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TABLE OF CONTENTS
TAOMEE HOLDINGS LIMITED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|
|
|
(Mark One)
|
|
|
o
|
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
|
ý
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 2013.
|
OR
|
o
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|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to
.
|
OR
|
o
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|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Date of event requiring this shell company
report:
.
|
Commission file number: 001-35190
TAOMEE HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District
Shanghai 200233, People's Republic of China
(Address of principal executive offices)
Paul Keung, Chief Financial Officer
Tel: (86-21) 6128-0056
E-mail: paulkeung@taomee.com
Facsimile number: +86 21 3367 4012
16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District
Shanghai 200233, People's Republic of China
(86-21) 6128-0056
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the Act.
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Title of Each Class
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Name of Each Exchange on Which Registered
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American Depositary Shares, each representing 20 ordinary shares of par value US$0.00002 per share
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New York Stock Exchange
|
Securities
registered or to be registered pursuant to Section 12(g) of the Act.
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.
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:
757,684,760
ordinary shares of par value US$0.00002 per share, as of December 31, 2013.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
o
Yes
ý
No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
o
Yes
ý
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
ý
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
ý
Yes
o
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):
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o
Large accelerated filer
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o
Accelerated filer
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|
ý
Non-accelerated filer
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Indicate
by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
ý
U.S. GAAP
o
International Financial Reporting Standards as issued
o
Other by the International Accounting Standards Board
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.
o
Item 17
o
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).
o
Yes
ý
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.
o
Yes
o
No
Table of Contents
TABLE OF CONTENTS
1
Table of Contents
CONVENTIONS USED IN THIS ANNUAL REPORT
In this annual report, unless otherwise indicated, references in this annual report
to:
-
-
"ADRs" are to the American depositary receipts, which, if issued, evidence our ADSs;
-
-
"ADSs" are to our American depositary shares, each of which represents 20 ordinary shares;
-
-
"China" and the "PRC" are to the People's Republic of China, excluding, for the purpose of this annual report only, Taiwan
and the special administrative regions of Hong Kong and Macau;
-
-
"shares" or "ordinary shares" are to our ordinary shares, par value US$0.00002 per share;
-
-
"RMB" and "Renminbi" are to the legal currency of China;
-
-
"US$" and "U.S. dollars" are to the legal currency of the United States;
-
-
"we," "us," "our company," "our" or "Taomee" are to Taomee Holdings Limited, a Cayman Islands company, its predecessor
entities, subsidiaries, consolidated variable interest entities ("VIEs") and VIEs' subsidiaries controlled by us.
References
to share information and per share data reflect the 50-for-1 share split effected on February 14, 2011, in which every ordinary share and Series A preferred
share was subdivided into 50 ordinary shares and 50 Series A preferred shares, respectively, and the par value of the shares was changed from US$0.001 per share to US$0.00002 per share for each
ordinary share and Series A preferred share.
This
annual report contains translations of certain Renminbi amounts into U.S. dollars at specified rates. For amounts not recorded in our consolidated financial statements included
elsewhere in this annual report, unless otherwise stated, all translation of financial data from Renminbi into U.S. dollars has been made at RMB 6.0537 to US$1.00, the noon buying rate in effect on
December 31, 2013 as set forth in the H.10 Statistical Release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report
could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See "Item 3. Key InformationD. Risk
FactorsRisks Related to Doing Business in ChinaFluctuation in the value of the RMB may have a material adverse effect on the value of your investment." On April 4,
2014, the noon buying rate was RMB6.2118 to US$1.00.
This
annual report on Form 20-F includes our audited consolidated statements of operations for the fiscal years ended December 31, 2011, 2012 and 2013, and consolidated
balance sheet data as of December 31, 2012 and 2013.
We
completed the initial public offering of 7,187,500 ADSs, each representing 20 ordinary shares of par value US$0.00002 per share, on June 10, 2011. On June 8, 2011, we
listed our ADSs on the New York Stock Exchange, or NYSE, under the ticker symbol "TAOM".
2
Table of Contents
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
-
A.
-
Selected Financial Data
The
following selected consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of
December 31, 2012 and 2013 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report. Our selected consolidated combined balance
sheet data as of December 31, 2009, 2010 and 2011, and selected consolidated combined statements of operations data for the year ended December 31, 2009 and 2010 have been derived from
our audited consolidated combined financial statements that are not included in this annual report.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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For Years Ended December 31,
|
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2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(US$ in thousands, except share and per share data)
|
|
Consolidated and Combined Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
6,877
|
|
|
33,683
|
|
|
40,331
|
|
|
32,169
|
|
|
35,330
|
|
Offline business
|
|
|
189
|
|
|
2,290
|
|
|
5,066
|
|
|
8,039
|
|
|
13,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
7,066
|
|
|
35,973
|
|
|
45,397
|
|
|
40,208
|
|
|
48,354
|
|
Cost of services(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
(1,913
|
)
|
|
(5,166
|
)
|
|
(6,035
|
)
|
|
(6,950
|
)
|
|
(7,644
|
)
|
Offline business
|
|
|
(90
|
)
|
|
(686
|
)
|
|
(1,653
|
)
|
|
(3,048
|
)
|
|
(5,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,063
|
|
|
30,122
|
|
|
37,709
|
|
|
30,210
|
|
|
35,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses(1)
|
|
|
(1,444
|
)
|
|
(4,649
|
)
|
|
(10,304
|
)
|
|
(12,318
|
)
|
|
(13,886
|
)
|
Sales and marketing expenses(1)
|
|
|
(893
|
)
|
|
(1,570
|
)
|
|
(6,255
|
)
|
|
(9,966
|
)
|
|
(9,446
|
)
|
General and administrative expenses(1)
|
|
|
(1,161
|
)
|
|
(5,729
|
)
|
|
(7,965
|
)
|
|
(10,078
|
)
|
|
(13,095
|
)
|
Impairment loss on acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,046
|
)
|
Other operating income
|
|
|
|
|
|
278
|
|
|
1,734
|
|
|
5,512
|
|
|
5,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(3,498
|
)
|
|
(11,670
|
)
|
|
(22,790
|
)
|
|
(26,850
|
)
|
|
(31,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,565
|
|
|
18,452
|
|
|
14,919
|
|
|
3,360
|
|
|
3,324
|
|
Interest income
|
|
|
7
|
|
|
240
|
|
|
1,410
|
|
|
2,647
|
|
|
2,932
|
|
Other income (expenses), net
|
|
|
(10
|
)
|
|
(115
|
)
|
|
667
|
|
|
859
|
|
|
771
|
|
Impairment loss on investment in an equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and share of profit in equity method investments
|
|
|
1,562
|
|
|
18,577
|
|
|
16,996
|
|
|
6,866
|
|
|
6,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense)/benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(22
|
)
|
|
(7
|
)
|
|
(2,539
|
)
|
|
1,279
|
|
|
(789
|
)
|
Deferred
|
|
|
(271
|
)
|
|
2,511
|
|
|
812
|
|
|
(424
|
)
|
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (expense)/benefit
|
|
|
(293
|
)
|
|
2,504
|
|
|
(1,727
|
)
|
|
855
|
|
|
(1,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before share of profit in equity method investments
|
|
|
1,269
|
|
|
21,081
|
|
|
15,269
|
|
|
7,721
|
|
|
5,238
|
|
Share of profit in equity method investments
|
|
|
49
|
|
|
494
|
|
|
4,224
|
|
|
1,140
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,318
|
|
|
21,574
|
|
|
19,493
|
|
|
8,861
|
|
|
5,445
|
|
3
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(US$ in thousands, except share and per share data)
|
|
Net income (loss) attributable to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taomee Holdings Limited
|
|
|
1,318
|
|
|
21,574
|
|
|
19,493
|
|
|
8,862
|
|
|
5,441
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
(210
|
)
|
|
(469
|
)
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to holders of ordinary shares
|
|
|
1,108
|
|
|
21,105
|
|
|
19,293
|
|
|
8,862
|
|
|
5,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.0020
|
|
$
|
0.0367
|
|
$
|
0.0292
|
|
$
|
0.0121
|
|
$
|
0.0074
|
|
Diluted
|
|
$
|
0.0020
|
|
$
|
0.0360
|
|
$
|
0.0278
|
|
$
|
0.0118
|
|
$
|
0.0073
|
|
Weighted average number of ordinary shares used in calculating earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
467,123,300
|
|
|
450,000,000
|
|
|
606,648,098
|
|
|
731,303,362
|
|
|
733,333,891
|
|
Diluted
|
|
|
467,123,300
|
|
|
458,482,370
|
|
|
640,377,175
|
|
|
753,533,499
|
|
|
746,532,112
|
|
-
(1)
-
Includes
share-based compensation expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(US$ in thousands)
|
|
Share-based compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
1.0
|
|
|
14.8
|
|
|
203.6
|
|
|
255.3
|
|
|
289.9
|
|
Product development expenses
|
|
|
10.1
|
|
|
80.9
|
|
|
814.2
|
|
|
498.5
|
|
|
360.9
|
|
Sales and marketing expenses
|
|
|
0.2
|
|
|
69.1
|
|
|
63.4
|
|
|
69.0
|
|
|
31.9
|
|
General and administrative expenses
|
|
|
61.9
|
|
|
5.6
|
|
|
915.6
|
|
|
1,383.7
|
|
|
1,459.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
73.2
|
|
|
170.4
|
|
|
1,996.8
|
|
|
2,206.5
|
|
|
2,142.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(US$ in thousands)
|
|
Consolidated and Combined Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
10,835
|
|
|
43,087
|
|
|
120,679
|
|
|
118,571
|
|
|
114,251
|
|
Accounts receivable, net
|
|
|
800
|
|
|
438
|
|
|
1,423
|
|
|
2,371
|
|
|
2,388
|
|
Total current assets
|
|
|
12,338
|
|
|
47,684
|
|
|
127,066
|
|
|
126,967
|
|
|
129,543
|
|
Total assets
|
|
|
13,461
|
|
|
53,032
|
|
|
134,454
|
|
|
139,758
|
|
|
151,189
|
|
Total current liabilities
|
|
|
7,063
|
|
|
34,297
|
|
|
31,303
|
|
|
26,007
|
|
|
29,260
|
|
Advances from customers
|
|
|
3,497
|
|
|
8,684
|
|
|
10,223
|
|
|
8,142
|
|
|
6,961
|
|
Deferred revenue
|
|
|
1,904
|
|
|
10,783
|
|
|
12,913
|
|
|
12,062
|
|
|
12,341
|
|
Dividends payable
|
|
|
|
|
|
8,950
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible redeemable preferred shares
|
|
|
5,159
|
|
|
5,628
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
9
|
|
|
9
|
|
|
15
|
|
|
15
|
|
|
15
|
|
Treasury stock
|
|
|
|
|
|
|
|
|
(563
|
)
|
|
(747
|
)
|
|
(1,199
|
)
|
Additional paid-in capital
|
|
|
988
|
|
|
1,158
|
|
|
70,782
|
|
|
72,437
|
|
|
73,757
|
|
Retained earnings
|
|
|
153
|
|
|
11,258
|
|
|
30,551
|
|
|
39,413
|
|
|
44,854
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
159
|
|
Total equity
|
|
|
1,239
|
|
|
13,107
|
|
|
103,151
|
|
|
113,751
|
|
|
121,929
|
|
Total liabilities, mezzanine equity and equity
|
|
|
13,461
|
|
|
53,032
|
|
|
134,454
|
|
|
139,758
|
|
|
151,189
|
|
4
Table of Contents
Exchange Rate Information
Our business is primarily conducted in China and substantially all of our revenues are denominated in RMB. This annual report contains
translations of RMB amounts into U.S. dollars at specified rates solely for the convenience of the reader. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of
the Federal Reserve Board. Unless otherwise noted, all translations from RMB to U.S. dollars were made at a rate of RMB6.0537 to US$1.00, the noon buying rate set forth as of December 31, 2013.
No representation is made that the RMB amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all. The PRC government imposes
control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 4, 2014, the
exchange rate was RMB6.2118 to US$1.00.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience
and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate
|
|
Period
|
|
Period End
|
|
Average(1)
|
|
Low
|
|
High
|
|
|
|
(RMB per US$1.00)
|
|
2009
|
|
|
6.8259
|
|
|
6.8295
|
|
|
6.8470
|
|
|
6.8176
|
|
2010
|
|
|
6.6000
|
|
|
6.7603
|
|
|
6.8330
|
|
|
6.6000
|
|
2011
|
|
|
6.2939
|
|
|
6.4475
|
|
|
6.6017
|
|
|
6.2939
|
|
2012
|
|
|
6.2301
|
|
|
6.3088
|
|
|
6.3879
|
|
|
6.2221
|
|
2013
|
|
|
6.0537
|
|
|
6.1412
|
|
|
6.2438
|
|
|
6.0537
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
|
6.0943
|
|
|
6.1032
|
|
|
6.1209
|
|
|
6.0815
|
|
November
|
|
|
6.0922
|
|
|
6.0929
|
|
|
6.0993
|
|
|
6.0903
|
|
December
|
|
|
6.0537
|
|
|
6.0738
|
|
|
6.0927
|
|
|
6.0537
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.0590
|
|
|
6.0509
|
|
|
6.0600
|
|
|
6.0402
|
|
February
|
|
|
6.1448
|
|
|
6.0816
|
|
|
6.1448
|
|
|
6.0591
|
|
March
|
|
|
6.2164
|
|
|
6.1729
|
|
|
6.2273
|
|
|
6.1183
|
|
April (through April 4, 2014)
|
|
|
6.2118
|
|
|
6.2085
|
|
|
6.2118
|
|
|
6.2054
|
|
Source:
Federal Reserve Statistical Release
-
(1)
-
Annual
averages were calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are
calculated by using the average of the daily rates during the relevant month.
-
B.
-
Capitalization and Indebtedness
Not
Applicable.
-
C.
-
Reasons for the Offer and Use of Proceeds
Not
Applicable.
5
Table of Contents
-
D.
-
Risk Factors
Risks Related to Our Business
Our limited relevant operating history makes it difficult to evaluate our business and prospects. We may experience net losses or earnings declines in the future and we may
not sustain our historical revenue growth rate or profitability.
We commercially launched our first virtual world, Mole's World, in September 2008. Our limited operating history may not be able to
provide a meaningful basis for you to evaluate our business. It is also difficult to evaluate our prospective business, because we may not have sufficient experience to address the risks frequently
encountered by early stage companies operating in a new and rapidly evolving industry, which may adversely affect our business and results of operations. These risks may include our potential failure
to:
-
-
retain existing users and attract new users;
-
-
develop, license, or acquire additional virtual worlds that are appealing to users;
-
-
anticipate and adapt to changing user preferences;
-
-
adapt to competitive market conditions;
-
-
timely respond to technological changes or resolve unexpected network interruptions;
-
-
adequately and efficiently operate, upgrade and develop our online entertainment community;
-
-
maintain adequate control of our expenses; and
-
-
attract and retain qualified personnel.
Our
net revenues amounted to US$45.4 million in 2011, decreased to US$40.2 million in 2012 and increased to US$48.4 million in 2013. We may not be able to achieve or
sustain our revenue growth in future periods and we cannot assure you that we will not incur net losses in the future due to a number of factors, including, among others, economic factors out of our
control, competition in the children's entertainment industry in China, in which market share can be quickly acquired or lost, the greater difficulty of growing at sustained rates from a larger net
revenue base, and adjustment to our strategic decision in response to changing circumstances that emphasize long-term influence over short-term growth. We also expect that our total operating expenses
will increase in absolute amount as we further grow our business. We incur substantial costs and expenses to develop, market and operate a virtual world and may not collect revenues in connection with
the virtual world for some time after its commercial launch or at all. We may not succeed in our expansion in the offline business. Any failure or delay in generating revenues could result in material
operating losses and harm our financial condition. Accordingly, you should not rely on the results of any prior period as an indication of our future operating performance.
As we currently depend on a limited number of virtual worlds for substantially all of our revenues, if any of these virtual worlds incur any adverse developments or if we
are unable to develop, purchase or license additional virtual worlds that are attractive to users and result in overall revenue growth, our business, financial condition and results of operations may
be materially and adversely affected.
Our virtual worlds, Seer Series, Gong Fu Pai and Flower Fairy, contributed to the majority of our revenues in 2013. We anticipate that
these and other existing virtual worlds of ours will continue to account for a substantial portion of our revenues in the near term. Accordingly, any of the following could materially and adversely
affect our business, financial condition and results of operations:
-
-
failure by us to make quality upgrades, enhancements or improvements to the existing virtual worlds in a timely manner;
-
-
delay in or discontinuation of regular content updates;
6
Table of Contents
-
-
any reduction in or failure to grow the user base of these existing virtual worlds, any decrease in their popularity in
the market due to intensifying competition or other factors;
-
-
any decrease in or failure to grow the amount of revenues generated from the existing virtual worlds; or
-
-
any breach of virtual world related software security, prolonged server interruption due to network failures, hacking
activities or other factors or any other adverse developments relating to our existing virtual worlds.
We
entered into revenue sharing agreements with third-party game developers, and primarily collect payments from game players in connection with the sale of in-game currencies and remit
certain agreed-upon percentages of the proceeds to the game developers and record revenue net of
remittances. Purchases of in-game currency are not refundable after they have been sold unless there is unused in-game currency at the time a game is discontinued. Typically, a game will be
discontinued when the monthly revenue generated by a game is insignificant. We make our effort to help the game players eliminate their loss before a game is discontinued to avoid paying cash refunds
to game players or game developers as a result of discontinuation of a game, or for any other reason. However, we cannot guarantee that we will not be required to pay such cash refunds in the future,
which may have adverse effect on our revenues.
In
addition, in order to achieve our long-term profitability and financial and operational success, we must continually develop, purchase or license new virtual worlds that are
attractive to users. Although we currently have new virtual worlds in development, they may not be released on time, may not be profitable or popular among children in China.
The
success of our internally developed virtual worlds will require additional investment prior to commercial launch. Furthermore, our ability to purchase or license successful virtual
worlds will depend on their availability on acceptable terms, including price, our ability to compete effectively against other potential purchasers or licensees to attract the developers of these
virtual worlds, and our ability to obtain government approvals required for the purchase or licensing and operation of these virtual worlds.
The
virtual worlds that we develop, purchase or license may not be attractive to users, may be viewed by the regulatory authorities as not complying with content restrictions, may not be
launched as scheduled or may not compete effectively with our competitors' products. For example, we incurred impairment of intangible assets of US$1.0 million in 2013, related to the write-off
of the remaining term of two underperforming games, Wizard 101, a game for which we obtained a three-year exclusive license in 2011 and commercially launched in the third quarter of 2012, and Speed
Hunter, a game for which we obtained a five-year exclusive license right in 2012 and commercially launched in the third quarter of 2013. If we are not able to successfully develop, purchase or license
virtual worlds appealing to users, our future profitability and growth prospects could decline.
We may not be able to maintain our revenues and profitability as we operate in a competitive industry and compete against many companies.
We believe that there are a number of competing developers and operators in China providing online and offline entertainment to
children. Given the relatively low capital requirements and entry barriers, we expect more companies to enter the children's entertainment industry in China. For example, our competitors could
introduce a wide range of virtual worlds targeting children to the China market in a relatively short period of time. We believe our principal competitors in online children's entertainment in China
include Tencent Holdings Limited, or Tencent, the developer of Roco Kingdom and Guangzhou Baitian Information Technology Ltd., the developer of Aola Star and Aobi Island. Potential competitors
also include major Internet portal operators, other domestic and foreign virtual
7
Table of Contents
world
developers and operators, media companies focused on children's entertainment and alliances between our existing and new competitors. Some of our competitors, especially major foreign and
China-based publicly listed media and virtual world operators, have significantly greater financial and marketing resources and name recognition than we have. We also face competition on the mobile
front with respect to mobile applications, as there are an increasing number of Internet companies in China tapping into the mobile market with applications and services targeting children. We also
face these and other competitors in our offline business, including Guangdong Alpha Animation and Culture Co., Ltd, a company listed in Shenzhen Stock Exchange which primarily engages in
toy and animation industry (Ticker: 002292). Our competitors may adopt loss-leading pricing or other tactics or business models, and if these prove to be more attractive to children on a temporary or
permanent basis, our users may switch to our competitors' services and products at our expense. We cannot assure you that we will be able to compete successfully against any new or existing
competitors, or maintain our user base and number of active paying accounts when competitors launch promotional campaigns targeting our user base, which could have a material adverse effect on our
revenues and profitability.
We face risks and uncertainties regarding the growth of the online entertainment industry for children and market acceptance of our online products and services.
The online entertainment industry for children in China, from which we currently derive most of our revenues, is a relatively new and
evolving industry and concept. The growth of the online entertainment industry for children and the level of demand and market acceptance of our virtual worlds and other online products and services
are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors, some of which are beyond our control. These factors
include:
-
-
the growth of personal computer, mobile devices, Internet and broadband users and penetration in China and other markets
in which we offer our virtual worlds, and the rate of any such growth;
-
-
whether the online entertainment market in China, and in particular the online entertainment market for children,
continues to grow and the rate of any such growth;
-
-
general economic conditions, particularly economic conditions adversely affecting discretionary spending on children's
entertainment;
-
-
the availability and popularity of other forms of entertainment, particularly console system games; and
-
-
our ability to create new digital entertainment products appealing to our users, including the ability to timely update
our existing virtual worlds and other services and introduce new virtual worlds and other services that attract existing and new users.
If
we fail to anticipate and effectively manage these risks and uncertainties, our market share may decrease, our business, financial condition and results of operations may be
materially and adversely affected.
Our digital entertainment products and services including new virtual worlds and mobile applications may attract our users away from our established virtual worlds, and
enhancements and updates to our established virtual worlds may result in certain users deciding not to participate in them, which could materially and adversely affect our business, results of
operations and financial condition.
Our digital entertainment products and service including new virtual worlds and mobile applications may attract our users away from our
established virtual worlds, particularly with respect to virtual worlds with similar story lines. Although we intend to target different types of users with new virtual worlds and therefore minimize
users of our existing virtual worlds migrating to later launched
8
Table of Contents
virtual
worlds, such movement may nevertheless occur and may lead to fewer active users, reduced network effect and lower spending on subscriptions and virtual items.
In
addition, in order to retain our existing users and to attract new users, we periodically introduce new features and make changes to our established virtual worlds based on feedback
gathered from our users. However, these changes may result in some of our existing users deciding not to participate in our virtual worlds, either temporarily or permanently. Our users may not respond
well to enhancements to our virtual worlds or policy changes in our online entertainment community, which could materially and adversely affect our business, results of operations and financial
condition.
We have no control over our distributors or licensees except through agreements we entered into with them. Our brands and reputation could be harmed and our results of
operations could suffer if our distributors or licensees fail to comply with our agreements with them.
We rely on our distributors to distribute our prepaid cards, through which our users pay subscription fees and purchase online virtual
items. We also rely on our licensees to manufacture and distribute products, including interactive toys, of our licensed franchises. We have limited ability to manage the activities of our
distributors and licensees, who are independent from us, except through the enforcement of agreements with them. If a significant number of our distributors or licensees fail to comply with our
agreements with them, such as distribution targets, brand and service promotion arrangements, quality control standards, or protocols on approving the presentation or portrayal of our franchises, our
brands and reputation could be harmed and our results of operations could suffer as a result.
We may not be successful in effectively promoting our brand or enhancing our brand recognition, and any negative publicity, regardless of its veracity, may harm our brand.
Promoting the "Taomee" brand and enhancing its recognition as a family-friendly brand dedicated to children's entertainment is an
integral part of our growth strategy. There is no assurance that we will be able to effectively promote or develop our brand and if we fail to do so, our growth may be adversely affected. In addition,
negative publicity or disputes regarding our brand, products and services, company or management could materially and adversely affect public perception of our brand and the virtual worlds and other
products and services we offer. Any negative publicity in relation to our services or products, regardless of its veracity, could harm our brand image among children and their parents and, in turn,
result in decreases in the number of users and average net revenues per paying account from the operation of our online business. Any impact on our ability to effectively promote our brand and any
significant damage to the public perception of the "Taomee" brand or our virtual worlds could materially and adversely affect our prospects and results of operations.
Unauthorized use of our intellectual property by our distributors, licensees or third parties, and the expenses incurred in protecting our intellectual property rights, may
harm our brands and reputation and adversely affect our business.
We regard our copyrights, trademarks and other intellectual property as important to our success. Unauthorized use of our intellectual
properties may harm our brands and reputation and adversely affect our business.
We
have historically relied on a combination of trademark and copyright law, trade secret protection, restrictions on disclosure and other agreements that restrict the use of our
intellectual properties to protect our intellectual property rights. Although our contracts with distributors and licensees prohibit the unauthorized use of our franchises, brands and other
intellectual property rights, we cannot assure you that they will always comply with these terms. Although we presently enter into confidentiality agreements with most of our employees, we cannot
assure you that these confidentiality
9
Table of Contents
agreements
will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology, know-how or other intellectual property will not otherwise become known to, or
be independently developed by, third parties.
As
of December 31, 2013, we had received approval for 351 and 7 trademark registrations in China and Taiwan, respectively, and are in the process of applying for registration of
an additional 46 trademarks in China. In addition, we have obtained 69 copyright registrations for software we developed, 4 copyright registrations for Mole's World and Seer animation series and 392
copyright registrations for artworks owned by us. We also registered 39 domain names, including www.61.com, our primary operation website. While we actively take steps to protect our proprietary
rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. In addition, we cannot assure you that any of the above trademark applications will
ultimately proceed to registration or will result in registration with adequate scope for our business. Some of our pending applications or registrations may be successfully challenged or invalidated
by others. If our trademark applications are not successful, we may have to use different marks for affected products or services, or seek to enter into arrangements with any third parties who may
have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.
Implementation
of intellectual property laws in China has historically been lacking, primarily because of ambiguities in the laws and difficulties in enforcement. Accordingly,
intellectual property right protection in China may not be as effective as in the United States or other countries. Policing unauthorized use of our proprietary technology, trademarks and other
intellectual property is difficult
and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could
disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
We rely on our nationwide prepaid card distribution network, merchandise licensees, interactive toy distributors and film distributors for a significant portion of our net
revenues. If we fail to effectively manage our distributor and licensee relationships or our distributors and licensees fail to adhere to our agreements with them, our results of operations could
suffer as a result.
We rely on a number of provincial and regional distributors to sell our prepaid cards. Online payment systems in China are still in a
relatively early stage of development and are not as widely acceptable to users in China as compared to the United States. Also, compared to adult online users, children have fewer means to make
payment through online payment channels. As a result, although we make our prepaid cards available for purchase online using an online payment system, our business is dependent on the performance of
our regional distributors. In 2011, 2012 and 2013, 80.3%, 73.9% and 71.9%, respectively, of our net sales proceeds collected were from the sales of prepaid cards to our distributors, respectively. Our
largest distributor accounted for 10.3%, 9.8% and 7.4% of our net sales proceeds generated from prepaid card sales in 2011, 2012 and 2013, respectively. Although we typically enter into semi-annual
contracts with and provide performance based incentives to our distributors, our distribution agreements are not exclusive and do not prohibit our distributors from selling our competitors' game
cards. Maintaining relationships with a significant number of distributors may be difficult and time-consuming. If we fail to maintain good relationships with, or to effectively manage, our
distributors, if these new distributors may not strictly adhere to our agreements with them or provide targeted distribution in locations frequented by target users, or if the distributors promote our
competitors' service and products at our expense, our results of operations could suffer as a result.
We
also rely on our licensees and distributors to distribute our merchandises and interactive toys. We sell a vast majority of our products in China through our licensees and
distributors, who in turn sell our products to consumers through retail stores directly operated by them or by their sub-distributors. Our distributors are not contractually obligated to work with us
on an exclusive basis. In addition, some of our distributors may sell products that compete with our products. Our dependence on distributors
10
Table of Contents
increases
their bargaining power with us and the need for us to maintain good relationships with them. To the extent that any material distributor ceases to cooperate with us for any reason and we are
not able to find a suitable replacement in a timely manner, we may lose significant business. In addition, we may have to offer volume-based discounts or more favorable credit terms to our
distributors in the future, which may lower our operating profit. As we rely to a large extent on our distributors for the sale of our products, our future growth will also depend on the performance
of our distributors and
their ability to expand their business and sales networks. There is no assurance that we will be able to renew our distribution agreements or renew such agreements on terms that are favorable to us.
In addition, there is no assurance that one or more of our major distributors will not breach their distribution agreements or fail to comply with their obligations thereunder. In such event or
events, our results of operations may be materially and adversely affected.
We
also rely on our film distributors to release our featured films. Film distributors act as intermediaries between film producers and movie theater operators. As a result, the releases
of our films depend on maintaining relationships with these film distributors. There can be no assurance that we will be able to maintain these relationships and that film distributors will continue
to enter into arrangements with us on favorable terms or at all. In addition, any deterioration in our relationships with the film distributors could require us to enter into arrangements with
alternative film distributors. If alternative film distributors do not provide us with comparable services at favorable terms or at all, we may not be able to release our films, which in turn could
materially and adversely affect our business, financial condition and results of operations. In addition, if any film distributor breaches the contracts with us and fails to pay us the film box office
sharing, our results of operations may be materially and adversely affected.
Unauthorized character enhancements, other hacking or cheating activities, and undetected programming errors or defects in our virtual worlds could harm our online business
and reputation and materially and adversely affect our results of operations.
With the increase in the number of virtual world users in China, virtual world operators have increasingly encountered problems arising
from the use of unauthorized character enhancements, theft of user account passwords and other hacking or cheating activities. We have from time to time detected a number of users who have gained an
unfair advantage by installing hacking or cheating tools to facilitate character progression. In response to these activities, we have installed detection mechanisms in our virtual worlds to identify
various hacking and cheating activities, and have expanded our technical team dedicated to detecting unauthorized character enhancements and resolving other hacking issues.
In
addition, our virtual worlds may contain undetected programming errors or other defects. Continued occurrences of unauthorized character enhancements, other hacking or cheating
activities, and undetected errors or defects in our virtual worlds may negatively impact the image of our virtual worlds and users' perception of their reliability, decrease the number of users,
reduce the users' interest in purchasing virtual items, shorten the life span of the virtual worlds and adversely affect our results of operations. A constant recurrence of these activities may
require us to shift our management's and personnel's attention from research and development and other operations to focus instead primarily on anti-hacking programs and activities, which could hurt
our ability to develop and launch new virtual worlds and could materially and adversely affect our business, financial condition and results of operations.
11
Table of Contents
If we fail to successfully execute our growth strategies, including our current expansion into film and merchandise sales, our future results of operations and growth
prospects may be materially and adversely affected.
As part of our growth strategy, we have expanded from the online business to the offline business, such as film, interactive toys and
other licensed products. Expansion into these or other new businesses or adoption of other new business models present operating and marketing challenges that are different from those that we
encounter in our online business. We face competition from existing players within these markets who may have more experience and resources. We may need to satisfy different regulatory requirements
and obtain additional licenses or permits from relevant regulatory authorities. If we cannot successfully address these new challenges and compete effectively in these markets or under these business
models, we may not be able to operate these offline businesses, attract a sufficiently large number of audience or customers, or recover costs incurred for developing and marketing these products or
services, and our future results of operations and growth strategies could be materially and adversely affected as a result. Pursuing these and other growth strategies in our offline business may also
require us to expand our operations through internal development efforts and through partnerships, joint ventures, investments and acquisitions. If we are unable to successfully implement our growth
strategies, our revenue and profitability may not grow as we expect, and our competitiveness may be materially and adversely affected.
We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In
addition, such undertakings may not be successful.
Our strategy includes plans to grow both organically and through acquisitions, joint ventures or other strategic alliances. Joint
ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able to identify
suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially
acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.
In
addition, our ability to successfully integrate acquired companies may be adversely affected by a number of factors. These factors include diversion of management's attention,
difficulties in retaining personnel of the acquired companies, unanticipated legal liabilities, and tax and accounting issues in
association with the acquisition and business combination. If we fail to integrate acquired companies efficiently, our earnings, revenues growth and business could be negatively affected.
Furthermore,
the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the acquired companies' operations,
and the loss of personnel. If we are not able to realize the benefits envisioned for such acquisitions, our business and results of operations could be materially and adversely affected. For example,
in 2013, we made an impairment of US$0.4 in our investment in Chuangyou, due to Chuangyou's deteriorating financial position and performance.
We may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a timely manner and we may not successfully recover our prepayment
thereunder, which may have a material adverse effect on our results of operations and financial condition.
In May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use rights
of two parcels with an aggregated area of approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of
RMB4.4 million (US$0.7 million) was paid in May 2013. In August
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2013,
we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of approximately 4,860 square meters in Songjiang District, Shanghai
for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. Pursuant to the
agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and
the building.
Our
execution of a definite land use rights and building purchase agreement and payment of the remaining consideration are contingent upon relevant PRC government authorities' approval.
If we fail to obtain the land use rights and the building, we rely on the government credit for the refund of our prepayment. We believe the risk of the government to breach its covenants is remote,
however, if we have difficulty recovering the balance of the deposits we have paid, we may be obliged to record provisions for impairment loss for all or part of our prepayments, which could have a
material adverse effect on our results of operations and financial condition.
Our limited resources may affect our ability to manage our growth.
Our growth to date has placed, and our anticipated further expansion will continue to place, a strain on our management, systems and
resources. To accommodate our growth pursuant to our strategies, we implemented and maintained and will continue to accommodate a variety of new and upgraded operational and financial systems,
procedures and controls, as well as our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage
and motivate our workforce, and manage our relationships with our users, our distributors and third-party product and service providers. All of these endeavors will require substantial management
effort and skill and the incurrence of additional expenditures. We cannot assure you that we will be able to efficiently or effectively implement our growth strategies and manage the growth of our
operations, and any failure to do so may limit our future growth and hamper our business strategy.
Our failure to anticipate or successfully implement new technologies could render our game engines, development platforms or virtual worlds unattractive or obsolete, and
reduce our revenues and market share.
Our proprietary engines for powering our virtual worlds, online games, and mobile applications, our flexible and secure software
framework and anti-cheating expertise are critical to our success. Our industry is subject to rapid technological changes. We need to anticipate the emergence of new technologies and assess their
market acceptance. We also need to invest significant resources, including financial resources, in research and development to keep pace with technological advances in order to make our development
capabilities and our virtual worlds competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our
development results. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace with which virtual world technology has been and will
continue to be developed, we may not be able to timely upgrade our engines or the software framework for our virtual world development in an efficient and cost-effective manner, or at all. New
technologies in virtual world programming or operations could render our technologies, our existing virtual worlds or the virtual worlds that we are developing or expect to develop in the future
obsolete or unattractive, thereby limiting our ability to recover related product development costs, purchase costs and/or licensing fees, which could result in a decline in our revenues and market
share.
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We may be subject to intellectual property infringement claims, which could be time-consuming and costly to defend and may result in diversion of our financial and
management resources and our inability to continue providing some of our existing virtual worlds.
We cannot assure you that our franchise characters, our plots, or other content posted on our websites or made available through our
video site or our partners' site, has not infringed or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business within the relevant statute of limitation. If we are found to have
violated the intellectual property rights of others, we may be enjoined from using such intellectual property, be forced to pay fines and damages, and we may incur licensing fees or be forced to
develop alternatives. In addition, we may incur substantial expenses and diversion of our financial and management resources in defending against these third-party infringement claims, regardless of
their merit. Successful infringement or other intellectual property rights claims against us may result in substantial monetary liabilities, which may disrupt our operations and materially adversely
affect our business, results of operations and prospects.
Some
of our employees were previously employed at other companies, including our current and potential competitors. We also intend to hire additional personnel to expand our development
team and technical support team. To the extent these employees are involved in the development of content
or technology similar to ours at their former employers, we may become subject to claims that such employees or we may have appropriated proprietary information or intellectual properties of the
former employers of our employees. If we fail to successfully defend such claims against us, our results of operations could be materially and adversely affected.
We could be liable for our users' privacy being compromised, which may have a material adverse effect on our reputation and business.
Although we seek to provide a safe playing environment for our users by implementing a sophisticated security mechanism, our virtual
worlds are subject to infiltrating behaviors from child predators and others who hack the accounts of our users to gain progression advantages, access these users' accounts, or for other purposes.
Despite our efforts to employ security features to filter offensive content and monitor users' interactions, there is no guarantee that we can successfully keep our users free from predatory behavior,
offensive contact or other acts that violate the privacy of our users. A significant number of failures to prevent our users' exposure to such infiltration would severely harm our reputation and
business.
We could be liable for breaches of security of our website and third-party payment systems, which may have a material adverse effect on our reputation and business.
In 2011, 2012 and 2013, 19.7%, 26.1% and 28.1%, respectively, of our net sales proceeds collected were generated from sales of our
virtual currency through third-party payment systems. In such transactions, secure transmission of confidential information, such as users' debit and credit card numbers and expiration dates, personal
information and billing addresses, over public networks, including our official website, is essential for maintaining user confidence. We currently provide password protection for all of our users'
accounts. In addition, we are developing new tools to better ensure the security of our users' accounts in the future. While we have not experienced any material breach of our security to date, we
still must prevent future breaches and current security measures may be inadequate. In addition, we expect that an increasing number of our sales will be conducted over the Internet as a result of the
expanded user base and the growing use of online payment systems. We also expect that associated online crime will likely increase accordingly. We must therefore be prepared to increase our security
measures and efforts so that our users have confidence in the reliability of the online payment systems that we use. We do not have control over the security measures of our third-
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party
payment operators, and their security measures may not be adequate at present or may not be adequate with the expected increased usage of online payment systems. We could be exposed to
litigation and possible liability if we fail to safeguard confidential user information, which could harm our reputation and our ability to attract users and may have a material adverse effect on our
business.
The successful operation of our online business depends on the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.
Our online business depends on the performance and reliability of the Internet infrastructure in China. Almost all access to the
Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT.
In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only channels through
which a domestic user can connect to the Internet. Although the PRC government has pledged to improve the Internet infrastructure in China as part of its stimulus packaged introduced in the first
quarter of 2009, a more sophisticated Internet infrastructure may not be developed in China. We or the users of our virtual worlds may not have access to alternative networks in the event of
disruptions, failures or other problems with China's Internet infrastructure.
Unexpected network interruptions, network security breaches or computer virus attacks could have a material adverse effect on our business, financial condition and results
of operations.
Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause
significant harm to our reputation and our ability to attract and maintain users. All of the servers operating our virtual worlds, all of the servers handling log-in, billing and data back-up matters
for us, and all of our backup servers are hosted by third-party service providers, and are maintained by our internal personnel. Major risks involved in such network infrastructure include any
break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures that may be attributable to sustained power shutdowns, or efforts to
gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.
In
the past, our server network has experienced unexpected outages for several hours and occasional slower performance in a number of locations in China as a result of failures by
third-party service providers. Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hacking and similar events. Any network
interruption,
virus or other inadequacy that causes interruptions in the availability of our virtual worlds or deterioration in the quality of access to our virtual worlds could reduce our users' satisfaction and
ultimately harm our business and results of operations.
We face risks associated with the licensing of our virtual worlds overseas, and if we are unable to effectively manage these risks, they could impair our ability to expand
our business internationally.
In order to expand into overseas markets, we have licensed our virtual worlds, including Mole's World, Seer, Seer II, Flower Fairy,
Gong Fu Pai and Reverse World to overseas operators. As of the date of this annual report, our virtual worlds are licensed in countries and regions including Korea, Japan, Hong Kong, Taiwan and Macau.
We may license our existing and new products in other countries and regions in the future. The offering of our products in the international markets could expose us to a number of risks,
including:
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difficulties in identifying and maintaining good relationships with licensees who are knowledgeable about, and can
effectively distribute and operate our products in, international markets;
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-
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difficulties in maintaining the reputation of our company and our products, given that our virtual worlds are operated by
licensees in the international markets pursuant to their own standards;
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difficulties in protecting our intellectual property rights internationally and the associated costs;
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difficulties and costs relating to compliance with the different commercial, legal and tax requirements of the
international markets in which we offer our products, such as foreign ownership restrictions, game import regulatory procedures, taxes and other restrictions;
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difficulties and uncertainties in obtaining software export contract registration license from the relevant PRC
authorities;
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fluctuations in currency exchange rates; and
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interruptions in cross-border Internet connections or other system failures.
If
we are unable to effectively manage such risks, they could impair our ability to expand our business internationally. We have ceased our cooperation with some of the third-party
operators because the operation results did not meet our expectation.
Our business depends substantially on the continuing efforts of our management and other key personnel. If we lose their services, we could incur significant costs in
finding suitable replacements and our business may be severely disrupted.
Our future success heavily depends upon the continued services of our management and other key personnel. In particular, we rely on the
expertise and experience of Mr. Benson Haibing Wang, our chief executive officer, and Mr. Roc Yunpeng Cheng, our president. In 2013 and 2014, certain of our executive officers resigned
from their positions. For example, Mr. Crow Zhen Wei stepped down from his position as our chief technology officer for personal reasons, although he remained as a member of our board of
directors and also served as an honorary outside counsel. At present time, we do not plan to find a replacement of chief technology officer. In addition, Mr. Paul Keung, our chief financial
officer, will be gradually handing over his responsibility in the near term to a new incoming chief financial officer. Mr. Paul Keung will remain his position as our chief financial officer
during the transition period including the filing of this annual report on Form 20-F for the year ended December 31, 2013. Although we believe that these changes of our management team
did not materially affect our business operations, if one or more of our senior management or key personnel are unable or unwilling to continue in their present positions in the future, we may not be
able to replace them easily or at all, and our business may be severely disrupted, our financial
condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain key personnel.
If
any of our management or key personnel joins a competitor or forms a competing company, we may lose users, distributors, know-how and key professionals and staff members. Each
of our executive officers has entered into employment agreements and confidentiality agreements and the majority of them have entered into non-competition agreements with us. However, if any dispute
arises between our officers and us, the non-competition provisions contained in their non-competition agreements may not be enforceable, especially in China, where most of these executive officers and
key employees reside, on the ground that we have not provided adequate compensation to these executive officers for their non-competition obligations, which is required under the relevant PRC
regulations.
We may not be successful in attracting and retaining qualified personnel and our business and results of operations could be negatively impacted.
We will need to hire and retain additional qualified employees to support our existing operations and planned expansion. Our ability to
anticipate and effectively respond to changing user needs
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depends
in part on our ability to attract and retain experienced personnel for our online and offline businesses in technology, graphic design, operation and other functions. The effective operation
of our information technology system, call center, logistics and other back office functions also depends in part on our professional employees. Since our industry is characterized by high demand and
intense competition for talent, we may need to offer higher compensation and other benefits in order to retain key personnel in the future. We cannot assure you that we will be able to attract or
retain the qualified key personnel that we will need to achieve our business objectives. In addition, as our business has grown rapidly, our ability to train and integrate new employees into our
operations may not meet the increasing demands of our business.
Our principal shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other holders of our ordinary shares
and ADSs.
As of December 31, 2013, our founders, Mr. Jason Liqing Zeng, Mr. Benson Haibing Wang, Mr. Crow Zhen Wei
and Mr. Roc Yunpeng Cheng, who beneficially own our shares
through a number of holding entities, and the Qiming Funds together hold 69.3% of our outstanding share capital. Accordingly, our founders and the Qiming Funds have substantial influence over our
business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election and change of directors and other significant corporate actions. This
concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of
a sale of our company and might reduce the price of our ADSs. Alternatively, these principal shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by
our other shareholders.
Our operating results fluctuate from period to period, making them difficult to predict and may not be indicative of future performance.
Our operating results from period to period are highly dependent upon, and will fluctuate as a result of a variety of factors,
including:
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seasonal trends in revenue generation as a result of seasonal fluctuations of active users and online play time, which
peaks during summer and winter school vacation periods, which usually occur in the first and third quarters of each year when children have more online playtime, and falls during second and fourth
quarters of each year, and generally increases during the Chinese New Year holidays, which occurs in the first quarter of each year, when children are given extra pocket money;
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the introduction of virtual worlds and other online and offline services and products;
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the quality, variety, popularity and mix of virtual items and online and offline services and products available for
purchase and related promotional efforts;
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the period of time over which we recognize revenue for some of our virtual items in our virtual worlds, which in certain
cases is based on the estimated lifespan of our virtual items, which may be adjusted from time to time;
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the period of time which we launch our films and recognize the films related revenue;
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content development costs and licensing or royalty payments; and
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the expansion of our distribution network and the related discounts and rebates.
Additionally,
because most of our operating expenses are expected to remain stable in absolute amount in the future, our net income during any given quarter may be adversely affected by
any decrease in revenue due to the seasonality effect.
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Due
to these and other factors, our operating results will vary from period to period, will be difficult to predict for any given period, may be adversely affected from period to period
and may not be indicative of our future performance.
If we fail to establish or maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our financial results or prevent
fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.
As a U.S. public company, we are subject to reporting obligations under the U.S. securities laws. Our reporting obligations as a public
company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We are required to prepare a management report on our internal
controls over financial reporting containing our management's assessment of the effectiveness of our internal controls over financial reporting. In addition, depending on our market capitalization,
our independent registered public accounting firm may be required to attest to and report on our management's assessment of the effectiveness of our internal controls over financial reporting. Our
management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are
effective, our independent registered public accounting
firm may still decline to attest to our management's assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented,
designed, operated or reviewed, or if it interprets the relevant requirements differently from us.
Prior
to our initial public offering, we had been a private company with a short operating history and limited numbers of accounting personnel and other resources with which to address
our internal controls and procedures. In connection with the audit of our consolidated and combined financial statements for 2011, 2012 and 2013, we and our auditors, an independent registered public
accounting firm, identified certain significant deficiencies and deficiencies in our internal control over financial reporting as defined in the standards established by the U.S. Public Company
Accounting Oversight Board, or PCAOB. In connection with our management's assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2013, we have not
noted any material weakness, as defined in the standards established by the PCAOB, in our internal controls over financial reporting.
We
will continue to implement measures to remedy any deficiencies to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain
the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting in the future. Moreover, effective internal controls over
financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls
over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of
our ordinary shares. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the
Sarbanes-Oxley Act.
The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are
deprived of the benefits of such inspection
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the US
Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States),
or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because
our auditors are located in the Peoples' Republic of China, a
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jurisdiction
where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
Inspections
of other firms that the PCAOB has conducted outside 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. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control
procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The
inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our
financial statements.
We may be unable to secure additional funding in the future or to obtain such funding on favorable terms.
We believe that our current cash and cash equivalents and the anticipated cash flow from operations will be sufficient to meet our
anticipated cash needs for the next 12 months. We may, however, require additional cash resources to finance our continued growth or other future developments, including any investments or
acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of new product launches, investments and/or acquisitions,
and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain a credit
facility. The issuance of additional equity securities or securities convertible into our ordinary shares could result in additional dilution to our shareholders. The incurrence of indebtedness would
result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is
subject to a variety of uncertainties. Financing may not be available in amounts or on terms acceptable to us, if at all, especially if there is a recession or other events causing volatilities in the
capital markets worldwide.
We have limited insurance coverage which could expose us to significant costs and business disruption.
Other than insurance for some of the vehicles used in our business, we have not purchased any insurance to cover our assets, property
and business. If we were to incur substantial losses or liabilities due to fire, explosions, floods, a wide range of other natural disasters or accidents or business interruption, our results of
operations could be materially and adversely affected.
Risks Related to Our Corporate Structure
If the PRC government determines that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and
regulations, we could be subject to severe penalties.
We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under Chinese laws, and our PRC subsidiary,
Shanghai Shengran Information Technology Co., Ltd., or Shanghai Shengran, is a foreign-invested enterprise. Various regulations in China currently restrict or prevent foreign-invested
entities from holding certain licenses required to operate online virtual worlds, including Internet content provision, Internet culture operation and Internet publishing licenses. In light of these
restrictions, we rely on our VIE, Shanghai Taomee, to hold and maintain the licenses necessary to operate our virtual worlds in China. We do not have any equity interest in Shanghai Taomee but receive
its economic benefits through various contractual arrangements and certain corporate governance and shareholder rights arrangements. In addition, we have entered into agreements with Shanghai Taomee
and its shareholders which provide us with a substantial ability to control Shanghai Taomee. For a description of these contractual arrangements with Shanghai Taomee,
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see
"Item 4. Information on the CompanyC. Organizational StructureContractual Arrangements with Shanghai Taomee and its Shareholders."
The
Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the MII Circular, issued by the MII, in July 2006,
reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license for
Internet content provision to conduct any value-added telecommunications business in China. Under the MII Circular, a domestic company that holds an Internet content provision license is prohibited
from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that
conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by
the local Internet content provision license holder. The MII Circular further requires each Internet content provision license holder to have the necessary facilities for its approved business
operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information
security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the MII Circular will have
on us or the other Chinese Internet companies that have adopted the same or similar corporate and contractual structures as ours.
In
the opinion of Allbright Law Offices, our PRC counsel, (i) the ownership structure and the business and operation model of Shanghai Shengran and Shanghai Taomee are not in
violation of any provisions of applicable PRC laws and regulations, and (ii) each contract under Shanghai Shengran's contractual arrangements with Shanghai Taomee and its shareholders is valid
and legally binding. However, there are uncertainties regarding the interpretation and application of PRC laws and regulations, including the MII Circular. Accordingly, we cannot assure you that the
PRC regulatory authorities will ultimately take a view that is consistent with the opinion of our PRC counsel.
If
we are found to be in violation of any existing or future PRC laws or regulations, including the MII Circular, or fail to obtain or maintain any of the required permits or approvals,
the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking Shanghai Shengran or Shanghai Taomee's
business or operating licenses, requiring us to restructure the relevant ownership structure or operations, and requiring us to discontinue or restrict our transaction with our VIEs, VIEs'
subsidiaries or PRC subsidiaries, limit our business expansion in China by contractual arrangements, or restrict or prohibit our use of proceeds to finance our business and operation China. If any of
these actions results in our inability to direct the activities of VIEs or VIEs' subsidiaries that affect their economic performance, and/or our failure to receive the economic benefits from VIEs and
VIEs' subsidiaries, we may not be able to consolidate the operating results of our VIEs and VIEs' subsidiaries into our consolidated financial statements in accordance with U.S. GAAP. However,
we do not believe that such actions would result in the liquidation or dissolution of our company or our wholly owned subsidiaries.
If the PRC government determines that our ownership structure does not comply with the restrictions contained in the GAPP Notice, we could be subject to severe penalties.
Our virtual worlds are deemed online games by relevant PRC government authorities and we are subject to relevant PRC regulations on
operators of online games. On September 28, 2009, the General Administration of Press and Publication, or the GAPP, together with the National Copyright Administration, and National Office of
Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening of the Administration of Pre-examination and Approval of Online Game and the Examination and Approval of
Imported Online Game, or the GAPP Notice. The GAPP
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Notice
provides, among other things, that foreign investors are not permitted to invest in online game operating businesses in China via wholly-owned, equity joint venture or cooperative joint venture
investments, and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture
companies, or contractual or technical arrangements. We are not aware of any online game companies adopting the same or similar contractual arrangements as ours having been penalized or ordered to be
terminated since the GAPP Notice first became effective. As advised by our PRC counsel, Allbright Law Offices, there is uncertainty with respect to the implementation of the GAPP Notice; however, the
GAPP is unlikely to directly affect our control over our PRC subsidiary, VIEs and VIEs' subsidiaries without joint actions with other authorities including the Ministry of Culture, based on the GAPP
Notice, since (i) according to the relevant provisions of the Regulation on the Main Functions, Internal Organization and Staffing of the GAPP issued by the General Office of the State Council
on July 11, 2008, or the Regulation on Three Provisions, the GAPP is authorized to approve the publication of online games before their launch on the Internet, while the Ministry of Culture is
authorized to administer and regulate the overall online game industry; (ii) a circular on the interpretation of the Regulations on Three Provisions, which was issued by the office of the
Central Organization Establishment Commission on September 7, 2009, provides that once an online game is launched on the Internet, it will only be regulated by the Ministry of Culture, and that
if an online game is launched on the Internet without prior approval of the GAPP, the Ministry of Culture, instead of the GAPP, is the direct authority to investigate the game; and (iii) the
original set of our contractual agreements with our significant VIE took effect in June 2009, which was prior to the effective date of the GAPP Notice. There are, however, uncertainties regarding the
interpretation and application of the GAPP Notice. Accordingly, we cannot assure you that the GAPP will not ultimately take a view that is contrary to the opinion of our PRC legal counsel. In the
event that we, our PRC subsidiary or VIEs are found to be in violation of the GAPP Notice to operate our online virtual worlds, the GAPP in conjunction with the relevant regulatory authorities would
have the power to investigate and deal with such violations, including in the most serious cases where relevant licenses and registrations would be suspended or revoked.
Our contractual arrangements with Shanghai Taomee and its shareholders may not be as effective in providing control over Shanghai Taomee as direct ownership of this company.
We conduct our business in China through Shanghai Taomee. Our contractual arrangements with Shanghai Taomee and its shareholders
provide us with effective control over Shanghai Taomee. See "Item 4. Information on the CompanyOrganizational StructureContractual Arrangements with Shanghai Taomee
and its Shareholders." As a result of these contractual arrangements, we are considered to be the primary beneficiary of Shanghai Taomee and accordingly, we consolidate the results of operations,
assets and liabilities of Shanghai Taomee in our financial statements.
Although
we have been advised by Allbright Law Offices, our PRC legal counsel, that each contract under these contractual arrangements is valid and legally binding, these contractual
arrangements may not be as effective in providing us with control over Shanghai Taomee as direct ownership of this company. If Shanghai Taomee or its shareholders fail to perform their respective
obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot assure you that it will be effective. See "Risks Related to Our Corporate StructureOur
ability to enforce the Equity Interest Pledge Agreements between us and the shareholders of Shanghai Taomee may be subject to limitations based on PRC laws and regulations".
These
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in
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accordance
with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our VIEs and
VIEs' subsidiaries, and our ability to conduct our business may be negatively affected and we may not be able to consolidate the financial results of our VIEs and VIEs' subsidiaries into our
consolidated financial statements in accordance with U.S. GAAP. See "Risks Related to Doing Business in ChinaUncertainties with respect to the PRC legal system could
have a material adverse effect on us."
The shareholders of Shanghai Taomee may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
Shanghai Taomee is jointly owned by Mr. Jason Liqing Zeng, our chairman, Mr. Benson Haibing Wang, our co-founder,
director and chief executive officer, Mr. Crow Zhen Wei, our co-founder and director, Mr. Roc Yunpeng Cheng, our co-founder, director and president, Mr. Bin Wang and
Mr. Yuliang Feng. In addition, except for Mr. Bin Wang and Mr. Yuliang Feng, the above other individuals are also directors or executive officers of Shanghai Taomee. The PRC
Company Law provides that a director or member of management owes a fiduciary duty to the company he directs or manages. The abovementioned individuals, except for Mr. Bin Wang and
Mr. Yuliang Feng, must therefore act in good faith and in the best interests of Shanghai Taomee and must not use their respective positions for personal gain. These laws do not require them to
consider our best interests when making decisions as a director or member of management of Shanghai Taomee.
Conflicts
of interests between these individuals' role as shareholders or directors of Shanghai Taomee and their duties to our company may arise. We cannot assure you that when conflicts
of interest arise, these individuals will act in the best interests of our company or that conflicts of interest will be resolved in our favor. In addition, these individuals may breach or cause
Shanghai Taomee to breach or refuse to renew the existing contractual arrangements that allow us to effectively control Shanghai Taomee, and receive economic benefits from it. Currently, we do not
have arrangements to address potential conflicts of interest between these individuals and our company and a conflict could result in these individuals as officers of our company violating fiduciary
duties to us. We believe these individuals will not act contrary to any of the contractual arrangements, and the option agreements entered into by each of these individuals with our company entitled
us to remove the shareholders as beneficial shareholders of the VIEs should any of them act in a way that is detrimental to our company. We rely on these individuals as our directors and executive
officers to fulfill their fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of our company. However, if we cannot resolve any conflicts of interest or
disputes between us and any of the shareholders of Shanghai Taomee, we would have to rely on legal proceedings, which could result in disruption to our business, and there would be uncertainty as to
the outcome of any such legal proceedings.
Our ability to enforce the Equity Interest Pledge Agreements between us and the shareholders of Shanghai Taomee may be subject to limitations based on PRC laws and
regulations.
Pursuant to the Equity Interest Pledge Agreements with the shareholders of Shanghai Taomee, such shareholders agreed to pledge their
equity interests in Shanghai Taomee to secure their performance under the relevant contractual arrangements. The equity pledges of Shanghai Taomee under these Equity Interest Pledge Agreements have
been registered with the local branch of State Administration for Industry and Commerce pursuant to the new PRC Property Rights Law. According to the PRC Property Rights Law and PRC Guarantee Law, the
pledgee and the pledgor are prohibited from making an agreement prior to the expiration of the debt performance period to transfer the ownership of the pledged equity to the pledgee when the obligor
fails to pay the debt due. However,
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under
the PRC Property Rights Law, when an obligor fails to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledgor to obtain the pledged equity or seek payments
from the proceeds of the auction or sell-off of the pledged equity. If Shanghai Taomee or its respective shareholders fail to perform their obligations secured by the pledges under the equity pledge
agreements, one remedy in the event of default under the agreements is to require the pledgor to sell the equity interests of Shanghai Taomee in an auction or private sale and remit the proceeds to
our wholly owned subsidiary in China, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of the full value of the equity interests in Shanghai Taomee. We
consider it very unlikely that the public auction process would be undertaken since, in an event of default, our preferred approach is to ask Shanghai Shengran, our PRC wholly owned subsidiary and a
party to the Option Agreements, to replace or designate another PRC person or entity to replace the existing shareholders of Shanghai Taomee pursuant to the direct transfer option we have under the
Option Agreement.
In
addition, in the registration forms of the local branch of State Administration for Industry and Commerce for the pledges over the equity interests under the Equity Interest Pledge
Agreements, the amount of registered equity interests in Shanghai Taomee pledged to us was stated as RMB10,000,000, which represents 100% of the registered capital of Shanghai Taomee. The Equity
Interest Pledge Agreements with the shareholders of Shanghai Taomee provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations and
liabilities under all of the contractual arrangements. In case of a breach of the contractual arrangement, Shanghai Shengran, as the pledgee, can require the shareholders of Shanghai Taomee to sell
the pledged equity interest in a private sale or auction in order to realize Shanghai Shengran's right to the pledged equity interest in Shanghai Taomee. However, if the proceeds obtained by the
shareholders of Shanghai Taomee from the foregoing realization process are insufficient to cover the full amount payable to Shanghai Shengran, the uncovered part will be determined as unsecured debt
and will rank pari passu with other unsecured debt of the shareholders of Shanghai Taomee. We do not have agreements that pledge the assets of Shanghai Taomee for the benefit of us.
Contractual arrangements we have entered into may be subject to scrutiny by the PRC tax authorities, and a finding that we or our affiliated entities owe additional taxes
could reduce our net income and the value of your investment.
As required by applicable PRC laws and regulations, arrangements and transactions among related parties need to be periodically filed
with local tax authorities and may be subject to audit or challenge by the PRC tax authorities. We could face adverse tax consequences if the PRC tax authorities determine that the contractual
arrangements between Shanghai Shengran and Shanghai Taomee do not represent pricing at arm's length and adjust Shanghai Taomee's income in the form of a transfer pricing adjustment. A transfer pricing
adjustment could, among other things, result
in a reduction, for PRC tax purposes, of expense deductions recorded by Shanghai Taomee, which could in turn increase its tax liabilities. In addition, the PRC tax authorities may impose late payment
fees and other penalties on our affiliated entities for underpaid taxes. Our net income may be adversely affected if our affiliated entities' tax liabilities increase or if they are found to be
subject to late payment fees or other penalties.
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Risks Related to Doing Business in China
Changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect
our business.
Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial
condition and prospects are subject to a significant degree to economic, political and legal developments in China. While China's economy has experienced significant growth over the past decades,
growth has been uneven, both geographically and among various sectors of the economy, and may slow down in the future. Any prolonged slowdown in the Chinese economy, in particular the information
technology industry, could have a negative impact on our business, operating results and financial condition in a number of ways. For example, our users may decrease spending on our products, while we
may have difficulty expanding our user base fast enough, or at all, to offset the impact of decreased spending by our existing users.
Although
the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China's economic growth through direct allocation of
resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange
between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China's significant growth in the past
30 years. If the PRC government's current or future policies fail to help the Chinese economy achieve further growth or otherwise negatively affect our business, our growth rate or strategy,
our results of operations could be adversely affected as a result.
Uncertainties in PRC government policies and regulations regarding virtual worlds and online games and children's Internet use in China may adversely affect our business.
In April 2007, the GAPP, the MII, the Ministry of Education, the Ministry of Public Security, and other relevant government authorities
jointly issued a circular concerning the mandatory implementation of an addiction prevention program in virtual worlds and online games, which aims to protect the physical and psychological health of
minors. This circular requires all virtual worlds to incorporate an addiction prevention program and an identity verification system, both of which limit the amount of time that a minor or other user
may continuously spend participating in a virtual world or playing an online game. Failure to do so may subject us to certain penalties, such as suspension of Internet publishing operation and
relevant Internet-access services or revocation of relevant licenses.
On
June 3, 2010, the Ministry of Culture, or the MOC, adopted the Provisional Administration Measures of Online Games, or the Online Games Administration Measures, which became
effective as of August 1, 2010. The MOC also issued a notice regarding the implementation of the Online Games Administration Measures. We are required to establish the identity verification
systems within three months of the effectiveness of the Online Games Administration Measures for online games and virtual worlds which started operation after August 1, 2010, and within six
months for those which started operation prior to August 1, 2010. Failing to do so may subject us to an order from relevant authorities to rectify and a fine up to RMB20,000 (approximately
US$3,304).
However,
since the users of our virtual worlds are principally minors, the implementation of an identity verification system has practical difficulties, mainly because most minors do not
have PRC identity cards. We understand that the purpose of identity verification system required under the abovementioned circular issued in 2007 is to facilitate addiction prevention; hence, we have
implemented addiction prevention programs for all users of our virtual worlds. We have established the identity verification system in all of our virtual worlds and are currently using it as one of
the ways for registration. We plan to use the identity verification system as the only option for registration once required by relevant authorities.
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In
addition, a notice jointly issued by several central governmental agencies in February 2007 increased the punishment for Internet cafés admitting minors. As Internet
cafés provide means for children to access the Internet especially in smaller cities, this restriction may adversely affect our plan for growth in these cities. Further strengthening of
these regulations, or enactment by the PRC government of any additional laws to further tighten its administration over the Internet, online games, and, in particular, the Internet use and access to
online games and virtual worlds by children, may result in less time spent by users or fewer users, which may materially and adversely affect our business results and prospects for future growth.
The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we or the third-party publishers we work
with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.
The online game industry in China is heavily regulated by the PRC government. Various regulatory authorities of the PRC central
government, such as the State Council, the MIIT, the GAPP, the Ministry of Culture and the Ministry of Public Security, have the authority to issue and implement regulations governing various aspects
of the online game industries.
We
are required to obtain applicable permits or approvals from different regulatory authorities in order to operate our virtual worlds. An Internet content provider, or ICP, such as
Shanghai Taomee, must obtain an ICP license in order to engage in any commercial ICP operations in China. Online game operators must also obtain a license from the Ministry of Culture and an Internet
publishing license from the GAPP in order to distribute games through the Internet. We hold the Internet culture operation license issued by the Ministry of Culture and the Internet publishing license
issued by GAPP. Prior to obtaining the Internet publishing license from GAPP, we worked with third party publishers to publish Mole's World, Seer, Flower Fairy, Magic Haqi and Gong Fu Pai. We have
obtained 19 approvals from the GAPP in total, covering the Internet publications of all the virtual worlds which are developed by us and have been commercially launched, including the above-mentioned
five franchises of Mole's World, Seer, Magic Haqi, Flower Fairy and Gong Fu Pai. If we cannot obtain the GAPP approval for our virtual worlds to be launched in future or fail to maintain any of our
permits or approvals, we may be subject to various penalties, including fines and the discontinuation or restriction of our operations. Any such disruption in our business operations would materially
and adversely affect our business, financial condition and results of operations.
As
virtual worlds and online game industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and
permits other than
those we currently have. As a result, uncertainties exist regarding the interpretation and implementation of current and future PRC laws and regulations applicable to virtual worlds. We cannot assure
you that we will be able to timely obtain required licenses or any other new license required in the future, or at all. We cannot assure you that we will not be found in violation of any current or
future PRC laws and regulations.
The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we, as the developer of our mobile games,
are required to obtain applicable permits and licenses before their release online, or if we are required to obtain approval for the release of our e-books on mobile platforms, it may materially and
adversely affect our business results and future growth.
According to the Regulation on Three Provisions, the term of online games refers to all the online game works provided to the public
through the Internet (including wired Internet and wireless network) for online user interaction or download, which includes but is not limited to MMORPG, web games, casual games, PC game downloading,
games with net connection function, online counter strike game platforms and online mobile games. In addition, the distribution of online games to the public
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through
the Internet for online user interaction or download is deemed as publication of such online games and is subject to the approval of the GAPP before such online games are distributed online.
To
further build our franchises and animated characters, we expanded into mobile platforms and have developed diversified mobile games and applications. Since the release of our first
mobile game, Mole's World iOS version in October 2011, we have further expanded our mobile game portfolio, including multiple games based on Seer franchise and Mole's World franchise. All of our
mobile games can be downloaded onto iPhones and iPads through Apple's App Store, and some games can also be downloaded onto Android based mobile devices. We may charge a fee for download or provide
free download of our mobile products, depending on the nature of our different types of products and relevant distribution strategies; while we may have an in-application purchase system for virtual
items. Currently, there is no official or public interpretation on the distinction between the terms of online games and mobile games, and we understand that the term of online mobile games are
covered by the definition of "online games" under the Regulation on Three Provisions, and we have obtained the approvals from the GAPP covering all of our online games, including Mole's World and
Seer. However, it still remains uncertain whether we need to obtain approvals for our online mobile games before we distribute such mobile games online. Furthermore, even under the assumption that our
mobile games are subject to separate approvals before they are released online, it is still unclear whether we, as the developer of our games, or the third-party operators who manage and operate the
platform where our
mobile games are offered to the public for download, are required to apply for the approval from GAPP before such online mobile games are distributed online.
As
of December 31, 2013, we have released over ten e-books which featured the Mole's World franchise and Seer animation application on Apple's iOS platform. According to
the Opinions of GAPP on the Development of E-Books
Industry
, which was promulgated by GAPP on October 9, 2010 and took effective on the same day,
enterprises engaging in e-book industries are subject to approvals and administration from relevant governmental authorities. In addition, enterprises engaging in the creation, editing and publication
of e-books or in the operation of platform where the e-book resources are delivered to users are deemed as e-book publishers and are subject to approvals for the publication of e-books. Since there is
no official or public interpretation on the definition of e-book publication, we are not certain whether our release of e-books on mobile platforms will be deemed as publication and therefore be
subject to the approval of GAPP.
If
relevant governmental authorities retroactively determine that we should obtain separate approvals for our online mobile games before we distribute them online, or that we should
apply for approval for the release of our e-books on mobile platforms, we may be subject to penalties or an order to withdraw our mobile games and/or e-books from the Internet, which may adversely
affect our business results and prospects for future growth.
The laws and regulations governing animation televisions and films in China are developing and are subject to future changes. If we or the third-parties we work with fail to
obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.
The film and animation industry of PRC is regulated mainly by the State Administration of Radio, Film and Television, or SARFT. The
administration of the foregoing industry is mainly focused on the production and broadcasting of a film and animation television series.
According
to the Regulations on the Administration of Movies promulgated by the State Council of PRC on December 25, 2001 which took effective as of February 1, 2002, the
film production entity is required to either obtain a Film Production License for engaging in film production activities or a One-Time Film Production License for each single film to be produced. In
addition, upon the completion of the film making, the film production entity is required to submit the film to the local
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branch
of SARFT for examination. SARFT will issue a License of Public Screening for each film that passes such examination, allowing the broadcast of such film to the public.
On
July 19, 2004, SARFT promulgated the
Administration Rules on the Production and Operation of Broadcasting Television Programs
,
pursuant to which an entity that plans to produce and operate television and broadcast programs in China is required to obtain the License for Producing and Operating Television and Broadcast
Programs. On July 11, 2006, SARFT issued
Provisional Regulations on Filing and Publicity of Domestic Television Animations
, stipulating that
registrations for domestic television animations must be filed with, and be publicly displayed by, SARFT prior to their production. On February 14, 2008, SARFT promulgated the
Notice of the State Administration of Radio,
Film and Television on Strengthening the Administration of the Broadcasting of Domestic Animation Series
and on May 14, 2010, SARFT further promulgated
Regulations on Content of Television Series
, which stated that for each domestic television
animation completed, the animation production entity is required to obtain the Domestic Animation Publication License prior to the broadcast of such domestic television animation to the public.
We
cooperate with third parties with the requisite qualifications and licenses in the production and distribution of the animation series and film based on our Mole's World franchise and
the film based on our Seer franchise. Shanghai Taomee Animation Co., Ltd. has obtained (i) the license for the production and broadcasting of radio and television program, and the
license for the broadcasting of Seer I, Seer II, Mole's World III and Flower Fairy animation series, (ii) one-time film production license and distribution license for the third film based on
our Seer franchise, and (iii) one-time film production license for the third film based on our Mole's World franchise. If we fail to renew the Broadcasting and Television Program Production
License obtained by us or if we or the third parties we worked with cannot obtain the license from SARFT for any of our future animation television series or films, the business of animation and film
production will be adversely affected. Any such disruption in our business operations would materially and adversely affect our business, financial condition and results of operations.
The laws and regulations governing broadcasting audio/video programs through the Internet in China are developing and are subject to future changes. If we or the
third-parties we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.
On July 6, 2004, the SARFT promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the
Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the opening, broadcasting, integration, transmission or download of
audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license,
with a term of two years, issued by the SARFT and
operate pursuant to the scope as provided in such license. Foreign-invested enterprises are not allowed to engage in the above business.
On
December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Document 56, which
came into effect as of January 31, 2008. Document 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service provider must obtain a license
from the SARFT. Furthermore, Document 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press
questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating
lawfully prior to the issuance of Document 56 may re-register and continue to operate without becoming state-owned or controlled,
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provided
that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Document 56 was issued.
In
January 2012, in cooperation with a number of China's leading online video websites who have obtained the audio/video program transmission licenses, we launched v.61.com, a website
that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In November 2012, we jointly developed with Turner Broadcasting
System Asia Pacific (the parent company of Cartoon Network) ben10.61.com, a dedicated Chinese online zone for Ben 10 fans featuring videos, online games, wallpaper downloads, e-comics and character
profiles. If the governmental authorities determine that our website v.61.com and ben10.61.com falls within Document 56, we may not be able to obtain the audio/video program transmission license as
required, and we may become subject to penalties, fines or an order to suspend our website v.61.com and ben10.61.com.
Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for information displayed on,
retrieved from, or linked to our Internet websites.
The PRC government has adopted certain regulations governing Internet access and the distribution of news and other information over
the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC
laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements could result in the revocation of ICP and
other required licenses and the closure of the
concerned websites. The website operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website.
In
addition, the MIIT has published regulations that subject website operators to potential liability for content included on their websites and the actions of users and others using
their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order
any local Internet service provider, or ISP, to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination
over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible for the protection of State secrets of the PRC government, is
authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the dissemination of online information.
As
these regulations are subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability
for us as a website operator. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated
or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any portion of our content objectionable, they may require us to
limit or eliminate the dissemination of such information or otherwise curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse effect on our
financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations arising from information displayed on, retrieved from or
linked to our websites, including a suspension or shutdown of our operations.
There are currently no laws or regulations in the PRC governing property rights of virtual assets and therefore it is not clear what liabilities, if any, we may have
relating to the loss of virtual assets by our users.
Users of our virtual worlds acquire and accumulate some virtual assets, such as performance-enhancing items, clothing, accessories and
other in-game items. Such virtual assets can be highly valued
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by
users. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of network service by a network crash, or by hacking activities. There are currently no PRC
laws and regulations governing property rights of virtual assets. As a result, it is unclear who the legal owner of
virtual assets is and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law whether an operator of virtual worlds such as us would have any liability
(whether in contract, tort or otherwise) for loss of such virtual assets by users. Based on several judgments regarding the liabilities of online game operators for loss of virtual assets by users,
the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by users. In the event of a loss of virtual assets, we may
be sued by users and may be held liable for damages.
Restrictions on virtual currency may adversely affect our game operations revenues.
Our virtual world operations revenues are collected through the sale of our prepaid cards. The Notice on the Reinforcement of the
Administration of Online Games issued by the Ministry of Culture and other governmental authorities on February 15, 2007, directs the People's Bank of China to strengthen the administration of
virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice also applies to virtual worlds we operate. This notice provides that the total amount
of virtual currency issued by online game operators and the amount purchased by individual users should be strictly limited, with a strict and clear division between virtual transactions and real
transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items. On June 4, 2009, Ministry of Culture and
Ministry of Commerce jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what virtual currency is and requires that entities obtain the
approval from the Ministry of Culture before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. We have obtained the approval from the
Ministry of Culture for the issuing of our virtual currency. These restrictions on virtual currency may result in lower sales of our prepaid cards, and could have an adverse effect on our revenues
from online business.
Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and
reduce our net income.
Shanghai Taomee, as a "software enterprise," enjoyed a full exemption from enterprise income tax, or EIT, in 2009 and 2010 and a 50%
reduction in the EIT rate from 2011 to 2013. The reduced applicable EIT rate of Shanghai Taomee was 12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax
authorities in May 2010. In addition, an enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a "High and New Technology Enterprise", or HNTE. In 2010,
Shanghai Taomee obtained "High and New Technology Enterprise" qualification, or HNTE qualification, which is effective for a period of three years and could be renewed thereafter. In 2013, Shanghai
Taomee applied for the renewal and received a new HNTE qualification. Currently Shanghai Taomee has not applied to the relevant tax authority for preferential tax treatment as a HNTE.
Shanghai
Shengran, which was established in 2009 and qualified as a "software enterprise" in 2010 and was informed in April 2011 that the full EIT exemption would apply retroactively in
2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013. In May 2012, Shanghai Shengran received a written approval from local tax authorities, according to which Shanghai Shengran
was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate, i.e. EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of US$2.1 million as a
one-time tax benefit in 2012.
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According
to the
Notice of the Ministry of Finance and Other Departments regarding Several Opinions on Facilitating the Development of China's Animation
Industry
forwarded by the General Office of the State Council on April 25, 2006, an animation enterprise as recognized by the relevant department of the State Council
which independently develops or produces animation products can apply for certain tax preferential treatment as applied to the software enterprises. Shanghai Animation was recognized as an "animation
enterprise" in November 2013. Shanghai Animation is in the process of obtaining a written approval from relevant tax authorities for the two-year EIT exemption and a three-year 50% EIT rate reduction.
If
Shanghai Taomee, Shanghai Shengran or Shanghai Animation fail to maintain their respective qualification as a "software enterprise" or as an "animation enterprise" or as a "HNTE", the
effective EIT rate will increase, which could adversely affect our results of operations. In addition, various local governments in China have provided discretionary preferential tax treatments to us.
However, these local governments may decide to reduce or eliminate these preferential tax treatments at any time. Furthermore, these local implementations of tax laws may be found to violate national
laws or regulations and we may be subject to retroactive imposition of higher taxes as a result. Any expiration, reduction or discontinuation of, or changes to, these tax incentives will increase our
tax burden and reduce our net income and thus have a material adverse effect on our operating results.
Further roll-out of the PRC government's plan to replace business tax with value-added tax, or VAT, may subject us to higher tax rate, which could adversely affect our
results of operations.
Pursuant to the PRC Provisional Regulations on Business Tax, taxpayers providing taxable services falling under the category of service
industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the
Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax, or Circular 111, pursuant to which, from January 1, 2012, VAT has replaced business tax in the transport and shipping
industry and some of the modern service industries in Shanghai. In July 2012, the Ministry of Finance and the State Administration of Taxation
promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries in
Eight Provinces and Municipalities (including Beijing), or Circular 71, which expanded the pilot regions to other eight provinces and municipalities including Beijing, Tianjin, and Shenzhen. In May
2013, the Ministry of Finance and the State Administration of Taxation promulgated the
Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to
Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries across the Country
, or Circular 37, which expanded the pilot regions to the whole
nation and Circular 111 and Circular 71 were annulled accordingly. In December 2013, the Ministry of Finance and the State Administration of Taxation promulgated the
Circular
on Expanding the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax to Railway Transport and Postal Service
, or Circular 106, pursuant to which, from
January 1, 2014, VAT would replace business tax in the transport and shipping industry, postal service and some of the modern service industries in PRC and Circular 37 was annulled accordingly.
Under Circular 106, a VAT rate of 6% applies to certain modern service industries. Most of our consolidated affiliated entities are located in these pilot regions, and the revenues recognized from
part of our businesses operated by Shanghai Shengran, Shanghai Taomee and Shanghai Animation are subject to VAT at a rate of 6% for certain other services such as advertisement, merchandise licensing
and box office revenue sharing and 17% for software sales, while other part of our business are still subject to PRC business tax at a statutory tax rate of 5%. If this plan is extended to apply to
other part of our business, we may be subject to VAT rate which is higher than the business tax rate, which could harm our financial condition and results of operations.
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We principally rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on
the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business.
We are a holding company, and we rely principally on dividends and other distributions on equity from our subsidiary in China for our
cash requirements, including the funds necessary to service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any,
determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to
fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The registered capital of Shanghai Shengran is
US$2.5 million. As of the date of this annual report, Shanghai Shengran has made allocations to its statutory reserve fund in compliance with the applicable PRC laws and regulations.
Furthermore, if our subsidiary in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Most of
our assets are held by, and substantially all of our earnings and cash flows are attributable to, our PRC subsidiary. If earnings from our PRC subsidiary were to decline, our earnings and cash flow
would be materially and adversely affected. Our cash flows are principally derived from dividends paid to us by our PRC subsidiary. As a result, our ability to distribute dividends largely depends on
earnings from our PRC subsidiary and its ability to pay dividends out of its earnings. Our PRC subsidiary does not have a history of paying dividends. We cannot assure you that our PRC subsidiary will
generate
sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
In
addition, under the PRC Enterprise Income Tax Law and the Implementing Rules, both of which became effective on January 1, 2008, dividends generated from the business of our
PRC subsidiary after January 1, 2008 and payable to us may be subject to a 10% withholding tax if the PRC tax authorities determine that we are a non-resident enterprise, unless there is an
applicable tax treaty with China that provides for a different withholding arrangement and we are deemed to be entitled to such favorable treatment.
We may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income
tax.
The PRC Enterprise Income Tax Law provides that enterprises established outside China whose "effective management" is located in China
are considered "resident enterprises" and will generally be subject to the uniform 25% EIT rate as to their global income. Under the implementation regulations, "effective management" is defined as
substantial and overall management and control over such aspects as the production and business, personnel, accounts and properties of an enterprise.
In
April 2009, the State Administration of Taxation released a circular that sets out the standards and procedures for recognizing the location of the "effective management" of an
enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors, or a Chinese Funded Enterprise. Under the circular, a Chinese Funded Enterprise is considered a
resident enterprise if all of the following applies: (i) a Chinese Funded Enterprise's major management department and personnel who are responsible for carrying out daily operations are
located in the PRC; (ii) the department or the personnel who have the right to decide or approve the Chinese Funded Enterprise's financial and human resource matters are located in the PRC;
(iii) the major assets, account book, company seal and meeting minutes of the Chinese Funded Enterprise are located or stored in the PRC; and (iv) the directors or management personnel
holding no less than 50% voting rights of the Chinese Funded Enterprise habitually reside in the PRC. The circular explicitly provides that the above standards apply to the enterprises which are
registered outside the PRC and funded by Chinese enterprises as
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controlling
investors, and therefore such standards may be cited for reference only and may not be directly adopted when considering whether our "effective management" is in the PRC or not.
Accordingly, it is still uncertain whether we may be considered a resident enterprise under the PRC EIT Law. If we are considered a resident enterprise and earn income other than dividends from our
PRC subsidiary, we will be subject to a 25% PRC income tax on our global income and such 25% PRC EIT on our global income could significantly increase our tax burden and materially and adversely
affect our cash flow and profitability.
If we are classified as a "resident enterprise" for PRC enterprise income tax purposes, you may be subject to PRC withholding tax on dividends from us and to PRC income tax
on gain realized on the transfer of our ADSs or ordinary shares.
Under the PRC Enterprise Income Tax Law and related implementation regulations, PRC EIT withholding tax at the rate of 10% is
applicable to dividends payable to investors that are "non-resident enterprises," which do not have an establishment or place of business in the PRC, or which have such establishment or place of
business if the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. In addition, any gain realized
on the transfer of ADSs or shares by such investors is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC unless a treaty otherwise provides. If we
are considered a PRC "resident enterprise," it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or
ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the PRC EIT Law to withhold PRC income tax on dividends payable to our non-PRC
investors that are "non-resident enterprises," or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs
may be materially and adversely affected.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
We conduct our business primarily through our subsidiary and affiliated entities in China. Our operations in China are governed by PRC
laws and regulations. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a
fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In
addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result,
we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Substantially all of our cash inflows and outflows are denominated in Renminbi. We may convert a portion of our revenues into other
currencies to meet our foreign currency obligations such as payment of dividends declared in respect of our ordinary shares. Under China's existing foreign exchange regulations, our PRC subsidiary is
able to make payments of current accounts, such as dividends to its offshore holding companies, in foreign currencies, without prior approval from SAFE, by complying with certain procedural
requirements. However, we cannot assure you that the PRC authorities will not take further measures in the future to restrict access to foreign currencies for current account
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transactions.
We may also have different views with the PRC authorities with respect to certain foreign exchange transactions. These and other uncertainties with respect to currency exchange controls
may have a material adverse impact on our operations and financial condition.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of
currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary.
Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its
foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from
trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC
government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiary and our PRC subsidiary's ability to distribute profits to us,
if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.
SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or
controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an "offshore special purpose vehicle." PRC
residents that are shareholders and/or beneficial owners of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before
March 31, 2006. In addition, any PRC resident that is a shareholder of an offshore special purpose vehicle is required to amend its SAFE registration with respect to that offshore special
purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China or
other material changes in share capital. In May 2007, SAFE issued relevant guidance to its local branches with respect to the operational process for SAFE registration, which standardized more
specific and stringent supervision on the registration relating to the SAFE notice.
All
our individual shareholders who are subject to Circular 75 have completed registration with SAFE with regard to the establishment of our company or their shareholding in our company
as required under Circular 75, and they have also filed application for change of registration to reflect our company's investment activities and later share subdivision. We are committed to
compliance with Circular 75 and have taken steps to ensure that our shareholders and beneficial owners who are subject to Circular 75 also comply with the relevant rules. However, we cannot provide
any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other
requirements required by the SAFE notice or other related rules. In case of any non-compliance on any of our PRC resident shareholders or beneficial owners, our PRC subsidiary and such shareholders
and beneficial owners may be subject to fines and other legal sanctions, including restriction on our ability to contribute additional capital into our PRC subsidiary and our PRC subsidiary's ability
to distribute dividends to our offshore holding companies, which will adversely affect our business.
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All employee participants in our share incentive plans who are domestic individuals may be required to register with SAFE. We may also face regulatory uncertainties that
could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
In December 2006, the People's Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth
the respective requirements for foreign exchange transactions by PRC individuals under either current account or the capital account. In January 2007, SAFE issued the Implementation Rules of the
Administrative Measures for Individual Foreign Exchange, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen's participation in
the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On February 15, 2012, SAFE promulgated the
Notice regarding Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock Option Plan of Overseas-Listing Companies
, or the Stock Option Rule, which substitutes the
Application Procedure of
Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed
Companies
promulgated by SAFE on March 28, 2007. Under the Stock Option Rule, the domestic individuals as defined under the
Foreign Exchange
Administration Regulations
who are granted stock options or other incentive alternatives by an overseas publicly listed company are required, through a PRC agent or PRC
subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.
We
and our relevant employees participating in our stock incentive plan are subject to the Stock Option Rule. Failure to comply with the Stock Option Rule and other relevant rules will
subject us or our relevant employees participating in our stock incentive plan to fines and other legal or administrative sanctions and impose restrictions on our execution of option plans, including
the grant of options under such plans to our employees, which could adversely affect our business operations. As the laws and regulations of PRC in relation to domestic individual's participation in
the stock option plan of overseas companies are developing, we may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees
under PRC law.
Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in
political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in an over 20% appreciation of the RMB against the U.S. dollar
over the following three years. For almost two years after reaching a high against the U.S. dollar in July 2008, however, the Renminbi traded within a narrow band against the U.S. dollar. As a
consequence, the Renminbi fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase
RMB exchange rate flexibility. However, it remains unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible
currency policy, which could result in greater fluctuation
of the RMB against the U.S. dollar. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. We principally
rely on dividends and other distributions paid to us by our subsidiary in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign
currency translation losses for financial reporting purposes.
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The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our initial public offering under a PRC regulation. The
regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and
Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC, and SAFE, jointly adopted the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006 and was amended by the Ministry of Commerce on June 22, 2009.
The regulations require offshore special purpose vehicles that are controlled by PRC companies or residents and that have been formed for the purpose of seeking a public listing on an overseas stock
exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the
CSRC published a notice on its website specifying the documents and materials that special purpose vehicles are required to submit when seeking CSRC approval for their listings outside of China. The
interpretation and application of the above regulations remain unclear, and the initial public offering which we completed in June , 2011 may require approval from the CSRC, and
if it does, it is uncertain how long it will take us to obtain the approval. If CSRC approval is required for the initial public offering, our failure in obtaining or delay in obtaining the CSRC
approval for the initial public offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China,
restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations and financial
condition.
Our
PRC counsel, Allbright Law Offices, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on
September 21, 2006, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on the New York Stock Exchange, because we do not
constitute a special purpose vehicle, as defined by the New M&A Rules, which is required to obtain approval from the CSRC for overseas listing, and no public record is found indicating that any of the
issuers having similar onshore corporate
structures and already listed on an off-shore stock exchange has been required by the CSRC to procure the approval of the CSRC prior to its listing.
The
new regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming
and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire
affiliated domestic companies. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the new regulations to complete such
transactions could be time-consuming, and any required approval processes, including approval from Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could
affect our ability to expand our business or maintain our market share.
We face risks of health epidemics and other disasters, which could severely disrupt our business operations.
Our business could be materially and adversely affected by the outbreak of swine influenza, avian influenza, severe acute respiratory
syndrome, or SARS, or another epidemic. In March 2013, a new virus subtype H7N9, commonly known as "bird flu" or "avian flu," was discovered in eastern China and has already sickened and killed some
people. Any adverse public health developments in China could
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require
the temporary closure of our offices. Such closures could severely disrupt our business operations and adversely affect our results of operations.
Our
operations are vulnerable to interruption and damage from man-made or natural disasters, including wars, acts of terrorism, earthquakes, fire, floods, environmental accidents, power
loss, communications failures and similar events, all of which may disrupt our business. If any significant man-made or natural disaster were to occur in the future, our ability to operate our
business could be seriously impaired.
The enforcement of labor contract law and increase in labor costs in the PRC may adversely affect our business and our profitability.
China adopted a labor contract law effective on January 1, 2008, which was amended by the Standing Committee of the National
People's Congress on December 28, 2012, and its implementation rules effective on September 18, 2008, respectively. The labor contract law and its implementation rules impose more
stringent requirements on employers with regard to, among others, minimum wages, severance payment upon permitted termination of the employment by an employer and non-fixed term employment contracts,
time limits for probation period as well as the duration and the times that an employee can be placed on a fixed term employment contract. Due to the lack of clarity with respect to their
implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and practices. Our employment policies and practices may violate the labor
contract law or its implementation rules and we may be subject to related penalties, fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating
expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to
terminate some of our employees or otherwise change our employment or labor practices, the labor contract law and its implementation rules may also limit our ability to effect those changes in a
manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.
Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements
being determined to not be in compliance with the requirements of the Exchange Act.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the
Sarbanes-Oxley Act of 2002 against the Chinese affiliates of the "big four" accounting firms, (including our auditors) and also against Dahua (the former BDO affiliate in China). The
Rule 102(e) proceedings initiated by the SEC relate to these firms' inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to
Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law
and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based
in China and all China-based businesses with securities listed in the United States.
In
January 2014, the administrative judge reached an Initial Decision that the "big four" accounting firms should be barred from practicing before the Commission for six months. However,
it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a petition for review of the Initial Decision and pending that review the effect of the
Initial Decision is suspended. The SEC Commissioners will review the Initial Decision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on these
audit firms. Once such an order was made, the accounting firms would have a further right to appeal to the
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US
Federal courts, and the effect of the order might be further stayed pending the outcome of that appeal.
Depending
upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in
the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including
possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market
price of our ADSs may be adversely affected.
Risks Related to Our ADSs
The market price for our ADSs has fluctuated and may be volatile.
The market price for our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the NYSE on
June 10, 2011, trading price of our ADSs have ranged from US$3.15 to US$17.90 per ADS, and the last reported trading price on April 10, 2014 was US$5.80 per ADS.
The
market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors within and outside our control including, but not limited to, the
following:
-
-
actual or anticipated fluctuations in our quarterly results of operations;
-
-
regulatory developments affecting us or our industry;
-
-
changes in the economic performance or market valuations of other companies operate in our industry;
-
-
changes in financial estimates by securities research analysts;
-
-
announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital
commitments;
-
-
fluctuations of exchange rates between RMB and the U.S. dollar;
-
-
intellectual property litigation;
-
-
economic or political conditions in China;
-
-
additions to or departures of our senior management;
-
-
release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
-
-
sales or perceived potential sales of additional ordinary shares or ADSs.
In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of any particular
companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Substantial future sales or the perception of sales of our ADSs or ordinary shares in the public market could cause the price of our ADSs to decline.
Additional sales of our ADSs or ordinary shares, including ADSs or ordinary shares issuable upon the exercise of our outstanding stock
options, in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell substantial amounts of our ADSs, including
those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to
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sell
equity or equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of ordinary shares, the
prevailing market price for our ADSs could be adversely affected.
In
addition, we may issue additional ordinary shares or ADSs. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership
interests in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.
You may not have the same voting rights as the holders of our ordinary shares and must act through the depositary to exercise your rights.
As an ADS holder, you may only exercise voting rights with respect to the underlying ordinary shares in accordance with the provisions
of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying
ordinary shares in accordance with these instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares underlying your ADSs.
Pursuant
to our third amended and restated memorandum and articles of association, we may convene a shareholders' meeting upon ten calendar days' notice. When a shareholder's meeting is
convened, you may not receive sufficient advance notice to withdraw the ordinary shares underlying your ADSs to allow you to vote with respect to any specific matter. If we give timely notice, the
depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to instruct the depositary
to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement
for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are registered under the Securities Act,
or the distribution of them to ADS holders is exempted from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration
statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to rely on an
exemption from registration under the Securities Act to distribute such rights and securities. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience
dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from
time to time when it deems expedient in
connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are
closed, or at any time if we or the depositary deem it advisable to do so due to any requirement of law or of any government or governmental body.
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated
under Cayman Islands law, conduct substantially all of our operations in China and the majority of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands and substantially all of our assets are located outside of the United States. We conduct
substantially all of our current operations in China through our subsidiary and affiliated entities in China. The majority of our officers and directors reside outside the United States and a
substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult 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 securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the
Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. In addition, there is uncertainty as to whether the courts of
the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States
or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated
upon the securities laws of the United States or any state.
Our
corporate affairs are governed by our memorandum and articles of association, as amended from time to time, and by the Companies Law (2013 Revision) and the common law of the Cayman
Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands
law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands
as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, because the Cayman
Islands law has no legislation specifically dedicated to the rights of investors in securities, and thus no statutorily defined private causes of action to investors in securities such as those found
under the Securities Act or the Securities Exchange Act of 1934 in the United States, it provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may
not have standing to initiate a shareholder derivative action before the federal courts of the United States.
As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders
than would shareholders of a corporation organized in a jurisdiction in the United States.
Our articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders' opportunity to sell
their shares, including ordinary shares represented by our ADSs, at a premium.
Our third amended and restated articles of association contain provisions to limit the ability of others to acquire control of our
company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority,
without further action by our shareholders, to issue preferred shares in one or more series and to determine their designations, powers, preferences, privileges and other rights, including dividend
rights, voting rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or
otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change
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in
control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of
the holders of our ordinary shares and ADSs may be materially and adversely affected.
We believe we may be a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S.
Holders of our ADSs or ordinary shares.
Based on the market price of our ADSs and composition of our income and assets, we believe we were a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2013. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75%
of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable
to assets that produce passive income or are held for the production of passive
income. Because the value of our assets for purposes of the PFIC test may be determined, in part, by reference to the market price of our ADSs or ordinary shares, our PFIC status will depend in large
part on the market price of the ADSs or ordinary shares, which may fluctuate significantly. Because we believe we were a PFIC for our taxable year ended December 31, 2013, certain adverse U.S.
federal income tax consequences could apply to U.S. Holders (as defined in "Item 10. Additional InformationE. TaxationUnited States Federal Income Taxation") of our
ADSs or ordinary shares with respect to any "excess distribution" received from us and any gain from a sale or other disposition of our ADSs or ordinary shares. See "Item 10. Additional
InformationE. TaxationUnited States Federal Income TaxationPassive Foreign Investment Company."
We have incurred increased costs as a result of being a public company, and we cannot predict or estimate the amount of additional future costs we may incur or the timing of
such costs.
As a public company, we have incurred a significantly higher level of legal, accounting and other expenses than we did as a private
company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have required changes in the corporate governance practices
of public companies. These rules and regulations have increased our legal, accounting and financial compliance costs and made some of our corporate activities more time-consuming and costly.
After
we became a public company, we have established additional board committees and adopted and implemented additional policies regarding internal controls over financial reporting and
disclosure controls and procedures. In particular, compliance with Section 404 of the Sarbanes-Oxley Act, which requires public companies to include a report of management on the effectiveness
of their internal control over financial reporting, has increased our costs. In addition, we have incurred costs associated with public company reporting requirements, such as the requirements to file
an annual report and other reports with the SEC. We expect these rules and regulations to increase our legal and financial compliance costs going forward, but we cannot predict or estimate the
additional costs or the timing of initially additional costs we may incur.
ITEM 4. INFORMATION ON THE COMPANY
-
A.
-
History and Development of the Company
Our
legal and commercial name is Taomee Holdings Limited. We commenced operations of our business of children's online entertainment in October 2007 through Shanghai Taomee, a limited
liability company established in China. Shanghai Taomee holds our licenses required for the above business under PRC laws and is in charge of the operation of our websites for our virtual worlds. To
enable us to raise capital from international investors, our holding company, Taomee Holdings Limited, was incorporated under the laws of the Cayman Islands in September 2008.
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In
November 2008, we incorporated Taomee Holdings (HK) Limited, or Taomee HK, our wholly-owned subsidiary in Hong Kong. In June 2009, Taomee HK established its wholly-owned subsidiary,
Shanghai Shengran, in China. We operate our virtual worlds through our VIE, Shanghai Taomee. In June 2009, through Shanghai Shengran, we entered into certain contractual arrangements with Shanghai
Taomee and its shareholders through which we gained effective control over the operations of Shanghai Taomee.
On
June 10, 2011, our ADSs began trading on the New York Stock Exchange under the ticker symbol "TAOM." We issued and sold a total of 7,187,500 ADSs, representing 143,750,000
ordinary shares, at an initial offering price of US$9.00 per ADS.
On
July 13, 2011, the underwriters of our initial public offering exercised their over-allotment option to purchase an additional 525,224 ADS from us at the initial public
offering price of US$9.00 per ADS, less the underwriting discount. With this exercise, we issued and sold a total of 7,712,724 ADSs, representing 154,254,480 ordinary shares.
On
November 28, 2011, we announced a share repurchase plan to repurchase up to US$10 million worth of outstanding American Depositary Shares ("ADSs") (each ADS represents
twenty ordinary shares of the Company) over a 12-month period. On September 28, 2012 and November 26, 2013, respectively, we extended the share repurchase plan for another
12 months from November 23, 2012 to November 23, 2013, and from November 24, 2013 to November 23, 2014, respectively. On March 28, 2014, we announced a share
repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period. As of December 31, 2013, we had repurchased an aggregated of 1,064,177 ADSs,
representing 21,283,540 ordinary shares on the open market for total cash consideration of US$4.4 million.
In
the first quarter of 2012, Shanghai Taomee entered into an investment agreement of US$0.1 million with Guangzhou Chuangyou Information Technology Co., Ltd., or
Chuangyou, a company principally engaged in the design and development of online games in China, to acquire 6.0% of Chuangyou's
equity interest and a contingent call option to further subscribe 13.16% newly issued equity interest for US$0.6 million. In September 2012, Shanghai Taomee exercised the call option and
completed the further acquisition in January 2013, resulted in 19.16% equity interest in Chuangyou. In December 2013, Chuangyou entered into an agreement to issue new shares for RMB2.5 million
(approximately US$0.4 million) to a new investor. The Company's equity share in Chuangyou will be diluted to 9.58% upon the closing of the transaction Chuangyou is a related party of us, as one
of Chuangyou's investors is our director and principle shareholder.
On
June 1, 2012, we incorporated Guangdong Taomee Animation Technology Co., Ltd., or Guangdong Taomee, under the laws of PRC, which primarily focuses on the design
and distribution of toys, trading cards as well as other products. Shanghai Taomee and an individual shareholder, Mr. Jinjun Zhao, are registered as the shareholders of Guangdong Taomee,
holding 80% and 20% of the equity interest in Guangdong Taomee, respectively. Notwithstanding the foregoing, among the equity interest in Guangdong Taomee currently registered under the name of
Mr. Jinjun Zhao 15% of the equity interest in Guangdong Taome is nominally held by Mr. Jinjun Zhao and is subject to a vesting schedule as provided under the Subscription Agreement
entered into between Shanghai Taomee and Mr. Jinjun Zhao on June 1, 2012, where one third of the foregoing 15% equity interest will be allocated to Mr. Jinjun Zhao annually upon
the anniversary of each one year period for his employment in Guangdong Taomee. As a result, as of December 31, 2013, one third out of the 15% equity interest in Guangdong Taomee nominally held
by Mr. Jinjun Zhao, i.e. 5% equity interest in Guangdong Taomee, has been allocated to Mr. Jinjun Zhao, and therefore Mr. Jinjun Zhao actually held 10% equity interest in
Guangdong Taomee and our equity interest in Guangdong Taomee was 90%.
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In September 2012, we obtained a minor equity interest in Gamespedia Holdings Limited, or Gamespedia, a Cayman Island company which operates its mini game portal
website through its wholly owned subsidiaries and VIEs in China, with total consideration of US$6.2 million.
In
October 2012, we incorporated Shanghai Xinsheng Information Technology Co., Ltd., or Shanghai Xinsheng, a PRC company wholly owned by Shanghai Shengran which focuses on
software development.
In
February 2013, we acquired a minority equity interest in Voozclub Co., Ltd., or Voozclub, a Korea-based character and animation studio with an established presence in
global brand licensing, online games, publishing and theme parks for a cash consideration of US$1.4 million.
In
March 2013, Shanghai Taomee entered into an agreement to set up Shanghai Taoyue Information Technology Co., Ltd. or Taoyue, a new online game development company, with
five third-party individuals, of which Shanghai Taomee held a 40% equity interest for a cash consideration of RMB2.0 million (approximately US$0.3 million). In January 2014, Shanghai
Taomee agreed to transfer such 40% equity interests in Taoyue to an existing investor of Taoyue for a cash consideration of RMB2.0 million (approximately US$0.3 million).
In
May, October and November 2013, we incorporated Shanghai Taomee Wireless Technology Co., Ltd., Shanghai Taomee Software Development Co., Ltd. and Shanghai
Taomee Property Service Co., Ltd., respectively, all of which are PRC subsidiaries of Shanghai Shengran. The three companies are incorporated for the purchase of land use rights and
building in Songjiang, Shanghai.
In
September 2013, we entered into an investment agreement to acquire minority stake of a Beijing-based pre-school education service provider for a consideration of
US$2.0 million.
In
September 2013, we entered into an investment agreement with two third-parties to establish a joint venture, Jiangxi Haomi Network Technology Co., Ltd., or Jiangxi
Haomi, a company which develops family entertainment and education application on mobile and multi-screen platforms in China. We paid a consideration of RMB12.9 million (approximately
US$2.1 million) for 43.0% equity interests in Jiangxi Haomi.
In
December 2013, we acquired a minority stake of a New York City company that develops mobile applications, animation and products for pre-school children for a cash consideration of
US$150,003.
In
January 2014, we entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), a Hi-tech toy design and R&D company to subscribe for 25%
of Shanghai Weiju's newly issued ordinary shares for cash consideration of RMB3.0 million (approximately US$0.5 million).
Our
principal executive offices are located at 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District, Shanghai 200233, People's Republic of China. Our telephone
number at this address is (86-21) 6128-0056 and our fax number is (86-21) 3367-4012. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited, PO
Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
Investor
inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our corporate information website is located at
www.taomee.com. The information contained on our corporate information website is not part of this annual report. Our agent for service of process in the United States is CT Corporation System located
at 111 Eighth Avenue, New York, NY 10011.
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-
B.
-
Business Overview
We
are one of the leading children's entertainment and media companies in China. We attribute our market position to our content development and cross-media platform capabilities that
leverage our innovative culture, experience in the children's entertainment market in China, and knowledge of virtual worlds and online entertainment to create enduring and iconic characters, images
and story lines that attract a loyal following among children of the targeted age groups. Our success in developing branded entertainment experiences across online and mobile platforms has translated
into growing demand for our franchises offline. By investing and building a cross-media platform that expands to mobile and offline, we reduced our dependency on content distribution through online
virtual worlds and web games, which we believe could enhance our brand awareness and extend franchise life cycle. We are committed to delivering exceptional entertainment to children and families and
leveraging our cross-media platform and child-centric culture.
We
have a proven track record in creating branded franchises popular with children and their families through our cross-media platforms comprised of virtual worlds, print media, film,
television, live events, online video streaming sites, mobile applications, and social networking sites. As a confirmation of our positive and significant influence on children, we were awarded in
2012 by China's Ministry of Culture the "National Culture Industries Demonstration Base," a specially designated business classification which the central government grants to Chinese cultural and
media-related enterprises with leading influence in this filed.
Established
in 2007 in Shanghai as the first children's entertainment company in China, we launched our first online product Mole's World in September 2008, which became a leading
popular brand among children and families. With encouraging participation and feedback from users, we successfully launched several online virtual worlds and other entertainment products in the
following years, including our major franchises of Seer, Flower Fairy and Gong Fu Pai. To further strengthen our leading market position, we established our publishing and licensing businesses in
2010, and expanded into merchandise licensing, film and cartoon animation. As of December 31, 2013, we had launched five films featuring Mole's World and Seer. To further promote our brand we
have produced approximately 250 episodes of cartoon animation broadcasted over more than 130 TV channels throughout mainland China and Taiwan. In October 2011, we also expanded into mobile front by
releasing the mobile version of Mole's World, which is our first mobile game. Since then, we have released additional mobile games and applications, and our accumulated mobile downloads on Apple iOS
and Android platforms had increased to over 25.5 million as of December 31, 2013.
Our
success is partly due to our efforts to reinforce parental trust by creating a safe and enjoyable entertainment environment with wholesome, age-appropriate content and
standard-setting security safeguards. We set corporate social responsibility standards and nurture a corporate culture that embraces family values and encourages education and learning. We believe we
were the first children's entertainment company in China to launch a separate online monitoring portal, "Taomee MaMa," which we believe increases online safety for children through parental
engagement.
We
have achieved substantial growth since we launched our first virtual world, Mole's World, in September 2008. Our net revenues amounted to US$45.4 million in 2011,
US$40.2 million in 2012 and US$48.4 million in 2013. For 2011, 2012 and 2013, 88.8%, 80.0% and 73.1% of our net revenues, respectively, were generated primarily from subscription fees
that allow users to access premium features, sales of virtual items, mobile games, online video platform, as well as other online services, and the remaining 11.2%, 20.0% and 26.9% of our net
revenues, respectively, were generated primarily from royalties, license fees, film box office sharing, and sales of interactive toys from our offline business. Our gross profit amounted to
US$37.7 million in 2011, US$30.2 million in 2012 and US$35.1 million in 2013. Our net income was US$19.5 million in 2011, US$8.9 million in 2012 and
US$5.4 million in 2013.
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Our Franchises
We have created and developed branded entertainment franchises, including our major franchises of Mole's World, Seer, Flower Fairy and
Gong Fu Pai. In addition, we have also obtained from Voozclub Co., Ltd., or Voozclub, a character development company incorporated in Korea, the exclusive license to operate the
franchise of Canimals in Mainland China and additional three franchises for our future pipeline. Our brands and franchises have expanded into various online and offline platforms including the virtual
worlds, video streaming site, mobile applications, social networking, merchandising and interactive toys.
Mole's World
Introduced in September 2008, Mole's World is our first and one of our most popular franchises. This franchise features a community of
cuddly red-nosed moles living in a
variety of settings and landscapes, and who collaborate and interact in many social activities that promote wholesome family values, friendships, and happiness.
We
have launched virtual worlds including Mole's World and Mole Hero based on this franchise, and also introduced mobile games such as Mole Kart and Mole's Baby. In 2012, our Moles'
World series of casual mobile games attracted a diversified audience and broadened our user base to young adults aged 18 to 30. We plan to launch other virtual worlds and mobile games based on this
franchise in the future.
Certain
animated characters of our Mole's World franchise, including Princess Momo, Uncle Bodhi, and Professor Kevin, have become highly popular among children in China. We license these
characters to publishers, makers of consumer products in areas such as clothing, toys and food and beverages. In 2011 and 2012, we further introduced the franchise to television and film. The movie
Mole's World
II
received the "Monkey King Award" for best writing in 2012. During the China Animation Committee's Annual Meeting. Mole's World animation
series was ranked the sixth most beloved domestic cartoon animation in 2012 by the China Animation Association. Our expansion of Mole's World franchise to TV animation has enabled us to expand the fan
and audience base to preschool children, and many new fans today are introduced through TV, film and books rather than online games.
Seer
Introduced in September 2009, Seer is one of our most popular franchises. The Seer franchise primarily appeals to boys between six and
14 with a theme of space exploration and adventure. Virtual worlds and games in the Seer franchise offer a sci-fi adventure experience which fosters children's interest in science and environmental
protection. For example, in the Seer virtual world, users travel through various different planets in search for new energy sources and often have to form teams with other users to defend against
attacks launched by space pirates who seek to monopolize energy reserves in outer space.
We
believe the Seer virtual world encourages strong teamwork and high levels of interaction among users. The Seer virtual world integrates mini-challenges that encourage children to
explore, discover and learn about physics, chemistry and mathematics. Our users often interact with classmates, parents and teachers to solve challenges.
In
November 2011, we launched a sequel virtual world Seer II, which becomes a popular virtual world among children and a major revenue contributor as part of our Seer franchise. In June
2013, we launched the mobile game
Seer: Universal Force
on Apple's iOS platform in conjunction with related film and offline products. We plan to launch
other virtual worlds and mobile games based on this franchise in the future.
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Certain
animated characters of our Seer franchise, including Mechanic Xixi, Captain Roger and Elf Rey, have become highly popular among children in China and we license these characters
to publishers, as well as makers of consumer products, such as clothing, toys and food and beverages. In 2011, 2012 and 2013, we launched films and an animated television series based on this
franchise. In 2013, we launched
Seer III: Universal Force
franchise, the first time in our history that we launched a franchise storyline simultaneously
across film, online web and mobile games, as well as consumer products, interactive toys, books and trading cards.
The
Seer franchise has received several awards, including being ranked the second most beloved domestic cartoon animation in 2012 by the China Animation Association, and the Golden
Dragon Award for "Best Animated Feature Film" in 2011 for the Movie,
Seer: The Search for the Sacred Phoenix.
Flower Fairy
We introduced Flower Fairy, our first franchise appealing to younger girls from five to 10, in June 2010. In the Flower Fairy virtual
world, each user chooses from a variety of fairy attributes and flower worlds to create a dream-like fairytale storyline. The user's fairy is in charge of tending her own garden, cultivating various
flowers and plants, and decorating her homes. The storyline promotes artistic expression, happiness, creativity, responsibility and cooperation. Certain animated characters, including Princess Wisdom
and Princess Benevolence, have become highly popular among children in China. We have integrated many of the aforementioned attributes that promote healthy development of children into the franchise.
In February 2014, we introduced an animated television series based on this franchise to further promote our products.
We
believe that TV animation series could extend the life cycle of the online game, expand the audience's fan base, and support additional monetization opportunities.
Gong Fu Pai
We introduced Gong Fu Pai in September 2010 as our first martial art-themed franchise, and a franchise appealing to users slightly
older than our existing franchises at the time. The Gong Fu Pai virtual world allows users to learn, explore and discover by interacting with other characters. Players select and adopt a character,
including Monkey Paipai, Rabbit Yier, Panda Big Bamboo and Dragon Aotian. By attending a martial arts academy, they learn wholesome values and skills to embark in a series of fantasy adventures. The
Gong Fu Pai franchise currently appeals to boys primarily between the ages eight and 15.
Other Franchises
Canimals
In 2012, we have obtained from Voozclub the exclusive license to operate the franchise of Canimals in Mainland China. Voozclub,
incorporated in Korea, is a character development and animation studio that produces merchandise concepts and style guides, digital applications and animation, and also licenses the content and
characters to global partners. The characters produced by Voozclub differ from our own set of characters, therefore they further help strengthen and diversify our platform franchises. Canimals
includes the alien animal characters of Ato, Nia, Fizzy, Mimi, Pow, Toki, Leon, Uly and Oz, and is a franchise appealing to tweener and teenagers, primarily girls between the ages nine and 18. We have
also launched Canimals mobile applications and animations produced by Voozclub. Furthermore, our licensing relationship with Voozclub provides us with the right to operate additional three franchises
developed by Voozclub for our future pipeline.
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Our Business Segments
We provide a diverse portfolio of services and products through two business segments: online business, and offline business.
Online Business
The online business includes developing and operating online virtual worlds, other online entertainment services as well as mobile
applications. Our online business achieved significant scale through the strength of our robust technology platform and targeted distribution network. Our reliable and flexible proprietary technology
platform, coupled with our experienced research and development team, allows us to quickly expand our user base, enhance the online experience of our users and shorten development cycles. Our platform
is supported by a national distribution network spanning 118,200 retail outlets that are primarily located near schools or other places frequented by target users in over 2,200 towns and cities across
China as of December 31, 2013.
Since our inception in 2007, we have successfully launched over ten virtual worlds featuring our core franchises including Mole's
World, Seer series, Flower Fairy and Gong Fu Pai for children between the age of five and 15. In our virtual worlds, all of which are all accessible through our online community, www.61.com, children
adopt avatars and participate in interactive games and activities set in fantasy landscape with evolving story lines. We have also licensed several third-party games hosted on our servers and have
links on our website to third-party hosted games. We believe our virtual worlds have a market overseas as well, and we have licensed the content to partners throughout Asia. Our current international
expansion strategy is to leverage our content and technology platform by establishing brand recognition and an active online community through virtual worlds, online games, and mobile applications.
Depending on geography, market and other factors, we also intend to strengthen our brand presence and monetization of our franchises overseas through offline channels, including films, TV animation,
live events, and merchandise licensing.
We
believe all our virtual worlds provide a safe and educational entertainment experience for children. We have adopted a number of safety measures to protect our young users and
reassure their parents by providing them with a certain level of family supervision through our uniquely designed monitoring system, Taomee MaMa, for example, is a website dedicated to parents and
caregivers to assist in the finding, reviewing, sharing and monitoring of children's entertainment websites, applications and
products targeting the parenting community. See "Online security features." Our virtual worlds also encourage the development of positive morals and values in children by rewarding acts
of diligence, social responsibility and teamwork. From time to time, we design virtual worlds that focus on fostering children's interest in science and the environment through interactive playing
with our NPCs and other users.
The
premium features of our virtual worlds are only available to users who pay for a 30-day subscription. These users enjoy additional capabilities and special privileges, such as having
a higher upper limit for the total number of friends that the users can have and access to exclusive online parties.
In
addition to generating revenues through subscriptions, we also have an item-based revenue stream. Our virtual world currency, the Mibi, can purchase coveted items such as special
edition clothing, accessories, and upgrades, which cannot be redeemed by virtual rewards from the in-community experience. For instance, with the Mibi, a user can upgrade his or her standard virtual
home into a two-story home or a castle, and furnish the virtual homes with chandeliers, drum sets, televisions, aquariums and other unique and exclusive items.
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To further build our franchises and animated characters, we expanded into mobile platforms and have launched a diversified product and
applications portfolio offering over 20 mobile games and applications. Since the release of our first mobile game, Mole's World iOS version in October 2011, we have further expanded our mobile game
portfolio, including multiple games based on Seer franchise and Mole's World franchise. Our mobile applications include the mobile version of Taomee MaMa launched in March 2012, over ten e-books
released as of December 31, 2013 which feature the Mole's World franchise, and Seer and Mole's World animation application on Apple's iOS platform. Many of these products have been ranked the
"most downloaded" applications on several application platforms in mainland China, Hong Kong and Taiwan.
All
of our mobile games and applications can be downloaded onto iPhones and iPads through Apple's App Store, and some games can also be downloaded onto Android-based mobile devices. We
may charge a fee for download or provide free download of our mobile products, depending on the nature of our different types of products and relevant distribution strategies; while we may have an
in-application purchase system for virtual items. As of December 31, 2013, the number of downloads for
the mobile applications operated by the Company has reached approximately 25.5 million on Apple iOS and Android platforms collectively.
We
remain focused on further developing and expanding our mobile game and applications offerings as we see more users interacting with our characters and franchises from mobile devices.
In November, 2013, we reorganized our wireless division and launched a new studio named "Glove Game" to develop mobile games. Our "Glove Game" brand and studio will focus on developing mainstream
mobile games, and no longer focuses solely on developing applications to build and market our brands.
In January 2012, in cooperation with a number of China's leading online video websites that have obtained the audio/video program
transmission licenses, we launched v.61.com, a website that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In 2013, our
monthly average page views exceeded 200 million. By the end of 2013, we had over 130,000 cartoon animation series available online.
In
November 2012, we jointly developed with Turner Broadcasting System Asia Pacific (the parent company of Cartoon Network) ben10.61.com, a dedicated Chinese online zone for Ben 10 fans
featuring videos, online games, wallpaper downloads, e-comics and character profiles.
We have established a system of stringent protection mechanisms which employ a number of different approaches to improve child safety
and facilitate parental supervision. Our security features include powerful content and language filters, restrictions on advertisements and access time, as well as a separate parental community and
monitoring site, "Taomee MaMa." We believe these measures reinforce parental trust, promote the healthy use of our virtual worlds in moderation at a young age, and protect children from inappropriate
content online.
Recognizing
the importance of protecting children's privacy online, we take extensive measures to safeguard our users' identities. Our weekly newsletters and user notifications remind
users not to share personal information online. We encourage children to use a series of pre-designed phrases to communicate with others within our fantasy world. While we allow online chatting to
foster our user communication, we also have powerful content and language filters to prevent the sharing of telephone numbers or other personal information and screen out language that may be
inappropriate for children.
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Chats
are also monitored by our staff moderators to prevent the use of abusive language and other inappropriate behavior, and we impose bans of varying length on users who are found to have engaged in
inappropriate behavior. We encourage users to report potential offenses to us in an online "neighborhood watch" program.
In
addition, we aim to create a healthy online environment suitable for children playing our self-developed virtual worlds and games. There is daily server downtime between the hours of
00:00 and 06:00 in Mainland China to encourage children to form healthy Internet usage habits. For every 45 minutes of continued access, children receive a visual reminder and after two hours
of continued access, users will experience a decrease in the rate of virtual reward accumulation. These measures encourage our users to develop moderate and sustainable usage habits.
We
launched our website for parents and caregivers, "Taomee MaMa," in January 2010, as a monitoring and communications channel for parents and guardians. We put in place a sophisticated
monitoring system, through which email addresses and cell phones registered by parents and guardians are tied to their children's user accounts to closely track children's time spent in our virtual
worlds. Parents can also send inquiries and suggestions to our staff and communicate with other parents on Taomee MaMa's discussion board.
Through
cooperation with the Children and Internet Laboratory at Fudan University's Media Research Center, we developed the first set of guidelines in China for families that want to
understand the influence of Internet use on children. The guidelines address concerns over safety, security and educational value of Internet usage for children in China.
To access our interactive virtual worlds, a user must register an account by setting up a unique account number. Once registered, the
user may access all of the interactive virtual worlds in our online entertainment community with their unique account number. Once the user accesses his or her account, the user may view information
on Mibi account balance, payment history and recharge the Mibi account.
Pricing, payment and distribution
Pricing
We offer the basic functions of our virtual worlds to users for free, and we charge a RMB10 (US$1.7) 30-day subscription fee per
virtual world for accessing premium features in each of our virtual worlds. Premium features significantly enhance user experience by providing users with more in-community credit and virtual items.
Our virtual items include props, clothing, home decor and accessories. We have generally maintained stable pricing for subscriptions to premium features of our virtual world and in-community items
since their launch.
Users conduct all of the transactions on the www.61.com interactive community with our own virtual currency, the Mibi. Users may
recharge their Mibi accounts through prepaid cards or other third-party payment channels.
Users
can purchase our prepaid cards through various distribution channels. Each of our prepaid cards contains a unique access code and password that enables users to recharge their Mibi
account. Our prepaid cards are offered in denominations of RMB10 (US$1.7) , RMB30 (US$5.0) and RMB50(US$8.3), to provide flexibility to users. Our physical prepaid cards will expire on the expiration
date printed thereon, which is generally two years after the date of card production. We offer both physical cards and cards in virtual form which are sold online through a third-party vendor.
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We sell our physical prepaid cards through a network of third-party distributors. We typically collect payment from our distributors
upon delivery of our prepaid cards. We sell the prepaid cards to our distributors at a pre-negotiated discount on the face value of the cards. Our distribution agreements also contain pre-set sales
targets and offer a volume rebate to distributors if they achieve certain pre-set sales targets. The rebate is provided to these distributors in the form of free prepaid cards. The pre-negotiated
discount rate is generally more favorable to wholesale distributors with higher sales volume. Our distribution agreements generally have a term between half a year and one year, which can be renewed
through the agreement of both parties. We require our distributors to distribute prepaid cards in designated geographical areas. We also require that each distributor work closely with our marketing
team and support its activities. As of December 31, 2013, these distributors resell the cards to sub-distributors who, in turn, distribute the cards to over 118,200 retail outlets, such as
newsstands and convenience stores, in over 2,200 towns and cities across China, many of which are strategically located near schools and other places frequented by target users.
Our
virtual prepaid cards are sold via third-party online distributors and via SMS through telecom operators. We also offer the distributors of our virtual cards a pre-negotiated
discount on the face value of the cards and a volume rebate.
Users
may purchase the Mibi at the www.61.com payment center, where they can directly charge their account. We also accept online payment from a variety of payment channels popular in
China, such as debit cards, Shanda game cards, China Mobile recharge cards and Alipay, among others. We pay a processing fee to banks and other third-party payment channels in connection with such
payments.
Offline Business
Our offline business focuses on merchandise licensing, publishing, design and distribution of interactive toys, as well as the
development of media and entertainment products, such as films, and self-branded TV shows.
Due to the growing popularity of the Taomee brand and our many franchises, we began licensing characters and images to third parties in
2009, and have achieved significant growth since then. We believe there is significant demand to license our content, but we seek to enter into licensing arrangements selectively in order to ensure
the quality and integrity of our brands and franchises when they are associated with third-party content, products and services. Therefore, we have only licensed our characters and images to companies
that are leaders in their respective sectors, such as traditional print, film, television media, manufacturing and select retailers of consumer merchandise such as toys, apparel, beverages and
electronic devices. While we currently leverage our franchises developed for virtual worlds for our offline franchising, our goal is to develop original content for our offline business as well. Our
coverage in offline business aims not only to diversify our revenues but also to raise our brand profile and extend our corporate reach as a leading children's entertainment and media company in
China.
We
develop and popularize children's books and magazines featuring our franchises and characters in conjunction with third-party publishers. We typically license our franchises to
publishers and earn royalties from these licenses.
We
license our franchises to leading brands in China, such as "Bright Dairy" and "China Citic Bank" and other consumer goods makers in categories such as apparel, toys, accessories,
stationery, consumer electronics, and food and beverages. As of December 31, 2013, we licensed our franchises to
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companies
operating in major consumer product categories including apparel, accessories, toys, stationery, consumer electronics, food, beverage, books, theme parks, live shows, and carnivals. Our
license fees are usually based on a fixed percentage of the wholesale or retail selling price of the products with a guaranteed minimum payment for a given year. Terms of our license agreements are
generally between one to two years.
We have invested in the development of animated film and television content in China due to the growing popularity of our franchise and
characters. Our investments include the development of animation films based on our Mole's World franchise and Seer franchise. In addition, we have set up a dedicated team that focuses on content
development for film, which work with experienced producers of films and televisions series.
We
have co-produced and invested in five featured films, based on our "Mole's World" and "Seer" franchises. Our two animated movies based on our franchises,
Seer:
The Search for the Sacred Phoenix
and
Legend of the MolesThe Frozen Horror
, were released in theaters across China
in July and August 2011 respectively. As a follow up to those successful movies, we launched two sequels nationwide; Seer II and Mole's World II, on June 28, 2012 and July 5,
2012, respectively. In June 2013, we further launched the third sequel movie of Seer franchise,
Seer III: Universal Force
, in conjunction with online
web and mobile games, as well as consumer products, interactive toys, books and trading cards. The movie has been watched by over 2.1 million audiences according to the public information
provided by EntGroup.cn. In November 2013, we released the film on several China's leading online video and internet TV platforms, including Best TV, Tencent Video, iQiyi and Youku Tudou.
To
further promote our franchise and brand, we have also co-produced and invested in animation series of approximately 250 episodes combined based on our "Mole's World", "Seer" and
"Flower Fairy" franchises, which have been broadcasted on over 130 channels including China Central Television, major satellite channels, China's leading cartoon networks and our website v.61.com.
On
February 1, 2013, we launched a new self-branded children's television show called
Taomee Dream School
on major cartoon channels
and TV stations across China. The television show, which also can be seen at http://dream.61.com/, serves as the designated television platform for premiering our original animation content.
We also procure and sell interactive toys featuring our franchise. In the second quarter of 2012, we established Guangdong Taomee
Animation Technology Co., Ltd. or Guangdong Taomee, a company incorporated in Guangzhou, Guangdong, China which primarily focuses on the design and distribution of toys, trading cards as
well as other products.
Our
products may also offer unique promotional and interactive features that allow our customers to explore and interactive with our online platform. As we continue to gain experience in
our offline business, we are always seeking new offline business and marketing opportunities to expand our portfolio and to attract users to our online community.
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As our franchises are our valuable assets, we focus on the protection of these franchises through careful selection of leading and
reputable merchandising partners and other licensees, and through enforcing the implementation, primarily through contract terms and through our course of dealings and active monitoring mechanisms, of
procedures on the branding of our franchise assets. These include stringent production quality measures, standards on the portrayal or presentation of our franchises in different media formats and in
merchandises, and strict pre-approval processes. For films and television productions, we control the development of each story line, including the shooting scripts; for books, we have approval rights
on the plot lines and character presentations; for merchandise, our approval is often required during the development of prototypes and packaging and, under most circumstances, we also have the right
to conduct onsite inspections and to request modifications of displays.
Leveraging
the extensive user base of our online entertainment community, we also employ in-community market surveys to analyze user demand and preferences before licensing our
franchises for specific commercial productions of our licensed franchises, which we believe improves the success of the products that bear our franchise assets.
Our pipeline
We plan to release more virtual worlds every year, and to increase our product development capabilities into more interactive online
entertainment platforms including mobile games in order to expand our audience and to satisfy our users as they mature and grow older. We will continue to release more mobile games for both iOS and
Android platforms. In our offline business, we will continue to invest in films, animation series, books, and TV programming including the release of our third movie based on the Mole's World
franchise and the fourth film based on the Seer franchise in the summer of 2014. We also plan to design and develop interactive toys and merchandise that may integrate features that interact with our
online platform.
Seasonality
Our quarterly results of operations may be affected by seasonal trends caused by user behavior and demand for our online and offline
offerings. We expect our net revenues from online business to be higher during winter and summer vacations when there are more active users and children have more online playtime during these
non-school days, which usually falls in the first and third quarters of each calendar year. Decreases in our net revenues from online business, if any, as a result of seasonality may be most visible
from the third quarter to the fourth quarter of each year, as the fourth quarter has less than half of the non-school days compared to the third quarter. Moreover, the sequential decline from the
first to the second quarters accentuated because Chinese New Year, a period when children have increased pocket money, typically falls in the first quarter. These seasonality trends generally manifest
themselves more clearly with respect to more mature virtual worlds and less clearly during periods of high growth that accompany the introductory stages of a highly popular virtual world.
Seasonality
of our offline business is affected by the different consumption patterns influencing different media formats or product categories for our licensed franchises and the mix of
media formats and product categories. For instance, sales of certain toys and stationery sold near primary schools may decrease during winter and summer vacations, while sales of clothing may increase
during such periods. In addition, our business may also be affected by the timing of new launches of content and product, such as the release of a film or TV animation series.
Competition
As a leading children's entertainment and media company, we face competition from both online and offline players who seek to develop
brands and franchises through the licensing or creation of
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content
for children. Currently, our offline competitors are primarily companies that produce, license, or distribute entertainment content and merchandise to similar target groups in China.
Meanwhile, the children's online entertainment industry in China is characterized by relatively low capital requirements and barriers to entry. There are a number of existing competitors in the
children's online entertainment industry and we expect more entrants to offer a range of virtual worlds and digital contents targeting children in China in a relatively short period of time. We
believe our principal competitors in online children's entertainment in China include Tencent Holdings Limited, or Tencent, the developer of Roco Kingdom and Guangzhou Baitian Information Technology
Ltd., the developer of Aola Star and Aobi Island. Potential competitors also include major Internet portal operators, other domestic and foreign virtual world developers and operators, media companies
focused on children's entertainment and alliances between our existing and new competitors. We also face competition on the mobile front with respect to mobile applications, as there are an increasing
number of Internet companies in China tapping into the mobile market with applications and services targeting children. We also face these and other competitors in our offline business, including
Guangdong Alpha Animation and Culture Co., Ltd, a company listed in Shenzhen Stock Exchange which primarily engages in toy and animation industry (Ticker: 002292). Some of our
competitors, especially major foreign and China-based publicly listed media and virtual world operators, have significantly greater financial and marketing resources and name recognition than we have.
Our competitors may adopt loss-leading pricing or other tactics or business models to attract our users. See "Item 3. Key InformationD. Risk FactorsRisks Related to
Our BusinessWe may not be able to maintain our revenues and profitability as we operate in a competitive industry and compete against many companies."
We
believe we compete primarily on the basis of our innovative culture and proven content development capabilities, our understanding of children and the industry, our brand recognition,
our advanced technology platform and our strong commitment to online safety.
Customer Services
As of December 31, 2013, our dedicated customer service team had 86 employees, mostly serving our online users. From our
inception, we have focused on catering to the needs of children and their parents and this focus is reflected in all major aspects of our service.
All
members of our customer service team receive training on how to communicate with children and their parents. Our call center functions as an extension to users' online experience.
For instance, unlike most call centers where customer support is identified by a numeric ID, each member of our customer service team is assigned a unique nickname. Users can reach our customer
service by telephone, email or our online bulletin board. Periodic reports based on these feedbacks are provided to our management and operational team. We frequently hold "Taomee Superdays" when we
invite children and parents to visit our office and meet our creative team.
Marketing and Promotion
We believe user referral is a significant and effective medium for promoting our franchises among children as they share their
experiences with friends and schoolmates.
We
also leverage the large user base of our online community to engage in effective and targeted cross-selling of our online and offline products and services. We publicize the launch of
new franchises primarily through promotion campaigns in our existing virtual worlds, online services and mobile applications. We also embed promotional messages in our digital products for certain
licensed products sold offline. We believe such cross-selling through our online community is one of the most effective means for promoting online and offline services to our users. We also place
advertisements on search engines and popular casual game portals in China to reach new users. Our distributors, who cover over
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118,200
retail outlets in over 2,200 towns and cities as of December 31, 2013, are obligated to promote our prepaid cards according to the terms of our distribution agreements with them.
We
believe the films and television series based on our franchises, such as the films and television series based on Mole's World and Seer that were released in 2011, 2012 and 2013, are
an important part our effort to build brand awareness and promote our franchises to a broader audience within a short time. See "Our Business SegmentsOffline Business."
For
a number of our licensed products, such as trading cards and books, we bundle the products with labels and promotion materials containing redemption codes for virtual items to
promote cross-selling of our online and our licensees' products.
We
also attend animation and toy exhibitions and expos, such as the Chinajoy Digital Entertainment Expo and Conference that usually attract a large number of children and their parents
to reach more potential users.
Intellectual Property
We actively safeguard our copyrights, trademarks, trade secrets and similar intellectual property. We rely on trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with our employees, suppliers and others to protect our proprietary rights. All of our research and development personnel
have entered into confidentiality and proprietary information agreements or contract clauses with us. These agreements address intellectual property protection issues and require our employees to
assign to us all of the inventions, designs, and technologies they develop during their employment with us.
As
of December 31, 2013, we had received approval for 351 and 7 trademark registrations in China and Taiwan respectively and are in the process of applying for registration of 46
trademarks in China. In addition, we have obtained 69 copyright registrations for software we developed, 4 copyright registrations for Mole's World and Seer animation series and 392 copyright
registrations for artworks which were produced by our employees and owned by us. We also registered 39 domain names, including www.61.com, our primary operation website, and www.taomee.com, our
corporate information website.
Under
the contractual arrangements we enter into with producers of film and television series, we either wholly own or jointly own the intellectual property rights for newly created
characters in the television series and films we help develop.
While
we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. This is
particularly the case
in China where the laws may not protect our proprietary rights as fully as in the United States. Infringement or misappropriation of our intellectual property could materially harm our business.
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Employees
We had 575, 640 and 623 employees as of December 31, 2011, 2012 and 2013, respectively. The following table sets forth the
number of our employees categorized by areas of operations as of December 31, 2013:
|
|
|
|
|
|
|
|
Function
|
|
Number of
Employees
|
|
Percentage
of total
|
|
Online operations
|
|
|
117
|
|
|
18.8
|
%
|
Offline operations
|
|
|
30
|
|
|
4.8
|
%
|
Product development
|
|
|
333
|
|
|
53.4
|
%
|
Sales and marketing
|
|
|
82
|
|
|
13.2
|
%
|
General and administrative
|
|
|
61
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
623
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
success depends on our ability to attract, retain and motivate qualified personnel. We believe we offer our employees competitive compensation packages, and we have generally been
able to attract and retain qualified personnel and maintain a stable core management team. For a description of the employment agreement we signed with some members of our senior management, see
"Item. 6. Directors, Senior Management and EmployeesC. Board PracticesEmployment Agreements."
Substantially
all of our employees are based in the PRC. In accordance with PRC laws, we participate in employee benefit plans organized by municipal and provincial governments,
including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans. We are required under PRC laws 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. A labor union of our
employees was established to represent employees with respect to labor disputes and other employee matters. We believe that we maintain a good working relationship with our employees and we have not
experienced any significant labor disputes or disputes with the labor department of the PRC government since our inception.
Facilities
We are headquartered in Shanghai and have leased an aggregate of approximately 8,890 square meters of offices in Shanghai from
independent third parties and do not own any real property.
In
May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use rights of two parcels with an aggregated area of
approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million
(US$0.7 million) was paid in May 2013. In August 2013, we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of
approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million
(US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of
RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building. Please see "Item 3. Key InformationD. Risk FactorsRisks
Related to Our BusinessWe may not be able to obtain the land use rights and building ownership right
in Songjiang, Shanghai in a timely manner and we may not successfully recover our prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition."
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Insurance
We do not maintain any property insurance other than insurance for our vehicles. Consistent with customary industry practice in China,
we do not maintain business interruption insurance or key employee insurance for our executive officers. Uninsured damage to any of our equipment or buildings or a significant product liability claim
could have a material adverse effect on our results of operations. See "Item 3. Key InformationD. Risk FactorsRisks Related to Our BusinessWe have a
limited insurance coverage which could expose us to significant costs and business disruption."
Legal and Administrative Proceedings
We are currently not a party to, and we are not aware of any threat of, any legal, arbitral or administrative proceedings, which, in
the opinion of our management, is likely to have a material and adverse effect on our business, financial condition or results of operations. We may from time to time become a party to various legal,
arbitral or administrative proceedings arising in the ordinary course of our business.
Regulations Related to Our Business
Our online and offline business are subject to various PRC laws and regulations relating to the telecommunications, Internet
information services, information security and censorship, online games and media industries, and are regulated by various PRC government authorities,
including:
-
-
the Ministry of Industry and Information Technology, or MIIT (formerly the Ministry of Information Industry, or MII);
-
-
the Ministry of Culture, or MOC;
-
-
the General Administration of Press and Publication, or GAPP;
-
-
the State Administration of Radio Film and Television, or the SARFT;
-
-
the Ministry of Public Security, or MPS;
-
-
the People's Bank of China, or PBOC;
-
-
the Ministry of Commerce, or MOFCOM;
-
-
the State Administration of Industry and Commerce, or SAIC;
-
-
the State Administration of Foreign Exchange, or SAFE; and
-
-
the National Copyright Administration, or NCAC.
According
to the
Proposal on the Institutional Reform and Functional Transformation of the State Council
promulgated by the State Council
on March 10, 2013, among the other things, GAPP and SARFT are integrated to form the State General Administration for Press, Publication, Radio, Film and Television. The foregoing proposal was
approved by the National People's Congress according to the
Decision of the First Session of the 12
th
National People's Congress on the Proposal on the
Institutional Reform and Functional Transformation of the State Council
promulgated by the National People's Congress on March 14, 2013.
New
laws and regulations may be adopted from time to time to address new and developing issues in the Internet information service and other industries, and such laws and regulations may
require licenses and permits in addition to those we currently have. As a result, uncertainties may exist with respect to the interpretation and implementation of current and any future PRC laws and
regulations applicable to our business.
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Restrictions on Foreign Ownership of Telecommunications services
Among all of the applicable laws and regulations, the
Telecommunications Regulations of the
PRC
, or the Telecom Regulations, implemented on September 25, 2000, are the primary regulations governing our online business activities. The Telecom Regulations set
forth extensive guidelines on various aspects of telecommunications operations in China and draw a distinction between "basic telecommunications services" and "value-added telecommunications
services." The
Catalog of Telecommunications Business
, which was amended on February 21, 2003 and became effective on April 1, 2003, and
issued as an attachment to the Telecom Regulations, provides that Internet information services are value-added telecommunications services. Under the Telecom Regulations, a telecommunication business
operator in China must obtain an operating license from MII or its provincial-level counterparts.
According
to the
Administrative Regulations on Foreign-Invested Telecommunications Enterprises
issued by the PRC State Council on
December 11, 2001 and amended on September 10, 2008, foreign-invested value-added telecommunications enterprises must be in the form of a Sino-foreign equity joint venture.
The regulations restrict the ultimate capital contribution percentage held by foreign investor(s) in a foreign-invested value-added telecommunication enterprise to 50% or less. In July 2006, the MII
issued the
Circular of the Ministry of Information Industry on
Strengthening
the Administration of Foreign Investment in
Value-added Telecommunication Business
, according to which, a foreign investor in the telecommunication service industry of China must establish a foreign invested enterprise
and apply for a telecommunication businesses operation license. On March 1, 2009, the MIIT promulgated the
Administrative Measures for Telecommunications Business
Operating License
, or the Telecom License Measures, effective from April 10, 2009, which set forth the types of licenses required to provide telecommunication services
in China and the procedures and requirements for obtaining such licenses. The licenses for foreign invested telecommunications business operators must be sought from the MIIT.
In
order to comply with foreign ownership restrictions, we conduct our operations in China primarily through Shanghai Taomee via a series of contractual arrangements that were entered
into with it and its shareholders. We exercise effective control through these arrangements and receive economic benefits generated from them. See "Item 4. Information on the
CompanyC. Organizational Structure."
Internet information services
The Internet information services are regulated by the
Administrative Measures on Internet Information
Services
, or the ICP Measures, issued on September 25, 2000 and amended on January 8, 2011 by the State Council. The ICP Measures define "Internet information
services" as services that provide information to online users through the Internet. Internet information services are divided into commercial services and non-commercial services. According to the
ICP Measures, the Internet information commercial service providers are required to obtain an operating license, or an ICP license, from the MIIT or the relevant provincial counterparts while the
Internet information non-commercial service providers are required to undertake the filing procedures with the MIIT or the relevant provincial counterparts. We obtained the ICP license from the
Shanghai branch of the MIIT in 2009.
The
PRC government has promulgated measures relating to Internet information service specifically prohibiting Internet activities that result in the publication of any content which is
found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise state security or secrets.
When an Internet information service provider finds that information falling within the above scope is transmitted on its website, it must terminate the transmission of such information or delete such
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information
immediately, maintain records and report to relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its
websites.
Internet publication and culture activities
GAPP and the MII jointly promulgated the
Tentative Measures for Internet Publication
Administration
, or Internet Publication Measures, on June 27, 2002, which took effect on August 1, 2002 and imposed a license requirement for any company that
intends to engage in Internet publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly
available on the Internet. Since the provision of online games is deemed an Internet publication activity, an online game operator must obtain an Internet publishing license in order to directly offer
its online games to the public in the PRC. We have been approved by the MIIT to conduct Internet publication activities.
We
obtained the Internet publishing license from GAPP in December 2010. Prior to obtaining an Internet publishing license from GAPP, we worked with third party publishers to publish
Mole's World, Seer, Flower Fairy, Magic Haqi and Gong Fu Pai. If this practice is later challenged by the GAPP, we may be subject to various penalties. See "Item 3. Key
InformationD. Risk FactorsRisks Related to Doing Business in ChinaThe laws and regulations governing virtual worlds and online games in China are developing and
are subject to future changes. If we or the third-party publishers we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and
adversely affected." In the future, after we receive an Internet publishing license from GAPP, we would be able to apply for GAPP pre-approval for our virtual worlds. For more information on the
pre-approval by the GAPP, see "Online games administration measures."
On
May 10, 2003, the MOC promulgated the
Provisional Regulations for the Administration of Internet Culture
, or the Internet
Culture Measures, which were revised in July 2004 and February 2011 respectively. The Internet Culture Measures apply to entities engaging in the provision of "Internet culture products" and the
relevant services. The term "Internet culture products" refers to the culture products produced and disseminated via the Internet, further divided into two categories, (1) culture products
specifically produced for Internet, such as online audio-video entertainment, online games, online plays, online performance, online works of art and online cartoons, and so forth; (2) culture
products such as audio-video entertainment, games, plays, performance, works of art and cartoons, and so forth, reproduced onto Internet by technical measures. According to the Internet Culture
Measures, commercial entities are required to apply for, in addition to the ICP license, an Internet culture operation license from the MOC, if they engage in any of the following types of activities:
the production, duplication, importation, distribution or broadcasting of Internet culture products; the dissemination of Internet culture product on the Internet or transmission thereof to computers,
fixed-line or mobile phones, radios, television sets or gaming consoles for the purpose of browsing, reading, using or downloading such products; or the exhibition or holding of contests related to
Internet culture products. We obtained the ICP license and Internet culture operation license in 2009.
Online games administration measures
The Provisional
Administration Measures of Online Games
, or the Online Games
Administration Measures, were promulgated by the Ministry of Culture on June 3, 2010 and became effective as of August 1, 2010. The Online Games Administration Measures govern the
activities in respect of online game development and operations, issuance of virtual currency, and provision of virtual currency exchange service. In addition, it provides that the MOC will be
responsible for the censorship of imported online games and record-filing of domestic online games. Record-filing procedures for domestic online games, which include the virtual worlds we develop,
will be carried out with the MOC within 30 days from the date such online games begin to be operated online, and in the case of material change, within 30 days from the date when the
relevant alteration takes effect.
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All
operators of online games, issuers of virtual currencies, and virtual currency exchange service providers (collectively, "Online Game Business Operators") are required to obtain the
abovementioned Internet culture operation license. An online cultural operating permit is valid for three years, and an application of renewal should be filed 30 days before the permit expires
in order to renew the permit. As to Online Game Business Operators, they must (1) request a valid identity certificate of game users for real name registration, and save their information;
(2) make the information public 60 days ahead when they terminate online games or transfer the franchising to operate online games, and return the unused virtual currencies and the
currently effective game services to the users by legal money or other means accepted by users; and they must not: (1) set compulsory battles between users without their consents in games;
(2) promote and propagandize games with any aforementioned prohibited content; and (3) induce game users to devote legal money or virtual currencies in exchange for game products and
services, by any incidental means such as random draw. It is also provided that the state culture activity administration will be responsible to promulgate the requisite terms of a standard online
game service agreement, which must be incorporated in the services agreement of each online game operator. The game operators' services agreement cannot contravene these requisite terms.
On
July 11, 2008, the General Office of the State Council issued the
Regulation on Main Functions, Internal Organization and Staffing of the PRC General
Administration of Press and Publication
, or the Regulation on Three Provisions. On September 7, 2009, the Central Organization Establishment Commission issued the
corresponding interpretation, or the Interpretation on Three Provisions, collectively as the Regulation on Three Provisions and Interpretation thereof. The Regulation on Three
Provisions and Interpretation thereof authorized the MOC with overall jurisdiction to regulate the online gaming industry, while granting GAPP the authority to grant approvals for the Internet
publication of online games, by expressly stating that (1) administration over online games (other than pre-examination and approval before Internet publication of online games) is granted to
the MOC; (2) subject to MOC's overall administration, GAPP is responsible for the pre-examination and approval for Internet publication of online games; and (3) once games are launched
online, the online games will be only administrated and regulated by MOC. As of the date hereof, we have obtained 19 approvals from the GAPP in total, covering the Internet publications of all
the virtual worlds which are developed by us and have been commercially launched, including the above-mentioned five franchises of Mole's World, Seer, Magic Haqi, Flower Fairy and Gong Fu Pai. We used
to work with third party publishers for the publication of such franchises prior to our obtaining of the Internet publishing license.
On
September 28, 2009, the GAPP together with several other governmental authorities jointly published the
Notice Regarding the Consistent Implementation
of the "Regulation on Three Provisions" of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the
Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games
, or the GAPP Notice. The GAPP Notice is issued for the
purpose of consistent implementation of the Regulation on Three Provisions and Interpretation thereof. However, Article IV of the GAPP Notice prohibits foreign investors from controlling or
participating in online game operating businesses directly or indirectly via wholly owned, equity joint venture or cooperative joint venture investments in China, or via contractual or technical
support arrangements, or the Contractual Arrangements. As to the implementation of Article IV of the GAPP Notice, please see "Item 3. Key InformationD. Risk
FactorsRisks Related to Our Corporate StructureIf the PRC government determines that our ownership structure does not comply with the restrictions contained in the GAPP
Notice, we could be subject to severe penalties" and "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaThe laws and
regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we, as the developer of our mobile games, are required to obtain applicable permits
and licenses, or if we are required to obtain approval for the release of our e-books on mobile platforms, it may materially and adversely affect our business results and future growth."
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Virtual currency
We issue virtual currency to our users, in the form of a prepaid charge card and prepaid points that function as virtual exchange
instruments, in exchange for services in our virtual worlds. On February 15, 2007, the MOC, the SAIC and other relevant governmental authorities jointly issued the
Circular on Further Strengthening the Administration of
Internet Cafes and Online Games
, or the Internet Cafes Circular. Under the Internet Cafes
Circular, the SAIC is directed to
strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. The Internet Cafes Circular provides that, (i) the total
amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited; (ii) a strict and clear division between virtual
transactions and real transactions carried out by way of electronic commerce must be observed, in that virtual currency should only be used for purchasing virtual items and services within the online
games and not for purchasing tangible or physical products; (iii) in case the virtual currency is redeemed, the value of the payment cannot be more than the original purchase price; and
(iv) the resale for a profit (i.e., scalping) of virtual currency is prohibited. Such prohibition provided by the Internet Cafes Circular in 2007 is for the purpose of preventing an
adverse impact on financial stability caused by the issuance of virtual currency.
On
June 4, 2009, the MOC and the Ministry of Commerce jointly issued the
Notice on Strengthening the Administration of Virtual Currency in Online
Games
, or the Virtual Currency Notice, which is designed to standardize the issuance and exchange service of virtual currency, or VCOG, in online games through establishing a
market access threshold for the issuance and exchange of virtual currency in online games, as well as to strengthen the management of the relevant qualifications for market players. The Virtual
Currency Notice requires that enterprises issuing virtual currency or providing virtual currency exchange services must meet the relevant requirements for setting up a commercial Internet culture
enterprise and must apply for an Internet culture operation license from the MOC.
The
Virtual Currency Notice further requires VCOG exchange service enterprises to (i) require a VCOG seller to register in its real name and be associated with a domestic bank
account registered with the same registration information, and retain all transaction and accounting records for no less than 180 days; (ii) develop recovery systems and technologies to
detect illegal VCOG transactions and examine the exchange information it receives to prevent illegal transactions; (iii) promptly delete the improper transaction information and stop providing
service once the VCOG exchange service enterprise is aware of or has confirmed after receiving notice that the VCOG was illegally obtained; and (iv) not provide service to underage game
players. We do not believe our business involves VCOG exchange services, which is the provision of a marketplace or platform to exchange VCOG among users.
Pursuant
to the Online Games Administration Measures, game operators who issue virtual currencies are required to ensure: (1) the virtual currencies can only be exchanged for the
online game services and products provided by themselves, but not for the purchase of services and products that are provided by other game operators; (2) the prepaid money of users for
purchase of virtual currencies shall not be misappropriated; (3) the game operators will keep purchase records of users for at least 180 days since the last time they receive services;
(4) the game operators will file the category, price, amount, and so forth, with the provincial culture administration which they register with.
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Information security and censorship
Internet content in China is also regulated and restricted from a state security standpoint. The Standing Committee of National
People's Congress enacted a decision on December 28, 2000 and amended such decision on August 27, 2009 that makes it unlawful to: (i) gain improper entry into a computer or system
of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) falsify or disseminate false commercial information that influences
trading of stock exchange or future exchanges or disrupts financial orders; or (v) infringe intellectual property rights. The MPS has promulgated measures that prohibit the use of the Internet
in ways which, among other things, result in a release of State secrets or a distribution of socially destabilizing content. The MPS has supervision and inspection rights in this regard, and we may be
subject to the jurisdiction of the local security bureaus. If an ICP operator violates these measures, the PRC government may revoke its ICP license and shut down its websites.
On
May 14, 2004, the MOC issued the
Notice Regarding the Strengthening of Network Game Censorship
. This notice mandates that all
imported and domestic online games are required to be filed with the MOC. We have made such filings for all of our existing virtual worlds. The filings of Mole's World, Seer and Flower Fairy have been
completed, and the filings of other virtual worlds are being reviewed as of the date of this annual report.
On
July 12, 2005, the MOC and the MII promulgated the
Opinions on the Development and Administration of Online Game
reflecting the
PRC government's intent to foster and control the development of the online game industry in China. In addition, the MOC will censor online games that threaten state security, disturb the social
order, or contain obscenity or violence.
Privacy Protection
On July 16, 2013, MIIT issued the
Provisions on Protecting the Personal Information of
Telecommunications and Internet Users
, effective on September 1, 2013. Pursuant to these provisions, an Internet content provider (i) shall not collect or use the
personal information of users unless such collection or usage is agreed by the users;(ii) should keep user personal information collected under the users' consent strictly confidential and take
relevant measures to prevent such information from being divulged, impaired or lost; and (iii) may not sell or illegally provide user personal information collected under the users' consent to
any third parties. We require our users to accept a user agreement whereby they agree to provide certain personal information to us and keep such personal information strictly confidential. If an
Internet content provider violates these regulations, the MIIT or its local bureaus may impose penalties and the Internet content provider may be liable for damages caused to its users.
Addiction prevention and identity verification system
In April 2007, GAPP and several other governmental authorities issued a circular requiring the implementation of addiction prevention
and the identity verification system by all PRC online game operators, in an effort to curb addictive online game play behaviors in minors under 18. Game operators are required to reduce in-game gains
or benefits after three hours of continuous play and eliminate in-game gains or benefits after five or more hours of continuous play.
To
identify whether a game player is a minor and thus subject to the addiction prevention system, an identity verification system is also adopted, which requires online game players to
register their real identity information before they play online games and requires us to submit the identity information of game players to the public security authority for verification. We have
implemented addiction prevention programs for all of our virtual worlds and have established the identity verification system in all of our virtual worlds as one of the ways for registration. Please
see "Item 3. Key InformationRisk FactorsRisks Related to Doing Business in ChinaUncertainties in PRC government policies and regulations regarding virtual
worlds and online games and children's Internet use in China may adversely affect our business."
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Internet infringement
The
Tort Law of the PRC
, which was promulgated by the Standing Committee of National
People's Congress on December 26, 2009, became effective on July 1, 2010. According to the Tort Law, an Internet user or an Internet service provider who infringes upon the civil rights
or interests of others through the use of the Internet will assume tort liability. Where an Internet user infringes upon the civil rights or interests of another through the use of the Internet, the
infringee will be entitled to notify and request the Internet service provider whose Internet services are facilitating the infringement to take necessary measures including the deletion, blocking or
disconnection of an Internet link. If, after being notified, the Internet service provider fails to take necessary measures in a timely manner to end the infringement, it will be jointly and severally
liable for any additional harm caused by its failure to act. Under the Tort Law, civil rights and interests will include the personal rights and rights of property, such as the right to life, right to
health, right to name, right to reputation, right to honor, right of portraiture, right of privacy, right of marital autonomy, right of guardianship, right to ownership, right to usufruct, right to
security interests, copyright, patent right, exclusive right to use trademarks, right to discovery, right to equity interests and right of heritage.
Regulations on Television and Film Industry
We have expanded into film and television production through the co-production of, or investments in, two animation series and two
feature films, based on our "Mole's World" and "Seer" franchises. On July 19, 2004, SARFT promulgated the
Administration Rules on the Production and Operation of
Broadcasting Television Programs
, pursuant to which an entity that plans to produce and operate television and broadcast programs in China is required to obtain the License for
Producing and Operating Television and Broadcast Programs. On July 11, 2006, SARFT issued
Provisional Regulations on Filing and Publicity of Domestic Television
Animations
, stipulating that registrations for domestic television animations must be filed with, and be publicly displayed by SARFT prior to their production. On
February 14, 2008, SARFT promulgated the
Notice of the State Administration of Radio, Film and Television on Strengthening the Administration of the Broadcasting of
Domestic Animation Series
and later on May 14, 2010, SARFT further promulgated
Regulations on Content of Television
Series
, pursuant to which for each domestic television animation completed, the animation production entity is required to obtain the Domestic Animation Publication License
prior to the broadcast of such domestic television animation to the public. On December 25, 2001, the State Council promulgated
Regulations on the Administration of
Movies
, according to which, an entity other than film production entities that intends to independently engage in movie production shall report to
SARFT for approval and obtain a One-Time Film Production License for each single film to be produced from SARFT. We cooperate with third parties with the requisite qualifications and licenses in the
production and distribution of the animation series and film based on our Mole's World franchise and the film based on our Seer franchise. Shanghai Taomee Animation Co., Ltd. has
obtained (i) the license for the production and broadcasting of radio and television program, and the license for the broadcasting of Seer I, Seer II, Mole's World III and Flower Fairy
animation series, (ii) one-time film production license for the third film based on our Seer franchise, and (iii) one-time film production license for the third film based on our Mole's
World franchise.
Policies to Foster Growth of Domestic Animation Industry
Since 2004, several circulars have been issued to encourage the development of the still nascent animation industry in China. On
April 20, 2004, SARFT promulgated
Several Opinions on Developing Domestic Animation and Film Industry
, which restricts foreign animation content
by putting a time limit on total hours allowed to be broadcast in television stations in China. SARFT issued the
Circular on Further Regulating the Broadcasting of
Animations
in 2006, and the
Circular on Strengthening the Regulation on the Broadcasting of Animations
in 2008, effectively
prohibiting the broadcasting of foreign animation content by nationwide television stations from 17:00 to 21:00 every day. In 2006 and 2008,
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circulars
were issued by various governmental departments including the Ministry of Finance and MOC, supporting domestic animation industry and promoting the animation production industrial chain.
Furthermore, on July 17, 2009, the Ministry of Finance and State Administration of Taxation jointly promulgated the
Circular on Tax Policy to Support Animation
Industry
, which provides domestic animation producers a series of preferential tax treatment with regard to their self-developed products. The Ministry of Finance and State
Administration of Taxation further promulgated the
Circular on the Value-Added Tax Policy of Software Products
on October 13, 2011and the
Circular on the Tax Policies of
Value-Added Tax and Business for Animation Industry
on November 28, 2013, which update the tax policies on
value-added tax and business tax for animation industry.
Regulation on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the SARFT promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the
Internet and Other Information Networks, or
the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the opening, broadcasting, integration, transmission or download of audio/video programs via the Internet and other
information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and
operate pursuant to the scope as provided in such license. Foreign-invested enterprises are not allowed to engage in the above business.
On
December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Document 56, which
came into effect as of January 31, 2008. Document 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service provider must obtain a license
from the SARFT. Furthermore, Document 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press
questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating
lawfully prior to the issuance of Document 56 may re-register and continue to operate without becoming state-owned or controlled, provided that such providers have not engaged in any unlawful
activities. This exemption will not be granted to online audio/video service providers established after Document 56 was issued.
In
January 2012, in cooperation with a number of China's leading online video websites which have obtained the audio/video program transmission licenses, we launched v.61.com, a website
that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In November 2012, we jointly developed with Turner Broadcasting
System Asia Pacific (the parent company of Cartoon Network) the website of ben10.61.com, a dedicated Chinese online zone for Ben 10 fans to get access to featuring videos, online games, wallpaper
downloads, e-comics and character profiles. If the governmental authorities determine that our online website falls within Document 56, we may not be able to obtain the audio/video program
transmission license, and we may become subject to significant penalties, fines, legal sanctions or an order to suspend our online website.
Regulations on E-Books
On October 9, 2010, GAPP have promulgated
The Opinions of GAPP on the Development of E-Books
Industry
, which came into effect on the same day, according to which enterprises engaging in e-book industries are subject to approvals and administration from relevant
governmental authorities. In addition, enterprises engaging in the creation, editing and publication of e-books or in the operation of platform where the e-book resources are delivered to users are
deemed as e-book publisher and are subject to approvals for the publication of e-books. We have released over ten e-books in the middle of 2012 which featured the Mole's World franchise, and Seer
animation application on Apple's iOS platform. Since there is no official or public interpretation on the definition of e-book publication, we are not sure whether our release of e-books on mobile
platforms will be deemed as publication and therefore be subject to the approval of GAPP.
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Regulations Related to Intellectual Property Rights
The State Council and the NCAC have promulgated various rules and regulations relating to the protection of software in China. Under
these rules and regulations, software owners, licensees and transferees may register their rights in software with the NCAC or its local branches and obtain software copyright registration
certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process to enjoy better protections of
registered software rights.
On
March 5, 2009, the MIIT promulgated the
Administrative Measures on Software Product
s, or the Software Measures, which replaced
the original
Administrative Measures on Software Measures
promulgated by MII in October 2000, to regulate software products and promote the development
of the software industry in China. Pursuant to the Software Measures, software products which are developed in China and registered with the local provincial government authorities in charge of the
information industry and filed with MIIT may enjoy the relevant encouragement policies. Software developers or producers are may sell or license their registered software products independently or
through agents. Upon registration, the software products will be granted registration certificates. Each registration certificate is valid for five years and may be renewed upon expiration.
The
PRC Trademark Law
, adopted in 1982 and revised in 2001 and 2013, with its implementation rules adopted in 2002, protects registered
trademarks. The PRC Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.
The
MII amended its
Administrative Measures on China Internet Domain Names
in 2004. According to these measures, the MII is in charge of
the overall administration of domain names in China. The registration of domain names in PRC is on a "first apply-first-registration" basis. A domain name applicant will become the domain name holder
upon the completion of the application procedure.
Regulations Related to Employment
On June 29, 2007, the Standing Committee of the National People's Congress adopted the
Employment
Contract Law
, or ECL, which became effective as of January 1, 2008. The ECL was further amended by the Standing Committee of the National People's Congress on
December 28, 2012. The ECL requires employers to provide written contracts to their employees, restricts the use of temporary workers, and aims to give employees long-term job security.
Pursuant
to the ECL, employment contracts lawfully concluded prior to the implementation of the ECL and continuing as of the date of its implementation will continue to be performed.
Where an employment relationship was established prior to the implementation of the ECL but no written employment contract was concluded, a contract must be concluded within one month after the
ECL's implementation.
Regulations Related to Foreign Currency Exchange and Dividend Distribution
Foreign currency exchange
The principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration
Regulations
, as amended in August 2008. Under this regulation, the RMB is freely convertible for current account items, including the trade and service-related foreign exchange
transactions and other current exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities, unless the prior
approval of SAFE is obtained and prior registration with SAFE is made.
Pursuant
to the
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
promulgated on June 20, 1996 by the
PBOC, foreign-invested enterprises in China may purchase or remit foreign currency for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under
the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
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In
October 2005, the SAFE issued the
Circular on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of
Domestic Residents Conducted via Offshore Special Purpose Companies
, or Circular 75, which became effective as of November 1, 2005. This was further supplemented by an
implementing notice issued by SAFE on November 24, 2005. Circular 75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by SAFE. Circular 75 states
that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of
overseas equity financing involving onshore assets or equity interests held by PRC residents. The term "PRC legal person residents" as used in Circular 75 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 Circular 75 includes all PRC citizens and all other natural
persons, including foreigners, who habitually reside in China for economic benefit. Under Circular 75, PRC residents are required to complete amended registrations with the local SAFE branch upon
(i) injection of equity interests or assets of an onshore enterprise into an offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also
required to complete amended registrations or filings with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in
share capital, share transfers and long-term equity or debt investments, and providing security. PRC residents who have already incorporated or gained control of offshore entities that have made
onshore investment in the PRC before Circular 75 was promulgated are required to register their shareholding in the offshore entities with the local SAFE branch on or before March 31, 2006.
Under
the Circular 75, PRC residents are further required to repatriate to the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore
entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under the Circular 75 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. All our individual shareholders who are subject to Circular 75 have obtained
registration with regards to the establishment of our company and the later changes of their shareholding in our company as required under Circular 75. Please see "Item 3. Key
InformationRisk FactorsRisks Related to Doing Business in ChinaWe may be subject to penalties, including restriction on our ability to inject capital into our
PRC subsidiary and our PRC subsidiary's ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules."
On
February 15, 2012, SAFE promulgated the
Notice regarding Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option
Plan of Overseas-Listing Companies
, which substitutes the
Application Procedure of Foreign Exchange Administration for Domestic Individuals
Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Companies
promulgated by SAFE on March 28, 2007. Under the Stock Option Rule, the
domestic individuals as defined under the
Foreign Exchange
Administration Regulations
who are granted stock options or other incentive alternatives by an overseas publicly listed company are required, through a PRC agent or PRC
subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.
Dividend distribution
The principal regulations governing distribution of dividends of foreign holding companies include the
Foreign
Investment Enterprise Law
issued in 1986 and amended in 2000, and the
Implementation Rules under the Foreign Investment Enterprise
Law
issued in 1990 and amended in 2001. Under these regulations, foreign investment 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, foreign investment enterprises in the PRC are required to allocate at least 10% of their respective accumulated
profits each
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year,
if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. Funds held in these reserves are not distributable as cash dividends.
Regulations Related to Taxation
On March 16, 2007, the National People's Congress, the PRC legislature, passed the new
Enterprise Income
Tax Law
, or the new EIT Law which became effective on January 1, 2008. On December 6, 2007, the State Council approved and promulgated the Implementation
Rules of PRC Enterprise Income Tax
Law
, which took effect simultaneously with the new EIT Law.
The
new EIT Law applies a uniform 25% Enterprise Income Tax rate to both foreign-invested enterprises and domestic enterprises and eliminates many of the preferential tax policies
afforded to foreign investors. Furthermore, dividends out of post-2007 earnings paid by a foreign-invested enterprise to a non-resident shareholder are now subject to a withholding tax of 10%, which
may be reduced under any applicable bi-lateral tax treaty between the PRC and the jurisdiction where the non-resident shareholder resides. According to the
Administrative
Measures for Non-residents Enjoying Tax Treaty Benefits (Trial Implementation)
issued by the State Administration of Taxation on August 24, 2009, which became effective
on October 1, 2009, an applicant seeking a preferential withholding tax rate under a bilateral tax
treaty must apply to the competent PRC tax authorities for recognition of eligibility for such treaty benefits. According to the
Circular of the SAT on How to Understand and
Identify "Beneficial Owner" under Tax Treaties
, which became effective on October 27, 2009, or Circular 601, the PRC tax authorities must evaluate whether an
applicant for treaty benefits with respect to dividends, interest and royalties qualifies as a "beneficial owner" on a case-by-case basis, and must follow the "substance over form" principle. Circular
601 sets up criteria to identify a "beneficial owner" and provides that an applicant that does not carry out substantial business activities, an agent or a conduit company, will not be regarded as a
"beneficial owner" and therefore cannot enjoy treaty benefits.
Pursuant
to the
Arrangement between Mainland of the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of
Fiscal Evasion with respect to Taxes on Income
signed on August 21, 2006, which in Hong Kong, applies to income derived in any year of assessment commencing on or after
April 1, 2007, and in the PRC, in any year commencing on or after January 1, 2007, a company incorporated in Hong Kong will be subject to withholding income tax at a rate of 5% on
dividends it receives from its PRC subsidiaries if it is deemed the beneficial owner by PRC tax authorities and holds a 25% or more equity interest in that particular PRC subsidiary at the time of the
distribution, or 10% if it holds less than a 25% equity interest in that subsidiary or is not the beneficial owner of the income.
An
enterprise registered under the laws of a jurisdiction outside the PRC may be deemed a PRC tax resident if its place of effective management is in the PRC. According to the
implementation rules, an enterprise's place of effective management may be deemed to be in the PRC if the PRC is the location of its "de facto management bodies", which are defined as the bodies that
have substantial and overall management and control over such aspects as the production and the business, personnel, accounts and properties of the enterprise.
In
addition, under the new EIT Law, foreign shareholders could become subject to a 10% income tax on any gains they realized from the transfer of their shares, if such gains are regarded
as income derived from sources within the PRC, and the enterprise in which their shares invested is considered a "tax resident enterprise" in the PRC. Once a non-PRC company is deemed to be a PRC tax
resident by following the "place of effective management" concept and any dividend distributions from such company are regarded as income derived from sources within the PRC, PRC withholding income
tax may be imposed and applied to dividend distributions from the deemed PRC tax resident to its foreign shareholders, and dividends distributed by its PRC subsidiaries to such deemed PRC tax resident
would be exempt from PRC tax if certain requirement are met.
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Pursuant
to the
PRC Individual Income Tax Law
, or the Individual Income Tax Law, adopted on December 29, 2007 and amended on
June 30, 2011, individuals who are domiciled in the PRC or who are not domiciled but have resided in the PRC for at least one year are required to pay Individual
Income Taxes in accordance with the Individual Income Tax Law on income derived from sources in and outside the PRC. For those individuals who are neither domiciled in nor residents of the PRC, or who
are not domiciled and reside for less than one year in the PRC, are required to pay Individual Income Taxes in accordance with this law on income derived from sources within the PRC.
Pursuant
to the PRC Provisional Regulations on Business Tax, taxpayers providing taxable services falling under the category of service industry in China are required to pay a business
tax at a normal tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the SAT promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. Pursuant
to this pilot plan and relevant notices, or Circular 111, pursuant to which from January 1, 2012, VAT has replaced business tax in the transport and shipping industry and some of the modern
service industries in Shanghai. In July 2012, the Ministry of Finance and the SAT promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business
Tax for Transport and Shipping Industry and Certain Modern Service Industries in Eight Provinces and Municipalities (including Beijing), , or Circular 71, which expanded the pilot regions to other
eight provinces and municipalities including Beijing, Tianjin, and Shenzhen. In May 2013, the Ministry of Finance and the State Administration of Taxation promulgated the
Circular concerning Implementing the Pilot Plan for
Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service
Industries across the Country
, or Circular 37, which expanded the pilot regions to the whole nation and Circular 111 and Circular 71 were annulled accordingly. In December
2013, the Ministry of Finance and the State Administration of Taxation promulgated the
Circular on Expanding the Pilot Plan for Imposition of Value-Added Tax to Replace
Business Tax to Railway Transport and Postal Service
, or Circular 106, pursuant to which, from January 1, 2014, VAT would replace business tax in the transport and
shipping industry, postal service and some of the modern service industries in PRC and Circular 37 was annulled accordingly. Under Circular 106, a VAT rate of 6% applies to certain modern service
industries. The revenues recognized from part of our businesses operated by Shanghai Shengran, Shanghai Taomee and Shanghai Animation are subject to VAT at a rate of 6% for certain other services such
as advertisement, merchandise licensing and box office revenue sharing and 17% for software sales, while other part of our business are still subject to PRC business tax at a statutory tax rate of 5%.
If this plan is extended to apply to other part of our business, we may be subject to VAT rate which is higher than the business tax rate, which could harm our financial condition and results of
operations.
Regulations Related to M&A and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and
Administration Commission, the State Administration of Taxation, the SAIC, the CSRC and SAFE, jointly issued the
Regulations on Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors
, or the New M&A Rules, which became effective on September 8, 2006 and was amended by the Ministry of Commerce on June 22, 2009. The New M&A
Rules, among other things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control a special purpose vehicle, or SPV, overseas, provided that they
intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share of the SPV, or Share Swap, and list their equity interests in the PRC company
overseas by listing the SPV in an overseas market; (ii) the SPV obtains MOFCOM's approval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company
by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas. Please see "Item 3. Key
InformationD. Risk FactorsRisks Related to Doing Business in ChinaThe approval of the China Securities Regulatory Commission, or the CSRC, may be required in
connection with the initial public offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more
difficult for us to grow through acquisitions."
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-
C.
-
Organizational Structure
The following diagram illustrates our corporate structure and the place of incorporation of each of our significant subsidiaries, VIEs and VIEs' subsidiaries as
of December 31, 2013.
-
(1)
-
Shanghai
Taomee is our VIE in China and is 30% owned by Mr. Jason Liqing Zeng, our chairman, 23.75% owned by Mr. Benson Haibing Wang, our
co-founder, director and chief executive officer, 17.375% owned by Mr. Crow Zhen Wei, our co-founder and director, 15.75% owned by Mr. Roc Yunpeng Cheng, our co-founder, director and
president, 8.125% owned by Mr. Bin Wang and 5% owned by Mr. Yuliang Feng.
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We
have entered into contractual arrangements with Shanghai Taomee and its shareholders, through which we exercise effective control over operations of Shanghai Taomee and receive
economic benefits generated from it. As a result of these contractual arrangements, under U.S. GAAP, we are considered the primary beneficiary of Shanghai Taomee and thus consolidate its
results in our consolidated financial statements. However, these contractual arrangements may not be as effective in providing us with control over the VIE as direct ownership of it. In addition, the
VIE or its shareholders may breach the contractual arrangements with us. In such cases, we would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light
of uncertainties in the PRC legal system. See "Item 3. Key InformationD. Risk FactorsRisks Related to Our Corporate StructureIf the PRC government
determines that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties"
and "Item 3. Key InformationD. Risk FactorsRisks Related to Our Corporate StructureIf the PRC government determines that our ownership structure does not
comply with the restrictions contained in the GAPP Notice, we could be subject to severe penalties."
Contractual Arrangements with Shanghai Taomee and its Shareholders
Our relationships with Shanghai Taomee and its shareholders are governed by a series of contractual arrangements. Under PRC laws, each
of Shanghai Taomee and Shanghai Shengran is an independent legal person and neither of them is exposed to liabilities incurred by the other party. Other than pursuant to the contractual arrangements
between Shanghai Taomee and Shanghai Shengran, Shanghai Taomee is not required to transfer any funds generated from its operations to Shanghai Shengran.
Loan Agreement.
Certain shareholders of Shanghai Taomee, namely Messrs. Jason Liqing Zeng, Benson Haibing Wang, Crow Zhen Wei, Roc
Yunpeng
Cheng and Bin Wang entered into a loan agreement with Shanghai Shengran, under which Shanghai Shengran provided an interest-free loan of RMB2.5 million (US$0.4 million) to these
shareholders, solely for their respective contributions to the increased capital of Shanghai Taomee. The loan has a term of ten years, which can be extended if mutually agreed by the parties. Shanghai
Shengran has the right to determine the method of loan repayment, including requiring the shareholders to transfer all of their respective equity interest in Shanghai Taomee to Shanghai Shengran
and/or its designee.
Option Agreement.
Shanghai Taomee's shareholders have entered into an option agreement with Shanghai Shengran, under which each
shareholder of
Shanghai Taomee granted Shanghai Shengran an exclusive option to purchase or have its designee purchase his equity interest in Shanghai Taomee at the purchase price equal to the lowest price permitted
by the PRC laws, and agreed to assist Shanghai Shengran in obtaining all necessary government approvals as may be then required in connection with the purchase. Shanghai Shengran may exercise such
option at any time to the extent permitted by the PRC laws. In addition, Shanghai Taomee and its shareholders agree that without Shanghai Shengran's prior written consent, they will not engage in
certain actions including transferring or otherwise disposing of the equity interest in Shanghai Taomee.
Proxy Agreement.
Shanghai Taomee and its shareholders have entered into a proxy agreement with Shanghai Shengran, under which each
shareholder of
Shanghai Taomee granted an irrevocable power of attorney to Shanghai Shengran that authorizes Shanghai Shengran to vote as the shareholder's attorney-in-fact on all of the matters of Shanghai Taomee
requiring shareholders' approval, including the appointment of board members and senior management members.
Business Operation Agreement.
Shanghai Taomee and its shareholders have entered into a business operation agreement with Shanghai
Shengran, under
which each of the shareholders agrees that, without the prior written consent of Shanghai Shengran or its designee, Shanghai Taomee will not
68
Table of Contents
conduct
any transactions which might substantially affect its assets, businesses, personnel, obligations, rights or operations confirmed by Shanghai Shengran. Shanghai Taomee and its shareholders
agree to fully comply with the advices in connection with its business operation and financial management
provided by Shanghai Shengran from time to time and to elect directors and officers of Shanghai Taomee in consistence with the direction of Shanghai Shengran. In addition, the shareholders agree to
unconditionally transfer to Shanghai Shengran, without any consideration, any dividends or other proceeds received from Shanghai Taomee in their capacity as shareholders of Shanghai Taomee.
Commercial Cooperation Agreement.
Under the commercial cooperation agreement between Shanghai Taomee and Shanghai Shengran, Shanghai
Shengran agrees
to place certain game updates and value-added components developed by it, or the objects, on Shanghai Taomee's platform for operation. Shanghai Shengran will provide routine maintenance, updates,
technical support and debugging for the operation of the objects, and Shanghai Taomee will provide platform servers, broadband resources and customer services. Unless Shanghai Shengran directs
otherwise and subject to applicable laws, any intellectual property in relation to the objects will belong to Shanghai Shengran and cannot be used by Shanghai Taomee beyond the agreed scope of uses.
Shanghai Shengran will enjoy the profits generated from this operation after the deduction of a reasonable portion thereof by Shanghai Taomee. The rate for the deduction will be determined through
negotiation by both parties based on the principles of arm's-length pricing.
Equity Interest Pledge Agreement.
Shanghai Taomee and its shareholders have entered into an equity interest pledge agreement with
Shanghai Shengran,
under which the shareholders of Shanghai Taomee pledged all of their equity interests in Shanghai Taomee to Shanghai Shengran to secure their and Shanghai Taomee's obligations under certain agreements
above and as collateral for all of the amounts payable by Shanghai Taomee to Shanghai Shengran under those agreements. If any event of default as defined under this agreement occurs, Shanghai
Shengran, as the pledgee, will be entitled to dispose of the pledged equity interests. In addition, any equity proceeds (including but not limited to any dividend or profit) from Shanghai Taomee will
be further pledged in favor of Shanghai Shengran excepted otherwise agreed by Shanghai Shengran in writing.
-
D.
-
Property, Plant and Equipment
Our
principal executive offices are located at 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District, Shanghai 200233, People's Republic of China. Our telephone
number at this address is (86-21) 6128-0056 and our fax number is (86-21) 3367-4012. We are headquartered in Shanghai and have leased an aggregate of approximately 8,890 square meters of offices in
Shanghai from independent third parties and do not own any real property.
In
May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use right of two parcels with an aggregated area of
approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million
(US$1.5 million). A prepayment of RMB4.4 million (US$0.7 million) was paid in June 2013. In August 2013, we entered into a letter of intent with respect to our intention to
purchase a building with an aggregated construction area of approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million
(US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties
thereto, we will be fully refunded of the prepayments of RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building. Please see "Item 3. Key
InformationD. Risk FactorsRisks Related to Our BusinessWe may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a
timely manner and we may not successfully recover our prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition."
69
Table of Contents
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
audited consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under
"Risk Factors" and elsewhere in this annual report.
-
A.
-
Operating Results
Overview
We are one of the leading children's entertainment and media companies in China. Our success online has translated into growing demand
for our content offline in merchandising, television, film and books. In our virtual worlds, children adopt avatars and learn through interactive games and group activities set in imaginative
landscapes with evolving story lines of exploration and adventure.
In
order to leverage our investment and expansion into offline and mobile products, we have developed a cross media platform. We work with publishers to offer a wide range of children's
books and magazines, featuring iconic characters, story lines and images we have developed and popularized. We license our franchises to leading brands in toys and other consumer products for children
in China. We also design and distribute toys, trading cards and products that potentially other interactive features. We have also developed content for animation film and television, which we
released in 2011, 2012 and 2013. We refer to these other businesses as our offline business.
We
generate revenues from our online business primarily through the sales of subscriptions and virtual items, which users pay for primarily in the form of virtual currency purchased with
prepaid cards. Our prepaid cards are distributed in over 118,200 retail outlets in over 2,200 towns and cities in China. We generate revenues from our offline business mainly from license fees and
royalties based on contracts with book publishers, makers of consumer products and other licensees as well as wholesale of interactive toys.
For
2011, 2012 and 2013, approximately 88.8%, 80.0% and 73.1%, respectively, of our net revenues were generated from online business, and approximately 11.2%, 20.0% and 26.9%,
respectively, of our net revenues were generated from offline business.
Our
net revenues were US$45.4 million in 2011, US$40.2 million in 2012 and US$48.4 million in 2013. Our gross profit was US$37.7 million in 2011,
US$30.2 million in 2012 and US$35.1 million in 2013. Our net income was US$19.5 million in 2011, US$8.9 million in 2012 and US$5.4 million in 2013. The number of
active paying accounts, in our online entertainment community were 1.7 million in the three months ended December 31, 2011, 1.2 million in the three months ended
December 31, 2012 and 1.3 million in the three months ended December 31, 2013, and per paying account average gross revenues from the operation of our virtual communities in
China, or ARPU, increased from approximately US$4.7 to US$4.8 and US$6.0 in the same periods.
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Table of Contents
Factors Affecting Our Results of Operations
Our results of operations are affected by the factors described in more details in the "Descriptions of Certain Statement
of Operations ItemsNet revenues" as well as the general and specific factors, including:
-
-
overall economic growth in China, which has resulted in increases in disposable income and discretionary consumer
spending;
-
-
urbanization rate, which has led to the development of a sophisticated consumer market and a greater concentration of
children in urban centers with ready access to the Internet;
-
-
discretionary spending on and by children and their caregivers, particularly in media and entertainment, which has
increased considerably as a result of Chinese families' growing affluence as well as population control policies of the Chinese government;
-
-
demand for online entertainment among children, which has grown as a result of rapidly increasing popularity of Internet
use among children.
-
-
government policies that restrict the operation by foreign content developers and operators. See "Item 4.
Information on the CompanyB. Business OverviewRegulations Related to Our BusinessOnline games administration measures";
-
-
the stability and quality of our management and employees;
-
-
competition in the children's entertainment and media industry, which is characterized by rapid change, impact of the new
and converging technologies, relatively low capital requirements and barriers to entry. See "Item 3. Key InformationD. Risk FactorsRisks Related to Our
BusinessWe may not be able to maintain our revenues and profitability as we operate in a competitive industry and compete against many companies"; and
-
-
our ability to achieve a high level of production and operation efficiency.
Descriptions of Certain Statement of Operations Items
Net revenues
We generate revenues from two sources: (i) online business through the operation of our virtual worlds, mobile games and
provision of other online services and products, including royalties for licensing our virtual worlds, and (ii) offline business.
In
2012, our net revenues from online business decreased together with the decrease of the active paying accounts. We believe the decrease is primarily due to competition and our
strategy to decelerate monetization temporarily to attract new users and increase user stickiness, which is evidenced by increased active accounts in 2012. In 2013, our net revenues from online
business increased as a result of our revenue growth of our core virtual worlds from the prior year, as well as contribution from several newly launched virtual worlds. Our net revenues from offline
business have increased in both amount and percentage in 2011, 2012 and 2013 as a result of our strategy to build our cross-media
71
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entertainment
platforms. The following table sets forth a breakdown of our net revenues from the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
40,331
|
|
|
88.8
|
|
|
32,169
|
|
|
80.0
|
|
|
35,330
|
|
|
73.1
|
|
Offline business
|
|
|
5,066
|
|
|
11.2
|
|
|
8,039
|
|
|
20.0
|
|
|
13,024
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
45,397
|
|
|
100.0
|
|
|
40,208
|
|
|
100.0
|
|
|
48,354
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net revenues from online business amounted to US$40.3 million, US$32.2 million and US$35.3 million in 2011,
2012 and 2013, respectively.
Our
net revenues from online business are net of discounts and rebates granted to our distributors, as well as business taxes or VAT and related surcharges incurred in connection with
our operations. Each of Shanghai Shengran and Shanghai Taomee is subject to PRC business tax at a statutory tax rate of 5% or VAT at a rate of, depending on different product categories, 17% or 6%,
and surcharges related to urban construction and education, which we deduct from our gross online business revenues.
We
generate revenues from our online business primarily through two revenue streams for virtual featurestime-based and item-based. While users can access our virtual worlds
for free, users may choose to pay a RMB10 (US$1.7) fee per virtual world to access premium features and gain privileges within each of our virtual worlds for 30 days. Users who pay the
subscription fee enjoy additional capabilities, special privileges, such as having a higher upper limit for the total number of friends that the users can have and access to exclusive online parties.
In addition, users pay a fee for each virtual item within our virtual worlds. For more details on revenue recognition, see "Critical Accounting Policies and EstimatesRevenue
Recognition." Starting from June, 2011, we began to generate online business revenues from licensing our virtual worlds outside of China. Starting from the second half of 2010, we also began to
operate third-party online casual games on our platform and generate revenues from such licensing arrangements.
Users
can purchase subscriptions and virtual items using our virtual currency, the Mibi, which in turn can be purchased from different distribution channels, such as our prepaid cards,
third-party prepaid cards, online payment channels and cellular telecom operators. We sell the prepaid cards to our distributors at a pre-negotiated discount on the face value of the cards and offer a
volume rebate to distributors if they meet a pre-set sales requirement. Net proceeds from distributors are initially recorded as advances from customer. Upon activation or charge of the prepaid cards
or the Mibi, these advances from customers are transferred to deferred revenues. The proceeds received from sales of the Mibi directly to users through third-party payment channels are recorded as
deferred revenues. For more details on our distribution agreements and payment systems, see "Item 4. Information on the CompanyB. Business OverviewOur Business
SegmentsOnline BusinessPricing, payment and distribution."
Our
physical prepaid cards will expire on the expiration date printed thereon, which is generally two years after the date of card production. The proceeds from the expired physical
prepaid cards that have not been activated are recognized as other operating income upon expiration of the cards. In 2011, 2012 and 2013, we recognized US$546,360, US$1,867,626 and US$1,620,842,
respectively, as other operating income due to expiration of prepaid cards.
72
Table of Contents
The following table sets forth the number of active accounts, the number of active paying accounts and ARPU for each period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Periods Ended
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Active Accounts (in thousands)
|
|
|
27,329
|
|
|
24,046
|
|
|
37,126
|
|
|
27,009
|
|
|
42,267
|
|
|
43,680
|
|
|
57,348
|
|
|
34,401
|
|
|
43,910
|
|
|
40,645
|
|
|
60,797
|
|
|
38,615
|
|
Active Paying Accounts (in thousands)(1)
|
|
|
2,741
|
|
|
2,207
|
|
|
2,129
|
|
|
1,677
|
|
|
1,899
|
|
|
1,817
|
|
|
1,716
|
|
|
1,213
|
|
|
1,463
|
|
|
1,340
|
|
|
1,726
|
|
|
1,295
|
|
ARPU (in US$)(2)
|
|
|
4.6
|
|
|
5.1
|
|
|
5.2
|
|
|
4.7
|
|
|
5.0
|
|
|
4.8
|
|
|
4.6
|
|
|
4.8
|
|
|
5.3
|
|
|
6.0
|
|
|
5.8
|
|
|
6.0
|
|
-
(1)
-
The
number of active paying accounts for each quarter is the number of active accounts that paid subscription fees to access premium features of our virtual
worlds or purchased virtual items in the relevant quarter.
-
(2)
-
Includes
gross revenues from online business, and excludes gross revenues from the licensing of our virtual worlds to third-parties.
We
believe net revenue from our online business is primarily affected by the following factors:
-
-
Our ability to maintain and expand our user base
which depends on the
continued growth of the number of children who use the Internet, our ability to bring appealing content and entertainment experiences to our users, coverage of mobile and new online platforms, use
effective promotion to reach new users, expand our user base in second and third-tier cities in China, and maintain and enhance our reputation among children and their parents. We will also develop
new virtual worlds and other services on our community, which may appeal to age groups and demographics that we have yet to reach and increase our revenues as a result. From time to time, we may adopt
the strategy of trying to gain market share and increase user stickiness and temporarily decelerate monetization. The operating results of 2012 and 2013 have bolstered our confidence in such strategy
to prioritize market share expansion as we foster the growth of our user base and user stickiness.
-
-
Our ability to increase item-based revenue stream.
We
generate revenues primarily through the sales of subscriptions to access premium features and gain privileges in our interactive communities and the sales of virtual items. The increase in sales
depends on our ability to frequently enhance and update our virtual items and premium features to cater to children's changing preferences and attract more sales. As we already have a large and stable
base of users who pay subscription fees, we expect one of the key drivers of future growth to be increased spending on virtual items.
-
-
Our ability to increase our ARPU by:
-
-
Effectively pricing our subscription fees and virtual items and utilizing
bundling.
We price our subscription fees and virtual items to be attractive and affordable for our users and to reflect market trend.
While we do not foresee near-term increase in per account subscription fee, we expect greater flexibility in pricing virtual items.
-
-
Optimizing revenue mix.
We have built and will continue to
build a portfolio of diverse virtual worlds that appeal to children of different age, gender and interests. As children of different gender and age groups exhibit different ARPU patterns, and as
virtual worlds with different themes or at different life stages exhibit different ARPU patterns, our revenues will be affected by the mix of virtual worlds and other services and communities we
offer. Our ability to continue to launch virtual worlds to create a portfolio with various target users and life cycles is critical to our sustained growth.
-
-
Our ability to expand the distribution network and negotiate favorable rebates and discounts with
distributors.
We maintain an extensive distribution system for our physical prepaid cards that reached approximately 118,200 retail
outlets in over 2,200 towns and cities around China, as of December 31, 2013. Since many children have limited access to online payment channels, we rely on payment through the physical prepaid
cards for a substantial amount of our revenues. We
73
Table of Contents
need
to identify additional retail outlets that are located near our target users and expand our distribution network to more second and third-tier cities in China. In addition, our ability to
negotiate favorable discount and rebate rates with more distributors and continue to optimize our distribution structure is important to our future revenue growth.
-
-
Seasonality in user behavior.
Our quarterly results of
operations may be affected by seasonal trends caused by user behavior and demand for our online and offline offerings. We expect our net revenues from online business to be higher during winter and
summer vacations when there are more active users and children have more online playtime during these non-school days, which usually falls in the first and third quarters of each calendar year. For
instance, there are more non-school days in the first quarter and third quarter of 2013. Decreases in our net revenues from online business, if any, as a result of seasonality may be most visible from
the third quarter to the fourth quarter of each year, as the fourth quarter has less than half of the non-school days compared to the third quarter, and from the first quarter to the second quarter as
well, not only because the decrease in non-school days in the second quarter as compared to the first quarter, but also because children are generally given extra pocket money during Chinese New Year
in the first quarter of each year. These seasonality trends generally manifest themselves more clearly with respect to more mature virtual worlds and less clearly during periods of high growth that
accompany the introductory stages of a highly popular virtual world.
-
-
Our ability to operate in a competitive industry.
We
operate in the children's online entertainment industry which is highly competitive. See "Factors Affecting Our Results of Operations." Our ability to maintain our competitive edge in
attracting and retaining users, to quickly respond to market trends and user preferences and to strategically promote our brands and services are crucial to our growth.
-
-
Our ability to expand cooperation with online game
developers.
Starting from the second half of 2010, we began to operate third-party online casual games on our platform and generate
revenues from such licensing arrangements. We plan to continue to enter into licensing arrangements to operate third-party online casual games on our platform.
Our net revenues from offline business amounted to US$5.1 million, US$8.0 million and US$13.0 million in 2011,
2012 and 2013, respectively.
Our
revenues from offline business mostly consisted of publishing royalties, film and merchandise licensing fees generated from licensing our content in the PRC. In addition to licensing
our franchises, we also design and sell interactive toys that bear images of our franchises, and sometimes books featuring our franchises. We take the associated inventory risks in connection with
such sales. See "Cost of ServicesOffline business."
We
invested in the production of, or licensed our franchise to producers of five feature films, based on our "Mole's World" and, "Seer" franchises, which we released in 2011, 2012 and
2013, and generated revenues through box office sharing proceeds and distribution of films on television and website.
Our
results of operations will be significantly affected by our ability to grow our offline business by leveraging our brand name and the popularity of our franchise assets and content
creation capabilities. We believe net revenue from our offline business is primarily affected by the following factors:
-
-
Our ability to engage additional licensees in more media formats and product
categories.
Currently, we are working with licensees in key categories of consumer goods, such as apparel, accessories, toys,
stationery, consumer electronics, food, beverage, books, theme parks, live shows, and carnivals, including many brands well-known in China. We plan to increase our offline revenues
74
Table of Contents
Cost of Services
The following table sets forth a breakdown of our cost of services and as a percentage of total cost of services for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
6,035
|
|
|
78.5
|
|
|
6,950
|
|
|
69.5
|
|
|
7,644
|
|
|
57.6
|
|
Offline business
|
|
|
1,653
|
|
|
21.5
|
|
|
3,048
|
|
|
30.5
|
|
|
5,621
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services
|
|
|
7,688
|
|
|
100.0
|
|
|
9,998
|
|
|
100.0
|
|
|
13,265
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cost of services relating to our online business primarily consists of bandwidth and server hosting costs, salaries and benefits of
our operations staff, production costs for prepaid cards, amortization of upfront licensing fees, depreciation and amortization of equipment and software purchased from third-parties, and other direct
costs.
Our
bandwidth costs represent the fees we pay to bandwidth vendors, which are typically telecommunications operators such as China Telecom and China Unicom, or independent third parties
that purchase bandwidth from major telecommunications operators in China. We also purchase servers from which we incur depreciation expenses and rental expenses for storing our servers. In the
foreseeable future, we expect our bandwidth costs and server-related depreciation and rental expenses to continue to increase in absolute amount given the anticipated increase in the volume of our
website
75
Table of Contents
traffic.
We expect this increase in absolute terms to be partially offset to the extent we are able to achieve better economies of scale as a result of increased sales volume and continued
technological improvements that optimize bandwidth and server usage.
Salaries
and benefits (including share-based compensation) cost for our online business primarily comprise compensation to operations support staff, including employees responsible for
database and user system maintenance, bandwidth and server monitoring and maintenance, prepaid card and billing system maintenance, online security, technical support and customer service. We expect
costs associated with salaries and benefits to increase as we continue to expand our operations and hire more staff. Our operations staff for online business increased from 115 as of
December 31, 2011 to 118 as of December 31, 2012, and slightly decreased to 117 as of December 31, 2013.
Our
production costs include the cost of manufacturing and transporting physical prepaid cards to our distributors around China. Such production costs may increase in absolute amount as
we continue to expand our operations and enter into distribution agreements with city level distributors. However, we do not expect production costs of the prepaid card to comprise a material part of
our cost of services going forward.
Cost of services relating to our offline business is primarily comprised of compensation to our operations employees, film production
cost and toy production and distribution cost, which is the inventory costs of our interactive toys and the cost involved in producing labels for the verification of the authenticity of our licensed
products.
Operating Expenses
Our operating expenses primarily consist of product development expenses, sales and marketing expenses and general and administration
expenses as well as impairment loss on acquired intangible assets and other operating income. The following table sets forth a
breakdown of our operating expenses in terms of amount and as a percentage of our total net revenues for the periods indicated. As we continue to expand both our online and offline business, we expect
our operating expenses to increase in absolute amount, and we aim to maintain or enhance our operating efficiency when our business further scales up.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Total net revenues:
|
|
|
45,397
|
|
|
100
|
|
|
40,208
|
|
|
100
|
|
|
48,354
|
|
|
100
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses
|
|
|
10,304
|
|
|
22.7
|
|
|
12,318
|
|
|
30.6
|
|
|
13,886
|
|
|
28.7
|
|
Sales and marketing expenses
|
|
|
6,255
|
|
|
13.8
|
|
|
9,966
|
|
|
24.8
|
|
|
9,446
|
|
|
19.5
|
|
General and administrative expenses
|
|
|
7,965
|
|
|
17.5
|
|
|
10,078
|
|
|
25.1
|
|
|
13,095
|
|
|
27.1
|
|
Impairment loss on acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046
|
|
|
2.2
|
|
Other operating (income)
|
|
|
(1,734
|
)
|
|
(3.8
|
)
|
|
(5,512
|
)
|
|
(13.7
|
)
|
|
(5,708
|
)
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
22,790
|
|
|
50.2
|
|
|
26,850
|
|
|
66.8
|
|
|
31,765
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our product development expenses consist primarily of salaries and benefits, including share-based compensation, for personnel engaged
in concept generation, community function development and design, story line development, website structure and content development and design, graphic and
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audio
design, quality control and testing of our virtual worlds and mobile games as well as other online services. Product development expenses accounted for approximately 22.7%, 30.6% and 28.7% of
our total net revenues in 2011, 2012 and 2013, respectively. Our product development expenses increased in recent years primarily due to the increased payroll expenses related to our hiring of
additional writers, engineers, development staff, animation and graphic artists as well as the increase in average salary. We expect that our product development expenses will further increase in
absolute amount in the future as we continue to devote resources to improve our interactive communities and the overall user experience and to create new virtual worlds, new online products and mobile
products, and to the extent we incur higher share-based compensation expenses.
Our sales and marketing expenses primarily consist of advertising and promotional expenses, film promotion and animation production
related expenses, salaries and benefits, including share-based compensation, and other overhead expenses incurred by our sales and marketing personnel. Sales and marketing expenses accounted for
approximately 13.8%, 24.8% and 19.5% of our total net revenues in 2011, 2012 and 2013, respectively. Our sales and marketing expenses increased in the absolute amount from 2011 to 2012 primarily due
to an expansion of our marketing efforts related to animation production in connection with promotional activities, as well as the growth of our sales and marketing team, and decreased slightly in
2013 primarily due to the decreased advertising expenses, partially offset by an increase in payroll expenses related to sales and marketing. We expect that our sales and marketing expenses will
increase in absolute amount as we further promote our virtual worlds in future periods on search engines, web portals and casual game websites and produce more promotional TV animations featured in
our franchises.
Our general and administration expenses primarily consist of salaries and benefits, including share-based compensation, for our general
and administration, finance and human resources personnel, office rentals, depreciation and amortization expenses relating to property and equipment used in general and administrative functions,
professional service fees and other expenses incurred in connection with general corporate purposes. General and administration expenses accounted for approximately 17.5%, 25.1% and 27.1% of our total
net revenues in 2011, 2012 and 2013, respectively. Our general and administration expenses increased in recent years primarily due to increases in payroll expenses and increases of indirect tax costs
related to intercompany transactions. We expect our general and administration expenses to increase in absolute amount as we incur additional expenses in connection with the expansion of our business,
our investment activities and our operations as a publicly traded company, which include hiring more staff for our general and administrative team, expenses related to improving and maintaining our
internal control over financial reporting and complying with our reporting obligations, and as we incur higher share-based compensation expenses. However, we expect our general and administration
expenses to stay relatively stable or increase in absolute amount in the future as we expect our general and administration expenses will keep pace with our revenue growth.
Our impairment loss on acquired intangible assets was incurred by writing off the remaining term of two underperforming games, Wizard
101 and Speed Hunter. Impairment on acquired intangible assets amounted to US$1.0 million in 2013.
Our other operating income consists of PRC government subsidies granted to our operating subsidiary and significant VIE and VIEs'
subsidiaries in China, income recognized as a result of
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expiration
of prepaid cards and government subsidies. Other operating income amounted to US$1.7 million in 2011, US$5.5 million in 2012 and US$5.7 million in 2013. We received
government subsidies in 2011, 2012 and 2013. However, the amount we receive may vary depending on government policy, our business operations and other factors. In 2011, 2012 and 2013, we recognized
US$0.5 million, US$1.9 million and US$1.6 million as other operating income due to the expiration of prepaid cards, respectively.
Share of Profits/Loss in Equity Method Investments
In December 2009, we obtained a minority interest in Elyn Corporation and its wholly owned subsidiary Taiwan
Taomee Co., Ltd., of which 20% equity interests was initially held through a related party, as consideration, in exchange for a three-year exclusive right to operate certain of our
virtual worlds in Taiwan, Hong Kong and Macau. As we have the ability to exercise significant influence over Elyn Corporation, we account for this investment using the equity method of accounting.
On
February 25, 2011, we entered into an agreement to effectively sell a 10.5% equity interest in Elyn Corporation that had been indirectly held by the related party on our
behalf. Of the 10.5% equity interest in Elyn Corporation, 9.14% was sold to Qiming Funds which are our existing shareholders and 1.36% was sold to a third party investor for US$3.4 million and
US$0.5 million, respectively, in cash. A gain of US$3.7 million was recognized in share of profit in equity method investments in the consolidated statement of operations. In addition,
the nominee shareholding agreement was terminated with the related party and we held all of our 29.5% equity in Elyn Corporation directly, and continued to account for this investment using the equity
method.
On
August 12, 2011, our equity interest in Elyn Corporation was diluted from 29.5% to 28.8% as a result of Elyn Corporation's issuing shares to its employees.
In
November 2011, Taiwan Taomee went through a reorganization and contemporaneously issued new ordinary shares to existing shareholders and certain employees. As a result of such
transactions, our equity interest in Taiwan Taomee was changed from 28.8% interest held through Elyn Corporation to a 27.6% effective interest which was held through (1) 29.50% in Elyn
Corporation, which held 72.09% of Taiwan Taomee, and (2) 28.77% in Joy Children Technology Co., Ltd., or Joy Children, a shell company with no operations, which owned 21.86% of
Taiwan Taomee after the reorganization. The change in equity interest reflected a dilution resulting from shares issued to Taiwan Taomee's employees, which were accounted for by Taiwan Taomee as stock
compensation. In addition, we paid total consideration of US$668,992 in cash for the newly issued shares of Taiwan Taomee through Joy Children, which was recorded as an increase in equity method
investment.
In
July 2012, our aggregated equity interest through Elyn and Joy Children in Taiwan Taomee was diluted from 27.6% to 27.1%, i.e. (1) 29.50% in Elyn, which holds 70.88% of Taiwan
Taomee and (2) 28.77% in Joy Children, which holds 21.49% of Taiwan Taomee. The dilution was mainly due to the issue of new ordinary shares by Taiwan Taomee from capital surplus and
appropriations of 2011 earnings to certain existing shareholders and employees.
In
June 2013, as part of a legal reorganization of Taiwan Taomee, our equity interest in Taiwan Taomee was held through Playgame Sdn. Bhd, a holding company established in Malaysia, and
Elyn was liquidated. Our aggregated equity interest in Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan Taomee's underwriters upon it
initial public offering in Taiwan Emerging Stock Market. As a result, Playgames's equity interest in Taiwan Taomee was accordingly diluted to 67.87% from 70.88%, resulting in a gain from investment of
approximately $287,790 recognized in the year 2013, reported within share of profit in equity method investees in the consolidated statements of operations.
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Our
equity in profit in 2011, 2012 and 2013 was US$1.0 million, US$0.5 million and US$0.5 million of Elyn Corporation (or Playgame, as applicable) and US$7,757,
US$0.2 million and US$0.1 million of Joy Children, respectively, and was recognized as share of profit in equity investment in the consolidated statements of operations.
In
October 2010, pursuant to an equity investment agreement which we entered into with Shenzhen Decent Investment Limited and two individuals unrelated to us, Shenzhen Ruigao was formed
in the PRC for the purpose of developing console games. We obtained a 17.65% equity interest in Shenzhen Ruigao for total cash consideration of US$1.0 million which was paid in two
installments, with the first payment being made in October 2010 and the remaining payment of US$0.5 million being paid in the first quarter of 2011. As we have the ability to exercise
significant influence over Shenzhen Ruigao, we account for this investment using the equity method of accounting. In May 2012, a third party investor obtained 7.5% equity interest in Shenzhen Ruigao
through capital injection, and our equity interest in Shenzhen Ruigao was reduced to 15.61%. In July 2012, Shanghai Taomee transferred all its equity interest in Shenzhen Ruigao for
US$1.0 million and recorded a gain of US$0.3 million. Our share of losses in equity investment in Shenzhen Ruigao was US$0.4 million in 2011, and our share of profits was
US$0.2 million in 2012 and nil in 2013.
In
the first quarter of 2012, Shanghai Taomee entered into an investment agreement of US$0.1 million with Guangzhou Chuangyou Information Technology Co., Ltd., or
Chuangyou, a company principally engaged in the design and development of online games in China, to acquire 6.0% of Chuangyou's equity interest and a contingent call option to further subscribe 13.16%
newly issued equity interest for US$0.6 million. In September 2012, Shanghai Taomee exercised the call option and completed the further acquisition in January 2013, resulted in 19.16% equity
interest in Chuangyou.
In
December 2013, Chuangyou entered into an agreement to issue new shares for RMB2.5 million (approximately US$0.4 million) to a new investor. The Company's equity share in
Chuangyou will be diluted to 9.58% upon the closing of the transaction. Chuangyou is a related party of us, as one of Chuangyou's investors is our director and principle shareholder.
As
of December 31, 2013, Chuangyou has experienced a deterioration financial position and performance and we did not expect Chuangyou to generate positive future cash flows.
Accordingly, we accrued an impairment charge of US$370,407 in 2013 for our investment in Chuangyou. Our equity in loss in Chuangyou was US$35,310 in 2012, and our equity in loss was US$212,240 in
2013.
In
March 2013, Shanghai Taomee entered into an agreement to set up Shanghai Taoyue Information Technology Co., Ltd., or Taoyue, a new online game development company, with
five third-party individuals, of which Shanghai Taomee held a 40% equity interest for a consideration of RMB2.0 million (approximately US$0.3 million). Our equity in loss in Taoyue was
US$150,052 in 2013. In January 2014, Shanghai Taomee agreed to transfer such 40% equity interests in Taoyue to an existing investor for a consideration of RMB2.0 million (approximately
US$0.3 million).
In
September 2013, we entered into an investment agreement with two third-parties to establish a joint venture, Jiangxi Haomi Network Technology Co., Ltd., or Jiangxi
Haomi, a company which develops family entertainment and education application on mobile and multi-screen platforms, including Smart TV portal for children in China. We paid a consideration of
RMB12.9 million (US$2.1 million) for 43.0% equity interests in Jiangxi Haomi. Our equity in loss in Jiangxi Haomi was US$27,199 in 2013.
In
January 2014, Shanghai Taomee entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), an hi-tech interactive toy design and R&D
company, to subscribe 25% of Shanghai Weiju's newly issued shares at a consideration of RMB3.0 million (US$0.5 million).
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Taxation
Cayman Islands
We are an exempted company incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to
income, corporate or capital gains tax. In addition, payment of dividends and capital by us to our shareholders in respect of our shares will not be subject to taxation in the Cayman Islands and no
withholding will be required on the payment of dividends or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands income or
corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.
Hong Kong
Our subsidiary in Hong Kong is subject to profits tax at the rate of 16.5% on assessable profits determined under relevant Hong Kong
tax legislation.
Under
the new EIT Law, the dividends paid by a foreign invested enterprise, or a FIE, to its immediate holding company outside the PRC (to the extent that such holding company does not
have a business organization or business place in China, or if it has a business organization or business place in China, its profits generated from PRC are not related to the foregoing business
organization or business place) are subject to withholding tax at a rate of 10% or a lower rate if such foreign investor's jurisdiction of incorporation has a tax treaty with the PRC. According to the
Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income
signed in August, 2006, or the Tax Treaty, dividends payable by a FIE to a Hong Kong resident company which directly owns at least 25.0% of the equity interest in that FIE will be subject to
withholding tax at a lower rate of 5%.
Taomee
HK, a company incorporated in Hong Kong in November 2008, currently holds all the equity interest in Shanghai Shengran. However, according to Circular 124 issued by the SAT, which
came into effect on October 1, 2009, the 5% withholding tax rate for dividends under the Tax Treaty does not apply automatically and Taomee HK needs to obtain an approval from the competent
local tax authority before it can enjoy such a preferential tax rate. According to Circular 81 issued by the SAT in February 2009, a key condition for a foreign investor to enjoy the preferential
withholding tax rate for dividends payable by a FIE is that such foreign investor is the "beneficial owner" of such dividends. Circular 601 issued by the SAT on October 27, 2009 further
clarifies that, generally the "beneficial owner" shall engage in substantive business operations such as manufacturing, distribution or management and, among others, the fact that the immediate
offshore holding company does not have any other business operations except holding property or rights generated from dividend income from the FIE would adversely affect such offshore shareholder in
the determination of its "beneficial owner" status by the tax authority.
In
respect of financial years 2011, 2012 and 2013, Taomee HK recorded a loss and therefore did not apply for approval to enjoy the 5% preferential tax rate under the Tax Treaty. Given
that Taomee HK is not engaged in substantive business operations and it does not have any other business operations except for its holding in Shanghai Shengran, Taomee HK may be subject to the 10.0%
withholding tax rate if it is not regarded as the "beneficial owner" of the dividends.
Dividends
paid by Taomee HK to its shareholder is not subject to any withholding tax in Hong Kong.
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China
PRC Enterprise Income Tax, or EIT
Prior to January 1, 2008, companies established in China were generally subject to state and local EIT at statutory rates of 30%
and 3% respectively. On March 16, 2007, the National People's Congress of China enacted a new enterprise income tax law, i.e. the PRC Enterprise Income Tax Law, which took effect
beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing Rules for the Enterprise Income Tax Law, or the Implementing Rules, which also took effect
beginning January 1, 2008. Under the PRC Enterprise Income Tax Law, foreign invested enterprises, or FIEs, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. On
February 22, 2008, the Ministry of Finance and the State Administration of Taxation, or the SAT, promulgated the Notice on Several Preferential Policies in Respect of Enterprise Income Tax, or
Notice No. 1 2008, reiterating the policy that a software enterprise newly established within China may,
upon determination, be exempted from income taxes for its first two profit-making years and shall be subject to the income tax at half the standard rate for the next three years. On April 24,
2009, the Ministry of Finance and SAT promulgated the Notice on Several Issues Relevant to the Implementation of the Preferential Policies on Enterprise Income Tax, which states that, software
enterprises established prior to the end of 2007 may, upon certification, enjoy the preferential policies on the EIT reductions and exemptions within specified periods as provided in the Notice
No. 1 2008. On April 20, 2012, the Ministry of Finance and SAT promulgated the
Notice on Enterprise Income Tax for Further Encouraging the Development of Software
and Integrated Circuit Industries
, which reiterates the preferential policy on EIT of software enterprises in Notice No.1 2008, limits the scope of applicable software
enterprises to enterprises which are profitable before December 31, 2017 and suspends the implementation of certain provisions in Notice No. 1 2008.
In
addition, an enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a "High and New Technology Enterprise", or HNTE. Pursuant to the
Administrative Measures on the Recognition of High
and New Technology Enterprises
, the provincial counterparts of the Ministry of Science and
Technology, the Ministry of Finance and the State Administration of Taxation shall jointly determine whether an enterprise is qualified as a HNTE under the EIT Law. In making such determination, these
government agencies shall consider, among other factors, ownership of core technology, whether the products or services fall within the scope of high and new technology strongly supported by the state
as specified in the measures, the ratios of technical personnel and research and development personnel to total personnel, the ratio of research and development expenditures to annual sales revenues,
the ratio of revenues attributed to high and new technology products or services to total revenues, and other measures set forth in relevant guidance. All enterprises that had been granted the HNTE
status before the effectiveness of the EIT Law are required to be re-examined in accordance with the measures mentioned above before they can be entitled to the preferential tax rate. A HNTE
certificate is effective for a period of three years and could be renewed for another three years. After that, an entity needs to re-apply for the "High and New Technology Enterprise" status in order
to be able to enjoy the preferential tax rate of 15%.
Our
VIE, Shanghai Taomee, which was established in 2007 and qualified as a "software enterprise" in 2009, enjoys a full exemption from EIT in 2009 and 2010 and a reduced EIT rate of
12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax authorities in May 2010. In addition, in 2010, Shanghai Taomee obtained HNTE qualification, which is
effective for a period of three years and could be renewed thereafter. In 2013, Shanghai Taomee applied for the renewal and received a new HNTE qualification. Currently Shanghai Taomee has not applied
to the relevant tax authority for preferential tax treatment as a HNTE.
Our
wholly-owned subsidiary, Shanghai Shengran, which was established in 2009 and qualified as a "software enterprise" in 2010 and was informed in April 2011 that the full EIT exemption
would apply
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retroactively
in 2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013. In May 2012, Shanghai Shengran further received a written approval from local tax authorities, according to
which Shanghai Shengran was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate, i.e. EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of
US$2.1 million as a one-time tax benefit in 2012.
Our
VIE's subsidiary, Shanghai Animation was recognized as an "animation enterprise" in November 2013. Animation enterprises as recognized by the relevant department of the State Council
which independently develop or produce animation products can apply for certain tax preferential treatment as applied to the software enterprises. Shanghai Animation is in the process of obtaining a
written approval from relevant tax authorities for a full exemption from EIT for two years and subsequently a 50% reduction in EIT rate for three years.
Continued
qualification as a "software enterprise" or as an "animation enterprise"or as a "HNTE" is however subject to assessment by the relevant government authorities in China.
See
"Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaWe may be classified as a "resident enterprise" for PRC
enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax."
Under
the PRC Enterprise Income Tax Law and the Implementing Rules, dividends generated from the business of our PRC subsidiary after January 1, 2008 and payable to us may be
subject to a withholding tax rate of 10% if we are considered a non-resident enterprise incorporated outside of the PRC unless there is an applicable tax treaty with China that provides for a
different withholding arrangement and we are deemed to be entitled to such favorable treatment. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.
The
PRC Enterprise Income Tax Law provides that enterprises established outside China whose "effective management" is located in China are considered "resident enterprises" and will
generally be subject to the uniform 25% EIT rate as to their global income. Under the implementation regulations, "effective management" is defined as substantial and overall management and control
over such aspects as the production and business, personnel, accounts and properties of an enterprise. The risk that we may be deemed to be a PRC resident enterprise under the PRC Enterprise Income
Tax Law and be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income is disclosed in "Risk FactorsRisks Related to Doing Business in ChinaWe may
be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax."
Share-Based Compensation Expenses
In May 2009, we adopted our 2009 Employee Stock Option Plan, or the 2009 Plan. We reserved 45,000,000 shares for grants under the 2009
Plan. As of December 31, 2013, options to purchase 11,879,840 ordinary shares were outstanding, 20,728,680 ordinary shares were exercised and 12,391,480 ordinary shares were available for
future grants under the 2009 Plan.
On
June 24, 2009, we granted options to purchase a total of 10,500,000 ordinary shares at the price of US$0.0400 per share to certain of our employees under the 2009 Plan. These
options are subject to vesting over four years, starting from June 24, 2009, and were valued at the estimated fair value on the date of the award.
On
June 7, 2010, we granted options to purchase a total of 35,175,000 ordinary shares at the price of US$0.0700 per share to certain of our directors, executive officers and
employees under the 2009 Plan. These options are subject to vesting over four years, starting from June 7, 2010, and were valued at the estimated fair market value on the date of the award. We
did not grant any options under our 2009 Plan in 2011, 2012 and 2013.
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On
March 18, 2014, we granted restricted share to our employees which will allow them to purchase up to a total of 1,600,000 restricted shares upon vesting at par value under the
2009 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.
In
June 2010, we adopted our 2010 Share Incentive Plan, or the 2010 Plan. We reserved 55,000,000 shares for grants under the 2010 Plan. As of the date December 31, 2013, options
to purchase 16,120,000 ordinary shares were outstanding, 19,040,414 restricted shares were outstanding and 12,626,167 ordinary shares were available for future grants under the 2010 Plan.
On
January 4, 2011, we granted options to our employees and a third-party consultant to purchase 16,665,000 and 2,500,000 of ordinary shares of the Company, respectively, at an
exercise price of US$0.3600 per share under the 2010 Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date. The
fair value of the stock
options as of the grant date was US$3,605,856 in the aggregate, or US$0.1881 per share. The options granted to the third-party consultant was subsequently forfeited in September 2011 as the contract
was terminated.
On
May 24, 2011, we granted options to purchase a total of 20,175,000 ordinary shares at the initial public offering price and a total of 4,500,000 restricted shares to our
independent director appointees, executive officers and certain employees under the 2010 Plan. The options granted to the independent director appointees are subject to vesting over three years, and
the rest are subject to vesting over four years, starting from May 24, 2011.
On
November 21, 2011, we granted options to an employee of us to purchase up to 150,000 shares under the 2010 Plan. The exercise price of the options is $0.2600 per share. These
options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date.
On
February 28, 2012, our compensation committee approved a share option exchange program that offered our eligible directors and employees the right to exchange vested and
unvested outstanding share options to purchase our ordinary shares granted under the 2010 Share Incentive Plan between January 2011 to May 2011 for our restricted shares at the ratio of 3:1. The
exchange ratio was determined based on the fair value of replacement restricted shares so that the fair value of the replacement restricted shares to be issued upon exchange would be approximately
equivalent to the fair value of the share options surrendered by an individual on the date of exchange. These replacement restricted shares are subject to substantially the same vesting schedule as
the options that are validly tendered in the exchange offer. A total of 102 directors and employees accepted the offer, and tendered options to purchase an aggregate of 28,790,000 ordinary shares,
including 14,090,000 shares granted on January 4, 2011 and 14,700,000 shares granted on May 24, 2011, in exchange for an aggregate of 9,596,718 restricted shares at a ratio of 3:1, which
were granted on March 30, 2012. The exchange of the share option for restricted shares was accounted for as a modification of share-based award, which involves a cancellation of the original
award and an issuance of a new award, with no incremental compensation cost recognized as the fair value of the restricted shares was not more than the fair value of the options given up on the date
of exchange.
On
July 16, 2012, we granted options to employees and directors to purchase up to a total of 19,840,000 ordinary shares under our 2010 Plan. The exercise price of the options is
US$0.2395 per share. These options vest over a four-year period, each with a graded vesting schedule, all commencing on July 16, 2012. We also granted to employees and directors to purchase up
to a total of 400,000 restricted shares at par value under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after
the grant date.
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On
July 20, 2012, we granted options to directors to purchase up to a total of 3,600,000 ordinary shares under our 2010 Plan. The exercise price is US$0.1960 per share. These
options vest over a three year period, each with a graded vesting schedule, all commencing on July 20, 2012.
On
September 4, 2013, we granted restricted shares to our employees which will allow them to purchase up to a total of 10,190,000 restricted shares upon vesting at par value under
the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.
On
November 5, 2013, we granted restricted shares to our senior management which will allow them to purchase up to a total of 4,800,000 restricted shares upon vesting at par value
under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.
On
December 11, 2013, we granted restricted shares to an external consultant which will allow him to purchase up to a total of 394,560 restricted shares upon vesting at par value
under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.
In
July 2012, we adopted our 2012 Share Incentive Plan, or the 2012 Plan. We reserved 30,000,000 shares for grants under the 2012 Plan. As of December 31, 2013, there were no
options or restricted shares granted under the 2012 Plan.
We
recognize the share grants as compensation for the relevant employees' services to us and recorded share-based compensation expenses. Our share-based compensation expenses amounted to
approximately US$2.0 million, US$2.2 million and US$2.1 million in 2011, 2012 and 2013, respectively.
As
of December 31, 2013, we had US$1.2 million in unrecognized compensation expenses related to unvested options, which we expect to recognize over a weighted average
period of 2.2 years, and we had US$4.8 million of total unrecognized compensation expenses related to non-vested restricted shares granted under the 2010 Plan, which we expect to
recognize over a weighted average period of 3.0 years.
We
are required to estimate the grant-date fair value of the share options and other share-based awards that we grant to our employees. The grant date fair value of the share options
granted in the year ended December 31, 2011 was estimated using the Black-Scholes-Merton option-pricing model, and the grant date fair value of the share options granted in the years ended
December 31, 2012 was estimated using binomial option-pricing model. The fair value of non-vested restricted shares granted to our employees and officers was computed based on the fair value of
our ordinary shares on the grant date, while the fair value of non-vested restricted shares granted to an external consultant was
re-measured at the end of each reporting period until the services being provided is completed. We estimated the expected term based on option terms related to vesting schedule and expected option
expiration date. The volatility rate estimation is developed based on the volatility of the comparable companies within the expected term commensurate with the expected time period modified to reflect
ways in which currently available information indicates that the future of the subject company is reasonably expected. The risk-free interest rate is selected based on the yield of Chinese
International Government Bond, which is denominated in U.S. dollars, with duration closest to the expected term.
On
November 28, 2011, we announced a share repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period. On September 28, 2012
and November 26, 2013, respectively, we extended the share repurchase plan for another 12 months from November 23, 2012 to November 23, 2013, and from November 24,
2013 to November 23, 2014, respectively. As of December 31, 2013, we had repurchased an aggregated of 1,064,177 ADSs, representing 21,283,540 ordinary shares on the open market for total
cash consideration of $4.4 million.
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Table of Contents
On
March 28, 2014, we completed the share repurchase program, under which we repurchased an aggregate of 41,191,160 ordinary shares, representing approximately 5.4% of our
outstanding shares as of March 28, 2014, at an average price of US$0.2 per ordinary share, or US$4.9 per ADS. On March 28, 2014, we announced a new share repurchase plan to repurchase up
to US$10 million worth of outstanding ADSs over a 12-month period.
Since
the completion of our initial public offering, we determined the fair value of the ordinary shares for the above option awards to our employees and officers was based on the
closing price of our ADSs traded on the NYSE on the grant day, while the fair value of non-vested restricted shares granted to an external consultant was re-measured at the end of each reporting
period until the services being provided is completed. The table below sets forth certain information concerning the options and restricted shares awarded to our directors and executive officers and
other individuals as a group in 2011, 2012 and 2013 on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date/Award Date
|
|
Options
|
|
Restricted
Shares
|
|
Exercise
Price/
Purchase
Price (US$)
|
|
Fair
Value of
Ordinary
Shares
(US$)
|
|
June 24, 2009
|
|
|
10,500,000
|
|
|
|
|
|
0.0400
|
|
|
0.0214
|
|
June 7, 2010
|
|
|
35,175,000
|
|
|
|
|
|
0.0700
|
|
|
0.0700
|
|
January 4, 2011
|
|
|
19,165,000
|
|
|
|
|
|
0.3600
|
|
|
0.3600
|
|
May 24, 2011
|
|
|
20,175,000
|
|
|
|
|
|
0.4500
|
|
|
0.5000
|
(1)
|
|
|
|
|
|
|
4,500,000
|
|
|
nil
|
|
|
0.5000
|
(1)
|
November 21, 2011
|
|
|
150,000
|
|
|
|
|
|
0.2600
|
|
|
0.2600
|
(2)
|
July 16, 2012
|
|
|
19,840,000
|
|
|
|
|
|
0.2395
|
|
|
0.2395
|
(3)
|
|
|
|
|
|
|
400,000
|
|
|
0.00002
|
|
|
0.2395
|
(3)
|
July 20, 2012
|
|
|
3,600,000
|
|
|
|
|
|
0.1960
|
|
|
0.1960
|
(4)
|
September 4, 2013
|
|
|
|
|
|
10,190,000
|
|
|
0.00002
|
|
|
0.2390
|
(5)
|
November 5, 2013
|
|
|
|
|
|
4,800,000
|
|
|
0.00002
|
|
|
0.2600
|
(6)
|
December 11, 2013
|
|
|
|
|
|
394,560
|
|
|
0.00002
|
|
|
0.2560
|
(7)
|
-
(1)
-
Estimated
based on the mid-point of the estimated public offering price set forth on the front cover of the preliminary prospectus dated May 24,
2011.
-
(2)
-
Determined
based on the closing price of our ADSs trade on the NYSE on November 21, 2011.
-
(3)
-
Determined
based on the closing price of our ADSs trade on the NYSE on July 16, 2012.
-
(4)
-
Determined
based on the closing price of our ADSs trade on the NYSE on July 20, 2012.
-
(5)
-
Determined
based on the closing price of our ADSs trade on the NYSE on September 4, 2013.
-
(6)
-
Determined
based on the closing price of our ADSs trade on the NYSE on November 5, 2013.
-
(7)
-
Determined
based on the re-measured at the end of each reporting period until the services being provided is completed.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions
that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of our contingent assets and liabilities. We continually evaluate these judgments, estimates and
assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which
form our basis for making judgments about matters that are not
85
Table of Contents
readily
apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
An
accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is
made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could material impact our
consolidated financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. The following
descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this annual report.
When
reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the
application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions.
Allowance for Doubtful Accounts
We determine the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected.
Allowance for doubtful accounts
are charged to general administrative expenses. We recorded nil and US$0.3 million allowance for doubtful accounts as of December 31, 2012 and 2013, respectively.
Impairment of Equity Investments
We assess our equity investments for other-than-temporary impairment by considering factors as well as all relevant and available
information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the technological feasibility of the
investee's products and technologies, the general market conditions in the investee's industry or geographic area, factors related to the investee's ability to remain in business, such as the
investee's liquidity, debt ratios, and cash burn rate and other company-specific information including recent financing rounds. We recorded nil, nil and US$0.4 million in impairment losses on
equity investee as of December 31, 2011, 2012 and 2013, respectively.
Impairment of Long-lived Assets
We evaluate out long-lived assets with definite useful life, including property and equipment and acquired intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, we measure impairment by comparing the carrying
amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the future undiscounted cash flow is less than
the carrying amount of the assets, we would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. There were nil, nil and US$1.0 million
impairment charge recognized for the years ended December 31, 2011, 2012 and 2013.
We
test the intangible asset with indefinite useful life for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. If
the carrying amount of the intangible asset exceeds its fair value, we recognize an impairment loss in an amount equal to that excess.
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Table of Contents
Revenue Recognition
We earn revenues through developing and operating proprietary online virtual worlds. We provide such services to children via an online
entertainment platform pursuant to a time-based revenue model and an item-based revenue model. Since our inception, we have not licensed or otherwise marketed any of our proprietary software to third
parties except in one instance which was immaterial.
Time-based model
Users pay RMB10 (US$1.7) for a 30-day subscription per virtual world to access premium features in each of our virtual worlds. We
recognize revenue generated from subscription fees ratably over the users' subscription period.
Item-based model
Users purchase our in-game virtual items under this model. Revenues are recognized over the estimated lives of the in-game virtual
premium items purchased or as the virtual premium items are consumed. For the virtual premium items that are immediately consumed, we recognize revenue upon consumption. For the virtual premium items
with no predetermined expiration or permanent items, we recognize revenue ratably over the estimated average lives of the permanent items (i.e. estimated period paying players play our games),
which range from one year to one and a half years. The amount of the unamortized permanent items and unconsumed items are recognized as deferred revenue. We recognized US$21.2 million,
US$16.3 million and US$22.4 million gross revenue from virtual premium items accounted for under the item-based model for the years ended December 31, 2011, 2012 and 2013,
respectively. We estimate the average lives of our permanent items based on an assessment of our historical data and user behavior patterns, including the average period that users typically stay in
our virtual worlds, the age group of our target users, and the number of active paying users in our virtual worlds, and the promotional events we launched, with reference to industry research data. We
assess the estimated lives of our permanent items periodically. If there are indications of any significant changes to the estimated lives of these permanent items, the revised estimates would be
applied prospectively in the period of change. Prior to June 30, 2010, we did not have sufficient historical data from our virtual worlds to estimate the useful life of the permanent items, and
used the industry research data and peer company information in developing the estimate of the average life of permanent items, which was determined to be one year for all our virtual worlds.
Effective July 1, 2010, we changed the accounting estimate of the useful life of our permanent items in Mole's World from one year to 18 months based on an analysis of the life of the
virtual world and user behavior patterns using historical user data since the launch of Mole's World in September 2008, and applied such change prospectively. The effect of the change in accounting
estimate on the results of operations for the year ended December 31, 2010 was immaterial. In 2011 and 2012, we did not make changes to the useful life of any of our virtual worlds. In 2013, we
assessed its historical data of user behavior as well as industry research data and noticed a shortening trend user lifespan and changed the estimated lives of premium items for newly launched online
virtual worlds to half a year. The estimated lives of existing virtual worlds remained unchanged. We will continue to monitor the user behavior patterns of each of our virtual worlds and will utilize
such information to update the estimates of the useful lives of permanent items.
We
record revenues net of sales discounts and rebates paid to our distributors. The cost of providing free virtual items as a result of promotional activities was immaterial for each of
the three years presented.
Users
pay subscription fees and purchase virtual items using our virtual currency, the Mibi, which can be purchased via various distribution channels, such as our prepaid cards,
third-party prepaid cards, online payment channels, and via short messages, or SMS, through cellular telecom operators. Under both the time-based and the item-based revenue models, proceeds we receive
directly from end users for sales of online points are recorded as deferred revenues, while proceeds we receive from sales of online points to parties in the distribution channel and from sales of
prepaid cards are initially
87
Table of Contents
recorded
as advances from customers. As we do not have control over and generally do not know the ultimate selling price of the prepaid cards or online points sold by the distributors, we record net
proceeds from the distributors as advances from customers. Upon activation of prepaid cards or purchase of online points, advances from customers are immediately transferred to deferred revenues.
Prepaid
cards expire on the expiration date printed thereon, which is generally two years after the date of card production. Proceeds from expired prepaid cards that have not been
activated are recognized as other operating income upon expiration of the cards. We recognized US$0.5 million, US$1.9 million and US$1.6 million in other operating income in
connection with expired prepaid cards for the years ended December 31, 2011, 2012 and 2013, respectively.
Licensing and royalty fee revenue
revenues from our offline business include licensing income and royalty fees for licensing our proprietary cartoon
figures to merchandisers and book publishers Most of the revenues generated under merchandise licensing income and royalty fees are recognized at the end of each month and calculated at the
contractual royalty rate times the sales of the licensed merchandise product for the month. The sales of the licensed product are derived from the monthly sales reports provided by the licensee.
In
certain of the merchandise licensing arrangements, we receive a guaranteed base fee and additional royalty fees that are contingent on sales volume. Proceeds from minimum guaranteed
royalties in excess of royalties earned are generally recognized as revenues at the end of the contract term. In a small number of our merchandise licensing arrangements, we receive a fixed royalty
fee from the licensee over the contract period. We recognize this type of royalty revenue ratably over the contract period.
Film revenue
we recognize revenue from the distribution of our films when the film is
exhibited in theaters, provided that no significant obligations remain, amounts can be accurately estimated, and collection is reasonably assured.
Revenue
from the distribution of the film on television and websites is recognized when the production is made available for exhibition and when other contractual obligations or
conditions are met.
Merchandise sales revenue
revenues from selling interactive toys, books and merchandise are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
Share-based compensation
Share-based payment transactions with employees, directors and external consultant, such as share options and non-vested restricted
shares, are measured based on the grant-date fair value of the equity instrument. We recognize share-based compensation costs net of a forfeiture rate on a straight line basis over the requisite
service period of the award, which is generally the same as the vesting period of the award. We adjust the estimated forfeiture rate 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 share-based compensation costs to be recognized in future periods.
We
are required to estimate the grant-date fair value of the share options and other share-based awards that we grant to our employees. The grant date fair value of the share options
granted in the year ended December 31, 2011 was estimated using the Black-Scholes-Merton option-pricing model, and the grant date fair value of the share options granted in the years ended
December 31, 2012 was estimated using binomial option-pricing model. We estimated the expected term based on option terms
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Table of Contents
related
to vesting schedule and expected option expiration date. The volatility rate estimation was developed based on the volatility of the comparable companies within the expected term commensurate
with the expected time period modified to reflect ways in which currently available information indicates that the future of the subject company is reasonably expected. The risk-free interest rate was
selected based on the yield of Chinese International Government Bond, which is denominated in U.S. dollars, with duration closest to the expected term.
Before
we completed the initial public offer, when we were a private company, we determined the fair value of our ordinary shares as of the grant date of the share-based awards by making
complex and highly subjective judgments and assumptions about our projected financial and operating results. We were also required to make other assumptions such as our weighted average cost of
capital, general market and macroeconomic conditions, nature and prospects of the children's entertainment and media industry, nature and stage of development of our company, comparable companies, and
our business risks. These assumptions were inherently uncertain. Changes in these assumptions could significantly affect the valuation results and the amount of share-based compensation expenses we
recognized in our consolidated financial statements.
The
fair value of our Company's ordinary shares underlying the share options granted prior to our completion of the initial public offering in June, 2011 was estimated by determining the
equity value of our Company and then allocating the equity value into the various classes of shares and options using the option-pricing method, which is one of the generally accepted valuation
methodologies. Firstly, the total equity value was developed by using the discounted cash flow approach and the guideline companies approach, which incorporated certain assumptions including the
market performance of comparable listed companies, as well as the our forecasted financial results and growth trends. We checked the results obtained under the discounted cash flow approach against
the results obtained from the guideline companies approach and found no material discrepancies. Then, equity value was allocated using the option pricing method under three scenarios, namely
liquidation scenario, redemption scenario and IPO scenario (based on the terms of the preferred shares, share options and management's expectation on an IPO event) to determine the fair value of our
ordinary shares. Under the option-pricing method, each class of equity is modeled as a call option with a distinct claim on the enterprise value of our company. The main inputs to this model included
equity value of our company, exercise price, expected volatility, expected term, expected dividend yield and risk-free interest rate. With regard to the share options and restricted shares that were
awarded on May 24, 2011, we used the mid-point of the price range set forth in the preliminary prospectus of IPO as the estimated fair value of ordinary shares.
For
the purpose of determining the estimated fair value of our share options prior to our initial public offering, we believed that the expected volatility is the most sensitive
assumptions since we had limited trading histories at the date we granted our options. Changes in the volatility assumption could significantly impact the estimated fair values of the options
calculated by the Black-Scholes option pricing model. Expected volatility was estimated based upon the average stock price volatility of the comparable companies over a period commensurate with the
expected term of the options. When estimating expected volatility of the share price of a nonpublic entity, historical volatility of other companies in a similar industry group was considered.
Determining
the value of our share-based compensation expense in future periods required the input of highly subjective assumptions, including estimated forfeitures. We estimated the
forfeitures of our share options based on past employee retention rates and our expectations of future retention rates, and we will prospectively revise our forfeiture rates based on actual history.
Our share-based compensation expense may change based on changes to our actual forfeitures.
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Table of Contents
Since
the completion of our initial public offering, we determined the fair value of the ordinary shares for the above option awards based on the closing price of our ADSs traded on the
NYSE on the date of grant.
Our
actual share-based compensation expense may be materially different from our current expectations. As of December 31, 2013, we had US$1.2 million of unrecognized
compensation expense related to unvested options granted under the option plans, which we expect to recognize over a weighted-average period of 2.2 years. As of December 31, 2013, we
also had US$4.8 million of total unrecognized compensation expense related to non-vested restricted shares granted under the 2010 Plan, which is expected to be recognized over a
weighted-average period of 3.0 years.
In
arriving at the equity value of our company, we applied a discount for lack of marketability, or DLOM, of 7.0% for the January 2011 grant, to reflect the fact that, at the time of the
grant, we were a closely-held company and there was no public market for our ordinary shares. We used the put option method to estimate the DLOM, taking into consideration factors like the timing of
liquidity event such as an IPO and estimated volatility of our ordinary shares. The decrease in the DLOM was primarily because we were approaching our initial public offering, as the closer the
valuation date was from the offering, the lower the put option value was, and thus the lower the implied DLOM. For the determination of the fair value of the options granted on each of the grant dates
prior to the initial public offering and the fair value of the underlying ordinary shares of our company prior to the initial public offering, we also considered retrospective valuations conducted by
an independent appraiser.
Other
general assumptions used in deriving the fair value of the ordinary shares transferred and our total equity value include the following: (i) there will be no material
changes in the existing political, legal, fiscal and economic conditions in China; (ii) there will be no material changes in tax law in China and the tax rates applicable to our subsidiary, VIE
and VIEs' subsidiary; (iii) exchange rates and interest rates will not differ materially from currently prevailing rates, (iv) the availability of finance will not be a constraint on the
future growth of the Company, (v) the Company will retain and have competent management, key personnel and technical staff to support its ongoing operation, and (vi) there will be no
material deviation in industry trends and market conditions from economic forecasts.
Income taxes
We provide for current income taxes in accordance with the laws of the relevant tax authorities. We recognize deferred income taxes
when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are
applied using enacted statutory tax rates applicable to future years. We reduce deferred tax assets by a valuation allowance when, in the opinion of our management, it is more-likely-than-not that a
portion of or all of our deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their
characteristics.
We
consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized. This assessment considers, among other matters,
the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our historical results of operations, and our
tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. As of December 31, 2013, we believe it is more-likely-than-not that Shanghai Animation will not realize the deferred tax assets resulted from the tax loss carried forward in the
future periods. Thus, a full valuation allowances are provided for the deferred tax assets of Shanghai Animation. The amount of the deferred tax assets considered realizable, however, could be reduced
in the near term if estimates of future taxable income
90
Table of Contents
during
the carry forward periods are reduced. Such reduction of deferred tax asset could increase our income tax expense and adversely affect our results of operations in the period in which an
allowance is recorded.
Under
applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax
basis in a domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the
enterprise expects that it will ultimately use that means. As of December 31, 2013, we have accrued deferred tax liabilities of US$1.5 million for undistributed earnings of Shanghai
Taomee and Guangdong Taomee, on the basis that distribution of the earnings generated after January 1, 2008, in the form of dividends or otherwise, to the Company would be subject to the then
applicable PRC tax laws and regulations, unless a tax strategy which we determined to avail ourselves of were devised to avoid such tax. Prior to 2013, these entities were in an accumulated loss
position.
We
recognize the impact of uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. For a tax position
that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax
audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of
changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by our management. We classify interest and/or penalties related to uncertain tax positions
in income tax expense.
Consolidation of VIEs
PRC laws and regulations currently prohibit or restrict foreign ownership of Internet-related business. In order to comply with these
foreign ownership restrictions, we operate our online entertainment community through Shanghai Taomee. We have entered into a series of contractual arrangements with Shanghai Taomee and its equity
owners. As a result of these contractual arrangements, we have the ability and intention to exercise control over the entities and the right and obligation to absorb substantially all of their profits
and losses Therefore, we have concluded that we are the primary beneficiary of Shanghai Taomee and have consolidated the entities since the date of execution of the contractual arrangements. This
conclusion is predicated on the assumption that the contractual arrangements are legally enforceable, which we have determined based on the advice of our PRC legal counsel. However, there are
substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Any changes in PRC laws and regulations that affect our ability to control
Shanghai Taomee might preclude us from consolidating Shanghai Taomee in the future. See "Item 3 Key Information Risks Related to Our Corporate Structure.
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Table of Contents
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated both in absolute amount
and as a percentage of our total net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
$
|
40,331
|
|
|
88.8
|
|
$
|
32,169
|
|
|
80.0
|
|
$
|
35,330
|
|
|
73.1
|
|
Offline business
|
|
|
5,066
|
|
|
11.2
|
|
|
8,039
|
|
|
20.0
|
|
|
13,024
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
45,397
|
|
|
100.0
|
|
|
40,208
|
|
|
100.0
|
|
|
48,354
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
(6,035
|
)
|
|
(13.3
|
)
|
|
(6,950
|
)
|
|
(17.3
|
)
|
|
(7,644
|
)
|
|
(15.8
|
)
|
Offline business
|
|
|
(1,653
|
)
|
|
(3.6
|
)
|
|
(3,048
|
)
|
|
(7.6
|
)
|
|
(5,621
|
)
|
|
(11.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,709
|
|
|
83.1
|
|
|
30,210
|
|
|
75.1
|
|
|
35,089
|
|
|
72.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development expenses
|
|
|
(10,304
|
)
|
|
(22.7
|
)
|
|
(12,318
|
)
|
|
(30.6
|
)
|
|
(13,886
|
)
|
|
(28.7
|
)
|
Sales and marketing expenses
|
|
|
(6,255
|
)
|
|
(13.8
|
)
|
|
(9,966
|
)
|
|
(24.8
|
)
|
|
(9,446
|
)
|
|
(19.5
|
)
|
General and administrative expenses
|
|
|
(7,965
|
)
|
|
(17.5
|
)
|
|
(10,078
|
)
|
|
(25.1
|
)
|
|
(13,095
|
)
|
|
(27.1
|
)
|
Impairment loss on acquired intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,046
|
)
|
|
(2.2
|
)
|
Other operating income
|
|
|
1,734
|
|
|
3.8
|
|
|
5,512
|
|
|
13.7
|
|
|
5,708
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(22,790
|
)
|
|
(50.2
|
)
|
|
(26,850
|
)
|
|
(66.8
|
)
|
|
(31,765
|
)
|
|
(65.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,919
|
|
|
32.9
|
|
|
3,360
|
|
|
8.4
|
|
|
3,324
|
|
|
6.9
|
|
Interest income
|
|
|
1,410
|
|
|
3.1
|
|
|
2,647
|
|
|
6.6
|
|
|
2,932
|
|
|
6.1
|
|
Other income (expenses), net
|
|
|
667
|
|
|
1.5
|
|
|
859
|
|
|
2.1
|
|
|
771
|
|
|
1.6
|
|
Impairment loss on investment in an equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
(0.8
|
)
|
Income before income taxes and share of profit in equity method investments
|
|
|
16,996
|
|
|
37.4
|
|
|
6,866
|
|
|
17.1
|
|
|
6,657
|
|
|
13.8
|
|
Income tax (expense)/benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,539
|
)
|
|
(5.6
|
)
|
|
1,279
|
|
|
3.2
|
|
|
(789
|
)
|
|
(1.6
|
)
|
Deferred
|
|
|
812
|
|
|
1.8
|
|
|
(424
|
)
|
|
(1.1
|
)
|
|
(630
|
)
|
|
(1.3
|
)
|
Total income tax (expenses)/benefits
|
|
|
(1,727
|
)
|
|
(3.8
|
)
|
|
855
|
|
|
2.1
|
|
|
(1,419
|
)
|
|
(2.9
|
)
|
Income before share of profit in equity method investments
|
|
|
15,269
|
|
|
33.6
|
|
|
7,721
|
|
|
19.2
|
|
|
5,238
|
|
|
10.8
|
|
Share of profit in equity method investments
|
|
|
4,224
|
|
|
9.3
|
|
|
1,140
|
|
|
2.8
|
|
|
207
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
19,493
|
|
|
42.9
|
|
|
8,861
|
|
|
22.0
|
|
|
5,445
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interest
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
0.0
|
|
|
4
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taomee Holdings Limited
|
|
|
19,493
|
|
|
42.9
|
|
|
8,862
|
|
|
22.0
|
|
|
5,441
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
(200
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to holders of ordinary shares
|
|
$
|
19,293
|
|
|
42.5
|
|
$
|
8,862
|
|
|
22.0
|
|
$
|
5,441
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Table of Contents
Reportable Segments
For 2011, 2012 and 2013, we had two reportable segments: (i) online business and (ii) offline business. Segment revenues
from the online business segment and our offline business segment accounted for 88.8% and 11.2%, respectively, in 2011, 80.0% and 20.0%, respectively, in 2012, and 73.1% and 26.9%, respectively, in
2013. The online business segment comprises primarily the operation of the virtual worlds offered through our online virtual community, mobile games and applications, online video platform as well as
other online services. In 2011, 2012 and 2013, the offline business segment comprised primarily of the licensing of our franchises to book publishers and makers of consumer products, as well as
revenues from film series and interactive toys featuring our cartoon figures. We do not allocate operating expenses to the segments. The following table sets forth our net revenues, gross profit and
gross profit margin by segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
Segment Net
Revenues
|
|
Segment
Gross Profit
|
|
Segment
Gross
Margin
|
|
Segment Net
Revenues
|
|
Segment
Gross Profit
|
|
Segment
Gross
Margin
|
|
Segment
Net
Revenues
|
|
Segment
Gross
Profit
|
|
Segment
Gross
Margin
|
|
|
|
US$
|
|
US$
|
|
%
|
|
US$
|
|
US$
|
|
%
|
|
US$
|
|
US$
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
Reportable Segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
40,331
|
|
|
34,295
|
|
|
85.0
|
|
|
32,169
|
|
|
25,220
|
|
|
78.4
|
|
|
35,330
|
|
|
27,686
|
|
|
78.4
|
|
Offline business
|
|
|
5,066
|
|
|
3,414
|
|
|
67.4
|
|
|
8,039
|
|
|
4,990
|
|
|
62.1
|
|
|
13,024
|
|
|
7,403
|
|
|
56.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
45,397
|
|
|
37,709
|
|
|
83.1
|
|
|
40,208
|
|
|
30,210
|
|
|
75.1
|
|
|
48,354
|
|
|
35,089
|
|
|
72.6
|
|
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net Revenues.
Our net revenues increased by 20.3% from US$40.2 million in 2012 to US$48.4 million in 2013. This
increase was primarily
attributable to the increase in both online business revenues and offline business revenues.
Online Business.
Net revenues generated from the online business increased by 9.8% from US$32.2 million in 2012 to
US$35.3 million in
2013. The increase was primarily driven by continued revenue growth of our core virtual worlds, as well as contribution from several newly launched franchises.
Offline Business.
Net revenues generated from our offline business increased by 62.0% to US$13.0 million in 2013 from
approximately
US$8.0 million in 2012. This increase was primarily attributable to revenue contribution from our interactive toy sales and box office sharing of our film
Seer III:
Universal Force
.
Cost of Services.
Our cost of services increased from US$10.0 million in 2012 to US$13.3 million in 2013, primarily
due to the
increased costs resulting from the growth of both online and offline businesses.
Online Business.
Cost of services relating to our online business increased by 10.0% to US$7.6 million in 2013 from
US$6.9 million in
2012. This increase was primarily due to an increase in bandwidth costs,
fees related to our operation of certain third-party developed virtual worlds and amortization costs associated with game licensing fees.
Offline Business.
Cost of services relating to our offline business increased by 84.4% to US$5.6 million in 2013 from
approximately
US$3.0 million in 2012. This increase was primarily due to an increase in interactive toy costs resulting from our expansion of our interactive toy sales.
93
Table of Contents
Gross Profit.
As a result of the foregoing, our gross profit increased to US$35.1 million in 2013 from US$30.2 million
in 2012, while
our gross margin decreased to 72.6% in 2013 from 75.1% in 2012, as a result of the revenue contribution from interactive toy business, which generates lower gross margin as compared to our online
business and other offline business.
Operating Expenses.
Our operating expenses increased by 18.3% to US$31.8 million in 2013 from US$26.8 million in 2012.
The increase in
our operating expenses was primarily due to the increase in general and administrative expenses and impairment loss on acquired intangible assets, and to a lesser extent, an increase in product
development expenses.
-
-
Product Development Expenses.
Our product development
expenses increased by 12.7% from US$12.3 million in 2012 to US$13.9 million in 2013. The increase was primarily attributable to an increase in personnel-related expenses associated with
an increase in salary and in performance related bonuses to retain our research and development talent, partially offset by a decrease in depreciation costs and share-based compensation.
-
-
Sales and Marketing Expenses.
Our sales and marketing
expenses decreased by 5.2% from US$10.0 million in 2012 to US$9.4 million in 2013. The decrease was primarily attributable to the decreased advertising expenses, partially offset by an
increase in payroll expenses and promotion expenses.
-
-
General and Administrative Expenses.
Our general and
administrative expenses increased by 29.9% from US$10.1 million in 2012 to US$13.1 million in 2013. The increase was primarily due to the increased indirect tax costs related to
intercompany transactions, an increase in payroll expense, and to a lesser extent, an increase in provision in accounts receivable.
-
-
Impairment loss on acquired intangible assets.
We incurred
impairment loss on acquired intangible assets of US$1.0 million in 2013 primarily incurred by writing off the remaining term of two underperforming games, Wizard 101 and Speed Hunter.
-
-
Other Operating Income.
We had other operating income of
US$5.7 million in 2013, an increase of 3.6% from US$5.5 million in 2012. Other operating income primarily consists of government subsidies and revenue recognized upon expiration of
prepaid cards.
Income Tax Benefit/(Expense).
We had income tax expense of US$1.4 million in 2013, compared to an income tax benefit of
approximately
US$0.9 million in 2012. The change was primarily due the accrual of deferred tax liabilities on the undistributed earnings of our VIEs and VIE subsidiaries in 2013, whereas in the prior year
they were in cumulative loss positions.
Interest Income, Net.
Our net interest income increased to approximately US$2.9 million in 2013 from approximately
US$2.6 million in
2012 primarily.
Other Income (Expenses), Net.
Our other income decreased to US$0.8 million in 2013 from approximately US$0.9 million
in 2012.
Impairment loss on Investment in an Equity Investee.
We incurred impairment loss on investment in an
equity investee of US$0.4 million in 2013 primarily due to the deteriorating operating and financial performance of our investment in Chuangyou.
Share of Profit in Equity Method Investments.
We incurred share of profit in equity investment of US$0.2 million in 2013,
compared with
US$1.1 million in 2012. The change was mainly due to our most recent equity method investments in entities which are loss-making as they are in the early stage of research and development.
Net Income.
As a result of the foregoing, our net income decreased from US$8.9 million in 2012 to US$5.4 million in
2013.
94
Table of Contents
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net Revenues.
Our net revenues decreased by 11.4% from US$45.4 million in 2011 to US$40.2 million in 2012. This
decrease was primarily
due to the decline in online revenues and was partially offset by the increase in offline revenues.
Online Business.
Net revenues generated from the online business decreased from US$40.3 million in 2011 to US$32.2 million in
2012. The
decrease was primarily due to the implementation of our strategy to focus less on short-term revenue growth and instead invest in long-term brand enhancement and platform expansion to attract new
users and increase user stickiness.
Offline Business.
Net revenues generated from our offline business increased by 58.7% to US$8.0 million in 2012 from approximately
US$5.1 million in 2011. This increase was primarily due to the increase in revenues generated from our co-branding and merchandise licensing, revenue-sharing arrangements for two films based on
the Mole and Seer franchises and revenue contributed by the interactive toy design and sales business.
Cost of Services.
Our cost of services increased from US$7.7 million in 2011 to US$10.0 million in 2012, primarily due
to the increased
costs related to the development of both online and offline businesses.
Online Business.
Cost of services relating to our online business increased by 15.2% to US$6.9 million in 2012 from
US$6.0 million in
2011. This increase was primarily due to an increase in personnel-related expenses, wireless products hosting cost as a result of the increased wireless revenue and amortization costs associated with
game licensing fees.
Offline Business.
Cost of services relating to our offline business increased by 84.5% to US$3.0 million in 2012 from
approximately
US$1.7 million in 2011. This significant increase was primarily due to the increase in personnel-related expenses, the film production costs, interactive toy inventory costs.
Gross Profit.
As a result of the foregoing, our gross profit decreased to US$30.2 million in 2012 from US$37.7 million
in 2011, and our
gross margin decreased to 75.1% in 2012 from 83.1% in 2011, as a result of the decreased net revenue and increased cost of services.
Operating Expenses.
Our operating expenses increased by 17.8% to US$26.8 million in 2012 from US$22.8 million in 2011.
The increase in
our operating expenses was primarily due to the increase in sales and marketing expenses, and to a lesser extent, increase in product development expenses and general and administrative expenses.
-
-
Product Development Expenses.
Our product development
expenses increased by 19.5% from US$10.3 million in 2011 to US$12.3 million in 2012. The increase was primarily attributable to an increase in personnel-related expenses associated with
headcount expansion and partially offset by a decrease in outsourced R&D expenses, amortization costs and share-based compensation. We also hired new staffs for the development of new product and
services including approximately 35 new employees for the mobile application research team. The number of our product development staff increased from 342 as of December 31, 2011 to 368 as of
December 31, 2012.
-
-
Sales and Marketing Expenses.
Our sales and marketing
expenses increased by 59.3% from US$6.3 million in 2011 to US$10.0 million in 2012. The increase was primarily attributable to the increase of personnel-related expenses, the increased
advertising and promotional activities, including the costs associated with the promotion for our new films, as well as an increase in animation production expenses.
95
Table of Contents
-
-
General and Administrative Expenses.
Our general and
administrative expenses increased by 26.5% from US$8.0 million in 2011 to US$10.1 million in 2012. The increase was primarily due to the increased personnel-related expenses in
connection with new hires and share-based compensation, traveling expenses and daily office expenses, incremental expenses associated with being a listed company as well as increased investment
activities.
-
-
Other Operating Income.
We had other operating income of
US$5.5 million in 2012, a significant increase of 218.0% from US$1.7 million in 2011, as we received more government subsidies and recognized US$1.9 million of other operating
income as a result of the expiration of prepaid cards.
Income Tax Benefit/(Expense).
We had income tax benefit of US$0.9 million in 2012, compared to an income tax expense of
approximately
US$1.7 million in 2011. The change was primarily due to our
recognition of a one-time income tax benefit of US$2.1 million as a result of governmental approval for tax reduction for the year of 2011.
Interest Income, Net.
Our net interest income increased to approximately US$2.6 million in 2012 from approximately
US$1.4 million in
2011 primarily due to the increase in our cash balance.
Other Income (Expenses), Net.
Our other income increased to US$0.9 million in 2012 from approximately US$0.7 million in
2011 primarily
due to exchange gains from our deposit denominated in RMB.
Share of Profit in Equity Method Investments.
Share of profit in equity investment was US$1.1 million in 2012, compared
with
US$4.2 million in 2011. The decrease is mainly due to the gains on disposals, whereby in 2012 we disposed all our equity interest in Shenzhen Ruigao for US$1.0 million and recorded a
gain of US$0.3 million in 2012, compared with a gain of US$3.7 million recognized from the sale of 10.5% equity interest in Elyn Corporation in 2011.
Net Income.
As a result of the foregoing, our net income decreased from US$19.5 million in 2011 to US$8.9 million in
2012.
-
B.
-
Liquidity and Capital Resources
The
following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
|
|
(US$ in thousands)
|
|
Net cash provided by operating activities
|
|
|
22,386
|
|
|
7,162
|
|
|
9,936
|
|
Net cash provided by (used in) investing activities
|
|
|
707
|
|
|
(7,731
|
)
|
|
(14,771
|
)
|
Net cash provided by (used in) financing activities
|
|
|
52,959
|
|
|
(1,667
|
)
|
|
(1,098
|
)
|
Effect of exchange rate changes
|
|
|
1,540
|
|
|
128
|
|
|
1,613
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
77,592
|
|
|
(2,108
|
)
|
|
(4,320
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
43,087
|
|
|
120,679
|
|
|
118,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
|
120,679
|
|
|
118,571
|
|
|
114,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
date, we have financed our operations primarily through cash from operations and proceeds from our initial public offering. We did not have any short-term or long-term bank borrowings
outstanding as of December 31, 2011, 2012 and 2013. As of December 31, 2012 and 2013, we had US$118.6 million and US$114.3 million in cash and cash equivalents,
respectively, among which US$51.5 million and US$44.9 million were held outside the PRC, respectively. Our cash and cash equivalents held outside the PRC primarily originated from our
initial public offering, and as of
96
Table of Contents
December 31,
2013, the proceeds were used as follows: (i) US$0.6 million were used to subscribe for the newly issued shares of Taiwan Taomee through Joy Children in the fourth
quarter of 2011; (ii) US$6.2 million were used to acquire 8.02% equity interest in Gamespedia in second half of 2012; (iii) US$4.3 million were used to pay increased legal,
accounting and other operational expenses and costs we incurred as a public company; (iv) US$6.4 million were used to pay a cash dividend declared in November 2010 to our shareholders in
July 2011 and August 2011; (v) US$1.4 million were used to acquire a minority equity interest in Voozclub in January 2013; (vi) US$3.0 million invested in a short-term
money market investment in the second quarter of 2013; (vii) US$2.0 million were used to acquire a minority equity interest in a Beijing-based pre-school education service provider in
September
2013, (viii) US$0.2 million were used to acquire a minority equity interest in a New York City company that develops mobile applications, animation and products for pre-school children
in December 2013, and (ix) US$4.4 million were used to repurchase from the open market during the period from December 2011 to December 2013 a total of 1,064,177 ADSs under our share
repurchase program approved by the Board in November 2011 and extended in September 2012 and November 2013. We will continue to use the IPO proceeds primarily for the purposes described in the "Use of
Proceeds" section of our Form F-1 in accordance with our business plans and on an as-needed basis.
Our
cash and cash equivalents as of December 31, 2011, 2012 and 2013 are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held in US$(in thousands)
|
|
Held in RMB (in thousands)
|
|
US$(in
thousands)
|
|
|
|
|
|
Cash located
inside the PRC(1)
|
|
|
|
|
|
Cash located
inside the PRC(1)
|
|
|
|
|
|
|
|
Cash located
outside the
PRC
|
|
Held by
non-VIEs
|
|
Held by
VIEs(2)
|
|
Total
|
|
Cash located
outside the
PRC
|
|
Held by
non-VIEs
|
|
Held by
VIEs(2)
|
|
Total
|
|
Total translated
to US$
|
|
December 31, 2013
|
|
|
17,122
|
|
|
103
|
|
|
|
|
|
17,225
|
|
|
168,453
|
|
|
347,554
|
|
|
74,482
|
|
|
590,489
|
|
|
114,251
|
|
December 31, 2012
|
|
|
19,541
|
|
|
103
|
|
|
|
|
|
19,644
|
|
|
198,699
|
|
|
323,809
|
|
|
97,214
|
|
|
619,722
|
|
|
118,571
|
|
December 31, 2011
|
|
|
22,465
|
|
|
103
|
|
|
|
|
|
22,568
|
|
|
227,071
|
|
|
284,430
|
|
|
108,213
|
|
|
619,714
|
|
|
120,679
|
|
-
(1)
-
Subject
to currency conversion control.
-
(2)
-
Including
VIE subsidiaries.
Cash
located in the PRC, which are held by our VIEs (including VIEs' subsidiaries) and non-VIE entities, can be transferred to our subsidiaries outside of China through dividend
payments, subject to PRC government's control of currency conversion. Such transfer will incur cost in the form of PRC withholding tax. See "Item 3. Key InformationD. Risk
FactorsRisks Related to Doing Business in ChinaWe principally rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing
requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our
ability to conduct our business.", "Restrictions on currency exchange may limit our ability to receive and use our revenues effectively", and "Governmental control of
currency conversion may affect the value of your investment."
The
decrease of the cash and cash equivalents from 2012 to 2013 was primarily due to a short-term money market investment of US$3.0 million as well as prepayment of
US$3.0 million for purchase of land use rights and building, and partially offset by the increase in interest income and foreign exchange gain. The decrease in cash provided by operating
activities from 2011 to 2013 was primarily attributable to the decrease in revenues of our online business, partially offset by the increases in our offline business revenues.
In
November 2010, we declared a cash dividend of US$10.0 million to our shareholders who were record holders of ours as of October 31, 2010, of which we paid
US$1.05 million in December 2010 and an additional US$2.55 million in March 2011 by using our cash reserves, and paid the rest in July
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2011
and August 2011 by using the proceeds from our initial public offering. We did not declare any dividend in 2012 and 2013.
We
are a holding company, and we rely principally on dividends and other distributions from our subsidiary in China for our cash requirements. We receive economic benefits generated from
our significant VIE, Shanghai Taomee, through various contractual arrangements entered into by Shanghai Shengran, our PRC subsidiary, with Shanghai Taomee. Such contractual arrangements include
business operation agreement, commercial cooperation agreement and equity interest pledge agreement with Shanghai Taomee. Under these contractual arrangements, Shanghai Taomee will pay to Shanghai
Shengran its earnings in RMB in the form of services fees. Under China's existing foreign exchange regulations, our PRC subsidiary is able to make payments of current accounts, like dividends to its
offshore holding companies, in foreign currencies, without prior approval from the SAFE, after complying with certain procedural requirements. See "Item 3. Key InformationRisk
FactorsRisks Related to Doing Business in ChinaGovernmental control of currency conversion may affect the value of your investment" and "Item 3. Key
InformationRisk FactorsRisks Related to Doing Business in ChinaWe may be subject to penalties, including restriction on our ability to inject capital into our
PRC subsidiary and our PRC subsidiary's ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules."
In
addition, current PRC regulations permit our subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations. Each of our subsidiaries, VIEs and VIEs' subsidiaries in China is required to set aside at least 10% of its after tax profits, as determined on a calendar year basis and in accordance
with PRC GAAP, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. The registered capital of Shanghai Taomee and Shanghai Shengran are RMB10 million
(US$1.4 million) and US$2.5 million, respectively. As of the date of this annual report, Shanghai Taomee and Shanghai Shengran have made allocations to the statutory reserve fund in
compliance with the applicable PRC
laws and regulations. Each of Shanghai Taomee and Shanghai Shengran has made no allocations for the year ended December 31, 2013 because their statutory reserves have reached 50% of their
registered capital, the maximum amount required under the PRC regulations. These reserves are not distributable as cash dividends.
We
determine the amount of statutory reserves to be set aside each year in accordance with PRC regulations based the amount of accumulated profits of our subsidiaries, VIEs and VIEs'
subsidiaries in China as determined under PRC GAAP. The differences in the amount of accumulated profits under PRC GAAP and the amount of retained earnings in our financial statements, prepared and
presented in accordance with U.S. GAAP, relate to the different methods of revenue recognition and accounting for share-based compensation under PRC GAAP and U.S. GAAP.
We
believe that our current levels of cash balances and cash flows from operations will be sufficient to meet our anticipated cash needs to fund our operations for at least the next
12 months. However, we may need additional cash resources in the future if we experience adverse business conditions or other developments or if we find and wish to pursue opportunities for
investment, acquisitions, strategic cooperation or other similar actions.
Operating Activities
Our net cash provided by operating activities in 2013 was approximately US$9.9 million. This is based on our net income of
US$5.4 million in 2013, positively adjusted by a US$2.2 million increase in depreciation and amortization, US$2.1 million increase in share-based compensation,
US$1.7 million increase in allowance for doubtful accounts as well as impairment of intangible assets and long-term investment. This was partially offset by US$1.5 million increase in
amounts due from related parties, US$1.2 million decrease in advance from customers, US$1.1 million decrease in accounts payable,
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Table of Contents
US$0.9 million
increase in other assets, and, to a less extent, by adjustment of accrued expenses and other current liabilities, accounts receivable, income tax payable and deferred revenue.
Our
net cash provided by operating activities in 2012 was approximately US$7.2 million. This is based on our net income of US$8.9 million in 2012, positively adjusted by a
US$2.3 million increase in share-based compensation and US$0.6 million dividends received from Elyn Corporation and Joy
Children. This was partly offset primarily by a US$2.2 million adjustment in income tax recoverable, as well as a US$2.1 million decrease in advance from customers, a
US$0.9 million decrease in deferred revenue and a US$0.9 million decrease in accounts receivable which are attributable to the decrease of our revenues of 2012 compared to the revenue of
2011, and, to a lesser extent, by adjustment of accrued expenses, accounts payables, deferred income tax, prepayments and other assets.
Our
net cash provided by operating activities in 2011 was approximately US$22.4 million. This is based on our net income of US$19.5 million in 2011, positively adjusted by
a US$2.0 million increase in share-based compensation, a US$2.1 million increase in deferred revenues, a US$2.2 increase in income taxes payable, a US$1.5 million increase in
advance from customers as our online business segment grew from 2010 to 2011. This was partly offset by a US$1.0 million decrease in accounts receivable, a US$0.4 million decrease in
accrued expenses and other current liabilities, and a US$1.5 million adjustment to amounts due from related parties, accounts payable, amounts due to related parties, prepaid and other current
assets and deferred income taxes, and other assets. The change in accrued expenses and other current liabilities were largely due to an increase in unpaid professional fees.
Investing Activities
Our net cash used in investing activities in 2013 was approximately US$14.8 million, primarily due to US$6.5 million paid
to acquire equity investees, US$3.0 million paid to purchase short-term investment, US$3.0 million paid as prepayments for land use right and building purchase, US$1.4 million
paid for the purchase of property and equipment for our ordinary course of businesses, as well as US$0.9 million paid to purchase intangible assets such as exclusive licensing right of Avata
Star and Speed Hunter.
Our
net cash used in investing activities in 2012 was approximately US$7.7 million, primarily due to US$7.0 million paid to acquire equity investees, including the purchase
of 8.02% equity interest in Gamespedia,US$1.4 million for the purchase of intangible assets such as Canimals franchise and additional three franchises for our future pipeline from Voozclub, and
the exclusive licensing right of two online games from our related parties, and to a lesser extent, US$0.3 million paid for the purchase of property and equipment for our ordinary course of
business. This was partly offset by US$1.0 million proceeds from the sale of all our equity interest in Shenzhen Ruigao.
Our
net cash provided by investing activities in 2011 was approximately US$0.7 million, primarily as a result of US$3.9 million from the proceeds from our sale of a 10.5%
equity interest in Elyn Corporation in February 2011, and partly offset by US$1.2 million payment to a third party game company as upfront licensing fee, US$1.1 million in investment in
an equity investee, and US$0.8 million in purchase of property and equipment.
Financing Activities
Our net cash used in financing activities in 2013 was approximately US$1.1 million, resulting from US$2.1 million used in
repurchase of ordinary shares, and was offset by the proceeds of US$1.0 million received from exercise of share options.
Our
net cash used in financing activities in 2012 was approximately US$1.7 million, resulting from US$1.7 million used in repurchase of ordinary shares and
US$0.3 million as issuance costs of our ordinary shares, and was offset by US$0.3 million received from exercise of share options.
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Table of Contents
Our net cash provided by financing activities in 2011 was approximately US$53.0 million, resulting from the proceeds of US$69.4 million received
from the initial public offering, and was offset by US$9.0 million of cash dividends paid, US$6.9 million payment of initial public offering costs and US$0.6 million used to
repurchase of ordinary shares.
Capital Expenditures
We had capital expenditures of US$2.1 million, US$1.7 million and US$5.3 million for 2011, 2012 and 2013,
respectively. Our capital expenditures were used primarily for (i) purchase of computer hardware and equipment, (ii) purchase of intangible assets, (iii) purchase of franchises
and online game licensing rights for our pipeline, and (iv) prepayments as deposits for purchasing land use rights and building ownership. Actual future capital expenditures may differ from the
amounts indicated above.
Restricted Net Assets
Pursuant to laws applicable to entities incorporated in the PRC, our subsidiaries, VIEs and VIEs' subsidiaries in the PRC must make
appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion
fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriation of 10% of after tax profit (as determined under
accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches 50% of their registered capital; the other fund appropriations are at
the subsidiaries' discretion. These reserve funds can only be used for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends and amounted to
US$2.0 million as of December 31, 2013. In addition, due to restrictions on the distribution of registered capital from our PRC subsidiaries, the PRC subsidiaries' registered capital of
US$24.9 million as of December 31, 2013, were considered restricted. As a result of these PRC laws and regulations, as of December 31, 2013, approximately US$26.9 million,
were not available for distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.
-
C.
-
Research and Development, Patents and Licenses, etc.
We
have created a proprietary engine for powering our virtual worlds. Our scalable hardware infrastructure allows us to cost-effectively accommodate rapid growth in user base and
traffic. The advanced modular architecture of our technology platform allows us to quickly update the content of our virtual worlds with new features, shorten development cycles and rapidly roll out
new virtual worlds and other services. The layering of more advanced features and functionalities afford us opportunities to increase the monetization of our user base. Our reliable account and
virtual currency management system and integrated prepaid card and online payment systems also allow us to analyze user spending patterns and quickly monetize any new virtual worlds and services. Our
research and development team possesses extensive experience in Flash and HTML5 technologies and is credited with the creation of innovative and advanced features, such as the continuous
side-scrolling action scenes that deliver a superior and highly engaging user experience and add monetization values. Our technology platform also features a scalable data warehouse and advanced data
and integrated data analytical functions that help us measure the popularity of themes, features and virtual items. This helps our product development team understand user preferences and develop
content that enhances user experience and creates better monetization potential.
In
each of the three years ended December 31, 2011, 2012 and 2013, our research and development expenditures, including share-based compensation expenses for research and
development staff, were US$10.3 million, US$12.3 million and US$13.9 million, representing 22.7%, 30.6% and 28.7% of our total net revenues for 2011, 2012 and 2013, respectively.
Our research and development
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Table of Contents
expenses
consist primarily of payroll expenses, share-based compensation expenses and rental expenses. We have expensed all of the development costs for the research and development of products.
Intellectual Property
We regard our copyrights, trademarks, trade secrets and similar intellectual property as important to our success, and rely on
trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, suppliers and others to protect our proprietary rights. All of our research and
development personnel have entered into confidentiality and proprietary information agreements or contract clauses with us. These agreements address intellectual property protection issues and require
our employees to assign to us all of the inventions, designs, and technologies they develop during their employment with us.
As
of December 31, 2013, we had received approval for 351 and 7 trademark registrations in China and Taiwan respectively and are in the process of applying for registration of 46
trademarks in China. In addition, we have obtained 69 copyright registrations for software we developed, 4 copyright registrations for Mole's World and Seer animation series and 392 copyright
registrations for artworks which were produced by our employees and owned by us. We also registered 39 domain names, including www.61.com, our primary operation website, and www.taomee.com, our
corporate information website.
Under
the contractual arrangements we enter into with producers of film and television series, we either wholly own or jointly own the intellectual property rights for newly created
characters in the television series and films we help develop.
While
we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. This is
particularly the case in China where the laws may not protect our proprietary rights as fully as in the United States. Infringement or misappropriation of our intellectual property could materially
harm our business.
-
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 year ended December 31, 2013 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 conditions.
-
E.
-
Off-Balance Sheet Arrangements
We
have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative
contracts that are indexed to our own shares and classified as shareholder's equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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Table of Contents
-
F.
-
Contractual Obligations
The
following table sets forth our operating lease obligations as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More than
5 years
|
|
Total
|
|
|
|
(US$ in thousands)
|
|
Operating lease obligations
|
|
|
1,812
|
|
|
878
|
|
|
|
|
|
|
|
|
2,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,812
|
|
|
878
|
|
|
|
|
|
|
|
|
2,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
operating lease obligations related to lease agreements for our corporate offices and Internet data centers.
In
May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use rights of two parcels with an aggregated area of
approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million
(US$0.7 million) was paid in May 2013. In August 2013, we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of
approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million
(US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of
RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building. Please see "Item 3. Key InformationD. Risk FactorsRisks
Related to Our BusinessWe may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a timely manner and we may not successfully recover our
prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition."
Other
than the obligations set forth above, we did not have any long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities as of
December 31, 2013.
-
G.
-
Safe Harbor
This
annual report contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to us. These statements involve
known and unknown risks, uncertainties and other factors, including those listed under "Risk Factors," which may cause our actual results, performance or achievements to be materially different from
those expressed or implied by the forward-looking statements.
In
some cases, you can identify these forward-looking statements by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe,"
"potential," "continue," "is/are likely to" or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things,
statements relating to:
-
-
our business strategies and initiatives as well as our business plans;
-
-
our future business development, results of operations and financial condition;
-
-
expected changes in our revenues and certain cost or expense items;
-
-
our expectations with respect to increased revenue growth and our ability to sustain profitability;
-
-
our services and products under development or planning;
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Table of Contents
-
-
our ability to attract users and further enhance our brand recognition; and
-
-
trends and competition in the children's entertainment and media market and industry, including those for online
entertainment.
This
annual report also contains data related to the children's online entertainment industry in China, including projections that are based on a number of assumptions. These market
data, including the public data from EntGroup.cn include projections that are based on a number of assumptions. The children's entertainment and media market and children's product market in China may
not grow at the rates suggested by the market data, or at all. The failure of the markets to grow at the projected rates may have a material adverse effect on our business and the market price of our
ADSs. In addition, the rapidly changing nature of the children's online entertainment industry in China subjects any projections or estimates relating to the growth prospects or future condition of
our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, our actual results may differ from the projections based on these
assumptions.
You
should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual results in the future may be materially
different from or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report include additional factors which
could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for
our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements.
You
should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
-
A.
-
Directors and Senior Management
The
following table sets forth information regarding our directors and executive officers as of the date of this annual report.
|
|
|
|
|
|
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Jason Liqing Zeng
|
|
|
44
|
|
Chairman
|
Benson Haibing Wang
|
|
|
33
|
|
Co-Founder, Director and Chief Executive Officer
|
Roc Yunpeng Cheng
|
|
|
36
|
|
Co-Founder, Director and President
|
Crow Zhen Wei
|
|
|
38
|
|
Co-Founder and Director
|
JP Gan
|
|
|
42
|
|
Independent Director
|
Shengwen Rong
|
|
|
45
|
|
Independent Director
|
Ted Lai
|
|
|
43
|
|
Independent Director
|
Changtian Wang
|
|
|
48
|
|
Independent Director
|
George Kuan
|
|
|
40
|
|
Independent Director
|
Paul Keung
|
|
|
43
|
|
Chief Financial Officer
|
Owen Quan Zhou
|
|
|
37
|
|
Vice president
|
Mr. Jason Liqing Zeng
has served as our chairman since October 2008. Mr. Zeng founded Shenzhen Decent Investment Limited, an
investment company which focuses on high-technology investment, in May 2007 and has served as the chairman since its inception. Previously, Mr. Zeng co-founded Tencent Holdings Limited, an
Internet service company in China listed on the Hong Kong
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Stock
Exchange, and served as its chief operating officer from 1999 to 2007. From 1993 to 1999, Mr. Zeng served as a manager in the Shenzhen Branch of China Telecom Corporation Limited, a
company engaging in information service and wired telecommunications and broadband services in China and listed on the Hong Kong Stock Exchange and the New York Stock Exchange. Mr. Zeng is also
an independent director of A8 Digital Music Holdings Limited, an integrated digital music company listed on the Hong Kong Stock Exchange, a director of Shenzhen Ruigao, a director of Chuangyou, a
director of Shenzhen Taole Network Technology Co., Ltd, a director of Shenzhen Kuaibo Technology Co., Ltd. and a director of several private companies. Mr. Zeng
received his EMBA degree from China Europe International Business School in China in 2007 and his bachelor's degree in computer communication from Xi'an Electronic Technology University in 1993.
Mr. Benson Haibing Wang
is one of the founders and the creative architect of many of our franchises. Mr. Wang is also our
chief executive officer and has served as our director since October 2008. Prior to co-founding our company, Mr. Wang worked as a project manager at Tencent Technology (Shenzhen) Company
Limited, a subsidiary of Tencent Holdings Limited, from 2004 to 2007. Mr. Wang is also a director of Gamespedia Holdings Limited and a director of Chuangyou. Mr. Wang has approximately
ten years of experience in the development of online products in China and has formulated our current strategy and led our rapid growth. Mr. Wang received his bachelor's degree in electrical
engineering and his master's degree in computer science from Huazhong University of Science and Technology in 2001 and 2004, respectively.
Mr. Roc Yunpeng Cheng
is one of our founders and our president. Mr. Cheng has served as our director since October 2008.
Prior to co-founding our company, Mr. Cheng worked as an assistant general manager of the advertising department of Tencent Technology (Shenzhen) Company Limited from 2001 to 2007, primarily
responsible for advertising business in East and South China. Mr. Cheng was a sales manager in the Shenzhen Branch of International Network Communications (Shanghai) Co., Ltd., a
company engaging in Internet portal and related business, from 1999 to 2001. Ms. Cheng is also a director of Shanghai Taoyue Information Technology Co., Ltd., an online game
development company, and a director of Jiangxi Haomi Network Technology Co., Ltd., a company which develops family entertainment and education application on mobile and multi-screen
platforms in China. Mr. Cheng has approximately 15 years of experience in marketing and operations. Mr. Cheng received his bachelor's degree in materials engineering from Harbin
Institute of Technology in 1999.
Mr. Crow Zhen Wei
is one of our founders. Mr. Wei has served as our director since October 2008 and as our chief technology
officer from October 2008 to February 2014. Prior to co-founding our company, Mr. Wei worked as a software engineer at Novell China Inc., a company engaging in infrastructure software
business, from 2006 to 2007. Mr. Wei was a system architecture designer and project manager at Tencent Technology (Shenzhen) Company Limited from 2004 to 2006. Prior to that, Mr. Wei was
a software engineer at Huawei Technologies Co., Ltd., a China-based telecom solutions provider, from July 2003 to December 2003. Mr. Wei has approximately 11 years of
experience in software and Internet technology. Mr. Wei received his bachelor's degree in chemistry and his master's degree in computer science from University of Science and Technology of
China in 1999 and 2003, respectively.
Mr. JP Gan
has served as our director since May 2009 and is currently our independent director. Mr. Gan has been serving as
a managing director and a member of the investment committee of Qiming Venture Partners, a private equity firm affiliated to the Qiming Funds, since 2007. From 2005 to 2006, Mr. Gan was the
chief financial officer of Kongzhong Corporation, a Nasdaq listed wireless Internet company. Prior to joining Kongzhong, Mr. Gan was a director of the Carlyle Group responsible for venture
capital investments in the Greater China region from 2000 to 2005. Mr. Gan worked at the investment banking division of Merrill Lynch, in Hong Kong from 1999 to 2000, and worked at
PricewaterhouseCoopers LLP in the United States from 1994 to 1997. Currently, Mr. Gan is also a director of Ctrip.com International Limited and Jiayuan.com International Ltd.,
both of which
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Table of Contents
are
NASDAQ-listed companies, a director of Playgame Sdn. Bhd, or Playgame, an affiliate of us, and a director of several private companies. Mr. Gan obtained his Masters of Business
Administration from the University of Chicago Booth School of Business and his bachelor's degree in business administration from the University of Iowa.
Mr. Shengwen Rong
has served as our independent director since June 2011. Mr. Rong has been the chief financial officer of
UCWeb Inc., a leading provider of mobile Internet software technology and application services. From April 2010 to January 2012, Mr. Rong was the chief financial officer of Country Style
Cooking Restaurant Chain Co., Ltd, a NYSE-listed company. Prior to that, Mr. Rong had been the chief financial officer of two privately held education companies in China since
April 2008. From 2000 to 2008, Mr. Rong held multiple financial management positions at Google, Inc. Solectron Corp., and Siebel Systems. Mr. Rong also worked at
PricewterhouseCoopers as an auditor both in its Chicago and Beijing offices. Mr. Rong obtained a bachelor's degree in economics from Renmin
University of China in 1991, a master's degree in professional accountancy from West Virginia University in 1996 and an MBA from the Booth School of Business at the University of Chicago in 2000.
Mr. Rong is a certified public accountant in the United States.
Mr. Ted Lai
has served as our independent director since June 2012. Mr. Lai serves on the steering committee of AngelVest, a
China based angel investor organization. From November 2011 to September 2013, Mr. Lai served as executive vice president for Asia of BBC Worldwide, responsible for strategic development across
the Asia region, driving growth through new brand, product and service initiatives. Before joining BBC, Mr. Lai spent more than a decade working for Time Warner with his last role being senior
vice president of Warner Bros. International TV. Previously, Mr. Lai was a business development and product management executive in the digital media industry, having worked in several
high-profile companies, including idealab's FreePC from inception to merger and initial public offering. Mr. Lai also developed strategic plans for theme parks and location-based entertainment
centers for the Walt Disney Company. Mr. Lai earned his MBA at Harvard Business School and master's and bachelor's degrees in engineering at Stanford University.
Mr. Changtian Wang
has served as our independent director since June 2012. Mr. Wang is the chairman and chief executive
officer of Beijing Enlight Media Co., Ltd., a company listed on the Shenzhen Stock Exchange. Mr. Wang has more than twenty years' experience in media industry. Before founding
Beijing Enlight Media Co., Ltd., Mr. Wang worked for some television channels and newspapers in China, such as Beijing Television. Mr. Wang is also director of JinHua
Changfeng Information and Technology Co., Ltd., a Zhejiang-based instant messaging and internet value-added service provider, and is also the chairman or director of several companies
which are affiliates or subsidiaries of Beijing Enlight Media Co., Ltd.. Mr. Wang earned his bachelor's degree in journalism from Fudan University.
Mr. George Kuan
has served as our independent director since June 2012. Mr. Kuan is currently in a sales leadership role at
Nike Inc. Greater China. Prior to joining Nike Inc. Greater China, Mr. Kuan worked at several well-known multinational corporations, including Coca-Cola (China)
Beverages, Ltd., SAP, Oracle Corporation and BMC Software Inc. Mr. Kuan earned his bachelor's degree in business administration in finance from the University of Houston in 1996,
his master of science in management and systems from New York University in 2004, and his Ph.D. in philosophy from the International School of Management in 2011.
Mr. Paul Keung
has been our chief financial officer and executive vice president of investment department since February 2011.
Prior to joining us, Mr. Keung was a managing director of Oppenheimer Investments Asia since 2009, overseeing the firm's Asia research practice. Between 2000 and 2008, Mr. Keung was the
executive director of CIBC World Markets, where for the majority of his time, he was responsible for coverage of the Internet, Media and Entertainment sectors in the US and China. From 1998 to
2000, Mr. Keung was the chief information officer of Wyndham International, a
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global
hospitality company. Between 1994 and 1998, he served in various investment banking and equity research roles at Deutsche Morgan Grenfell, PaineWebber Securities, and Salomon Brothers.
Mr. Keung currently serves as an Independent director of Jiayuan.com International Ltd., a NASDAQ-listed company, and the director of Taiwan Taomee. Mr. Keung obtained his
bachelor's degree in hotel administration from Cornell University and his master's degree in real estate from New York University.
Mr. Owen Quan Zhou
has been our vice president in charge of human resources since July 2011. Prior to joining our company,
Mr. Zhou worked as a strategic manager of human resources and manager of human resources of wireless industry department of Tencent Technology Company Limited, from January 2004 to July 2011.
Mr. Zhou was the officer of human resources development and the manager of human resources of Ping An Insurance (Group) Company of China, Ltd., Henan branch, from July 1997 to December
2003. Mr. Zhou has approximately 17 years of experience in human resources management. Mr. Zhou received his bachelor's degree in international trade and commerce from Jiangxi
University of Finance and Economics in 1997.
-
B.
-
Compensation of Directors and Executive Officers
In
2013, we paid an aggregate of approximately RMB5.5 million (US$0.9 million) in cash to our executive officers, and an aggregate of approximately US$60,000 in cash to our
independent directors. For options granted to our executive officers, see "Share Incentive Plans."
We
have neither set aside nor accrued any amount of cash to provide pension, retirement or other similar benefits to our officers and directors. Our PRC subsidiaries, VIE and VIEs'
subsidiaries are required by law to make contributions equal to certain percentages of each employee's salary for his or her retirement benefit, medical insurance benefits, housing funds, unemployment
and other statutory benefit. Our PRC subsidiary contributed an aggregate of RMB0.4 million (US$0.07 million) for retirement and similar benefits for our officers and directors in 2013.
Share Incentive Plans
2009 Stock Option Plan
We have adopted our 2009 Stock Option Plan, or the 2009 Plan, to promote our success and to increase shareholder value by providing an
additional means, through the grant of awards, to attract, motivate, retain and reward selected employees and other eligible persons. The maximum number of shares which may be issued pursuant to all
awards under the 2009 Plan is 45,000,000. As of December 31, 2013, options to purchase an aggregate of 11,879,840 ordinary shares under the 2009 Plan were outstanding.
Types of Awards.
The 2009 Plan permits the grant of several kinds of awards, including among others, options, restricted shares and
restricted share
units.
Plan Administration.
Our board of directors, or one or more committees designated by our board of directors, will administer the 2009
Plan. The
administrator will determine the terms and conditions of each grant, including, without limitation, the eligibility of the persons, whether and to what extent awards are granted, the grant price, the
number of awards, the forms of the award agreements, limited amendment of terms of any outstanding award, the construction and interpretation of the 2009 Plan and any award agreements, and such other
action not inconsistent with the terms of the 2009 Plan as the administrator deems appropriate.
Award Agreements.
Options and other awards granted under the 2009 Plan are evidenced by a written award agreement that sets forth the
material terms
and conditions for each grant.
Eligibility.
We may grant awards to employees and directors of our company and consultants.
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Table of Contents
Term of the Option and Stock Appreciation Rights.
The term of each option and stock appreciation rights granted will not exceed ten
years.
Vesting Schedule.
In general, the option agreements specify the vesting schedules.
Amendment and Termination of the 2009 Plan.
Unless terminated earlier, the 2009 Plan will continue in effect for a term of ten years
from the date of
its approval by the board of directors. Our board of directors has the authority to amend, modify, suspend, or terminate the 2009 Plan subject to shareholder approval to the extent required by
applicable laws or if such amendment would lessen the shareholder approval requirements. However, no such action may impair the rights of any award recipient unless agreed by the recipient in written.
2010 Share Incentive Plan
We have adopted our 2010 Share Incentive Plan, or the 2010 Plan. The maximum number of shares which may be issued pursuant to all
awards under the 2010 Plan is 55,000,000. As of December 31, 2013, options to purchase an aggregate of 16,120,000 ordinary shares and 19,040,414 restricted shares under the 2010 Plan were
outstanding.
Types of Awards.
The 2010 Plan permits the grant of several kinds of awards, including among others, options, restricted shares,
restricted share
units and share appreciation rights.
Plan Administration.
The compensation committee of our board of directors will administer the 2010 Plan, and may delegate its
administrative
authority to a committee of one or more members of our board or one or more of our officers, subject to certain restrictions. Among other things, the compensation committee will designate the eligible
individuals who may receive awards, and determine the types and number of awards to be granted and terms and conditions of each award grant. The compensation committee has the sole power and
discretion to cancel, forfeit or surrender an outstanding award.
Award Agreements.
Options and other awards granted under the 2010 Plan will be evidenced by a written award agreement that sets forth
the material
terms and conditions for each grant.
Eligibility.
We may grant awards to the employees, consultants rendering bona fide services to us or our affiliated entities designated
by our board,
as well as our directors, provided that awards cannot be granted to consultants or non-employee directors who are resident of any country in the European Union, and any other country which pursuant to
applicable laws does not allow grants to non-employees.
Term of the Option and Stock Appreciation Rights.
The term of each option and stock appreciation rights granted will not exceed ten
years, and the
compensation committee may extend the term subject to certain limitation under relevant applicable regulations.
Acceleration of Awards upon Corporate Transactions.
The compensation committee may, in its sole discretion, upon or in anticipation of
a corporate
transaction, accelerate awards, purchase the awards from the holder or replace the awards.
Vesting Schedule.
In general, the compensation committee determines, or the option agreements specify the vesting schedules.
Amendment and Termination of the 2010 Plan.
The compensation committee may at any time amend, modify or terminate the 2010 Plan subject
to
shareholder approval to the extent required by laws. Additionally, shareholder approval will be specifically required to increase the number of shares available under the 2010 Plan, or to permit the
compensation committee to extend the term or the exercise period of an option or share appreciation right beyond ten years, or if amendments result in
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material
increases in benefits or a change in eligibility requirements. Any amendment, modification or termination of the 2010 Plan must not impair any rights or obligations under awards already
granted without consent of the holder of such awards. Unless terminated earlier, the 2010 Plan will expire and no further awards may be granted after the tenth anniversary of the shareholders'
approval of the 2010 Plan.
2012 Share Incentive Plan
We have adopted our 2012 Share Incentive Plan, or the 2012 Plan. The maximum number of shares which may be issued pursuant to all
awards under the 2012 Plan is 30,000,000. As of December 31, 2013, there were no options or restricted shares granted under the 2012 Plan.
Types of Awards.
The 2012 Plan permits the grant of several kinds of awards, including among others, options, restricted shares,
restricted share
units and share appreciation rights.
Plan Administration.
The compensation committee of our board of directors will administer the 2012 Plan, and may delegate its
administrative
authority to a committee of one or more members of our board or one or more of our officers, subject to certain restrictions. Among other things, the compensation committee will designate the eligible
individuals who may receive awards, and determine the types and number of awards to be granted and terms and conditions of each award grant. The compensation committee has the sole power and
discretion to cancel, forfeit or surrender an outstanding award.
Award Agreements.
Options and other awards granted under the 2012 Plan will be evidenced by a written award agreement that sets forth
the material
terms and conditions for each grant.
Eligibility.
We may grant awards to the employees, consultants rendering bona fide services to us or our affiliated entities designated
by our board,
as well as our directors, provided that awards cannot be granted to consultants or non-employee directors who are resident of any country in the European Union, and any other country which pursuant to
applicable laws does not allow grants to non-employees.
Term of the Option and Stock Appreciation Rights.
The term of each option and stock appreciation rights granted will not exceed ten
years, and the
compensation committee may extend the term subject to certain limitation under relevant applicable regulations.
Acceleration of Awards upon Corporate Transactions.
The compensation committee may, in its sole discretion, upon or in anticipation of
a corporate
transaction, accelerate awards, purchase the awards from the holder or replace the awards.
Vesting Schedule.
In general, the compensation committee determines, or the option agreements specify the vesting schedules.
Amendment and Termination of the 2012 Plan.
The compensation committee may at any time amend, modify or terminate the 2012 Plan subject
to
shareholder approval to the extent required by laws. Additionally, shareholder approval will be specifically required to increase the number of shares available under the 2012 Plan, or to permit the
compensation committee to extend the term or the exercise period of an option or share appreciation right beyond ten years, or if amendments result in material increases in benefits or a change in
eligibility requirements. Any amendment, modification or termination of the 2012 Plan must not impair any rights or obligations under awards already granted without consent of the holder of such
awards. Unless terminated earlier, the 2012 Plan will expire and no further awards may be granted after the tenth anniversary of the shareholders' approval of the 2012 Plan.
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Table of Contents
The
table below sets forth, as of December 31, 2013, the option and restricted share grants made to our directors and executive officers and other individuals as a group, under
our share incentive plans:
|
|
|
|
|
|
|
|
|
|
Name
|
|
Ordinary
Shares
Underlying
Outstanding
Options/
Restricted
Shares
|
|
Exercise Price/
Purchase Price
(US$/Share)
|
|
Grant Date/
Award Date
|
|
Expiration Date
|
Benson Haibing Wang
|
|
*
|
|
|
0.07
|
|
June 7, 2010
|
|
June 7, 2020
|
|
|
*
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Roc Yunpeng Cheng
|
|
*
|
|
|
0.07
|
|
June 7, 2010
|
|
June 7, 2020
|
|
|
*
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Crow Zhen Wei
|
|
*
|
|
|
0.07
|
|
June 7, 2010
|
|
June 7, 2020
|
|
|
*
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Shengwen Rong
|
|
*
|
|
|
0.45
|
|
May 24, 2011
|
|
May 24, 2021
|
Ted Lai
|
|
*
|
|
|
0.1960
|
|
July 20, 2012
|
|
July 20, 2022
|
Changtian Wang
|
|
*
|
|
|
0.1960
|
|
July 20, 2012
|
|
July 20, 2022
|
George Kuan
|
|
*
|
|
|
0.1960
|
|
July 20, 2012
|
|
July 20, 2022
|
JP Gan
|
|
*
|
|
|
0.1960
|
|
July 20, 2012
|
|
July 20, 2022
|
Paul Keung
|
|
*
|
|
|
nil
|
|
May 24, 2011
|
|
May 24, 2021
|
|
|
*
|
|
|
0.2395
|
|
July 16, 2012
|
|
July 16, 2022
|
|
|
*
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Quan Zhou
|
|
*
|
|
|
nil
|
|
May 24, 2011
|
|
May 24, 2021
|
|
|
*
|
|
|
0.2395
|
|
July 16, 2012
|
|
July 16, 2022
|
|
|
*
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Directors and executive officers as a group
|
|
7,750,000
|
|
|
0.07
|
|
June 7, 2010
|
|
June 7, 2020
|
|
|
3,083,334
|
|
|
nil
|
|
May 24, 2011
|
|
May 24, 2021
|
|
|
3,000,000
|
|
|
0.2395
|
|
July 16, 2012
|
|
July 16, 2022
|
|
|
3,600,000
|
|
|
0.1960
|
|
July 20, 2012
|
|
July 20, 2022
|
|
|
4,800,000
|
|
|
0.00002
|
|
November 5, 2013
|
|
November 5, 2023
|
Other individuals as a group
|
|
1,368,260
|
|
|
0.04
|
|
June 24, 2009
|
|
June 24, 2019
|
|
|
2,761,580
|
|
|
0.07
|
|
June 7, 2010
|
|
June 7, 2020
|
|
|
1,460,844
|
|
|
0.36/nil
|
|
January 4, 2011
|
|
January 4, 2021
|
|
|
441,676
|
|
|
nil
|
|
May 24, 2011
|
|
May 24, 2021
|
|
|
8,770,000
|
|
|
0.2395
|
|
July 16, 2012
|
|
July 16, 2022
|
|
|
9,610,000
|
|
|
0.00002
|
|
September 4, 2013
|
|
September 4, 2023
|
|
|
394,560
|
|
|
0.00002
|
|
December 11, 2013
|
|
December 11, 2023
|
-
*
-
Ordinary
shares underlying the share options held by such person comprise less than 1% of our outstanding ordinary shares.
On
February 28, 2012, our compensation committee approved a share option exchange program that offered our eligible directors and employees the right to exchange vested and
unvested outstanding share options to purchase our ordinary shares granted under the 2010 Share Incentive Plan between January 2011 to May 2011 for our restricted shares at the ratio of 3:1. The
exchange ratio was determined based on the fair value of replacement restricted shares so that the fair value of the replacement restricted shares to be issued upon exchange would be approximately
equivalent to the fair value of the share options surrendered by an individual. These replacement restricted shares are subject to substantially the same vesting schedule as the options that were
validly tendered in the exchange
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Table of Contents
offer.
A total of 102 directors and employees accepted the offer, and tendered options to purchase an aggregate of 28,790,000 ordinary shares, including 14,090,000 shares granted on January 4,
2011 and 14,700,000 shares granted on May 24, 2011, in exchange for an aggregate of 9,596,718 restricted shares at a ratio of 3:1, which were granted on March 30, 2012. The exchange of
the share option for restricted shares was accounted for as a modification of share-based award, which involves a cancellation of the original award and an issuance of a new award, with no incremental
compensation cost recognized as the fair value of the restricted shares was not more than the fair value of the options given up on the date of exchange. This exchange program is expected to provide
additional incentive and retention value. The replacement restricted shares to our directors, officers and employees as listed below:
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Restricted
Shares
Granted
|
|
Date of Grant of
Restricted Shares
|
|
Date of Grant of
Cancelled Option
|
|
Shengwen Rong
|
|
*
|
|
|
March 30, 2012
|
|
|
May 24, 2011
|
|
Paul Keung
|
|
*
|
|
|
March 30, 2012
|
|
|
May 24, 2011
|
|
Quan Zhou
|
|
*
|
|
|
March 30, 2012
|
|
|
May 24, 2011
|
|
Directors and executive officers as a group
|
|
*
|
|
|
March 30, 2012
|
|
|
January 4, 2011/
|
|
|
|
|
|
|
|
|
|
May 24, 2011
|
|
Other individuals as a group
|
|
*
|
|
|
March 30, 2012
|
|
|
January 4, 2011/
|
|
|
|
|
|
|
|
|
|
May 24, 2011
|
|
-
*
-
Beneficially
own less than 1.0% of our outstanding ordinary shares.
-
C.
-
Board Practices
Board of Directors
Our board of directors consists of nine members. A director is not required to hold any shares in the company by way of qualification.
A director may vote with respect to any contract or proposed contract or arrangement notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted
in the quorum at any meeting of the directors at which any such contract or proposed contract or arrangement is considered. A director who is in any way, whether directly or indirectly, interested in
a contract or proposed contract with our company is required to declare the nature of his interest at a meeting of our directors. The directors may exercise all the powers of our company to borrow
money, mortgage or charge its undertaking, property and uncalled capital or any part thereof, and issue debentures or other securities whenever money is borrowed or as security for any debt, liability
or obligation of the company or of any third-party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of employment.
Committees of the Board of Directors
We have established three committees under the board of directors: the audit committee, the compensation committee and the corporate
governance and nominating committee, and adopt a charter for each of the committees. Each committee's members and functions are described below.
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Table of Contents
Audit Committee
Our audit committee consists of Mr. Shengwen Rong, Mr. Ted Lai and Mr. George Kuan. Mr. Rong,
Mr. Lai and Mr. Kuan satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock Exchange and Rule 10A-3 under the
Securities Exchange Act of 1934, as amended. Mr. Rong is the chairman of our audit committee and meets the criteria of an audit committee financial expert as set forth under the applicable
rules of the SEC. Mr. Rong, Mr. Lai and Mr. Kuan all have extensive knowledge and experience applying U.S. GAAP. From April 2010 to January 2012, Mr. Rong was the
chief financial officer of Country Style Cooking Restaurant Chain Co., Ltd, a NYSE-listed company which prepares and presents its consolidated financial statements in accordance with
U.S. GAAP, and also had experience applying U.S. GAAP at his previous positions at Google, Inc., Solectron Corp., and Siebel Systems. Prior to that, Mr. Rong worked at
PricewaterhouseCoopers LLP in the United States and Beijing. Mr. Rong is a certified public accountant in the United States. Mr. Kuan has served in various finance and accounting
roles at BMC Software Inc., including serving as the regional finance manager based in Australia and the country controller at BMC Japan. In BMC Software Inc., Mr. Kuan was a
member of the corporate accounting team responsible for operating expenses management control. In BMC Japan, Mr. Kuan served in the corporate accounting team responsible for revenue recognition
accounting practice, in accordance with GAAP software policy. Mr. Lai has experience of reviewing company financial statements related to his work with AngelVest, as well as with BBC Worldwide,
Time Warner and the Walt Disney Company.
The
audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among
other things:
-
-
selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services
permitted to be performed by our independent registered public accounting firm;
-
-
reviewing with the independent registered public accounting firm 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
under the Securities Act;
-
-
discussing the annual audited financial statements with management and our independent registered public accounting firm;
-
-
annually reviewing and reassessing the adequacy of our audit committee charter;
-
-
meeting separately and periodically with management and our independent registered public accounting firms;
-
-
reporting regularly to the full board of directors; and
-
-
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
Compensation Committee
Our compensation committee consists of Mr. JP Gan, Mr. Ted Lai and Mr. George Kuan. Mr. Gan, Mr. Tai
and Mr. Kuan satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock Exchange. Mr. Gan is the chairman of our compensation
committee. Our compensation committee assists the board of directors in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation
to be provided to our directors and executive officers. Our chief executive officer may
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Table of Contents
not
be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other
things:
-
-
reviewing and recommending to the board with respect to the total compensation package for our four most senior
executives;
-
-
approving and overseeing the total compensation package for our executives other than the four most senior executives;
-
-
reviewing and making recommendations to the board of directors with respect to the compensation of our directors;
-
-
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar
arrangements, annual bonuses, employee pension and welfare benefit plans; and
-
-
retaining or obtaining the advice of a compensation consultant, legal counsel or other adviser in the compensation
committee's sole discretion,
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Changtian Wang, Mr. JP Gan and
Mr. Shengwen Rong. Mr. Wang, Mr. Gan and Mr. Rong satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock
Exchange. Mr. Wang is the chairman of our corporate governance and nominating committee. The corporate governance and nominating committee assists our board of directors in identifying
individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other
things:
-
-
identifying and recommending nominees for election or re-election to our board of directors, or for appointment to fill
any vacancy;
-
-
reviewing annually with our board of directors its current composition in light of the characteristics of independence,
age, skills, experience and availability of service to us;
-
-
identifying and recommending to our board the directors to serve as members of committees;
-
-
advising the board periodically with respect to significant developments in the law and practice of corporate governance
as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken;
and
-
-
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance.
Duties of Directors
Under Cayman Islands law, our directors owe to us fiduciary duties, including a duty of loyalty, a duty to act honestly, and a duty to
act in what they consider in good faith and to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably
prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association as may be
amended from time to time. Our company has a right to seek damages against any director who breaches a duty owed to us.
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Table of Contents
Terms of Directors and Officers
Pursuant to our memorandum and articles of association, our board of directors are designated into three classes, namely Class A
directors, Class B directors and Class C directors, who shall retire from office and be eligible for re-election at the first, second and third annual general meeting after our initial
public offering, respectively. Mr. Roc Yunpeng Cheng, Mr. Ted Lai and Mr. Changtian Wang have been designated as Class A directors. Mr. Crow Zhen Wei,
Mr. Shengwen Rong and Mr. George Kuan have been designated as Class B directors. Mr. Jason Liqing Zeng, Mr. Benson Haibing Wang and Mr. JP Gan have been
designated as Class C directors. At each subsequent annual general meeting after the third annual general meeting after our initial offering, one-third of our directors for the time being (or,
if their number is not a multiple of three (3), the number nearest to but not greater than one-third) shall retire from office by rotation, and each such
retiring director shall be eligible for re-election. Every director shall be subject to retirement by rotation at least once every three years. A director may be removed from office at any time by an
ordinary resolution of our shareholders. In addition, the office of a director shall be vacated if the director (i) dies, becomes bankrupt or makes any arrangement or composition with his
creditors, (ii) is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to our company, (iv) without special leave of absence from our board of
directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated, or (v) if he is otherwise removed from office pursuant to our memorandum and
articles of association or the Companies Law or other laws of the Cayman Islands.
Officers
are appointed by and serve at the discretion of our board of directors.
Employment Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers
is employed for a three-year period or five-year period. We may terminate an executive officer's employment for cause, at any time, without notice or remuneration, for certain acts of the officer,
including but not limited to serious or persistent breach or non-observance of the employment terms or a conviction of a criminal offence. An executive officer may terminate his/her employment at any
time with one-month prior written notice. Furthermore, we may terminate the employment at any time without cause upon advance written notice and certain amount of compensation payment.
Each
executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except for our benefit,
any confidential information of our company. In addition, the majority of our executive officers have agreed to be bound by non-competition restrictions which are set forth in his or her employment
agreement.
Board Observer
We have granted Saban Media Ventures, an affiliate of Saban Capital Group, a non-voting observer seat on our board of directors for a
period of eighteen months after the closing of the initial public offering, and our board of directors further renewed such period for another eighteen months to June 9, 2014. Mr. Sumeet
Jaisinghani has been designated by Saban as our board observer since July 2011. Mr Jaisinghani is the Managing Director of Saban Capital Group (Asia), responsible for Saban's principal
investment activities in Asia, and is head of the firm's Singapore office. In addition, Mr. Jaisinghani is a member of the Board of Directors of Partner Communications
and Celestial Tiger Entertainment (CTE), and played a key role in Saban's investments in Bezeq Telecommunications, Partner, Media Nusantara Citra, MNC Sky Vision, CTE and Taomee.
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-
D.
-
Employees
We
had 575, 640 and 623 employees as of December 31, 2011, 2012 and 2013, respectively. The following table sets forth the number of our employees categorized by areas of
operations as of December 31, 2013:
|
|
|
|
|
|
|
|
Function
|
|
Number of
Employees
|
|
Percentage
of total
|
|
Online operations
|
|
|
117
|
|
|
18.8
|
%
|
Offline operations
|
|
|
30
|
|
|
4.8
|
%
|
Product development
|
|
|
333
|
|
|
53.4
|
%
|
Sales and marketing
|
|
|
82
|
|
|
13.2
|
%
|
General and administrative
|
|
|
61
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
623
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
success depends on our ability to attract, retain and motivate qualified personnel. We believe we offer our employees competitive compensation packages, and we have generally been
able to attract and retain qualified personnel and maintain a stable core management team. For a description of the employment agreement we signed with some members of our senior management, see
"Item. 6. Directors, Senior Management and EmployeesC. Board PracticesEmployment Agreements."
Substantially
all of our employees are based in the PRC. In accordance with PRC laws, we participate in employee benefit plans organized by municipal and provincial governments,
including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans. We are required under PRC laws 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. A labor union of our
employees was established to represent employees with respect to labor disputes and other employee matters. We believe that we maintain a good working relationship with our employees and we have not
experienced any significant labor disputes or disputes with the labor department of the PRC government since our inception.
-
E.
-
Share Ownership
The
following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this annual report,
by:
-
-
each of our directors and executive officers; and
-
-
each person known to us to own beneficially more than 5% of our ordinary shares.
The
total number of ordinary shares outstanding as of December 31, 2013 is 757,684,760, including ordinary shares represented by ADSs. As of December 31, 2013, we had
16,557,901 ordinary shares which were legally issued according to our share incentive plans, but were not deemed issued or outstanding from accounting perspective.
For
each person and group included in the following table, percentage of beneficial ownership is calculated by dividing the number of shares beneficially owned by such person or group
(which includes ordinary shares underlying share options held by such person or group that are exercisable within 60 days after the date of this annual report) by the sum of (i) the
number of ordinary shares outstanding as of the date of this annual report, (ii) the number of ordinary shares underlying share options held by such person or group that are exercisable within
60 days after the date of this annual
114
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report
, and (iii) the number of non-vested equity shares held by such person or group that will vest within 60 days after the date of this annual report.
Except
as otherwise noted, the business address of each person listed in the table is c/o Taomee Holdings Limited, 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui
District, Shanghai 200233, People's Republic of China.
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
Beneficially Owned
|
|
|
|
Number
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
Jason Liqing Zeng(1)
|
|
|
167,568,540
|
|
|
22.1
|
|
Benson Haibing Wang(2)
|
|
|
87,392,592
|
|
|
11.5
|
|
Roc Yunpeng Cheng(3)
|
|
|
74,323,193
|
|
|
9.8
|
|
Crow Zhen Wei(4)
|
|
|
74,492,593
|
|
|
9.8
|
|
JP Gan(5)
|
|
|
125,300,000
|
|
|
16.5
|
|
Shengwen Rong(6)
|
|
|
*
|
|
|
*
|
|
Ted Lai(7)
|
|
|
*
|
|
|
*
|
|
Changtian Wang(8)
|
|
|
*
|
|
|
*
|
|
George Kuan(9)
|
|
|
*
|
|
|
*
|
|
Paul Keung(10)
|
|
|
*
|
|
|
*
|
|
Quan Zhou(11)
|
|
|
*
|
|
|
*
|
|
All Directors and Executive Officers as a Group(12)
|
|
|
533,901,958
|
|
|
70.5
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
Frontier Technology Holdings Limited(13)
|
|
|
135,000,000
|
|
|
17.8
|
|
Speednext Industrial Limited (14)
|
|
|
32,568,540
|
|
|
4.3
|
|
Qiming Venture Partners II, L.P.(15)
|
|
|
113,418,000
|
|
|
15.0
|
|
Qiming Venture Partners II-C, L.P.(16)
|
|
|
9,931,500
|
|
|
1.3
|
|
Qiming Managing Directors Fund II, L.P(17).
|
|
|
1,650,500
|
|
|
0.2
|
|
Joy Union Holdings Limited(18)
|
|
|
86,392,592
|
|
|
11.4
|
|
Universys Holdings Ltd.(19)
|
|
|
74,492,593
|
|
|
9.8
|
|
Charming China Limited(20)
|
|
|
71,392,593
|
|
|
9.4
|
|
-
*
-
Less
than 1%
-
(1)
-
Includes
6,750,000 ADSs representing 135,000,000 ordinary shares held by Frontier Technology Holdings Limited and 1,628,427 ADSs representing 32,568,540
ordinary shares held by Speednext Industrial Limited, a British Virgin Islands company wholly-owned by Mr. Zeng.
-
(2)
-
Represents
12 ordinary shares and 86,392,580 ordinary shares represented by 4,319,629 ADSs held by Joy Union Holdings Limited, a British Virgin Islands
company wholly owned by Mr. Wang, and 1,000,000 ordinary shares issuable upon exercise of options within 60 days of the date of this annual report held by Mr. Wang.
-
(3)
-
Represents
13 ordinary shares and 71,392,580 ordinary shares represented by 3,569,629 ADSs held by Charming China Limited, a British Virgin Islands company
wholly owned by Mr. Cheng, and 2,930,600 ordinary shares issuable upon exercise of options within 60 days of the date of this annual report held by Mr. Cheng.
-
(4)
-
Represents
13 ordinary shares and 74,492,580 ordinary shares represented by 3,724,629 ADSs held by Universys Holdings Ltd., a British Virgin Islands
company wholly owned by Mr. Wei.
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Table of Contents
-
(5)
-
Represents
113,418,000 ordinary shares held by Qiming Venture Partners II, L.P., 9,931,500 ordinary shares held by Qiming Venture Partners
II-C, L.P., 1,650,500 ordinary shares held by Qiming Managing Directors Fund II, L.P., and ordinary shares issuable upon exercise of options and the non-vested equity shares that will
vest within 60 days of the date of this annual report held by Mr. Gan. Mr. Gan is a managing director of and participates on the investment committee of Qiming Corporate GP
II, Ltd. The business address of Mr. Gan is c/o Qiming Corporate GP II, Ltd., 11400 SE Sixth Street, Suite 100 Bellevue, Washington 98004, USA.
-
(6)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Rong.
-
(7)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Lai.
-
(8)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Wang.
-
(9)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Kuan.
-
(10)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Keung.
-
(11)
-
Represents
ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this
annual report held by Mr. Zhou.
-
(12)
-
Represents
ordinary shares held by all of our directors and executive officers as a group and ordinary shares issuable upon exercise of options and the
non-vested equity shares that will vest within 60 days of the date of this annual report held by all of our directors and executive officers as a group.
-
(13)
-
Represents
6,750,000 ADSs representing 135,000,000 ordinary shares held by Frontier Technology Holdings Limited, a British Virgin Islands company wholly
owned by Mr. Jason Liqing Zeng. The registered address for Frontier Technology Holdings Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.
-
(14)
-
Represents
1,628,427 ADSs representing 32,568,540 ordinary shares held by Speednext Industrial Limited, a British Virgin Islands company wholly owned by
Mr. Jason Liqing Zeng. The registered address of Speednext Industrial Limited is Offshore Incorporations Limited, P.O Box 957, Offshore Incorporations Centre, Road Town, Tortola, British
Virgin Islands.
-
(15)
-
Represents
113,418,000 ordinary shares held by Qiming Venture Partners II, L.P. The general partner of both Qiming Venture Partners
II, L.P. and Qiming Venture Partners II-C, L.P. is Qiming GP II, L.P., a Cayman Islands exempted limited partnership, whose general partner is Qiming
Corporate GP II, Ltd., a Cayman Islands limited company which is also the general partner of Qiming Managing Directors Fund II, L.P. Voting and investment power of the shares held
by the Qiming Funds is exercised by the investment committee of Qiming Corporate GP II, Ltd., which consists of Duane Kuang, Gary Rieschel, JP Gan and Robert Headley. Each of Duane
Kuang, Gary Rieschel, JP Gan and Robert Headley disclaims beneficial ownership of the ordinary shares, except to the extent of such person's own pecuniary interest therein. The business address of
each of the Qiming Funds, Qiming GP II, L.P. and Qiming Corporate GP II, Ltd. is 11400 SE Sixth Street, Suite 100 Bellevue, Washington 98004,
USA.
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Table of Contents
-
(16)
-
Represents
9,931,500 ordinary shares held by Qiming Venture Partners II-C, L.P. See also note (15) to this table above.
-
(17)
-
Represents
1,650,500 ordinary shares held by Qiming Managing Directors Fund II, L.P. See also note (15) to this table above.
-
(18)
-
Represents
12 ordinary shares and 86,392,580 ordinary shares represented by 4,319,629 ADSs held by Joy Union Holdings Limited, a British Virgin Islands
company wholly owned by Mr. Benson Haibing Wang. The registered address for Joy Union Holdings Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin
Islands.
-
(19)
-
Represents
13 ordinary shares and 74,492,580 ordinary shares represented by 3,724,629 ADSs held by Universys Holdings Ltd., a British Virgin Islands
company wholly owned by Mr. Crow Zhen Wei. The registered address for Universys Holdings Ltd. is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin
Islands.
-
(20)
-
Represents
13 ordinary shares and 71,392,580 ordinary shares represented by 3,569,629 ADSs held by Charming China Limited, a British Virgin Islands company
wholly owned by Mr. Roc Yunpeng Cheng. The registered address for Charming China Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.
As
of the date of this annual report, to our knowledge, 628,184,722 ordinary shares were held by two record holders in the United States, including JPMorgan Chase Bank N.A., the
depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United
States. None of our existing shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our
company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
-
A.
-
Major Shareholders
See
"Item 6. Directors, Senior Management and EmployeesE. Share Ownership."
-
B.
-
Related Party Transactions
Contractual Arrangements
PRC laws currently restrict foreign ownership of online virtual world businesses. To comply with PRC laws, we conduct our online
virtual world business through contractual arrangements with Shanghai Taomee and its shareholders. See "Item 4. Information on the CompanyC. Organizational Structure" for a
description of these contractual arrangements.
As
part of our contractual arrangements with Shanghai Taomee and certain of its shareholders, Mr. Jason Liqing Zeng, our chairman, Mr. Benson Haibing Wang, our co-founder,
director and chief executive officer, Mr. Crow Zhen Wei, our co-founder, director and chief technology officer, Mr. Roc Yunpeng Cheng, our co-founder, director and president and
Mr. Bin Wang, Shanghai Shengran entered into a loan agreement with these five persons, under which Shanghai Shengran lent an interest-free loan of RMB2.5 million (US$0.4 million)
to these persons, solely for their respective contributions to the increased capital of Shanghai Taomee, our significant VIE.
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Table of Contents
Transactions with Certain Officers, Shareholders and Affiliates and Key Management Personnel
In June 2009, Shanghai Taomee entered into an agreement with Shenzhen ParaEngine Corporation, or Shenzhen ParaEngine, a company
significantly influenced by Mr. Jason Liqing Zeng, who is a director of Shenzhen ParaEngine's controlling entity, for developing and operating a 3-D online virtual world for children. In August
2011, Shanghai Taomee entered into a supplement agreement with ParaEngine, pursuant to which Shanghai Taomee gave up its exclusive rights of this 3-D online virtual world and increased the royalty
percentage to be paid to ParaEngine. In May 2012, Shanghai Taomee entered into another 3-D online virtual world co-develop agreement with ParaEngine. For the years ended December 31, 2011, 2012
and 2013, we paid US$173,281, US$203,444 and US$193,559 in royalty, and nil, US$0.2 million and nil in licensing fees to Shenzhen ParaEngine, respectively. As of December 31, 2013, we
had approximately US$18,857 due to Shenzhen ParaEngine Corporation.
In
June 2011, Shanghai Shengran entered into an agreement with Taiwan Taomee for the license to Taiwan Taomee of certain operating rights of an online game developed and owned by
Shanghai Shengran. Shanghai Shengran also entered into agreement with Taiwan Taomee for the license of certain offline products which are derived from the online game images. In 2012, Shanghai
Shengran
licensed Taiwan Taomee two additional online games. In 2013, Shanghai Shengran further granted Taiwan Taomee the exclusive right of three additional games at an aggregate license fee of approximately
US$0.3 million in Taiwan and will share the royalty at a certain agreed percentage. Revenues generated from Taiwan Taomee were US$245,015 and US$240,160 for online licensing and offline
licensing respectively for the year ended December 31, 2011, US$127,644 and US$175,500 respectively for the year ended December 31, 2012, and US$767,267 and US$130,808 respectively for
the year ended December 31, 2013. As of December 31, 2013, we had an amount due from Taiwan Taomee of US$72,517, and an amount due to Taiwan Taomee of US$347,026.
On
February 25, 2011, we entered into an agreement to effectively sell a 10.5% equity interest in Elyn Corporation that had been indirectly held by a related party on our behalf.
Of the 10.5% equity interest in Elyn Corporation, 9.14% was sold to Qiming Funds, which are our existing shareholders and 1.36% was sold to an investor, an independent third party who was not
affiliated with us or the Series A shareholders, for a consideration of approximately US$3.4 million and US$0.5 million in cash, respectively, at the same price per share. In
addition, the nominee shareholding agreement was terminated with the related party and we currently hold 29.5% equity in Elyn Corporation directly.
On
August 12, 2011, our equity interest in Elyn Corporation was diluted from 29.5% to 28.8% as a result of Elyn Corporation's issuing shares to its employees.
In
November 2011, Taiwan Taomee went through a reorganization and contemporaneously issued new ordinary shares to existing shareholders and certain employees. As a result of such
transactions, our equity interest in Taiwan Taomee was changed from 28.8% interest held through Elyn Corporation to a 27.6% effective interest which was held through (1) 29.50% in Elyn
Corporation, which held 72.09% of Taiwan Taomee, and (2) 28.77% in Joy Children Technology Co., Ltd., or Joy Children, a shell company with no operations, which owned 21.86% of
Taiwan Taomee after the reorganization. The change in equity interest reflected a dilution resulting from shares issued to Taiwan Taomee's employees, which were accounted for by Taiwan Taomee as stock
compensation. In addition, we paid total consideration of US$668,992 in cash for the newly issued shares of Taiwan Taomee through Joy Children, which was recorded as an increase in equity method
investment.
In
July 2012, our aggregated equity interest through Elyn and Joy Children in Taiwan Taomee was diluted from 27.6% to 27.1%, i.e. (1) 29.50% in Elyn, which holds 70.88% of Taiwan
Taomee and (2) 28.77% in Joy Children, which holds 21.49% of Taiwan Taomee. The dilution was mainly due to the issue of new ordinary shares by Taiwan Taomee from capital surplus and
appropriations of 2011 earnings to certain existing shareholders and employees.
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Table of Contents
In
June 2013, as part of a restructuring of Taiwan Taomee, our equity interest in Taiwan Taomee was held through Playgame, and Elyn was liquidated. Our aggregated equity interest in
Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan Taomee's underwriters upon it initial public offering in Taiwan Emerging Stock Market. As
a result, Playgames's equity interest in Taiwan Taomee was diluted from 70.88% to 67.87%, resulting in a gain from investment of approximately US$287,790 recognized in the year 2013, reported within
share of profit in equity method investees in the consolidated statements of operations.
Our
equity in profit in 2011, 2012 and 2013 was US$965,959, US$506,644 and US$500,388 of Elyn Corporation (or Playgame, as applicable) and US$7,757, US$191,381 and US$96,869 of Joy
Children, respectively, and was recognized as share of profit in equity investment in the consolidated statements of operations.
In
November 2011, Shanghai Taomee entered into an agreement with Shenzhen Taole Network Technology Co., Ltd., or Shenzhen Taole, a company engages in the research and
development of network games, to obtain the licenses of certain operating rights of an online game. For the years ended December 31, 2011, 2012 and 2013, we paid nil, US$8,969 and US$6,067 in
royalty, respectively, to Shenzhen Taole. As of December 31, 2013, we had an amount of US$1,594 due to Shenzhen Taole.
In
July 2012, Shanghai Taomee entered into an operating agreement with Guangzhou Chuangyou Information Technology Co., Ltd., or Chuangyou, a company principally engaged in
the design and development of online games in China, and a related party of us, as one of Chuangyou's investors is our director and principle shareholder. According to such operating agreement,
Chuangyou granted to Shanghai Taomee the operating rights of an online game developed and owned by Chuangyou. For the years ended December 31, 2011, 2012 and 2013, Shanghai Taomee has paid nil,
nil and US$9,787 royalties and nil, US$150,000 and US$50,000 licensing fee to Chuangyou, respectively. As of December 31, 2013,, Shanghai Taomee had US$2,506 as licensing fee to Chuangyou, and
recorded as amount due to Chuangyou.
In
the first quarter of 2013, Shanghai Animation entered into an agreement with Beijing Enlight Pictures Co. Ltd., or Enlight Media, to jointly invest in the production and
distribution of an animation film of our feature film,
Seer III: Universal Force
. As at December 31, 2013, Enlight Media paid
RMB 3.9 million (approximately US$0.6 million) to Shanghai Animation to invest in the film. The film was released in July 2013 in Mainland China. As of December 31, 2013,
we had an amount of RMB13.3 million (approximately US$2.2 million) due from such related party.
Employment Agreement
See "Item 6. Directors, Senior Management and EmployeesC. Board PracticesEmployment Agreements"
Share Incentives
See "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive
OfficersShare Incentive Plan."
-
C.
-
Interests of Experts and Counsel
Not
applicable.
ITEM 8. FINANCIAL INFORMATION
-
A.
-
Consolidated Statements and Other Financial Information
We
have appended consolidated financial statements filed as part of this annual report.
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Table of Contents
Legal Proceedings
We are not currently a party to any material litigation or other legal proceeding and are not aware of any pending or threatened
litigation or other legal proceeding that may have a material adverse impact on our business or operations.
Dividend Policy
Our board of directors has complete discretion over whether to pay dividends on our ordinary shares. If our board of directors decides
to pay dividends on our ordinary shares, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant.
On
May 6, 2009, we issued 125,000,000 shares of Series A convertible redeemable preferred shares for aggregate cash proceeds of US$4,948,718, net of direct and incremental
equity issuance costs of US$51,282 to new investors. As the Series A preferred shares were negotiated with independent third-party investors, the cash proceeds received represented the fair
value of the issued Series A preferred shares. The accretion to the redemption value, which was considered as deemed dividends, was calculated over the period from the issuance date to the
earliest redemption date using the effective interest method and reflected as a reduction to net income to arrive at net income attributable to the ordinary shareholders in the accompanying
consolidated statements of operations and amounted to US$200,601, nil and nil in 2011, 2012 and 2013, respectively.
In
November 2010, we declared a cash dividend of US$10.0 million to our shareholders who were record holders of ours as of October 31, 2010, of which we paid
US$1.05 million in December 2010 and an additional US$2.55 million in March 2011 by using our cash reserves, and paid the rest in July 2011 and August 2011 by using the proceeds from our
initial public offering. We did not declare any dividend in 2012 and 2013.
We
intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. If we pay any dividends, the depositary will pay our ADS holders
the dividends it receives on our ordinary shares, after deducting its fees and expenses as provided in the deposit agreement. Cash dividends on our ordinary shares, if any, will be paid in U.S.
dollars.
We
are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our subsidiary in China for our cash requirements, including any payment of dividends
to our shareholders. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards
and regulations. In addition, each of our subsidiaries, VIEs and VIEs' subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain
statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries, VIEs and VIEs' subsidiaries in China incur debt on their own behalf in the future, the
instruments governing the debt may restrict their ability to pay dividends or make other payments to us.
-
B.
-
Significant Changes
Except
as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
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Table of Contents
ITEM 9. THE OFFER AND LISTING
-
A.
-
Offer and Listing Details
We
completed the initial public offering of 7,187,500 ADSs, each representing 20 ordinary shares of par value US$0.00002 per share, on June 10, 2011. On June 8, 2011, we
listed our ADSs on the NYSE under the ticker symbol "TAOM".
The
following table provides the high and low trading prices for our ADSs on the NYSE for the periods shown.
|
|
|
|
|
|
|
|
|
|
Sales Price
|
|
|
|
High
|
|
Low
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
Fiscal Year ended December 31, 2011 (from June 8, 2011)
|
|
|
17.90
|
|
|
3.95
|
|
Fiscal Year ended December 31, 2012
|
|
|
6.50
|
|
|
3.15
|
|
Fiscal Year ended December 31, 2013
|
|
|
6.98
|
|
|
3.54
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
First Quarter ended March 31, 2012
|
|
|
6.50
|
|
|
4.50
|
|
Second Quarter ended June 30, 2012
|
|
|
5.75
|
|
|
3.74
|
|
Third Quarter ended September 31, 2012
|
|
|
4.89
|
|
|
3.25
|
|
Fourth Quarter ended December 31, 2012
|
|
|
3.84
|
|
|
3.15
|
|
First Quarter ended March 31, 2013
|
|
|
5.29
|
|
|
3.54
|
|
Second Quarter ended June 30, 2013
|
|
|
5.10
|
|
|
3.69
|
|
Third Quarter ended September 31, 2013
|
|
|
6.98
|
|
|
3.92
|
|
Fourth Quarter ended December 31, 2013
|
|
|
6.44
|
|
|
4.73
|
|
First Quarter ended March 31, 2013
|
|
|
8.90
|
|
|
5.06
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
October 2013
|
|
|
6.44
|
|
|
5.03
|
|
November 2013
|
|
|
5.60
|
|
|
4.76
|
|
December 2013
|
|
|
5.41
|
|
|
4.73
|
|
January 2014
|
|
|
7.78
|
|
|
5.06
|
|
February 2014
|
|
|
7.20
|
|
|
5.68
|
|
March 2014
|
|
|
8.90
|
|
|
5.73
|
|
April 2014 (through April 10, 2014)
|
|
|
6.28
|
|
|
5.75
|
|
-
B.
-
Plan of Distribution
Not
applicable.
-
C.
-
Markets
Our
ADSs, each representing 20 ordinary shares, have been listed on the NYSE since June 8, 2011. Our ADSs are traded under the symbol "TAOM."
-
D.
-
Selling Shareholders
Not
applicable.
-
E.
-
Dilution
Not
applicable.
121
Table of Contents
-
F.
-
Expenses of the Issue
Not
applicable.
ITEM 10. ADDITIONAL INFORMATION
-
A.
-
Share Capital
Not
applicable.
-
B.
-
Memorandum and Articles of Association
We
are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the Companies Law of the Cayman Islands, which is referred to as the
Companies Law below. We incorporate by reference into this annual report the description of our third amended and restated memorandum and articles of association contained in our F-1 registration
statement (File No. 333-174293) originally filed with the SEC on May 18, 2011.
-
C.
-
Material Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information on the Company" or elsewhere
in this annual report on Form 20-F.
-
D.
-
Exchange Controls
See
"Item 4. Information on the CompanyB. Business OverviewRegulations Related to Our BusinessRegulation related to Foreign Currency
Exchange and Dividend Distribution".
-
E.
-
Taxation
The
following summary of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares 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 our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there
is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and 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 not party to
any double tax treaties which are applicable to payments made by or to our company. 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-Council:
-
(1)
-
that
no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our
operations; and
122
Table of Contents
-
(2)
-
that
the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.
The
undertaking for us is for a period of twenty years from August 10, 2010.
People's Republic of China Taxation
If the PRC tax authorities determine that our Cayman Islands holding company is a "resident enterprise" for PRC enterprise income tax
purposes, a withholding tax of 10% for our non-PRC enterprise shareholders or potentially 20% for non-PRC individual shareholders may be imposed on dividends they receive from us and a 10% (20% in the
case of non-PRC individual shareholders) income tax may be imposed on gains they recognize from transferring our shares or ADSs. See "Item 3. Key InformationD. Risk
FactorsRisks Related to Doing Business in ChinaWe may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income
becoming subject to 25% PRC enterprise income tax" and "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaIf we are classified
as a "resident enterprise" for PRC enterprise income tax purposes, you may be subject to PRC withholding tax on dividends from us and to PRC income tax on gain realized on the transfer of our ADSs or
ordinary shares."
United States Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) under current
law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets within the meaning of Section 1221 of
the United States Internal Revenue Code of 1986, as amended (generally, property held for investment), and that have the U.S. dollar as their functional currency. The effects of other U.S. federal tax
laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the tax laws of the United States as of the date of this
annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on
or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. We have not sought and will
not seek any rulings from the U.S. Internal Revenue Service regarding the matters discussed below. There can be no assurance the U.S. Internal Revenue Service or a court will not take a contrary
position to that discussed below regarding the tax consequences of the ownership and disposition of the ADSs or ordinary shares.
The
following discussion does not address all U.S. federal income tax consequences relevant to a U.S. Holder's particular circumstances, including the impact of the Medicare contribution
tax on net investment income. In addition, it does not address consequences relevant to U.S. Holders subject to special rules, including, without
limitation:
-
-
banks, insurance companies and other financial institutions;
-
-
regulated investment companies;
-
-
real estate investment trusts;
-
-
broker, dealers or traders in securities;
-
-
"controlled foreign corporations," "passive foreign investment companies," and corporations that accumulate earnings to
avoid U.S. federal income tax;
-
-
U.S. expatriates and former citizens or long-term residents of the United States;
-
-
tax-exempt organizations or governmental entities;
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Table of Contents
-
-
persons subject to alternative minimum tax;
-
-
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction;
-
-
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting
stock;
-
-
persons deemed to sell ADSs or oridinary shares under the constructive sale provisions of the United States Internal
Revenue Code of 1986, as amended;
-
-
persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as
compensation; or
-
-
partnerships or pass-through entities, or persons holding ADSs or ordinary shares through such entities.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE,
LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
For
purposes of the discussion below of the U.S. federal income tax consequences to "U.S. Holders," you are a U.S. Holder if you are a beneficial owner of ADSs or ordinary shares and you
are, for U.S. federal income tax purposes,
-
-
an individual who is a citizen or resident of the United States;
-
-
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the
United States or under the laws of the United States, any State thereof or the District of Columbia;
-
-
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
-
-
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one
or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If
you are a partner in a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) that holds ADSs or ordinary shares, your tax treatment will
generally depend on your status and the activities of the partnership. If you are a partner in such a partnership, you should consult your tax advisor.
The
discussion below assumes the representations contained in the deposit agreement are true and the obligations in the deposit agreement and any related agreement have been and will be
complied with in accordance with their terms. If you own ADSs, you should be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.
The
U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of a depositary share and the issuer of the security underlying the depositary
share may be taking actions that are inconsistent with the beneficial ownership of the underlying security (which may include, for example, pre-releasing ADSs to persons that do not have the
beneficial ownership of the securities underlying the ADSs). Accordingly, the creditability of any PRC taxes, or the availability of the reduced tax rate for any dividends received by certain
non-corporate U.S. Holders, including individual U.S. Holders (discussed below), could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our
company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying ordinary shares.
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Table of Contents
Passive Foreign Investment Company
Based on the market price of our ADSs and the composition of our income and assets, we believe we were a PFIC for U.S. federal income
tax purposes for our taxable year ended December 31, 2013. A non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year if
either:
-
-
at least 75% of its gross income for such year is passive income; or
-
-
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is
attributable to assets that produce passive income or are held for the production of passive income.
For
this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not
derived from a related person). In addition, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we
own, directly or indirectly, at least 25% (by value) of the stock.
A
separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will
generally be determined, in part, by reference to the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of the ADSs and ordinary shares, which
may fluctuate significantly.
If
we were treated as a PFIC for our taxable year ended December 31, 2013 and you held ADSs or ordinary shares during such year, we generally will continue to be treated as a PFIC
with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a "deemed sale" election with respect to the ADSs or ordinary
shares. If such election is made, you will be deemed to have sold ADSs or ordinary shares you hold at their fair market value on the last day of the last taxable year in which we were a PFIC and any
gain from such deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, your ADSs or ordinary shares with respect to which the deemed sale
election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.
For
each taxable year we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any "excess distribution" you receive and any gain you
recognize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a "mark-to-market" election as discussed below. Distributions you receive in a taxable
year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be
treated as an excess distribution. Under these special tax rules:
-
-
the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary
shares;
-
-
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable
year in which we were a PFIC, will be treated as ordinary income; and
-
-
the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or
corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The
tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains
(but not losses)
125
Table of Contents
realized
on the sale or other disposition of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
If
we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or indirect equity method investments in
other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary shares
you own bears to the value of all of our ADSs or ordinary shares, as applicable, and you may be subject to the adverse tax consequences described in the preceding two paragraphs with respect to the
shares of such lower-tier PFICs that you are deemed to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
A
U.S. Holder of "marketable stock" in a PFIC may make a mark-to-market election for such stock to elect out of the PFIC rules described above regarding excess distributions and
recognized gains. For this purpose, "marketable stock" is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ADSs, but not
our ordinary shares, are listed on the New York Stock Exchange, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs are listed on the New York Stock Exchange
and are regularly traded, and you are a holder of ADSs, we expect the mark-to-market election would be available to you.
If
you make a mark-to-market election for the ADSs, you will include in income for each year we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs as
of the close of your taxable year over your adjusted basis in such ADSs. You will be allowed an ordinary deduction for the excess, if any, of the adjusted basis of the ADSs over their fair market
value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs, will be treated as ordinary income. Ordinary loss treatment will also
apply to the deductible portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or other disposition of the ADSs, to the extent the amount of such loss does
not exceed the net mark-to-market gains previously included for such ADSs. Your basis in the ADSs will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election,
any distributions we make would generally be subject to the rules discussed below under "Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares," except the lower
tax rate applicable to qualified dividend income would not apply. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue
to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should
consult your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
Alternatively,
if a non-U.S. corporation is a PFIC, a holder of shares in that corporation may avoid taxation under the PFIC rules described above regarding excess distributions and
recognized gains by making a "qualified electing fund" election to include in income its share of the corporation's income on a current basis. However, you may make a qualified electing fund election
with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.
Unless
otherwise provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. Since we
believe we were a PFIC for our taxable year ended December 31, 2013, you should consult your tax advisor regarding any reporting requirements that may apply to you.
126
Table of Contents
You
are strongly urged to consult your tax advisor regarding the application of the PFIC rules to your investment in the ADSs or ordinary shares.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distributions we make to you with respect to the ADSs or ordinary
shares (including the amount of any taxes withheld therefrom) generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or on
the date of receipt by you, in the case of ordinary shares, but only to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). Any such dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of certain dividends received from U.S. corporations. To the
extent the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a
tax-free return of your tax basis in your ADSs or ordinary shares, and then, to the extent such excess amount exceeds your tax basis in your ADSs or ordinary shares, as capital gain. We currently do
not and we do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect any distribution we make to you will be reported as a dividend
even if such distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
With
respect to certain non-corporate U.S. Holders, including individual U.S. Holders, any dividends may be taxed at the lower capital gains rates applicable to "qualified dividend
income," provided (1) either (a) our ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States, or (b) we are eligible
for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we were neither a PFIC nor treated as such with respect to you
for the taxable year in which the dividend was paid and the preceding taxable year (discussed below), and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service
authority, ADSs are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the New York Stock
Exchange, as our ADSs (but not our ordinary shares) are. Based on existing guidance, it is not entirely clear whether dividends you receive with respect to the ordinary shares may qualify as qualified
dividend income because the ordinary shares are not themselves listed on a U.S. exchange. In addition, as discussed above in "Passive Foreign Investment Company," we believe we were a
PFIC for our taxable year ended December 31, 2013. If we are treated as a "resident enterprise" for PRC tax purposes under the PRC EIT Law, we may be eligible for the benefits of the income tax
treaty between the United States and the PRC. You should consult your tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividends we pay
with respect to the ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report.
Any
dividends we pay with respect to the ADSs or ordinary shares will constitute foreign source income for foreign tax credit limitation purposes. If any such dividends are taxed as
qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross
amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, any dividends we pay with
respect to the ADSs or ordinary shares will generally constitute "passive category income" but could, in the case of certain U.S. Holders, constitute "general category income."
If
PRC withholding taxes apply to any dividends paid to you with respect to our ADSs or ordinary shares (see "Item 5. Operating and Financial Review and ProspectsA.
Operating ResultsTaxation
127
Table of Contents
China"),
the amount of the dividend would include the withheld PRC taxes and, subject to certain conditions and limitations, such PRC withholding taxes would be treated as foreign taxes eligible for
credit against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the
availability of a foreign tax credit in your particular circumstances.
Taxation of Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition
of ADSs or ordinary shares equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. The gain or loss generally will be
capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the ADSs or ordinary shares for more than one year, you may be eligible for reduced
U.S. federal income tax rates. The deductibility of capital losses is subject to limitations. Any gain or loss you recognize on a disposition of ADSs or ordinary shares will generally be treated as
U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a "resident enterprise" for PRC tax purposes, we may be eligible for the benefits of the income tax
treaty between the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares (see "Item 5. Operating and Financial
Review and ProspectsA. Operating ResultsTaxationChina"), a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and
the PRC may elect to treat the gain as PRC source income for foreign tax credit purposes, in which case, subject to certain conditions and limitations, such PRC tax would be eligible for credit
against the holder's U.S. federal income tax liability. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the effects of
any applicable income tax treaties.
Information Reporting and Backup Withholding
Any dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or other taxable disposition of ADSs
or ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and backup withholding, unless the U.S. Holder is an exempt recipient. Backup withholding will not
apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9. U.S. Holders that
are exempt from backup withholding may be required to complete U.S. Internal Revenue Service Form W-9 to avoid possible erroneous backup withholding. U.S. Holders should consult their tax
advisors regarding the application of the information reporting and backup withholding rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information in a timely manner.
Additional Reporting Requirements
Certain U.S. Holders who are individuals are required to report information relating to an interest in our ADSs or ordinary shares,
subject to certain exceptions (including an exception for ADSs and ordinary shares held in accounts maintained by certain financial institutions). U.S. Holders should consult their tax advisors
regarding the effect, if any, of these rules on their ownership and disposition of the ADSs or ordinary shares.
128
Table of Contents
-
F.
-
Dividends and Paying Agents
Not
Applicable.
-
G.
-
Statement by Experts
Not
Applicable.
-
H.
-
Documents on Display
We
previously filed with the SEC our registration statement on Form F-1 (Registration Number 333-174293), as amended and prospectus under the Securities Act of 1933, with
respect to our ordinary shares represented by the ADSs. We also filed with the SEC a related registration statement on Form F-6 (Registration Number 333-174441) with respect to the ADSs.
We have also filed with the SEC our registration statements on Form S-8 (Registration Number 333-176920 and 333-183651) with respect to our securities to be issued under our 2009 Stock
Option Plan, 2010 Share Incentive Plan and 2012 Share Incentive Plan.
We
are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports,
including annual reports on Form 20-F, and other information with the SEC. All documents filed by us with the SEC can be inspected and copied at the public reference facilities maintained by
the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms. The SEC also maintains a web site at
www.sec.gov
that contains reports, proxy
and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.
As
a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive
officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not
required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We
intend to furnish JPMorgan Chase Bank, N.A., the depositary of our ADSs, with all notices of shareholders' meeting and other reports and communications that are made generally
available to our
shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our written request, will mail to all record holders of ADSs the information
contained in any notice of a shareholders' meeting received by the depositary from us.
In
accordance with NYSE Rules 203.01, we will post this annual report on Form 20-F on our website at http://ir.taomee.com/phoenix.zhtml?c=243417&p=irol-sec. In addition, we
will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.
-
I.
-
Subsidiary Information
For
a listing of our subsidiaries, see "Item 4Information on the CompanyC. Organizational Structure," as well as Exhibit 8.1 filed herewith.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our revenues and purchases are generally denominated in Renminbi. Our assets and liabilities are also denominated in Renminbi, except
for cash held in other currencies, which included approximately US$17.2 million as of December 31, 2013. As a result, fluctuations in the exchange rates between the U.S. dollar and
Renminbi will affect our results of operations and financial condition. Such fluctuations will also affect us with respect to the translation of the net proceeds that we will receive from the initial
public offering into Renminbi. The Renminbi's exchange rate with the U.S. dollar is affected by, among other things, changes in China's political and economic conditions and
China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the Renminbi was
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For almost two years after reaching a high against the U.S. dollar in July 2008, the Renminbi
traded within a narrow band against the U.S. dollar. As a consequence, the Renminbi fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June
2010, the PRC government announced that it would increase the Renminbi exchange rate flexibility and since that time the Renminbi has gradually appreciated against the U.S. dollar. However, it remains
unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater
fluctuation of the Renminbi against the U.S. dollar.
To
the extent that we need to convert U.S. dollars that we have on hand or receive from future financing activities into the Renminbi for our operations or other uses within the PRC,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. On the other hand, a decline in the value of the Renminbi
against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of
which may have a material adverse effect on the prices of ADSs. As of December 31, 2013, we had U.S. dollar-denominated cash balances of US$17.2 million. Assuming we had converted the
US$17.2 million into the Renminbi at the exchange rate of US$1.00 for RMB6.0537 as of December 31, 2013, this cash balance would have been RMB104.1 million. Assuming a 5%
appreciation of the RMB against the U.S. dollar, this cash balance would have decreased to RMB99.2 million as of December 31, 2013.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to finance income generated by excess cash invested in demand deposits with
original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. We have not been exposed, nor do we anticipate being exposed,
to material risks due to changes in interest rates. However, our future finance income may be lower than expected due to changes in market interest rates.
Inflation Risk
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 China's Consumer Price Index increased by 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. If inflation rises, it may materially and adversely affect our business.
Credit Risk
As of December 31, 2011, 2012 and 2013, substantially all of our cash and cash equivalents were held by financial institutions
that we believe to have high credit quality. Therefore, we believe we are
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not
exposed to unusual risks. We have not experienced any losses on deposits of cash and cash equivalents. Due to the limited availability of online payment systems in China and the limited access
children have to online payment channels, users pay for our online business primarily through purchase of our prepaid cards, which distributed through a network of third-party distributors. Our top
three distributors contributed to 10.3%, 8.5% and 8.4% of the sales of our prepaid cards in 2011, 9.8%, 8.9% and 7.2% in 2012, and 7.4%, 6.4% and 6.0% in 2013. We collect payment from distributors
upon delivery of the prepaid cards, which helps reduce our accounts receivable related to our online business. Accounts receivables generated from offline business are primarily resulted from sharing
of box-office revenues and licensing royalties. We made nil, nil and US$0.3 allowance for doubtful accounts in 2011, 2012 and 2013, respectively. We wrote off RMB1.0 million
(US$0.2 million) in bad debt to an independent third party in 2011.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
-
A.
-
Debt Securities
Not
applicable.
-
B.
-
Warrants and Rights
Not
applicable.
-
C.
-
Other Securities
Not
applicable.
-
D.
-
American Depositary Shares
Fees and Charges Our ADS holders May Have to Pay
ADS holders will be required to pay the following service fees to the depository:
|
|
|
Service
|
|
Fee
|
Issuance of
ADSs
|
|
Up to US$0.05 per ADS issued
|
Cancellation of
ADSs
|
|
Up to US$0.05 per ADS canceled
|
Distribution of
cash dividends or other cash distributions
|
|
Up to US$0.05 per ADS held
|
Distribution of
ADSs pursuant to stock dividends, free stock distributions or exercise of rights.
|
|
Up to US$0.05 per ADS held
|
Distribution of
securities other than ADSs or rights to purchase additional ADSs
|
|
Up to US$0.05 per ADS held
|
Depositary
services
|
|
Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary
|
Transfer of ADSs
|
|
US$1.50 per certificate presented for transfer
|
The
depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights
and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the
ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs
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are
cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by
public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.
The
following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued
(including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs),
whichever is applicable:
-
-
a fee of up to US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
-
-
a fee of up to US$0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
-
-
a fee of up to US$0.05 per ADS per calendar year (or portion thereof) for services performed by the depositary in
administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed against holders of ADRs as of the record date or record dates set by the depositary
during each calendar year and shall be payable in the manner described in the next succeeding provision);
-
-
reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of the depositary's agents
(including, without limitation, the custodian and expenses incurred on behalf of holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to
foreign investment) in connection with the servicing of the shares or other deposited securities, the delivery of deposited securities or otherwise in connection with the depositary's or its
custodian's compliance with applicable law, rule or regulation (which charge shall be assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall
be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions);
-
-
a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in
an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities (treating all such securities as if they were shares) but
which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto;
-
-
stock transfer or other taxes and other governmental charges;
-
-
cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or
delivery of shares;
-
-
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; and
-
-
expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars.
We
will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the
depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our
depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and
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exchange
application and listing fees. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued and
outstanding, (ii) the level of fees to be charged to holders of ADSs and (iii) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects
its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary
collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect
its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The
depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the
depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid.
At
the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not Applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. - D. Material Modifications to the Rights of Security Holders
None.
See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.
-
E.
-
Use of Proceeds
The
following "Use of Proceeds" information relates to our registration statement on Form F-1 (file No. 333-174293) filed with the Securities and Exchange Commission on
May 18, 2011 for our initial public offering of 7,187,500 ADSs, representing 143,750,000 ordinary shares, and the underwriters' exercise of their option to purchase an additional 525,224 ADSs,
representing 10,504,480 ordinary shares, which registration statement was declared effective by the Securities and Exchange Commission on June 10, 2011.
We
received net proceeds from the initial public offering (including over-allotment) of approximately US$62.2 million after deducting the underwriting discounts and commissions
and the estimated offering expenses payable by us. As of December 31, 2013, the proceeds were used as follows: (i) US$0.6 million were used to subscribe for the newly issued
shares of Taiwan Taomee through Joy Children in the fourth quarter of 2011; (ii) US$6.2 million were used to acquire 8.02% equity interest in Gamespedia in
second half of 2012; (iii) US$4.3 million were used to pay increased legal, accounting and other operational expenses and costs we incurred as a public company;
(iv) US$6.4 million were used to pay a cash dividend declared in November 2010 to our shareholders in July 2011 and August 2011; (v) US$1.4 million were used to acquire a
minority equity interest in Voozclub in January 2013; (vi) US$3.0 million were used to invest in a short-term money market investment in the second quarter of 2013;
(vii) US$2.0 million were used to acquire a minority equity interest in a Beijing-based pre-school education service provider in September 2013, (viii) US$0.2 million were
used to acquire a minority equity interest in a New York City company that develops mobile applications, animation and products for pre-school children in December 2013; and
(ix) US$4.4 million were used to repurchase our ADSs from the open market during the period from
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December
2011 to December 2013 a total of 1,064,177 ADSs under our share repurchase program approved by the Board in November 2011 and extended in September 2012 and November 2013. We will continue to
use the IPO proceeds primarily for the purposes described in the "Use of Proceeds" section of our Form F-1 in accordance with our business plans and on an as-needed basis.
Proceeds from our initial public offering that have yet to be applied have been invested in bank deposits. Credit Suisse Securities (USA) LLC and Deutsche
Bank Securities Inc were the managing underwriters for our initial public offering.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by
Rule 13a-15(b) under the Exchange Act.
Based
upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2013, our disclosure controls and procedures were
effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles, and includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company's assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company's
receipts and expenditures are being made only in accordance with authorizations of a company's management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of a company's assets that could have a material effect on the consolidated financial statements.
Due
to its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation
and presentation, and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As
required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of the internal control over financial
reporting as of December 31, 2013 using criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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Based
on this assessment, our management has concluded that the internal control over financial reporting was effective as of December 31, 2013.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during 2013 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT
Mr. Shengwen Rong qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F.
Mr. Rong satisfies the independence requirements under the standards set forth in Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3
under the Securities Exchange Act of 1934, as amended.
ITEM 16B. CODE OF ETHICS
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees. We have
filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-174293) filed with the Securities and Exchange Commission on
May 18, 2011, and have filed the amended code of business conduct and ethics as Exhibit 11.1 of our annual report on Form 20-F (file No. 001-35190) filed with the
Securities and Exchange Commission on April 18, 2012. We have posted a copy of our code of business conduct and ethics on our investor relations website at
http://ir.taomee.com/phoenix.zhtml?c=243417&p=irol-sec. We hereby undertake to provide to any person without charge, upon a written request, a copy of our code of business conduct and ethics.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services
rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP our principal external auditors, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
2012
|
|
2013
|
|
|
|
USD
(in thousands)
|
|
USD
(in thousands)
|
|
Audit fees(1)
|
|
|
625
|
|
|
680
|
|
Audit-related fees(2)
|
|
|
61
|
|
|
36
|
|
Tax fees(3)
|
|
|
13
|
|
|
30
|
|
-
(1)
-
"Audit
fees" means the aggregate fees billed for professional services rendered in connection with the audit or review of our financial statements.
-
(2)
-
"Audit-related
fees" represents aggregate fees billed for professional services rendered in connection with the assurance and related services.
-
(3)
-
"Tax
fees" represents the aggregated fees billed for professional services rendered in connection with tax compliance, tax advice and tax planning.
The
policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP including audit
services, audit-related services, tax services and other services as described above for the fiscal year ended December 31, 2013, other than those for de minimus services which are approved by
our audit committee prior to the completion of the audit. Prior to our initial public offering, all initial public offering related accountant fees were approved by the Board.
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Table of Contents
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
On November 28, 2011, we announced a share repurchase plan approved by our board of directors on November 22, 2011 to
repurchase our ADSs, through open market purchase or privately negotiated transactions, up to US$10 million over a period of 12 months. On September 28, 2012 and
November 26, 2013, respectively, our board of directors approved the extension
of such share repurchase plan for another 12 months from November 23, 2012 to November 23, 2013, and from November 24, 2013 to November 23, 2014, respectively, to
repurchase our ADSs up to the remaining balance of the US$10 million. On March 28, 2014, we completed the share repurchase program, under which we repurchased 41,191,160 common shares,
representing approximately 5.4% of our outstanding shares as of March 28, 2014, at an average price of $4.9 per share. On March 28, 2014, we announced a new share repurchase plan to
repurchase up to US$10 million worth of outstanding ADSs over a 12-month period.
The
table below is a summary of the ADSs repurchased by us in the fiscal year of 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number
of ADSs
Purchased(1)
|
|
Average
Price Paid
Per ADS(2)
|
|
Total Number of
ADSs Purchased as
Part of Publicly
Announced Plans
|
|
Approximate
Dollar Value
of ADSs that
May Yet Be
Purchased Under
the Plans
|
|
January 2, 2013 to January 31, 2013
|
|
|
118,771
|
|
US$
|
3.82
|
|
|
704,323
|
|
US$
|
7,228,488
|
|
February 1, 2013 to February 28, 2013
|
|
|
27,308
|
|
US$
|
4.37
|
|
|
731,631
|
|
US$
|
7,109,049
|
|
March 1, 2013 to March 28, 2013
|
|
|
71,855
|
|
US$
|
3.96
|
|
|
803,486
|
|
US$
|
6,824,840
|
|
April 1, 2013 to April 15, 2013
|
|
|
22,197
|
|
US$
|
4.28
|
|
|
825,683
|
|
US$
|
6,729,746
|
|
May 10, 2013 to May 31, 2013
|
|
|
20,100
|
|
US$
|
4.17
|
|
|
845,783
|
|
US$
|
6,645,995
|
|
June 3, 2013 to June 14, 2013
|
|
|
36,314
|
|
US$
|
3.99
|
|
|
882,097
|
|
US$
|
6,500,969
|
|
July 8, 2013 to July 26, 2013
|
|
|
67,940
|
|
US$
|
4.32
|
|
|
950,037
|
|
US$
|
6,207,195
|
|
August 30, 2013
|
|
|
200
|
|
US$
|
4.53
|
|
|
950,237
|
|
US$
|
6,206,289
|
|
November 29, 2013
|
|
|
1,900
|
|
US$
|
4.97
|
|
|
952,137
|
|
US$
|
6,196,846
|
|
December 2, 2013 to December 27, 2013
|
|
|
112,040
|
|
US$
|
5.10
|
|
|
1,064,177
|
|
US$
|
5,625,935
|
|
Total
|
|
|
478,625
|
|
US$
|
4.30
|
|
|
1,064,177
|
|
US$
|
5,625,935
|
|
-
(1)
-
All
the ADSs were purchased in the open market.
-
(2)
-
Each
ADS represents 20 ordinary share. Average price includes service charge and commission occurred during the repurchase.
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not Applicable.
ITEM 16G. CORPORATE GOVERNANCE
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. As a
foreign private issuer with shares listed on the NYSE, we are subject to corporate governance requirements imposed by the NYSE. Under Section 303A of the NYSE's Listed Company Manual, NYSE
listed non-US companies may, in general, follow their home country corporate governance practices in lieu of some of the NYSE corporate governance
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Table of Contents
requirements.
We are committed to a high standard of corporate governance. We believe that there are no significant differences between our corporate governance practices and those of U.S. domestic
companies under the listing standards of the New York Stock Exchange.
ITEM 16H. MINE SAFETY DISCLOSURE
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidate financial statements of Taomee Holdings Limited and its subsidiaries are included at the end of this annual report.
ITEM 19. EXHIBITS
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
1.1
|
|
Form of Third Amended and Restated Memorandum and Articles of Association of the Registrant, which became effective upon the completion of the initial public offering. (incorporated by reference to Exhibit 3.2 of our
registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
2.1
|
|
Registrant's Specimen American Depositary Receipt (incorporated by reference to Exhibit 99.A of our registration statement on Form F-6 (File No. 333-174441) filed with the Commission on May 24,
2011)
|
|
2.2
|
|
Registrant's Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the
Commission on May 31, 2011)
|
|
2.3
|
|
Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 99.A of our registration statement on Form F-6 (File
No. 333-174441) filed with the Commission on May 24, 2011)
|
|
4.1
|
|
Shareholder's Agreement, dated as of May 6, 2009, among the Registrant, the then shareholders of the Registrant and certain other parties listed thereunder. (incorporated by reference to Exhibit 4.4 of our
registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.2
|
|
2009 Stock Option Plan (incorporated by reference to Exhibit 10.1 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18,
2011)
|
|
4.3
|
|
2010 Share Incentive Plan (incorporated by reference to Exhibit 10.2 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18,
2011)
|
|
4.4
|
|
2012 Share Incentive Plan (incorporated by reference to Exhibit 10.1 of our registration statement on Form S-8 (File No. 333-183651), filed with the Commission on August 31, 2012)
|
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Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
4.5
|
|
Form of Indemnification Agreement with the Registrant's directors and officers (incorporated by reference to Exhibit 10.3 of our registration statement on Form F-1 (File No. 333-174293), as amended,
initially filed with the Commission on May 18, 2011)
|
|
4.6
|
|
Form of Employment Agreements with the Registrant's senior executives.(incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially
filed with the Commission on May 18, 2011 and May 24, 2011)
|
|
4.7
|
|
English Translation of Loan Agreement, dated as of June 12, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei and Shanghai
Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.5 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18,
2011)
|
|
4.8
|
|
English Translation of Proxy Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei,
Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.6 of our registration statement on Form F-1 (File
No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.9
|
|
English Translation of Option Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei,
Mr. Yuliang Feng and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.7 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the
Commission on May 18, 2011)
|
|
4.10
|
|
English Translation of Business Operation Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow
Zhen Wei, Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 of our registration statement on Form F-1
(File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.11
|
|
English Translation of Commercial Cooperation Agreement between Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to
Exhibit 10.9 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.12
|
|
English Translation of Equity Interest Pledge Agreement, dated as of March 17, 2010 among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow
Zhen Wei, Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.10 of our registration statement on Form F-1
(File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.13
|
|
Form of Director Agreement with independent directors of the Registrant (incorporated by reference to Exhibit 10.20 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially
filed with the Commission on May 18, 2011)
|
138
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
4.14
|
|
Registration Rights Addendum, dated as of May 4, 2011, between Taomee Holdings Limited and Saban Media Ventures LLC. (incorporated by reference to Exhibit 10.21 of our registration statement on
Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
|
|
4.15
|
|
English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Taomee Network Technology Co., Ltd. (incorporated by reference to
Exhibit 4.17 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.16
|
|
English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to
Exhibit 4.18 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.17
|
|
English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Xinsheng Information Technology Co., Ltd. (incorporated by reference to
Exhibit 4.19 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.18
|
|
English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Taomee Animation Co., Ltd. (incorporated by reference to Exhibit 4.20 of
our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.19
|
|
English Translation of Form Regional Agency Sales Cooperation Agreement of Internet Physical Cards between the Company and third-party distributor (incorporated by reference to Exhibit 4.21 of our annual report
on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.20
|
|
English Translation of Form Regional Agency Sales Cooperation Agreement of Internet Visual Cards between the Company and third-party distributor (incorporated by reference to Exhibit 4.22 of our annual report on
Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.21
|
|
Subscription Agreement, dated June 1, 2012, between Shanghai Taomee Network Technology Co., Ltd. and Jinjun Zhao with respect to the establishment of Guangdong Taomee (incorporated by reference to
Exhibit 4.24 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.22
|
|
Joint Investment Contract for Seer III the Movie, dated February 1, 2013, between Shanghai Taomee Animation Co., Ltd. and Beijing Enlight Pictures Co. Ltd. (incorporated by reference to
Exhibit 4.25 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
|
|
4.23
|
*
|
Series B Preferred Share Purchase Agreement, dated September 13, 2013, among Slanissue Holdings Limited, Slanissue Hong Kong Limited, Slanissue (Beijing) Information Technology Co., Ltd., Beijing
Slanissue Technology Co., Ltd., Beijing Huibozhiye Culture Communication Co., Ltd., Wei Yang, Qi Mo, Liqing Zeng, Zhaoyang Liu, Fan Peng, Qiming Venture Partners III, L.P., Qiming Managing Directors Fund III, L.P.,
Taomee Holdings Limited and Ace Classic Investments Limited.
|
|
8.1
|
*
|
Subsidiaries of the Registrant
|
139
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description of Document
|
|
11.1
|
|
Code of Business Conduct and Ethics of the Registrant, as amended (incorporated by reference to Exhibit 11.1 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on
April 18, 2012)
|
|
12.1
|
*
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
12.2
|
*
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
13.1
|
*
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
13.2
|
*
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
15.1
|
*
|
Consent of Allbright Law Offices
|
|
15.2
|
*
|
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
|
|
101.INS
|
**
|
XBRL Instance Document.
|
|
101.SCH
|
**
|
XBRL Taxonomy Extension Schema Document.
|
|
101.CAL
|
**
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
101.DEF
|
**
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB
|
**
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
101.PRE
|
**
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
-
*
-
Filed
with this annual report on Form 20-F.
-
-
Order
for confidential treatment of portions of this document has been granted by the Commission pursuant to Rule 406 of the Securities
Act.
-
**
-
XBRL
(Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to
liability under these sections.
140
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
|
|
|
|
|
|
|
Taomee Holdings Limited
|
|
|
By:
|
|
/s/ BENSON HAIBING WANG
|
|
|
|
|
Name:
|
|
Benson Haibing Wang
|
|
|
|
|
Title:
|
|
Chief Executive Officer
|
Date:
April 11, 2014
141
Table of Contents
TAOMEE HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TAOMEE HOLDINGS LIMITED
We
have audited the accompanying consolidated balance sheets of Taomee Holdings Limited (the "Company") and its subsidiaries and variable interest entities (the "Group") as
of December 31, 2012 and 2013, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended
December 31, 2013. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2012 and 2013, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the
United States of America.
/s/
Deloitte Touche Tohmatsu Certified Public Accountants LLP.
Shanghai,
China
April 11, 2014
F-2
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(In US dollars, except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2012
|
|
2013
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
118,570,672
|
|
$
|
114,250,772
|
|
Short-term investment
|
|
|
|
|
|
2,992,343
|
|
Accounts receivable, net
|
|
|
2,371,060
|
|
|
2,387,747
|
|
Inventory
|
|
|
41,316
|
|
|
196,757
|
|
Income tax recoverable
|
|
|
49,956
|
|
|
402,460
|
|
Due from related parties
|
|
|
893,020
|
|
|
2,242,382
|
|
Prepayments and other current assets
|
|
|
2,071,509
|
|
|
2,904,695
|
|
Deferred tax assetscurrent
|
|
|
2,969,896
|
|
|
4,166,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
126,967,429
|
|
|
129,543,244
|
|
Investment in equity investees
|
|
|
8,262,077
|
|
|
14,047,509
|
|
Property and equipment, net
|
|
|
1,305,721
|
|
|
1,840,419
|
|
Prepayments for land use rights and building purchase
|
|
|
|
|
|
3,008,520
|
|
Acquired intangible asset
|
|
|
1,664,763
|
|
|
1,252,572
|
|
Other assets
|
|
|
1,557,532
|
|
|
1,496,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
139,757,522
|
|
$
|
151,188,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable (including accounts payable of the consolidated VIEs without recourse to Taomee Holdings Limited of 425,845 and 1,538,665 as of
December 31, 2012 and 2013, respectively)
|
|
$
|
434,626
|
|
$
|
1,549,908
|
|
Income tax payable (including income tax payable of the consolidated VIEs without recourse to Taomee Holdings Limited of 245,189 and nil as of
December 31, 2012 and 2013, respectively)
|
|
|
|
|
|
|
|
Due to related parties (including due to related parties of the consolidated VIEs without recourse to Taomee Holdings Limited of 14,725 and 22,957 as
of December 31, 2012 and 2013, respectively)
|
|
|
89,728
|
|
|
369,983
|
|
Advance from customers (including advance from customers of the consolidated VIEs without recourse to Taomee Holdings Limited of 6,730,725 and
6,184,953 as of December 31, 2012 and 2013, respectively)
|
|
|
8,142,177
|
|
|
6,960,857
|
|
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to Taomee Holdings Limited of 12,061,510 and 12,340,821 as of
December 31, 2012 and 2013, respectively)
|
|
|
12,061,510
|
|
|
12,340,821
|
|
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to
Taomee Holdings Limited of 1,281,439 and 1,680,767 as of December 31, 2012 and 2013, respectively)
|
|
|
5,265,461
|
|
|
6,279,858
|
|
Deferred tax liabilitiescurrent (including deferred tax liabilities of the consolidated VIEs without recourse to Taomee Holdings Limited of 13,473
and 1,758,134 as of December 31, 2012 and 2013, respectively)
|
|
|
13,473
|
|
|
1,758,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,006,975
|
|
|
29,259,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
Taomee Holdings Limited shareholders' equity
|
|
|
|
|
|
|
|
Ordinary shares ($0.00002 par value; 875,000,000 shares authorized; 736,648,732 and 741,126,859 shares issued; 732,409,792 and
735,913,039 shares outstanding as of December 31, 2012 and 2013, respectively)
|
|
|
14,733
|
|
|
14,823
|
|
Treasury stock (at cost)
|
|
|
(747,359
|
)
|
|
(1,198,904
|
)
|
Additional paid-in capital
|
|
|
72,437,283
|
|
|
73,757,483
|
|
Accumulated other comprehensive income
|
|
|
2,555,570
|
|
|
4,342,755
|
|
Retained earnings
|
|
|
39,412,717
|
|
|
44,853,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taomee Holdings Limited shareholders' equity
|
|
|
113,672,944
|
|
|
121,770,134
|
|
Noncontrolling interests
|
|
|
77,603
|
|
|
158,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
113,750,547
|
|
|
121,928,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
139,757,522
|
|
$
|
151,188,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars,
except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Online business, net
|
|
$
|
40,330,778
|
|
$
|
32,169,495
|
|
$
|
35,330,152
|
|
Offline business, net
|
|
|
5,066,263
|
|
|
8,038,739
|
|
|
13,023,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
45,397,041
|
|
|
40,208,234
|
|
|
48,353,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services:
|
|
|
|
|
|
|
|
|
|
|
Online business
|
|
|
(6,035,323
|
)
|
|
(6,949,772
|
)
|
|
(7,643,598
|
)
|
Offline business
|
|
|
(1,652,235
|
)
|
|
(3,048,618
|
)
|
|
(5,620,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services
|
|
|
(7,687,558
|
)
|
|
(9,998,390
|
)
|
|
(13,264,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,709,483
|
|
|
30,209,844
|
|
|
35,089,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
Product development expenses
|
|
|
(10,303,929
|
)
|
|
(12,317,528
|
)
|
|
(13,885,922
|
)
|
Sales and marketing expenses
|
|
|
(6,254,531
|
)
|
|
(9,966,282
|
)
|
|
(9,446,025
|
)
|
General and administrative expenses
|
|
|
(7,965,104
|
)
|
|
(10,077,739
|
)
|
|
(13,095,086
|
)
|
Impairment loss on acquired intangible assets
|
|
|
|
|
|
|
|
|
(1,046,173
|
)
|
Other operating income
|
|
|
1,733,418
|
|
|
5,511,806
|
|
|
5,708,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(22,790,146
|
)
|
|
(26,849,743
|
)
|
|
(31,764,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,919,337
|
|
|
3,360,101
|
|
|
3,324,719
|
|
Interest income
|
|
|
1,409,662
|
|
|
2,646,967
|
|
|
2,931,511
|
|
Other income (expenses), net
|
|
|
666,961
|
|
|
858,869
|
|
|
770,807
|
|
Impairment loss on investment in an equity investee
|
|
|
|
|
|
|
|
|
(370,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and share of profit in equity method investments
|
|
|
16,995,960
|
|
|
6,865,937
|
|
|
6,656,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,539,332
|
)
|
|
1,279,003
|
|
|
(788,724
|
)
|
Deferred
|
|
|
812,262
|
|
|
(424,099
|
)
|
|
(630,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
|
(1,727,070
|
)
|
|
854,904
|
|
|
(1,419,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before share of profit in equity method investments
|
|
|
15,268,890
|
|
|
7,720, 841
|
|
|
5,237,567
|
|
Share of profit in equity method investees
|
|
|
4,224,281
|
|
|
1,139,650
|
|
|
207,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
19,493,171
|
|
|
8,860,491
|
|
|
5,445,333
|
|
Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
(1,376
|
)
|
|
4,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taomee Holdings Limited
|
|
$
|
19,493,171
|
|
$
|
8,861,867
|
|
$
|
5,441,260
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
(200,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to holders of ordinary shares
|
|
$
|
19,292,570
|
|
$
|
8,861,867
|
|
$
|
5,441,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Weighted average number of shares used in calculating earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
606,648,098
|
|
|
731,303,362
|
|
|
733,333,891
|
|
Diluted
|
|
|
640,377,175
|
|
|
753,533,499
|
|
|
746,532,112
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Net income
|
|
$
|
19,493,171
|
|
$
|
8,860,491
|
|
$
|
5,445,333
|
|
Other comprehensive income, net of tax of nil
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
1,683,779
|
|
|
189,354
|
|
|
1,787,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
21,176,950
|
|
|
9,049,845
|
|
|
7,232,518
|
|
Comprehensive income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
(1,376
|
)
|
|
4,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Taomee Holdings Limited
|
|
|
21,176,950
|
|
|
9,051,221
|
|
|
7,228,445
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
(200,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to holders of ordinary shares
|
|
$
|
20,976,349
|
|
$
|
9,051,221
|
|
$
|
7,228,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taomee Holdings Limited Shareholders' equity
|
|
|
|
|
|
|
|
Ordinary shares
|
|
Treasury stock
|
|
|
|
|
|
Accumulated
other
comprehensive
income
|
|
|
|
|
|
|
|
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
|
|
Noncontrolling
interests
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Total
|
|
Total
|
|
Balance as of January 1, 2011
|
|
|
450,000,000
|
|
$
|
9,000
|
|
|
|
|
|
|
|
$
|
1,158,534
|
|
$
|
11,258,280
|
|
$
|
682,437
|
|
$
|
13,108,251
|
|
$
|
|
|
$
|
13,108,251
|
|
Issuance of ordinary shares (net of issuance cost of US$7,707,115)
|
|
|
154,254,480
|
|
|
3,085
|
|
|
|
|
|
|
|
|
61,704,316
|
|
|
|
|
|
|
|
|
61,707,401
|
|
|
|
|
|
61,707,401
|
|
Conversion of series A preferred shares to ordinary shares
|
|
|
125,000,000
|
|
|
2,500
|
|
|
|
|
|
|
|
|
5,825,491
|
|
|
|
|
|
|
|
|
5,827,991
|
|
|
|
|
|
5,827,991
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200,601
|
)
|
|
|
|
|
(200,601
|
)
|
|
|
|
|
(200,601
|
)
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
2,473,160
|
|
|
(562,502
|
)
|
|
|
|
|
|
|
|
|
|
|
(562,502
|
)
|
|
|
|
|
(562,502
|
)
|
Exercise of options
|
|
|
1,646,200
|
|
|
33
|
|
|
|
|
|
|
|
|
97,276
|
|
|
|
|
|
|
|
|
97,309
|
|
|
|
|
|
97,309
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,996,753
|
|
|
|
|
|
|
|
|
1,996,753
|
|
|
|
|
|
1,996,753
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,493,171
|
|
|
|
|
|
19,493,171
|
|
|
|
|
|
19,493,171
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,683,779
|
|
|
1,683,779
|
|
|
|
|
|
1,683,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
730,900,680
|
|
$
|
14,618
|
|
|
2,473,160
|
|
$
|
(562,502
|
)
|
$
|
70,782,370
|
|
$
|
30,550,850
|
|
|
2,366,216
|
|
$
|
103,151,552
|
|
$
|
|
|
$
|
103,151,552
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
9,237,880
|
|
|
(1,754,792
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,754,792
|
)
|
|
|
|
|
(1,754,792
|
)
|
Cancellation of repurchased shares
|
|
|
(7,472,100
|
)
|
|
(149
|
)
|
|
(7,472,100
|
)
|
|
1,569,935
|
|
|
(1,569,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares upon exercise of options and vesting of restricted shares
|
|
|
13,220,152
|
|
|
264
|
|
|
|
|
|
|
|
|
550,966
|
|
|
|
|
|
|
|
|
551,230
|
|
|
|
|
|
551,230
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,252,552
|
|
|
|
|
|
|
|
|
2,252,552
|
|
|
|
|
|
2,252,552
|
|
Reversal of accrued IPO costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,181
|
|
|
|
|
|
|
|
|
421,181
|
|
|
|
|
|
421,181
|
|
Noncontrolling interest for establishment of Guangdong Taomee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,979
|
|
|
78,979
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,861,867
|
|
|
|
|
|
8,861,867
|
|
|
(1,376
|
)
|
|
8,860,491
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,354
|
|
|
189,354
|
|
|
|
|
|
189,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
736,648,732
|
|
$
|
14,733
|
|
|
4,238,940
|
|
$
|
(747,359
|
)
|
$
|
72,437,283
|
|
$
|
39,412,717
|
|
$
|
2,555,570
|
|
$
|
113,672,944
|
|
$
|
77,603
|
|
$
|
113,750,547
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
9,572,500
|
|
|
(2,056,771
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,056,771
|
)
|
|
|
|
|
(2,056,771
|
)
|
Cancellation of repurchased shares
|
|
|
(8,597,620
|
)
|
|
(172
|
)
|
|
(8,597,620
|
)
|
|
1,605,226
|
|
|
(1,605,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares upon exercise of options and vesting of restricted shares
|
|
|
13,075,747
|
|
|
262
|
|
|
|
|
|
|
|
|
859,944
|
|
|
|
|
|
|
|
|
860,206
|
|
|
|
|
|
860,206
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,142,445
|
|
|
|
|
|
|
|
|
2,142,445
|
|
|
|
|
|
2,142,445
|
|
Noncontrolling interest on establishment of Guangdong Taomee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,135
|
)
|
|
|
|
|
|
|
|
(77,135
|
)
|
|
77,135
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,441,260
|
|
|
|
|
|
5,441,260
|
|
|
4,073
|
|
|
5,445,333
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,787,185
|
|
|
1,787,185
|
|
|
|
|
|
1,787,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
|
741,126,859
|
|
$
|
14,823
|
|
|
5,213,820
|
|
$
|
(1,198,904
|
)
|
$
|
73,757,483
|
|
$
|
44,853,977
|
|
$
|
4,342,755
|
|
$
|
121,770,134
|
|
$
|
158,811
|
|
$
|
121,928,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars,
except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,493,171
|
|
$
|
8,860,491
|
|
$
|
5,445,333
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,996,753
|
|
|
2,252,552
|
|
|
2,142,445
|
|
Depreciation and amortization
|
|
|
2,320,731
|
|
|
2,629,532
|
|
|
2,234,816
|
|
Share of profit in equity method investees, net of gain/loss on disposals
|
|
|
(4,224,281
|
)
|
|
(1,139,650
|
)
|
|
(207,766
|
)
|
Deferred income taxes
|
|
|
(812,262
|
)
|
|
424,099
|
|
|
630,339
|
|
Loss on disposal of property and equipment
|
|
|
12,325
|
|
|
3,891
|
|
|
62,811
|
|
Write-off of other receivable
|
|
|
(155,171
|
)
|
|
|
|
|
|
|
Provision of allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
313,851
|
|
Loss from impairment on acquired intangible assets
|
|
|
|
|
|
|
|
|
1,046,173
|
|
Loss from impairment on investment in an equity investee
|
|
|
|
|
|
|
|
|
370,407
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(984,291
|
)
|
|
(948,526
|
)
|
|
(330,538
|
)
|
Inventories
|
|
|
|
|
|
(41,316
|
)
|
|
(155,441
|
)
|
Due from related parties
|
|
|
(202,267
|
)
|
|
16,608
|
|
|
(1,499,362
|
)
|
Prepayments and other current assets
|
|
|
360,721
|
|
|
(232,860
|
)
|
|
(775,819
|
)
|
Other assets
|
|
|
(713,993
|
)
|
|
(565,770
|
)
|
|
(921,629
|
)
|
Accounts payable
|
|
|
(122,878
|
)
|
|
212,806
|
|
|
1,115,282
|
|
Income taxes payable
|
|
|
2,187,076
|
|
|
(2,237,032
|
)
|
|
(352,504
|
)
|
Due to related parties
|
|
|
(25,711
|
)
|
|
76,613
|
|
|
280,255
|
|
Advance from customers
|
|
|
1,539,111
|
|
|
(2,081,132
|
)
|
|
(1,181,320
|
)
|
Deferred revenue
|
|
|
2,129,741
|
|
|
(851,429
|
)
|
|
279,311
|
|
Accrued expenses and other current liabilities
|
|
|
(412,638
|
)
|
|
160,218
|
|
|
858,830
|
|
Return on investment in equity investees
|
|
|
|
|
|
623,120
|
|
|
581,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
22,386,137
|
|
|
7,162,215
|
|
|
9,936,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investment
|
|
|
|
|
|
|
|
|
(2,992,343
|
)
|
Purchases of property and equipment
|
|
|
(826,122
|
)
|
|
(336,612
|
)
|
|
(1,432,161
|
)
|
Purchases of intangible asset
|
|
|
(1,233,020
|
)
|
|
(1,398,020
|
)
|
|
(853,939
|
)
|
Prepayments for land use rights and building purchase
|
|
|
|
|
|
|
|
|
(2,963,461
|
)
|
Lending of loans receivable
|
|
|
|
|
|
(79,548
|
)
|
|
|
|
Lending to a related party
|
|
|
|
|
|
(76,366
|
)
|
|
|
|
Collection of amounts due from related party
|
|
|
|
|
|
76,366
|
|
|
|
|
Cash paid to acquire equity investees
|
|
|
(1,118,538
|
)
|
|
(6,957,520
|
)
|
|
(6,529,154
|
)
|
Proceeds from sale of equity method investees
|
|
|
3,885,000
|
|
|
1,041,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
707,320
|
|
|
(7,730,576
|
)
|
|
(14,771,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares
|
|
|
69,414,516
|
|
|
|
|
|
|
|
Issuance cost of ordinary shares
|
|
|
(6,943,426
|
)
|
|
(340,713
|
)
|
|
|
|
Cash dividends paid
|
|
|
(8,950,000
|
)
|
|
|
|
|
|
|
Proceeds from exercise of share options
|
|
|
|
|
|
275,825
|
|
|
1,046,021
|
|
Capital contribution from noncontrolling interest
|
|
|
|
|
|
78,979
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(562,502
|
)
|
|
(1,681,520
|
)
|
|
(2,144,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
Table of Contents
TAOMEE HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share and per share data, unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Net cash provided by (used in) financing activities
|
|
|
52,958,588
|
|
|
(1,667,429
|
)
|
|
(1,098,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
1,539,719
|
|
|
127,564
|
|
|
1,612,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
77,591,764
|
|
|
(2,108,226
|
)
|
|
(4,319,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of the year
|
|
|
43,087,134
|
|
|
120,678,898
|
|
|
118,570,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
120,678,898
|
|
$
|
118,570,672
|
|
$
|
114,250,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
352,255
|
|
$
|
950,028
|
|
$
|
1,528,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment included in accrued expenses
|
|
$
|
80,942
|
|
$
|
|
|
$
|
|
|
Initial public offering costs not yet paid
|
|
$
|
761,894
|
|
$
|
|
|
$
|
|
|
Repurchases of ordinary shares included in accrued expenses
|
|
$
|
14,343
|
|
$
|
87,615
|
|
$
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities
Taomee Holdings Limited (the "Company"), all of its subsidiaries and consolidated variable interest entities ("VIEs") are collectively referred to as the "Group". The Group is
principally engaged in the development and operation of online virtual worlds, mobile applications and other online services, the provision of related offline operations by licensing the Group's
proprietary cartoon figures to merchandisers and book publishers as well as producing films and trading interactive toys. The Group's principal operations and geographic market are in the People's
Republic of China ("PRC").
The
subsidiaries and consolidated VIEs of the Company as of December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
Name of subsidiaries and consolidated VIEs
|
|
Percentage
of ownership
|
|
Date of incorporation
or combination
|
|
Place of
incorporation
|
Taomee Holdings (HK) Limited ("Taomee Hong Kong")
|
|
|
100
|
%
|
|
November 27, 2008
|
|
Hong Kong
|
Shanghai Shengran Information Technology Co., Ltd. ("Shanghai Shengran")
|
|
|
100
|
%
|
|
June 12, 2009
|
|
PRC
|
Shanghai Taomee Network Technology Co., Ltd. ("Shanghai Taomee")
|
|
|
VIE
|
|
|
October 8, 2007
|
|
PRC
|
Shanghai Qidong Information Technology Co., Ltd. ("Shanghai Qidong")
|
|
|
VIE
|
|
|
March 4, 2009
|
|
PRC
|
Shanghai Taomee Animation Co., Ltd. ("Shanghai Animation")
|
|
|
VIE
|
|
|
November 11, 2010
|
|
PRC
|
Guangdong Taomee Animation Technology Co., Ltd. ("Guangdong Taomee")
|
|
|
VIE
|
|
|
June 1, 2012
|
|
PRC
|
Shanghai Xinsheng Information Technology Co., Ltd. ("Shanghai Xinsheng")
|
|
|
100
|
%
|
|
October 31, 2012
|
|
PRC
|
Shanghai Taomee Wireless Technology Co., Ltd. ("Shanghai Wireless")
|
|
|
99
|
%
|
|
May 6, 2013
|
|
PRC
|
Shanghai Taomee Software Development Co., Ltd. ("Shanghai Software")
|
|
|
99
|
%
|
|
October 29, 2013
|
|
PRC
|
Shanghai Taomee Property Service Co., Ltd. ("Shanghai Property Service")
|
|
|
99
|
%
|
|
November 1, 2013
|
|
PRC
|
The
Group conducts its business primarily through two consolidated VIEs Shanghai Taomee and Shanghai Qidong. Shanghai Animation and Guangdong Taomee were incorporated under Shanghai
Taomee and were consolidated since their respective date of incorporation.
The
Company, through its wholly owned subsidiary Shanghai Shengran, entered into a series of contractual arrangements with the VIEs and the shareholders, pursuant to which the Company is
entitled to receive effectively all economic benefits generated from the shareholders' equity interests in the VIEs. These contractual arrangements include:
(i)
a Proxy Agreement, under which each shareholder of the VIEs has assigned Shanghai Shengran all rights as a shareholder of the VIEs including voting rights. The Proxy Agreement is
valid infinitely and is only subject to be terminated by Shanghai Shengran;
F-9
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities (Continued)
(ii)
an Option Agreement, under which the shareholders of the VIEs granted Shanghai Shengran an irrevocable and exclusive option to purchase all or a portion of their equity interests in
the VIEs when and to the extent permitted by PRC law. The Option Agreement will terminate when the equity interests in the VIEs are legally transferred to Shanghai Shengran;
(iii)
a Business Operation Agreement, under which the shareholders of the VIEs have agreed that Shanghai Shengran shall direct the day-to-day operational and financial activities of the
VIEs including electing directors and officers and hiring personnel, that the VIEs will not conduct any transactions which might substantially affect their assets and business operations without the
prior written consent of Shanghai Shengran, and that the shareholders will unconditionally transfer to Shanghai Shengran, for no consideration, all dividends or other proceeds received from the VIEs
in their capacity as shareholders;
(iv)
a Commercial Cooperation Agreement between the VIEs and Shanghai Shengran, under which Shanghai Shengran is engaged by the VIEs as the exclusive provider of software services,
technology support, and marketing services for a service fee. By virtue of the governance rights Shanghai Shengran maintains over the VIEs, through the terms of the other agreements noted above, the
Company is able unilaterally renew, extend or amend the service agreements at its discretion;
(v)
an Equity Interest Pledge Agreement, under which the shareholders pledged all of their equity interests in the VIEs to Shanghai Shengran as collateral to secure their obligations
under the agreement, and all benefits derived from the equity interests in the VIEs shall be the guarantee for the VIEs' debt. The Equity Interest Pledge Agreement is continuously effective until the
full performance of the contractual obligations or the full repayment of the guaranteed liabilities as described in such agreement; and
(vi)
a Loan Agreement, under which Shanghai Shengran shall provide interest-free loans of up to a total of RMB2.5 million (equivalent to $366,129) to PRC citizens Mr. WANG
Haibing, Mr. WEI Zhen, Mr. CHENG Yunpeng, Mr. ZENG Liqing and Mr. WANG Bin (collectively referred to as the "five shareholders") for their respective capital contributions
in the VIEs. The loans have an unspecified term and will remain outstanding for the duration of Shanghai Shengran or until such time that Shanghai Shengran elects to terminate the agreement (which is
at Shanghai Shengran's sole discretion) at which point the loans are payable on demand. The five shareholders of the VIEs may not prepay all or any portion of the loans without Shanghai Shengran's
prior written request.
Under
the above agreements, the shareholders of the VIEs irrevocably granted Shanghai Shengran the power to exercise all voting rights to which they were entitled. In addition, Shanghai
Shengran has the option to acquire all of the equity interests in the VIEs, to the extent permitted by the then-effective PRC laws and regulations, for nominal consideration. Shanghai Shengran is
entitled to receive service fees for certain services to be provided to the VIEs.
These
contractual agreements are designed to provide the Company control of the VIEs. The Option Agreement and Proxy Agreement provide Shanghai Shengran effective control over the VIEs,
while the Equity Interest Pledge Agreement secures the shareholers' obligations under these agreements. Because the Company, through its wholly owned subsidiary Shanghai Shengran has (1) the
F-10
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities (Continued)
power
to direct the activities of the VIEs that affect the Company's economic performance and (2) the right to receive benefits from the VIEs, it has been deemed to be the primary beneficiary
of the VIEs and has a result consolidated the respective VIEs since the date of execution of such agreements. The call option on subsidiary shares under the Option Agreement and the guarantee of VIEs'
debt under the Equity Interest Pledge Agreement have not been accounted for in the consolidated financial statements since they are agreements between a parent and a consolidated subsidiary. The
service fees under the Commercial Cooperation Agreement are eliminated upon consolidation.
In
arriving at the conclusion that the Company is the primary beneficiary of the VIEs, the Company relied on the determination that the Company's rights under the terms of the Option
Agreement provide it with a substantive kick out right, subject to applicable PRC law. The Company also believes that the minimum amount of consideration permitted by the applicable PRC law to
exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the Option Agreement.
The
Company has concluded that these contractual arrangements are legally binding and the Company exercises control over the VIEs. The Group's current ownership structure, as well as the
contractual arrangements that Shanghai Shengran entered into with the consolidated VIEs and their shareholders are in compliance with all existing PRC laws and regulations. However, the aforementioned
contractual arrangements with the VIEs and their respective shareholders are subject to risks and uncertainties:
-
-
The VIEs and their respective shareholders may have or develop interests that conflict with the Company's interests, which
may lead them to pursue opportunities in violation of or to refuse to renew the aforementioned contractual arrangements.
-
-
The VIEs or their shareholders may be deemed to be in violation of PRC laws and regulations or could fail to obtain the
proper operating licenses. As a result, the PRC government could:
1) Confiscate
incomes of the VIEs, impose fines or other requirements with which the Company's PRC subsidiaries may not be able to comply;
2) Revoke
the business or operating licenses of the Company's PRC subsidiaries;
3) Require
a restructuring of the current VIE structure, or require the VIEs or the Company to mandate a change in ownership structure or operations of the VIEs or the Company, or
discontinue all or any portion of their business.
4) Discontinue
or restrict the operations of any related-party transactions among the Company's PRC subsidiaries;
5) Limit
the Group's business expansion in China through contractual arrangements;
6) Restrict
or prohibit the Company's use of the proceeds from any additional public offering to finance the Company's business and operations
in China.
-
-
The aforementioned contractual agreements may not be as effective as direct ownership in providing control over the VIEs.
The Group may incur substantial costs and resources to
F-11
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities (Continued)
If
these adverse circumstances were to occur, the Company may lose the ability to exert effective control over the VIEs and its shareholders, and it may lose the ability to receive
economic benefits from the VIEs. As a result, the Company may not be able to consolidate the VIEs into its consolidated financial statements. The Company, however, does not believe such actions would
result in the liquidation or dissolution of the Company, the WFOE or the VIEs.
The
aforementioned shareholders collectively own all of the equity interests in the VIEs and together own a majority of the Company's shares as of December 31, 2013. The Company
cannot assure that, when conflicts of interest arise, the shareholders will act in the best interests of the Company or that conflicts of interests will be resolved in the Company's favor. Currently,
the Company does not have existing arrangements to address potential conflicts of interest the shareholders may encounter in their capacity as owners of record and directors of the VIEs, on the one
hand, and as beneficial owners and directors of the Company, on the other hand. The Company believes the shareholders will not act contrary to any of the contractual arrangements and the Option
Agreement entitles the Company to remove the shareholders as beneficial shareholders of the VIEs should any of them act in a way that is detrimental to the Company. The Company relies on the
shareholders as directors and executive officers of the Company to fulfill their fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the
Company cannot resolve any conflicts of interest or disputes between the Company and the shareholders, the Company would have to rely on legal proceedings, which could result in disruption of its
business, and there would likely be substantial uncertainty as to the outcome of any such legal proceedings.
Nonetheless,
the Company believes that its ability to direct the activities of the VIEs that most significantly impact their economic performance and the VIE arrangements are not
affected by current PRC laws and regulations. Accordingly, the VIEs continue to be consolidated by the Company, as the primary beneficiary.
However,
there may be changes and other developments in the PRC laws and regulations or their interpretation could affect the Company's ability to control the VIEs and preclude the
Company from consolidating the VIEs in the future.
F-12
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities (Continued)
Summary
financial information of the Group's VIEs included in the accompanying consolidated financial statements (after eliminating all intercompany transactions and balances, except for
cash flow information which was before eliminating intercompany transactions and balances) is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2013
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
15,466,456
|
|
|
12,216,436
|
|
Accounts receivable, net
|
|
|
2,012,824
|
|
|
1,849,786
|
|
Inventory
|
|
|
41,316
|
|
|
196,757
|
|
Income tax recoverable
|
|
|
|
|
|
585,861
|
|
Due from related party
|
|
|
707,968
|
|
|
2,169,866
|
|
Prepayments and other current assets
|
|
|
427,844
|
|
|
1,614,931
|
|
Deferred tax assetscurrent
|
|
|
2,435,351
|
|
|
3,489,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
21,091,759
|
|
|
22,123,442
|
|
Investment in equity investees
|
|
|
28,186
|
|
|
2,326,793
|
|
Property and equipment, net
|
|
|
643,315
|
|
|
1,163,086
|
|
Acquired intangible asset
|
|
|
350,631
|
|
|
1,030,702
|
|
Other assets
|
|
|
362,148
|
|
|
376,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
22,476,039
|
|
|
27,020,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
425,845
|
|
|
1,538,665
|
|
Income taxes payable
|
|
|
245,189
|
|
|
|
|
Due to related parties
|
|
|
14,725
|
|
|
22,957
|
|
Advance from customers
|
|
|
6,730,725
|
|
|
6,184,953
|
|
Deferred revenue
|
|
|
12,061,510
|
|
|
12,340,821
|
|
Accrued expenses and other current liabilities
|
|
|
1,281,439
|
|
|
1,680,767
|
|
Deferred tax liabilitiescurrent
|
|
|
13,473
|
|
|
1,758,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,772,906
|
|
|
23,526,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company earns service fees from the VIEs which are eliminated upon consolidation. For the years ended December 31, 2011, 2012 and 2013, the service fees payable by the VIEs to
Shanghai Shengran were RMB207 million (US$32.2 million), RMB102 million (US$16.2 million) and RMB118 million (US$19.1 million). The service fees outstanding
and payable to the WFOE from the
F-13
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
1. Organization and principal activities (Continued)
VIEs
were RMB5 million (US$0.8 million) and RMB0.3 million (US$0.05 million) as of December 31, 2012 and 2013, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Net revenues
|
|
$
|
41,204,989
|
|
$
|
33,535,368
|
|
$
|
40,985,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,468,498
|
|
$
|
20,773,883
|
|
$
|
21,586,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Net cash provided by (used in) operating activities
|
|
|
(14,987,061
|
)
|
|
(1,468,141
|
)
|
|
1,741,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(912,413
|
)
|
|
(318,549
|
)
|
|
(4,991,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
78,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalent
|
|
|
(15,899,474
|
)
|
|
(1,707,711
|
)
|
|
(3,250,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
VIEs contributed an aggregate of 90.8%, 83.4% and 84.8% of the consolidated net revenues for the year ended December 31, 2011, 2012 and 2013, respectively. The Company's
operations not
conducted through contractual arrangements with the VIEs primarily consist of its merchandise licensing and book royalty business. As of the fiscal years ended December 31, 2012 and 2013, the
VIEs accounted for an aggregate of 16.1% and 17.9%, respectively, of the consolidated total assets, and 79.9% and 80.4%, respectively, of the consolidated total liabilities. The assets not associated
with the VIEs primarily consist of cash and cash equivalents.
There
are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries. There are no
terms in any arrangements, considering both explicit arrangements and implicit variable interest that require the Company or its subsidiaries to provide financial support to the VIEs. However, if the
VIEs were to require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIEs through loans.
Relevant
PRC laws and regulations restrict the VIEs from transferring a portion of its net assets, equivalent to the balance of its statutory reserve and its share capital, to the
Company in the form of loans and advances or cash dividends. Please refer to Note 12 for disclosure of restricted net assets.
2. Summary of principal accounting policies
-
(1)
-
Basis
of presentation
The
consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America
("US GAAP"). Significant
accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.
F-14
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(2)
-
Basis
of consolidation
The
consolidated financial statements include the financial statements of the Group, its subsidiaries and VIEs. All intercompany transactions and balances are eliminated upon
consolidation.
A
subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power or has the power to: appoint or remove the majority of the members
of the board of directors; cast a majority of votes at the meeting of the board of directors; or govern the financial and operating policies of the investee under a statute or agreement among the
shareholders or equity holders.
US
GAAP provides guidance on the identification and financial reporting for entities over which control is achieved through means other than voting interests, which requires certain VIEs
to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional subordinated financial support from other parties. Through the contractual arrangements between the Company and the VIEs, the
Company controls the operating activities and holds all the beneficial interests of the VIEs and has been determined to be the primary beneficiary of the VIEs. The Company has concluded that such
contractual arrangements are legally enforceable (see footnote 1 for related risks and uncertainties).
-
(3)
-
Use
of estimates
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affected the reported amount of the assets
and liabilities, the disclosure of assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reported periods. Actual results may differ from
those
estimates. Significant accounting estimates reflected in the Group's consolidated financial statements mainly include allowance for doubtful accounts, the useful life of in-game items, useful life and
impairment for property and equipment and intangible asset, impairment of cost method investment and equity method investments, future cash flow estimates for purposes of determining the fair value of
the ordinary shares of the Company before the initial public offering ("IPO"), assumptions related to the valuation of share-based compensation and related forfeiture rates, consolidation of VIEs,
assumptions applied in the classification of equity investments and realization of deferred tax assets. Such accounting policies are impacted significantly by judgments, assumptions and estimates used
in the preparation of our consolidated financial statements, and actual results could differ materially from these estimates.
-
(4)
-
Cash
and cash equivalents
Cash
and cash equivalents represent cash on hand and demand deposits, which are unrestricted as to withdrawal or use, and which have original maturities of three months or less
when purchased.
F-15
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(5)
-
Short-term
investment
Investments
in debt or equity securities are accounted for based on the nature of the products invested, and the Group's intent and ability to hold the investments to maturity. In 2013,
the Company invested in a short-term money market investment whose return is linked to a short term interest rate with interest income accrued on a daily basis. The instrument does not have a stated
maturity but can be traded daily at par value plus accrued interest, subject to certain normal market conditions. The investment was accounted for as an available-for-sale security at fair value with
changes in fair value reflected in other comprehensive income.
-
(6)
-
Accounts
receivable, net
Accounts
receivable mainly consists of receivables from the distribution of films, receivables from third party online payment channels, and royalties due from corporate customers, and
is recorded net of allowance for doubtful accounts. The Group determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected.
Allowance for doubtful accounts are charged to general administrative expenses. The Group recorded nil and $0.3 million allowance for doubtful accounts as of December 31, 2012 and 2013,
respectively.
-
(7)
-
Inventory
Inventory
as of December 31, 2013 primarily consists of interactive toys. Inventories are stated at the lower of cost or market and the cost of merchandise inventory is determined
using the weighted average cost method. The Group records valuation adjustments to write-down the inventories if the cost of specific inventory items on hand exceeds the amount expected to be realized
from the ultimate sale or disposal of the inventory. The Group recorded no inventory write-downs in the periods presented.
-
(8)
-
Investment
in equity method investees
The
Group uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equity interest or otherwise control. The Group
records equity method adjustments in share of earnings and losses. Equity method adjustments include the Group's proportionate share of investee income or loss, adjustments to recognize certain
differences between the Group's carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. Dividends
received are recorded as a reduction of carrying amount of the investment. Cumulative distributions that do not exceed the Group's cumulative equity in earnings of the investee are considered as a
return on investment and classified as cash inflows from operating activities. Cumulative distributions in excess of the Group's cumulative equity in the investee's earnings are considered as a return
of investment and classified as cash inflows from investing activities. Equity method investments only include non-marketable investments. For equity investments over which the Group does not have
significant influence or control, the cost method of accounting is used.
F-16
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
The
Group assesses its equity investments for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to,
current economic and market conditions, the operating performance of the investees including current earnings trends, the technological feasibility of the investee's products and technologies, the
general market conditions in the investee's industry or geographic area, factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and cash burn
rate and other company-specific information including recent financing rounds.
The
group recorded nil, nil and US$0.4 million in impairment losses on equity investee as of December 31, 2011, 2012 and 2013, respectively.
-
(9)
-
Property
and equipment, net
Property
and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line method over the following
estimated useful lives:
|
|
|
|
|
Estimated useful lives
|
Leasehold improvements
|
|
Lesser of the lease term or their estimated useful lives
|
Computers and office equipment
|
|
3-5 years
|
Software
|
|
Lesser of 5 years or the contracted term of use
|
Vehicles
|
|
4 years
|
-
(10)
-
Impairment
of long-lived assets
The
Group evaluates its long-lived assets with definite useful life, including property and equipment and acquired intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Group measures impairment by comparing the carrying amount of the assets to the
future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the future undiscounted cash flow is less than the carrying amount of the
assets, the Group would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. There were nil, nil and US$1.0 million impairment charge
recognized for the years ended December 31, 2011, 2012 and 2013.
The
Group tests the intangible asset with indefinite useful life for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be
impaired. If the carrying amount of the intangible asset exceeds its fair value, the Group recognizes an impairment loss in an amount equal to that excess.
F-17
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(11)
-
Acquired
intangible assets
Upfront licensing fees paid to third party licensors are capitalized when paid and amortized on a straight-line basis over the shorter
of the estimated economic life of the intangible assets or license period, ranging from three to seven years. Amortization of acquired game licenses commences upon the commercial launch of the related
online game. As of December 31, 2012 and 2013, the carrying values of these acquired upfront licensing fees were $1.5 million and $1.1 million, the accumulated amortization were
$0.2 million and $0.2 million, respectively.
The
less than satisfactory performance of certain games indicated that the carrying amounts of acquired intangible assets may not be recoverable. The Group tested the long-lived assets
and goodwill for impairment. As a result of the long-lived asset impairment tests, upfront licensing fees held and used with a carrying amount of $1.0 million were fully impaired, with the
resulting impairment charges included in earnings for the year ended December 31, 2013.
Company purchased a domain name from a third party in 2009 for $141,735. The domain name is considered to have an indefinite useful
life, as there is no legal or contractual limit to its terms of usage. The intangible asset is carried at cost less any accumulated impairment losses.
The
Group recorded amortization of acquired intangible assets of nil, $204,266 and $414,510 for the years ended December 31, 2011, 2012 and 2013, respectively. The amortization
expenses of the above acquired intangible assets will be approximately $273,542, $274,094, $206,875, $206,875 and $124,866 for 2014, 2015, 2016, 2017 and 2018, respectively
-
(12)
-
Film
cost
Film
cost include capitalized production costs, production overhead, development costs and acquired production costs for the production of animated films which have been completed or are
still in production. The costs are stated at the lower of cost, less accumulated amortization, or fair value.
Film
production costs are capitalized and then amortized to cost when the films are completed and on release, together with any participation and residual costs, based on the ratio of
the current period's revenues to estimated remaining total revenues ("Ultimate Revenues") from all sources on an individual production basis. Ultimate Revenues for film productions include revenues
that will be earned within ten years from the date of the initial theatrical release. These estimates are reviewed on a periodic basis.
Costs
of film productions are subject to regular recoverability assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs
of film productions exceed their estimated fair values is written off.
During
production, the Group records the amount paid to the third parties as its capitalized film costs up to the Group's proportionate share of the actual cumulative film production
costs that have
F-18
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
been
incurred by the third parties, as the Group assumes full risk for that portion of the film asset acquired in this transaction. The Group shares the same estimates of ultimate revenue and ultimate
participation costs as the other participants. When the film is released, the Group recognizes its share of the net profit due from the other participants as film revenue and amortizes the capitalized
film costs as cost of film revenue on the consolidated statement of operations based on the ratio of the current period revenues to the estimated ultimate revenues and an estimated profit margin from
the film. The Group records the prepayments and capitalized film costs under these arrangements in other assets on its consolidated balance sheet.
The
Group recorded amortization of capitalized film costs of $556,899, $968,276 and $937,860 for the years ended December 31, 2011, 2012 and 2013, respectively.
-
(13)
-
Treasury
Stock
The
Group accounted for those shares repurchased but not yet cancelled as Treasury Stock at cost and presented separately in the Shareholders' Equity. When the Group cancels the treasury
stock, the difference between the original issuance price and the repurchase price is charged to additional paid-in capital.
-
(14)
-
Revenue
recognition
Online Business
The Group earns revenue primarily through developing and operating proprietary online virtual worlds. The Group provides such services
to children via an online entertainment platform pursuant to two types of revenue models: a time-based revenue model and an item-based revenue model.
For
online services using the time-based model, users pay a subscription fee for calendar days of unlimited play on the online platform. The Group recognizes revenue generated from
subscription fees based on the number of calendar days on which the users are provided the services.
For
the item-based model, revenue is recognized over the estimated lives of the in-game virtual premium items purchased or as the virtual premium items are consumed. For the virtual
premium items that are immediately consumed, revenue is recognized upon consumption. For virtual premium items with no predetermined expiration ("permanent items"), revenue is recognized ratably over
the estimated average lives of the permanent items, which range from half a year to one and a half years. The amount of the unamortized permanent items and unconsumed items are recognized as deferred
revenue. The Group recognized $21,203,727, $16,269,659 and $22,396,393 gross revenue from virtual premium items accounted for under the item-based model for the years ended December 31, 2011,
2012 and 2013, respectively. The Group estimates the average lives of the permanent items based on an assessment of its historical data and user behavior patterns, including the average period that
users typically stay on the platform, the age group of the target users, and the number of active paying users
in the virtual worlds, and the promotional events launched, with reference to industry research data. The Group assesses the estimated lives of premium items periodically. If there are indications of
any
F-19
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
significant
changes to the estimated lives of these premium items, the revised estimates would be applied prospectively in the period of change. Prior to June 30, 2010, the Group did not have
sufficient historical data from its virtual worlds to estimate the useful life of the permanent items, and used the industry research data and peer company information in developing the estimate of
the average life of permanent items, which was determined to be one year for all its virtual worlds. Effective on July 1, 2010, the Group changed the accounting estimate of the useful life of
the permanent items in Mole's World from one year to 18 months based on an analysis of the life of the virtual world and user behavior patterns using historical user data since the launch of
Mole's World in September 2008, and applied such change prospectively. The effect of the change in accounting estimate on the results of operations for the year ended December 31, 2010
was immaterial. In 2011 and 2012, the Group did not make any changes to the useful life of any of its virtual worlds. In 2013, the Group assessed its historical data of user behavior as well as
industry research data and noticed a shortening trend user lifespan and changed the estimated lives of premium items for newly launched online virtual worlds to half a year. The estimated lives of
existing virtual worlds remained unchanged. The Group will continue to monitor the user behavior patterns of each of its virtual worlds and will utilize such information to update the estimates of the
useful lives of permanent items.
Revenues
are recorded net of sales discounts and rebates paid to distributors. The cost of providing free virtual items as a result of promotional activities was immaterial for each of
the three years presented.
Users
pay subscription fees and purchase virtual items using the Group's virtual currency, which can be purchased via various distribution channels, such as the prepaid cards sold by the
Group, third party prepaid cards, online payment channels, and via Short Message Services ("SMS") through cellular telecom operators. Under both the time-based and the item-based revenue models,
proceeds that the Group receives directly from end users for sales of online points are recorded as deferred revenues, while proceeds received from sales of online points to parties in the
distribution channel and from sales of prepaid cards are initially recorded as advances from customers. As the Group does not have control over and generally does not know the ultimate selling price
of the prepaid cards or online points sold by the distributors, the Group records net proceeds from the distributors as advances from customers. Upon activation of prepaid cards or purchase of online
points, advances from customers are immediately transferred to deferred revenues.
Prepaid
cards will expire on the expiration date printed thereon, which is generally two years after the date of card production. Proceeds from expired prepaid cards that have not been
activated are recognized as other operating income upon expiration of the cards. The Group had recognized
$546,360, $1,867,626 and $1,620,842 in other operating income in connection with expired prepaid cards for the years ended December 31, 2011, 2012 and 2013, respectively.
F-20
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
Offline Business
Revenues from the Group's offline business include licensing income and royalty fees for licensing the Group's proprietary cartoon
figures to merchandisers and book publishers. Most of the revenues generated under merchandise licensing income and royalty fees are recognized at the end of each month and calculated at the
contractual royalty rate times the sales of the licensed merchandise product for the month. The sales of the licensed product are derived from the monthly sales reports provided by
the licensee.
In
certain of the merchandise licensing arrangements, the Group receives a guaranteed base fee and additional royalty fees that are contingent on sales volume. Proceeds from minimum
guaranteed royalties in excess of royalties earned are generally recognized as revenues at the end of the contract term. In a small number of its merchandise licensing arrangements, the Group receives
a fixed royalty fee from the licensee over the contract period. The Group recognizes this type of royalty revenue ratably over the contract period.
The Group recognizes revenue from the distribution of its films when the film is exhibited in theaters, provided that no significant
obligations remain, amounts can be accurately estimated, and collection is reasonably assured. Revenue from the distribution of the film on television and websites is recognized when the production is
made available for exhibition and other contractual obligations or conditions are met.
Revenues from selling interactive toys, books and merchandise are recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
Sales tax and Value-added tax
The Group is subject to sales tax at a rate of 5% for sales of prepaid Mimi cards, or value-added tax at a rate of 17% for software
sales and interactive toy sales, or value-added tax at a rate of 6% for certain other services such as advertisement, merchandise licensing and box office revenue sharing, as well as related
surcharges on revenue earned from online services and offline business conducted in the PRC, respectively. The Group presents revenue net of sales taxes or value-added tax incurred.
In
July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of Value-added tax in lieu of business tax
in certain areas and industries in the PRC. Such VAT pilot program is to be phased in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and
December 2012. Starting from August 2012, certain subsidiaries and VIEs became subject to VAT at the rates of 6% on certain service revenues which were previously subject to
business tax.
F-21
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(15)
-
Advance
from customers and deferred revenue
For
online services, online points that have been sold but not activated yet are recognized as advance from customers. Online points that have been activated but for which online
entertainment services will be rendered in the future are recognized as deferred revenue. Under the time-based model, deferred revenue is recognized as revenue based on the calendar days on which the
online services are provided to the end users. Under the item-based model, deferred revenue represents the amounts of unamortized permanent items and unconsumed items. For offline services, advance
from customers represents the unamortized balance of advance royalty fees paid by licensees.
-
(16)
-
Cost
of services
Cost
of revenues consists of primarily of salaries and benefits, bandwidth costs, film production costs, amortization of upfront licensing fees, depreciation and amortization of
equipment and software, inventory cost of merchandise and other direct costs.
-
(17)
-
Product
development costs
Product
development costs consist primarily of personnel-related expenses and other overhead expenses related to the research and development activities.
The
Group expenses software development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility, all subsequent software
costs for that product are capitalized until that product is released for marketing. After a virtual world is released, the capitalized product development costs are amortized over the estimated
product life. Since the
inception of the Group, the amount of costs qualifying for capitalization has been immaterial and, as a result, all software development costs have been expensed as incurred.
-
(18)
-
Sales
and marketing expenses
Sales
and marketing expenses consist primarily of advertising and promotional expenses, animation related expenses, payroll and other overhead expenses incurred by the Group's sales and
marketing personnel. Advertising expenses in the amount of $3,295,128, $5,078,703 and $3,468,749, for the years ended December 31, 2011, 2012 and 2013, respectively, were expensed
as incurred.
-
(19)
-
Government
subsidies
The
Group receives unrestricted cash subsidies of $1,187,059, $3,377,496 and $3,792,495 for the years ended December 31, 2011, 2012 and 2013, respectively, from local government
agencies. The government agencies use their discretion to determine the amount of the subsidies with reference to business tax, value-added tax and income tax paid by the Group and qualification as
high technology projects. These subsidies were an incentive to the Group to establish business within a particular geographic area in China. The subsidies are unrestricted as to use and can be
utilized by the Company in any manner it deems appropriate. The Company has utilized, and expects to continue to utilize,
F-22
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
these
subsidies to fund general operating expenses. The Group records unrestricted government subsidies as other operating income in the consolidated statements of operations.
-
(20)
-
Share-based
compensation
Share-based
payment transactions with employees, such as share options and non-vested restricted shares are measured based on the grant date fair value of the equity instrument.
Share-based payment transactions with nonemployees are remeasured at the end of each reporting period until a measurement date is established. The measurement date of a nonemployee award is the
earlier of (1) the performance commitment date or (2) the date on which the performance is complete. The Group recognizes the compensation costs net of a forfeiture rate on a
straight-line basis, over the requisite service period of the award, which is generally the vesting period of the award. The amount of compensation expenses recognized for any period is not less than
the portion of the grant date fair value of the options vested during that period. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Includes share-based compensation related to:
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
$
|
203,626
|
|
$
|
255,315
|
|
$
|
289,921
|
|
Product development expenses
|
|
|
814,185
|
|
|
498,500
|
|
|
360,852
|
|
Sales and marketing expenses
|
|
|
63,387
|
|
|
68,978
|
|
|
31,938
|
|
General and administrative expenses
|
|
|
915,555
|
|
|
1,383,687
|
|
|
1,459,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,996,753
|
|
$
|
2,206,480
|
|
$
|
2,142,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(21)
-
Operating
leases
Leases
are accounted for as operating leases if substantially all of the risks and rewards of ownership of assets remain with the leasing company. Payments made under operating leases
net of any incentives received are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
-
(22)
-
Income
taxes
Current
income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax
bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates
applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets
will not be realized. The
F-23
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
components
of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
Under
ASC 740 "Income Taxes", a deferred tax liability ("DTL"), except for certain exceptions which is only applicable in terms of investment in foreign subsidiaries,
should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax basis of an investment in a more than 50% interest in a domestic subsidiary, which
represents the outside basis difference. However, the DTL is also not required in the situation where that such outside basis difference can be recovered tax-free and the enterprise expects that it
will ultimately use that means. The Group accrues deferred tax liabilities on the undistributed earnings of its Variable Interest Entities ("VIEs").
The
Group recognizes the impact of uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. The Group
classifies interest and/or penalties related to uncertain tax positions in income tax expense.
-
(23)
-
Foreign
currency translation
The
functional currency and reporting currency of Taomee Holdings Limited and Taomee Hong Kong are the United States dollar ("U.S. dollar"). Monetary assets and liabilities
denominated in currencies other than the U.S. dollar are translated into the U.S. dollar at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than
the U.S. dollar during the year are converted into U.S. dollar at the applicable rates of exchange prevailing on the first day of the month in which the transactions occurred.
Transaction gains and losses are recognized in the consolidated statements of operations.
The
financial records of the Group's PRC subsidiaries and VIEs are denominated in its local currency, the Renminbi ("RMB"), which is the functional currency. Assets and liabilities are
translated into the U.S. dollar at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated
into the U.S. dollar using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulated other
comprehensive income in the consolidated statements of changes in equity and comprehensive income (loss).
The
RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of RMB into
foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign
Exchange Trading System market. The Group's aggregate amount of cash and cash equivalents denominated in RMB amounted to RMB 619,722,535 and RMB 590,488,850 as of December 31, 2012 and
2013, respectively.
F-24
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(24)
-
Concentration
of credit risk
Financial
instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, due from related party and accounts receivable.
All of the Group's cash and cash equivalents are held with financial institutions that the Group believes to be high credit quality. The Group conducts credit evaluations of customers and generally
does not require collateral or other security from its customers. The Group establishes an allowance for doubtful accounts primarily based on the age of the receivables and factors surrounding the
credit risk of specific customers.
Due
to the limited availability of online payment systems in China, a substantial portion of the Group's sales are carried out via a distribution network composed of third-party
distributors. In 2011, 2012 and 2013, there was no concentration of third-party distributors, and none of the distributors represented more than 10% of the total sales to third-party distributors.
-
(25)
-
Fair
value measurement
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. Authoritative literature provides a fair value hierarchy which 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
applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as
quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
assets or liabilities.
The
Group's financial instruments not reported at fair value consist of cash and cash equivalents, accounts receivable, due from related parties, accounts payable, and due to related
parties. The carrying amounts of these financial instruments as of December 31, 2012 and 2013 were considered representative of their fair values due to their short-term in nature.
F-25
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
-
(26)
-
Earnings
per share
Before
the conversion of Series A convertible redeemable preferred shares, the Group has determined that its Series A convertible redeemable preferred shares are
participating securities as the preferred shares participate in the undistributed earnings on the same basis as the ordinary shares. Accordingly, the Group has used the two-class method of computing
earnings per share. Under this method, net income applicable to the holders of ordinary shares is allocated on a pro-rata basis to the ordinary and preferred shares to the extent that each class may
share in income for the period. Losses are not allocated to the participating securities. Diluted earnings per share are computed using the more dilutive of the two-class method or the if-converted
method.
After
the conversion of Series A convertible redeemable preferred shares, basic earnings per share is computed by dividing net income attributable to the holders of ordinary
shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to the holders of ordinary shares as
adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period.
Ordinary share equivalents of stock options and warrants are calculated using the treasury stock method. However, ordinary share equivalents are not included in the denominator of the diluted earnings
per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
-
(27)
-
Recently
issued accounting pronouncements
In
March 2013, the FASB issued ASU 2013-05 related to parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of
assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a
nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related
cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or
substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This ASU is effective prospectively for fiscal years (and interim reporting
periods within those years) beginning after December 15, 2013. It should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be
adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption. The adoption of the
amendments will not have a material impact on the Group's consolidated financial statements.
In
July 2013, the FASB issued ASU 2013-11 which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists. The ASU requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements
as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward is not
F-26
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
2. Summary of principal accounting policies (Continued)
available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the
applicable
jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial
statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is
permitted. The adoption of the amendments will not have a material impact on the Group's consolidated financial statements.
3. Property and equipment, net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2013
|
|
Leasehold improvements
|
|
$
|
1,593,739
|
|
$
|
1,287,820
|
|
Computers and office equipment
|
|
|
3,303,347
|
|
|
4,329,524
|
|
Vehicle
|
|
|
144,453
|
|
|
370,346
|
|
Software
|
|
|
402,339
|
|
|
637,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,443,878
|
|
|
6,625,678
|
|
Less: accumulated depreciation and amortization
|
|
|
(4,138,157
|
)
|
|
(4,785,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,305,721
|
|
$
|
1,840,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for property and equipment was $1,763,832, $1,456,990 and $1,296,956 for the years ended December 31, 2011, 2012 and 2013, respectively.
4. Investment in equity method investees
Elyn, Joychildren and Playgame
In December 2009, the Company obtained a 40% equity interest in Elyn Corporation ("Elyn"), a newly formed entity and its wholly
owned subsidiary Taiwan Taomee Co., LTD ("Taiwan Taomee"), of which 20% was initially held through a related party, as consideration, in exchange for a three-year exclusive right to
operate three virtual worlds on the Group's online entertainment platform in Taiwan and other areas in Asia. The fair value of the exclusive operating right contributed by the Company was $1,666,680.
As the Company has the ability to exercise significant influence over Elyn, the Group accounts for this investment using the equity method of accounting.
In
February 2011, the Company entered into an agreement to sell 10.5% of its equity interest in Elyn that had been indirectly held by the related party. Of the 10.5% equity
interest in Elyn, 9.14% was sold to Qiming Funds, which are existing shareholders of the Company and 1.36% was sold to a
F-27
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
4. Investment in equity method investees (Continued)
third
party investor for $3,385,000, and $500,000, respectively in cash. A gain of $3,662,098 was recognized in share of profit in equity method investments in the consolidated statement of
operations. In addition, the nominee shareholding agreement was terminated with the related party and the Company now holds all of its 29.5% equity in Elyn directly, and continues to account for this
investment using the equity method.
On
August 12, 2011, the Company's equity interest in Elyn was diluted from 29.5% to 28.8% as a result of Elyn's issuing shares to its employees.
In
November 2011, Taiwan Taomee underwent reorganization and contemporaneously issued new ordinary shares to existing shareholders and certain employees. As a result of such
transactions, the Company's equity interest in Taiwan Taomee was changed from 28.8% interest held through Elyn to a 27.6% effective interest which is now held through (1) 29.50% in Elyn, which
held 72.09% of Taiwan Taomee, and (2) 28.77% in Joy Children, shell company with no operations, which owned 21.86% of Taiwan Taomee after the reorganization. The change in equity interest
reflected a dilution resulting from shares issued to Taiwan Taomee's employees, which were accounted for by Taiwan Taomee as stock compensation. In addition, the Company paid total consideration of
$668,992 in cash for the newly issued shares of Taiwan Taomee through Joy Children, which was recorded as an increase in equity method investment.
In
July 2012, the Company's aggregated equity interest through Elyn and Joy Children in Taiwan Taomee was diluted from 27.6% to 27.1%, and is comprised of (1) 29.50% in
Elyn, which holds 70.88% of Taiwan Taomee and (2) 28.77% in Joy Children, which holds 21.49% of Taiwan Taomee. The dilution was due to the issue of new ordinary shares by Taiwan Taomee from
capital surplus and appropriations of 2011 earnings to certain existing shareholders and employees.
In
June 2013, as part of a restructuring of Taiwan Taomee, our equity interest in Taiwan Taomee held through Elyn was transferred to Playgame Sdn. Bhd, a holding company
established in Malaysia, and Elyn was liquidated. Our aggregated equity interest in Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan
Taomee's underwriters after its initial public offering in Taiwan Emerging Stock Market. As a result, Playgames's equity interest in Taiwan Taomee was diluted from 70.88% to 67.87%, resulting in a
gain from investment of approximately $287,790 recognized within share of profit in equity method investees in the consolidated statements of operations of 2013.
The
Group's share of profit in these equity method investments recorded in the consolidated statements of operations for 2011, 2012 and 2013 was $965,959, $506,644 and $500,388 from Elyn
/ (Playgame) and $7,757, $191,381 and $96,869 from Joy Children, respectively.
In October 2010, pursuant to an equity investment agreement entered into with Shenzhen Decent Investment Limited
(Note 15) and two individuals unrelated to the Group, Shenzhen Ruigao Information Technology Co., Ltd. ("Ruigao") was formed in the PRC for the purpose of developing
console games. Shanghai Taomee obtained a 17.65% equity interest in Ruigao for total cash
F-28
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
4. Investment in equity method investees (Continued)
consideration
of $986,370, which was paid in two installments, with the first payment being made in October 2010 and the remaining payment of $502,534 being paid in the first quarter of 2011.
As Shanghai Taomee has the ability to exercise significant influence over Ruigao, the Group accounts for this investment using the equity method of accounting.
In
May 2012, a third party investor obtained 7.5% equity interest in Ruigao through a capital injection. As a result of this transaction, Shanghai Taomee's effective equity
interest in Ruigao was diluted to 15.61%.
In
July 2012, Shanghai Taomee sold all its equity interest in RuiGao for $1,041,124 and recorded a gain of $323,982.
The
Group's equity in losses of Ruigao in 2011 was $52,864 and the equity in profit of Ruigao in 2012 was $152,953.
In the first quarter of 2012, the Company paid RMB 900,000 ($142,694) to acquire a 6% of equity interest in Guangzhou Chuangyou
Information Technology Co., Ltd ("Chuangyou"), a company principally engaged in the design and development of online games in China, and a call option to further subscribe for a 13.16%
newly issued equity interest in the future at RMB 3,500,000 (equivalent to $555,476) if certain operating targets are met ("Call Option"). In September 2012, the Company exercised the Call
Option and completed the further acquisition in January 2013 with a total equity share of 19.16%. Prior to these events, Chuangyou was a related party of the Company as one of Chuangyou's
investors is the Company's director and also a principal shareholder. Refer to Note 15 for detail description of related party transactions.
Shanghai
Taomee has the ability to exercise significant influence over Chuangyou primarily through representation in the board of directors and accounts for the investment using the
equity method of accounting. In December 2013, Chuangyou entered into an agreement to issue new shares for RMB 2.5 million (approximately $0.4 million) to a new investor.
The Company's equity share in Chuangyou will be diluted to 9.58% upon the closing of the transaction.
The
Group's equity in the losses of Chuangyou in 2012 and 2013 were $35,310 and $212,240, which were recognized as share of loss in equity method investment in the consolidated
statements of operations.
As
of December 31, 2013, Chuangyou has experienced a deteriorating financial position and performance and the Company does not expect them to generate any positive future cash
flows. Accordingly, the Company recorded an impairment loss of $370,407 in 2013 on Chuangyou investment based on its fair value.
In March 2013, pursuant to an equity investment agreement entered into with five individuals unrelated to the Group, Shanghai
Taoyue Information Technology Co., Ltd. ("Taoyue") was formed in
F-29
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
4. Investment in equity method investees (Continued)
the
PRC for the purpose of developing online games. Shanghai Taomee obtained a 40% equity interest in Taoyue for cash consideration of RMB 2.0 million (equivalent to $323,798).
As
Shanghai Taomee has the ability to exercise significant influence over Taoyue, the Group accounts for this investment using the equity method of accounting.
The
Group's equity in the losses of Taoyue in 2013 was $150,052 and was recognized as share of loss in equity method investment in the consolidated statements of operations.
In
January 2014, Shanghai Taomee fully transferred its investment in Taoyue to an existing shareholder of Taoyue at the original purchase price.
In September 2013, pursuant to an equity investment agreement entered into with two individuals unrelated to the Group, Jiangxi
Haomi Network Technology Co., Ltd ("Jiangxi Haomi") was formed in the PRC to develop family entertainment and education applications on mobile and multi-screen platforms in Mainland
China. Shanghai Taomee obtained a 43% equity interest in Jiangxi Haomi for cash consideration of RMB 12.9 million (approximately $2.1 million).
As
Shanghai Taomee has the ability to exercise significant influence over Jiangxi Haomi, the Group accounts for this investment using the equity method of accounting.
The
Group's equity in the losses of Jiangxi Haomi in 2013 was $27,199 and was recognized as share of loss in equity method investments in the consolidated statements
of operations.
5. Investment in cost method investees
The Company applies the cost method of accounting for investments in unconsolidated affiliates when the Company does not have the ability to exercise significant influence.
In
September 2012, the Company acquired 8.02% equity interest in Gamespedia Holdings Limited ("Gamespedia") for $6.2 million in cash. Gamespedia is a Cayman company and
operates its mini game portal website through its wholly owned subsidiaries and VIEs in China. This investment is accounted for under the cost method.
In
February 2013, the Company acquired a minority equity interest in Voozclub Co., Ltd., or Voozclub, a Korea-based character and animation studio with an
established presence in global brand licensing, online games, publishing and theme parks, for a cash consideration of $1.4 million.
In
September 2013, the Company acquired a minority stake of a Beijing-based pre-school education service provider for a cash consideration of $2.0 million.
In
December 2013, we entered into an investment agreement to acquire a minority stake of a New York City company that develops mobile applications, animation and products
for pre-school children, for a cash consideration of $150,003.
F-30
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
5. Investment in cost method investees (Continued)
As
of December 31, 2013, there were no indicators of impairment for any of the Company's investments in cost method investees.
6. Series A convertible redeemable preferred shares
On May 6, 2009, the Group issued 125,000,000 shares of Series A convertible redeemable preferred shares, par value $0.00002, at $0.04 per share ("Preferred Shares")
for aggregate cash proceeds of $4,948,718, net of direct and incremental equity issuance costs of $51,282 to new investors (the "Investors"). As the Preferred Shares were negotiated with
independent third party investors, the cash proceeds received represented the fair value of the issued Preferred Shares. The accretion to the redemption value was calculated over the period from the
issuance date to the earliest redemption date using the effective interest method and reflected as a reduction to net income to arrive at net income attributable to the ordinary shareholders in the
accompanying consolidated statements of operations and amounted to $200,601 for the year ended December 31, 2011.
Given
the nature of certain key terms of the Preferred Shares including the conversion feature and redemption feature, the Company classified the Preferred Shares as mezzanine equity.
All
the Preferred Shares were converted into 125,000,000 ordinary shares upon the consummation of the IPO in June 2011 on a one-to-one basis.
The
reconciliation of the Series A Convertible Redeemable Preferred Shares is as follows:
|
|
|
|
|
|
|
Year ended
December 31,
2011
|
|
Balance at January 1
|
|
$
|
5,627,390
|
|
Issuance of Series A convertible redeemable preferred shares
|
|
|
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
200,601
|
|
|
|
|
|
|
|
|
|
|
Conversion to ordinary shares
|
|
|
(5,827,991
|
)
|
Balance at December 31
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Ordinary Shares
On February 14, 2011, the Company's shareholders approved and executed a 50-for-one share split of the Company's share capital. Each ordinary share and each Series A
convertible redeemable preferred share of the Company is subdivided into 50 shares at a par value of $0.00002. The preferred shares remain convertible into ordinary shares at a
1:1 ratio. This share split has been retroactively reflected for all periods presented.
On
June 10, 2011, the Company completed an initial public offering of 154,254,480 ordinary shares on New York Stock Exchange and received proceeds of $64,555,500,
net of underwriting discounts and commissions of $4,859,016. On June 8, 2011, we listed our ADSs on the New York Stock Exchange, or NYSE, under the ticker symbol "TAOM". As of
December 31, 2012 and 2013, the Group had 29,633,648 and 16,557,901 ordinary shares respectively, including restricted shares, which were legally
F-31
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
7. Ordinary Shares (Continued)
issued
according to its share incentive plans, but were not deemed issued or outstanding from an accounting perspective.
8. Treasury Stock
In November 2011, the Company's Board authorized a share repurchase program to repurchase up to US$10 million of the Company's American Depositary Shares ("ADSs") (each ADS
represents twenty ordinary shares) from November 2011 to November 2012. In September 2012, the Group decided to further extend the share repurchase plan for another
12 months to November 23, 2013. In December 2013, the Group announced the further extension of the share repurchase plan from November 24, 2013 to
November 23, 2014.
During
the years of 2011, 2012 and 2013, the Company had repurchased 123,658, 461,894 and 478,625 ADSs respectively on the open market, representing 2,473,160, 9,237,880 and
9,572,500 ordinary shares for total cash consideration of $562,502, $1,754,792 and $ 2,056,771, respectively. As of December 31, 2013, the Company has repurchased a total of
1,064,177 ADSs, representing 21,283,540 ordinary shares for cash consideration of $ 4,374,065.
9. Share-based Compensation
The Company measures share-based compensation cost on the grant date at the fair value of the award and recognizes this cost as an expense over the grant recipients' requisite service
periods.
The
following table presents the Company's share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Share options
|
|
$
|
1,654,630
|
|
$
|
792,691
|
|
$
|
671,768
|
|
Non-vested restricted shares
|
|
|
342,123
|
|
|
1,413,789
|
|
|
1,470,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
|
|
$
|
1,996,753
|
|
$
|
2,206,480
|
|
$
|
2,142,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to 2009, the Group did not grant share-based awards to employees, officers, directors or individual consultants and/or advisors who rendered services to the Group.
On
May 6, 2009, the Board of Directors of the Company approved the 2009 Share Incentive Plan, which authorized the issuance of options to purchase up to
45,000,000 ordinary shares to the Group's employees, directors, and consultants, as determined by the Board of Directors of the Company. The maximum contractual term of the awards under this
plan shall be no more than ten years from the date of grant. For the years ended December 31, 2009 and 2010, 10,500,000, 35,175,000 options were granted to the employees of the Group at
exercise prices at $0.04 and $0.07, respectively, and these awards vest over a four-year period, with 25% of the options to vest on the each of the anniversary
F-32
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
9. Share-based Compensation (Continued)
after
the grant date. As of December 31, 2013, options to purchase 11,879,840 ordinary shares were outstanding under the Company's 2009 Share Incentive Plan.
On
June 13, 2010, the Board of Directors of the Company further approved the 2010 Share Incentive Plan, which authorized the issuance of options to
purchase up to 55,000,000 ordinary shares to employees, directors, and consultants of the Group, as determined by the Board of Directors of the Company. The maximum contractual term of the
awards under this plan shall be no more than ten years from the date of grant.
On
January 4, 2011, the Company granted options to the employees of the Group and a third party consultant to purchase 16,665,000 and 2,500,000 of ordinary shares of the Company,
respectively, at an
exercise price of $0.36 per share under the Company's 2010 Share Incentive Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after
the grant date. The 2,500,000 options were in provided exchange for consulting services which were to have been delivered over the next four years. In September 2011, the options granted
to a third party consultant were forfeited as the underlying service contract was terminated.
On
May 24, 2011, the Company granted options to the directors and certain employees to purchase a total of 20,175,000 ordinary shares of the Company at an exercise price of
$0.45 per share under the Company's 2010 Share Incentive Plan. These options vest over either a four or three year period, each with a graded vesting schedule, all commencing on
May 24, 2011.
On
November 21, 2011, the Company granted options to an employee of the Group to purchase up to 150,000 ordinary shares at an exercise price of $0.26 per share under the
Company's 2010 Share Incentive Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date.
On
July 16, 2012, the Company granted options to employees and directors of the Group to purchase up to a total of 19,840,000 ordinary shares of the Company at an exercise
price of $0.24 per share under the Company's 2010 Share Incentive Plan. These options vest over a four-year period, each with a graded vesting schedule, all commencing on July 16, 2012.
On
July 20, 2012, the Company granted options to directors of the Group to purchase up to a total of 3,600,000 ordinary shares of the Company at an exercise price of $0.20
per share under the Company's 2010 Share Incentive Plan. These options vest over a three year period, each with a graded vesting schedule, all commencing on July 20, 2012.
As
of December 31, 2013, options to purchase 16,120,000 ordinary shares were outstanding under the Company's 2010 Share Incentive Plan.
On
July 25, 2012, the Annual General Meeting of the Company further approved the 2012 Share Incentive Plan, which authorized the issuance of options to
purchase up to 30,000,000 ordinary shares
F-33
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
9. Share-based Compensation (Continued)
to
employees, directors, and consultants of the Group, as determined by the Board of Directors of the Company. The maximum contractual term of the awards under this plan shall be no more than ten
years from the date of grant. As of December 31, 2013, there were no options granted under the 2012 Share Incentive Plan.
The
weighted-average grant date fair value for options granted during the years ended December 31, 2011, 2012 and 2013 was $0.22, $0.12 and nil per
share, respectively. 1,646,200, 9,639,780 and 10,412,700 options were exercised during the years ended December 31, 2011, 2012 and 2013, respectively. Total intrinsic value of options
exercised for the years ended December 31, 2011, 2012 and 2013 was $266,516, $1,251,212, and $1,569,183, respectively.
On
March 30, 2012, 14,090,000 shares granted on January 4, 2011 and 14,700,000 shares granted on May 24, 2011 have been converted to restricted shares
at a ratio of 3:1. This event was accounted for as a modification of share-based award with no incremental compensation cost recognized as the fair value of the restricted shares was not more than the
fair value of the options canceled on the date of exchange.
The
fair value of the options was estimated using the Black-Scholes-Merton option-pricing model in 2011 and binomial option-pricing model in 2012. The risk-free interest rate for periods
within the contractual life of the option is based on the yield of Chinese International Government Bond, which is denominated in U.S. dollars. The expected life of options granted represents
the period of time that the options are expected to be outstanding and is based on option terms related to vesting schedule and option expiration date. Expected volatilities are based on the
volatility of comparable companies with the time period commensurate with the expected time period.
The
key assumptions used in the Black-Scholes-Merton and binomial option-pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
2011
|
|
2012
|
|
Risk-free interest rate
|
|
|
1.11%-2.61%
|
|
|
2.51%-3.04%
|
|
Expected term
|
|
|
6-6.25 years
|
|
|
|
|
Contractual term
|
|
|
|
|
|
8.78-10 years
|
|
Expected volatility rate
|
|
|
55.00%-60.00%
|
|
|
54.57%-57.16%
|
|
Dividend yield
|
|
|
0%
|
|
|
0%
|
|
In
determining the fair value of the Company's ordinary shares underlying the options granted before the completion of the Company's IPO in 2011, the Company used generally accepted
valuation methodologies, including the discounted cash flow approach and the guideline comparable method, which incorporates certain assumptions including the market performance of comparable listed
companies as well as the financial results and growth trends of the Company, to derive the total equity value of the Company. The equity value is then allocated using the option pricing method under
three scenarios, namely liquidation scenario, redemption scenario and IPO scenario (based on the terms of the preferred shares, share options and management's expectation on IPO event) to determine
the fair
F-34
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
9. Share-based Compensation (Continued)
value
of ordinary shares. Under the option-pricing method, each class of stock is modeled as a call option with a distinct claim on the enterprise value of the Company. The main inputs to this model
include equity value of the Company, exercise price, expected volatility, expected time to expiration, expected dividend yield, and risk free interest rate. With regard to the share options and
restricted shares that were awarded on May 24, 2011, the Company used the mid-point of the price range set forth in the preliminary prospectus of IPO as the estimated fair value of ordinary
shares.
In
determining the fair value of the Company's ordinary shares underlying the options granted after the IPO, the Company used the closing spot price of the Company on the principal
exchange or system.
A
summary of the option activity for the year ended December 31, 2013 and the information regarding the options outstanding as of December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of options
|
|
Weighted average
exercise price
|
|
Weighted
Average
remaining
contract terms
|
|
Aggregate
intrinsic value
|
|
Options outstanding at January 1, 2013
|
|
|
46,921,360
|
|
$
|
0.14
|
|
|
|
|
|
|
Granted
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,508,820
|
)
|
$
|
0.16
|
|
|
|
|
|
|
Conversion to restricted shares
|
|
|
|
|
$
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,412,700
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2013
|
|
|
27,999,840
|
|
$
|
0.16
|
|
7.5 years
|
|
|
2,565,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest at December 31, 2013
|
|
|
26,599,848
|
|
$
|
0.16
|
|
7.5 years
|
|
|
2,437,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2013
|
|
|
12,051,090
|
|
$
|
0.13
|
|
7.0 years
|
|
|
1,561,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2013, there was $1,208,282 in total unrecognized compensation expense related to unvested options granted under the share incentive plans, which is expected to
be recognized over a weighted-average period of 2.2 years.
On
May 24, 2011 and July 16, 2012, the Company granted 4,500,000 and 400,000 non-vested restricted shares to its employees and officers
for no consideration, respectively, under the Company's 2010 Share Incentive Plan. These restricted shares will vest over a four-year requisite service period, with 25% to vest on each anniversary
after the grant date. The fair value of non-vested restricted shares was computed based on the fair value of the Group's ordinary shares on the grant date.
On
June 1, 2012, Shanghai Taomee granted a co-founder and senior management of Guangdong Taomee a 15% equity interest in Guangdong Taomee in the form of non-vested restricted
shares. These restricted shares will vest over a three-year requisite service period, with 33.3% to vest on each anniversary after the grant date. The fair value of non-vested restricted shares was
determined based
F-35
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
9. Share-based Compensation (Continued)
on
estimated fair value of Guangdong Taomee on the grant date. The Company recorded $46,072 and $80,571 compensation expense related to these non-vested restricted shares in 2012 and 2013. As of
December 31, 2013, there was $114,439 unrecognized compensation expense to be recognized over the weighted-average period of 1.5 years.
On
September 4, November 5, and December 11, 2013, the Company granted a total of 10,190,000, 4,800,000 and 394,560 non-vested restricted shares to employees,
officers and an external consultant at par value, respectively, under the Company's 2010 Share Incentive Plan. These restricted shares will vest over a four-year requisite service period, with 25% to
vest on each anniversary after the grant date. The fair value of non-vested restricted shares granted to employees and officers was computed based on the fair value of the Group's ordinary shares on
the grant date, while the fair value of non-vested restricted shares granted to an external consultant was re-measured at the end of each reporting period until the services being provided is
completed.
A
summary of the non-vested restricted shares activities under share incentive plan for the year ended December 31, 2013 and the information regarding the restricted shares
outstanding as of December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
Number of
Non-vested Restricted Shares
|
|
Weighted average
grant-date
fair value
|
|
Non-vested as of January 1, 2013
|
|
|
8,649,648
|
|
|
0.60
|
|
Granted
|
|
|
15,384,560
|
|
|
0.25
|
|
Forfeited
|
|
|
(2,330,747
|
)
|
|
0.54
|
|
Vested
|
|
|
(2,663,047
|
)
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2013
|
|
|
19,040,414
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2013, there was $4,785,797 of total unrecognized compensation expense related to non-vested restricted shares granted under 2010 share incentive plan, which is
expected to be recognized over a weighted-average period of 3.0 years.
10. Taxation
Cayman Islands
The Group is incorporated in the Cayman Islands and is not subject to tax in this jurisdiction. In addition, upon payment of dividends
by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
F-36
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
10. Taxation (Continued)
Hong Kong
The Group's subsidiaries in Hong Kong did not have assessable profits that were derived in Hong Kong during each of the three years
ended December 31, 2011, 2012 and 2013. Therefore, no Hong Kong profit tax has been provided for in the years presented.
PRC
Pursuant to PRC New Corporate Income Tax Law effective January 1, 2008, the Group's VIE subsidiaries incorporated in the
PRC are subject to Enterprise Income Tax ("EIT") on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the EIT Law and the Income Tax Law of
the People's Republic of China.
In
April 2009, Shanghai Taomee obtained a Software Enterprise Certification (the "Certification"), which was effective on January 1, 2009. An enterprise having such
Certification is entitled to two years' exemption and three years' 50% reduction in corporate income tax (the "tax holiday"). Shanghai Taomee was subject to an income tax rate of 0% for both
2009 and 2010, and 12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax authorities in May 2010. In 2010 Shanghai Taomee obtained "High and
New Technology Enterprise" ("HNTE") qualification. Subject to certain new implementation rules for application and assessment of HNTE announced by certain government authorities in 2008, every
qualified HNTE company is required to re-apply for this
qualification. The HNTE qualification is valid for three years and could be renewed for another 3 year period. In 2013 Shanghai Taomee re-applied for the HNTE and received approval for the HNTE
qualification. Entities with HNTE are entitled to enjoy a 15% preferential EIT rate during the valid period.
In
September 2010, Shanghai Shengran also obtained a Software Enterprise Certification and was informed in April 2011 that the full EIT exemption would apply retroactively
in 2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013.In May 2012, Shanghai Shengran further received a written approval from local tax authorities, according to which
Shanghai Shengran was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of $2.1 million as a
one-time tax benefit in 2012.
In
November 2013, Shanghai Animation obtained an Animation Enterprise Certification, which provides an enterprise entitling to two years' exemption and three years' 50% reduction
in corporate income tax (the "tax holiday"). The Company is in the process of obtaining the written approval from tax authorities for the tax holiday.
Shanghai
Qidong, Guangdong Taomee, Shanghai Xinsheng, Shanghai Wireless, Shanghai Software and Shanghai Property Service were subject to an income tax rate of 25%.
In
accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises ("FIEs") earned after January 1, 2008, are subject to a 10% withholding income
tax. In addition, under certain tax treaties between the PRC and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident and beneficial owner, the
applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less
F-37
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
10. Taxation (Continued)
than
25% in the FIE. A deferred tax liability should be recognized for the undistributed profits of PRC companies unless the Company has sufficient evidence to demonstrate that the undistributed
dividends will be reinvested and the remittance of the dividends will be postponed indefinitely. As of December 31, 2013, the Group plans to indefinitely reinvest undistributed profits earned
from Shanghai Shengran in its operations in the PRC. Therefore, no withholding income tax for undistributed profits of Shanghai Shengran has been provided in 2013.
Upon
distribution of those earnings generated after January 1, 2008, in the form of dividends, the Group would be subject to the applicable PRC dividend withholding tax.
Distributions of earnings generated before January 1, 2008 are exempt from PRC dividend withholding tax. The amounts of
unrecognized deferred tax liabilities for these earnings generated after January 1, 2008 are in the range of $3.0 million to $6.0 million, as the withholding tax rate of the
profit distribution will be 5% or 10% depends on whether the immediate offshore companies can enjoy the preferential withholding tax rate of 5%.
Under
applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax
basis in a domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the
enterprise expects that it will ultimately use that means. As of December 31, 2013, deferred tax liabilities of US$1.5 million were accrued for undistributed earnings of Shanghai Taomee
and Guangdong Taomee, on the basis that distribution of the earnings, in the form of dividends or otherwise, to Shanghai Shengran would be subject to the applicable PRC tax laws and regulations,
unless a tax strategy which the Group determined to avail itself of were devised to avoid such tax. Prior to 2013, these entities were in an accumulated loss position.
The
Group made its assessment of the level of authority for each of its uncertain tax position (including the potential application of interests and penalties) based on the technical
merits, and has measured the unrecognized benefits associated with the tax positions. This assessment did not have any impact on the Group's total liabilities or equity. At December 31, 2011,
2012 and 2013, the amounts of gross unrecognized tax benefits were zero. The Group does not anticipate any significant increase to its liability for unrecognized tax benefit within the next
12 months. The Group will classify interest and penalties related to income tax matters, if any, in income tax expense.
According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the
taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding RMB
100,000 is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in
the case of tax evasion. The Group's PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2009 through 2013 on non-transfer pricing matters, and from 2007 (year of
incorporation) through 2013 on transfer pricing matters.
F-38
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
10. Taxation (Continued)
Reconciliation
between the effective income tax rate and the PRC statutory income tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
PRC statutory tax rate
|
|
|
25.0
|
%
|
|
25.0
|
%
|
|
25.0
|
%
|
Tax effect of other expenses that are not deductible in determining taxable profit
|
|
|
0.1
|
%
|
|
0.4
|
%
|
|
2.5
|
%
|
Effect of different tax rate of group entity operating in other jurisdictions
|
|
|
2.8
|
%
|
|
7.0
|
%
|
|
3.5
|
%
|
Effect of tax holidays granted to PRC subsidiaries, deferred income tax impact
|
|
|
(0.6)
|
%
|
|
(2.8)
|
%
|
|
(8.5)
|
%
|
Effect of tax holidays granted to PRC subsidiaries, current income tax impact
|
|
|
(14.3)
|
%
|
|
(13.9)
|
%
|
|
(13.7)
|
%
|
Effect of additional research and development of new technology, products, and processes ("R&D") deduction
|
|
|
(0.8)
|
%
|
|
(3.5)
|
%
|
|
(1.8)
|
%
|
Effect of valuation allowance
|
|
|
0.9
|
%
|
|
1.4
|
%
|
|
1.3
|
%
|
Withholding tax on undistributed earnings
|
|
|
(2.9)
|
%
|
|
|
|
|
21.8
|
%
|
Effect of adjustment of prior year tax benefit
|
|
|
|
|
|
(26.0)
|
%
|
|
(9.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
10.2
|
%
|
|
(12.4)
|
%
|
|
20.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate dollar effect of tax holidays on income tax expense for the period amounted to $2,463,963, $2,546,454, and $1,551,717 in 2011, 2012 and 2013, respectively, representing a
decrease in basic earnings per share of less than $0.01 and a decrease in diluted earnings per share less than of $0.01 for each of the three years in the period ended December 31, 2013
F-39
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
10. Taxation (Continued)
The
principal components of the Group's deferred income tax assets and liabilities as of December 31, 2012 and 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2013
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Deferred revenue and advance from customers
|
|
$
|
2,441,578
|
|
$
|
2,738,502
|
|
Payroll payable and accrued expenses
|
|
|
363,097
|
|
|
639,491
|
|
Net operating losses
|
|
|
242,460
|
|
|
475,471
|
|
Advertising expenses
|
|
|
151,510
|
|
|
356,419
|
|
Other
|
|
|
13,711
|
|
|
292,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets:
|
|
$
|
3,212,356
|
|
$
|
4,502,075
|
|
Valuation allowances
|
|
|
(242,460
|
)
|
|
(335,987
|
)
|
Net deferred tax assets
|
|
$
|
2,969,896
|
|
$
|
4,166,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
13,473
|
|
|
229,540
|
|
Undistributed retained earnings of VIE
|
|
|
|
|
|
1,528,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
13,473
|
|
$
|
1,758,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets are analyzed as:
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,969,896
|
|
$
|
4,166,088
|
|
Non-Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,969,896
|
|
$
|
4,166,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities are analyzed as:
|
|
|
|
|
|
|
|
Current
|
|
$
|
13,473
|
|
$
|
1,758,134
|
|
Non-Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,473
|
|
$
|
1,758,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As
of December 31, 2013, some of the Group's PRC subsidiaries had net operating loss carry forwards of $1.92 million, of which $0.01 million, $0.01 million,
$0.01 million, $1.36 million and $0.53 million will expire in 2014, 2015, 2016, 2017 and 2018, respectively. The Group has provided a full valuation allowance as it is more likely
than not that the net operation losses cannot be utilized before expiry.
F-40
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
11. Employment benefits and profit appropriation
The full-time employees of the Company's subsidiaries and VIE subsidiaries that are incorporated in the PRC are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. These companies are required to accrue for these benefits based on
certain percentages of the employees' salaries in accordance with the relevant regulations, and to make contributions to the state-sponsored pension and medical plans out of the amounts accrued for
medical and pension benefits. The total amounts charged to the consolidated statements of operations for such employee benefits amounted to $1,809,423, $3,130,133 and $3,721,218 for the years ended
December 31, 2011, 2012 and 2013 respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.
12. Restricted net assets
Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries and the VIEs of the Group in the PRC must make appropriations from after-tax profit to non-distributable
reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject
to certain cumulative limits, the general reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each
year-end) until the accumulative amount of such reserve fund reaches 50% of their registered capital; the other fund appropriations are at the subsidiaries' discretion. These reserve funds can only be
used for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends and amounted to $2,009,740 as of December 31, 2013. In addition, due
to restrictions on the distribution of registered capital from the Company's PRC subsidiaries, the PRC subsidiaries' registered capital of $24,906,325 as of December 31, 2013, were considered
restricted. As a result of these PRC laws and regulations, as of December 31, 2013, approximately $26,916,065, were not available for distribution to the Company by its PRC subsidiaries in the
form of dividends, loans or advances.
Relevant
PRC laws and regulations restrict the WFOE and VIEs from transferring a portion of their net assets, equivalent to the balance of their statutory reserves and their share
capital, to the Company in the form of loans, advances or cash dividends. The balance of restricted net assets was $26,916,065, of which $7,756,591 was attributed to the paid in capital and statutory
reserves of the VIEs and $19,159,474 was attributed to the paid in capital and statutory reserves of the WFOE, as of December 31 2013, respectively. The WFOE's accumulated profits may be
distributed as dividends to the Company without the consent of a third party. The VIEs' revenues and accumulated profits may be transferred to the Company through contractual arrangements without the
consent of a third party. Under applicable PRC law, loans from PRC companies to their offshore affiliated entities require governmental approval, and advances by PRC companies to their offshore
affiliated entities must be supported by bona fide business transactions.
F-41
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
13. Commitments and contingencies
-
(a)
-
Operating
lease commitments
The
Group has entered into operating lease arrangements relating to the use of certain office premises and internet data centers. Rental expenses under operating leases for 2011, 2012
and 2013 were $1,986,464, $2,149,379 and $ 2,689,618, respectively.
As
of December 31, 2013, total future minimum lease payments under non-cancelable operating leases agreements are as follows,
|
|
|
|
|
|
|
|
|
|
RMB
|
|
USD
|
|
2014
|
|
|
11,212,168
|
|
|
1,811,453
|
|
2015
|
|
|
5,435,489
|
|
|
878,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,647,657
|
|
|
2,689,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(b)
-
Contractual
commitment
In
May 2013, the Group entered into a land pre-development cooperation agreement with respect to the intention to purchase land use rights in Songjiang District, Shanghai for a
total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million (US$0.7 million) was paid in June 2013. In August 2013, the Group
entered into a letter of intention to purchase a building in the same area for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million
(US$2.3 million) was paid as of December 31, 2013. The execution of a definite land use rights and building purchase agreement and payment of the remaining consideration are contingent
upon relevant PRC government authorities' approval. The prepayments of RMB18.4 million (US$3.0 million) are refundable if we fail to obtain the land use rights and the building.
-
(c)
-
Contingencies
The
Group is subject to periodic legal or administrative proceedings in the ordinary course of our business. Currently, the Group does not have any significant pending legal or
administrative proceedings to which the Group is a party and the Group believes that none of the existing proceedings will have a material effect on the Company's cash flows, operating results, or
financial condition.
F-42
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
14. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2011, 2012 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Taomee Holdings Limited
|
|
$
|
19,493,171
|
|
$
|
8,861,867
|
|
$
|
5,441,260
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series A convertible redeemable preferred shares
|
|
|
(200,601
|
)
|
|
|
|
|
|
|
Amounts allocated to preferred shares for participating rights to dividends
|
|
|
(1,589,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders-basic and diluted
|
|
$
|
17,703,523
|
|
$
|
8,861,867
|
|
$
|
5,441,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstandingbasic
|
|
|
606,648,098
|
|
|
731,303,362
|
|
|
733, 333,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders-basic and diluted
|
|
$
|
17,703,523
|
|
$
|
8,861,867
|
|
$
|
5,441,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstandingbasic
|
|
|
606,648,098
|
|
|
731,303,362
|
|
|
733,333,891
|
|
Stock options
|
|
|
33,729,077
|
|
|
22,230,137
|
|
|
13,198,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding-diluted
|
|
|
640,377,175
|
|
|
753,533,499
|
|
|
746,532,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31, 2011, 2012 and 2013, the Group had securities which could potentially dilute basic earnings per share in the future, but were excluded from the
computation of diluted earnings per share as their effects would have been anti-dilutive. Such securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
Options
|
|
|
33,640,000
|
|
|
21,425,000
|
|
|
12,520,000
|
|
Non-vested restricted shares
|
|
|
4,500,000
|
|
|
8,649,648
|
|
|
3,525,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
38,140,000
|
|
|
30,074,648
|
|
|
16,045,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
15. Related party transactions
The following parties/ entities are considered to be related parties of the Group:
|
|
|
Related Party
|
|
Nature of the Relationship
|
WANG Haibing
|
|
Co-founder and CEO
|
CHENG Yunpeng
|
|
Co-founder and President
|
WEI Zhen
|
|
Co-founder and CTO
|
ZENG Liqing
|
|
Director and a principal shareholder
|
WANG Bin
|
|
Principal shareholder before May 2010
|
Shenzhen Decent Investment Limited ("Decent Investment")
|
|
Controlled by ZENG Liqing
|
Shenzhen ParaEngine Corporation ("PE")
|
|
Significantly influenced by ZENG Liqing who is a director of the controlling entity
|
Guangzhou Chuangyou Information Technology Co., Ltd ("Chuangyou")
|
|
Equity method investee of the Group
|
Shenzhen Ruigao Information Technology Co., Ltd. ("Ruigao")
|
|
Equity method investee of the Group
|
Taiwan Taomee Co., Ltd. ("Taiwan Taomee")
|
|
Equity method investee of the Group
|
Beijing Enlight Pictures Co. Ltd ("Enlight Media")
|
|
Controlled by WANG Changtian who is a director
|
Shenzhen Taole Network Technology Co., Ltd ("Shenzhen Taole")
|
|
Significantly influenced by ZENG Liqing who is a director and principal shareholder
|
Jiangxi Haomi Network Technology Co., Ltd ("Jiangxi Haomi")
|
|
Equity method investee of the Group
|
Qiming Funds
|
|
Principal shareholder
|
In
June 2009 and May 2012, Shanghai Taomee entered into two agreements with PE to co-develop 3-D online virtual worlds for children. For the years ended December 31,
2011, 2012 and 2013, Shanghai Taomee has paid $173,281, $203,444 and $193,559 royalties and nil, $200,000 and nil licensing fee to PE, respectively. As of December 31, 2013, the Group had
$18,857 royalty fee due to PE.
In
June 2011, Shanghai Shengran entered into an agreement with Taiwan Taomee for the license to Taiwan Taomee of certain operating rights of an online game developed and owned by
Shanghai Shengran. Shanghai Shengran also entered into an agreement with Taiwan Taomee for the license of certain offline products which are derived from the online game images. In 2012, Shanghai
Shengran licensed Taiwan Taomee two additional online games. For the years ended December 31, 2011, 2012 and 2013 revenues generated from Taiwan Taomee were $245,015, $127,644 and $767,267 for
online licensing and $240,160, $175,500 and $130,808 for offline licensing. As of December 31, 2013, the Group had an amount due from Taiwan Taomee of $72,517 and amount due to Taiwan Taomee
of $347,026.
In
November 2011, Shanghai Taomee entered into an agreement with Shenzhen Taole for the license to Shanghai Taomee of certain operating rights of an online game. For the years
ended
F-44
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
15. Related party transactions (Continued)
December 31,
2011, 2012 and 2013, Shanghai Taomee has paid nil, $8,969 and $6,067 royalties, respectively. As of December 31, 2013, the Group had $1,594 as royalty fee due to
Shenzhen Taole.
In
November 2011, the Company entered into a share transfer agreement with Qiming Funds at consideration of $52,989. The Company paid this amount in February 2012. Refer to
Note 4 for a detailed description of the share transfer.
In
July 2012, Shanghai Taomee entered into an operating agreement with Chuangyou for the license to Shanghai Taomee of certain operating rights of an online game developed and
owned by Chuangyou. For the years ended December 31, 2011, 2012 and 2013, Shanghai Taomee has paid nil, nil and $9,787 royalties and nil, $150,000 and $50,000 licensing fee to Chuangyou,
respectively. As of December 31, 2013, the Group had $2,506 as royalty fee due to Chuangyou.
In
November 2012, Shanghai Shengran provided a RMB 480,000 (equivalent to $76,366) interest-free loan to Chuangyou. Chuangyou paid off the loan in December 2012.
In
the first quarter of 2013, Shanghai Animation entered into an agreement with Enlight Media to jointly invest in the production and distribution of the Group's feature film,
Seer III: Universal Force
.
The film was release in July in mainland China. As of December 31, 2013, the Group had an amount due from Enlight
Media of RMB 13,299,454 (equivalent to $2,169,865).
16. Segment and geographic information
The Group's chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results of operations data by two segments, online business and
offline business, when making decisions about allocating resources and assessing performance of the Group. In identifying its reportable segments, the Group also considers the nature of services
provided by its operating segments.
The
Group's chief operating decision maker evaluates segment performance based on revenues, cost of revenues and gross profit. Accordingly, all expenses are considered corporate level
activities and are not allocated to segments. Therefore, it is not feasible to show profit or loss by reportable segments. Also, the Group's chief operating decision maker does not assign assets to
these segments and no asset information by segment is provided to the chief operating decision maker.
The
Group has two reportable segments: online business and offline business. The online business segment is responsible for developing and operating online virtual worlds and operating
proprietary
F-45
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
16. Segment and geographic information (Continued)
online
virtual worlds. The offline business segment is responsible for licensing the Group's proprietary cartoon figures, producing films and merchandising sales of the Group's cartoon figures.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
Online Business
|
|
Offline Business
|
|
Total
|
|
Revenue
|
|
$
|
43,115,126
|
|
$
|
5,296,444
|
|
$
|
48,411,570
|
|
Less: sales tax and related taxes
|
|
|
2,784,348
|
|
|
230,181
|
|
|
3,014,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
40,330,778
|
|
|
5,066,263
|
|
|
45,397,041
|
|
Less: cost of services
|
|
|
6,035,323
|
|
|
1,652,235
|
|
|
7,687,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
34,295,455
|
|
$
|
3,414,028
|
|
$
|
37,709,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
Online Business
|
|
Offline Business
|
|
Total
|
|
Revenue
|
|
$
|
34,091,925
|
|
$
|
8,188,499
|
|
$
|
42,280,424
|
|
Less: sales tax and related taxes
|
|
|
1,922,430
|
|
|
149,760
|
|
|
2,072,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
32,169,495
|
|
|
8,038,739
|
|
|
40,208,234
|
|
Less: cost of services
|
|
|
6,949,772
|
|
|
3,048,618
|
|
|
9,998,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
25,219,723
|
|
$
|
4,990,121
|
|
$
|
30,209,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013
|
|
Online Business
|
|
Offline Business
|
|
Total
|
|
Revenue
|
|
$
|
37,670,793
|
|
$
|
13,117,356
|
|
$
|
50,788,149
|
|
Less: sales tax and related taxes
|
|
|
2,340,641
|
|
|
93,821
|
|
|
2,434,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
35,330,152
|
|
|
13,023,535
|
|
|
48,353,687
|
|
Less: cost of services
|
|
|
7,643,598
|
|
|
5,620,619
|
|
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13,264,217
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|
|
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|
|
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|
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Gross profit
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$
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27,686,554
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|
$
|
7,402,916
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|
$
|
35,089,470
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|
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The
Group generates substantially all of its revenues from customers in the PRC. Substantially all of the Group's long-lived assets are located in the PRC.
17. Fair value measurements
The Group did not have any assets or liabilities measured at fair value on a recurring or non-recurring basis for the years ended December 31, 2011 and 2012.
Assets measured at fair value on a recurring basis
As of December 31, 2013, the Group's asset measured at fair value on a recurring basis subsequent to initial recognition
consisted of short-term investment in a money market fund accounted for as available-for-sale security. As the return of the investment was referenced to short term interest rate and interest income
accrued on a daily basis, the fair value approximates carrying amount of US$3.0 million and is classified as a Level 2 fair value measurement.
F-46
Table of Contents
TAOMEE HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013
(In US dollars, except share data, unless otherwise stated)
17. Fair value measurements (Continued)
Assets measured at fair value on a non-recurring basis
In the year ended December 31, 2013, the Group's assets measured at fair value on a non-recurring basis consisted of
the following:
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Fair Value Measurement at Reporting Date Using
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Year Ended
December 31,
2013
|
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Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total
Losses
|
|
|
|
|
|
USD
|
|
USD
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|
USD
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|
|
|
Acquired intangible assets-upfront licensing fees
|
|
$
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|
|
$
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|
|
$
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|
|
$
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|
|
$
|
1,046,173
|
|
Investment in equity investeesChuangyou
|
|
|
82,466
|
|
|
|
|
|
|
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|
82,466
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|
|
370,407
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|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,416,580
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|
In
accordance with the provision of ASC 350, upfront licensing fees related to two games with a carrying amount of $0.8 million and $0.2 million, respectively, were fully
impaired, with the resulting impairment charge of $1,046,173 included in earnings for the year ended December 31, 2013.
In
accordance with the provision of ASC 323, investment in Chuangyou was written down to its fair value of $82,466, resulting in an impairment charge of $370,407 recognized as share of
profit (loss) in equity method investees in the consolidated statements of operations for the year ended December 31, 2013 (Note 4). The fair value of the investment was measured based
on a discounted cash flow approach. The discounted cash flow analysis requires the use of significant unobservable inputs, including projected future cash flows and a discount rate calculated based on
the weighted average cost of capital of 45%. As the significant inputs are not observable or cannot be corroborated with market information, the fair value measurement is classified as Level 3.
Any change in the projected future cash flow would result in a change in the fair value measurement in the same direction, while the change in discount rate would result in adverse change in the fair
value measurement.
18. Subsequent events
In January 2014, Shanghai Taomee entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), a Hi-tech toy design and R&D company
to subscribe for 25% of Shanghai Weiju's newly issued ordinary shares for cash consideration of RMB3.0 million (approximately $0.5 million).
On
March 28, 2014, the Company's Board authorized a share repurchase program to repurchase up to $10 million worth of the outstanding American Depositary Shares ("ADSs")
(each ADS represents twenty ordinary shares of the Company) over the next 12 months.
F-47
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