategic investment in OpenV. Pursuant to the share purchase agreement and related transaction documents, we acquired an
11.5% equity interest (subject to adjustment based on, among other things, OpenV's performance) in OpenV for a consideration of
US$5.0 million and received a warrant to purchase ordinary shares of OpenV of up to US$4.5 million. As part of this investment
transaction, we also agreed to extend to OpenV a US$2.5 million interest-free convertible loan, which could be converted into ordinary
shares of OpenV, subject to certain closing conditions. The Company did not purchase additional ordinary shares of OpenV pursuant
to the warrant, which expired, and the interest-free convertible loan was not extended to OpenV due to OpenV's performance in 2010.
In 2010, we wrote off our entire investment in OpenV because we had doubts about OpenV's ability to continue as a going concern.
As of December 31, 2013, we understood that OpenV's normal online video services had not been restored. On October 11, 2012, we
entered into a share redemption agreement with OpenV, pursuant to which OpenV repurchased 460,080 of its shares from us for US$0.82
million. We continue to hold 2,345,267 shares of OpenV after the share repurchase.
In February 2010, N-S Digital TV acquired
from Beijing Shi Xun Hu Lian Technology Co., Ltd., or Beijing Shi Xun, and another shareholder of Guangdong Digital Media Technology
Research & Development Institute Co., Ltd., or Guangdong R&D, their entire equity interest in Guangdong R&D for RMB3.0
million (US$0.4 million) and became the sole shareholder of Guangdong R&D. We decided to discontinue the business of Guangdong
R&D and dissolved Guangdong R&D in April 2013.
In May 2010, we entered into a share subscription
agreement with 3DiJoy Corp., or 3DiJoy, a company specializing in the research and development of interactive and motion-sensing
gaming products, and several other parties to make a strategic investment in 3DiJoy. Pursuant to the share subscription agreement,
we acquired an aggregate of 4,953,798 series C convertible preferred shares of 3DiJoy, representing a 24% equity interest, for
an aggregate subscription price of US$6.0 million. In 2012, we accrued a full impairment charge of US$4.5 million related to our
investment in 3DiJoy based on the fair value of 3DiJoy we estimated with the assistance of a third-party valuation firm, as we
had doubts regarding 3DiJoy's ability to operate as a going concern given that it had been experiencing financial difficulties.
In May 2010, Beijing Super TV acquired
an aggregate 34.45% equity interest in Guangzhou Rujia Network Technology Co., Ltd., or Guangzhou Rujia, through both purchase
of existing shares from a shareholder of Rujia and contribution to its capital increase, for a total consideration of RMB16.5 million
(US$2.5 million).
In August 2010, N-S Media Investment entered
into an equity transfer agreement with Guangzhou Rujia to transfer all of its equity interest in Guangdong Super TV Digital Media
Co., Ltd., or Guangdong Super TV, a wholly owned subsidiary of N-S Media Investment established in October 2008, for a consideration
of RMB30.3 million (US$4.6 million).
In September 2015, a third-party investor
contributed cash to increase the capital of Guangzhou Rujia resulting in the equity interest of Guangzhou Rujia held by Beijing
Super TV decreasing to 33.3%. The investment in Guangzhou Rujia was sold as part of the Super TV Disposition in December 2016.
In December 2010, Beijing Super TV and
Beijing Yuewu Yuntian Software Technology Ltd., or Yuewu Yuntian, agreed to establish Cyber Cloud in Beijing, which mainly engages
in research and development of cloud computing technology-based digital video delivery solutions. Beijing Super TV and Yuewu Yuntian
contributed RMB45.0 million (US$6.8 million) and RMB5.0 million (US$0.8 million) in cash, representing 90% and 10% of the equity
interest in Cyber Cloud, respectively. Cyber Cloud was formally established on January 19, 2011. Pursuant to a series of agreements
dated April 30, 2014, Cyber Cloud acquired a 100% equity interest in Xinsi Yijia from Yuewu Yuntian and Beijing Holch Capital Investment
Center, or Holch Capital, and in exchange, Yuewu Yuntian and Holch Capital obtained certain non-controlling interests in Cyber
Cloud. Moreover, Beijing Super TV transferred its remaining equity interest in Cyber Cloud to CSM Holdings. As a result of these
transactions, CSM Holdings, Yuewu Yuntian and Holch Capital held 75%, 15% and 10% of the equity interest in Cyber Cloud, respectively.
Xinsi Yijia became a wholly owned subsidiary of Cyber Cloud. Beijing Dingyuan Technology Co., Ltd., or Dingyuan, is controlled
by Xinsi Yijia through a series of contractual arrangements. Dingyuan is immaterial from a financial perspective. In December,
2014, Beijing Gehua CATV Network Co., Ltd., or Gehua, injected capital into Cyber Cloud in exchange of a 10% equity interest in
Cyber Cloud. The approval for the capital injection was obtained from the relevant PRC governmental authority in June 2015. As
a result, CSM Holdings, Yuewu Yuntian, Gehua and Holch Capital held 67.5%, 13.5%, 10% and 9% of the equity interest in Cyber Cloud,
respectively. In May and June 2016, the then existing shareholders of Cyber Cloud made a supplemental cash contribution proportionally
to Cyber Cloud. In October 2016, Tianjin Xuanwutianxia Network Technology Center, or Xuanwutianxia, an entity owned by two employees
of Cyber Cloud, entered into a share contribution agreement to make a cash contribution to Cyber Cloud. Further in December 2016,
Ningbo Meishan Free Trade Port Area Jinxinronghui Investment Partnership, or Jinxinronghui, a third-party investor, contributed
RMB33.0 million to Cyber Cloud. As a result, CSM Holdings, Yuewu Yuntian, Jinxinronghui, Gehua, Holch Capital and Xuanwutianxia
will hold 57.7%, 11.5%, 10.0%, 8.6%, 7.7% and 4.5% of the equity interest in Cyber Cloud, respectively.
In April 2011, Beijing Super TV and Beijing
Ying Zhi Cheng Technology Co., Ltd., or Ying Zhi Cheng Technology, an entity that is held mainly by employees of Joysee, agreed
to establish Joysee in Beijing, which mainly engages in the research and development of advanced digital television terminals.
Beijing Super TV and Ying Zhi Cheng Technology contributed RMB27.0 million (US$4.2 million) and RMB3.0 million (US$0.5 million)
in cash, representing 90% and 10% of the equity interest in Joysee, respectively. Pursuant to an agreement, dated May 24, 2011,
among Beijing Super TV, N-S Digital TV and Ying Zhi Cheng Technology, N-S Digital TV contributed RMB6.0 million (US$0.9 million)
in cash, representing a 16.7% equity interest in Joysee. Pursuant to an agreement, dated June 13, 2011, among Beijing Super TV,
N-S Digital TV, Ying Zhi Cheng Technology and Intel Semiconductor (Dalian) Ltd., or Intel, a wholly owned subsidiary of Intel Corporation
in the PRC, Intel contributed RMB33.0 million (US$5.1 million) in cash, representing a 37.5% equity interest in Joysee. Pursuant
to an equity transfer agreement, dated June 13, 2011, between N-S Digital TV and Intel, Intel transferred 7.5% of its equity investment
in Joysee to N-S Digital TV for a nominal consideration. As a result of these transactions, Beijing Super TV, N-S Digital TV, Ying
Zhi Cheng Technology and Intel each held a 46.9%, 17.9%, 5.2% and 30% equity interest in Joysee, respectively. In June 2014, Beijing
Super TV and N-S Digital TV transferred their equity interest in Joysee to N-S Information Technology and Ying Zhi Cheng Technology,
respectively. As a result of these transactions, N-S Information Technology, Ying Zhi Cheng Technology and Intel held 46.9%, 23.1%
and 30% of the equity interests in Joysee, respectively. According to the articles of association of Joysee, N-S Information Technology
is entitled to recommend for appointment three out of the five members to the board of directors of Joysee and has the power to
determine all the major financial and operating decisions of Joysee. As a result, we are considered to have the ability to control
Joysee. In September 2015, N-S Information Technology purchased the 30% equity interest in Joysee held by Intel. As a result, N-S
Information Technology and Ying Zhi Cheng Technology held 76.9% and 23.1% of the equity interests in Joysee, respectively.
In June 2011, Beijing Super TV and Beijing
AirMedia Advertising Co., Ltd., or AirMedia, entered into a framework cooperation agreement for the establishment of two joint
ventures, Shibo Movie and Beijing Xinghe Union Media Co., Ltd., or Xinghe Union, in the PRC, each of which mainly engages in movie-related
content sourcing and distribution services. In December 2011, Beijing Super TV, N-S Digital TV and AirMedia entered into a supplemental
agreement, pursuant to which Beijing Super TV transferred its rights and obligations under the framework cooperation agreement
to N-S Digital TV. N-S Digital TV and Air Media each contributed in cash RMB5.0 million (US$0.8 million), representing 50% of the
equity interest in Shibo Movie, and RMB5.0 million (US$0.8 million) in cash, representing 50% of the equity interest in Xinghe
Union. Shibo Movie and Xinghe Union were formally established on February 15, 2012 and March 13, 2012, respectively. On September
29, 2013, N-S Digital TV and AirMedia entered into a share swap agreement, pursuant to which N-S Digital TV transferred its equity
interest in Xinghe Union to AirMedia, in exchange for AirMedia's equity interest in Shibo Movie. Upon completion of the registration
update of Shibo Movie with the relevant PRC authorities in February 2014, Shibo Movie became wholly owned by N-S Digital TV. In
June 2014, N-S Digital TV transferred its equity interest in Shibo Movie to N-S Information Technology.
In August 2011, Beijing Super TV and Beijing
Chaoying Weichuang Technology Ltd. agreed to establish Super Movie, which mainly engaged in video program delivery services. Beijing
Super TV and Beijing Chaoying Weichuang Technology Ltd. contributed cash in the amount of RMB13.5 million (US$2.1 million) and
RMB1.5 million (US$0.2 million), respectively, representing 90% and 10% of the equity interest in Super Movie, respectively. Super
Movie was formally established on September 23, 2011. We decided to discontinue the business of Super Movie and dissolved Super
Movie in November 2013.
In August 2015, Shibo Movie, Guoshi Communication
(Beijing) Co., Ltd., or Guoshi, and certain individuals set up Sinoscreens Media (Beijing) Co., Ltd., or Sinoscreens, in which
Shibo Movie held 34% of the equity interest. In June 2016, Shibo Movie transferred the equity interest in Sinoscreens to a third-party.
In August 2015, N-S Information Technology
and Hubei Taizihu Cultural Digital Innovation Industry Park Investment Co., Ltd., or Hubei Taizihu, a third-party company, established
Hubei Shibo Screen Cross Technology Development Co., Ltd., or Hubei Shibo, in which N-S Information Technology would hold 65% of
the equity interest.
In February 2016, CSM Holdings made an
investment of RMB20.0 million (US$3.1 million) in cash to Beijing Dagong Technology Co. Ltd., or Dagong Technology, and owned 80%
of the equity interest in Dagong Technology, which mainly engages in the research and development of unmanned aerial vehicle, or
UAV, technology. In December 2016, N-S Information Technology purchased the remaining 20% equity interest of Dagong Technology from
a noncontrolling shareholder. In February 2017, Dagong Technology was renamed Beijing Shibo Qihang Technology Co., Ltd., or Shibo
Qihang.
Capital Expenditures and Divestitures
See "Item 5. Operating and Financial
Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures" for information concerning our principal
capital expenditures for the previous three years and those currently in progress. See "Item 4. Information on the Company—A.
History and Development of the Company" for information concerning our divestitures.
Overview
We are a leading
provider of cloud platforms, with gaming and other applications embedded, to PRC digital television and telecommunication network
operators, enabling them to bring these applications to household television sets and other mobile devices.
Our cloud platforms provide cloud computing
technology-based digital video delivery solutions to television and telecommunication network operators. Through the platforms,
end users' requests are processed on centralized cloud servers. The cloud servers will then deliver content and solutions corresponding
to such requests through the network in the form of audio and video streams which are in turn decoded and presented by the terminal
to the end users.
Our cloud platforms enable television
and telecommunication network operators to use their two-way set-top boxes that have already been installed to run a large number
of value-added applications, such as video games, 3D games, educational applications and business service applications, which are
accessible on smart phones, tablet computers, personal computers, Internet TVs and other devices.
As of December 31,
2016, we have entered into partnership agreements with more than 30 television and telecommunication network operators in Beijing,
Shanghai, Guangdong, Jiangsu, Jilin, Chongqing, Sichuan, Hebei, Xinjiang, Shandong and other provinces. Our cloud platforms cover
more than 130 million users, with more than 100 million digital TV users and 30 million IPTV users. We continue to focus on marketing
and promotional efforts for our products and services to increase our cloud platform user base. For content offered through our
cloud platform, we continue to explore applications outside of games, in fields such as education, online shopping and other forms
of entertainment.
In December 2016,
we disposed our CA and CA-related business through the Super TV Disposition. Accordingly, the operating results of Super TV have
been reclassified as discontinued operations in the consolidated financial statements for all periods presented.
Our Products and Services
Our core products and services from continuing
operations include the following:
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Other products and services
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Our core products and services
from discontinued operations include the following:
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End-to-end CA systems, including smart cards, head-end software and terminal-end licensing
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Other digital television application systems for television network operators
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Continuing Operations
Cloud Platforms
Key features of our cloud platforms include:
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Uniform dissemination:
The cross-version compatibility of the platforms preserves the value of past investment into
platform development and helps the user base grow rapidly.
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Uniform media:
Different terminals and terminals of different regions can share access to uniform content.
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Expeditious introduction of new services:
The platforms are open-sourced and hence new services can be introduced expeditiously
at a lower cost, since there is no need for secondary development.
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Linear investment input:
Level of investment can be increased gradually as the platform coverage expands, thereby reducing
the risk of investment.
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Multi-platform compatibility:
The platforms are compatible with smart phones, tablet computers, personal computers,
Internet TVs and other devices, facilitating the growth of the platforms' market share.
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We provide a wide
spectrum of value-added services through our cloud platforms and applications available on the platforms include cloud gaming and
cloud education. We also provide operational strategies and customer service systems to operators.
Cloud gaming:
Our cloud platforms focus on the development of cloud gaming with a vision to render users an instantaneous gaming experience
without being limited to the device. Our cloud platforms operate a new service branded "1+ Cloud Gaming", through which
it provides 2D games, 3D games, motion-sensing games and customized games. Our cloud platform cooperates broadly with a number
of game developers.
Cloud education:
We have launched the interactive education application on the cloud platform, mainly through cloud television programs, for
children of age 0 to 7 and primary school students of age 7 to 13. The content of our programs primarily relates to nursery rhymes,
early education, English language education and online drawing.
Operational strategies
and customer service systems:
We provide operators with a full range of professional operational strategies and a complete
system of customer services based on the cloud platform. We perform content integration, data analysis, operation designs, promotion
and customer services on the cloud platform.
Other Products and Services
We also provide other products and services
to customers, including advanced digital television terminals which enable digital television network operators to provide value-added
services to their subscribers and other products and services related to our newly developed business.
Discontinued
Operations
CA Systems and Other Digital Television
Application Systems for Television Network Operators
Our CA and CA-related business provides CA systems to the PRC's
digital television market. CA systems consist of: software installed at the premises of the television network operators, or the
head end; technology for the set-top box at the subscriber's end, or the terminal end; and smart cards used in the set-top boxes.
Technical Support and Services
We offer technical support and services
for our cloud platform, and other products and services.
As of December 31, 2016, we have a specialized technical support
team responsible for technical issues and customer complaints, providing services for both network operators and end users. Our
technical service center is located in Beijing to respond to customer requests for information and assistance, provide remote assistance
and on-site visits.
Sales and Marketing
As of December 31, 2016, we had 55 full-time sales personnel.
We maintain regular contact with our customer base through contacts at industry forums, sales visits and use these opportunities
to educate them about digital television systems and cloud platforms. We target operators planning to launch new cloud platform
with more frequent contact from our sales and technical personnel. We compensate our sales personnel by means of base salaries
and performance bonuses.
Customers
Our primary customers are television and
telecommunication network operators. Our top three customers in 2016 were Beijing Gehua CATV Network Co., Ltd., Chongqing Cable
TV Network Co., Ltd. and North United Broadcasting TV Network Co., Ltd., which contributed 40.5%, 14.6% and 8.4%, respectively,
to our total revenues for that year.
We current derive, and we expect to continue
to derive, a significant portion of our revenues each period from a limited number of large customers, although the particular
customers may vary from period to period. See "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business
and Industry—We depend, and expect to continue to depend, on a limited number of customers for a significant portion of our
revenues in any single period. If one customer defers or cancels its orders, our revenues and net income could decline significantly."
More than 30 television network and telecommunication
operators in the PRC, including operators located in Beijing, Shanghai, Guangdong, Jiangsu, Jilin, Chongqing, Sichuan, Hebei, Xinjiang
and Shandong, have utilized our cloud technologies.
Suppliers
Our primary suppliers are game developers.
We have arrangements with a number of game developers, including Shanghai Holyblade Network Technology Co., Ltd and Shanghai Transmension
Technology Co., Ltd., to obtain games for our cloud platform.
For information about risks relating to
our relationships with our suppliers, see "Item 3. Key Information—D. Risk Factors—We may be exposed to infringement
or misappropriation claims by our suppliers and third parties that, if determined adversely to us, could require us to pay significant
damage awards."
Competition
Currently, as the only major cloud platform
provider for television operators and telecommunication operators in China, we do not have significant competitor in this market.
We compete on the basis of customer service and technical support, brand name, track record and market recognition, technologies
and price. On macro level, cloud platform services can be viewed as in competition with smart terminal solutions, since these two
types of services are normally interchangeable and mutually exclusive. In order to enhance our ability to capture a wider customer
base, we are in the process of combining cloud services with smart terminal solutions.
We believe that we can continue to compete successfully because
of our advanced technology, our local knowledge and relationships and our more extensive customer support and service network
.
Research and Development
Our success to date has in large part
resulted from our strong research and development capabilities. As of December 31, 2016, our research and development team consisted
of 66 employees, decreased from 300 as of December 31, 2015, as a result of the Super TV Disposition. Our research and development
expenses for continuing operations increased from US$7.3 million in 2014 to US$8.8 million in 2015, and decreased to US$5.7 million
in 2016.
Our business and the market in which we
operate are characterized by rapid technological development, evolving market demand and frequent product upgrades. As cloud platforms
and related products become more popular in the PRC, users are likely to seek more sophisticated applications that offer them greater
reliability, flexibility and functionality. Our continued success will depend, in part, on our ability to continue developing and
marketing products and services that respond to technological changes and evolving market demand in a timely and cost-effective
manner.
Many of our current research and development
staff are graduates of the PRC's top science and engineering universities, including Tsinghua University, and have extensive experience
in cloud technologies.
Our research and development personnel focus our research on
further developing (1) streaming-based cloud computing technology, including the development of streaming technologies based on
the Android system and multi-screen compatibility, (2) the cloud plus terminal technologies, including the management and monitoring
platforms, metadata analysis platforms and other systems, and (3) the cloud virtual reality technology solutions.
Intellectual Property
We develop all of our software internally,
and our proprietary intellectual property is critical to our success. We rely primarily on a combination of patent, trademark and
copyright laws, trade secrets, licenses and employee and third-party confidentiality agreements to safeguard our intellectual property.
We generally enter into confidentiality and non-disclosure agreements with our employees, customers and suppliers.
As of December 31, 2016, we had a total
of 25 patents issued and 9 pending patent applications in the PRC. Our issued patents and pending patent applications relate primarily
to cloud computing technologies, encryption and decryption technologies and technologies relating to video processing. We have
also completed copyright registration of 30 software programs relating to application of cloud platforms in the PRC.
As of December 31, 2016, we owned 9 trademarks,
all of which are registered trademarks. We have seven registered domain names, one of which was filed with the Ministry of Industry
and Information Technology, or MIIT, which is cybercloud.com.cn. For information about risks relating to our intellectual property
rights, see "Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry."
Insurance
We do not maintain any business insurance
or key-man insurance for continuing operations. Insurance companies in the PRC offer limited business insurance products and, to
our knowledge, offer limited business liability insurance.
While business disruption insurance is available to a
limited extent in the PRC, we have determined that the risks of disruption, cost of such insurance and the difficulties associated
with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result,
we do not have any business liability, disruption or litigation insurance coverage for our operations in the PRC. We also generally
do not maintain property insurance, except for insurance that covers the company’s automobiles.
Employees
As of December 31, 2016, 141 employees
were engaged in our continuing operations. We have no part-time employees. Substantially all of our employees are located in the
PRC.
The table below shows the number of employees
categorized by business area and as a percentage of our workforce as of December 31, 2014, 2015 and 2016:
|
|
As of December 31,
2014
|
|
|
As of December 31,
2015
|
|
|
As of December 31,
2016
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
Research and development
|
|
|
362
|
|
|
|
53.2
|
%
|
|
|
300
|
|
|
|
49.2
|
%
|
|
|
66
|
|
|
|
46.8
|
%
|
Technical service
|
|
|
53
|
|
|
|
7.8
|
|
|
|
51
|
|
|
|
8.4
|
|
|
|
-
|
|
|
|
-
|
|
Sales and marketing
|
|
|
153
|
|
|
|
22.5
|
|
|
|
158
|
|
|
|
25.9
|
|
|
|
55
|
|
|
|
39.0
|
|
General and administration
|
|
|
82
|
|
|
|
12.1
|
|
|
|
71
|
|
|
|
11.7
|
|
|
|
20
|
|
|
|
14.2
|
|
Smart card production
|
|
|
30
|
|
|
|
4.4
|
|
|
|
29
|
|
|
|
4.8
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
680
|
|
|
|
100.0
|
%
|
|
|
609
|
|
|
|
100.0
|
%
|
|
|
141
|
|
|
|
100.0
|
%
|
As required by applicable PRC regulations,
we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing,
pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans
at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by
the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of
the salary prevailing at the member's retirement date. The total contributions made to employee benefit plans for both continuing
and discontinued operations in 2014, 2015 and 2016 were approximately US$5.8 million, US$5.5 million and US$5.0 million, respectively.
Our employees are not represented by any collective bargaining agreements or labor unions.
We believe that we maintain
a good working relationship with our employees and we have not experienced any significant labor disputes.
We typically enter into a standard confidentiality agreement
with our employees. We also enter into an agreement with each of our employees giving us full rights to any inventions developed
by such persons during the course of their employment by us. In addition, we enter into a non-competition agreement with each of
our executive officers and key research and development personnel. These agreements include a covenant that prohibits each of them
from engaging in any activities that directly or indirectly compete with our business during, and for one year after, the period
of their employment with us.
Regulations
We operate substantially all of our business
in the PRC and various aspects of our business activities are subject to the laws, rules and regulations of the PRC, including
laws, rules and regulations relating to the cloud computing industry, the software industry and the cable television industry.
These laws, rules and regulations require us to obtain certain licenses and certificates for our products. In addition, certain
laws, rules and regulations of the PRC also affect the rights of our shareholders to receive dividends and other distributions
from us. This section summarizes the principal regulations relevant to our lines of business.
Software Products Registrations
The Computer Software Copyright Registration
Measures promulgated by the China Copyright Office on February 20, 2002 regulates software copyright registration, exclusive
licensing contracts of software copyright and transfer agreements. Although such registration is not mandatory under PRC law, software
copyright owners are encouraged to go through the registration process and registered software may receive better protection. As
of December 31, 2016, we had 9 registered software products.
Taxes
See "Item 5. Operating and Financial
Review and Prospects—A. Operating Results—Taxes and Incentives—PRC."
Foreign Currency Exchange
Foreign currency exchange in the PRC is
primarily governed by the following regulations:
|
·
|
Foreign Exchange Administration Rules
(1996),
as amended in 2008; and
|
|
·
|
Regulations of Settlement, Sale and Payment of
Foreign Exchange
(1996).
|
Under the
Foreign Exchange Administration
Rules
, the Renminbi is freely convertible for current account items, including the distribution of dividends, payment of interest,
trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment,
loans, securities investment and repatriation of investment, however, is still generally subject to the approval or verification
of the SAFE.
Under the
Regulations of Settlement,
Sale and Payment of Foreign Exchange
, foreign-invested enterprises may only buy, sell 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 the SAFE. Capital investments by foreign-invested enterprises outside the PRC are also
subject to limitations, which include approvals by the MOFCOM, the SAFE and the National Development and Reform Commission.
On February 28, 2015, the SAFE promulgated
the
Notice on Further Simplifying and Improving Foreign Exchange Policy on Direct Investment
, or SAFE Notice 13, which became
effective on June 1, 2015. Pursuant to SAFE Notice 13, instead of applying for approvals regarding foreign exchange registrations
of foreign direct investment and overseas direct investment from the SAFE as required under current laws, entities and individuals
will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision
of the SAFE, will directly examine the applications and conduct the registration.
On March 30, 2015, the SAFE promulgated
the
Circular on Reforming Administration of Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises
, or Circular
19, which took effect on June 1, 2015, replacing previous SAFE Circular 142. SAFE Circular No. 19 removed certain restrictions
previously imposed under Circular No. 142 for conversion by a foreign-invested enterprise of foreign currency registered capital
into RMB and use of such RMB capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other
things, using the Renminbi converted from its foreign exchange capital for expenditure outside of its business scope, providing
entrusted loans or repaying loans between non-financial enterprises. Any violation of Circular 19 may result in severe penalties,
including substantial fines.
Stock Incentive Plans
On December 25, 2006, the People's Bank
of China issued the
Administrative Measures on Individual Foreign Exchange Control
, and on January 5, 2007, the SAFE issued
the Implementation Rules of the Administrative Measures on Individual Foreign Exchange Control
, both of which became effective
on February 1, 2007. Under these regulations, all foreign exchange matters involved in employee share ownership plans, share option
plans and other equity incentive plans participated in by PRC individuals are to be transacted upon the approval of the SAFE or
its authorized branches.
On February 15, 2012, the SAFE promulgated
SAFE Notice 7, which superseded SAFE Notice 78. Under SAFE Notice 7, Domestic Individuals who are granted stock options or any
other stock-related rights and benefits under a stock incentive plan by an overseas-listed company are required, through a Domestic
Agent, to register with the SAFE or its authorized local counterparts and complete certain other procedures. The Domestic Agent
is required to submit information relating to a stock incentive plan with the authorized local counterparts of the SAFE within
three business days of each quarter and complete foreign exchange cancellation procedures within 20 business days after the termination
of a stock incentive plan.
Dividend Distribution
The principal regulations governing distribution
of dividends paid by wholly foreign-owned enterprises include:
|
·
|
Wholly Foreign-Owned Enterprise Law
(1986),
as amended in 2000 and 2016; and
|
|
·
|
Wholly Foreign-Owned Enterprise Law Implementation
Rules
(1990), as amended in 2001 and 2014.
|
Under these regulations, wholly foreign-owned
enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, according to the
PRC Company Law
, wholly foreign-owned enterprises in the PRC, like
other PRC companies, are required to set aside to fund a statutory reserve each year at least 10% of their after-tax profit, based
on PRC accounting standards, until the cumulative total of such reserve reaches 50% of its registered capital. This reserve is
not distributable as cash dividends to equity owners.
Regulations of Foreign Exchange
in Certain Onshore and Offshore Transactions
In July 2014, the SAFE issued SAFE Notice
37, to replace the
Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing
and Roundtrip Investments via Overseas Special Purpose Vehicles
, or SAFE Notice 75. SAFE Notice 37 provides that PRC residents,
whether natural or legal persons, must register with the relevant local SAFE branch in connection with establishing or taking control
of an offshore entity established for the purpose of overseas equity financing involving legitimate onshore or offshore assets
or equity interests held by them. The term "PRC legal person residents" as used in the SAFE regulations refers to those
entities with legal person status or other economic organizations established within the territory of the PRC. The term "PRC
natural person residents" as used in the SAFE regulations includes all PRC citizens and all other natural persons, including
foreigners, who habitually reside in the PRC for economic benefit.
On February 28, 2015, the SAFE promulgated
the
Notice on Further Simplifying and Improving Foreign Exchange Policy on Direct Investment
, or SAFE Notice 13, which became
effective on June 1, 2015. Pursuant to SAFE Notice 37 and SAFE Notice 13, PRC residents are also required to complete amended registrations
or filing with qualified banks after any material change in the shareholding or capital of the offshore entity, such as changes
of basic information, increases or decreases in investment amount, share transfers or exchanges, and mergers or divisions. The
qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
The registration and filing procedures
under the SAFE regulations are prerequisites for other approval and registration procedures necessary for capital inflow from the
offshore entity, such as inbound investments 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.
Regulations of Overseas Listings
On August 8, 2006, six PRC regulatory
agencies, including the MOFCOM, the SASAC, the SAT, the SAIC, the CSRC and the SAFE, jointly adopted the M&A Rules, which became
effective on September 8, 2006 and were amended on June 22, 2009. The M&A Rules, among other things, include provisions that
purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities in a PRC
company and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing
and trading of such special purpose vehicle's securities on an overseas stock exchange.
We completed the initial listing and trading
of our ADSs on the NYSE on October 11, 2007. We did not seek CSRC approval in connection with our initial public offering, as we
were advised by our PRC counsel that, based on their understanding of the current PRC laws, regulations and rules, because we completed
our restructuring before September 8, 2006, the effective date of the M&A Rules, we were not required by the M&A Rules
to apply to the CSRC for approval of the listing and trading of our ADSs on a U.S. stock exchange, unless we were clearly required
to do so by any rules promulgated in the future. See "Item 3. Key Information—D. Risk Factors—Risks Relating to
the People's Republic of China—The approval of the CSRC might be required in connection with our initial public offering
under certain PRC regulation; failure to obtain this approval, if required, could have a material adverse effect on our business,
financial condition, results of operations and reputation as well as the trading price of our ADSs."
Regulations on PRC Foreign Investment
The MOFCOM published the draft Foreign
Investment Law in January 2015, aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment
in China, namely, the
Sino-foreign Equity Joint Venture Enterprise Law
, the
Sino-foreign Cooperative Joint Venture Enterprise
Law
and the
Wholly Foreign-invested Enterprise Law
, together with their implementation rules and ancillary regulations.
The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime
in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign
and domestic investments. The MOFCOM is currently soliciting comments on this draft and substantial uncertainties exist with respect
to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially
impact the viability of our current corporate structure, corporate governance and business operations in many aspects.
Among other things, the draft Foreign
Investment Law expands the definition of foreign investment and introduces the principle of "actual control" in determining
whether an entity should be treated as a foreign-invested enterprise, or an FIE. According to the definition set forth in the draft
Foreign Investment Law, FIEs shall refer to enterprises established in China pursuant to PRC laws that are solely or partially
invested by foreign investors. The draft Foreign Investment Law specifically provides that entities established in China (without
direct foreign share ownership) but "controlled" by foreign investors, via contracts or trust, for example, will be treated
as FIEs. Once an entity falls within the definition of FIE, it may be subject to foreign investment restrictions or prohibitions
set forth in a "negative list" to be separately issued by the State Council at a later date. If the underlying business
of an FIE is subject to foreign investment restrictions, it needs to go through a market entry clearance process carried out by
the MOFCOM before the FIE can be established. If the underlying business of the FIE is subject to foreign investment prohibitions,
it may not enter such business in China. However, an FIE, during the market entry clearance process, may apply in writing to be
treated as a PRC domestic enterprise if its foreign investor(s) is/are "controlled" by PRC government authorities and
its affiliates and/or PRC citizens. In this connection, "control" is broadly defined in the draft law to cover the following
summarized categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting
rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision-making
bodies, or having the voting power to exert material influence on the board, the shareholders' meeting or other equivalent decision-making
bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity's
operations, financial matters or other key aspects of business operations.
The draft also emphasizes the security
review requirements, whereby all foreign investments concerning national security must be reviewed and approved in accordance with
the security review procedure. In addition, the draft imposes stringent ad hoc and periodic information reporting requirements
on foreign investors and applicable FIEs. In addition to investment implementation reports and investment amendment reports, which
are required for each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors
meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information
reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly
responsible may be subject to criminal liabilities.
The draft is now open for public review
and comments. It is still uncertain when the draft would be signed into law and whether the final version would have any substantial
changes from the draft. When the Foreign Investment Law becomes effective, the trio of existing laws regulating foreign investment
in China, namely, the
Sino-foreign Equity Joint Venture Enterprise Law
, the
Sino-foreign Cooperative Joint Venture Enterprise
Law
and the
Wholly Foreign-invested Enterprise Law
, together with their implementation rules and ancillary regulations,
will be abolished.
|
C.
|
Organizational Structure
|
We are a Cayman Islands holding company
and conduct substantially all of our business through our operating subsidiaries in the PRC. We own 100% of the equity interest
of CDTV BVI, a BVI holding company, that directly owns 100% of the equity interest of Golden Benefit and CSM Holdings, each a Hong
Kong holding company. CSM Holdings directly owns a 100%, 80% and 57.7% equity interest in N-S Information Technology, Shibo Qihang
and Cyber Cloud, respectively. N-S Information Technology holds a 76.9%, 100%, 100%, 65% and 20% equity interest in Joysee, N-S
Media Investment, Shibo Movie, Hubei Shibo and Shibo Qihang, respectively, and Cyber Cloud holds a 100% equity interest in Xinsi
Yijia.
The following diagram illustrates our key
corporate structure as of the date of this annual report:
N-T Information Engineering was established
by Tsinghua Enterprise Group, a company affiliated with Tsinghua University, and Hong Kong-based Tsinghua Novel Hi-Tech Investment
Holding Ltd. in July 1998, and initially focused on developing, producing and selling digital data broadcasting equipment for cable
television operators. In December 2002, N-T Information Engineering completed its acquisition of the CA systems-related assets
of Tsinghua Tongfang. In March 2004, CDTV BVI was incorporated as a holding company in the BVI. Following the establishment of
CDTV BVI, we restructured our operations in connection with an investment by SAIF. As part of this restructuring, we established
Beijing Super TV, a wholly owned subsidiary of CDTV BVI, on May 31, 2004. On the same day, N-S Digital TV was also established.
In June 2004, N-S Digital TV acquired from N-T Information Engineering its smart card and CA systems business and, in August 2006,
N-S Digital TV acquired from N-T Information Engineering its set-top box design business. In April 2007, a new holding company,
CDTV Holding, was established in the Cayman Islands. In May 2007, CDTV BVI executed a 40-for-1 share split of its ordinary shares
and Series A preferred shares. Following this share split, the shareholders of CDTV BVI exchanged all of their shares of CDTV BVI
for shares of CDTV Holding in proportion to their percentage interest in CDTV BVI. As a result, CDTV BVI became a wholly owned
subsidiary of CDTV Holding. As a result of a series of transactions over the years, Tianxing Wang, Lei Zhang, Shizhou Shen and
Wenjun Wang in aggregate owned all of the equity interest of N-S Digital TV.
In order to benefit from the tax arrangement
between the PRC and Hong Kong, in December 2007, CDTV BVI acquired Golden Benefit, a company incorporated in Hong Kong, for a nominal
consideration, and transferred its 100% equity interest in Beijing Super TV to Golden Benefit. See "Item 3. Key Information—D.
Risk Factors—Risks Relating to the People's Republic of China—We may be subject to PRC income tax on our global income,
or dividends we receive from our PRC subsidiary may be subject to PRC withholding tax, depending on whether we are recognized as
a resident enterprise in the PRC" and "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxes
and Incentives—Tax Arrangement between the PRC and Hong Kong."
In December 2007, Beijing Super TV established
a wholly owned subsidiary, N-S Media Investment, and transferred the equity interest of N-S Media Investment to N-S Information
Technology in June 2014. In February 2008, CDTV BVI established a wholly owned subsidiary, CSM Holdings, in Hong Kong. In July
2010, we established N-S Investment Holdings, a wholly owned subsidiary of Beijing Super TV, in the PRC. In June 2014, N-S Investment
Holdings was renamed N-S Information Technology, and Beijing Super TV transferred its 100% equity interest in N-S Information Technology
to CSM Holdings.
In January 2011, we established Cyber
Cloud, a subsidiary in which Beijing Super TV holds a 90% equity interest, in the PRC. Pursuant to a series of agreements dated
April 30, 2014, Cyber Cloud acquired 100% equity interest in Xinsi Yijia from Yuewu Yuntian and Holch Capital, and in exchange,
Yuewu Yuntian and Holch Capital obtained certain non-controlling interests in Cyber Cloud. Moreover, Beijing Super TV transferred
its remaining equity interest in Cyber Cloud to CSM Holdings. Dingyuan is controlled by Xinsi Yijia through a series of contractual
arrangements. In June 2015, Cyber Cloud completed the registration with the relevant PRC governmental authority of the capital
contribution from Gehua. As a result of the transactions, CSM Holdings, Yuewu Yuntian, Gehua and Holch Capital held 67.5%, 13.5%,
10% and 9% of the equity interest in Cyber Cloud, respectively. In May and June 2016, the then existing shareholders of Cyber Cloud
made a supplemental cash contribution proportionally to Cyber Cloud. In October 2016, Xuanwutianxia, an entity owned by two employees
of Cyber Cloud, entered into a share contribution agreement to make a cash contribution to Cyber Cloud. Further, in December 2016,
Jinxinronghui, a third-party investor, contributed RMB33.0 million to Cyber Cloud. As a result, CSM Holdings, Yuewu Yuntian, Jinxinronghui,
Gehua, Holch Capital and Xuanwutianxia will hold 57.7%, 11.5%, 10.0%, 8.6%, 7.7% and 4.5% of the equity interest in Cyber Cloud,
respectively.
Joysee was established in May 2011, and
as a result of a series of equity transactions, N-S Information Technology held a 76.9% equity interest in Joysee
.
Shibo
Movie was established in February 2012 as a joint venture of Beijing Super TV and became wholly owned by N-S Information Technology
upon completion of a series of equity transactions in June 2014. See "Item 4. Information on the Company—A. History
and Development of the Company—Our Investments and Acquisitions."
In May 2004, we established N-S Digital
TV, which was incorporated in the PRC and wholly owned by PRC citizens, to produce and sell our CA systems to avoid our CA systems
being deemed as non-PRC CA systems. We conducted a significant portion of our operations through N-S Digital TV. Prior to June
2014, we did not directly or indirectly have any equity interest in N-S Digital TV. However, Beijing Super TV, our wholly owned
subsidiary in the PRC, had entered into a series of contractual arrangements with N-S Digital TV and its shareholders. As a result
of these contractual arrangements, we were considered the primary beneficiary of N-S Digital TV and, accordingly, we consolidated
N-S Digital TV's results of operations in our financial statements as part of our discontinued operations.
Beijing Super TV mainly engaged in supplying
software products relating to smart cards to N-S Digital TV, providing technical support and related services to N-S Digital TV,
and developing technology for use by N-S Digital TV. Specifically, Beijing Super TV and N-S Digital TV had entered into a series
of contracts, including a products and software purchase agreement, a technical support and related services agreement, a technology
license agreement and a technology development agreement, which were subsequently terminated on June 20, 2014.
In addition, Beijing Super TV had entered
into an equity transfer option agreement, a business operating agreement, loan agreements, powers of attorney and share pledge
agreements, which provided us with the ability to control N-S Digital TV, which were subsequently terminated on June 20, 2014.
In August 2015, N-S Information Technology
and Hubei Taizihu, a third-party company, established Hubei Shibo, in which N-S Information Technology would hold 65% of the equity
interest.
In February 2016, CSM Holdings contributed
RMB20.0 million (US$3.1 million) in cash to Dagong Technology, which was renamed Shibo Qihang in February 2017, representing 80%
of the equity interest in Dagong Technology, which mainly engages in the research and development of UAV technology. In December
2016, N-S Information Technology purchased the remaining 20% equity interest in Dagong Technology.
On November 7, 2016, we entered into the Equity Transfer Agreement
with Bao Li for the sale of all the equity interest held by Golden Benefit, our wholly-owned subsidiary, in Beijing Super TV for
RMB610 million, as followed by a supplemental agreement on December 26, 2016. Bao Li has transferred the consideration by Renminbi
to a PRC subsidiary of the Company and Beijing Super TV completed the legal registration update of its shareholder information
with the relevant PRC governmental authorities on December 29, 2016. As a result, from December 29, 2016, the Company no longer
retained power of control over Beijing Super TV. See "Item 4. Information on the Company—A. History and Development
of the Company."
|
D.
|
Property, Plants and Equipment
|
We currently maintain our headquarters and most
of our operations at Jingmeng High-Tech Building B, 4th Floor, No. 5 Shangdi East Road, Haidian District, Beijing 100085, PRC,
where we lease 1,230 square meters of office space pursuant to two short-term lease agreements with the same landlord for separate
portions of the total space. The lease agreements are: (1) a lease agreement of N-S Information Technology with respect to an area
of 470 square meters for its operational use; and (2) a lease agreement of Cyber Cloud with respect to an area of 760 square meters
for its operational use. All the lease agreements will expire in April 2018.
Item 4A. Unresolved
Staff Comments
Not applicable.
Item 5.
Operating and Financial Review and Prospects
Operating and Financial Review and Prospects
The following discussion and analysis
should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual
report. Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected
in the forward-looking statements. In evaluating our business, you should carefully consider the information provided in "Item
3. Key Information—D. Risk Factors."
Overview
We are a leading
provider of cloud platforms, with gaming and other applications embedded, to PRC digital television and telecommunication network
operators, enabling them to bring these applications to household television sets and other mobile devices.
Our cloud platforms provide cloud computing
technology-based digital video delivery solutions to television and telecommunication network operators. Through the platforms,
end users' requests are processed on centralized cloud servers. The cloud servers will then deliver content and solutions corresponding
to such requests through the network in the form of audio and video streams which are in turn decoded and presented by the terminal
to the end users.
Our cloud platforms enable television
and telecommunication network operators to use their two-way set-top boxes that have already been installed to run a large number
of value-added applications, such as video games, 3D games, educational applications and business service applications, which are
accessible on smart phones, tablet computers, personal computers, Internet TVs and other devices.
As of December 31,
2016, we have entered into partnership agreements with more than 30 television and telecommunication network operators in Beijing,
Shanghai, Guangdong, Jiangsu, Jilin, Chongqing, Sichuan, Hebei, Xinjiang, Shandong, and other provinces. Our cloud platforms cover
more than 130 million users, with more than 100 million digital TV users and 30 million IPTV users. We continue to focus on marketing
and promotional efforts for our products and services to increase our cloud platform user base. For content offered through our
cloud platform, we continue to explore applications outside of games, in fields such as education, online shopping and other forms
of entertainment.
In December 2016,
we disposed our CA and CA-related business through the Super TV Disposition. Accordingly, the operating results of Super TV have
been reclassified as discontinued operations in the financial data for all periods presented.
Among the most significant factors affecting
our business, financial condition and results of operations are:
|
·
|
Purchasing
patterns of our customers.
The revenue we generate from television and telecommunication
network operators depends on the spending of end users on the cloud platforms. The uncertainty
of the spending habits of end users will cause our revenue to fluctuate.
|
|
·
|
Ability
to respond effectively to technological and commercial changes.
Our business
and the market in which we operate are characterized by rapid commercial and technological
change, evolving market demand and frequent product enhancements. Our continued success
will depend, in part, on our ability to continue developing and marketing products and
services that respond to technological changes and evolving market demand in a timely
and cost-effective manner.
|
|
·
|
Cost
structure.
Our profitability also depends on the cost structure of our operations,
including, among other things, whether the revenue sharing model with game developers
is on a pro rata basis or on a fixed amount basis.
|
In addition to the factors discussed above,
our reported results are also affected by the fluctuations in the value of the Renminbi against the U.S. dollar, as our reporting
currency is the U.S. dollar while the functional currency of our subsidiaries and variable interest entities in China, which operate
substantially all of our business, is the Renminbi. In 2014, 2015 and 2016, the Renminbi depreciated against the U.S. dollar by
approximately 2.5%, 4.4% and 7.2%, respectively. The depreciation of the Renminbi against the U.S. dollar contributed to the decrease
in our net income reported in U.S. dollar terms in 2014, 2015 and 2016, respectively.
For additional information relating
to the fluctuations in the value of the Renminbi against the U.S. dollar, see "Item 3. Key Information—A. Selected Financial
Data—Exchange Rate Information", "Item 3. Key Information—D. Risk Factors—Risks Relating to the People's
Republic of China—Fluctuations in exchange rates could result in foreign currency exchange losses" and "Item 11.
Quantitative and Qualitative Disclosures About Market Risks—Foreign Currency Risk."
Our business is managed as a single operating
segment. Our management reviews our consolidated results of operations prepared in accordance with U.S. GAAP when making decisions
about allocating our resources and assessing our performance.
Revenues
Our continuing operations derive revenues
primarily from the following two sources:
|
·
|
Products
.
In 2014, we derived revenues
from sales of advanced digital television terminals which enable digital television network operators to provide value-added services
to their subscribers. In 2015 and 2016, we derived revenues from sales of hardware and software related to the application of
cloud platform and other newly developed products.
|
|
·
|
Services
. We derive revenue from providing operating
services, system integration services and system development services based on the cloud platform for television and telecommunication
network operators. For operating services, we cooperate with the operators by providing the cloud platform, including games embedded
in the platform, conducting daily operational management and performing customer services. Our cloud platform system integration
services involve providing cloud computing software, hardware, related system integration services and post-contract customer
support, or PCS, to our customers. Our system development services involve the development of customized cloud-based software
applications for our customers.
|
Revenues from the sales of our products
and services accounted for 14.6% and 85.4%, respectively, of our total revenues in 2016, compared with 12.9% and 87.1%, respectively,
of our total revenues in 2015.
Our net revenues represent total revenues less PRC VAT surcharge
taxes and fees.
Cost of Revenues
Cost of revenues primarily includes:
costs of hardware purchased from third-party suppliers as parts of our products sold or services provided, content fees paid
to third-party developers for games embedded in the cloud platform, and other miscellaneous costs. Cost of revenues increased
by 9.9% to US$1.5 million in 2016 from US$1.4 million in 2015. Cost of revenues related to the sales of our products and to
the sales of our services accounted for 33.4% and 66.6%, respectively, of our total cost of revenues in 2016, compared with
10.4% and 89.6%, respectively, of our total cost of revenues in 2015. As a percentage of our net revenues, cost of revenues
decreased from 71.8% in 2015 to 35.9% in 2016.
Gross Profit and Gross Margin
Gross profit is equal to net revenues less cost of revenues.
Gross margin is equal to gross profit divided by net revenues. Our gross margin was 28.2% and 64.1% in 2015 and 2016, respectively,
compared to negative gross margin in 2014. The increase in our gross margin from 2015 to 2016 was mainly due to an increase in
revenue from high-margin business, such as cloud platform operations.
Operating Expenses
Our operating expenses consist of research
and development expenses, selling and marketing expenses and general and administrative expenses. Each of these components of our
operating expenses includes a portion of our total share-based compensation expenses, which are generally allocated according to
the functions of those individuals who received share-based awards.
Research and Development Expenses
.
Research and development expenses consist primarily of costs associated with the design, development and testing of our products
and technologies. Among other things, these costs include compensation and benefits for our research and development staff, rental
for our office premises used for research and development activities, depreciation expenses related to equipment used in research
and development activities, expenditures for purchases of supplies and other relevant costs. Compensation and benefits for our
research and development staff accounted for the majority of our research and development expenses. Research and development expenses
as a percentage of our net revenues were 458.2% and 133.8% in 2015 and 2016, respectively.
Selling and Marketing Expenses
.
Selling and marketing expenses consist primarily of compensation and benefits for our sales and marketing staff, expenses for promotional,
advertising, travel and entertainment activities, expenditures for purchases of supplies and amortization of intangible assets.
Selling and marketing expenses as a percentage of our net revenues were 214.3% and 65% in 2015 and 2016, respectively.
General and Administrative Expenses
.
General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative
staff, professional advisory fees, depreciation and amortization with respect to equipment used for general corporate purposes,
rental costs for our office premises used by general management, finance and administrative staff, and other expenses incurred
in connection with general corporate purposes. General and administrative expenses as a percentage of our net revenues were 167.7%
and 88.4% in 2015 and 2016, respectively.
Share-Based Compensation Expenses
.
We account for share-based compensation expenses based on the fair value of share option grants at the date of grant.
We adopted our 2005, 2008, 2010 and 2012
Stock Incentive Plans in February 2005, September 2007, November 2010 and May 2012, respectively, and options to purchase an aggregate
of 3,918,869 ordinary shares have been granted and were outstanding under the plans as of March 31, 2017. We also recognized immediately
vested shared-based compensation in connection with capital injection by employees in 2016. We incurred share-based compensation
expenses of US$1.7 million, US$0.1 million and US$0.9 million for continuing operations and nil, nil and USD$4.0 million for discontinued
operations in 2014, 2015 and 2016, respectively. For additional information regarding our share-based compensation expenses, see
Note 15 to our consolidated financial statements included elsewhere in this annual report.
The table below shows the allocation of
share-based compensation from continuing operations charges to cost of revenues and our operating expense line items for the periods
indicated:
|
|
For the years ended December 31,
|
|
Share-Based Compensation Related to:
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(in thousands of U.S. dollars)
|
|
Cost of revenues
|
|
US$
|
12
|
|
|
US$
|
3
|
|
|
US$
|
-
|
|
Research and development expenses
|
|
|
98
|
|
|
|
49
|
|
|
|
463
|
|
Selling and marketing expenses
|
|
|
130
|
|
|
|
30
|
|
|
|
447
|
|
General and administrative expenses
|
|
|
1,459
|
|
|
|
36
|
|
|
|
2
|
|
Total
|
|
US$
|
1,699
|
|
|
US$
|
118
|
|
|
US$
|
912
|
|
Income/(loss) from Operations
Income/(loss) from operations represents
gross profit less operating expenses.
Non-operating Income/(Expenses)
Non-operating income/(expenses) includes
interest income, gain from disposal of equity method investment and other income/(expense), each as presented in our consolidated
statements of comprehensive income. Our interest income was US$0.2 million, US$0.1 million and US$0.1 million in 2014, 2015 and
2016, respectively. We had no interest expense these years. We recorded gain from disposal of an equity method investment in Sinoscreens
of US$0.1 million in 2016. We also had other expense of US$0.1 million in 2014 and other income of US$0.4 million and US$1.1 million
in 2015 and 2016, respectively.
Critical Accounting Policies
We prepare our financial statements in
conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things,
assets and liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and
assumptions based on the most recently available information, our own historical experience and other factors that we believe to
be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions,
our actual results could differ from what we expect. This is especially true with some accounting policies that require higher
degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding
of our consolidated financial statements because they involve the greatest reliance on our management's judgment.
Revenue Recognition
We historically derived revenues primarily
from two sources: (1) sales of products, including smart cards and other products sourced from third-party suppliers; and (2) provision
of services, including cloud platform operating services, head-end system integration services, head-end system development services,
and CA system terminal-end technology that generate licensing income and royalty income.
All the revenues from sales of smart cards,
licensing and royalty income and substantially all of system integration service and system development service were derived from
the CA business from the operation of Super TV. Since Super TV was disposed by the Company in December 2016, the related revenues
are included in income from operations of discontinued operations for all periods presented.
For sales of our products, we recognize
revenue when the products are delivered to and received by customers.
Our cloud platforms provide cloud gaming
with a vision to render end users an instantaneous gaming service.
We enter into agreements with cable TV
network operators and publishes games developed by third-party game developers onto the cloud game platforms embedded in cable
TV. The cloud game platforms enable the end users to purchase in-game virtual items by converting virtual currencies, which is
purchased in the uniform platform virtual currency system. The cable TV network operators receive the service fees paid by end
users and they will pay us a pre-agreed portion of the cash received.
We view cable TV network operators as
our customers. In the arrangements with cable TV network operators, cable TV network operators enter into agreements with end users
and are in the role of operating the cable TV network system. Our cloud platform service is one of the value added services embedded
in the cable TV network system.
We are not able to estimate accurately
the amount of revenue before billing statements are mutually agreed with cable TV network operators. Amount of revenue earned is
only determinable, when we have received mutually agreed billing statements from cable TV network operators.
We consider ourselves as the primary obligor,
as we operate the cloud platforms, including initiating promotion activities, providing bug fixing and upgrades services of the
platforms, maintaining virtual currency system, managing interfaces of the platform, and maintaining the servers, as needed. In
addition, we have the discretion in supplier selection and the latitude in establishing price. As such, we recognize such revenue
on a gross basis.
Once the end users convert the platform
virtual currency to in-game virtual items, the in-game virtual items will be used by the end users in a very short period of time.
In addition, substantially most of the in-game virtual items can be used only once and provide immediate advantages to the end
users in the game without further substantial benefits.
At each period end, we summarize
consumed virtual currencies and the balance of unconsumed virtual currencies. We recognize revenue for consumed virtual
currencies based on the billing statements mutually agreed with cable TV network operators, and defer revenue for unconsumed
balance as of each period end.
Our cloud platform and CA system integration
services primarily involve provision of our software, third-party hardware and software, related installation and integration services
and PCS, including telephone support and bug-fixing. Our head-end system development services involve the development of customized
software applications related to cloud platform and digital TV technology.
For multi-element arrangements of our
system integration services, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances,
we use the following hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific
objective evidence of fair value, or VSOE; (ii) third-party evidence of selling price, or TPE; and (iii) best estimate of selling
price, or ESP. VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that
deliverable. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone
basis.
When we deliver the hardware and software
to, and install and integrate them for, our customers, our customers sign the preliminary acceptance. The final acceptance is
typically signed six months to one year after the issuance of the preliminary acceptance if no major technical problems are discovered.
Hardware, software, integration, and installation are considered delivered to customers when the preliminary acceptance is signed
because only at that time are customers able to use the integrated system. Therefore, revenue for the system integration services,
except PCS, is recognized when the installation and integration of software is completed, which is indicated by obtaining the
preliminary acceptance from customers. We defer the revenue for PCS and recognize it over the free PCS term.
With respect to our system development
services, we use the completed-contract method to recognize revenue when the software application development is finished and accepted
by customers, as a system development arrangement requires significant production, modification, or customization of software and
is generally completed within several weeks or months.
We receive licensing fees from set-top
box manufacturers who license our CA systems terminal-end technology, and we are also entitled to receive royalties from them based
on the quantity of set-top boxes manufactured under such licenses. Royalty revenue is recognized when both of the following criteria
are met: (1) sales reports are received from set-top box manufacturers; and (2) payments are received. Licensing income is recognized
when we receive acceptance note of license issued by the set-top box manufacturers.
Goodwill
The excess of the purchase price over
the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Goodwill is not amortized but
is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Goodwill is tested for impairment at the
reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant
change in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale or disposition
of a significant portion of a reporting unit.
Application of the goodwill impairment
test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Estimating fair value is
performed by utilizing various valuation techniques, with a primary technique being a discounted cash flow which requires significant
judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate
of growth for the Company's business, estimation of the useful life over which cash flows will occur, and determination of the
Company's weighted average cost of capital.
In the evaluation of the goodwill for
impairment, we may first assess qualitative factors to determine whether it is "more likely than not" that the fair value
of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
goodwill is then tested following a two-step process. The first step compares the fair value of each reporting unit with its carrying
amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to
be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second
step compares the implied fair value of goodwill with the carrying value of a reporting unit's goodwill. The implied fair value
of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair
value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized
for any excess in the carrying value of goodwill over the implied fair value of goodwill. We have determined to perform the annual
impairment test on December 31 of each year. We did not incur any impairment loss on goodwill for the years ended December 31,
2014, 2015 or 2016.
Income Taxes
Deferred income taxes are provided using
the asset and liability method. Under this method, deferred income taxes are recognized based on net operating losses available
for carry-forwards and significant temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax rates in effect for the years in which the differences are expected
to reverse. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than
not that some portion of, or all of, the deferred tax assets will not be realized.
Income taxes are provided for in accordance
with the laws, rules and regulations applicable to the relevant companies as enacted by the relevant tax authorities. The impact
of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than
not to be sustained upon audit of the relevant tax authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained.
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2(ee) to our consolidated financial
statements included elsewhere in this annual report for recently issued accounting standards that we believe may have implications
on our consolidated financial statements for future periods.
Taxes and Incentives
Cayman Islands, British Virgin Islands
and Hong Kong
Our company, as an exempted company incorporated
in the Cayman Islands, and CDTV BVI, our wholly owned subsidiary incorporated in BVI, are not subject to any income or capital
gains tax under the current laws of the Cayman Islands and BVI. Golden Benefit and CSM Holdings, our indirectly wholly owned subsidiaries
incorporated in Hong Kong, were subject to 16.5% Hong Kong profits tax in 2014, 2015 and 2016 on their activities conducted in
Hong Kong.
PRC
Our subsidiaries, our VIE and the subsidiaries
of our VIE operating in the PRC are subject to PRC taxes as described below:
Enterprise Income
Tax
. Effective from January 1, 2008, the PRC statutory income tax rate is 25% according to the 2008 EIT Law. Beijing
Super TV, N-S Digital TV, N-S Media Investment, N-S Information Technology, Joysee, Cyber Cloud, Shibo Movie, Xinsi Yijia,
Dingyuan, Dagong Technology and Hubei Shibo are registered in the PRC and are subject to PRC Enterprise Income Tax
("EIT") on the taxable income in accordance with the relevant PRC income tax laws.
N-S Digital TV qualified as "High-and-New
Technology Enterprise", or the HNTE, under the 2008 EIT Law,
and therefore qualified for a preferential tax rate of 15% for a three year period. In October 2011 and again in October 2014,
N-S Digital TV successfully renewed its HNTE qualification and qualified for a preferential tax rate of 15% from 2011 to 2016.
In October 2014, Cyber Cloud obtained the HNTE certificate for the tax years from 2014 to 2016, and Cyber Cloud is entitled to
a preferential income tax rate of 15% in each of those years. Beijing Super TV has been qualified as “Key Software Enterprise”
and entitled for a preferential tax rate of 10% since 2010. In December 2013, Beijing Super TV obtained such certificate for the
tax years from 2013 to 2014. As a result, Beijing Super TV was entitled to a preferential income tax rate of 10% in each of those
years. Beginning from 2015, the administrative examination and approval for certification of “Key Software Enterprise”
have been cancelled and was changed to self-assessment. In 2015 and 2016, Beijing Super TV assessed that it was qualified as “Key
Software Enterprise”, based on the benchmarks to be qualified for such preferential tax rate.
In addition, under the 2008 EIT Law, an
enterprise established under the laws of a foreign country or region whose "de facto management body" is located within
the PRC territory is considered a resident enterprise and will generally be subject to the enterprise income tax at the rate of
25% on its global income as well as PRC enterprise income tax reporting obligations. According to the Implementation Rules, "de
facto management body" refers to a managing body that exercises, in substance, overall management and control over the production
and business, personnel, accounting and assets of an enterprise. SAT Notice 82 provides for certain specific criteria for determining
whether the "de facto management body" of a Chinese-controlled offshore enterprise is located in the PRC. In addition,
SAT Bulletin 45, which became effective on September 1, 2011, provides guidance on the implementation of SAT Notice 82. SAT Bulletin
45 clarifies certain issues relating to: (i) the determination procedures of PRC resident enterprise status; and (ii) tax registration
and other related procedures for PRC resident enterprises. SAT Bulletin 45 also provides that if an offshore PRC resident enterprise
presents a copy of the Chinese tax resident determination certificate issued by the competent tax authorities to a payer of PRC-sourced
dividends, interest, royalties and other income, such payer shall not withhold income tax on these payments to the offshore PRC
resident enterprise. We believe that we are not a PRC resident enterprise with reference to the criteria set forth in SAT Notice
82. However, if we were to be considered as a PRC resident enterprise, we would be subject to the enterprise income tax at the
rate of 25% on our global income as well as PRC enterprise income tax reporting obligations. See "Item 3. Key Information—D.
Risk Factors—Risks Relating to the People's Republic of China—We may be subject to PRC income tax on our global income,
or dividends we receive from our PRC subsidiary may be subject to PRC withholding tax, depending on whether we are recognized as
a resident enterprise in the PRC." In addition, the 2008 EIT Law and the Implementation Rules provide that a withholding tax
of 10% (which may be reduced by the relevant tax treaties between the PRC and other jurisdictions) will generally be applicable
to dividends payable to non-resident enterprises, and, unlike the prior tax law, does not specifically exempt corporations that
pay dividends from withholding all or part of such income tax when they pay dividends to their non-resident investors. To the extent
we are not considered as a PRC resident enterprise or dividends paid from our PRC operating subsidiary are not deemed as "dividends
among qualified PRC resident enterprises", the dividends our PRC subsidiary pays to us will be subject to this withholding
tax. See "Item 3. Key Information—D. Risk Factors—Risks Relating to the People's Republic of China—We may
be subject to PRC income tax on our global income, or dividends we receive from our PRC subsidiary may be subject to PRC withholding
tax, depending on whether we are recognized as a resident enterprise in the PRC." In addition, this withholding tax may also
apply to dividends we pay to our non-PRC individual shareholders if we were to be considered as a PRC resident enterprise. See
"Item 3. Key Information—D. Risk Factors—Risks Relating to the People's Republic of China—Dividends payable
by us to our non-PRC shareholders and ADS holders, and gains on the sales of our ordinary shares or ADSs, may be subject to withholding
taxes under PRC tax laws, which may materially reduce the value of your investment."
Value-Added Tax
.
We are subject to value-added tax, or VAT, at the rate of 17% and 6% on the sales of our products and rendering our services, respectively.
Pursuant to a PRC tax policy intended to encourage the development of software and integrated circuit industries and a notice jointly
issued by the PRC Ministry of Finance and the SAT in October 2011, each of N-S Digital TV, Beijing Super TV and Cyber Cloud is
entitled to a refund of VAT paid at a rate of 14% (i.e., the excess of the effective VAT rate over 3%) of the sale value of some
of our software products. The amount of VAT refund included in our total revenues from continuing operations was nil, US$9.4 thousand
and US$57.0 thousand in 2014, 2015 and 2016, respectively, accounting for nil, 0.5% and 1.3%, respectively, of our total revenues
in the corresponding periods. We include such refunds in the total revenues in our consolidated statements of comprehensive income
included elsewhere in this annual report.
Tax Arrangement between the PRC
and Hong Kong
The Hong Kong government and the PRC government
entered into the
Arrangement for Avoidance of Double Taxation on Income and Prevention of Tax Evasion
on August 21, 2006,
which took effect on January 1, 2007 and April 1, 2007 in the PRC and Hong Kong, respectively. This arrangement provides certain
tax incentives to use a Hong Kong company as an intermediate holding company for holding investments in the PRC. The withholding
tax rate applicable to dividends received by a Hong Kong resident enterprise from its investments in the PRC is 5% compared with
the 10% withholding tax rate applicable to dividends received by a company incorporated in a jurisdiction where there is no similar
tax treaty or arrangement with the PRC, provided, among other things, that the Hong Kong resident enterprise owns at least 25%
of the shareholding of the PRC company at all times within the 12-month period immediately preceding the distribution of dividends.
In addition, a full tax exemption in the PRC is available on a capital gain derived by a Hong Kong resident enterprise from the
disposal of its shares in a PRC company, provided that the Hong Kong resident enterprise owns less than 25% of the shareholding
of the PRC company at all times within the 12-month period immediately preceding the distribution of dividends and the assets of
the PRC company do not consist mainly of real property situated in the PRC.
The SAT issued SAT Notice 601 and SAT
Announcement 30 on October 27, 2009 and June 29, 2012, respectively, both of which are applicable to the tax arrangements between
the PRC and Hong Kong. Specifically, SAT Notice 601 provides that only enterprises with active operations can be recognized as
"beneficial owners" under relevant tax treaties which are entitled to enjoy the corresponding tax benefits. It further
provides that those enterprises that are established solely for the purposes of benefiting from favorable tax treatment under the
relevant tax treaties should not be recognized as "beneficial owners" and therefore cannot enjoy favorable tax treatment.
Furthermore, SAT Announcement 30 provides that a comprehensive analysis should be made when determining the "beneficial owner"
status based on all the factors set out in SAT Notice 601. See "Item 3. Key Information—D. Risk Factors—Risks
Relating to the People's Republic of China—We may be subject to PRC income tax on our global income, or dividends we receive
from our PRC subsidiary may be subject to PRC withholding tax, depending on whether we are recognized as a resident enterprise
in the PRC."
Recent Acquisitions
See "Item 4. Information on the Company—A.
History and Development of the Company—Our Investments and Acquisitions."
Discontinued operations
In December 2016, Bao Li acquired all
of the 90.09% equity interest in Beijing Super TV held by Golden Benefit. As a result, we deconsolidated Beijing Super TV and its
wholly owned subsidiary, N-S Digital TV, from our consolidated financial statements. Retrospective adjustments to the historical
consolidated statements of comprehensive income/(loss) have also been made to provide a consistent basis of comparison for the
financial results. Specifically, Super TV’s operational results have been excluded from our financial results from continuing
operations and have been reclassified to income from operations of discontinued operations.
Results of Operations
The following table sets forth our condensed
consolidated statements of operations by amount and as a percentage of our net revenues for the periods indicated:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
|
(In thousands of U.S. dollars, except percentages)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
US$
|
1,571
|
|
|
|
82.0
|
%
|
|
US$
|
248
|
|
|
|
12.9
|
%
|
|
US$
|
618
|
|
|
|
14.6
|
%
|
Services
|
|
|
344
|
|
|
|
18.0
|
|
|
|
1,674
|
|
|
|
87.2
|
|
|
|
3,622
|
|
|
|
85.7
|
|
Total revenues
|
|
|
1,915
|
|
|
|
100.0
|
|
|
|
1,922
|
|
|
|
100.1
|
|
|
|
4,240
|
|
|
|
100.3
|
|
Tax and surcharges
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(0.1
|
)
|
|
|
(12
|
)
|
|
|
(0.3
|
)
|
Net revenues
|
|
|
1,915
|
|
|
|
100.0
|
|
|
|
1,920
|
|
|
|
100.0
|
|
|
|
4,228
|
|
|
|
100.0
|
|
Cost of revenues:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
2,052
|
|
|
|
107.2
|
|
|
|
143
|
|
|
|
7.4
|
|
|
|
506
|
|
|
|
12.0
|
|
Services
|
|
|
292
|
|
|
|
15.2
|
|
|
|
1,237
|
|
|
|
64.4
|
|
|
|
1,011
|
|
|
|
23.9
|
|
Total cost of revenues
|
|
|
2,344
|
|
|
|
122.4
|
|
|
|
1,380
|
|
|
|
71.8
|
|
|
|
1,517
|
|
|
|
35.9
|
|
Gross (loss)/profit
|
|
|
(429
|
)
|
|
|
(22.4
|
)
|
|
|
540
|
|
|
|
28.2
|
|
|
|
2,711
|
|
|
|
64.1
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
(1)
|
|
|
7,265
|
|
|
|
379.4
|
|
|
|
8,798
|
|
|
|
458.2
|
|
|
|
5,655
|
|
|
|
133.8
|
|
Selling and marketing
(1)
|
|
|
3,696
|
|
|
|
193.0
|
|
|
|
4,114
|
|
|
|
214.3
|
|
|
|
2,747
|
|
|
|
65.0
|
|
General and administrative
(1)
|
|
|
6,236
|
|
|
|
325.6
|
|
|
|
3,220
|
|
|
|
167.7
|
|
|
|
3,739
|
|
|
|
88.4
|
|
Total operating expenses
|
|
|
17,197
|
|
|
|
898.0
|
|
|
|
16,132
|
|
|
|
840.2
|
|
|
|
12,141
|
|
|
|
287.2
|
|
Loss from continuing operations
|
|
|
(17,626
|
)
|
|
|
(920.4
|
)
|
|
|
(15,592
|
)
|
|
|
(812.0
|
)
|
|
|
(9,430
|
)
|
|
|
(223.1
|
)
|
Interest income
|
|
|
205
|
|
|
|
10.7
|
|
|
|
104
|
|
|
|
5.4
|
|
|
|
105
|
|
|
|
2.5
|
|
Gain from disposal of equity method investments
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
95
|
|
|
|
2.3
|
|
Other (expense)/income
|
|
|
(50
|
)
|
|
|
(2.6
|
)
|
|
|
354
|
|
|
|
18.4
|
|
|
|
1,088
|
|
|
|
25.7
|
|
Loss from continuing operations before income tax expenses
|
|
|
(17,471
|
)
|
|
|
(912.3
|
)
|
|
|
(15,134
|
)
|
|
|
(788.2
|
)
|
|
|
(8,142
|
)
|
|
|
(192.6
|
)
|
Income tax expenses
|
|
|
81
|
|
|
|
4.2
|
|
|
|
292
|
|
|
|
15.2
|
|
|
|
114
|
|
|
|
2.7
|
|
Net loss from continuing operations before share of loss on equity method investments
|
|
|
(17,552
|
)
|
|
|
(916.5
|
)
|
|
|
(15,426
|
)
|
|
|
(803.4
|
)
|
|
|
(8,256
|
)
|
|
|
(195.3
|
)
|
Share of loss on an equity method investment, net of nil income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
(101
|
)
|
|
|
(5.3
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(17,552
|
)
|
|
|
(916.5
|
)
|
|
|
(15,527
|
)
|
|
|
(808.7
|
)
|
|
|
(8,256
|
)
|
|
|
(195.3
|
)
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from the operations of discontinued operations, net of income taxes
|
|
|
36,717
|
|
|
|
1,917.3
|
|
|
|
16,155
|
|
|
|
841.4
|
|
|
|
10,445
|
|
|
|
247.0
|
|
Gain from disposal of discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,190
|
|
|
|
1,021.5
|
|
Income from discontinued operations, net of income taxes
|
|
|
36,717
|
|
|
|
1,917.3
|
|
|
|
16,155
|
|
|
|
841.4
|
|
|
|
53,635
|
|
|
|
1,268.5
|
|
Net income
|
|
|
19,165
|
|
|
|
1,000.8
|
|
|
|
628
|
|
|
|
32.7
|
|
|
|
45,379
|
|
|
|
1,073.2
|
|
Less: Net loss attributable to noncontrolling interest
|
|
|
(1,725
|
)
|
|
|
(90.1
|
)
|
|
|
(900
|
)
|
|
|
(46.9
|
)
|
|
|
(39
|
)
|
|
|
(0.9
|
)
|
Net loss from continuing operations attributable to China Digital TV Holding Co., Ltd.
|
|
|
(15,827
|
)
|
|
|
(826.4
|
)
|
|
|
(14,627
|
)
|
|
|
(761.8
|
)
|
|
|
(7,226
|
)
|
|
|
(170.9
|
)
|
Net income from discontinued operations attributable to China Digital TV Holding Co., Ltd.
|
|
|
36,717
|
|
|
|
1,917.3
|
|
|
|
16,155
|
|
|
|
841.4
|
|
|
|
52,644
|
|
|
|
1,245.0
|
|
Net income attributable to China Digital TV Holding Co., Ltd.
|
|
US$
|
20,890
|
|
|
|
1,090.9
|
%
|
|
US$
|
1,528
|
|
|
|
79.6
|
%
|
|
US$
|
45,418
|
|
|
|
1,074.1
|
%
|
|
(1)
|
Share-based compensation charges incurred during the period related to:
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
|
(In thousands of U.S. dollars, except percentages)
|
|
Cost of revenues
|
|
US$
|
12
|
|
|
|
0.6
|
%
|
|
US$
|
3
|
|
|
|
0.2
|
%
|
|
US$
|
-
|
|
|
|
0.0
|
%
|
Research and development expenses
|
|
|
98
|
|
|
|
5.1
|
|
|
|
49
|
|
|
|
2.6
|
|
|
|
463
|
|
|
|
11.0
|
|
Selling and marketing expenses
|
|
|
130
|
|
|
|
6.8
|
|
|
|
30
|
|
|
|
1.6
|
|
|
|
447
|
|
|
|
10.6
|
|
General and administrative expenses
|
|
US$
|
1,459
|
|
|
|
76.2
|
%
|
|
US$
|
36
|
|
|
|
1.9
|
%
|
|
US$
|
2
|
|
|
|
0.0
|
%
|
Comparison of
Years Ended December 31, 2016 and December 31, 2015
Revenues
. The following
table sets forth revenues by sources and the percentage of our total revenues for the periods indicated:
|
|
For
the years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
of Total
Revenues
|
|
|
Amount
|
|
|
%
of Total
Revenues
|
|
|
|
(In thousands
of U.S. dollars, except percentages)
|
|
Products
|
|
US$
|
248
|
|
|
|
12.9
|
%
|
|
US$
|
618
|
|
|
|
14.6
|
%
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud
platform operations
|
|
|
412
|
|
|
|
21.4
|
|
|
|
2,019
|
|
|
|
47.6
|
|
Head-end
system integration
|
|
|
527
|
|
|
|
27.4
|
|
|
|
708
|
|
|
|
16.7
|
|
Head-end
system development
|
|
|
735
|
|
|
|
38.3
|
|
|
|
895
|
|
|
|
21.1
|
|
Subtotal
|
|
|
1,674
|
|
|
|
87.1
|
|
|
|
3,622
|
|
|
|
85.4
|
|
Total
revenues
|
|
US$
|
1,922
|
|
|
|
100.0
|
%
|
|
US$
|
4,240
|
|
|
|
100.0
|
%
|
Our total revenues increased by 120.6%
from US$1.9 million in 2015 to US$4.2 million in 2016, reflecting an increase in revenues from the cloud platform operations.
Revenues from the sales of our products
increased by 149.2% from US$0.2 million in 2015 to US$0.6 million in 2016, mainly due to an increase in the sales of our newly
developed products.
Revenues from the sales of our services
increased by 116.4% from US$1.7 million in 2015 to US$3.6 million in 2016, primarily due to the increase in revenues from the cloud
platform operations.
Net Revenues
. Our net revenues
increased by 120.2% from US$1.9 million in 2015 to US$4.2 million in 2016.
Cost of Revenues
. The following
table sets forth cost of revenues by sources of revenues by amount and as a percentage of net revenues for the periods indicated:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
|
(In thousands of U.S. dollars, except percentages)
|
|
Products
|
|
US$
|
143
|
|
|
|
7.4
|
%
|
|
US$
|
506
|
|
|
|
12.0
|
%
|
Services
|
|
|
1,237
|
|
|
|
64.4
|
|
|
|
1,011
|
|
|
|
23.9
|
|
Total cost of revenues
|
|
US$
|
1,380
|
|
|
|
71.8
|
%
|
|
US$
|
1,517
|
|
|
|
35.9
|
%
|
Cost of revenues increased by
9.9% to US$1.5 million in 2016 from US$1.4 million in 2015, reflecting an increase in cost of revenues relating to our
products. Cost of revenues relating to our products increased by 253.8% to US$0.5million in 2016 from US$0.1 million in 2015,
mainly due to an increase in cost of revenues from our newly developed products. Cost of revenues relating to our services
decreased by 18.3% to US$ 1.0 million in 2016 from US$1.2 million in 2015, mainly due to a decrease in cost for purchase of
hardware related to cloud platform system integration provided in 2016.
Gross Profit and Gross Margin
.
Gross profit increased by 402.0% from US$0.5 million in 2015 to US$2.7 million in 2016.
Our gross margin increased
from 28.2% in 2015 to 64.1% in 2016, primarily due to an increase in the cloud platform operations, which have a higher margin
than the Company’s other continuing operations, such as system integration and system development.
Operating Expenses
. Our
operating expenses decreased by 24.7% to US$12.1 million in 2016 from US$16.1 million in 2015. This reflected decreases in research
and development expenses, selling and marketing expenses, which was partially offset by an increase in general and administrative
expenses. Operating expenses, as a percentage of net revenues, decreased to 287.2% in 2016 from 840.2% in 2015.
Research and Development Expenses
.
Our research and development expenses decreased by 35.7% to US$5.7 million in 2016 from US$8.8 million in 2015. This was mainly
due to a decrease in personnel-related expenses resulting from lower headcount. Our research and development expenses, as a percentage
of net revenues, decreased to 133.8% in 2016 from 458.2% in 2015.
Selling and Marketing Expenses
.
Our selling and marketing expenses decreased by 33.2% to US$2.7 million in 2016 from US$4.1 million in 2015. This was primarily
due to a decrease in personnel- related expenses resulting from lower headcount, as well as decreased marketing expenses. Our selling
and marketing expenses, as a percentage of net revenues, decreased to 65.0% in 2016 from 214.3% in 2015.
General and Administrative Expenses
.
Our general and administrative expenses increased by 16.1% to US$3.7 million in 2016 from US$3.2 million in 2015, primarily due
to an increase in professional fees.
Loss from Operations
. As
a result of the foregoing, our loss from operations decreased by 39.5% to US$9.4 million in 2016 from US$15.6 million in 2015.
Non-Operating Income (Expenses)
.
We had non-operating income of US$1.3 million in 2016, compared with US$0.5 million in 2015. Our non-operating income in 2016 primarily
consisted of interest income of US$0.1 million, gain from disposal of an equity method investment of US$0.1 million and other income
of US$1.1 million. Our interest income remained relatively stable as compared with 2015. Our other income increased from US$0.4
million in 2015 to US$1.1 million in 2016, primarily due to an increase in government subsidy income.
Income Tax Expenses
. Our
income tax expenses decreased from US$0.3 million in 2015 to US$0.1 million in 2016. The decrease in our income tax expenses was
primarily due to a decrease in withholding income tax for reimbursements to our expenses incurred as a registrant from Deutsche
Bank Trust Company Americas, or DBTCA.
Share of Loss on an Equity Method
Investment, Net of Income Taxes
. Our share of loss on an equity method investment decreased from US$0.1 million in 2015
to nil in 2016. Our share of loss on an equity method investment in 2015 was attributable to the share of loss from our equity
investment in Sinoscreens, which was disposed of in 2016.
Net Loss Attributable to Non-controlling
Interest
. Net loss attributable to non-controlling interest decreased from US$0.9 million in 2015 to US$39.0 thousand in
2016. Net loss attributable to non-controlling interest represents the proportional share of net loss of our consolidated, but
not wholly owned, subsidiaries that are attributable to the other shareholders of such subsidiaries. The change was primarily due
to share of net income of Beijing Super TV, which was profitable and changed from our wholly-owned subsidiary to majority-owned
subsidiary in 2016.
Net Loss from Continuing Operations
Attributable to Holders of Ordinary Shares
. As a result of the foregoing, net loss from continuing operations attributable
to holders of ordinary shares decreased by 50.6% from US$14.6 million in 2015 to US$7.2 million in 2016. Our basic and diluted
loss per ordinary share from continuing operations in 2016 were US$0.12 and US$0.12, respectively.
Comparison of Years Ended December
31, 2015 and December 31, 2014
Revenues
. The following
table sets forth revenues by sources and the percentage of our total revenues for the periods indicated:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of Total
Revenues
|
|
|
Amount
|
|
|
% of Total
Revenues
|
|
|
|
(In thousands of U.S. dollars, except percentages)
|
|
Products
|
|
US$
|
1,571
|
|
|
|
82.0
|
%
|
|
US$
|
248
|
|
|
|
12.9
|
%
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud platform operations
|
|
|
12
|
|
|
|
0.6
|
|
|
|
412
|
|
|
|
21.4
|
|
Head-end system integration
|
|
|
178
|
|
|
|
9.3
|
|
|
|
527
|
|
|
|
27.4
|
|
Head-end system development
|
|
|
154
|
|
|
|
8.1
|
|
|
|
735
|
|
|
|
38.3
|
|
Subtotal
|
|
|
344
|
|
|
|
18.0
|
|
|
|
1,674
|
|
|
|
87.1
|
|
Total revenues
|
|
US$
|
1,915
|
|
|
|
100.0
|
%
|
|
US$
|
1,922
|
|
|
|
100.0
|
%
|
Our total revenues remained relatively
stable for 2015 as compared with 2014.
Revenues from the sales of our products
decreased by 84.2% from US$1.6 million in 2014 to US$0.2 million in 2015, mainly due to a decline in sales of smart television
terminals which enable digital television network operators to provide value-added services to their subscribers.
Revenues from the sales of our services
increased by 386.6% from US$0.3 million in 2014 to US$1.7 million in 2015, primarily due to the increase in revenues from cloud
platform system integration and system development.
Net Revenues
. Our net revenues
remained relatively stable for 2015 as compared with 2014.
Cost of Revenues
. The following
table sets forth cost of revenues by sources of revenues by amount and as a percentage of net revenues for the periods indicated:
|
|
Years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
Amount
|
|
|
% of Net
Revenues
|
|
|
|
(In thousands of U.S. dollars, except percentages)
|
|
Products
|
|
US$
|
2,052
|
|
|
|
107.2
|
%
|
|
US$
|
143
|
|
|
|
7.4
|
%
|
Services
|
|
|
292
|
|
|
|
15.2
|
|
|
|
1,237
|
|
|
|
64.4
|
|
Total cost of revenues
|
|
US$
|
2,344
|
|
|
|
122.4
|
%
|
|
US$
|
1,380
|
|
|
|
71.8
|
%
|
Cost of revenues decreased by 41.1% to
US$1.4 million in 2015 from US$2.3 million in 2014, reflecting a decrease in cost of revenues relating to our products, which was
partially offset by increase in cost of revenues relating to our services. Cost of revenues relating to our products decreased
by 93.0% to US$0.1 million in 2015 from US$2.0 million in 2014, mainly due to a decline in cost of revenues from smart television
terminals, corresponding to decreased revenues. Cost of revenues relating to our services increased by 323.6% to US$1.2 million
in 2015 from US$0.3 million in 2014, mainly due to an increase in cost of revenues from cloud platform system integration and system
development.
Gross Profit and Gross Margin
.
Gross profit was 0.5 million in 2015, compared with a loss of 0.4 million in 2014. Our gross margin was 28.2% in 2015, primarily
due to a decrease in the loss-making sale of products, as well as the increase in revenues from services which have comparatively
high margin.
Operating Expenses
. Our
operating expenses decreased by 6.2% to US$16.1 million in 2015 from US$17.2 million in 2014. This reflected decreases in general
and administrative expenses, which was partially offset by increase in research and development expenses and selling and marketing
expenses. Operating expenses, as a percentage of net revenues, decreased to 840.2% in 2015 from 898.0% in 2014.
Research and Development Expenses
.
Our research and development expenses increased by 21.1% to US$8.8 million in 2015 from US$7.3 million in 2014. This was mainly
due to an increase in personnel-related expenses resulting from higher headcount. Our research and development expenses, as a percentage
of net revenues, increased to 458.2% in 2015 from 379.4% in 2014.
Selling and Marketing Expenses
.
Our selling and marketing expenses increased by 11.3% to US$4.1 million in 2015 from US$3.7 million in 2014. This was primarily
due to increases in personnel-related expenses resulting from higher headcount and in marketing expenses. Our selling and marketing
expenses, as a percentage of net revenues, increased to 214.3% in 2015 from 193.0% in 2014.
General and Administrative Expenses
.
Our general and administrative expenses decreased by 48.4% to US$3.2 million in 2015 from US$6.2 million in 2014, primarily due
to a decrease in professional fees.
Loss from Operations
. As
a result of the foregoing, our loss from operations decreased by 11.5% to US$15.6 million in 2015 from US$17.6 million in 2014.
Non-Operating Income (Expenses)
.
We had non-operating income of US$0.5 million in 2015 compared with US$0.2 million in 2014. Our non-operating income in 2015 primarily
consisted of interest income of US$0.1 million and other income of US$0.4 million. Our interest income decreased by 49.3% from
US$0.2 million in 2014 to US$0.1 million in 2015, primarily due to a decrease in the average interest rate of our bank deposits.
Our other income was US$0.4 million in 2015, compared with other expense of US$0.1 million in 2014, primarily due to an increase
in government subsidy income.
Income Tax Expenses
. Our
income tax expenses increased from US$0.1 million in 2014 to US$0.3 million in 2015. The increase in our income tax expenses was
primarily due to an increase in withholding income tax for reimbursements to our expenses incurred as a registrant from DBTCA.
Share of Loss from an Equity Method
Investment, Net of Income Taxes
. Our share of loss from an equity method investment was US$0.1 million in 2015, compared
to nil in 2014. Our loss from an equity method investment in 2015 was attributable to the share of loss from our equity investment
in Sinoscreens, which was made in August 2015.
Net Loss Attributable to Non-controlling
Interest
. Net loss attributable to non-controlling interest decreased from US$1.7 million in 2014 to US$0.9 million in
2015. Net loss attributable to non-controlling interest represents the proportional share of net loss of our consolidated, but
not wholly owned, subsidiaries that are attributable to the other shareholders of such subsidiaries. The change was primarily due
to a decrease in the loss of our majority-owned subsidiaries, in particular, Joysee and Cyber Cloud.
Net Loss from Continuing Operations
Attributable to Holders of Ordinary Shares
. As a result of the foregoing, net loss from continuing operations attributable
to holders of ordinary shares decreased by 7.6% from US$15.8 million in 2014 to US$14.6 million in 2015. Our basic and diluted
loss per ordinary share from continuing operations in 2015 was US$0.24 and US$0.24, respectively.
B. Liquidity and Capital Resources
Liquidity
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(In thousands of U.S. dollars)
|
|
Cash and cash equivalents, including those recorded
in current assets of Super TV, at the end of the year
|
|
US$
|
62,042
|
|
|
US$
|
70,138
|
|
|
US$
|
117,292
|
|
Net cash provided by operating activities
|
|
|
12,210
|
|
|
|
7,468
|
|
|
|
4,444
|
|
Net cash provided by/(used in) investing activities
|
|
|
284
|
|
|
|
2,108
|
|
|
|
51,326
|
|
Net cash (used in)/provided by financing activities
|
|
|
(26,712
|
)
|
|
|
653
|
|
|
|
(5,489
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
US$
|
(2,825)
|
|
|
US$
|
(2,133)
|
|
|
US$
|
(3,127)
|
|
Operating Activities
. Net
cash provided by operating activities was US$4.4 million in 2016, which was primarily derived from our net income of US$45.4 million,
adjusted to reflect the adding back of US$4.9 million share-based compensation charges, US$1.7 million increase in allowance for
doubtful accounts and US$0.7 million depreciation and amortization. Cash provided by operating activities in 2016 was partially
offset by gain from the Super TV Disposition of US$43.2 million and a decrease in cash from working capital items of US$4.8 million.
Net cash provided by operating activities
was US$7.5 million in 2015, which was primarily derived from our net income of US$0.6 million, adjusted to reflect the adding back
of US$2.8 million increase in allowance for doubtful accounts, US$1.1 million increase in write down for inventory, US$0.6 million
depreciation and amortization, and US$2.4 million increase in cash from working capital items.
Net cash provided by operating activities
was US$12.2 million in 2014, which was primarily derived from our net income of US$19.2 million, adjusted to reflect the adding
back of US$0.8 million increase in allowance for doubtful accounts, US$1.3 million increase in write down for inventory, US$0.9
million depreciation and amortization and US$1.7 million share-based compensation charges. Cash provided by operating activities
in 2014 was partially offset by a decrease in cash from working capital items of US$11.7 million.
Investing Activities
.
Net cash provided by investing activities was US$51.3 million in 2016, primarily consisting of US$54.7 million net proceeds
from the Super TV Disposition, which was partially offset by US$2.3 million cash outflow for an increase in term deposits and
US$0.7 million purchase of property and equipment.
Net cash provided by investing activities
was US$2.1 million in 2015, primarily consisting of US$2.8 million proceeds from disposal of property and equipment, which was
partially offset by US$0.5 million cash outflow for equity method investment and US$ 0.2 million purchase of property and equipment.
Net cash provided by investing activities
was US$0.3 million in 2014, primarily consisting of US$2.2 million cash in acquired entities as a result of our acquisition of
Shibo Movie and Xinsi Yijia in 2014 and US$0.8 million decrease in bank deposits pledged as security for accounts payable to suppliers,
which was partially offset by US$2.8 million purchase of property and equipment.
Financing Activities
. Net
cash used in financing activities was US$5.5 million in 2016, primarily consisting of the US$12.0 million special cash dividend
paid to our shareholders, which was partially offset by capital contribution of US$6.8 million from non-controlling shareholders
in our subsidiaries.
Net cash used in financing activities
was US$0.7 million in 2015, primarily consisting of proceeds from stock option exercise.
Net cash used in financing activities
was US$26.7 million in 2014, primarily consisting of the US$29.7 million special cash dividend paid to our shareholders, which
was partially offset by an advance payment of US$2.3 million received in relation to an investment in Cyber Cloud.
According to the amended
PRC Company
Law
, which took effect on March 1, 2014, and its predecessor law, our subsidiaries and variable interest entities in the PRC
are required to make appropriations to the statutory surplus reserve which are still required to be made at the rate of 10% of
profits after tax as determined under PRC GAAP until the balance of such reserve fund reaches 50% of the entities' registered capital.
Our subsidiaries and our variable interest
entities in the PRC may, upon a resolution passed by their respective shareholders, convert the statutory surplus reserve into
capital. The statutory reserve represents appropriations of retained earnings determined according to PRC law and may not be distributed.
As a result of these laws, US$18.4 million and US$0.1 million of our retained earnings were not available for distribution as of
December 31, 2015 and December 31, 2016, respectively.
As a holding company, our ability to pay
dividends and other cash distributions to our shareholders depends in part upon dividends and other distributions paid to us by
our PRC subsidiaries. As of December 31, 2016, the amount of cash held by our PRC subsidiaries was RMB 599.8 million (or US$86.4
million), and the amount of cash held by entities outside the PRC was US$30.9 million. There is a risk that any existing or future
restrictions under the applicable PRC laws, rules or regulations on currency exchange may limit our ability to utilize the cash
held by entities inside the PRC. See "Item 3. Key Information—D. Risk Factors—Risks Relating to the People's Republic
of China—Restrictions on currency exchange may limit our ability to effectively utilize our revenues as well as the ability
of our PRC subsidiaries to obtain debt or equity financing from financial institutions or investors outside the PRC, including
us" for more information.
Capital Expenditures
In 2014, 2015 and 2016, our capital expenditures
totaled US$2.8 million, US$0.7 million and US$0.7 million, respectively. Our capital expenditures in 2016 were attributable to
the purchase of computers and other electronic equipment.
We believe that our current levels of
cash and cash equivalents, and cash flows from operations in the near future, will be sufficient to meet our anticipated capital
expenditure and other cash needs for at least the next 12 months. However, we may need additional cash resources in the future
if we experience changed business conditions or other developments. We may also need additional cash resources in the future if
we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we ever
determine that our cash requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue debt or equity
securities or obtain a credit facility. Any issuance of equity securities could cause dilution for our shareholders. Any incurrence
of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and finance covenants.
It is possible that, when we need additional cash resources, financing will be available to us only in amounts or on terms that
would not be acceptable to us or financing will not be available at all.
C. Research and Development, Patents
and Licenses, etc.
See "Item 4. Information on the Company—B.
Business Overview—Research and Development" for information relating to our research and development.
See "Item 4. Information on the Company—B.
Business Overview—Intellectual Property" for information relating to our intellectual property.
D. Trend Information
Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2016
to December 31, 2016 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity
or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
E. Off-Balance Sheet Arrangements
We have not entered into any financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as shareholders' equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development
services with us.
F. Tabular Disclosure of Contractual
Obligations
The following table sets forth our contractual
obligations as of December 31, 2016:
|
|
Contractual Obligations
|
|
|
|
Less than 1
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than
5 Years
|
|
|
Total
|
|
|
|
(In thousands of U.S. dollars)
|
|
Operating lease obligations
(1)
|
|
$
|
330
|
|
|
$
|
110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
440
|
|
Purchase obligations
|
|
|
515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
515
|
|
Total
|
|
$
|
845
|
|
|
$
|
110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
955
|
|
(1)
Operating leases generally
relate to the lease of our office premises.
|
Item 6.
|
Directors,
Senior Management and Employees
|
A. Directors and Senior Management
Our board of directors consists of five
directors, including three independent directors. The following table sets forth certain information concerning our directors and
executive officers as of April 21, 2017:
Name
|
|
Age
|
|
Position
|
Jianhua ZHU
|
|
47
|
|
Chief Executive Officer and Director
|
Zengxiang LU
|
|
46
|
|
Chairman
|
Jianyue PAN
|
|
49
|
|
Independent Director
|
Songzuo XIANG
|
|
52
|
|
Independent Director
|
Michael ELYAKIM
|
|
43
|
|
Independent Director
|
Zhenwen LIANG
|
|
43
|
|
Chief Financial Officer
|
Jianhua ZHU
, one of our founders,
resumed his role as chief executive officer in June 2015. He has been a board member since 2004. He was the chairman of our board
of directors from 2004 to December 2006, and from November 2008 to June 2014, and chief executive officer of our company from December
2006 to June 2014. From 2001 until 2004, Mr. Zhu was general manager of N-T Information Engineering. From 1998 until 2001, he was
deputy general manager of N-T Information Engineering. He has also been the supervisor of N-T Information Engineering since 2006.
Mr. Zhu was the executive director of Guangdong R&D prior to April 2010. He worked at the China Technology Import and Export
Corp. from 1994 until 1997. Mr. Zhu holds a bachelor's degree and a master's degree in precision instrumentation from Tsinghua
University.
Zengxiang LU
, one of our founders,
has been a board member since 2004 and chairman of our board of directors since June 2014. He was chairman of our board of directors
and our chief strategy officer from December 2006 until November 2008 and chief executive officer from 2004 until December 2006.
Dr. Lu was the president of Guangdong R&D prior to April 2010 and was also a director from 2005 until 2007. Dr. Lu worked on
the development of CA systems at Tsinghua Tongfang from 1999 to August 2001. He was deputy general manager of N-T Information Engineering
from August 2001 until 2004, and has served on the board of N-T Information Engineering since 1998. Dr. Lu holds a bachelor's degree
in automation and a doctorate degree in signal processing from Tsinghua University.
Jianyue
PAN
serves as the Founding General Partner of SummitView Capital. Mr. Pan as well is the President of
Tsinghua Entrepreneur & Executive Club (TEEC). Since 1995, Mr. Pan had been in charge of Synopsys China. He witnessed and
supported the development of China integrated circuit industry and the growth of Chinese Semiconductor Companies. During 2008
to 2015, Mr. Pan was the President of Asia-Pacific, Synopsys Inc., leading business as well as operations in the Asia-Pacific
region comprised of several countries and regions including China, Taiwan, Korea, India, Singapore, and Australia. On behalf
of Synopsys and SummitView Capital, Mr. Pan led the investments in Spreadtrum, Maxscend, GigaDevice (603986) Silver Basis (002786),
Quick Soldering (603203), Nanova, State Micro (HK02239) and Tsino Dynatron, among others. In 2015, Mr. Pan led the efforts
to complete the privatization of ISSI, a NASDAQ-listed company. Mr. Pan currently serves as the Co-Chairman of ISSI. Mr.
Pan has a Bachelor's and Master's degree of Engineering from Tsinghua University and an Executive MBA degree from China-Europe
International Business School (CEIBS).
Songzuo XIANG
has been an independent
director of our company since September 2008. Dr. Xiang is the editor-in-chief of the Global Business & Finance magazine, a
Chinese business publication sponsored by the Development Research Center of the State Council. He has also been appointed as the
chief economist of the Agricultural Bank of China Limited since March 2012. Dr. Xiang is currently a director of AirMedia Group
Inc., a company listed on the Nasdaq Global Market. Dr. Xiang was also a director of Hurray! Solutions Ltd. from 2000 to 2009 and
its chief executive officer from March 2009 to October 2009. From 1995 to 1998, Dr. Xiang was deputy director of the Fund Planning
Department at the Shenzhen branch office of the People's Bank of China. Dr. Xiang holds a master's degree in international affairs
from Columbia University, a doctorate degree and a master's degree in economics from Renmin University of China and a bachelor's
degree in mechanical engineering from Huazhong University of Science and Technology.
Michael ELYAKIM
has been an independent
director of our company since January 2014. Mr. Elyakim serves as the managing director for China investments at Aurec Capital
Ltd., an Israel-based investment company, and is leading Aurec Capital's investments and operations in China. He also serves as
a director of Shanghai Lezare International Trading, an organic cosmetic online distribution chain in China, a director of Beauty
Express, a cosmetic retail chain operated in Hong Kong and Macau, and a director of Suzhou Goldrich Organic Agricultural Limited,
a China-based agri-tech company focused on organic hydroponic vegetables. Prior to joining Aurec Capital Ltd., Mr. Elyakim co-founded
and was the managing partner of CIG, an Israel-based initiative to develop healthcare services in China. He also acted as the mergers
and acquisitions officer and director of the financial department for Scorpio BSG Ltd. Mr. Elyakim also held several senior positions
in the investment banking sector in Israel and provided a variety of financial services. He holds a bachelor's degree in law and
a bachelor's degree in economics from Tel-Aviv University and is a licensed Israeli lawyer.
Zhenwen LIANG
resumed
his role as our chief financial officer in May 2016. Mr. Liang served as the chief financial officer of our company from November
2010 to June 2014. Mr. Liang has served as general manager of the Company’s new business unit, responsible for developing
value-added services since 2006. From 2004 to 2006, Mr. Liang was responsible for overseeing our entire financial operations. From
1998 to 2004, Mr. Liang headed the finance team at N-T Information Engineering. Mr. Liang has a bachelor’s degree in accounting
from the Central University of Finance and Economics and a master’s degree in business administration from Renmin University
of China. Mr. Liang is a member of the Chinese Institute of Certified Public Accountants.
At our annual general meeting held on
December 19, 2016, our shareholders approved the re-election of Mr. Jianyue Pan and Mr. Songzuo Xiang as Class III Directors to
serve on the board of directors for a further three-year term.
There is no family relationship among any of our
directors or executive officers. There is no shareholding qualification for directors.
|
B.
|
Compensation of Directors
and Senior Officers
|
Our executive officers receive compensation
in the form of salaries, annual bonuses and share options. Some of our current and former directors have received compensation
in the form of share options. We do not provide any benefits to our non-executive directors upon retirement. In 2016, the aggregate
cash compensation to our directors and executive officers was US$0.9 million.
Share Options
Our Amended and Restated China Digital
TV Holding Co., Ltd. 2005 Stock Incentive Plan, or the 2005 Stock Incentive Plan, China Digital TV Holding Co., Ltd. 2008 Stock
Incentive Plan, or the 2008 Stock Incentive Plan, China Digital TV Holding Co., Ltd. 2010 Stock Incentive Plan, or the 2010 Stock
Incentive Plan, and China Digital TV Holding Co., Ltd. 2012 Stock Incentive Plan, or the 2012 Stock Incentive Plan, are intended
to provide incentives to our directors, officers and employees as well as consultants and advisors of our company and its present
or future parent company or subsidiaries, or related corporations.
The 2005 Stock Incentive Plan
The 2005 Stock Incentive Plan was adopted
by the board of directors of CDTV BVI on February 3, 2005 and the Amended and Restated 2005 Stock Incentive Plan was adopted by
our board of directors and approved by our shareholders on September 13, 2007 to amend and restate the 2005 Stock Incentive Plan.
In 2005, CDTV BVI was the ultimate holding company of our business. As a result of our restructuring in May 2007, CDTV BVI became
our wholly owned subsidiary and the options already granted under the 2005 Stock Incentive Plan were converted to options for the
ordinary shares of our company. Pursuant to the 2005 Stock Incentive Plan, we may issue share options, stock appreciation rights,
share bonuses, restricted shares, performance shares, share units, phantom shares, dividend equivalents or similar rights to purchase
or acquire shares.
We reserved a total of 4,444,440 ordinary
shares for issuance under the 2005 Stock Incentive Plan, subject to any adjustments as contemplated by the plan. We granted share
options to purchase 3,067,498, 47,918, 543,674, 620,212 and 53,280 ordinary shares pursuant to the 2005 Stock Incentive Plan on
February 3, 2005, April 13, 2006, September 22, 2006, December 5, 2006 and October 5, 2008, respectively. On November 19, 2010,
the number of ordinary shares reserved for issuance under the 2005 Stock Incentive Plan was cancelled to the extent the corresponding
options had not been awarded as of that date. There were no share options remaining outstanding as of March 31, 2017 under the
2005 Stock Incentive Plan.
With respect to the share options that
we granted on February 3, 2005, two vesting schedules apply. The first vesting schedule is as follows: 50% vest at the end of the
six-month period after the award date, and the remaining 50% vest in 42 equal monthly installments, beginning from the end of the
six-month period after the award date. The second vesting schedule is as follows: 25% vest on the first anniversary of the award
date and the remaining 75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following
the month in which the first anniversary of the award date occurs. The original exercise price for all share options granted on
this date was US$0.543 per share.
With respect to the share options that
we granted on April 13, 2006, the vesting schedule is as follows: 50% vest at the end of the six-month period after the award date,
and the remaining 50% vest in 42 equal monthly installments, beginning from the end of the six-month period after the award date.
The original exercise price for all share options granted on this date was US$0.543 per share.
With respect to the share options that
we granted on September 22, 2006, the vesting schedule is as follows: 25% vest on the first anniversary of the award date and the
remaining 75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following the month in
which the first anniversary of the award date occurs. The original exercise price was US$1.771 per share.
With respect to the share options that
we granted on December 5, 2006, with the exception of share options that we granted to one of our executive officers, the vesting
schedule is as follows: 25% vest on the first anniversary of the award date, and the remaining 75% vest in 36 substantially equal
monthly installments, beginning on the last day of the month following the month in which the first anniversary of the award date
occurs. The executive officer's share options vest according to the following schedule: 25% of 320,000 options vest upon the closing
of our initial public offering; 75% of 320,000 options vest in 36 substantially equal monthly installments, with the first installment
vesting on the last day of the month following the month in which the executive officer took office; and 32,000 options vest upon
the achievement of certain financial targets. In July 2010, these 32,000 shares were forfeited as the financial targets were not
met. The original exercise price for all share options granted on this date was US$4.172 per share.
With respect to the share options that
we granted on October 5, 2008, the vesting schedule is as follows: 25% vest on the first anniversary of the award date and the
remaining 75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following the month in
which the first anniversary of the award date occurs. The original exercise price was US$0.543 per share.
The 2008 Stock Incentive Plan
The 2008 Stock Incentive Plan was adopted
by our board of directors and approved by our shareholders on September 13, 2007. Pursuant to the 2008 Stock Incentive Plan, we
may issue share options, share appreciation rights, share bonuses, restricted shares and restricted share units, performance shares,
share units, phantom shares, dividend equivalents or similar rights to purchase or acquire shares.
We reserved a total of 1,200,000 ordinary
shares for issuance under the 2008 Stock Incentive Plan, subject to any adjustments as contemplated by the plan. The plan also
provides for an annual increase, beginning in 2009, in the number of ordinary shares that may be delivered pursuant to awards under
the plan, totaling 2% of our issued and outstanding shares as of the first business day of the relevant calendar year. The maximum
number of shares subject to awards that may be granted during any single calendar year is such number as equals 2% of our issued
and outstanding shares as of the first business day of that calendar year. We granted share options to purchase 406,776, 357,548,
42,880 and 50,000 ordinary shares on October 5, 2008, June 2, 2009, February 10, 2010 and November 15, 2010, respectively. On November
19, 2010, the number of ordinary shares that had been reserved for issuance under the 2008 Stock Incentive Plan was cancelled to
the extent the corresponding options had not been awarded as of that date. Options to purchase 490,022 ordinary shares remained
outstanding as of March 31, 2017 under the 2008 Stock Incentive Plan.
With respect to the share options that
we granted on October 5, 2008, the vesting schedule is as follows: 25% vest on the first anniversary of the award date, and the
remaining 75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following the month in
which the first anniversary of the award date occurs. The original exercise price was US$7.89 per share. On February 10, 2010,
we accelerated the vesting schedule of a total of 29,480 share options to purchase 29,480 ordinary shares so that all these share
options were vested on February 20, 2010.
With respect to the share options that
we granted on June 2, 2009, the vesting schedule is as follows: 25% vest on the first anniversary of the award date, and the remaining
75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following the month in which the
first anniversary of the award date occurs. The original exercise price was US$9.09 per share.
With respect to the share options that
we granted on February 10, 2010, all these share options were vested on the grant date. The original exercise price was US$0.543
per share.
With respect to the share options that
we granted on November 15, 2010, the vesting of these options is conditional upon the fulfillment of certain performance targets
by the optionees in the four years following the grant date. The original exercise price was US$6.96 per share.
The 2010 Stock Incentive Plan
The 2010 Stock Incentive Plan was adopted
by our board of directors on November 19, 2010. Pursuant to the 2010 Stock Incentive Plan, we may issue share options, share appreciation
rights, share bonuses, restricted shares, performance shares, share units, phantom shares, dividend equivalents or similar rights
to purchase or acquire shares.
We reserved a total of 3,600,000 ordinary
shares for issuance under the 2010 Stock Incentive Plan, subject to adjustments as contemplated by the plan. We granted share options
to purchase 1,000,000, 1,600,000, 700,000 and 300,000 ordinary shares on November 19, 2010, May 16, 2011, September 30, 2011 and
November 19, 2011, respectively. Options to purchase 2,813,290 ordinary shares remained outstanding as of March 31, 2016 under
the 2010 Stock Incentive Plan.
With respect to the share options that
we granted on November 19, 2010, the vesting schedule is as follows: 25% vest on the first anniversary of the award date, and the
remaining 75% vest in 36 substantially equal monthly installments, beginning on the last day of the month following the month in
which the first anniversary of the award date occurs. The original exercise price was US$6.90 per share.
With respect to the share options that
we granted on May 16, 2011, two vesting schedules apply. The first vesting schedule is as follows: 25% vest on November 19, 2011,
and the remaining 75% vest in 36 substantially equal monthly installments, beginning on December 31, 2011 and then on the last
day of the month following thereafter. The second vesting schedule is as follows: the vesting of the options is conditioned upon
the fulfillment of certain performance targets by the optionees on April 1, 2012. The original exercise price was US$4.90 per share.
With respect to the share options that
we granted on September 30, 2011, the vesting schedule is as follows: 25% vest on November 19, 2011, and the remaining 75% vest
in 36 substantially equal monthly installments, beginning on December 31, 2011 and then on the last day of the month following
thereafter. The original exercise price is US$4.34 per share.
With respect to the share options that
we granted on November 19, 2011, the vesting schedule is as follows: 25% vest on November 19, 2011, and the remaining 75% vest
in 36 substantially equal monthly installments, beginning on December 31, 2011 and then on the last day of the month following
thereafter. The original exercise price is US$4.34 per share.
The 2012 Stock Incentive Plan
The 2012 Stock Incentive Plan was adopted
by our board of directors on May 1, 2012. Pursuant to the 2012 Stock Incentive Plan, we may issue share options, share appreciation
rights, share bonuses, restricted shares, performance shares, share units, phantom shares, dividend equivalents or similar rights
to purchase or acquire shares.
We reserved a total of 1,200,000 ordinary
shares for issuance under the 2012 Stock Incentive Plan, subject to adjustments as contemplated by the plan. We granted share options
to purchase 1,200,000 ordinary shares on January 8, 2013. Options to purchase 615,557 ordinary shares remained outstanding as of
March 31, 2017 under the 2012 Stock Incentive Plan.
With respect to the share options that
we granted on January 8, 2013, the vesting schedule is as follows: 25% vest on January 8, 2013, and the remaining 75% vest in 36
substantially equal monthly installments, beginning on February 28, 2013 and then on the last day of the month following thereafter.
The original exercise price is US$1.18 per share.
The 2005, 2008, 2010 and 2012 Stock
Incentive Plans
Our board of directors administers the
2005 and 2008 Stock Incentive Plans and Jianhua Zhu administers the 2010 and 2012 Stock Incentive Plans. The administrator of each
plan has wide discretion in determining who will receive awards, the type and timing of awards, the vesting schedule and other
terms and conditions of the awards, including the exercise price of share option grants. Generally, if an outstanding share option
grant made under the plans has not vested by the date of termination of the recipient's employment with us, no further installments
of the recipient's grant will become exercisable following the date of termination of employment, and the recipient will have 30
days from such date to exercise any share options that had already vested but not yet been exercised. If any ordinary shares subject
to a restricted share award remain subject to restrictions by the date of termination of employment, no additional ordinary shares
will vest following the date of termination of employment.
The 2005 Stock Incentive Plan terminated
on February 2, 2015. Our board of directors may amend or terminate the 2008, 2010 and 2012 Stock Incentive Plans at any time; provided,
however, that our board of directors must seek the recipients' approval with respect to any amendment or termination that would
adversely affect the rights of such recipients under any award already made. Without further action by our board of directors,
the 2008, 2010 and 2012 Stock Incentive Plans will terminate on September 12, 2017, November 18, 2020 and April 30, 2022, respectively.
In addition to the options granted pursuant
to the 2005, 2008, 2010 and 2012 Stock Incentive Plans, on May 15, 2007, we granted options to purchase 40,000 ordinary shares
to Louis T. Hsieh, who became an independent director of our company upon the completion of our initial public offering, at an
exercise price of US$4.172 per share. Mr. Hsieh retired from our board of directors in December 2009, following which 33,889 of
his options were exercised with the remainder being forfeited.
On November 19, 2010, our board of directors
approved an adjustment to the exercise price of all options granted prior to, but remained outstanding as of, December 23, 2010
under the 2005 Stock Incentive Plan, the 2008 Stock Incentive Plan and the 2010 Stock Incentive Plan, or the Adjusted Options.
The per share exercise price of all Adjusted Options with a per share exercise price higher than US$2.00 was reduced by US$2.00
on December 23, 2010, and the per share exercise price of all Adjusted Options with a per share exercise price no more than US$2.00
was reduced to US$0.01. Our board of directors also resolved that if any future dividend is declared, the per share exercise price
of all options granted prior to and outstanding as of the date of record of such dividend shall be reduced by an amount equal to
the dividend payable on each ordinary share, provided that the per share exercise price after adjustment shall not be less than
US$0.01. Due to special cash dividends of US$0.56, US$2.30, US$0.50 and US$0.20 per ordinary share declared in May 2011, November
2012, April 2014 and April 2016, respectively, the per share exercise prices of all of the options granted prior to and remaining
outstanding as of June 20, 2011, November 26, 2012, April 14, 2014 and April 29, 2016, each a record date, were reduced by US$0.56,
US$2.30, US$0.50 and US$0.20 pursuant to such resolution of our board of directors referenced above, respectively, provided that
the per share exercise prices after adjustment shall not be less than US$0.01.
The following table sets forth information
on share options that have been granted and were outstanding as of March 31, 2017 pursuant to the 2005, 2008, 2010 and 2012 Stock
Incentive Plans:
|
|
Number of
Ordinary Shares
Underlying
Outstanding
Options
|
|
|
Exercise Price
per Ordinary
Share**
|
|
|
Date of Grant
|
|
|
Date of Expiration
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zengxiang LU
|
|
|
1,150,000
|
|
|
|
US$1.34
|
|
|
|
May 16, 2011
|
|
|
|
May 15, 2021
|
|
|
|
|
|
|
|
|
US$0.48
|
|
|
|
January 8, 2013
|
|
|
|
January 7, 2023
|
|
Jianhua ZHU
|
|
|
1,150,000
|
|
|
|
US$1.34
|
|
|
|
November 19, 2010
|
|
|
|
November 18, 2020
|
|
|
|
|
|
|
|
|
US$0.48
|
|
|
|
January 8, 2013
|
|
|
|
January 7, 2023
|
|
Zhenwen LIANG
|
|
|
*
|
|
|
|
US$0.48
|
|
|
|
January 8, 2013
|
|
|
|
January 7, 2023
|
|
Other grantees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other grantees as a group (comprising 74 individuals)
|
|
|
1,580,869
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
*
|
The number of ordinary shares underlying the outstanding options held by each of the officers represents less than 1% of our
ordinary shares.
|
|
**
|
The exercise price per Ordinary Share has reflected the impact of the exercise price modifications in December 2010, June 2011,
November 2012, April 2014 and April 2016, respectively.
|
Employees will need to comply
with our plan and policies. Section 6.3 of the Stock Incentive Plans provides that "if an entity ceases to be a
Subsidiary of the Corporation, a termination of employment or service shall be deemed to have occurred with respect to each
Eligible Person in respect of such Subsidiary who does not continue as an Eligible Person in respect of another member of us
after giving effect to the Subsidiary’s change in status." In January 2017, we extended the period for the
exercise of vested options held by employees of Beijing Super TV and N-S Digital TV from 30 days after Beijing Super TV and
N-S Digital TV ceased to be subsidiaries of the Company to the end of the contractual life of each stock option agreement
under the Stock Incentive Plans.
C. Board Practices
General
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;
|
|
·
|
implementing shareholders' resolutions;
|
|
·
|
determining our business plans and investment proposals;
|
|
·
|
declaring dividends and distributions;
|
|
·
|
exercising the borrowing powers of our company and mortgaging the property of our company;
|
|
·
|
approving the transfer of shares of our company, including the registering of such shares in our share register; and
|
|
·
|
exercising any other powers conferred by the shareholders' meetings or under our Second Amended and Restated Memorandum and
Articles of Association.
|
Terms of Directors
Our Second Amended and Restated Memorandum
and Articles of Association provide for three classes of directors, each with three-year terms. The term of the Class I directors,
who are Dr. Zengxiang Lu and Jianhua Zhu, will expire upon the annual general meeting of shareholders to be held in 2017; the term
of the Class II director, who is Michael Elyakim, will expire upon the annual general meeting of shareholders to be held in 2018;
and the term of the Class III directors, who are Jianyue Pan, and Songzuo Xiang, will expire upon the annual general meeting of
shareholders to be held in 2019.
Employment Agreements
We have entered into service contracts
with our directors. The service contracts do not provide any benefits to our directors upon termination of service.
We have entered into an employment agreement
with each of our executive officers. Under these agreements, we may terminate an executive officer's employment for cause at any
time, without notice or remuneration, for certain acts of the executive officer, including but not limited to material acts of
fraud, material violations of our terms of employment, material dereliction of duty or engaging in graft to the material harm of
the company. An executive officer may terminate employment if a government regulatory agency determines that working conditions
are extremely deficient and injurious to health, if the executive has been subject to violence, threats or illegal constraints
upon his liberty, or if we have failed to pay compensation on time. We and each executive officer may also decide to terminate
such executive officer's employment for other reasons or no reason after providing written notice at least 30 days in advance and
after we have made arrangements for a successor. Our employment agreements do not provide any benefits to any of our executive
officers upon termination.
Each executive officer who has executed
an employment agreement with us has agreed to hold in confidence and not to use, both during and after such executive officer's
term of employment, any of our confidential information, including but not limited to information relating to important company
policies, technological secrets, commercial secrets, company processes and any intellectual property discovered, invented or created
by such executive officer during his or her term of employment. In addition, each of our executive officers has agreed to give
us full rights to any work-related patents, inventions or achievements.
Each executive officer has also agreed
that for one year after terminating employment with us, such executive officer will not, without our consent, accept employment
by any of our competitors or engage in any activities that, directly or indirectly, compete with us. In addition, each executive
officer has agreed that he or she will not, without our consent, induce any of our employees to terminate employment with us.
Board Committees
To enhance our corporate governance, our
board of directors has established two board committees: an audit committee and a corporate governance and nominations committee.
The charters of each of our audit committee and corporate governance and nominations committee are publicly available on our website
at http://ir.chinadtv.cn. In addition, Songzuo Xiang, one of our independent directors, assists the board in reviewing and approving
our compensation structure, including all forms of compensation relating to our directors and executive officers, and administering
our stock incentive plans.
Audit Committee
Our audit committee is responsible for,
among other things:
|
·
|
recommending to our shareholders, if appropriate, the annual reappointment of our independent auditors and pre-approving all
audit and non-audit services permitted to be performed by our independent auditors;
|
|
·
|
annually reviewing with our independent auditors any audit problems or difficulties and management's response;
|
|
·
|
reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K promulgated by the
SEC;
|
|
·
|
discussing the annual audited financial statements with management and our independent auditors;
|
|
·
|
discussing with management and the independent auditors major issues regarding accounting principles and financial statement
presentations;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material
control deficiencies;
|
|
·
|
discussing policies with respect to risk assessment and risk management;
|
|
·
|
timely reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used
by our company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management and
all other material written communications between the independent auditors and management;
|
|
·
|
establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal
accounting controls or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
meeting separately and periodically with management and our internal and independent auditors; and
|
|
·
|
reporting regularly to our board of directors.
|
Our audit committee currently consists
of Songzuo Xiang and Jianyue Pan, and has a formal written charter that sets forth its duties and powers. Our board has determined
that each of Songzuo Xiang and Jianyue Pan qualifies as an "independent" director under the rules of the SEC and the
NYSE. Our board also has determined that Songzuo Xiang qualifies as an audit committee financial expert within the meaning of the
rules of the SEC. Our audit committee meets at least once each quarter.
We currently only have two members on
our audit committee and we no longer comply with Section 303A.07 of the NYSE-listed Company Manual, which, among other things,
requires a listed company to have an audit committee that has a minimum of three members. As a foreign private issuer, we are permitted
to follow home country practice in lieu of such requirements pursuant to Section 303A.00 of the NYSE-listed Company Manual. The
corporate governance practice in our home country, the Cayman Islands, does not require companies to have a minimum number of members
on the audit committee.
Corporate Governance and Nominations
Committee
Our corporate governance and nominations
committee consists of Songzuo Xiang and Jianyue Pan, and has a formal written charter that sets forth its duties and powers. Our
corporate governance and nominations committee is responsible for identifying individuals qualified to become members of our board
of directors and recommending them to our board of directors for nomination. Our corporate governance and nominations committee
is also responsible for implementing our Code of Business Conduct and Ethics.
We currently do not have a compensation
committee and we no longer comply with Section 303A.05 of the NYSE-listed Company Manual, which, among other things, requires a
listed company to have a compensation committee composed entirely of independent directors. However, Songzuo Xiang, one of our
independent directors, currently assists the board in reviewing and approving our compensation structure, including all forms of
compensation relating to our directors and executive officers, and administering our stock incentive plans.
As a
foreign private issuer, we are permitted to follow home country practice in lieu of such requirements pursuant to Section 303A.00
of the NYSE-listed Company Manual. The corporate governance practice in our home country, the Cayman Islands, does not require
companies to have a compensation committee.
Corporate Governance
Guidelines
Our board of directors has adopted a set
of corporate governance guidelines. These guidelines reflect certain guiding principles with respect to the composition, selection
and performance evaluation of our board of directors, the board committees, management succession and executive compensation. They
are publicly available on our website at
http://ir.chinadtv.cn
.
See "Item 4. Information on the Company—B.
Business Overview—Employees."
Under the Exchange Act Rule 13d-3, a person
is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes
the power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose
of or to direct the disposition of such security. A person is also deemed to be the beneficial owner of any securities of which
that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of securities as to which such person has no economic interest.
The following table sets forth certain
information with respect to the directors, officers and each of the persons known to us who own beneficially 5% or more of our
ordinary shares as of March 31, 2017 unless otherwise indicated. The number of ordinary shares outstanding in calculating the percentages
for each listed person includes the ordinary shares underlying share options held by such person. The percentage of beneficial
ownership of each listed person is based on 60,297,192 ordinary shares outstanding (excluding the 3,825,900 ordinary shares that
were issued and held for the Company's account in preparation for exercise of share options by option holders under our employee
stock incentive plans), as well as the ordinary shares underlying share options exercisable by such person within 60 days of March
31, 2017.
|
|
Shares beneficially
owned
|
|
|
|
Number
|
|
|
Percent
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
Zengxiang LU
(1)
|
|
|
10,753,702
|
|
|
|
17.50
|
%
|
Jianhua ZHU
(2)
|
|
|
10,501,102
|
|
|
|
17.09
|
%
|
Jianyue PAN
|
|
|
*
|
|
|
|
*
|
|
Michael ELYAKIM
|
|
|
*
|
|
|
|
*
|
|
Songzuo XIANG
|
|
|
—
|
|
|
|
—
|
|
Zhenwen LIANG
(3)
|
|
|
764,811
|
|
|
|
1.27
|
%
|
Directors and executive officers as a group
(4)
|
|
|
22,548,319
|
|
|
|
36.73
|
%
|
Principal Shareholder
|
|
|
|
|
|
|
|
|
Aurec Capital
(5)
|
|
|
3,419,551
|
|
|
|
5.67
|
%
|
|
*
|
Beneficially owns less than 1% of our ordinary shares.
|
|
(1)
|
Represents: (i) the 9,273,393 ordinary shares and 252,600 ADSs held by Polar Light Group Limited, which is wholly owned by
Dr. Zengxiang Lu; (ii) the 155,418 ordinary shares held by China Cast Investment Holdings Limited, or China Cast; and (iii) the
1,150,000 ordinary shares issuable upon exercise of options held by Dr. Lu that are exercisable within 60 days of March 31, 2017.
Dr. Lu, together with Jianhua Zhu, exercises investment and voting powers over the shares held by China Cast. Dr. Lu owns 50% of
the equity interest of China Cast and disclaims beneficial ownership of those shares held by China Cast except to the extent of
his pecuniary interest therein.
|
|
(2)
|
Represents: (i) the 9,273,393 ordinary shares held by Smart Live Group Limited, which is wholly owned by Jianhua Zhu; (ii)
the 155,418 ordinary shares held by China Cast; and (iii) the 1,150,000 ordinary shares issuable upon exercise of options held
by Mr. Zhu that are exercisable within 60 days of March 31, 2017. Mr. Zhu, together with Dr. Zengxiang Lu, exercises investment
and voting powers over the shares held by China Cast. Mr. Zhu owns 50% of the equity interest of China Cast and disclaims beneficial
ownership of those shares held by China Cast except to the extent of his pecuniary interest therein.
|
|
(3)
|
Represents the sum of ordinary shares and ADSs owned by
Mr. Liang and ordinary shares issuable upon exercise of options held by Mr. Liang.
|
|
(4)
|
Represents 100% of the 155,418 ordinary shares held by
China Cast (Dr. Zengxiang Lu and Jianhua Zhu jointly exercise investment and voting powers over the shares held by China Cast),
ordinary shares and ADSs held by Dr. Lu (other than those ordinary shares held through China Cast), Mr. Zhu (other than those
ordinary shares held through China Cast), Mr. Pan, Mr. Elyakim and Mr. Liang and ordinary shares issuable upon exercise of options
held by Dr. Lu, Mr. Zhu and Mr. Liang.
|
|
(5)
|
Represents the sum of ADSs owned by Aurec Capital Limited,
which is owned by Shmuel Meitar.
|
Item 7. Major
Shareholders and Related Party Transactions
Please refer to "Item 6. Directors,
Senior Management and Employees—E. Share Ownership" in this annual report.
None of our major shareholders has voting
rights different from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled
by another corporation, by any foreign government or by any other natural or legal person severally or jointly.
We are not aware of any arrangement that
may, at a subsequent date, result in a change of control of our company.
For information regarding our shares held
or beneficially owned by persons in the United States, see "Item 9. The Offer and Listing—A. Offering and Listing Details—Market
and Share Price Information" in this annual report.
|
B.
|
Related Party Transactions
|
Shareholders Agreement
Pursuant to the First Amended and Restated
Shareholders Agreement of China Digital TV Holding Co., Ltd., or the Shareholders Agreement, dated September 13, 2007, among N-T
Information Engineering, N-S Digital TV, CDTV BVI, China Capital, China Cast, SAIF, Capital Funds and certain other shareholders,
as amended by an agreement, dated June 14, 2011, among us, N-S Digital TV, China Cast, SAIF, Capital Funds and certain other shareholders,
at any time beginning six months after the closing of our initial public offering, each of SAIF, Capital Funds and China Capital
may, on three occasions only, require us to effect the registration on a form other than Form F-3 of all or part of the registrable
securities then outstanding. In addition, any holder of registrable securities may require us to effect a registration statement
on Form F-3 (or any successor form or any comparable form for a registration in a jurisdiction other than the United States) for
a public offering of registrable securities so long as we are entitled to use Form F-3 (or a comparable form) for such offering.
Demand for a registration on Form F-3 may be made on unlimited occasions, although we are not obligated to effect more than one
such registration per shareholder in any six-month period.
Registrable securities are ordinary shares
not previously sold to the public and issued or issuable or sold to SAIF, Capital Funds and China Capital, including: (a) ordinary
shares issuable upon conversion or exercise of either (i) any of the Series A preferred shares, or (ii) any options or warrants
to purchase ordinary shares or the Series A preferred shares of our company; (b) ordinary shares held by Capital Funds and China
Capital; (c) ordinary shares issued pursuant to share splits, share dividends, and similar distributions to SAIF, Capital Funds
and China Capital; and (d) any other securities of our company granted with registration rights pursuant to the Shareholders Agreement.
Holders of registrable securities also
have "piggyback" registration rights, which may require us to register all or any part of the registrable securities
then held by such holders when we register any of our ordinary shares.
We are generally required to bear all
of the registration expenses incurred in connection with three demand registrations on a form other than Form F-3 for each of SAIF,
Capital Funds and China Capital, unlimited Form F-3 and piggyback registrations, except underwriting discounts and selling commissions,
but including reasonable expenses of one counsel for the party exercising the registration right. The registration right under
the Shareholders Agreement has been terminated on June 14, 2015.
Share Transfer Agreements (Xinsi Yijia
and Cyber Cloud)
Pursuant to a series of share transfer
agreements, dated April 30, 2014, among Beijing Super TV, CSM Holdings, Yuewu Yuntian, Holch Capital, Cyber Cloud and Xinsi Yijia,
Cyber Cloud acquired the equity interest in Xinsi Yijia held by Yuewu Yuntian, and in exchange, Yuewu Yuntian obtained certain
equity interests in Cyber Cloud.
Share Transfer Agreement (Shibo Movie)
Pursuant to a share transfer agreement,
dated June 18, 2014, between N-S Digital TV and N-S Information Technology, N-S Digital TV transferred its 100% equity interest
in Shibo Movie to N-S Information Technology, for a consideration of RMB5.2 million (US$0.8 million).
Share Transfer Agreement (N-S Media
Investment)
Pursuant to a share transfer agreement,
dated June 18, 2014, between N-S Digital TV and N-S Information Technology, N-S Digital TV transferred its 100% equity interest
in N-S Media Investment to N-S Information Technology, for a consideration of RMB17.2 million (US$2.8 million).
Equity Transfer Agreement (Super TV)
Pursuant to a definitive equity transfer agreement,
dated November 7, 2016, and a supplemental agreement thereto, dated December 26, 2016, between Golden Benefit, our wholly-owned
subsidiary, and Bao Li, a newly established limited liability company collectively owned by several buyer parties, including Jianhua
Zhu, our Chief Executive Officer and director, Golden Benefit transferred all the equity interest then held by it in Beijing Super
TV to Bao Li for a consideration of RMB610 million.
|
C.
|
Interests of Experts and
Counsel
|
Not Applicable.
Item 8. Financial
Information
|
A.
|
Consolidated Statements
and Other Financial Information
|
Consolidated Statements
See "Item 18. Financial Statements."
Legal Proceedings
We are not currently a party to any material
legal proceeding and, to our knowledge, there are no material legal proceedings threatened against us. From time to time, we may
be subject to various claims and legal actions arising in the ordinary course of business.
Dividend Policy
In December 2008, in the belief that a
special dividend is an efficient use of our cash to maximize shareholder value, our board of directors determined to declare and
pay a special cash dividend of US$1.00 per ordinary share of the company. This special dividend in the amount of US$57.3 million
was fully paid by the end of February 2009.
In November 2010, our board of directors
declared a special cash dividend of US$2.00 per ordinary share to be paid in two installments of US$1.00 each. The special cash
dividend was fully paid on May 31, 2011.
In May 2011, our board of directors declared
a special cash dividend of US$0.56 per ordinary share. US$32,937,000 was paid in 2012 and the remaining US$79,000 was paid in 2013.
In November 2012, our board of directors
declared a special cash dividend of US$2.30 per ordinary share to be paid in two installments of US$1.00 and US$1.30, respectively.
Cash dividend totaling US$59,013,000 was paid in 2012, US$76,863,000 was paid in 2013, and the remaining US$57,000 was paid in
2014.
In April 2014, our board of directors
declared a special cash dividend of US$0.50 per ordinary share. The dividend was paid in May 2014.
In April 2016, our board of directors
declared a special cash dividend of US$0.20 per ordinary share. US$12,034,386 was paid in August 2016 with
US$3,600
remaining payable as of December 31, 2016.
On
April 19, 2017, our board of directors declared a special cash dividend of US$1.50 per ordinary share, which will be paid to all
shareholders of record as of the close of business on May 31, 2017. The aggregate amount of cash dividends to be paid is approximately
US$90.4 million based on the number of outstanding ordinary shares as of December 31, 2016. As the fund for the dividend will
come from the sale proceeds of our interests in Beijing Super TV, therefore, the dividend can only be paid after the completion
of all necessary administrative procedures for foreign currency exchange from Renminbi to US dollars.
Our board of directors has the discretion
to determine the payment of any dividends. As a matter of company policy, our board of directors will consider declaring and paying
dividends for a given period, subject to the board of directors' determination that (i) we have sufficient profit attributable
to shareholders for such period and (ii) our funding requirements can be fully satisfied if a proposed dividend is declared and
paid. Our board of directors will review and decide whether to revise our dividend policy, from time to time, in light of our future
operations and earnings, capital requirements and surplus, financial condition, contractual restrictions, general business conditions
and other factors as the board of directors may deem relevant.
Holders of ADSs will be entitled to receive
dividends, subject to the terms of the deposit agreement, less the fees and expenses payable under the deposit agreement. Cash
dividends will be paid by the depositary to holders of ADSs in U.S. dollars. Other distributions, if any, will be paid by the depositary
to holders of our ADSs by any means it deems legal, fair and practical.
See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”
Item 9. The
Offer and Listing
|
A.
|
Offering and Listing Details
|
Market and Share
Price Information
Our ADSs, each representing one ordinary
share, have been listed on the NYSE since October 5, 2007. Our ADSs trade under the symbol "STV." The NYSE is the principal
trading market for our ADSs, which are not listed on any other exchanges in or outside of the United States.
The high and low closing prices of our
ADSs on the NYSE since listing are as follows:
|
|
Price per ADS (US$)
|
|
|
|
High
|
|
|
Low
|
|
Yearly:
|
|
|
|
|
|
|
|
|
2012
|
|
|
4.35
|
|
|
|
1.68
|
|
2013
|
|
|
2.27
|
|
|
|
1.36
|
|
2014
|
|
|
4.94
|
|
|
|
1.81
|
|
2015
|
|
|
5.08
|
|
|
|
1.50
|
|
2016
|
|
|
1.73
|
|
|
|
1.12
|
|
Quarterly:
|
|
|
|
|
|
|
|
|
First Quarter, 2015
|
|
|
3.87
|
|
|
|
2.90
|
|
Second Quarter, 2015
|
|
|
5.08
|
|
|
|
3.74
|
|
Third Quarter, 2015
|
|
|
4.12
|
|
|
|
1.95
|
|
Fourth Quarter, 2015
|
|
|
2.34
|
|
|
|
1.50
|
|
First Quarter, 2016
|
|
|
1.72
|
|
|
|
1.40
|
|
Second Quarter, 2016
|
|
|
1.73
|
|
|
|
1.13
|
|
Third Quarter, 2016
|
|
|
1.39
|
|
|
|
1.12
|
|
Fourth Quarter, 2016
|
|
|
1.61
|
|
|
|
1.15
|
|
First Quarter, 2017
|
|
|
1.48
|
|
|
|
1.25
|
|
Monthly:
|
|
|
|
|
|
|
|
|
October 2016
|
|
|
1.21
|
|
|
|
1.16
|
|
November 2016
|
|
|
1.61
|
|
|
|
1.15
|
|
December 2016
|
|
|
1.60
|
|
|
|
1.46
|
|
January 2017
|
|
|
1.48
|
|
|
|
1.25
|
|
February 2017
|
|
|
1.36
|
|
|
|
1.29
|
|
March 2017
|
|
|
1.46
|
|
|
|
1.27
|
|
April 2017 (through April 19)
|
|
|
1.29
|
|
|
|
1.27
|
|
As
of March 31, 2017, a total of 39,933,095 ADSs were outstanding, excluding the 3,825,900 ADSs that were held for our account in
preparation for exercise of share options by option holders under our employee stock incentive plans. As of March 31, 2017, 39,933,095
ordinary shares were registered in the name of Deutsche Bank Trust Company Americas, the depositary under the deposit agreement,
excluding 3,825,900 ordinary shares that were issued and held for our account in preparation for exercise of share options by option
holders under our employee stock incentive plans.
Not Applicable.
Our ADSs, each representing one ordinary
share, have been listed on the NYSE since October 5, 2007 under the symbol "STV."
Not Applicable.
Not Applicable.
Not Applicable.
|
Item 10.
|
Additional Information
|
Not Applicable.
|
B.
|
Memorandum and Articles
of Association
|
We incorporate by reference into this
annual report the description of our Second Amended and Restated Memorandum and Articles of Association contained in our registration
statement on Form F-1 (File No. 333-146072) filed with the SEC on September 14, 2007. Our shareholders adopted our Second Amended
and Restated Memorandum and Articles of Association on September 13, 2007.
Other than the contracts described elsewhere
in this annual report, we and our operating companies have not entered into any material contracts that are not in the ordinary
course of business within the two years preceding the date of this annual report.
The Cayman Islands currently have no exchange
control restrictions. See also "Item 4. Information on the Company—B. Business Overview—Regulation—Foreign
Currency Exchange" and "Item 4. Information on the Company—B. Business Overview—Regulations—Regulations
of Foreign Exchange in Certain Onshore and Offshore Transactions" for information on foreign currency exchange in the PRC.
The following discussion of the material
Cayman Islands and United States federal income tax consequences of an investment in the ADSs is based upon laws and relevant interpretations
thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all
possible tax consequences relating to an investment in the ADSs, such as the tax consequences under state, local and other tax
laws.
Cayman Islands Taxation
To the extent the following discussion
relates to Cayman Islands law with respect to the income tax consequence of an investment in our ADSs, it represents the opinion
of Conyers Dill & Pearman.
The Cayman Islands currently levies no
taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature
of inheritance tax or estate duty or withholding tax applicable to us or to any holder of ADSs or ordinary shares. There are no
other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable
on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. No stamp duty is payable
in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman
Islands. The Cayman Islands is a party to a double tax treaty entered into with the United Kingdom in 2010 but is otherwise not
party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Pursuant to Section 6 of the Tax Concessions
Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet:
|
·
|
that no law which is enacted in the Cayman Islands imposing
any tax to be levied on profits or income or gains or appreciations shall apply to the Company or its operations; and
|
|
·
|
that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures
or other obligations of the Company.
|
The undertaking for us is for a period
of 20 years from May 1, 2007.
United States Federal
Income Taxation
This section describes the material United
States federal income tax consequences of owning ADSs. It applies to you only if you are a U.S. holder, as defined below, and you
hold your ADSs as capital assets for United States federal income tax purposes. This section does not apply to you if you are a
member of a special class of holders subject to special rules, including:
|
·
|
a dealer in securities;
|
|
·
|
a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
|
|
·
|
a tax-exempt organization;
|
|
·
|
a life insurance company;
|
|
·
|
a person liable for alternative minimum tax;
|
|
·
|
a person that actually or constructively owns 10% or more of our voting stock;
|
|
·
|
a person that holds ADSs as part of a straddle or a hedging or conversion transaction;
|
|
·
|
a person that purchases or sells ADSs as part of a wash sale for tax purposes; or
|
|
·
|
a person whose functional currency is not the U.S. dollar.
|
U.S. holders are urged to consult their
tax advisors about the application of the United States federal tax rules to their particular circumstances as well as the state,
local and non-United States tax consequences to them of the purchase, ownership and disposition of our ADSs or ordinary shares.
This section is based on the Internal
Revenue Code of 1986, as amended, its legislative history, existing and proposed Treasury regulations, published rulings and court
decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section
is based in part upon the representations of the depositary and the assumption that each obligation in the Deposit Agreement and
any related agreement will be performed in accordance with its terms.
If a partnership holds the ADSs, the United
States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the
partnership. A partner in a partnership holding the ADSs should consult its tax advisor with respect to the United States federal
income tax treatment of an investment in the ADSs.
You are a U.S. holder if you are a beneficial
owner of ADSs for United States federal income tax purposes and you are:
|
·
|
an individual that is a citizen or resident of the United States;
|
|
·
|
a corporation (or other entity taxable as a corporation for United States federal income tax purposes) organized under the
laws of the United States, any State or the District of Columbia;
|
|
·
|
an estate whose income is subject to United States federal income tax regardless of its source; or
|
|
·
|
a trust if a United States court can exercise primary supervision over the trust's administration and one or more United States
persons are authorized to control all substantial decisions of the trust.
|
In general, and taking into account the
earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the
owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject
to United States federal income tax. Unless noted otherwise, the United States federal income tax treatment of holding shares is
generally the same as that of holding ADSs that represent such shares.
Taxation of Dividends
Under the United States federal income
tax laws, and subject to the PFIC rules discussed below, the gross amount of any dividend we pay out of our current or accumulated
earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation.
Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any
distribution paid by us with respect to our ADSs is generally expected to be reported as a "dividend" for United States
federal income tax purposes. If you are a non-corporate U.S. holder, including an individual, dividends that constitute qualified
dividend income will be taxable to you at the preferential rates applicable to long-term capital gains provided that you hold the
ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period
requirements and certain other requirements are met. Dividends we pay with respect to the ADSs generally will be qualified dividend
income provided that, in the year that you receive the dividend, the ADSs are readily tradable on an established securities market
in the United States and we are not treated as a PFIC in the year the dividend is paid or the prior taxable year with respect to
you. The NYSE, where our ADSs, but not our ordinary shares, trade should qualify as an established securities market in the United
States for this purpose. As discussed below, we believe that we were treated as a PFIC for the taxable year ended December 31,
2016.
You must include any foreign tax withheld
from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when the
depositary receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction
generally allowed to U.S. holders that are United States corporations in respect of dividends received from other United States
corporations.
Subject to certain limitations, in the
event that PRC tax is withheld and paid over to the PRC with regard to the dividend payments, the PRC tax may in certain circumstances
be creditable or deductible against your United States federal income tax liability. See "Item 3. Key Information—D.
Risk Factors—Risks Relating to the People's Republic of China—Dividends payable by us to our non-PRC shareholders and
ADS holders, and gains on the sales of our ordinary shares or ADSs, may be subject to withholding taxes under PRC tax laws, which
may materially reduce the value of your investment." Special rules apply in determining the foreign tax credit limitation
with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available
under PRC law, the amount of tax withheld that is refundable will not be creditable against your United States federal income tax
liability. The rules governing foreign tax credits are complex and, therefore, U.S. holders should consult their tax advisors regarding
the availability of a foreign tax credit or deduction in respect thereof in such U.S. holders' particular circumstances.
Dividends will generally be treated as
income from sources outside the United States, and, depending on your circumstances, will be either "passive" or "general"
category income for purposes of computing the foreign tax credit allowable to you.
You should consult your own tax advisor
regarding how to account for dividends paid in a currency other than the U.S. dollar.
Taxation of Capital Gains
Subject to the PFIC rules discussed below,
a U.S. holder will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS equal to the difference
between the U.S. dollar value of the amount realized for the ADS and the U.S. holder's U.S. dollar tax basis in the ADS. The gain
or loss will be capital gain or loss. A non-corporate U.S. holder, including an individual U.S. holder, who has held the ADSs for
more than one year will be eligible for reduced capital gains tax rates. The deductibility of capital losses is subject to limitations.
Any such gain or loss that a U.S. holder recognizes will generally be treated as United States source income (or loss, in the case
of losses, subject to certain limitations).
Any gain or loss that you recognize on
a disposition of our ADSs generally will be treated as United States source income or loss for foreign tax credit limitation purposes.
In the event that any gain from the disposition of our ADSs is subject to PRC withholding tax, a U.S. holder that is eligible for
the benefits of the income tax treaty between the United States and the PRC may be able to elect to treat the gain as PRC source
income for foreign tax credit purposes. U.S. holders should consult their tax advisors regarding their eligibility for benefits
under the income tax treaty between the United States and the PRC and their ability to credit any PRC tax withheld in respect of
a sale of our ADSs or Class A ordinary shares against their United States federal income tax liability.
U.S. holders should consult their tax
advisors regarding how to account for amounts received in a currency other than the U.S. dollar.
PFIC Rules
Based on analyses of our income and the
value of our assets, we believe we were a PFIC for the taxable year ended December 31, 2016. In addition, although we believe we
were not treated as a PFIC for our taxable years ended December 31, 2015 and December 31, 2014, we believe that we have been treated
as a PFIC in prior taxable years before the taxable year ended December 31, 2014. The conclusion as to our PFIC status is a factual
determination that is made annually and thus we may or may not be a PFIC for the taxable year ending December 31, 2017 or subsequent
taxable years. In addition, because PFIC status is determined based on complex rules that may not be entirely clear, and based
on the value of assets that cannot in certain circumstances be known for certain, no guarantee regarding our PFIC status can be
made for any particular year. To the extent that we hold a significant amount of cash or other passive assets in the future, as
a general matter, it is more likely that we would be treated as a PFIC in such future taxable years. You will generally be treated
as holding stock of a PFIC in the first taxable year of your holding period in which we became a PFIC and subsequent taxable years
even if we cease to satisfy the tests to be classified as a PFIC in subsequent taxable years, unless you make certain elections.
In general, we will be a PFIC if for any
taxable year in which you held our ADSs:
|
·
|
at least 75% of our gross income for the taxable year is passive income; or
|
|
·
|
at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce
or are held for the production of passive income.
|
Passive income generally includes dividends,
interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities
and gains from assets that produce passive income. In general, if a foreign corporation owns at least 25% by value of the stock
of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of
the assets of the other corporation, and as receiving directly its proportionate share of the other corporation's income.
Because we believe that we likely were
classified as a PFIC for our immediately prior taxable year and before the taxable year ended December 31, 2014, you will generally
be subject to the special PFIC tax rules if you held our ADSs in a taxable year while we were treated as a PFIC with respect to
you. In addition, if you made a mark-to-market election with respect to our ADS, such election will continue to be in effect even
in years in which we are not treated as a PFIC although you may not have mark-to-market gain or loss inclusions in such years,
as described below.
If we are a PFIC with respect to a U.S.
holder for any taxable years during which a U.S. holder holds our ADSs and any of our subsidiaries (including any entities treated
as being owned by us for United States federal income tax purposes) is also a PFIC, such U.S. holder would be treated as owning
a proportionate amount (by value) of the shares of each such subsidiary classified as a PFIC) for purposes of the application of
these rules.
If we are treated as a PFIC, and you are
a U.S. holder that did not make a mark-to-market election, you will be subject to special rules with respect to:
|
·
|
any gain you realize on the sale or other disposition of your ADSs; and
|
|
·
|
any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater
than 125% of the average annual distributions received by you in respect of the ADSs during the three preceding taxable years or,
if shorter, your holding period for the ADSs).
|
Under these rules:
|
·
|
the gain or excess distribution (collectively, an "excess distribution") will be allocated ratably over your holding
period for the ADSs;
|
|
·
|
the amount allocated to the taxable year in which you realized excess distribution will be taxed as ordinary income;
|
|
·
|
the amount allocated to each prior year generally will be taxed at the highest tax rate in effect for that year; and
|
|
·
|
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such year.
|
Moreover, your ADSs will be treated as
stock in a PFIC if we were a PFIC at any time during your holding period in your ADSs, even if we are not currently a PFIC at the
time of a distribution or recognition of gain, unless certain elections are made.
The adverse tax consequences mentioned
above may be mitigated if a U.S. holder is eligible and does elect to annually mark-to-market the ADSs. If a U.S. holder makes
a mark-to-market election, such holder will generally include as ordinary income the excess, if any, of the fair market value of
the ADSs at the end of each taxable year over their adjusted basis, and will be permitted an ordinary loss in respect of the excess,
if any, of the adjusted basis of the 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 in income as a result of the mark-to-market election). Any gain recognized on the
sale or other disposition of the ADSs will be treated as ordinary income. The mark-to-market election is available only for "marketable
stock," which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter
on a qualified exchange or other market, as defined in the applicable Treasury regulations. Our ADSs, but not our ordinary shares,
are listed on the NYSE and therefore our ADSs should qualify as "marketable stock" for this purpose.
A U.S. holder's adjusted tax basis in
the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market
rules. If a U.S. holder makes a mark-to-market election it will be effective for the taxable year for which the election is made
and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the U.S. Internal Revenue
Service, or the IRS consents to the revocation of the election. U.S. holders are urged to consult their tax advisors about the
availability of the mark-to-market election, and whether making the election would be advisable in their particular circumstances.
It should be noted that the stock of any of our subsidiaries that were, or are, PFICs would generally not be eligible for the mark-to-market
election. Because a mark-to-market election cannot be made for any lower-tier PFICs, a U.S. holder will likely continue to be subject
to the PFIC rules with respect to such U.S. holder's indirect interest in any subsidiaries held by us that are treated as an equity
interest in a PFIC for United States federal income tax purposes.
If we are or were a PFIC for any taxable
year during which you hold or held our ADSs, unless you make or have made a timely mark-to-market election (as described above),
we will continue to be treated as a PFIC with respect to you for all subsequent years during which you hold the ADSs, unless we
have ceased to be classified as a PFIC under the tests described above and you make a "deemed sale" election. If you
make a deemed sale election, you will be deemed to have sold your ADSs at their fair market value on the last day of the last taxable
year in which we qualified as a PFIC and any gain from such deemed sale would be subject to the excess distribution rules described
above. After the deemed sale election, so long as we do not become a PFIC in a subsequent taxable year, your ADSs with respect
to which a deemed sale election was made will not be treated as equity interests in a PFIC. However, as discussed above, even if
we cease to be treated as a PFIC, we may be treated as a PFIC in subsequent taxable years, in which case you would be subject to
the excess distribution rules discussed above with respect to such subsequent taxable years, unless a mark-to-market election,
as discussed above, is made.
In certain circumstances, a U.S. holder
of stock in a PFIC may avoid the adverse tax and interest charge regime applicable to excess distributions described above by making
a "qualified electing fund" election. U.S holders of our ADSs are not expected to be able to make this election.
If you own ADSs during any year that we
are a PFIC with respect to you, you generally must file Internal Revenue Service Form 8621 with your U.S. federal income tax return.
You should discuss this filing requirement with your tax advisor.
You should consult your own tax advisor
regarding the application of the PFIC rules to your ownership and disposition of the ADSs or shares, the effect of our not being
treated as a PFIC for the taxable year ended December 31, 2016 and the availability, application and consequences of the elections
discussed above.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs
and proceeds from the sale, exchange or redemption of ADSs may be subject to information reporting to the Internal Revenue Service
and possible United States backup withholding. Backup withholding will not apply, however, to a U.S. holder who furnishes a correct
taxpayer identification number and makes any other required certifications or who is otherwise exempt from backup withholding,
and demonstrates such exemption when requested. U.S. holders can generally avoid being subject to backup withholding by providing
a properly completed Internal Revenue Service form W-9. U.S. holders should consult their tax advisors regarding the application
of the United States information reporting and backup withholding rules. Backup withholding is not an additional tax. Amounts withheld
as backup withholding generally are allowed as a credit against your United States federal income tax liability, and you may be
entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file an appropriate claim
for refund with the IRS and furnish any required information in a timely manner. U.S. holders should consult their tax advisors
regarding the application of the information reporting and backup withholding rules.
Individual U.S. holders, and certain entities,
that own "specified foreign financial assets" with an aggregate value in excess of $50,000 are generally required to
file an information statement along with their tax returns, currently on Internal Revenue Service Form 8938, with respect to such
assets. "Specified foreign financial assets" generally include financial accounts held at non-U.S. financial institutions,
as well as securities issued by a non-U.S. issuer (which would include our ADSs) that are not held in accounts maintained by certain
financial institutions. Higher reporting thresholds apply, including to certain individuals living abroad and to certain married
individuals. Regulations have been issued extending this reporting requirement to certain entities that are treated as formed or
availed of to hold direct or indirect interests in specified foreign financial assets. U.S. holders who fail to report the required
information could be subject to substantial penalties. U.S. holders should consult their own tax advisors concerning the application
of these rules to their investment in our ADSs in their particular circumstances.
U.S. holders of ADSs should consult their
own tax advisors regarding the application of the U.S. federal income tax laws to their particular situations as well as any tax
consequences resulting from purchasing, holding or disposing of our ADSs, including the applicability and effect of the tax laws
of any state, local or non-U.S. jurisdiction.
|
F.
|
Dividends and Paying Agents
|
Not Applicable.
Not Applicable.
You can read and copy documents referred
to in this annual report that have been filed with the SEC at the SEC's public reference room located at 100 F Street, NE, Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR system.
|
I.
|
Subsidiary Information
|
Not Applicable.
|
Item 11.
|
Quantitative and Qualitative
Disclosures About Market Risks
|
Interest Rate Risk
As of December 31, 2016, we had no short-term
or long-term borrowings. Our exposure to market risk for changes in interest rates relates primarily to the interest income generated
by our cash deposits with the banks. We have not used any derivative financial instruments in our investment portfolio. Interest
earning instruments 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. However, our future interest income may fall short of expectations due to changes in interest
rates. In addition, we may borrow loans in the future and changes in interest rates may affect our finance cost.
Foreign Currency
Risk
Although the conversion of the Renminbi
is highly regulated in the PRC, the value of the Renminbi against the value of the U.S. dollar (or any other currency) nonetheless
may fluctuate and be affected by, among other things, changes in the political and economic conditions in the PRC. Under the currency
policy in effect in the PRC today, the Renminbi is permitted to fluctuate in value within a narrow band against a basket of certain
foreign currencies. The PRC is currently under significant international pressures to liberalize this government currency policy,
and if such liberalization were to occur, the value of the Renminbi could appreciate or depreciate against the U.S. dollar.
In 2016, substantially all of our
revenues and cost of revenues of our continuing operations are generated from our PRC subsidiaries and are denominated in
Renminbi. However, fluctuations in exchange rates may affect our revenues, costs, profit margins and net income (loss), when
they are reported in U.S. dollar.
Fluctuations in exchange rates may also
affect our balance sheet. For example, to the extent that we need to convert U.S. dollars received in our initial public offering
into the Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the
Renminbi amount that we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. Considering the amount of our
cash and cash equivalents as of December 31, 2016, a 1.0% appreciation of the Renminbi against the U.S. dollar will result in an
estimated increase of approximately US$0.9 million in our total amount of cash and cash equivalents, and a 1.0% appreciation of
the U.S. dollar against the Renminbi will result in a decrease of approximately US$0.9 million in our total cash and cash equivalents.
See also "Item 3. Key Information—D.
Risk Factors—Risks Relating to the People's Public of China—Fluctuations in exchange rates could result in foreign
currency exchange losses."
In April and May 2011, we entered into
foreign currency forward contracts to facilitate the payment of a special cash dividend declared in November 2010, in an effort
to reduce our exposure to foreign currency exchange risk. These foreign currency forward contracts expired in the second quarter
of 2012.
In accordance
with the Equity Transfer Agreement for the Super TV Disposition and the supplemental agreement thereto, the purchase
consideration of Renminbi 552 million, net of withholding income tax and stamp duties of Renminbi 58 million was paid by Bao
Li to our bank account on December 27, 2016. Once Bao Li completes all necessary administrative procedures for
foreign currency exchange, the purchase consideration will be exchanged into U.S. dollars and remit the payment in U.S.
dollars to Golden Benefit's offshore bank account, unless otherwise instructed by Golden Benefit. The possible future
depreciation in value of the Renminbi against the U.S. dollar may affect the amount of payment we receive in U.S. dollars.
See also "Item 3. Key Information—D. Risk Factors— Risks Relating to Our Business and Industry—If Bao
Li's creditors lay claim on the deposit for the period the purchase consideration is deposited in the co-owned bank account,
we may not be able to receive the payment we are entitled to under the Equity Transfer Agreement in full or at all."
Inflation
In recent years, inflation has not had
a material impact on our results of operations. According to the National Bureau of Statistics of China, the change in the Consumer
Price Index in the PRC was 2.0%, 1.4% and 2.0% in 2014, 2015 and 2016, respectively. Although we have not been materially affected
by inflation since our inception, we cannot assure you that we will not be affected in the future by higher rates of inflation
in the PRC.
|
Item 12.
|
Description of Securities
Other than Equity Securities
|
Not Applicable.
Not Applicable.
Not Applicable.
|
D.
|
American Depositary Shares
|
Fees and Charges
for Holders of American Depositary Receipts
Our American Depositary Receipt, or ADR,
facility is maintained by Deutsche Bank Trust Company Americas, or DBTCA, pursuant to a deposit agreement dated as of October 11,
2007, or the Deposit Agreement, by and among us, DBTCA, and holders and beneficial owners of ADSs evidenced by ADRs issued thereunder.
We use the term "holder" in this discussion to refer to the person in whose name an ADR is registered.
In accordance with the terms of the Deposit
Agreement, DBTCA may charge holders of our ADSs, either directly or indirectly, fees or charges up to the amounts described below.
|
·
|
US$5.00 for each 100 ADSs, or any portion thereof, issued or surrendered, for:
|
|
·
|
each issuance of ADSs, including upon the deposit of shares or to any person to whom an ADS distribution is made pursuant to
share dividends or other free distributions of shares, bonus distributions, share splits or other distributions (except where converted
to cash); and
|
|
·
|
each surrender of ADSs for cancellation and withdrawal of deposited securities, including cash distributions made pursuant
to a cancellation or withdrawal;
|
|
·
|
US$2.00 per 100 ADSs for distribution of cash proceeds pursuant to a cash distribution (so long as the charging of such fee
is not prohibited by any exchange upon which the ADSs are listed), sale of rights and other entitlements, not made pursuant to
a cancellation or withdrawal;
|
|
·
|
US$5.00 per 100 ADSs, or any portion thereof, issued upon the exercise of rights;
|
|
·
|
an annual fee of US$0.02 per ADS for the operation and maintenance costs in administering the facility; and
|
|
·
|
in connection with inspections of the relevant share register maintained by the local registrar, if applicable, undertaken
by DBTCA, its custodian or their respective agents: an annual fee of US$0.01 per ADS (such fee to be assessed against holders of
record as of the date or dates set by DBTCA as it sees fit and collected at the sole discretion of DBTCA by billing such holders
for such fee or by deducting such fee from one or more cash dividends or other cash distributions).
|
In addition, holders or beneficial owners
of our ADSs, persons depositing shares for deposit and persons surrendering ADSs for cancellation and withdrawal of deposited securities
may be required to pay DBTCA the following charges:
|
·
|
taxes, including applicable interest and penalties, and other governmental charges;
|
|
·
|
transfer or registration fees for the registration of transfer of deposited securities on any applicable register in connection
with the deposit or withdrawal of deposited securities, including those of a central depository for securities (where applicable);
|
|
·
|
certain cable, telex, facsimile and electronic transmission and delivery expenses;
|
|
·
|
expenses incurred by DBTCA in connection with the conversion of foreign currency into U.S. dollars;
|
|
·
|
fees and expenses incurred by DBTCA in connection with compliance with exchange control regulations and other regulatory requirements
applicable to the shares, deposited securities and ADSs; and
|
|
·
|
any additional fees, charges, costs or expenses that may be incurred by DBTCA from time to time.
|
The fees charged upon issuance of ADSs
are imposed on the person to whom ADSs are issued, and in the case of withdrawals and cancellations, on the person surrendering
the ADSs. In the case of cash distributions, service fees are generally deducted from the cash being distributed. In the case of
distributions other than cash, such as stock dividends and rights, the depositary charges the applicable ADS record date holder
concurrent with the distribution. Annual fees may be collected from holders of ADSs in a manner determined by DBTCA. In the case
of ADSs registered in the name of the investor (whether certificated or in book-entry form), DBTCA sends invoices to holders of
our ADSs as of the applicable record date. In the case of ADSs being held in brokerage and custodian accounts (via The Depositary
Trust and Clearing Corporation, or DTCC), DBTCA may, if permitted by the settlement systems provided by DTCC, collect the fees
through such settlement systems (whose nominee is the registered holder of the ADSs held in DTCC) from the brokers and custodians
holding the ADSs in their DTCC accounts. The brokers and custodians who hold their clients' ADSs in DTCC accounts in such case
may, in turn, charge their clients' accounts the amount of the service fees paid to DBTCA.
The ADS holders are responsible for any
taxes or other governmental charges payable on their ADSs or on the deposited securities underlying their ADSs. The custodian of
DBTCA may refuse to deposit shares and DBTCA may refuse to issue ADSs, deliver ADRs, register the transfer, split up or combination
of ADRs, or allow the relevant ADS holder to withdraw the deposited securities underlying the ADSs until such taxes or other charges,
including any applicable interest and penalty, are paid. DBTCA may apply payments owed to the relevant ADS holder or sell deposited
securities underlying the ADSs to pay any taxes, including interest and penalty owed, and the relevant ADS holder will remain liable
for any deficiency. If DBTCA sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale
and pay to the relevant ADS holder any proceeds, or send to the relevant ADS holder any property remaining after it has paid the
taxes.
Payment Made by
DBTCA to Our Company
For the year ended December 31, 2016,
DBTCA reimbursed us US$0.3 million
for contributions towards our investor relations
activities and other miscellaneous expenses related to the listing of our ADSs on the NYSE. In addition, DBTCA paid an aggregate
of US$20,089 on our behalf for organizing our annual general shareholders' meeting for the year 2016.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompany notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
China Digital TV Holding Co., Ltd.
(the "Company" or "CDTV Holding") was incorporated in the Cayman Islands in 2007. The Company, through its
subsidiaries and consolidated variable interest entities (“VIEs”) (collectively, the "Group"), is primarily
engaged in providing cable TV value added services which enables cable TV and IPTV network operators to offer diversified TV content
services in the People's Republic of China ("PRC").
Prior to December 2016, the Group
was also engaged in the installation and integration of conditional access systems ("CA Systems"), subscriber management
systems and electronic program guidance systems to cable TV operators and the sale of digital TV intelligent cards ("smart
cards") to these operators. These operations were conducted through the Company’s subsidiary, Beijing Super TV Co.,
Ltd (“Beijing Super TV”) and Beijing Super TV’s wholly owned subsidiary Beijing Novel-Super Digital TV Technology
Co., Ltd. (“N-S Digital TV”). Beijing Super TV and N-S Digital TV’s (collectively “Super TV”) operations
and cash flows were clearly distinguished, operationally and for financial reporting, from the rest of the Group.
On November 7, 2016 and
December 26, 2016, the Group entered into share transfer agreement and supplemental share transfer agreement to dispose
Beijing Super TV, including N-S Digital TV, and the sale closed on December 29, 2016 (see Note 3). The sale
of Super TV represented a strategic shift and had a major effect on the Group’s result of operations. Accordingly,
revenues, costs and expenses related to Super TV have been reclassified in the accompanying consolidated financial statements
as discontinued operations for all the periods presented. Assets and liabilities of Super TV as of December 31, 2015 were
reclassified separately from other assets and liabilities of the Group on the consolidated balance sheet.
VIE contractual
agreements
Since June 2014, N-S Digital TV
was a wholly owned subsidiary of Beijing Super TV. Prior to June 2014, the Company entered into a series of contractual agreements
among Beijing Super TV, N-S Digital TV, and the nominee owners of N-S Digital TV. According to the contractual arrangements, Beijing
Super TV had the power to (1) direct the activities that most significantly affected the economic performance of N-S Digital TV,
and (2) receive the economic benefits of N-S Digital TV. Accordingly, N-S Digital TV’s financial results of operations, and
assets and liabilities were consolidated in the Company’s consolidated financial statements for periods prior to June 2014.
Pursuant to an agreement dated
in June 2014, the contractual agreements among Beijing Super TV, N-S Digital TV and the N-S Digital TV’s nominee owners
were terminated, and concurrently, the 100% legal interest of N-S Digital TV were transferred to Beijing Super TV. As a
result, N-S Digital TV became a wholly owned subsidiary of Beijing Super TV and continued to be consolidated in the
Company’s consolidated financial statements since June 2014, until Super TV was disposed in December 2016.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE contractual agreements
- continued
Beijing Dingyuan Technology Co., Ltd. ("Dingyuan") is a PRC entity held by several nominee shareholders
("Shareholders"), all of which are employees of the Company. Beijing Xinsi Yijia Technology Co., Ltd. ("Xinsi Yijia"),
a majority-owned subsidiary of the Company, has entered into a series of contractual agreements with Dingyuan, and the Shareholders.
As a result of these contractual agreements, since June 2014, when the Company acquired Xinsi Yijia (see Note 5), the Company (1)
had the power to direct the activities that most significantly affected the economic performance of Dingyuan, and (2) received
the economic benefits of Dingyuan. A summary of the contractual agreements entered into among Xinsi Yijia, Dingyuan, and the Shareholders
is as follows:
|
Ÿ
|
Loan Agreements and Supplemental Agreements to Loan Agreements:
Under loan agreements between
Xinsi Yijia and the Shareholders, Xinsi Yijia extended loans to the Shareholders for contributing registered capital to Dingyuan.
The term of each loan is ten years, which is renewable upon the approval of each party. With consent of Xinsi Yijia, the Shareholders
may transfer the equity interests in Dingyuan to any third party, and their obligations under the loan agreements shall be borne
by such transferee.
|
|
Ÿ
|
Equity Pledge Agreements:
Pursuant to the equity pledge agreements, each of the Shareholders
pledged all of their respective equity interests in Dingyuan to Xinsi Yijia to secure the Shareholders' performance of their respective
obligations under the contractual arrangements between the Shareholders and Xinsi Yijia. In addition, each of the Shareholders
agreed not to transfer their equity interests in Dingyuan or create, or allow the creation of, any pledge over their respective
equity interests in Dingyuan that may affect Xinsi Yijia's interests without Xinsi Yijia's consent. Xinsi Yijia is entitled to
receive the dividends on the pledged equity interests during the term of the pledges. The duration of each of the equity pledge
agreements is equivalent to the maximum duration of the contractual arrangements between the Shareholders and Xinsi Yijia. The
agreements may only be terminated: (i) by Xinsi Yijia in writing; or (ii) upon the fulfillment of the Shareholders' respective
obligations under the contractual arrangements between the Shareholders and Xinsi Yijia, which is subject to Xinsi Yijia's written
confirmation.
|
|
Ÿ
|
Powers of Attorney:
Each of the Shareholders has executed an irrevocable power of attorney
appointing Xinsi Yijia, or any person designated by Xinsi Yijia, as the attorney-in-fact to vote on their respective behalves on
all matters of Dingyuan requiring shareholder approval under PRC laws, rules and regulations and the articles of association of
Dingyuan. Each power of attorney has a term of ten years, subject to earlier termination in the event of the termination of the
relevant loan agreement. The powers of attorney will be automatically renewed upon the extension of the term of the relevant loan
agreement.
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
VIE contractual agreements
- continued
|
Ÿ
|
Equity Transfer Option Agreement:
Under this agreement, the Shareholders jointly granted Xinsi
Yijia an exclusive and irrevocable option to purchase all of the equity interests held by them in Dingyuan at any time that Xinsi
Yijia deems fit. Xinsi Yijia may purchase these equity interests itself or designate another party to purchase the equity interests.
|
|
Ÿ
|
Exclusive Technical Support and Related Services Agreement:
Dingyuan irrevocably appoints and
designates Xinsi Yijia as its exclusive service provider to provide services, including but not limit to technical support, technical
training and personnel services to Dingyuan. Service fees are determined based on the content and quality of the services provided
by Xinsi Yijia, which could be up to all of Dingyuan’s pre-tax profit. The term of this agreement was 15 years, which is
renewable upon the approval of each party.
|
In making the conclusion that Xinsi
Yijia was the primary beneficiary of the VIE, the Company believes Xinsi Yijia's rights under the terms of the equity transfer
option agreement had provided it with a substantive kick out right. More specifically, the Company believes the terms of the equity
transfer option agreement were valid, binding and enforceable under PRC laws and regulations currently in effect. The Company
also believes that the minimum amount of consideration permitted by the applicable PRC law to exercise the option did not represent
a financial barrier or disincentive for Xinsi Yijia to exercise its rights under the equity transfer option agreement. In addition,
t
he articles of association of Dingyuan provided that
the Shareholders of Dingyuan had the power to, in a shareholders' meeting: (i) approve the operating strategy and investment plan;
(ii) elect the members of board of directors and approve their compensation; and (iii) review and approve the annual budget and
earnings distribution plan. Consequently, Xinsi Yijia's rights under the powers of attorney have reinforced the Company's abilities
to direct the activities most significantly impacting Dingyuan’s economic performance.
The Company also believes
that this ability to exercise control ensured that Dingyuan would continue to execute and renew service agreements and pay service
fees to Xinsi Yijia. By charging service fees in whatever amounts Xinsi Yijia deemed fit, and by ensuring that service agreements
were executed and renewed, Xinsi Yijia had the rights to receive substantially all of the economic benefits from Dingyuan.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
The following financial statement
amounts and balances of the Company’s consolidated VIEs were included in the accompanying consolidated financial statements
as of and for the years ended December 31:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
638
|
|
|
$
|
746
|
|
Total non-current assets
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
640
|
|
|
$
|
746
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
15
|
|
|
$
|
123
|
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from continuing operations
|
|
$
|
-
|
|
|
$
|
25
|
|
|
$
|
394
|
|
Net loss from continuing operations
|
|
$
|
(361
|
)
|
|
$
|
(137
|
)
|
|
$
|
(200
|
)
|
Net income from discontinued operations
|
|
$
|
955
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by /(used in) operating activities
|
|
$
|
2,897
|
|
|
$
|
63
|
|
|
$
|
(6
|
)
|
Net cash provided by investing activities
|
|
$
|
1,538
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net cash provided by financing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
151
|
|
In accordance with the
contractual agreements, relevant PRC subsidiary of the Company has the power to direct activities of the consolidated VIE,
and can have assets transferred out of the Group’s VIE. Therefore, the Company considers that there is no asset in the
Group’s VIE that can be used only to settle its obligations. None of the assets of the consolidated VIE have been
pledged or collateralized. The creditors of the consolidated VIE do not have recourse to the general credit of the Company
and its consolidated subsidiary.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
As of December 31, 2016, the Company's subsidiaries and consolidated variable interest entity consist
of the following entities:
|
|
|
|
Place of incorporation
|
|
Percentage of
|
Subsidiaries
|
|
Date of incorporation
|
|
/establishment
|
|
economic ownership
|
|
|
|
|
|
|
|
China Digital TV Technology Co., Ltd. (“CDTV BVI”)
|
|
March 9, 2004
|
|
BVI
|
|
100%
|
Golden Benefit Technology Limited ("Golden Benefit")
|
|
December 6, 2007
|
|
Hong Kong
|
|
100%
|
China Super Media Holdings Limited ("CSM Holdings")
|
|
February 25, 2008
|
|
Hong Kong
|
|
100%
|
Beijing N-S Information Technology Co., Ltd. ("N-S Information Technology")
|
|
July 23, 2010
|
|
the PRC
|
|
100%
|
Beijing Cyber Cloud Co., Ltd. ("Cyber Cloud")
|
|
January 19, 2011
|
|
the PRC
|
|
57.7%
|
Beijing Joysee Technology Co., Ltd. ("Joysee")
|
|
May 13, 2011
|
|
the PRC
|
|
76.9%
|
Xinsi Yijia
|
|
December 31, 2012
|
|
the PRC
|
|
57.7%
|
Beijing Shibo Movie Technology Co., Ltd. ("Shibo Movie")
|
|
February 15, 2012
|
|
the PRC
|
|
100%
|
Beijing Dagong Technology Co. Ltd. ("Dagong Technology")
|
|
December 24, 2015
|
|
the PRC
|
|
100%
|
Beijing Novel-Super Media Investment Co., Ltd. ("N-S Media Investment")
|
|
December 19, 2007
|
|
the PRC
|
|
100%
|
Hubei Shibo Screen Cross Technology Development Co., Ltd. (“Hubei Shibo”)
|
|
August 12, 2015
|
|
the PRC
|
|
65.0%
|
|
|
|
|
|
|
|
Variable interest entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dingyuan
|
|
August 21, 2013
|
|
the PRC
|
|
57.7%
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
Basis of presentation
|
The consolidated financial statements
of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America
("U.S. GAAP").
Certain accounts and balances in the
2014 and 2015 consolidated financial statements and the related notes have been retrospectively adjusted to reflect the effect
of discontinued operations as described in Note 3.
|
(b)
|
Basis of consolidation
|
The consolidated financial statements
of the Company include the financial statements of CDTV Holding, its subsidiaries, and consolidated VIEs. All inter-company transactions
and balances have been eliminated upon consolidation.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and revenues, costs and expenses in the consolidated financial statements and accompanying notes. Significant accounting
estimates reflected in the Company's consolidated financial statements include the allowance for doubtful accounts, valuation of
inventories, valuation allowance for deferred income tax assets, impairment of long-lived assets, and fair value valuations of
share-based payments. The current economic environment has increased the degree of uncertainty inherent in these estimates and
assumptions.
|
(d)
|
Cash and cash equivalents
|
Cash and cash equivalents consist
of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three
months or less when purchased.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(e)
|
Accounts receivable and allowance for doubtful accounts
|
Accounts receivable are stated at
the amount the Group expects to collect. The Group maintains allowances for doubtful accounts for estimated losses. Management
considers the following factors when determining the collectability of specific accounts: historical experience, credit worthiness
of the clients, aging of the receivables and other specific circumstances related to the accounts. Allowance for doubtful accounts
is made and recorded into general and administrative expenses based on aging of accounts receivable and on any specifically identified
accounts receivable that may become uncollectible. The accounts receivable balance shall be charged off in the period in which
the accounts receivables are deemed uncollectible.
From time to time, certain accounts receivable balances are settled in the form of notes receivable. As
of December 31, 2016, notes receivable represents bank acceptance drafts that are non-interest bearing and due within six months.
Upon maturity of the bank acceptance drafts, the Group collects the face amount from the banks.
Equity method investments
Investee companies over which the
Group has the ability to exercise significant influence, but does not have a controlling interest are accounted for using the equity
method. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of
the investee between 20% and 50%, and other factors, such as representation on the investee's Board of Directors, voting rights
and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.
An impairment charge is recorded if
the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The Group
did not incur any impairment loss on equity method investments for the years ended December 31, 2014, 2015 and 2016.
Cost method investments
Investee companies over which the
Group does not have significant influence or a controlling interest are carried at cost and recognized as income for any dividend
received from distribution of the investee's earnings.
An impairment charge is recorded if
the carrying amount of the investment exceeds its fair value and determined to be other-than-temporary.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(g)
|
Financial instruments
|
Financial instruments of the Group primarily consist of cash and cash equivalents, restricted cash, term
deposits, notes receivable, accounts receivable, and accounts payable. The carrying values of the Group's financial instruments
approximate their fair values, principally because of the short-term maturity of these instruments or their terms.
|
(h)
|
Concentration of credit risk
|
Financial instruments that potentially
expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, term deposits,
notes receivable and accounts receivable. The Group places their cash and cash equivalents, restricted cash and term deposits in
financial institutions with high-credit ratings and quality.
Approximately 94.5% of the Group's
cash deposits were placed with two commercial banks in the PRC as of December 31, 2016. The Group takes into account a number of
factors, including, among other things, the industry rankings, credit rating and reputation, in determining the creditworthiness
and quality of the financial institutions in the PRC with which it has placed its cash and cash equivalents, restricted cash and
term deposits (collectively “cash deposits”). The following table sets forth information relating to the three largest
proportions of the Group's cash deposits held by banks as of December 31, 2015 and 2016, respectively.
Details of
the banks accounting for 10% or more of total cash deposits are as follows:
|
|
As of December 31,
|
|
Bank
|
|
2015
|
|
|
2016
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
Bank A
|
|
|
82.7
|
|
|
|
83.7
|
|
Bank B
|
|
|
*
|
|
|
|
10.8
|
|
Bank C
|
|
|
16.2
|
|
|
|
*
|
|
|
*
|
The amount was less than 10%.
|
The Group conducts credit worthiness
evaluations of customers and generally does not require collateral or other security from customers.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(h)
|
Concentration of credit risk - continued
|
Customers accounting for 10% or
more of total revenues from continuing operations are as below:
|
|
For years ended December 31,
|
|
Customer
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
-
|
|
|
|
54.8
|
|
|
|
40.5
|
|
Customer B
|
|
|
-
|
|
|
|
*
|
|
|
|
14.6
|
|
Customer C
|
|
|
25.5
|
|
|
|
-
|
|
|
|
-
|
|
Customer D
|
|
|
23.8
|
|
|
|
-
|
|
|
|
-
|
|
|
*
|
The amount was less than 10%.
|
Inventories are stated at the lower
of cost or market value. Cost is determined using the weighted average method. The components of inventory cost include raw materials,
processing cost of finished goods and purchase cost of products. Inventories are written down for obsolescence based upon estimates
of future demand, technology developments, and market conditions.
|
(j)
|
Property and equipment
|
Property and equipment are carried
at cost less accumulated depreciation and any recorded impairment. Depreciation is calculated on
a straight-line basis over the following estimated useful lives:
Computer and electronic equipment
|
|
3 years
|
Furniture and fixture
|
|
5 years
|
Leasehold improvement
|
|
Shorter of useful life of the asset or the lease term
|
Motor vehicles
|
|
5 years
|
Costs of repairs and maintenance are
expensed as incurred and asset improvements are capitalized. The cost and related accumulated depreciation of
assets disposed of or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Intangible assets, other than goodwill,
acquired in connection with a business combination are estimated by management with the assistance of a third party valuer based
on the fair value of the assets acquired.
Identifiable intangible assets are
carried at cost less accumulated amortization. Amortization of intangible assets with finite useful lives is computed using the
straight-line method over the following estimated average useful lives, which are as follows:
Core technology
|
|
3 years
|
Customer relationship
|
|
9.5 years
|
|
(l)
|
Impairment of long-lived assets other than goodwill
|
The Group evaluates the recoverability
of long-lived assets, including property and equipment and intangible assets with finite useful lives, whenever events or changes
in circumstances indicate that a long-lived asset's carrying amount may not be recoverable. The Group measures the carrying amount
of long-lived asset (assets group) against the estimated undiscounted future cash flows associated with the asset (assets group).
Impairment exists when the sum of the undiscounted cash flows expected to be generated by that asset is less than the carrying
value of the asset (assets group) being evaluated. Impairment loss is calculated as the amount by which the carrying value of the
asset (assets group) exceeds its fair value. Fair value is estimated based on various techniques, including the discounted value
of estimated future cash flows. The evaluation of asset impairment requires the Group to make assumptions about future cash flows
over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed
and estimated amounts.
The Group did not incur any impairment
loss on long-lived assets for the years ended December 31, 2014, 2015 or 2016.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
The excess of the purchase price over
the fair value of identifiable net assets acquired in a business combination is recorded on the consolidated balance sheet as goodwill.
Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate
that it might be impaired.
Goodwill is tested for impairment
at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include
a significant change in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale
or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment
test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Estimating fair value is
performed by utilizing various valuation techniques, with a primary technique being a discounted cash flow which requires significant
judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long term rate
of growth for the Company's business, estimation of the useful life over which cash flows will be generated, and determination
of the Company's weighted average cost of capital.
In the evaluation of the goodwill for impairment,
the Group may first assess qualitative factors to determine whether it is "more likely than not" that the fair value
of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step
goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
goodwill is then tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to
be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second
step compares the implied fair value of goodwill to the carrying value of a reporting unit's goodwill. The implied fair value of
goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value
determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized
for any excess in the carrying value of goodwill over the implied fair value of goodwill. The Group has determined to perform the
annual impairment test on December 31 of each year. The Group did not incur any impairment loss on goodwill for the years ended
December 31, 2014, 2015 or 2016.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
The Group’s revenues are principally
derived from sales of products and services, and are recorded net of value added tax (“VAT”). Revenue is recognized
when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery of the products has occurred
or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. These criteria are
related to each of the following major revenue generating activities described below.
Specifically, sales of products include:
|
(1)
|
Sales of smart cards; and
|
|
(2)
|
Sales of other products.
|
Sales of services include the following
arrangements:
|
(1)
|
Cloud-based application platform (“cloud platform”) operating services;
|
|
(2)
|
Head-end software, hardware and related system integration service ("SI service");
|
|
(3)
|
Head-end system development service ("SD service");
|
|
(4)
|
Licensing income; and
|
All the revenues from sales of smart cards, licensing and royalty fees and substantially
all
of SI service and SD service were derived from the operation of Super TV. Since Super TV was disposed by the Company in December
2016, the related revenues are included in income from operations of discontinued operations for all the periods presented (see
Note 3).
Sales of smart cards
Smart cards are manufactured by third-party
manufacturers based on the Group’s blueprints. When the Group receives these products from the manufacturers, the Group programs
each one with a unique security code so that it can communicate with the Group’s CA Systems.
For sales to customers
in the PRC, revenue is recognized when acceptance of delivery is signed by customers. Whereas sales to customers outside
the PRC, revenue is recognized when delivery occurs according to the term in agreements with customers.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(n)
|
Revenue recognition
- continued
|
Sales of smart cards - continued
The Group also offers a certain amount
of free cards when the cumulative volume of smart card purchases from the same customer is greater than a set volume during a specific
period. The Group accounts for volume based sales incentives as deferred revenue which is deducted against the initial revenue.
The Group generally guarantees the
quality of smart cards for periods ranging from one to three years, and if any smart cards are found defective during the warranty
period, the Group is obligated to replace them at the Group’s cost. Historically, the defect rate of smart cards has been
low and the Group accrues warranty liabilities based on historical information.
Sales of others products
The Group also derives revenues from
the sales other products.
For sales to customers in the PRC,
revenue is recognized when acceptance of delivery is signed by customers. Whereas sales to customers outside the PRC,
revenue is recognized when delivery occurs according to the term in agreements with customers.
The Group guarantees the quality of
a part of the products for a period after sale, and if any products are found defective during the warranty period, the Group is
obligated to replace them at the Group’s cost. Historically, the defect rate has been low and the Group accrues warranty
liabilities based on historical information.
Cloud platform operating services
The Group enters into agreements with
cable TV network operators and publishes games developed by third party game developers onto the cloud platforms. The end users
are able to access the cloud platforms on cable TV. The cloud platforms enable the end users to purchase in-game virtual items
by converting virtual currencies, which is purchased in the uniform platform virtual currency system. The cable TV network operators
receive the service fees paid by end users and they will pay the Group a pre-agreed portion of the cash received.
The Group views cable TV network operators
as the Group’s customers. In the arrangements with cable TV network operators, cable TV network operators enter into agreements
with end users and are in the role of operating the cable TV network system. The Group’s cloud platform service is one of
the value added services embedded in the cable TV network system.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(n)
|
Revenue recognition - continued
|
Cloud platform operating services
- continued
The Group is not able to estimate
amount of revenue before billing statements are mutually agreed with cable TV network operators. Amount of revenue earned is only
determinable, when the Group receives billing statements from cable TV network operators.
The Group considers itself as the
primary obligor, as it operates the cloud platforms, including initiating promotion activities, providing bug fixing and upgrades
services of the platforms, maintaining virtual currency system, managing interfaces of the platform, and maintaining the servers,
as needed. In addition, the Group has the discretion in supplier selection and the latitude in establishing price. As such, the
Group recognizes such revenue on a gross basis.
Once the end users convert the platform
virtual currency to in-game virtual items, the in-game virtual items are normally used by the end users in a very short period
of time. In addition, substantially most of the in-game virtual items can be used only once and provide one-time advantages to
the end users upon usage in the game without further substantial benefits.
At each period end, the Group summarizes consumed virtual currencies and the balance of unconsumed virtual
currencies. The Group recognizes revenue for consumed virtual currencies based on the billing statements mutually agreed with cable
TV network operators and defers revenue for unconsumed balance as of each period end.
SI service
For cloud platform and CA System,
the Group signs contracts with cable network operators to install and integrate the Group’s software with the hardware and
software purchased from third-party suppliers.
Deliverables of SI service include:
software, hardware, integration, installation, and post-contract customer support ("PCS").
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(n)
|
Revenue recognition - continued
|
SI service
- continued
For multi-element arrangements of
SI service, which include delivery, integration, and installation of hardware products containing software essential to the hardware
product’s functionality, and provision of PCS. The Group allocates revenue to deliverables based on their relative selling
prices. In such circumstances, the Group uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables:
(i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”)
and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Group sells the deliverable separately
and is the price actually charged by the Group for that deliverable. ESPs reflect the Group’s best estimates of what the
selling prices of elements would be if they were sold regularly on a stand-alone basis.
When the Group delivers the hardware
and software, installs and integrates them together to customers, customers sign the preliminary acceptance. Final acceptance is
typically signed six months to one year after the issuance of the preliminary acceptance if no major technical problems are discovered.
Hardware, software, integration, and installation are considered delivered to customers when preliminary acceptance is signed because
only at that time customers are able to use the integrated system. Therefore, revenue for the SI service, except PCS, is recognized
when the installation and integration of software is completed, which is indicated by obtaining the preliminary acceptance from
customers. The Group defers the revenue for PCS and recognizes it over the period of PCS.
SD service
The Group develops head-end system
applications relating to cloud platform and digital TV technology for its customers.
Deliverables in SD service include
the completed software application. A few arrangements also include free PCS for a period, generally less than one year, starting
from customer acceptance. Payment terms vary based on the stage of the service. Normally a portion of the contract amount is paid
when the contract is signed, and the remaining is paid upon the completion of the project and customer acceptance. The cost of
providing free PCS has historically been insignificant.
Because a system development arrangement
requires significant production, modification, or customization of software, the Group refers to Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("ASC") 605-35, "Construction-Type and Production-Type
Contracts" for revenue recognition. As the system development service is generally completed within several weeks or months,
the completed-contract method is used. Revenue for system development is recognized when the system development is finished and
accepted by the customer.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(n)
|
Revenue recognition - continued
|
Licensing income
The Group coordinates with network
operators to produce set-top boxes compatible with the Group’s CA Systems. The Group enters into contracts with set-top box
manufacturers selected by the network operators and provides these manufacturers with CA Systems terminal-end technology that is
integrated in the set-top boxes and which permits the unscrambling of digital TV broadcasts that have been transmitted by TV network
operators who use the Group’s CA Systems. The Group provides testing and certifying service on the CA Systems’ terminal-end
technology so that the set-top box is compatible with the Group’s CA system. The set-top box manufacturers pay the Group
a one-time license fee, which includes a testing and certifying fee, for obtaining the blueprints and technologies. According to
the contracts, these manufacturers are required to provide a set-top box prototype to the Group in order to obtain a certificate
from the Group which indicates the set-top box is compatible with the Group’s CA Systems and suitable for mass-production.
The licenses to set-top box manufacturers are perpetual once provided. No PCS is offered in the licensing arrangement.
Licensing income is recognized when
all revenue recognition criteria have been met, which is indicated by the Group receiving acceptance note of license issued by
the set-top box manufacturers.
Royalty income
The Group receives royalties on sales of CA Systems terminal-end technology from set-top box manufacturers.
Royalty revenue is recognized when both of the following criteria are met: (1) sales reports are received from set-top box manufacturers;
and (2) payments are received.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
VAT on sales is calculated at 17%
on revenue from product sales and SI Services or 6% on revenue from other services and subsequently paid to the PRC tax authorities
after netting input VAT on purchases. The excess of output VAT over input VAT is reflected in Accrued expenses and other current
liabilities, and the excess of input VAT over output VAT is reflected in Prepaid expenses and other current assets in the consolidated
balance sheets.
For certain software related products
that qualify as "software products" by PRC tax authorities, the Group pays VAT at 17% first and then receives a 14% refund.
The Group records VAT refund receivables on an accrual basis. VAT refund is recorded in revenue in the consolidated statements
of comprehensive income (loss).
The Company’s PRC subsidiaries
and consolidated VIEs are subject to taxes and surcharges which are calculated based on the net amounts of VAT payable to tax authority.
Government subsidies mainly represent
amounts granted by local government authorities as an incentive for companies to promote economic development of the local technology
industry. When the Group receives the subsidies related to government sponsored projects, the subsidies are recorded as a liability
and are recognized as subsidy income when there is no further performance obligation. Government subsidies that compensate the
acquisition cost of an asset are recognized in profit or loss over the useful life of the asset as other income. Subsidy income
of $1, $197 and $460 from continuing operations were recognized in other income and $2,111, $1,250 and $863 from discontinued operations
were recognized in income from operations of discontinued operations, for the years ended December 31, 2014, 2015 and 2016, respectively.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Leases where substantially all the
rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating
leases are charged to the consolidated statements of comprehensive income (loss) on a straight-line basis over the lease periods.
|
(s)
|
Foreign currency translation
|
The functional and reporting currency
of the Company is the US dollar. The functional currency of the Company's subsidiaries outside the PRC is the US dollar. The functional
currency of the Company's subsidiaries and consolidated VIEs in the PRC is Renminbi ("RMB").
Monetary assets and liabilities denominated
in currencies other than the applicable functional currencies are translated into the functional currencies at the prevailing rates
of exchange at the balance sheet date. Nonmonetary assets and liabilities are remeasured into the applicable functional currencies
at historical exchange rates. Transactions in currencies other than the applicable functional currencies during the year are converted
into the functional currencies at the applicable rates of exchange prevailing at the transaction dates. Transaction gains and losses
are recognized in the consolidated statements of comprehensive income (loss).
For translating the financial statements
of the Company's PRC subsidiaries (including consolidated VIEs) into the reporting currency of the Company (US dollar), assets
and liabilities are translated from each subsidiary's functional currency to the reporting currency at the exchange rate on the
balance sheet date. Equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated
using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown
as a separate component of other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
When the Company deconsolidates any
of its subsidiaries which functional currencies are not US Dollar, the amount of accumulated other comprehensive income related
to foreign currency translation adjustment of the deconsolidated subsidiaries will be reclassified to profit or loss and included
in the calculation of gain or loss from deconsolidation.
Since the RMB is not a fully convertible
currency, all foreign exchange transactions involving RMB must take place either through the People’s Bank of China ("PBOC")
or other institution authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Deferred income taxes are provided
using the asset and liability method. Under this method, deferred income taxes are recognized for net operating losses available
for carry-forwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis using enacted tax rates in effect for the years in which the differences are expected to reverse.
A valuation allowance is provided to reduce the amount of deferred income tax assets if it is considered more likely than not that
some portion of, or all of the deferred income tax assets will not be realized.
Income taxes are provided for in accordance with the laws and regulations applicable to the Group as enacted
by the relevant tax authorities. The impact of an
uncertain
income tax position on the income tax return is recognized at the largest amount that is more-likely-than not to be sustained upon
audit of the related tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The
Group records interest and penalties related to unrecognized tax benefits (if any) in interest expenses and general and administrative
expenses, respectively.
|
(u)
|
Earnings/(loss) per share
|
Basic earnings/(loss) per ordinary
share is computed by dividing net income/(loss) attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period.
Diluted earnings/(loss) per ordinary
share reflect the potential dilution that could occur if dilutive potential common shares were exercised or converted into ordinary
shares. The Group has stock options which could potentially dilute basic earnings/(loss) per share. The dilutive effect of stock
options is computed using the treasury stock method. Potential dilutive securities are not included in the calculation of diluted
earnings/(loss) per share if the impact is anti-dilutive.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(v)
|
Research and development expenses
|
Research and development expenses
are costs incurred in the development of the Group's products and technologies, including significant improvements and refinements
to existing products and services. All research and development expenses are expensed as incurred.
|
(w)
|
Share-based compensation
|
Share-based payment transactions with
employees and directors are measured based on the grant date fair value of the equity instrument issued. Share-based compensation
expenses, net of an estimated forfeiture rate, are recognized over the requisite service period based on the graded vesting attribution
method, with a corresponding impact reflected in additional paid-in capital.
The Group recognizes the estimated
compensation expenses of performance-based stock options based on the grant date fair value. The awards are earned upon attainment
of identified performance goals. The estimate of forfeitures will be adjusted over the requisite service period to the extent that
actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized
through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense
to be recognized in future periods.
Forfeitures are estimated at the time
of grant and revised in the subsequent periods if actual forfeitures differ from those estimates. The Group uses historical data
to estimate pre-vesting option forfeitures and record share-based compensation expenses only for those awards that are expected
to vest.
A change in any of the terms or conditions
of share options shall be accounted for as a modification of the plan. Therefore, the Group calculates incremental compensation
cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately
before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested
options, the Group would recognize incremental compensation cost in the period the modification occurred and for unvested options,
the Group would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining
unrecognized compensation cost for the original award on the modification date.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Fair value is the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
Fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the
fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement
as follows:
|
·
|
Level 1-inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets.
|
|
·
|
Level 2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
·
|
Level 3-inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques.
|
The carrying amounts of cash and cash equivalents, restricted cash, term deposits, notes receivable, accounts
receivable, and accounts payable, as of December 31, 2015 and 2016, approximate fair value because of the short maturity of these
instruments.
The Group measures certain financial
assets, including cost method investment and equity method investments, at fair value on a nonrecurring basis only if an impairment
loss were to be recognized. The Group’s non-financial assets, such as intangible assets, goodwill and property and equipment,
would be measured at fair value only if they were determined to be impaired.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(y)
|
Business combinations
|
Business combinations are recorded
using the acquisition method of accounting. The purchase price of the acquisition is allocated to the tangible assets, liabilities,
identifiable intangible assets acquired and noncontrolling interest, if any, based on their estimated fair values as of the acquisition
date. The excess of the purchase price over those fair values is recorded as goodwill. If the purchase price is less than those
fair values, the difference is recognized directly in the consolidated statements of comprehensive income (loss). Acquisition-related
expenses and restructuring costs are expensed as incurred.
In a business combination achieved
in stages, the Group remeasures its previously held equity interest in the acquiree immediately before obtaining control at its
acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in earnings.
Where the consideration in an acquisition
includes contingent consideration and the payment of which depends on the achievement of certain specified conditions post-acquisition,
the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability,
it is subsequently carried at fair value with changes in fair value reflected in earnings.
|
(z)
|
Transactions between entities under common control
|
When accounting for a transfer
of assets or exchange of shares between entities under common control of the Company, the carrying amounts of the assets and liabilities
transferred shall remain unchanged subsequent to the transaction, and no gain or loss shall be recorded in the Company's consolidated
statements of comprehensive income (loss).
|
(aa)
|
Commitments and contingencies
|
In the normal course of business,
the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, shareholder lawsuits, and non-income tax matters. An accrual
for a loss contingency is recognized when it is probable that a liability has been incurred and the amount of loss can be reasonably
estimated. If a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
is disclosed.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(bb)
|
Discontinued operations
|
The Company reports disposal of subsidiaries
in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s
operations and financial results, when either the subsidiaries are classified as held for sale or are disposed by sale.
When a discontinued operation is disposed of before being classified as held for sale, the Company presents
the assets and liabilities of the discontinued operation separately from other assets and liabilities on the consolidated balance
sheet before the period that includes the disposal.
The Company considers the internal
reporting used by the Company’s chief operating decision maker for making operating decisions about the allocation of resources
of the segment and the assessment of its performance in determining the Company’s reportable operating segments. Management
has determined that the Company has one operating segment, which is digital television related products and services.
|
(dd)
|
Recently adopted accounting standards
|
In November 2015, the FASB issued
Accounting Standard Update (“ASU”) No. 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires
all deferred tax assets and liabilities, and related valuation allowances, to be classified as noncurrent on the Company’s
consolidated balance sheets. ASU No. 2015-17 is effective for the Company for annual periods in fiscal years beginning after December
15, 2017, and requires either prospective or retrospective adoption. The Company elected to early adopt the new standard retrospectively
in 2016, which resulted in the reclassifications of $69 from current to noncurrent deferred income tax assets, and $2,946 and $5,334
from current to noncurrent assets and liabilities of Super TV, respectively, within the consolidated balance sheet as of December
31, 2015.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(ee)
|
Recently issued accounting pronouncements not yet adopted
|
In May 2014, the FASB issued ASU
No. 2014-09, Revenue from Contracts with Customers. This ASU requires an entity to recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative
information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers. In December 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers, which deferred the effective date of ASU No. 2014-09. In March 2016, the FASB issued ASU No. 2016-08, Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which
clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an
entity in determining whether it controls a specified good or service before it is transferred to the customers. The new
standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for
annual reporting periods beginning after December 15, 2016. The new standard may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Group plans to
complete its evaluation by the third quarter of 2017, including an assessment of the new expanded disclosure requirements and
a final determination of the transition method the Group will use to adopt the new standard.
In February 2016, the FASB issued
ASC Topic 842,
Leases
through ASU No. 2016-02. ASC Topic 842 requires a lessee to recognize all leases, including operating
leases, on balance sheet via a right-of-use asset and lease liability, unless the lease is a short-term lease. All (or a portion
of) fixed payments by the lessee to cover lessor costs related to ownership of the underlying assets, or executory costs, that
do not represent payments for a good or service will be considered lease payments and reflected in the measurement of lease assets
and lease liabilities by lessees. The new standard does not substantially change lessor accounting from current U.S. GAAP. The
new standard also requires lessees and lessors to disclose more qualitative and quantitative information about their leases than
current U.S. GAAP does. The standard is applied retrospectively, with elective reliefs. The new standard is effective for annual
and interim reporting periods beginning after December 15, 2018 for a public business entity. Early adoption is permitted. The
Group is currently evaluating the impact ASU No. 2016-02 will have on its consolidated financial statements.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(ee)
|
Recently issued accounting pronouncements not yet
adopted - continued
|
In March 2016, the FASB issued
ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
ASU
No. 2016-09 was issued as part of the FASB’s simplification initiative aimed at reducing costs and complexity while maintaining
or improving the usefulness of financial information. This update involves several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures, statutory tax withholding requirements, and classification in
the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within
those annual periods. Early adoption is permitted for any interim or annual period. If an entity early adopts the amendments in
an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period,
and the entity must adopt all of the amendments in the same period. The Group does not expect the adoption of ASU No. 2016-09 will
have a material impact on its consolidated financial statements.
In August 2016, the FASB issued
ASU No. 2016-15,
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
, which clarifies
the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted. The Group is currently evaluating the impact ASU No. 2016-15 will have on its consolidated
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows - Restricted cash.
This ASU requires companies to
include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement
of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after
December 15, 2017.
Early adoption is permitted, including adoption in an interim period. If
an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year
that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each
period presented. The Group is currently evaluating the impact ASU No. 2016-15 will have on its consolidated financial statements.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
3.
|
DISCONTINUED OPERATIONS
|
On November 7, 2016 and December
26, 2016, the Company’s subsidiary Golden Benefit entered into an equity transfer agreement and a supplemental agreement
to equity transfer agreement (collectively the “Equity Transfer Agreements”) with Beijing Super TV and Changxing Bao
Li Rui Xin Technology Co., Ltd. (“Bao Li”), a newly-formed limited liability company.
Mr. Zhu Jianhua, Chief Executive
Officer and Director of the Company, owns interests in and have significant influence on Bao Li.
According to the Equity Transfer
Agreements, Bao Li agreed to pay cash consideration of RMB610 million to acquire all of the equity interest in Beijing Super TV
owned by Golden Benefit, which represents 90.09% of outstanding equity interests of Beijing Super TV (the “Transaction”).
A PRC subsidiary of the
Company received total purchase consideration of RMB552 million, net of withholding income tax and stamp duties of RMB58
million from Bao Li in Renminbi, on December 27, 2016. Beijing Super TV completed the legal registration update of its
shareholder information with the relevant PRC governmental authorities on December 29, 2016.
As a result, the Company no longer
retained power of control over Beijing Super TV and deconsolidated Beijing Super TV and its wholly owned subsidiary, N-S Digital
TV from the Company’s consolidated financial statements on December 29, 2016. $43,190 was recognized as gain from disposal
of discontinued operations in the consolidated statements of comprehensive income (loss).
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
3.
|
DISCONTINUED OPERATIONS - continued
|
The operating results from discontinued
operations included in the Company’s consolidated statements of comprehensive income (loss) were as follows for the years
ended December 31, 2014, 2015 and 2016.
|
|
For years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Major classes of line items constituting pretax profit of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
79,618
|
|
|
$
|
50,944
|
|
|
$
|
47,328
|
|
Cost of revenues (including share-based compensation of nil, nil and $181 for 2014, 2015 and 2016, respectively)
|
|
|
(15,885
|
)
|
|
|
(13,767
|
)
|
|
|
(12,719
|
)
|
Selling, research and development, and general and administrative expenses (including share-based compensation
of nil, nil and $3,793 for 2014, 2015 and 2016, respectively)
|
|
|
(24,891
|
)
|
|
|
(19,452
|
)
|
|
|
(23,823
|
)
|
Other income and expenses that are not major
|
|
|
4,226
|
|
|
|
2,662
|
|
|
|
1,956
|
|
Income from the operations of the discontinued operations, before income taxes (Note a)
|
|
|
43,068
|
|
|
|
20,387
|
|
|
|
12,742
|
|
Income tax expenses (Note b)
|
|
|
(6,292
|
)
|
|
|
(4,286
|
)
|
|
|
(2,492
|
)
|
Net income from the operations of discontinued operations, before share of
(loss)/income on equity method investments
|
|
|
36,776
|
|
|
|
16,101
|
|
|
|
10,250
|
|
Share of (loss)/income on equity method investments
|
|
|
(59
|
)
|
|
|
54
|
|
|
|
195
|
|
Income from the operations of the discontinued operations, net of income taxes
|
|
|
36,717
|
|
|
|
16,155
|
|
|
|
10,445
|
|
Gain from disposal of discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
43,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
36,717
|
|
|
$
|
16,155
|
|
|
$
|
53,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations attributable to China Digital TV Holding Co., Ltd.
|
|
$
|
36,717
|
|
|
$
|
16,155
|
|
|
$
|
52,644
|
|
|
a.
|
Income from the operations of discontinued operations, before income taxes, attributable to China Digital TV Holding Co.,
Ltd. was $43,068, $20,387 and $11,750 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
|
b.
|
Golden Benefit incurred withholding income tax expense relating to retained earnings of Beijing Super
TV at a 10% income tax rate. This withholding tax expense is included as income tax expenses for the discontinued operations at
the amount of $3,362, $1,608, and $2,045 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
3.
|
DISCONTINUED OPERATIONS - continued
|
The assets and liabilities of Super TV as of December 31, 2015 were as follows:
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,425
|
|
Restricted cash
|
|
|
11
|
|
Notes receivable
|
|
|
4,851
|
|
Accounts receivable
|
|
|
38,029
|
|
Inventories
|
|
|
4,381
|
|
Prepaid expenses and other current assets
|
|
|
2,773
|
|
|
|
|
|
|
Total current assets
|
|
|
101,470
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
381
|
|
Goodwill
|
|
|
641
|
|
Equity method investments
|
|
|
2,627
|
|
Deferred income tax assets
|
|
|
3,330
|
|
|
|
|
|
|
Total non-current assets
|
|
|
6,979
|
|
|
|
|
|
|
Total assets
|
|
$
|
108,449
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Accounts payable
|
|
|
1,110
|
|
Accrued expenses and other current liabilities
|
|
|
8,935
|
|
Deferred revenue-current
|
|
|
2,699
|
|
Income tax payable
|
|
|
2,401
|
|
Government subsidies-current
|
|
|
800
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,945
|
|
|
|
|
|
|
Government subsidies -non-current
|
|
|
2,207
|
|
Deferred income tax liabilities
|
|
|
5,334
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
7,541
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
23,486
|
|
The condensed cash flows of Super
TV were as follows for the years ended December 31, 2014, 2015 and 2016:
|
|
For years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
17,601
|
|
|
$
|
22,847
|
|
|
$
|
18,278
|
|
Net cash (used in)/provided by investing activities
|
|
|
(2,668
|
)
|
|
|
2,507
|
|
|
|
(206
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,015
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,565
|
)
|
|
|
(1,752
|
)
|
|
|
(2,041
|
)
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
4.
|
SEGMENT INFORMATION AND REVENUE ANALYSIS
|
The Group's chief operating decision
maker is the Chief Executive Officer, who reviews consolidated results of operations when making decisions about allocating resources
and assessing performance of the Group.
The Group primarily operates in
the PRC, all of the Group's long-lived assets are located in the PRC and majority of the Company’s revenues for the years
ended December 31, 2014, 2015 and 2016 were generated from the PRC.
After the disposal as described
in Note 3, the Company still has one operating segment, which is digital television related products and services. The gross revenues
consist of the following:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,571
|
|
|
$
|
248
|
|
|
$
|
618
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud platform operations
|
|
|
12
|
|
|
|
412
|
|
|
|
2,019
|
|
Head-end system integration
|
|
|
178
|
|
|
|
527
|
|
|
|
708
|
|
Head-end system development
|
|
|
154
|
|
|
|
735
|
|
|
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
344
|
|
|
|
1,674
|
|
|
|
3,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,915
|
|
|
$
|
1,922
|
|
|
$
|
4,240
|
|
Revenues generated by the discontinued operations, which were included in income from operations of discontinued
operations, consisted of revenues from products of $71,949, $46,150 and $43,504, and revenues from services of $9,079, $5,630 and $4,541
for the years ended December 31, 2014, 2015, and 2016, respectively.
VAT refunds of nil, $9 and $57 from
continuing operations were included in revenues and $5,433, $4,120 and $3,062 from discontinued operations were included in income
from operations of discontinued operations for the years ended December 31, 2014, 2015 and 2016, respectively.
China digital tv holding co., l
TD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
(a)
|
In 2010, the Group entered into an agreement with Beijing
Yuewu Yuntian Software Technology Ltd. ("Yuewu Yuntian") to establish Cyber Cloud, in which the Group and Yuewu Yuntian
held 90% and 10% of the equity interests, respectively.
|
Pursuant to a series of agreements
dated on April 30, 2014, between the Group, Yuewu Yuntian and Beijing Holch Capital Investment Center ("Holch Capital",
a third party), Cyber Cloud acquired 100% equity interest in Xinsi Yijia from Yuewu Yuntian and Holch Capital, and in exchange,
Yuewu Yuntian and Holch Capital obtained noncontrolling equity interests in Cyber Cloud. These transactions were closed on June
30, 2014. As a result, the Group, Yuewu Yuntian and Holch Capital held 75%, 15% and 10% of the equity interests in Cyber Cloud,
respectively. Xinsi Yijia became a wholly owned subsidiary of Cyber Cloud, and therefore a 75% owned subsidiary of the Group after
June 30, 2014. The purpose of the acquisition of Xinsi Yijia is to develop the Group's cloud computing technology-based digital
video delivery solutions. The purchase price for the acquisition of Xinsi Yijia was determined to be $2,541 based on the acquisition-date
fair value of Xinsi Yijia which is more reliably measurable. Such fair value has been estimated by management with the assistance
of a third party valuer.
The following table summarizes the
fair values of assets acquired and liabilities assumed at the date of acquisition:
|
|
As of June 30, 2014
|
|
Current assets
|
|
$
|
1,791
|
|
Property, plant, and equipment
|
|
|
132
|
|
Intangible assets
|
|
|
478
|
|
Goodwill
|
|
|
853
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,254
|
|
|
|
|
|
|
Current liabilities
|
|
|
(512
|
)
|
Non-current liabilities
|
|
|
(201
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(713
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,541
|
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
5.
|
ACQUISITIONS - continued
|
|
(b)
|
In 2012, the Group and Beijing AirMedia Advertising Co.,
Ltd. ("AirMedia") set up two joint ventures Shibo Movie and Beijing Xinghe Union Media Co., Ltd. ("Xinghe Union"),
in each of which the Group contributed cash of $794, representing 50% of equity interests in each of the joint ventures, respectively.
The Group has accounted for these investments using equity method accounting because the Group did not control the investees but
had the ability to exercise significant influence over the operating and financial policies of the investees.
|
On September 30, 2013, the Group
signed an agreement with AirMedia for the exchange of 50% equity interests in Shibo Movie held by AirMedia with its 50% equity
interests in Xinghe Union. In February 2014, the exchange was completed and Shibo Movie became a wholly-owned subsidiary of the
Group. The carrying values of the Group’s equity investments in Shibo Movie and Xinghe Union were $456 and $291, respective
prior to the exchange. The Group accounted for the exchange as a disposal of its equity investment in Xinghe Union and a step acquisition
of Shibo Movie. The fair value of Shibo Movie asset acquired and liabilities assumed was $912. The Group recorded a gain of $165
on the disposal of Xinghe Union, which was included in income from operations of discontinued operations in 2014.
Restricted cash consists of the
following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Bank deposits pledged as security for issuing letters of credit and bank bills
|
|
$
|
23
|
|
|
$
|
-
|
|
Bank deposits in an escrow account (Note 18(e))
|
|
|
-
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
23
|
|
|
$
|
4,753
|
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment, net, consist
of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Computers and other electronic equipment
|
|
$
|
784
|
|
|
$
|
989
|
|
Furniture and fixtures
|
|
|
15
|
|
|
|
6
|
|
Leasehold improvements
|
|
|
34
|
|
|
|
35
|
|
Motor vehicles
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
847
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(548
|
)
|
|
|
(622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
299
|
|
|
$
|
421
|
|
For the years ended December 31, 2014, 2015 and 2016, depreciation expense was $190, $273 and $368 for
continuing operations, respectively, and $710, $259 and $231 for discontinued operations which was included in income from operations
of discontinued operations, respectively.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
8.
|
INTANGIBLE ASSETS, NET
|
Intangible assets, net, consist
of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Core technology
|
|
$
|
108
|
|
|
$
|
101
|
|
Customer relationship
|
|
|
350
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
428
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
(54
|
)
|
|
|
(84
|
)
|
Customer relationship
|
|
|
(56
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
348
|
|
|
$
|
258
|
|
For the years ended December 31, 2014, 2015 and 2016, the Group recorded amortization expense of $44,
$75 and $71 for continuing operations, respectively, and nil amortization expense for discontinued
operations for each of the periods presented. Estimated amortization expenses of intangible assets for the years ending December 31, 2017, 2018, 2019, 2020, 2021
and 2022 and thereafter are $51, $34, $34, $34, $34 and $71, respectively.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
9.
|
EQUITY METHOD INVESTMENT
|
In August 2015, the Group, Guoshi
Communication (Beijing) Co., Ltd. (“Guoshi”) and certain third party individuals set up Sinoscreens Media (Beijing)
Co., Ltd. ("Sinoscreens"), in which the Group held 34% of the equity interest. The Group injected cash of RMB3.4 million
(equivalent to $541) to Sinoscreens in 2015. The Group has accounted for this long-term investment using equity method accounting
because the Group does not control the investee but has the ability to exercise significant influence over the operating and financial
policies of the investee.
In June 2016, the Group sold its
equity interest in Sinoscreens to a third party for a cash consideration of $512.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
10.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current
liabilities consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll and bonus
|
|
$
|
1,286
|
|
|
$
|
752
|
|
Other taxes payable
|
|
|
98
|
|
|
|
135
|
|
Accrued professional fees
|
|
|
953
|
|
|
|
1,088
|
|
Social insurance withholding
|
|
|
284
|
|
|
|
149
|
|
Payable for acquisition of noncontrolling interest*
|
|
|
-
|
|
|
|
338
|
|
Others
|
|
|
250
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,871
|
|
|
$
|
2,557
|
|
|
*
|
In December 2016, N-S Information Technology purchased
the remaining 20% of the equity interest in Dagong Technology held by Beijing Quanda Technology Center (“Quanda”)
for a cash consideration of $626, among which $338 remained payable as of December 31, 2016 (see Note 18(f)). The balance
was subsequently paid in February 2017.
|
China
digital tv holding co., l
TD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
Deferred revenue consists of the
following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Advance from customers
|
|
$
|
936
|
|
|
$
|
1,030
|
|
Deferred revenue for SI service contracts with remaining PCS period within one year
|
|
|
-
|
|
|
|
16
|
|
Unconsumed virtual currency balance estimated to be consumed within one year
|
|
|
-
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936
|
|
|
|
1,382
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Advance from customers
|
|
|
173
|
|
|
|
-
|
|
Deferred revenue for SI service contracts with remaining PCS period longer than one year
|
|
|
-
|
|
|
|
6
|
|
Unconsumed virtual currency balance estimated to be consumed longer than one year
|
|
|
-
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,109
|
|
|
$
|
1,507
|
|
CDTV Holdings and CDTV BVI are tax-exempted
companies incorporated in the Cayman Islands and the British Virgin Islands, respectively.
Golden Benefit and CSM Holdings
are subject to Hong Kong Profits Tax on its activities conducted in Hong Kong. No provision for Hong Kong Profits tax has been
made in the consolidated financial statements as they both have no assessable profits for the years presented.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
12.
|
INCOME TAXES - continued
|
The Company’s PRC subsidiaries and consolidated VIEs file separate tax returns in the PRC. Effective
from January 1, 2008, the PRC statutory income tax rate is 25% according to the Corporate Income Tax Law which was passed by the
National People’s Congress on March 16, 2007.
N-S
Digital TV qualified as "High-and-New Technology Enterprise" ("HNTE") under the Enterprise Income Tax Law effective
from January 1, 2008 (the "2008 EIT law") and therefore qualified for a preferential tax rate of 15% for a three year
period. In October 2011 and again in October 2014, N-S Digital TV successfully renewed its HNTE qualification and qualified for
a preferential tax rate of 15% from 2011 to 2016.
In October 2014, Cyber Cloud obtained
the HNTE certificate for the tax years from 2014 to 2016, and Cyber Cloud is entitled to a preferential income tax rate of 15%
in each of those years.
Beijing Super TV has been qualified as “Key Software Enterprise” and entitled for a preferential
tax rate of 10% since 2010. In December 2013, Beijing Super TV obtained such certificate for the tax years from 2013 to 2014. As
a result, Beijing Super TV was entitled to a preferential income tax rate of 10% in each of those years. Beginning from 2015, the
administrative examination and approval for certification of “Key Software Enterprise” have been cancelled and was
changed to self-assessment. In 2015 and 2016, Beijing Super TV assessed that it was qualified as “Key Software Enterprise”.
Deferred income taxes result principally
from differences in the recognition of certain assets and liabilities for tax and financial reporting purposes and the tax effect
of tax loss carry forwards.
The components of loss before income
taxes from continuing operations are as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
PRC, excluding Hong Kong
|
|
$
|
(14,706
|
)
|
|
$
|
(14,101
|
)
|
|
$
|
(6,805
|
)
|
Cayman Islands
|
|
|
(2,550
|
)
|
|
|
(702
|
)
|
|
|
(1,241
|
)
|
BVI
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Hong Kong
|
|
|
(211
|
)
|
|
|
(329
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss before income taxes
|
|
$
|
(17,471
|
)
|
|
$
|
(15,134
|
)
|
|
$
|
(8,142
|
)
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
12.
|
INCOME TAXES - continued
|
The principal components of the
deferred income tax assets (liabilities) are as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Write-down of inventory value
|
|
$
|
60
|
|
|
$
|
72
|
|
Allowance for doubtful accounts
|
|
|
5
|
|
|
|
22
|
|
Accrued expenses
|
|
|
228
|
|
|
|
150
|
|
Accrued bonus
|
|
|
166
|
|
|
|
90
|
|
Deferred revenue
|
|
|
121
|
|
|
|
124
|
|
Government subsidies
|
|
|
133
|
|
|
|
66
|
|
Depreciation and amortization
|
|
|
(76
|
)
|
|
|
-
|
|
Tax loss carry-forward deferred tax assets
|
|
|
8,860
|
|
|
|
8,716
|
|
Valuation allowance
|
|
|
(9,376
|
)
|
|
|
(9,124
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets, net
|
|
|
121
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
(87
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(87
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
121
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
(87
|
)
|
|
$
|
-
|
|
The Company's subsidiaries registered
in the PRC have total net operating loss carry forwards of $40,220 as of December 31, 2016 which will expire on various dates between
December 31, 2017 and December 31, 2021. Valuation allowances have been established because the Group believes that it is more
likely than not that its deferred income tax assets will not be realized as it does not expect to generate sufficient taxable income
before those temporary differences expire.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
12.
|
INCOME TAXES - continued
|
Movement of valuation allowance
is as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
5,454
|
|
|
$
|
6,719
|
|
|
$
|
9,376
|
|
Additions
|
|
|
2,655
|
|
|
|
3,173
|
|
|
|
939
|
|
Acquisition of subsidiaries
|
|
|
614
|
|
|
|
-
|
|
|
|
-
|
|
Expired tax losses
|
|
|
(1,057
|
)
|
|
|
(141
|
)
|
|
|
(547
|
)
|
Change of income tax rate
|
|
|
(805
|
)
|
|
|
-
|
|
|
|
-
|
|
Exchange rate difference
|
|
|
(142
|
)
|
|
|
(375
|
)
|
|
|
(644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
6,719
|
|
|
$
|
9,376
|
|
|
$
|
9,124
|
|
The Group is currently not the subject
of any income tax examinations. According to the PRC Tax Administration and Collection Law, the statute of limitation is three
years if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of
limitation is extended to five years under special circumstances where the underpayment of taxes is more than RMB100,000. In the
case of transfer pricing issues, the statute of limitation is 10 years. There is no statute of limitation in the case of tax evasion.
The income tax returns of the Group’s consolidated PRC subsidiaries and VIEs for the years from 2014 are open to examination
by the PRC tax authorities.
Reconciliation between the provision
for income taxes of continuing operations computed by applying the PRC statutory income tax rates of 25% to loss before income
taxes and the actual provision of income taxes is as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
$
|
(17,471
|
)
|
|
$
|
(15,134
|
)
|
|
$
|
(8,142
|
)
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at statutory tax rate
|
|
|
(4,368
|
)
|
|
|
(3,784
|
)
|
|
|
(2,036
|
)
|
Expenses not deductible for tax purposes
|
|
|
848
|
|
|
|
60
|
|
|
|
317
|
|
Research and development expenses bonus deduction
|
|
|
-
|
|
|
|
(165
|
)
|
|
|
(726
|
)
|
Other permanent differences
|
|
|
122
|
|
|
|
119
|
|
|
|
365
|
|
Effect of preferential income tax rate
|
|
|
1,034
|
|
|
|
346
|
|
|
|
450
|
|
Effect of income tax rate difference in other jurisdictions
|
|
|
595
|
|
|
|
543
|
|
|
|
805
|
|
Change in valuation allowance
|
|
|
1,850
|
|
|
|
3,173
|
|
|
|
939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
$
|
81
|
|
|
$
|
292
|
|
|
$
|
114
|
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
12.
|
INCOME TAXES - continued
|
The EIT Law and its implementation rules impose a withholding income tax at 10%, unless reduced by a tax
treaty or arrangement, on the amount of dividends distributed by a PRC-resident enterprise to its immediate holding company outside
the PRC that are related to earnings accumulated beginning on January 1, 2008. As a result, withholding tax of $3,362, $1,608 and
$2,045 was recorded to income tax expenses for discontinued operations in 2014, 2015 and 2016, respectively. Upon the disposal
of Super TV, the balance of deferred income tax liabilities related to withholding income tax on the undistributed earnings generated
by Beijing Super TV was derecognized.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
13.
|
EARNINGS/(LOSS) PER SHARE
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to China Digital TV Holding Co., Ltd.
|
|
$
|
(15,827
|
)
|
|
$
|
(14,627
|
)
|
|
$
|
(7,226
|
)
|
Net income from discontinued operations attributable to China Digital TV Holding Co., Ltd.
|
|
|
36,717
|
|
|
|
16,155
|
|
|
|
52,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to China Digital TV Holding Co., Ltd., basic and diluted
|
|
$
|
20,890
|
|
|
$
|
1,528
|
|
|
$
|
45,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
59,369,708
|
|
|
|
59,968,346
|
|
|
|
60,199,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to ordinary
shareholders of China Digital TV Holding Co., Ltd.
|
|
$
|
(0.27
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.12
|
)
|
Net income from discontinued operations attributable to
ordinary shareholders of China Digital TV Holding Co., Ltd.
|
|
|
0.62
|
|
|
|
0.27
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders of China Digital TV Holding Co., Ltd.
|
|
$
|
0.35
|
|
|
$
|
0.03
|
|
|
$
|
0.75
|
|
Outstanding stock options were excluded in the computation of diluted earnings/(loss) per share as they
are anti-dilutive in all the periods presented.
|
14.
|
SPECIAL CASH DIVIDEND TO SHAREHOLDERS
|
In April 2014, the Group declared
a special cash dividend of $0.5 per share on the Company's ordinary shares with the total amount of $29,635 paid in 2014.
In April 2016, the Group declared
a special cash dividend of $0.2 per share on the Company's ordinary shares. $12,034 was paid in 2016 and $4 remained payable as
of December 31, 2016.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION
|
|
(a)
|
Option granted by the Company
|
Option
granted to employees
Pursuant to the directors' resolution,
the Company adopted Share Incentive Plans in 2005, under which the Company may grant options to purchase up to 4,444,440 ordinary
shares of the Company, to its employees, directors, and consultants, subject to vesting requirements. Under the 2005 Share Incentive
Plans, there are four schemes of the options granted: Scheme I, Scheme II, Scheme III and Scheme IV, which were granted on February
3, 2005, September 22, 2006, December 5, 2006 and October 5, 2008, respectively. There were no share options granted under Scheme
I, Scheme II, Scheme III and Scheme IV outstanding as of December 31, 2016.
On September 13, 2007, the board
of directors of CDTV Holding approved the 2008 Stock Incentive Plan, pursuant to which the Company may grant options to purchase
up to 1,200,000 ordinary shares to its employees and other eligible people. Under the 2008 Share Incentive Plans, there are four
schemes of the options granted: Scheme V, Scheme VI, Scheme VII and Scheme VIII, which were granted on October 5, 2008, June 2,
2009, February 10, 2010 and November 15, 2010, respectively. There were no share options granted under Scheme VII and Scheme VIII
outstanding as of December 31, 2016.
On November 19, 2010, the board
of directors of CDTV Holding approved the 2010 Stock Incentive Plan, pursuant to which the Company may grant options to purchase
up to 3,600,000 ordinary shares to its employees and other eligible people. Under the 2010 Share Incentive Plans, there are four
schemes of the options granted: Scheme IX, Scheme X, Scheme XI and Scheme XII, which were granted on November 19, 2010, May 16,
2011, September 30, 2011 and November 19, 2011, respectively.
On May 1, 2012, the board of directors
of CDTV Holding approved the 2012 Stock Incentive Plan, pursuant to which the Company may grant options to purchase up to 1,200,000
ordinary shares to its employees. Under the 2012 Share Incentive Plans, Scheme XIII was granted on January 8, 2013.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company
- continued
|
Modification of option plans
On November 19, 2010, the board
of directors of CDTV Holding approved that the exercise price of all options which were granted under the 2005 Plan, the 2008 Plan
and the 2010 Plan prior to December 23, 2010 (the "Adjusted Options") and remain outstanding as of December 23, 2010
shall be adjusted as follows to reflect the declaration and payment of the special cash dividend.
The per share exercise price of
all Adjusted Options with a per share exercise price higher than $2.00 was reduced by $2.00 on December 23, 2010; the per share
exercise price of all Adjusted Options with a per share exercise price no more than $2.00 was reduced to $0.01. The board also
determined that if any future dividend is declared by the Board of the Company on all ordinary shares of the Company, the per share
exercise price of all options granted prior to and outstanding as of the date of record of such dividend shall be reduced by an
amount equal to the dividend payable on each ordinary shares, provided that the per share exercise price after adjustment shall
not be less than $0.01.
As the Company declared special
cash dividends of $0.56, $2.3, $0.5 and $0.2 per share, on May 20, 2011, November 12, 2012, April 2, 2014 and April 15, 2016, respectively,
on the Company's ordinary shares, the per share exercise price of all options granted prior to and remaining outstanding as of
the respective record dates, which were June 20, 2011, November 26, 2012, April 14, 2014 and April 29, 2016, was reduced by $0.56,
$2.3, $0.5 and $0.2, respectively, provided that the per share exercise price after adjustment shall not be less than $0.01.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company - continued
|
Details of the Share Incentive
Plans
:
Scheme V
Grant date: October 5, 2008
Exercise price per share- original:
$7.89
Exercise price per share after modification:
$2.33
Expiration date: October 4, 2018
Number of options granted: 406,776
Vesting schedule: (1) 25% of the
total number of the option shares on the first anniversary of the grant date and (2) the remaining 75% of the Option Shares shall
vest in 36 substantially equal monthly installments, with the first installment vesting on the last day of the month following
the month in which the first anniversary of the Grant date occurs and an additional installment vesting on the last day of each
of the 35 months thereafter.
Scheme VI
Grant date: June 2, 2009
Exercise price per share- original:
$9.09
Exercise price per share after modification:
$3.53
Expiration date: June 1, 2019
Number of options granted: 357,548
Vesting schedule: (1) 25% of the
total number of the option shares on the first anniversary of the grant date and (2) the remaining 75% of the Option Shares shall
vest in 36 substantially equal monthly installments, with the first installment vesting on the last day of the month following
the month in which the first anniversary of the Grant date occurs and an additional installment vesting on the last day of each
of the 35 months thereafter.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company - continued
|
Details of the Share Incentive
Plans: - continued
Scheme IX
Grant date: November 19, 2010
Exercise price per share- original:
$6.90
Exercise price per share after modification:
$1.34
Expiration date: November 19, 2020
Number of options granted: 1,000,000
Vesting schedule: (1) 25% of the
total number of option shares on the first anniversary of the grant date; and (2) the remaining 75% of the option shares shall
vest in 36 substantially equal monthly installments, with the first installment vesting on the last day of the month following
the month in which the first anniversary of the grant date occurs and an additional installment vesting on the last day of each
of the 35 months thereafter.
Scheme X
Grant date: May 16, 2011
Exercise price per share- original:
$4.90
Exercise price per share after modification:
$1.34
Expiration date: May 15, 2021
Number of options granted: 1,600,000
Type I under Scheme X:
Number of options granted: 1,457,000
Vesting schedule: (1) 25% of the
total number of option shares on November 19, 2011; and (2) the remaining 75% of the option shares shall vest in 36 substantially
equal monthly installments, with the first installment vesting on the last day of the month following November 19, 2011 and an
additional installment vesting on the last day of each of the 35 months thereafter.
Type II under Scheme X:
Number of options granted: 143,000
Vesting schedule: The vesting of
the options is conditional upon whether the performance of the optionee can meet certain performance targets as of April 1, 2012.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company - continued
|
Details of the Share Incentive
Plans: - continued
Scheme XI
Grant date: September 30, 2011
Exercise price per share-original:
$4.34
Exercise price per share after modification:
$1.34
Expiration date: September 29, 2021
Number of options granted: 700,000
Vesting schedule: (1) 25% of the
total number of option shares on November 19, 2011; and (2) the remaining 75% of the option shares shall vest in 36 substantially
equal monthly installments, with the first installment vesting on the last day of the month following November 19, 2011 and an
additional installment vesting on the last day of each of the 35 months thereafter.
Scheme XII
Grant date: November 19, 2011
Exercise price per share-original:
$4.34
Exercise price per share after modification:
$1.34
Expiration date: November 18, 2021
Number of options granted: 300,000
Vesting schedule: (1) 25% of the
total number of option shares immediately on November 19, 2011; and (2) the remaining 75% of the option shares shall vest in 36
substantially equal monthly installments, with the first installment vesting on the last day of the month following November 19,
2011 and an additional installment vesting on the last day of each of the 35 months thereafter.
Scheme XIII
Grant date: January 8, 2013
Exercise price per share-original:
$1.18
Exercise price per share after modification:
$0.48
Expiration date: January 7, 2023
Number of options granted: 1,200,000
Vesting schedule: (1) 25% of the
total number of option shares immediately on January 8, 2013; and (2) the remaining 75% of the option shares shall vest in 36 substantially
equal monthly installments with the first installment vesting on February 28, 2013 and an additional installment vesting on the
last day of each of the 35 months thereafter.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company - continued
|
Termination of options
If the grantee ceases to be employed
by or ceases to provide services to the Group, (a) the grantee will have until the date that is 30 days after his or her severance
date to exercise the options (or portion thereof) to the extent that they were vested on the severance date; (b) the options, to
the extent not vested on the severance date, shall terminate on the severance date; (c) the options, to the extent exercisable
for the 30-day period following the severance date and not exercised during such period, shall terminate at the close of the business
on the last day of the 30-day period.
Option exercise
A summary of stock option activity
is as follows:
|
|
|
|
|
Weighted average
|
|
|
|
Number of options
|
|
|
exercise price
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2016
|
|
|
4,048,973
|
|
|
|
1.58
|
|
Exercised
|
|
|
(111,090
|
)
|
|
|
0.58
|
|
Forfeited
|
|
|
(6,909
|
)
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2016
|
|
|
3,930,974
|
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2016
|
|
|
3,930,974
|
|
|
|
1.41
|
|
The following table summarizes information
with respect to share options outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Weighted-average
|
|
|
Number
|
|
|
Number
|
|
|
remaining
|
|
|
exercise
price
|
|
|
outstanding
|
|
|
exercisable
|
|
|
contractual
life
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheme V
|
|
|
2.33
|
|
|
|
229,468
|
|
|
|
229,468
|
|
|
1.76 years
|
Scheme VI
|
|
|
3.53
|
|
|
|
260,554
|
|
|
|
260,554
|
|
|
2.42 years
|
Scheme IX
|
|
|
1.34
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
3.89 years
|
Scheme X
|
|
|
1.34
|
|
|
|
1,410,748
|
|
|
|
1,410,748
|
|
|
4.38 years
|
Scheme XI
|
|
|
1.34
|
|
|
|
332,667
|
|
|
|
332,667
|
|
|
4.75 years
|
Scheme XII
|
|
|
1.34
|
|
|
|
69,875
|
|
|
|
69,875
|
|
|
4.89 years
|
Scheme XIII
|
|
|
0.48
|
|
|
|
627,662
|
|
|
|
627,662
|
|
|
6.02 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,930,974
|
|
|
|
3,930,974
|
|
|
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(a)
|
Option granted by the Company - continued
|
Option exercise - continued
There were no options granted during 2014, 2015 and 2016.
The aggregate intrinsic value of
options outstanding and exercisable as of December 31, 2016 was both $953. The total intrinsic value of options exercised during
the years ended December 31, 2014, 2015 and 2016 was $1,027, $1,250 and $97, respectively.
A summary of unvested stock option
activity as of December 31, 2016, and changes during the year ended December 31, 2016 are presented below:
|
|
|
|
|
Weighted average
|
|
Unvested Stock Option
|
|
Number of Shares
|
|
|
Grant-date Fair Value
|
|
|
|
|
|
|
|
|
Unvested at January 1, 2016
|
|
|
21,052
|
|
|
$
|
1.15
|
|
Vested
|
|
|
(21,052
|
)
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
The Company recorded the share-based
compensation expense of $736, $80 and $3 for the years ended December 31, 2014, 2015 and 2016, respectively.
There were no share options unvested
as of December 31, 2016. Total fair value of stock options vested during the years ended December 31, 2014, 2015 and 2016 was $2,452,
$299 and $24, respectively.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(b)
|
Options granted by Cyber Cloud
|
On January 18, 2012, Cyber Cloud,
a majority-owned subsidiary of the Company, approved the Cyber Cloud 2012 Stock Incentive Plan, under which Cyber Cloud granted
551,000 options to its employees. The share option plan has a term of ten years, which will expire on January 17, 2022 unless terminated
earlier by its shareholders and board of directors. The exercise price of the options is $0.17 per share.
On January 31, 2013, Cyber Cloud
approved the Cyber Cloud 2013 Stock Incentive Plan, under which Cyber Cloud granted 613,000 options to its employees. The share
option plan has a term of ten years, which will expire on January 30, 2023 unless terminated earlier by its shareholders and board
of directors. The exercise price of the options is $0.16 per share.
On April 1, 2015, Cyber Cloud approved
the Cyber Cloud 2015 Stock Incentive Plan, under which Cyber Cloud granted 542,000 options to its employees. The share option plan
has a term of ten years, which will expire on March 31, 2025 unless terminated earlier by its shareholders and board of directors.
The exercise price of the options is $0.16 per share.
The following table summarizes the
Cyber Cloud's share option activities with employees:
|
|
|
|
|
Weighted average
|
|
|
|
Number of options
|
|
|
exercise price
|
|
|
|
|
|
|
|
|
Options outstanding as of January 1, 2016
|
|
|
1,111,000
|
|
|
|
0.16
|
|
Forfeited
|
|
|
(119,000
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2016
|
|
|
992,000
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2016
|
|
|
986,342
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2016
|
|
|
748,667
|
|
|
|
0.16
|
|
Management used Binomial model to
estimate the fair value of the following options granted in the year ended December 31, 2015 on their respective grant date with
the following assumptions:
|
|
Expected
|
|
|
Risk-free
|
|
|
Expected
|
|
Expected
|
|
|
|
volatility range
|
|
|
interest rate range
|
|
|
life
|
|
dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted under 2015 Stock Incentive Plan
|
|
|
51.00
|
%
|
|
|
1.87
|
%
|
|
10 years
|
|
|
-
|
|
There were no options granted
in 2014 and 2016.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(b)
|
Option granted by Cyber Cloud - continued
|
In calculating the fair value of
the options using the Binomial option pricing model, the following major assumptions were used:
The volatility of the underlying ordinary
shares during the life of the options was estimated based on the historical stock prices volatility of listed comparable companies
over a period comparable to the expected term of the options.
|
(2)
|
Risk free interest rate
|
Risk free interest rate was estimated
based on the yield to maturity of government bonds with a maturity period close to the expected term of the options.
Cyber Cloud estimated the expected
term as the average between the vesting term of the options and the original contractual term.
Cyber Cloud estimated the time to
vest as the weighted average remaining vesting period of the options based on the vesting schedule of the options.
The dividend yield was estimated by
Cyber Cloud based on its expected dividend policy over the expected term of the options and its historical special cash dividend
payments.
The exercise price of the options
was determined and approved by Cyber Cloud's board of directors.
|
(7)
|
Fair value of underlying ordinary shares
|
The estimated fair value of the ordinary
shares underlying the options as of the grant date was determined based on a retrospective valuation.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(b)
|
Option granted by Cyber Cloud - continued
|
Vesting schedule: all options
will vest equally in 48 months after the grant date.
Cyber Cloud recorded share-based
compensation expense of $23, $40 and $19 for the years ended December 31, 2014, 2015 and 2016, respectively.
As of December 31, 2016, total
unrecognized compensation expense related to the unvested share options was $15, which is expected to be recognized over a weighted-average
period of 0.94 years according to the graded vesting schedule.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
15.
|
SHARE-BASED COMPENSATION - continued
|
|
(c)
|
Option granted by Joysee
|
On February 17, 2012, Joysee, a
majority-owned subsidiary of the Company, approved the Joysee 2012 Stock Incentive Plan, under which Joysee granted 520,000 options
to its employees. The share option plan has a term of ten years, which will expire on February 16, 2022 unless terminated earlier
by its shareholders and board of directors. The options will vest equally in 4 years after the grant date. The exercise price of
the options is $0.17 per share. There were no share options granted under Joysee 2012 stock Incentive Plan outstanding as of December
31, 2016.
For options granted under Joysee's
stock incentive plan, Joysee reversed share-based compensation expense of $23 and $2 for the years ended December 31, 2014 and
2015, respectively, to reflect the actual forfeiture.
|
(d)
|
Immediately vested share-based compensation
|
On May 11, 2016, the board of directors
of Beijing Super TV approved capital injection of RMB33.0 million, representing 9.91% of Beijing Super TV’s equity interests
after the capital injection, from certain employees of Beijing Super TV. The consideration of capital injection was lower than
its proportion of the fair value of Beijing Super TV as of the date of approval. The difference of RMB25.8 million between proportionate
fair value and the consideration paid was recognized as shared-based compensation costs immediately, as there are not any vesting
conditions in such arrangement. The share-based compensation costs were included in net income of operations of discontinued operations
for the year ended December 31, 2016.
On August 12, 2016, the board of
directors of Cyber Cloud approved capital injection of RMB8.4 million, representing 5.0% of Cyber Cloud’s equity interests
after the capital injection, from two management members of Cyber Cloud. The consideration of capital injection was lower than
its proportion of the fair value of Cyber Cloud as of the date of approval. The difference of RMB6.2 between proportionate fair
value and the consideration paid was recognized as shared-based compensation costs immediately, as there are not any vesting conditions
in such arrangement.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
16.
|
MAINLAND CHINA CONTRIBUTION PLAN
|
Full time employees of the Group
in the PRC participate in a government-mandated multiemployer defined contribution plan pursuant to which certain pension benefits,
medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations
require the Group to accrue for these benefits based on certain percentages of the employees' salaries. The total contribution
for such employee benefits from continuing operations were $1,970, $2,629 and $1,548 and from discontinued operations were $3,793,
$2,855 and $3,425 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
Operating lease commitment
The Group has operating lease agreements
principally for its office spaces in the PRC. These leases expire through 2018 and are renewable upon negotiation. Rental expense
under operating leases for the years ended December 31, 2014 and 2015 and 2016 were $945, $1,119 and $744 for continuing operations
and $1,355, $1,177 and $1,569 for discontinued operations, respectively.
Future minimum lease payments under
non-cancelable operating lease agreements are as follows:
2017
|
|
$
|
330
|
|
2018
|
|
|
110
|
|
|
|
|
|
|
|
|
$
|
440
|
|
Purchase commitments
As of December 31, 2016, the Group
has purchase commitments of $515, mainly for services and products.
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
18.
|
NONCONTROLLING INTEREST
|
|
|
|
|
|
|
|
|
Dagong
|
|
|
Beijing
|
|
|
|
|
|
|
|
|
|
Cyber Cloud
|
|
|
Joysee
|
|
|
Technology
|
|
|
Super TV
|
|
|
Others
|
|
|
Total
|
|
Balance as of January 1, 2014
|
|
$
|
(31
|
)
|
|
$
|
967
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
936
|
|
Share-based compensation
|
|
|
4
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
Partial disposal of Joysee's equity (Note b)
|
|
|
-
|
|
|
|
215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
215
|
|
Transfer of noncontrolling interest-Cyber Cloud (Note a)
|
|
|
1,160
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,160
|
|
Net loss
|
|
|
(620
|
)
|
|
|
(1,105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,725
|
)
|
Foreign currency translation adjustment
|
|
|
9
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Balance as of December 31, 2014
|
|
|
522
|
|
|
|
43
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
565
|
|
Share-based compensation
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
Capital injection by noncontrolling
interests (Note c)
|
|
|
741
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
741
|
|
Acquisition of noncontrolling interests of Joysee (Note d)
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(59
|
)
|
Net (loss)/income
|
|
|
(972
|
)
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(900
|
)
|
Foreign currency translation adjustment
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
273
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
326
|
|
Share-based compensation
|
|
|
295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
295
|
|
Capital injection by noncontrolling
interests (Note e)
|
|
|
3,741
|
|
|
|
-
|
|
|
|
763
|
|
|
|
5,524
|
|
|
|
-
|
|
|
|
10,028
|
|
Acquisition of noncontrolling interests of Dagong Technology (Note f)
|
|
|
-
|
|
|
|
-
|
|
|
|
(548
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(548
|
)
|
Disposal of Super TV
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,203
|
)
|
|
|
-
|
|
|
|
(6,203
|
)
|
Net (loss)/income
|
|
|
(817
|
)
|
|
|
(34
|
)
|
|
|
(180
|
)
|
|
|
991
|
|
|
|
1
|
|
|
|
(39
|
)
|
Foreign currency translation adjustment
|
|
|
(48
|
)
|
|
|
(3
|
)
|
|
|
(35
|
)
|
|
|
(312
|
)
|
|
|
-
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
3,444
|
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
3,461
|
|
The following summarized the effects
of changes in the Group's ownership interests in its subsidiaries on the Group's equity:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
$
|
20,890
|
|
|
$
|
1,528
|
|
|
$
|
45,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in the Group's additional paid-in capital for transfer of noncontrolling interest in Joysee (Note b)
|
|
|
(215
|
)
|
|
|
-
|
|
|
|
-
|
|
Increase in the Group's additional paid-in capital for transfer of noncontrolling interest in Cyber Cloud (Note a)
|
|
|
1,381
|
|
|
|
-
|
|
|
|
-
|
|
Increase in the Group's additional paid-in capital from capital
injection of noncontrolling interest (Note c and Note e)
|
|
|
-
|
|
|
|
1,531
|
|
|
|
2,704
|
|
Increase/(decrease) in the Group's additional paid-in capital for acquisition of noncontrolling interest (Note d and Note f)
|
|
|
-
|
|
|
|
12
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from noncontrolling interest
|
|
|
1,166
|
|
|
|
1,543
|
|
|
|
2,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes from net income attributable to the Company and transfers from noncontrolling interest
|
|
$
|
22,056
|
|
|
$
|
3,071
|
|
|
$
|
48,044
|
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
18.
|
NONCONTROLLING INTEREST – continued
|
|
a.
|
Pursuant to a series of agreements dated April 30, 2014, Cyber Cloud acquired 100% equity interest
in Xinsi Yijia from Yuewu Yuntian and Holch Capital, and in exchange, Yuewu Yuntian and Holch Capital obtained certain noncontrolling
interests in Cyber Cloud. Moreover, Beijing Super TV transferred its remaining equity interest in Cyber Cloud to CSM Holdings,
a subsidiary of the Company. As a result of these transactions, CSM Holdings, Yuewu Yuntian and Holch Capital held 75%, 15% and
10% of the equity interest in Cyber Cloud, respectively (Note 5(a)).
|
|
b.
|
Pursuant to agreements dated June 20, 2014, the Group transferred
17.9% equity interests in Joysee to Beijing Ying Zhi Cheng Technology Co., Ltd. ("Ying Zhi Cheng Technology"), an entity
that is held mainly by employees of Joysee and who held 5.2% of the equity interest in Joysee before the equity transfer. As a
result of this transaction, the Group, Ying Zhi Cheng Technology and Intel Semiconductor (Dalian) Ltd. ( "Intel"), held
46.9%, 23.1% and 30% of the equity interests in Joysee, respectively. According to the article of association of Joysee, N-S Information
Technology is entitled to recommend for appointment three out of the five members to the board of directors of Joysee, and has
the power to determine all the major financial and operating decisions of Joysee. Accordingly, after the transfer, the Group continues
to have the ability to control Joysee. The Group has accounted for the transfer of equity interest as stock based compensation.
Stock based compensation of $963 has been recorded for the year ended December 31, 2014 accordingly.
|
|
c.
|
In June 2015, Beijing Gehua CATV Network Co., Ltd. (“Gehua”) made a capital contribution of RMB13.9 million
(equivalent to $2,272) to Cyber Cloud. As a result, the Group, Yuewu Yuntian, Gehua and Holch Capital held 67.5%, 13.5%, 10%
and 9% of the equity interest in Cyber Cloud, respectively. The Group’s additional paid-in capital and noncontrolling
interest were increased by $1,531 and $741 from this capital injection, respectively.
|
|
d.
|
In September 2015, N-S Information Technology purchased
the 30% of the equity interest in Joysee held by Intel in consideration of RMB0.3 million (equivalent to $47). As a result of
this transaction, the Group and Ying Zhi Cheng Technology held 76.9% and 23.1% of the equity interest in Joysee, respectively.
The Group’s additional paid-in capital was increased by $12 and noncontrolling interest was decreased by $59 from this transaction.
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
18.
|
NONCONTROLLING INTEREST – continued
|
|
e.
|
In February 2016, CSM Holdings and Bejing Quanda Technology
Center (“Quanda”) made cash contribution of $3,815 and $763 to establish Dagong Technology, representing 80% and 20%
of the equity interest in Dagong Technology, respectively.
|
In May 2016, certain key employees
of Beijing Super TV made a cash investment in amount of RMB33 million (equivalent to $5,015) to Beijing Super TV in exchange of
a 9.91% equity interest in Beijing Super TV. As a result, the Group held 90.09% of the equity interest in Beijing Super TV. The
Group’s additional paid-in capital was decreased by $509 and noncontrolling interest was increased by $5,524 from this capital
injection.
In May 2016, the existing noncontrolling
shareholders of Cyber Cloud, Yuewu Yuntian, Gehua and Holch Capital, made cash contribution in aggregate of RMB20 million (equivalent
to $3,040) to Cyber Cloud according to their proportion of equity interest in Cyber Cloud to increase the share capital of Cyber
Cloud. As a result, the Group’s noncontrolling interest was increased by $988.
In October 2016, Tianjin
Xuanwutianxia Network Technology Center (“Xuanwutianxia”), an entity owned by two management of Cyber Cloud
entered into a share contribution agreement to make a cash contribution of RMB8.4 million (equivalent to $1,213) to Cyber
Cloud in return of 5.0% of equity interests of Cyber Cloud after such contribution. $399 and $218 were received in January
2017 and March 2017, respectively, and $596 which remained outstanding as of the release date of this financial report
was recognized as subscription receivable. The Group’s additional paid-in capital and noncontrolling interest
were increased by $688 and $525 from this capital injection, respectively.
In December 2016, Ningbo
Meishan Free Trade Port Area Jinxinronghui Investment Partnership (“Jinxinronghui”), a third-party investor, made
a cash contribution in amount of RMB33 million (equivalent to $4,753) to Cyber Cloud. As a result, the Group, Yuewu Yuntian,
Jinxinronghui, Gehua, Holch Capital and Xuanwutianxia held 57.7%, 11.5%, 10.0%, 8.6%, 7.7% and 4.5% of the equity interests
in Cyber Cloud, respectively, as of December 31, 2016. The Group’s additional paid-in capital and noncontrolling
interest were increased by $2,525 and $2,228 from this capital injection, respectively. The capital injection was paid to an
escrow account of Cyber Cloud in December 2016 and was subsequently transferred to a current deposit account in January 2017
after the update of shareholder register on December 28, 2016.
|
f.
|
In December 2016, N-S Information Technology purchased the remaining 20% of the equity interest in Dagong
Technology held by Quanda in consideration of RMB4.35 million (equivalent to $626). As a result of the completion of this transaction,
Dagong Technology became a wholly owned subsidiary of the Group
.
The Group’s additional paid-in capital and noncontrolling interest were decreased by $78 and $548 from this acquisition,
respectively.
|
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
19.
|
RELATED PARTY BALANCES AND TRANSACTIONS
|
In the years ended December 31,
2014, 2015 and 2016, the Group’s discontinued operations purchased certain media information system amounting to $66, $82
and nil, respectively, from Rujia. As of December 31, 2015, the amount due to Rujia and the amounts due from Rujia for guarantee
deposit were $44 and $23, which were included in the current liabilities of Super TV and current assets of Super TV, respectively.
Pursuant to a series of agreements,
dated April 30, 2014, Beijing Super TV transferred a portion of its equity interest in Cyber Cloud to Yuewu Yuntian, an entity
in which the Chief Technology Officer of the Company at that time was able to exercise significant influence. Concurrently, Yuewu
Yuntian transferred its equity interest in Xinsi Yijia to Cyber Cloud (Note 18(a)).
China
digital tv holding co., l
TD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED
DECEMBER 31, 2014, 2015 AND 2016
(
U.S.
dollars in thousands, except share and per share data
)
|
20.
|
STATUTORY RESERVES AND RESTRICTED NET ASSETS
|
As stipulated by the relevant
law and regulations in the PRC, the Company's subsidiaries in the PRC are required to maintain non-distributable statutory
reserves. Appropriations to the statutory reserves are required to be made at 10% of profit after taxes as reported in these
entities' statutory financial statements prepared under PRC GAAP. Once appropriated, these amounts are not available for
future distribution to owners or shareholders. Once the statutory reserves are accumulated to 50% of these entities'
registered capital, these entities can choose not to provide further statutory reserves. The statutory reserves may be
applied against prior year losses, if any, and may be used for general business expansion and production and an increase in
registered capital of these entities. Amounts contributed to the statutory reserves from continuing operations were $1, $3
and $1 for 2014, 2015 and 2016, respectively. Amounts contributed to the statutory reserves from discontinued operations were
$69 and $381 for 2014 and 2015 respectively. The balance of statutory reserve of $18,274 from discontinued operations was
reclassified to retained earnings in the consolidated financial statements upon disposal of Super TV.
Relevant PRC laws and regulations
restrict the foreign invested enterprises ("FIEs") and VIEs established in the PRC from transferring a portion of their
net assets to the Company in the form of loans, advances or cash dividends.
Based
on the Company’s group structure and as advised by the Company’s PRC legal counsel, the registered capital of the
Company’s FIEs and its consolidated VIEs (all of which are domestic PRC entities) may be reduced as approved by their
respective shareholders, subject to the minimum registered capital requirements under PRC law and after repayment of or
provision for guarantees of debt as required by creditor (if any), and any excess registered capital after such reduction
(
"
Excess Capital
"
) may be transferred to
such shareholders within the PRC without the consent of a third party pursuant to relevant PRC laws, rules and regulations.
Such Excess Capital may be transferred to the FIEs, which could in turn transfer it to the parent of the FIEs (a non-PRC
entity) and then ultimately transferred to the Company in the form of dividend distributions.
As a result, the Company’s
restricted net assets (which consist of the registered capital of the FIEs and the statutory reserve, attributable to the Company)
was $30,846 as of December 31, 2016.
On April 19, 2017,
the Company’s Board of Directors declared a special cash dividend of US$1.50 per ordinary share, which will be paid to
all shareholders of record as of the close of business on May 31, 2017. The aggregate amount of cash dividends to be paid
is approximately US$90.4 million based on the number of outstanding ordinary shares as of December 31, 2016. The dividend
is expected to be paid after the purchase consideration from the sale of SuperTV, which has already been received in
Renminbi, is exchanged to U.S. dollars.
China
digital tv holding co., l
TD.
Additional Information-Financial Statement
Schedule I
Condensed Financial Information of Parent
Company
BALANCE SHEETS
(U.S. dollars in thousands)
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,551
|
|
|
$
|
616
|
|
Amounts due from subsidiaries - current
|
|
|
967
|
|
|
|
1,862
|
|
Dividend receivable
|
|
|
6,001
|
|
|
|
6,001
|
|
Prepaid expenses and other current assets
|
|
|
189
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,708
|
|
|
|
8,780
|
|
Accounts due from subsidiaries - non-current
|
|
|
1,151
|
|
|
|
1,151
|
|
Investments in subsidiaries and VIE
|
|
|
92,480
|
|
|
|
110,543
|
|
Deferred income tax assets
|
|
|
121
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
102,460
|
|
|
$
|
120,526
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
577
|
|
|
|
743
|
|
Deferred revenue-current
|
|
|
403
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
980
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
980
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
30
|
|
|
|
30
|
|
Additional paid-in capital and subscription receivable
|
|
|
37,988
|
|
|
|
44,677
|
|
Retained earnings
|
|
|
41,812
|
|
|
|
75,192
|
|
Accumulated other comprehensive income/(loss)
|
|
|
21,650
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
101,480
|
|
|
|
119,610
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
102,460
|
|
|
$
|
120,526
|
|
China
digital tv holding co., l
TD.
Additional Information-Financial Statement
Schedule I
Condensed Financial Information of Parent
Company
STATEMENTS OF
COMPREHENSIVE
INCOME/(LOSS)
(U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
(2,554
|
)
|
|
$
|
(702
|
)
|
|
$
|
(1,241
|
)
|
Interest income
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
Equity in earnings of subsidiaries and VIEs
|
|
|
23,528
|
|
|
|
2,535
|
|
|
|
46,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
20,978
|
|
|
|
1,833
|
|
|
|
45,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(88
|
)
|
|
|
(305
|
)
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
|
20,890
|
|
|
|
1,528
|
|
|
|
45,418
|
|
Other comprehensive loss, after reclassification, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(3,431
|
)
|
|
|
(3,859
|
)
|
|
|
(21,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) attributable to ordinary shareholders
|
|
$
|
17,459
|
|
|
$
|
(2,331
|
)
|
|
$
|
23,479
|
|
China
digital tv holding co., l
TD.
Additional Information-Financial Statement
Schedule I
Condensed Financial Information of Parent
Company
STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
$
|
27,294
|
|
|
$
|
(1,631
|
)
|
|
$
|
11,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities
|
|
|
(28,966
|
)
|
|
|
700
|
|
|
|
(11,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,672
|
)
|
|
|
(931
|
)
|
|
|
(935
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
|
|
|
4,154
|
|
|
|
2,482
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF THE YEAR
|
|
$
|
2,482
|
|
|
$
|
1,551
|
|
|
$
|
616
|
|
China
digital tv holding co., l
TD.
Additional Information-Financial Statement
Schedule I
Condensed Financial Information of Parent
Company
NOTES TO THE FINANCIAL STATEMENTS
(
U.S.
dollars in thousands, except share and per share data
)
1.
|
|
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04(c) of Regulation S-X, which require condensed financial information as to the financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
|
2.
|
|
The condensed financial information of China Digital TV Holding Co., Ltd. has been prepared using the same accounting policies as set out in the accompanying consolidated financial statements except that the equity method has been used to account for investments in its subsidiaries.
|
3.
|
|
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the consolidated financial statements of the Group.
|
4.
|
|
As of December 31, 2016, there were no material
contingencies, significant provisions of long-term obligations, mandatory dividend or redemption requirements of redeemable stocks
or guarantees of the Company.
|
5.
|
|
$30,000, nil and $13,481 of cash dividends were paid to the Company by its subsidiary in the years ended December 31, 2014, 2015 and 2016, respectively.
|