~~INTRODUCTION~~

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only:

“$” and “U.S. dollars” refer to the legal currency of the United States;

	•		~~“ADSs” refers to our American depositary shares, each of which represents 100 ordinary shares;~~

	•		~~“$,” “US$” and “U.S. dollars” refer to the legal currency of the United States;~~

	•		“ADSs” refers to our American depositary shares, each of which represents 100 ordinary shares; “Cayman Companies Law” refers to the Companies Law (2011 Revision) of the Cayman Islands (as amended); “China” and the “PRC” refer to the People’s Republic of China, excluding, for the purposes of this ~~annual report on Form 20-F only, Taiwan and the special administrative regions of Hong Kong and Macau;~~

	•		~~“ordinary shares” refers to our ordinary shares, par value US$0.00005 per share;~~

	•		~~“RMB” and “Renminbi” refer to the legal currency of China;~~

	•		~~“telecom operators” refer to China Mobile, China Unicom and China Telecom, the three principal telecommunication network operators in China, and~~

	•		~~“we,” “us,” “our company” and “our” refer to HURRAY! HOLDING CO., LTD. and its subsidiaries, affiliates and predecessor entities.~~

~~This~~ annual report on Form 20-F ~~includes~~only, Taiwan and the special administrative regions of Hong Kong and Macau;

“Ku6 Holding” refers to Ku6 Holding Limited and its subsidiaries, affiliates and predecessor entities;

“ordinary shares” refers to our ~~audited~~ordinary shares, par value $0.00005 per share;

“our consolidated ~~financial statements as~~affiliated entities” refers to Ku6 (Beijing) Information Technology Co., Ltd., or Ku6 Information Technology, Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd., or Tianjin Ku6 Zheng Yuan, Ku6 (Beijing) Cultural Media Co., Ltd., or Ku6 Cultural, and Tianjin Ku6 Network Communication Technology Co., Ltd., or Tianjin Ku6 Network;

“our PRC subsidiaries” refers to Ku6 (Beijing) Technology Co., Ltd., or Beijing WFOE, WeiMoSanYi (Tianjin) Technology Co., Ltd., or Tianjin WFOE, and Kusheng (Tianjin) Technology Co., Ltd., or Tianjin Ku6 Network WFOE;

“RMB” and “Renminbi” refer to the legal currency of ~~December 31, 2008~~China;

“Shanda Interactive” refers to Shanda Interactive Entertainment Limited, a Cayman Islands company;

“Shanda Group” refers to Shanda Interactive and ~~2007~~its subsidiaries and ~~for~~consolidated affiliated entities, including, unless the ~~years ended December 31, 2008, 2007~~context requires otherwise, Ku6 Media Co., Ltd. and ~~2006.~~its subsidiaries and consolidated affiliated entities;

~~Forward-Looking Information~~

“we,” “us,” “our company” and “our” refer to Ku6 Media Co., Ltd. and its subsidiaries, consolidated affiliated entities and predecessor entities.

FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of ahistorical fact in this form are forward-looking ~~nature.~~statements. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is/are ~~made under~~likely to” or other similar expressions. The forward-looking statements included in this form relate to, among others:

our goals and strategies;

our future business development, financial condition and results of operations;

our projected revenues, earnings, profits and other estimated financial information;

expected changes in our margins and certain costs or expenditures;

expected continued acceptance of our new revenue model;

our plans to expand and diversify the ~~“safe harbor” provisions~~sources of our revenues;

expected changes in the ~~U.S. Private Securities Litigation Reform Act~~respective shares of ~~1995. You can identify~~our revenues from particular sources;

our plans for staffing, research and development and regional focus;

our plans to launch new products and services;

our plans for strategic partnerships with other businesses;

our acquisition and divestiture strategy, and our ability to successfully integrate past or future acquisitions with our existing operations and complete planned divestitures;

competition in the PRC online video industry;

the outcome of ongoing, or any future, litigation or arbitration;

changes in PRC governmental preferential tax treatment and financial incentives we currently qualify for and expect to qualify for; and

PRC governmental policies relating to media and the Internet and Internet content providers and to the provision of advertising over the Internet.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements ~~by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “seeks, “estimates”~~are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from and ~~similar statements. The accuracy of these statements may be impacted by a number of business~~worse than our expectations. Important risks and ~~uncertainties~~factors that could cause our actual results to ~~differ~~be materially different from ~~those projected or anticipated, including but not limited to those risks and uncertainties identified under the section heading~~our expectations are generally set forth in Item 3.D. “Risk Factors” ~~below.~~

~~All~~and elsewhere in this annual report. The forward-looking statements made in this annual report ~~on Form 20-F are made~~relate only to events or information as of the date ~~of filing hereof, based~~ on ~~information available to us as of that date, and we assume~~which the statements are made in this annual report. We undertake no obligation to update ~~or revise~~ any ~~of these~~ forward-looking statements ~~even if experience~~to reflect events or ~~future changes show that~~circumstances after the ~~indicated results~~date on which the statements are made or ~~events will not be realized.~~

to reflect the occurrence of unanticipated events.

PART I

Item 1. Identity of Directors, Senior Management and ~~Advisers~~Advisors

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents certain selected consolidated financial information for our business. You should read the following information in conjunction with our audited consolidated financial statements, the notes thereto and Item 55. “Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F. The ~~following~~ data as of December 31, ~~2008~~2010 and ~~2007~~2011 and for the years ended December 31, ~~2008, 2007~~2009, 2010 and ~~2006~~2011 has been derived from our audited consolidated financial statements ~~for those years and should be read in conjunction with those statements, which are~~ included in this annual report beginning on page F-1. The ~~following~~ data as of December 31, ~~2006, 2005 and 2004 and for the years ended December 31, 2005 and 2004 have also~~2009 has been derived from our audited consolidated financial statements ~~for those years, which are~~ not included in this annual ~~report on Form 20-F. Our audited~~report. The data as of December 31, 2007 and 2008 and for the years ended December 31, 2007 and 2008 has been derived from unaudited consolidated financial statements ~~for the foregoing periods were~~not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or USU.S. GAAP.

For the Year Ended December 31,
2008 2007 2006 2005⁽¹⁾ 2004⁽¹⁾
(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Statement of Operations Data

Revenues:
Wireless value-added services $ 42,672 $ 50,038 $ 62,512 $ 56,063 $ 43,173
Recorded music 11,287 10,489 6,203 — —

Total revenues 53,959 60,527 68,715 56,063 43,173

Cost of revenues:
Wireless value-added services 32,840 36,394 40,672 28,635 18,053
Recorded music 6,730 6,233 3,553 — —

Total cost of revenues 39,570 42,627 44,225 28,635 18,053

Gross profit 14,389 17,900 24,490 27,428 25,120
Operating expenses 22,669 61,462 19,882 14,277 10,436

Operating (loss) income from continuing operations (8,280 ) (43,562 ) 4,608 13,151 14,684
Interest income 1,613 2,313 2,529 1,390 28
Interest expense — (179 ) (45 ) (27 ) (312 )
Gain on reduction of acquisition payable 5,000 — — — —
Foreign exchange loss (8,990 ) — — — —
Other income, net 247 466 315 330

(Loss) income before provision for income taxes, earnings in equity investments, minority interest and discontinued operations (10,410 ) (40,962 ) 7,407 14,844 14,400
Income tax expense (credit) 486 (182 ) 205 (323 ) —

Net (loss) income from continuing operations after income taxes before minority interests (10,896 ) (40,780 ) 7,202 14,521 14,400
Minority interests 337 (688 ) (562 ) — —
Equity in earnings (losses) of affiliate 64 (63 ) — — —
Impairment for Investment in equity affiliate (1,871 ) — — — —

Net (loss) income from continuing operations (12,366 ) (41,531 ) 6,640 14,521 14,400

Our historical results do not necessarily indicate our results expected for any future periods.
In May 2010, we sold all of our 51% interest in Beijing Huayi Brothers Music Co., Ltd., or Huayi Music, to Huayi Brothers Media Corporation. In August 2010, we completed the disposal of our remaining wireless value-added services, or WVAS, and recorded music businesses to Shanda Interactive and also acquired from Shanda Interactive the control of Shanghai Yisheng Network Technology Co., Ltd., or Yisheng, an online audio business. The initial acquisition of the online audio business from Shanda Interactive was accounted for as an acquisition under common control and the disposal of the WVAS and recorded music businesses, including Huayi Music, was accounted for as discontinued operations in accordance with U.S. GAAP in our consolidated financial statements. On August 11, 2011, we have ceased to control Yisheng as a 100% controlled consolidated affiliated entity and we currently hold a 20% interest in Yisheng.

4

   For the Year Ended December 31,
   2007 2008 2009 2010 2011
   (in thousands of U.S. dollars, except for share and per share data)
Historical Condensed Consolidated Statement of Operations Data

Net revenues:

Advertising

Third parties
   —      —      758    15,854    11,146
Related parties
   —      —      279    702    8,076


Total net revenues
   —      —      1,037    16,556    19,222


Cost of revenues:

Advertising

Third parties
   —      —      (557 ) (40,083 ) (30,501 )
Related parties
   —      —      —      (376 ) (379 )


Total cost of revenues
   —      —      (557 ) (40,459 ) (30,880 )


Gross profit (loss)
   —      —      480    (23,903 ) (11,658 )
Operating expenses
   (2,738 ) (2,401 ) (7,130 ) (29,703 ) (37,912 )


Operating loss from continuing operations
   (2,738 ) (2,401 ) (6,650 ) (53,606 ) (49,570 )
Interest income
   2,084    1,432    356    57    170
Interest expense
   (179 ) —      —      (31 ) (1,119 )
Gain on reduction of acquisition payable
   —      5,000    —      —      —
Foreign exchange loss
   —      (8,990 ) —      —      —
Other income, net
   105    —      2    0    1,294


Loss before income tax benefit from continuing operations
   (728 ) (4,959 ) (6,292 ) (53,580 ) (49,226 )
Income tax benefit
   —      —      14    41    99
Equity in loss of affiliated company, net of tax
   —      —      —      —      (263 )


Loss from continuing operations, net of tax
   (728 ) (4,959 ) (6,278 ) (53,539 ) (49,390 )
   For the Year Ended December 31,
   2007 2008 2009 2010 2011
   (in thousands of U.S. dollars, except for share and per share data)
Discontinued operations:

Loss from operations of discontinued operations, net of tax
   (40,727 ) (7,744 ) (21,778 ) (3,383 ) —
Gain from disposal of discontinued operations, net of tax
   193    413    222    4,487    —


(Loss) income from discontinued operations, net of tax
   (40,534 ) (7,331 ) (21,556 ) 1,104    —


Net loss
   (41,262 ) (12,290 ) (27,834 ) (52,435 ) (49,390 )
Less: Net loss attributable to the non-controlling interests from continuing operations
   —      —      257    681    46
Less: Net (income) loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations
   (688 ) 337    4,183    244    —


Net loss attributable to Ku6 Media Co., Ltd.
   (41,950 ) (11,953 ) (23,395 ) (51,510 ) (49,344 )


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (728 ) (4,959 ) (6,021 ) (52,858 ) (49,344 )
(Loss) income from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (41,222 ) (6,994 ) (17,374 ) 1,348    —


Net loss attributable to Ku6 Media Co., Ltd.
   (41,950 ) (11,953 ) (23,395 ) (51,510 ) (49,344 )


Loss per share, basic and diluted

Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders
   —      —      (0.00 ) (0.02 ) (0.01 )
(Loss) income from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders
   (0.02 ) (0.01 ) (0.01 ) 0.00    —


Net loss attributable to Ku6 Media Co., Ltd. ordinary shareholders
   (0.02 ) (0.01 ) (0.01 ) (0.02 ) (0.01 )


Weighted average shares used in per share calculation—basic and diluted
   2,172,208,190    2,185,615,129    2,196,291,947    3,096,421,097    4,265,277,638


   As of December 31,
   2007    2008    2009    2010 2011
   (in thousands of U.S. dollars, except for share data)
Historical Condensed Consolidated Balance Sheet Data

Cash and cash equivalents
   65,979       59,473       49,744       27,295    26,750
Restricted cash
   —         —         —         —      3,600
Short term investments
   —         —         10,000       —      —
Accounts receivable, net
   14,691       12,658       4,062       8,461    3,517
Other current assets
   8,777       5,580       2,155       9,051    20,424
Property and equipment, net
   1,636       980       1,472       8,003    3,593
Goodwill
   5,621       3,157       2,099       6,896    6,233
Other assets
   8,890       6,476       1,976       27,264    24,673








Total assets
   105,594       88,324       71,508       86,970    88,790








Current liabilities
   14,467       6,316       13,783       36,406    33,111
Non-current liabilities
   877       316       421       4,926    4,826








Total liabilities
   15,344       6,632       14,204       41,332    37,937
Redeemable non-controlling interests
   —         —         371       —      —
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 2,174,784,440, 2,193,343,740, 2,200,194,040, 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2007, 2008, 2009, 2010 and 2011, respectively)
   109       110       110       174    251
Other Ku6 Media Co., Ltd. shareholders’ equity
   85,474       76,799       54,966       45,572    50,602
Non-controlling interests
   4,667       4,783       1,857       (108 ) —








Total liabilities, redeemable non-controlling interests and shareholders’ equity
   105,594       88,324       71,508       86,970    88,790








For the Year Ended December 31,
2008 2007 2006 2005⁽¹⁾ 2004⁽¹⁾
(in thousands of U.S. dollars, except percentages)
Discontinued operations:
Net (loss) income from discontinued operations, net of tax — (612 ) (836 ) 4,098 2,840
Gain from disposal of discontinued operations 413 193 — — —

Net income (loss) from discontinued operations, net of tax 413 (419 ) (836 ) 4,098 2,840

Net (loss) income (11,953 ) (41,950 ) 5,804 18,619 17,240
Deemed dividends on Series A convertible preference shares — — — — (40 )

Net (loss) income attributable to holders of ordinary shares $ (11,953 ) $ (41,950 ) $ 5,804 $ 18,619 $ 17,200

Net (loss) income per share, basic $ (0.01 ) $ (0.02 ) $ 0.00 $ 0.01 $ 0.01

Net (loss) income per share, diluted $ (0.01 ) $ (0.02 ) $ 0.00 $ 0.01 $ 0.01

Shares used in calculating basic (loss) income per share 2,185,615,129 2,172,208,190 2,189,748,563 2,092,089,848 1,208,512,142

Shares used in calculating diluted (loss) income per share 2,185,615,129 2,172,208,190 2,208,758,636 2,129,228,961 1,572,887,775

~~(1)~~ The amounts of share-based compensation included in operating expenses for 2006, 2007 and 2008 reflect the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) effective January 1, 2006. Had we applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in prior periods, we would have reported net income of $16,511 thousand and $17,007 thousand for 2004 and 2005, respectively, and net income per share (diluted) of $0.01 for both 2004 and 2005.

As of and for the Year Ended December 31,
2008 2007 2006 2005 2004
(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Balance Sheet Data

Cash $ 59,473 $ 65,979 $ 74,597 $ 75,959 $ 8,714
Accounts receivable, net 12,658 14,691 13,449 18,089 11,883
Other current assets 5,580 8,777 3,342 2,297 2,133
Property and equipment, net 980 1,636 1,954 2,536 2,617
Goodwill 3,157 5,621 39,621 23,869 20,412
Other assets 6,476 8,890 7,027 4,953 705

Total assets $ 88,324 $ 105,594 $ 139,990 $ 127,703 $ 46,464

5

As of and for the Year Ended December 31,
2008 2007 2006 2005 2004
(in thousands of U.S. dollars, except percentages)
Current liabilities $ 6,316 $ 14,467 $ 12,960 $ 7,636 $ 8,743
Non-current liabilities 316 877 851 843 —

Total liabilities $ 6,632 $ 15,344 $ 13,811 $ 8,479 $ 8,743

Minority interests $ 4,783 $ 4,667 $ 3,359 $ 605 $ —
Series A convertible preference shares (16,924,497 shares issued and outstanding as of December 31, 2004, and nil issued and outstanding as of December 31, 2005 to 2008) — — — — 17
Ordinary shares (2,193,343,740, 2,174,784,440, 2,163,031,740, 2,229,754,340 and 1,186,672,000 shares issued and outstanding as of December 31, 2008, 2007, 2006, 2005 and 2004, respectively) 110 109 108 111 59
Other shareholders’ equity 76,799 85,474 122,712 118,508 37,645

Total liabilities, minority interests and shareholders’ equity $ 88,324 $ 105,594 $ 139,990 $ 127,703 $ 46,464

Other Historical Condensed Consolidated Financial Data:

Gross profit margin
Wireless value-added services 23.0 % 27.3 % 34.9 % 48.9 % 58.2 %
Recorded music 40.4 % 40.6 % 42.7 % — —
Total gross profit margin 26.7 % 29.6 % 35.6 % 48.9 % 58.2 %
(Loss) income from continuing operations margin⁽¹⁾
(15.3 %) (72.0 %) 6.7 % 23.5 % 34.0 %
Net (loss) income from continuing operations margin⁽¹⁾
(22.9 %) (68.6 %) 9.7 % 25.9 % 33.4 %
Net (loss) income margin⁽¹⁾
(22.2 %) (69.3 %) 8.4 % 33.2 % 39.9 %
Depreciation 990 1,269 1,580 1,461 �� 1,335
Amortization 2,338 2,375 1,901 478 651
Capital expenditure 349 864 957 1,289 1,871
~~(1)~~ (Loss) income from continuing operations margin, net (loss) income from continuing operations margin and net (loss) income margin are the (loss) income from continuing operations, net (loss) income from continuing operations and net (loss) income as a percentage of our total revenues.
Exchange Rate Information
We present our historical consolidated financial statements in U.S. dollars. ~~In addition, certain pricing information is presented in U.S. dollars and certain~~Certain contractual amounts ~~that are~~ in Renminbi ~~include a~~described in this annual report are translated into U.S. dollar ~~equivalent~~amounts solely for the convenience of the reader. Except as otherwise specified, ~~this pricing information and~~ these ~~contractual~~ amounts are translated at ~~RMB6.8225 = US$1.00,~~a rate of RMB6.2939 to $1.00, the prevailing rate on December 31, 2008. The translations are not a representation that the Renminbi amounts could actually be converted to U.S. dollars at this rate. For a discussion of the exchange rates used for the presentation of our financial statements, see note 2(m) to our audited consolidated financial statements.
6
~~The~~ noon buying rate in The City of New York ~~City~~ for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York ~~was RMB6.8278 = US$1.00~~ on ~~May 29, 2009.~~ December 30, 2011, unless otherwise stated. We make no representation that any Renminbi or U.S. dollar amounts 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.
The following table sets forth ~~the high and low noon buying~~information regarding exchange rates ~~for cable transfers~~ between Renminbi and U.S. ~~dollar as certified~~dollars for ~~customs purposes by~~ the periods indicated:
   Exchange Rate
Period
   Period End    Average⁽¹⁾    High    Low
   (RMB per US$1.00)
2007
   7.2946       7.5806       7.8127       7.2946
2008
   6.8225       6.9193       7.2946       6.7800
2009
   6.8259       6.8295       6.8470       6.8176
2010
   6.6000       6.7603       6.8330       6.6000
2011
   6.2939       6.4475       6.6364       6.2939
September
   6.3780       6.3885       6.3975       6.3780
October
   6.3547       6.3710       6.3825       6.3534
November
   6.3765       6.3564       6.3839       6.3400
December
   6.2939       6.3482       6.3733       6.2939
2012

January
   6.3080       6.3172       6.3330       6.2940
February
   6.2935       6.2997       6.3120       6.2935
March (through March 23, 2012)
   6.3021       6.3145       6.3315       6.2982
Source: Federal Reserve ~~Bank of New York for each of periods indicated below.~~

Noon Buying Rate
RMB per US$1.00
High Low
December 2008 6.8842 6.8225
January 2009 6.8403 6.8225
February 2009 6.8470 6.8241
March 2009 6.8438 6.8240
April 2009 6.8361 6.8180
May 2009 6.8265 6.8176
The following table sets forth the average noon buying rates for cable transfers between Renminbi and U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York for each of 2004, 2005, 2006, 2007 and 2008, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

Average Noon Buying Rate
RMB per US$1.00
2004 8.2768
2005 8.1826
2006 7.9579
2007 7.5806
2008 6.9193
2009 (through May 30) 6.8326
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 were 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.

D. Risk Factors
~~RISKS RELATED TO OUR COMPANY~~
Risks Related to Our ~~Wireless Value-added Services~~
Business
We ~~depend on China Mobile, China Unicom~~have a short operating history in a new and ~~China Telecom,~~unproven market, which makes it difficult to evaluate our future prospects and may increase the ~~three~~risk that we will not be successful.
We entered the online video business in January 2010 when we acquired Ku6 Holding. As we subsequently disposed of the WVAS and recorded music businesses in August 2010 and a 80% interest in the online audio business in August 2011, we are currently operating the online video business as our principal ~~telecommunications network operators in China, for the major portion~~business and generate substantially all of our ~~revenue,~~revenues from online advertising. However, we only have a short operating history in this new and ~~any loss or deterioration of~~unproven market that may not develop as expected, if at all. This short operating history makes it difficult to effectively assess our ~~relationship with China Mobile, China Unicom and China Telecom, due to the recent government imposed restructurings or otherwise, may result in severe disruptions to~~future prospects. You should consider our business ~~operations~~ and prospects in light of the ~~loss of a major portion of our revenue.~~
~~We offer our services over mobile networks to consumers through the three principal telecom operators~~risks and difficulties we encounter in China, China Mobile Communications Corporation, or China Mobile, China United Telecommunications Corporation, or China Unicom, and China Telecommunications Corporation, or China Telecom. These principal operators service the major portion of China’s approximately 641 million mobile phone subscribers as of December 31, 2008, according to a December 2008 Report issued by China’s Ministry of Industry and Information Technology, or the MIIT. Our agreements with these operators and their provincial affiliates are non-exclusive andthis rapidly evolving market.
We have a ~~limited term (generally one year for China Mobile~~history of losses, and ~~one~~we may be unable to achieve or two years for China Unicom). We usually renew these agreements or enter into new ones when the prior agreements expire, but on occasion the renewal or new agreements can be delayed by periods of one month or more. China Telecom and its provincial affiliates have recently entered into new agreements with us in connection with the network assets that they acquired from China Unicom (as discussed below).
If any of China Mobile, China Unicom or China Telecom ceases to continue to cooperate with us, it would be impossible to find appropriate replacement telecom operators with the requisite licenses and permits, infrastructure and customer base to offer our wireless value-added services (“WVAS”). We derived approximately 57% of our combined WVAS revenue from China Mobile, 25% from China Unicom, and 12% from China Telecom in 2008.
sustain profitability.
7
In addition, the Chinese government has extensive involvement in determining the structure of the telecommunications industry in China. During the development of this industry, changes in government policy have resulted in major restructurings of the telecommunications operators, including the establishment of new operators and the combination of all or part of existing operators. In an effort to promote greater competition among the telecommunications operators and foster the development of 3G mobile networks, on May 24, 2008, the MIIT, the PRC National Development and Reform Commission, or the NDRC, and the PRC Ministry of Finance jointly issued the Notice on Strengthening the Reform of Telecommunications Systems, or the Telecom Notice, which aims to consolidate China’s existing telecommunication operators into three new telecommunications operators that can offer both mobile and fixed-line services. Under the Telecom Notice, China Mobile merged with China Railway Communication Co., Ltd., which operated a national fixed-line network, China Telecom acquired the Code Division Multiple Access (CDMA) wireless business and network from China Unicom, and China Unicom, which operates a Global System for Mobile communications (GSM) network and business, merged with China Netcom, which was principally a fixed-line operator. Due to the restructuring, our services to China Telecom have increased and our services to China Unicom have decreased beginning from October 1, 2008, the date that China Telecom officially acquired the CDMA wireless business and network from China Unicom. On January 7, 2009, the MIIT issued 3G licenses to China Mobile, China Unicom and China Telecom. China Mobile is expected to operate the TD-SCDMA network, China’s self-developed 3G standard, China Unicom is licensed to run WCDMA, a 3G standard originally developed in Europe, and China Telecom is expected to operate CDMA2000, a 3G standard originally developed in U.S. We are currently assessing the potential impact of such consolidations on our business.
Any future significant restructuring of any segment of the telecommunications industry in China, including in particular China Mobile, China Unicom or China Telecom (which are collectively referred to hereinafter in this annual report on Form 20-F as the “telecom operators”) or any other telecom operators in China and the potential combination of the mobile operations of various telecom operators in China, could significantly affect our relationships with these telecom operators, our operations and our revenues. Due to our reliance on the telecom operators for our WVAS, any loss or deterioration of our relationships with them, due to their own business decisions or government-imposed restructurings, may result in severe disruptions to our business operations and the loss of a major portion of our revenue.
We incurred net losses in each of the fiscal years from 2007 ~~2008~~through 2009 and continued to incur losses in each of the fiscal years from 2010 through 2011 after we entered the online video business. Our ability to achieve profitability is affected by various factors, including:
growth of the online video industry and the ~~first quarter~~online advertising market;
the transition from long-form professional content to short-form user-generated content, or UGC;
the continued growth and maintenance of ~~2009~~our user base;
our ability to control our costs and expenses; and
our ability to provide new advertising services to meet the demands of our advertising customers.
Many of these factors are beyond our control. For example, our revenues and profitability depend on the continuous development of the online advertising market in China and brand advertisers’ allocation of more budgets to online video industry. We cannot assure you that online advertising, as a new marketing channel, will become more widely accepted in China or that the advertisers will increase their spending on online video websites. We may continue to incur ~~additional losses in future periods.~~
~~We incurred~~ net losses in ~~2007, 2008~~the future due to our continued investments in content, bandwidth and the first quarter of 2009 primarily as a result of changes in the telecom operator policies and the manner in which they are enforced and intense market competition in the WVAS and music industries. In light of this, we have recently been implementing certain cost control measures, however,technology. If we cannot successfully offset our increased costs with an increase in net revenues, our gross margin, financial condition and results of operations could be ~~certain that these measures will be effective~~materially and ~~we will be able to return to profitability. In addition, we could~~adversely affected. We may also continue to incur net losses in the future due to changes in the ~~market, operating~~macroeconomic and regulatory environment, ~~and~~ competitive dynamics and our ~~ability~~inability to respond to ~~those~~these changes ~~as well as any possible new strategic initiatives launched by our company. If~~in a timely and effective manner.
We operate in a highly competitive market and we ~~do not restore profitability, the market price of our ADSs may decline.~~
~~The termination or alteration of our various agreements with the telecom operators and their provincial affiliates would materially and adversely impact our revenue and profitability.~~
Given the dominant market position of China Mobile, China Unicom and China Telecom, our leverage with these telecom operators is limited in terms of negotiating agreements, resolving disputes or otherwise. In particular, our agreements with them can be terminated in advance, penalties may be imposed or other parts of our services may be suspended or terminated, and approval for our new services may be delayed for a variety of reasons which vary among the individual agreements with the telecom operators, including, for example, where we breach our obligations under the agreements, a high number of customer complaints are made about our services or we cannot satisfy the operational or financial performance criteria established by the applicable mobile operator.
We may also be compelled to alter our agreements with these telecom operators in ways which adversely affect our business, such as by limiting the services we can offer or imposing other changes that limit the revenue we can derive from such agreements. In the past, telecom operators have entered into new contracts in certain provinces with service providers in which it changed the share percentages it retained for customer payments. The percentage of the payments from customers received by service providers has been decreasing since 2006. Subsequently, the share percentage of customer payments that service providers received from the telecom operators has decreased by a range of 5% to 10%. We may not be able to ~~adequately respond~~compete successfully against our competitors.
We face significant competition, primarily from those companies that operate online video websites in China, which our management estimates to currently number over one hundred. A large number of independent online video sites, such as Youku.com and Tudou.com, compete against us. In addition, Chinese Internet portals, including Sina.com, Sohu.com and Baidu.com, and some of China’s major TV networks, such as China Central Television, or CCTV, Phoenix Satellite TV and Hunan Satellite TV, which have longer operating histories and more experience in attracting and retaining users and managing customers than we do, have launched their own video businesses. We also face competition from Internet video streaming platforms based on the P2P technology, such as PPS and PPTV. We compete with these companies for users and advertisers. Our competitors may compete with us in a variety of ways, including by conducting brand promotions and other marketing activities and making acquisitions. In addition, certain online video websites may continue to derive their revenues from providing content that infringes third-party copyright and may not monitor their websites for any such ~~changes because~~infringing content. As a result, we ~~are~~may be placed at a disadvantage to some of these websites that do not ~~able~~incur similar costs as we do with respect to ~~predict if the telecom operators will unilaterally amend~~content monitoring. Some of our ~~contracts with them.~~
8

~~Unilateral changes in the policies of the MIIT~~competitors have a longer operating history and ~~the telecom operators~~significantly greater financial resources than we do, and in their enforcement of their policies have resulted in service suspensions and our having to pay additional charges to the telecom operators, and further changes could materially and adversely impact our revenue and profitability in the future.
The MIIT and the telecom operators have a wide range of policies and procedures regarding customer service, quality control and other aspects of the WVAS industry. As the industry has evolved over the last several years, the telecom operators have refined these policies to improve overall service quality and increase customer satisfaction. For example, in July 2006, China Mobile introduced new policies which require extended free trial periods for WVAS, new billing reminders for new and existing monthly subscribers and positive user confirmations for conversion of per-message subscriptions to monthly subscriptions. Subsequently, in May 2007, China Mobile began the operational practice of displaying service fee reminders and seeking express confirmation prior to processing the wireless application protocol (“WAP”) page download requests of mobile phone users. China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of certain mobile handsets with customized software for China Mobile users. In the past, such embedded menus featured links to all popular products offered on China Mobile’s networks, including our products.
In August 2007, MIIT introduced new policies regarding WVAS that mobile phone users subscribe to on a free trial basis. Service providers are now required to notify such mobile phone users once the free trial period ends and must obtain confirmation from them prior to charging them for continued subscription to the services. Upon obtaining such confirmation, service providers are then required to notify mobile phone users of the exact pricing for such service and send billing reminders to them.
In addition, in the last several years, acting under the guidance of the MIIT, the telecom operators have begun enforcing their customer service policies more rigorously than in the past and have initiated steps to improve customer service. This rigorous enforcement has resulted in a number of severe penalties imposed on us and other participants in the market in recent years. Penalties have included precluding service providers from offering certain services over a mobile operator’s network or from offering new services for a fixed period.
Weturn may ~~not~~ be able to ~~adequately respond~~attract and retain more users and advertisers. If any of our competitors achieves greater market acceptance than we do or is able to ~~these or other developments in mobile operator policies, or changes in the manner in~~offer more attractive online video content, our user traffic may decrease and our market share may decrease, which ~~such policies are enforced. Furthermore, because the telecom operators’ policies are~~may result in a ~~state~~loss of ~~flux at this time~~advertisers and ~~they are highly sensitive to customer complaints (even if the complaints~~ have no merit), we cannot be certain that our business activities will always be deemed in compliance with those policies despite our efforts to so comply. Accordingly, we may be subject to monetary penalties or service suspensions or both, even for conduct which we believed to be permissible. Any future noncompliance with the telecom operators’ policies by us, whether inadvertent or not, could result in a material and adverse effect on our ~~revenue~~business, financial condition and ~~profitability.~~
results of operations.
In addition, Internet streaming of content represents only one of many existing and potential new technologies for viewing video. Many users maintain simultaneous relationships with multiple video providers and can easily shift from one provider to another. For example, users may subscribe to cable, buy a DVD, and download a movie from Apple iTunes or other sources, or some combination thereof. New competitors may be able to launch new businesses at a relatively low cost.
We also face competition from other types of advertising media, such as newspapers, magazines, yellow pages, billboards and other forms of outdoor media, television and radio. Most large companies in China allocate, and will likely continue to allocate, most of their marketing budgets to traditional advertising media and only a small portion of their budgets to online marketing and other forms of advertising media. If these companies do not devote a larger portion of their marketing budgets to online marketing services provided by our online video business, or if our existing customers reduce the amount they spend on online marketing, our results of operations and future growth prospects could be adversely affected.
~~Our 2.5G revenues were negatively affected~~We require a significant amount of cash to fund our operations. We cannot assure you that we can meet our working capital requirements or other capital needs through improved operating results or additional financings in ~~2008 by the delayed expansion~~amounts or on terms acceptable to us, or at all.
The operation of ~~2.5G mobile networks by the telecom operators. If this trend continues~~an online video business requires significant upfront capital expenditures as well as continuous, substantial investment in content, technology and infrastructure. In order to implement our development strategies to expand our infrastructure and optimize our services across Internet-enabled devices, and further expand and diversify our revenue sources, we may incur additional capital needs in the future. We reported net losses attributable to our company of $23.4 million, $51.5 million and ~~profitability~~$49.3 million for the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011, we had cash and cash equivalents of $26.8 million and net current assets of $21.2 million. Our net cash used in operating activities in 2011 was $39.2 million. We cannot assure you that we will be able to generate sufficient cash flows or otherwise maintain sufficient working capital to finance our anticipated operations and capital expenditure requirements, as well as achieve projected cash collections from customers and contain expenses and cash used in operations. Achievement of better operating performance is not assured and management expects to continue to implement its liquidity plans, which includes reducing operating expenses. In addition, various matters may impact our liquidity such as:
inability to achieve planned operating results that could increase liquidity requirements beyond those considered in our business plan;
changes in financial market conditions or our business condition that could limit our access to existing credit facilities or make new financings more costly or even unfeasible; and
changes in China’s currency exchange control regulations that could limit our ability to access cash in China to meet liquidity requirements for our operations in China or elsewhere.
If we cannot meet our liquidity needs through improved operating results, we may need to obtain financings from financial institutions or issue debt securities. For example, on June 29, 2011, we issued $50,000,000 aggregate principal amount of senior convertible bonds to Shanda Media Group Limited (formerly known as Shanda Music Group Limited), or Shanda Media, a wholly owned subsidiary of Shanda Interactive. These senior convertible bonds were to mature in three years after issuance, but based on our working capital position, we redeemed the senior convertible bonds on September 30, 2011. We cannot assure you that we will be ~~further~~able to obtain any future financings if required under commercially reasonable terms, or at all. In addition, we may have to obtain additional funding through equity offerings. For example, pursuant to a share purchase agreement dated April 1, 2011, we issued 1,538,461,538 ordinary shares to Shanda Media for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share). We may have to issue and sell additional securities to meet our liquidity needs, but our ability to sell our securities is not assured. Any additional issuance of securities would dilute the ownership of our shareholders and ADS holders. Our ability to obtain additional financings in the future is subject to a number of uncertainties, including:
our future business development, financial condition and results of operations;
general market conditions for financing activities by companies in our industry; and
macroeconomic, political and other conditions in China and elsewhere.
If we cannot obtain sufficient capital to meet our capital expenditure needs, we may not be able to execute our growth strategies and our business, financial condition and prospects may be materially and adversely affected.
The online video industry in China and user acceptance of our online video content may not grow as quickly as expected, which may adversely affect our revenues and business prospects.
Our business prospects depend on the continuing development of the online video industry in China. As an emerging industry, China’s online video industry has experienced substantial growth in recent years in terms of both users and content. We cannot assure you, however, that the online video industry will continue to grow as rapidly as it has in the past. With the development of technology, new forms of media may emerge and render online video websites less attractive to users. Growth of the online video industry is affected by numerous factors, such as users’ general online video experience, technological innovations, development of Internet and Internet-based services, regulatory changes, especially regulations affecting copyrights, and the macroeconomic environment. If the online video industry in China does not grow as quickly as expected or if we fail to benefit from such growth by successfully implementing our business strategies, our user traffic may decrease and our business and prospects may be adversely affected.
We operate in a rapidly evolving industry. If we fail to keep up with the technological developments and users’ changing requirements, our business, results of operations and prospects may be materially and adversely affected.

~~Revenues~~
The online video industry is rapidly evolving and subject to continuous technological changes and changes in industry standards. Our success will depend on our ability to keep up with the changes in technology and user behavior resulting from ~~2.5G WVAS declined from $17.4 million for fiscal year 2007 to $11.3 million for fiscal year 2008, representing a decline~~the technological developments. For example, the development of ~~35.1%. Our 2.5G value-added services declined~~broadband enabled the enjoyment of high definition videos online. In addition, the number of people accessing the Internet via devices other than personal computers, including mobile phones and other hand-held devices, has increased in ~~part because of~~recent years. With the ~~telecom operators’ decision to delay expanding capacity or building out 2.5G mobile networks as they awaited the issuance~~introduction of 3G ~~licenses.~~mobile services by all three mobile carriers in China in 2009, we expect this trend to continue. If ~~this~~we do not adapt our products and services to such changes in an effective and timely manner, we may suffer from a decreased user traffic, which may result in a reduced number of advertisers using our online advertising services. Furthermore, changes in technologies may require substantial capital expenditures in product development as well as in modification of products, services or infrastructure. Failure in keeping up with technological development may result in our products and services being less attractive, which in turn, may materially and adversely affect our business, results of operations and prospects.
We generate substantially all of our revenues from online advertising. If we fail to retain existing advertisers or attract new advertisers to advertise on our website or if we are unable to collect accounts receivable from the advertisers or advertising agencies in a timely manner, our financial condition, results of operations and prospects may be materially and adversely affected.
We generate substantially all of our revenues from online advertising. The online advertising market ~~does~~is new and rapidly evolving, particularly in China. As a result, many of our current and potential advertising clients have limited experience using the Internet for advertising purposes and historically have not ~~grow~~devoted a significant portion of their advertising budget to Internet-based advertising. Moreover, changes in government policy could restrict or curtail our online advertising services. For example, in 2006 and ~~evolve~~2007, the PRC government enacted a series of regulations, administrative instructions and policies to restrict online medical advertising.
We retain existing advertisers and attract new advertisers by maximizing return on their investment. If, however, our advertisers determine that their expenditures on online video websites do not generate expected returns, they may allocate a portion or all of their advertising budgets to other advertising channels such as television, newspapers and magazines and reduce or discontinue business with us. Since most of our advertisers are not bound by long-term contracts, they may amend or terminate advertising arrangements with us easily without incurring liabilities. Failure to retain existing advertisers or attract new advertisers to advertise on our website may materially and adversely affect our business, financial condition, results of operations and prospects.
Historically, we entered into a majority of our online advertising agreements with various third-party advertising agencies. Beginning in the second quarter of 2011, we have relied on Shanghai Shengyue Advertising Ltd., or Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency for sales to, and collection of payments from, a majority of our advertisers. The financial soundness of our advertisers and Shengyue may affect our collection of accounts receivable. Any inability of our advertisers or Shengyue to pay us in a timely manner ~~or in the timeframe that~~may adversely affect our liquidity and cash flows.
If we fail to continue to anticipate user preferences and provide products and services to attract and retain users, we may not be able to generate sufficient user traffic to remain competitive.
Our success depends on our ability to generate sufficient user traffic through provision of attractive products and services. To attract and retain users and compete against our competitors, we must continue to offer high-quality content that provides our users with a satisfactory online video experience. To this end, we must continue to produce new in-house content and encourage more UGC, while balancing the value of each type of content to our advertising services. For example, with UGC, users can upload and share their own videos and spend a longer time on our website, and a “community-like” environment enhances users’ loyalty to our website and such network effect broadens advertisers’ reach of audience; and with our in-house productions, we tailor such content to users’ preferences based on our industry experience and combine these productions with targeted advertising services such as product placements, which benefits both the users and our advertisers.
Based on the feedback on our website design and our statistics regarding users’ watching behavior, we keep developing new website features that appeal to users, such as designing more user-friendly content searching tools, creating additional interactive social functions or offering better website compatibility with new Internet-enabled devices. We need to continuously anticipate user preferences and industry changes and respond to such changes in a timely and effective manner. If we fail to cater to the needs and preferences of our users and, as a result, fail to deliver satisfactory user experience, we may suffer from reduced user traffic and our business and results of operations may be materially and adversely affected.
The success of our business depends on our ability to maintain and enhance our brand.
We believe that maintaining and enhancing our Ku6 brand is of significant ~~sustainable~~importance to the success of our business. Since the online video market is highly competitive, a well-recognized brand is critical to increasing our user base and, in turn, enhancing our attractiveness to advertisers. We believe that the importance of brand recognition will increase as the number of Internet users in China grows. In order to attract and retain Internet users and advertisers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing our brand, as well as our ability to remain competitive, will also depend on our success in offering high-quality content, features and functionality. If we fail to promote our brand successfully or if visitors to our website or advertisers do not perceive our content and services to be of high quality, we may not be able to continue growing our business and attracting users and advertisers.
Our quarterly revenues and operating results may fluctuate, which makes our results of operations difficult to predict and may cause our quarterly results of operations to fall short of expectations.
Our quarterly revenues and operating results have fluctuated in the past and may continue to fluctuate depending upon a number of factors, many of which are out of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may be significantly different from our ~~2.5G business.~~historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause the price of our ADSs to fall. Other factors that may affect our financial results include, among others:
global economic conditions;
our ability to maintain and increase user traffic;
our ability to attract and retain advertisers;
changes in government policies or regulations, or their enforcement; and
geopolitical events or natural disasters such as war, threat of war, earthquake or epidemics.
Our operating results tend to be seasonal. For instance, we may have slightly lower revenues during the first quarter of each year primarily due to the Chinese New Year holidays in that quarter. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of our customers.
~~The Chinese government~~We may not be able to manage our expansion effectively.
Our net revenues grew significantly from $1.0 million in 2009 to $16.6 million in 2010 and further to $19.2 million in 2011. To manage the further expansion of our business and the ~~telecom~~growth of our operations and personnel, we need to continuously expand and enhance our infrastructure and technology, and improve our operational and financial systems, procedures and controls. We also need to expand, train and manage our growing employee base. In addition, our management will be required to maintain and expand our relationships with content providers, advertisers, advertising agencies and other third parties. We cannot assure you that our current infrastructure, systems, procedures and controls will be adequate to support our expanding operations. If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and adversely affected.
We may be subject to administrative actions by PRC regulatory authorities and other liabilities because of advertisements shown on our website.
Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our website to ensure that such content is true, accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of advertisements prior to website posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been obtained from competent governmental authority, which is generally the local branch of the State Administration for Industry and Commerce, or the SAIC. Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations, such as posting a pharmaceutical product advertisement without approval, or posting an advertisement for fake pharmaceutical products, PRC governmental authorities may force us to terminate our advertising operation or revoke our licenses. Furthermore, advertisers, advertising operators or advertising distributors, including us, may ~~prevent~~be subject to civil liability if they infringe on the legal rights and interests of third parties.
A majority of the advertisements shown on our website are provided to us ~~from distributing,~~by advertising agencies on behalf of advertisers. We cannot assure you that all the content contained in such advertisements is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the application of these laws and regulations. For example, Article 38 of the Advertisement Law provides that an advertisement operator who knows or should have known the posted advertisement is false or fraudulent will be subject to joint and several liabilities. However, for the determination of the truth and accuracy of the advertisements and the actual or constructive knowledge of the website, there are no implementing rules or official interpretations, and such a determination is at the sole discretion of the relevant local branch of the SAIC, which results in uncertainty in the application of these laws and regulations.

If we are found to be in violation of applicable PRC advertising laws and regulations in the future, we may be subject to ~~liability for, content that any of them believe is inappropriate.~~

~~China has enacted regulations governing telecommunication service providers, Internet access~~penalties and the distribution of news and other information. In the past, the Chinese government has stopped the distribution of information over the Internet that it believes to violate Chinese law, including content that is pornographic or obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory.

China Mobile, China Unicom and China Telecom also have their own policies regarding the distribution of inappropriate content by WVAS providers and have punished certain providers for distributing inappropriate content through the imposition of fines and service suspensions. Some of those providers indicated that the telecom operators informed them that certain of their content were construed as too adult-oriented or sexually suggestive.

The determination of whether or not WVAS content is appropriate is inherently subjective, and is subject to the interpretation of the governmental authorities and telecom operators in China. Their standards are generally more restrictive than those applied in many other countries like the United States. Accordingly, while we intend to comply with all applicable rules regarding wireless content, itour reputation may be very difficult for us to assess whether any particular content we offer that could be construed by the telecom operators as inappropriate under current regulations in China. Any penalties imposed on us by the telecom operators for the content of our services could result inharmed, which may have a material and adverse effect on our ~~revenue, profitability and reputation.~~

~~The telecom operators may impose higher service or network fees on us for their own~~ business, ~~purposes or if we are unable to satisfy customer usage and other performance criteria, which could reduce our gross margins.~~

Fees for our WVAS are charged on a monthly subscription or per-use basis. As provided in our network service agreements, we rely on the telecom operators for both billing of and collection from, mobile phone users of fees for our services. As noted above under “— The termination or alteration of our various agreements with the telecom operators and their provincial affiliates would materially and adversely impact our revenue and profitability,” our negotiating leverage with the telecom operators is limited. As a result, the telecom operators could for their own business purposes unilaterally amend our agreements with them to increase the service or network fees that they retain from the revenues generated by our WVAS.

In addition, under these agreements, these service fees in some cases rise if we fail to meet certain customer usage, revenues and other performance criteria. Moreover, for 2G services, to the extent that the number of messages sent by us over networks of the telecom operators exceeds the number of messages our customers send to us, we must pay per message network fees, which decrease in several provinces as the volume of customer usage of our services increases. The number of messages sent by us will exceed those sent by our users, for example, if a user sends us a single message to order a game but we in turn must send that user several messages to confirm his or her order and deliver the game itself. We cannot be certain that we will be able to satisfy any performance criteria in the future or that the telecom operators will keep the criteria at their current levels. Any increase in the service or network fees of the telecom operators could reduce our gross margins.

~~If any of the telecom operators change their practices with regard to how service selections appear on their WAP portals, the revenue from our services, and thus our overall~~ financial condition, ~~could be materially and adversely affected.~~

The current practice of the telecom operators is generally to place the most popular WAP services at the top of the menu on the first page of the list of services available in each service category on their WAP portals. Services at the top of the menu are more accessible to users than other services and, in our experience, are more frequently accessed than those services lower on the menu. This effectively reinforces the position of the most popular services. The placement of services on these menus creates significant competitive advantages for the top-ranked services and significant challenges for newer and less popular services. We believe that our prominent position on the WAP portals of the telecom operators historically helped us maintain our position in the market. If any of the telecom operators changes its current practices so that the most popular services are not those that are the most accessible to customers, restricts the number or type of services a service provider is permitted to place on service menus or adopts new interface technologies that eliminate the current service menus, our services could become more difficult for users to access and could, therefore, become less popular. In addition, as discussed below under the heading “—Our revenue from WVAS may be adversely affected by the telecom operators providing their own full portfolio of 2G, 2.5G and any upcoming 3G services that compete with our services,” China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers such as our company. This practice has adversely affected our revenues. If additional similar changes occur, they will likely materially and adversely affect the revenue from our services, and thus our overall financial condition.

~~Our revenue from WVAS may be adversely affected by the telecom operators providing their own full portfolio of 2G , 2.5G and any upcoming 3G services that compete with our services.~~

In 2006, China Mobile began operating its own music WAP portal and procuring music content from music companies directly. Our revenues as a service provider have been adversely affected by this development, although some of this effect has been mitigated by China Mobile procuring music content from our affiliated music companies. China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers like us. Such practice has adversely affected our revenues. Our business would likely be adversely affected if any of the telecom operators decide to provide additional 2G, 2.5G and any upcoming 3G services to mobile phone users, which compete with our services. In that case, we would not only face enhanced competition, but could be partially or completely denied access to the networks of these telecom operators which would adversely affect our revenue from WVAS.

The popularity of our WVAS services, and therefore revenues from these services and our profitability, would be adversely affected if our competitors offer more attractive and engaging services or we are unsuccessful in developing and offering attractive and engaging services on 3G mobile networks, which are in the process of being launched.

The WVAS market is highly competitive, and our competitors may offer new or different services, which are more popular than our 2G and 2.5G services. Moreover, we cannot be certain that we will successfully develop and sell popular services on 3G mobile networks, which are in the process of being launched, following MIIT’s grant of licenses to the telecom operators in January 2009. Although we plan to transition our 2.5G services to 3G services as the 3G mobile networks are launched, it is difficult to predict the development of new mobile technologies or the types of services that will be popular on any new mobile networks.

The telecom operators allow us to offer our services over their networks only if we achieve minimum customer usage, revenues and other criteria, and our revenues from 2.5G services depend in particular on our ability to meet those criteria to keep our services among the most popular offered through the telecom operators.

If we fail to achieve minimum customer usage, revenues and other criteria imposed by the telecom operators at their discretion from time to time, our services could be excluded from the applicable mobile operator’s entire network at a provincial or national level, or we could be prevented from introducing new services. In addition, we believe that the success of our 2.5G services depends significantly on whether our services appear at the top of the menu on the first page of the list of services available in each service category on the telecom operators’ WAP portals. The ranking of services on these WAP page menus depends on the satisfaction of performance criteria established by the telecom operators from time to time. If we are excluded from any mobile operator’s network or are not able to keep our 2.5G services at the top of the service lists on any mobile operator’s WAP pages due to performance problems, our WVAS revenue would be substantially reduced, which would materially and adversely affect our overall financial condition and the market price of our ADSs.

We must rely on the telecom operators to maintain accurate records of fees paid by users of our services, deduct service and network fees due to them and pay us fees due to us. Errors in record-keeping by the telecom operators could adversely affect our profitability and the market price of our ADSs.

We must rely on the telecom operators to maintain accurate records of the fees paid by users and deduct the service and network fees due to them under our network service agreements. Specifically, the telecom operators provide us with monthly statements for our 2G services that do not provide itemized information regarding amounts paid for each of our services or calculations of the service and network fees. As a result, monthly statements that we have received from the telecom operators for our 2G services cannot be reconciled to our own internal records for the reasons discussed under “— The telecom operators do not supply us with detailed information on billing and transmission failures, revenues, service or network fees or other charges, particularly with respect to our 2G services, and accordingly, it is difficult to analyze the factors affecting our financial performance.” In addition, we have only limited means to independently verify the information provided to us with respect to such 2G services because we do not have access to the telecom operators’ internal records. Rather, we can only seek consultations with the telecom operators to discuss the reasons for any discrepancies.

With respect to our 2.5G services, the telecom operators allow us limited access to their transmission and billing system information to monitor if our services are actually delivered and paid for, which information we then reconcile to our own internal records. In addition, the telecom operators in general provide us with monthly statements within two to three weeks after month end. However, the statements can be delayed by periods of four months or more. As discussed below in Item 5.A. “Operating Results —Factors Affecting Results of Operations and Financial Condition”, discrepancies between our internal records and the telecom operators’ confirmations have been significant in 2008. Nonetheless, we are still ultimately dependent on the ability of the telecom operators’ systems to accurately collect and analyze the relevant transmission and payment data regarding our services.

Because of the dominant market position of these telecom operators, we have limited leverage in challenging any discrepancies between their monthly statements and 2.5G system information, on the one hand, and our own records, on the other hand. Our profitability and the market price of our ADSs could be adversely affected if these telecom operators miscalculate the revenues generated from our services and our portion of those revenues.

Our dependence on the billing records of the telecom operators may adversely affect our ability to record, process, summarize and report revenue and other information regarding our WVAS. Any inaccuracies in our records and public reports could adversely affect our ability to effectively manage our business and the market price of our ADSs.

We maintain controls and procedures to ensure that financial and non-financial information regarding our business is recorded, processed, summarized and reported in a timely and accurate manner. However, as noted in the prior risk factor, we depend on the billing records of the telecom operators and have only limited means to independently verify information provided by them. If the information they provide us is incorrect or incomplete, then our own internal records will also be incorrect or incomplete. Our business could be adversely affected if our management and board of directors make decisions based on deficient internal information, such as strategic initiatives involving new WVAS. Moreover, it is possible that, if information provided to us by the telecom operators were not correct or complete, our public reports could also be deficient, which could adversely affect the market price of our ADSs.

We recognize revenue for a portion of our 2G services on an accrual basis, based on an internal estimation process which involves the use of estimates of monthly revenues to the extent we are unable to obtain actual figures from the telecom operators before we finalize our financial statements, which could in turn require us to make adjustments to our financial statements.

We recognize revenue for a portion of our 2G services (as well as for a smaller portion of our 2.5G services) on an accrual basis in order to report our quarterly earnings on a timely basis. This involves the use of estimates of monthly revenues based on our internal records for the month and prior monthly confirmation rates with the telecom operators in prior months if we are unable to obtain actual figures from the telecom operators before we finalize our financial statements. We expect the effect of these estimates on our financial results will be more significant on our quarterly results of operations than on our annual results, as we are less likely to receive confirmation on all of our 2G revenues before we disclose our quarterly results. To the extent that our revenues have not been confirmed by the telecom operators for any reporting period, we willand prospects.

We may need to ~~adjust~~record impairment charges to earnings if our ~~revenues in the subsequent periods in which these revenues~~acquisition goodwill or acquired intangible assets are confirmed. Actual revenues may differ from prior estimates when unexpected variations in billing and transmission failures occur. Recognizing revenues on an accrual basis could potentially require us to later make adjustments to our financial statements if the telecom operators’ billing statements and cash payments are different from our estimates, which could adversely affect our reputation and the market price of our ADSs.

~~Our revenues and cost of revenues for 2G services, and to a lesser degree 2.5G services, are affected by billing and transmission failures and other discrepancies which are often beyond our control.~~

~~We do not collect fees for our services from the telecom operators in a number of circumstances, including if:~~

the delivery of our service to a customer is prevented because his or her phone is turned off for an extended period of time, the customer’s prepaid phone card has run out of value or the customer has ceaseddetermined to be ~~a customer of the applicable mobile operator;~~

~~any telecom operator experiences technical problems with its network, thus preventing the delivery of our services to the customer;~~

~~we experience technical problems with our technology platform that prevents delivery of our services; or~~

~~the customer refuses to pay for our services due to quality or other problems.~~

These situations are known in the industry as billing and transmission failures, and we do not recognize any revenues for services which are characterized as billing and transmission failures. Billing and transmission failures therefore significantly lower the revenues we record. The failure rate for 2G services can vary among the telecom operators, and by province, and has fluctuated significantly in the past, ranging from 0.0% to 19.1% of the total billable messages on a monthly basis as reflected in our internal records during 2008. The failure rate increased in 2008 compared to prior year due to the restructuring of the telecom operators.

Although we do not experience the same type of billing and transmission failures for our 2.5G services as we do for our 2G services, we do experience a discrepancy between the revenues recorded by our internal system and the revenues confirmed by the telecom operators. This difference ranged from 0.4% to 27.5% per month and relates to services that are provided but are not billed to the user for a variety of reasons associated with the manner in which the telecom operators register new users and manage their internal billing reconciliation process. As discussed below in Item 5.A. “Operating Results —Factors Affecting Results of Operations and Financial Condition”, these discrepancies increased in 2008 due to the restructuring of the telecom operators.

We are also required to pay some of our content providers a percentage of the revenues received from or confirmed by the telecom operators with respect to services incorporating the content providers’ products. In calculating the fees payable to these providers, we make estimates to take into account billing and transmission failures, which may have been applicable to the services incorporating the providers’ products, and reduce the fees payable by us accordingly. Nonetheless, as estimates involve making assumptions which may prove inaccurate, we have in the past paid, and may continue to pay, such providers fees which are disproportionate to what we have been paid for the relevant service. Our costs of services, gross margins and profitability could be adversely affected if, due to problems in estimating billing and transmission failures, we overpay service providers on a consistent and continuous basis.

The telecom operators do not supply us with detailed information on billing and transmission failures, revenues, service and network fees or other charges, particularly with respect to our 2G services, and accordingly it is difficult to analyze the factors affecting our financial performance.

The telecom operators’ monthly statements to service providers, including our company, regarding the services provided through their networks currently do not contain information about billing and transmission failures, revenues, service and network fees or other charges or detailed information on a service-by-service basis, particularly with respect to our 2G services. While the telecom operators allow third party service providers such as our company to have access to their 2.5G transmission and billing systems, such access is limited and does not offer complete information on all fee calculations and other charges. Moreover, China Mobile and China Unicom have from time to time imposed penalty charges and service suspensions on us when they believe we have contravened their customer service policies. The information provided by the telecom operators does not, however, identify exactly which services caused the problem or the time period in which they occurred.

As a result of the foregoing, we are unable to effectively analyze the factors that affect our financial performance and can only estimate our revenues and cost of revenues by service type. We are also unable to confirm which of our 2G services were transmitted but resulted in billing and transmission failures. As a result, with respect to specific services, we are not able to definitively calculate and monitor revenues, margin and other financial information, such as average revenues per-user by service and total revenues per-user by service, and also cannot definitively determine which of these services are or may be profitable. Moreover, we do not know what adjustments, if any, should be made with respect to specific services to avoid inadvertent violations of the telecom operators’ customer service policies.

The services we offer and the prices we charge are subject to approval by the telecom operators, and if requested approvals are not granted in a timely manner or approved services are suspended or terminated, our competitive position, revenue and profitability could be adversely affected.

We must obtain approval from China Mobile, China Unicom and China Telecom with respect to each 2G, 2.5G and any upcoming 3G service that we propose to offer to their customers and the pricing for such service. In addition, any changes in the pricing of our existing services must be approved in advance by these operators. There can be no assurance that such approvals will be granted in a timely manner or at all. Failure to obtain, or a delay in, obtaining such approvals could place us at a competitive disadvantage in the market and adversely affect our revenue and profitability. In addition, the recent more rigorous enforcement of customer service policies by the telecom operators could result in heightened scrutiny of our existing or proposed services and pricing by the telecom operators. This could, in turn, result in delays in their approving new services, our failure to obtain approval for new services or suspensions or termination of all or part of our existing services or reductions in approved pricing of our services. The occurrence of any of these actions could materially and adversely affect our revenues.

~~Risks Related to Our Music Business~~

~~The businesses of our affiliated music companies are subject to constantly changing consumer tastes.~~

In order to implement our strategy to enter the music development, production and distribution and artist development industries, we formed an affiliated Chinese entity, Hurray! Digital Media, and established a new wholly owned Cayman Islands subsidiary, Hurray! Music Holding Co., Ltd. in 2005, whose name was changed to Hurray! Media Co., Ltd. (“Hurray! Media”). As part of our strategy to grow through opportunistic acquisitions and strategic investments, we have acquired, in recent years, equity interests in Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”), Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”), Beijing New Run Entertainment Development Co., Ltd. (“New Run”), Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd. (“Secular Bird”), Seed Music Group Limited (“Seed Music Group”) and Beijing Hurray! Fly Songs International Culture Co., Ltd. (“Fly Songs”), which we refer to collectively as our affiliated music companies in this annual report on Form 20-F. The first five of the foregoing companies engage in artist development and music production and distribution in Mainland China (and in Taiwan in the case of Seed Music), and the sixth company, Fly Songs, engages in concert promotions in Mainland China and Taiwan. We have also recently expanded our artist agency business as discussed in Item 4. “Information on the Company—Our Business—Our Music and Artist Agency Business.”

Each music recording and concert performance is an individual artistic work. The commercial success of a music product or concert depends on consumer taste, the quality and acceptance of competing offerings or events released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change quickly. Accordingly, there can be no assurance as to the financial success of any particular product, the timing of such success, or the popularity of any particular artist.

The future success of our affiliated music companies depends on their ability to continue to develop recorded music and organize concerts that are interesting and engaging to our target audience, primarily users of the Internet and WVAS in the case of our recorded music. If our audience determines that the content does not reflect its tastes, then our audience size could decrease,impaired, which would adversely affect our results of operations. ~~The ability of Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group to develop compelling content depends on several factors, including the following:~~

~~technical expertise of their production and recording staff,~~

~~popularity of the artists~~

As part of our ~~affiliated music~~expansion and diversification strategy, we may acquire or invest in companies

~~access~~ in the same or related industries in which we operate. We record acquisition goodwill and acquired intangible assets on our balance sheet in connection with such acquisitions and investments arrangements, respectively. We are required to ~~songs~~review our acquisition goodwill for impairment at least annually and review our acquired intangible assets for impairment when events or ~~songwriters, and~~

~~effectiveness of online and offline marketing and promotional activities.~~

~~Furthermore, our affiliated music companies must invest significant amounts for development prior to~~changes in circumstances indicate that the ~~release of any product or organization of an event. These costs~~carrying value may not be ~~recovered if~~recoverable, including a decline in stock price and market capitalization and a slow down in our industry, which may result from the ~~product~~recent global economic slowdown. If the carrying value of our acquisition goodwill or ~~event~~acquired intangible assets were determined to be impaired, we would be required to write down the carrying value or to record charges to earnings in our financial statements during the period in which our acquisition goodwill or acquired intangible assets is ~~unsuccessful. There can~~determined to be ~~no assurance~~impaired. During the years ended December 31, 2009, 2010 and 2011, we recorded impairment of $3.6 million, nil and nil, respectively, for acquisition goodwill relating to our discontinued operations and impairment of $3.5 million, nil and $1.4 million, respectively, for acquired intangible assets relating to our discontinued operations and continued operations. Any significant impairment charges would adversely affect our results of operations.

Disruption or failure of our systems could impair our users’ online video experience and adversely affect our reputation.

Our ability to provide users with a high-quality online video experience depends on the continuous and reliable operation of our systems. We cannot assure you that ~~such products or events~~we will be ~~successful releases~~able to procure sufficient bandwidth in a timely manner or ~~that any product~~on acceptable terms or ~~events will generate revenues sufficient~~at all. Failure to ~~cover~~do so may significantly impair user experience on our website and decrease the ~~cost~~overall effectiveness of ~~development~~our website to both users and advertisers. Disruptions, failures, unscheduled service interruptions or ~~organization.~~

a decrease in connection speeds could hurt user experience and our reputation, causing our users and advertisers to switch to our competitors’ websites. Our ~~affiliated music companies may unknowingly purchase~~systems and proprietary video content delivery network, or ~~license songs, which have already been,~~CDN, are vulnerable to damage or ~~may in the future be, sold or licensed to third parties, which could create costly legal disputes over intellectual property rights with such third parties and the songs’ authors or composers.~~

Our affiliate music companies generally purchase or license songs for their artists from the original authors or composers of the songs. In China, original authors and composers sometimes license or sell their songs to multiple music companies without informing each such company. In that case, our affiliated music companies may unknowingly purchase or license songs that have already been, or may in the future be, licensed or sold to one or more third parties. As a result, disputes may arise between our affiliated music companies, third party music companies and original authors or composers over the rights to particular songs. Any such dispute may require our affiliated music companies to incur significant costs to investigate and resolve them, including potentially the payment of damages to third parties.

In addition, our affiliated music companies license and distribute songs to third parties such as providers of Internet and WVAS, which then distribute the music content to their customers. Such companies may be subject to claims by such providers or any of their other customers if the customers suffer lossesinterruption as a result of ~~a dispute over the ownership of copyrights~~fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses, hacking and other attempts to ~~songs provided to them.~~

~~Our affiliated music companies often enter into contracts with third parties on behalf of their artists. If those artists fail to satisfy the requirements under those contracts,~~harm our ~~affiliated music companies may be subject to claims, which could expose them to significant costs and business disruption.~~

Our affiliated music companies often enter into various types of contracts with third parties on behalf of their artists, including contracts relating to album publishing, advertising and promotional activities and public performances. If an artist fails to satisfy the requirements under any such contract for whatever reason (such as health problems), then our affiliated music companies may be deemed tosystems. We have breached the relevant contracts. In that case, our affiliated music companies may be subject to claims for breach of contract by the counterparty to the contracts, which could expose them to significant costs and business disruption.

~~Revenue from our affiliated music companies may not grow as fast as expected due to continuing problems of copyright enforcement in China and retention of popular artists.~~

It can be difficult to enforce certain copyright protections in China. In particular, the music industry in China has suffered from serious piracy issues for many years. Our management estimates that for every dollar of copyrighted CD sales, there are approximately five to ten dollars of pirated CD sales in China. In addition, it can be difficult to retain artists who become popular and generate large revenue for us, given that such artists may decide to renegotiate with us or contract with other music content providers. This is a common problem faced by music companiesexperienced service interruptions in the ~~PRC. The revenue generated from~~past which typically were caused by (i) overload of our ~~affiliated music companies~~servers; (ii) unexpected overflow of user traffic; and/or (iii) service malfunction of the telecommunications operators, such as power outage of Internet data centers or network transmission congestion. We may continue to experience similar interruptions in the future despite our continuous efforts to improve our systems. Since we host our servers at third-party Internet data centers, any natural disaster or unexpected closure of Internet data centers operated by third-party providers may result in lengthy service interruptions.

If we experience frequent or persistent service disruptions, whether caused by failures of our own systems or those of third-party service providers, our users’ experience may be ~~adversely~~negatively affected, ~~by the difficulty~~which in ~~enforcing copyrights and retaining popular artists, and therefore may not grow as fast as anticipated.~~

~~Additional Risks Related to Our Company~~

~~Our recent acquisitions and strategic investments and any future acquisitions or investments~~turn, may have ana material and adverse effect on our ~~ability to manage our business~~reputation. We cannot assure you that we will be successful in minimizing the frequency or duration of service interruptions.
Undetected programming errors could adversely affect user experience and ~~may subject us to unforeseen liabilities.~~

~~Selective acquisitions and strategic investments, such as our recent acquisition of Seed Music Group as described in Item 4. “Information on~~ the ~~Company—History and Development of the Company,” form part~~market acceptance of our ~~strategy to further expand our business. Such companies~~video programs, which may ~~not be as successful as they have been in the past,~~materially and may also not perform as well as we expect. Moreover, the integration of such companies into our operations has required significant attention from our management. In particular, we must ensure that the relationships of our newly acquired wireless value-added service companies with the telecom operators are not disrupted by the acquisitions. In addition, our management must also devote significant resources to enhancing its knowledge of the music development, production and distribution business in China, with which we have limited experience, and new geographical markets such as Taiwan and Hong Kong in the case of our recent acquisition of Seed Music Group. Future acquisitions will also likely present similar challenges.

The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. Acquisitions expose us to potential risks, including risks associated with the assimilation of new operations, services and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient revenues to offset the costs and expenses of acquisitions and potential loss of, or harm to, relationships with employees and content providers as a result of integration of new businesses. The acquisition of any company could also subject us to unforeseen liabilities arising from the acquisition itself or the operations of the company or both.

~~We face intense competition, which could cause us to lose market share and materially~~ adversely affect our business and results of operations.

The ~~Chinese market for WVAS~~video programs, including advertising video programs, on our website may contain programming errors that may only become apparent after their release. We receive user feedback in connection with programming errors affecting their user experience from time to time, and such errors may also come to our attention during our monitoring process. We generally have been able to resolve such programming errors in a timely manner. However, we cannot assure you that we will be able to detect and resolve all these programming errors effectively. Undetected audio or video programming errors or defects may adversely affect user experience and cause our advertisers to reduce their use of our services, any of which could materially and adversely affect our business and results of operations.

Our operations depend on the performance of the Internet infrastructure and telecommunications networks in China and third-party service providers.

Our products and services depend on the ability of our users to access the Internet. Therefore, the successful operation of our business depends on the performance of the Internet infrastructure and telecommunications networks in China. Almost all access to the Internet is ~~changing rapidly~~maintained through state-owned telecommunications operators under the administrative control and ~~is intensely competitive. We compete principally~~regulatory supervision of China’s Ministry of Industry and Information Technology, or the MIIT. Moreover, we have entered into contracts with ~~four groups~~various subsidiaries of ~~2G, 2.5G and 3G~~a limited number of telecommunications service providers in ~~China,~~each province and rely on them to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the telecommunications networks provided by telecommunications service providers. Our Ku6.com website regularly serves a large number of users and advertisers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our websites. However, we have no control over the costs of the services provided by telecommunications service providers. If the prices we pay for telecommunications and Internet services rise significantly, our results of operations may be materially and adversely affected. If Internet access fees or other charges to Internet users increase, our user traffic may decline and our business may be hurt. Our servers, which ~~include companies that focus primarily~~are partly hosted at third-party Internet data centers, are vulnerable to break-ins, sabotage and vandalism. The occurrence of a natural disaster or ~~entirely~~a closure of an Internet data center by a third-party provider without adequate notice could result in lengthy service interruptions. Moreover, the agreements we have entered into with domestic telecommunications carriers to host our servers typically have terms of approximately one year and are renewable subject to early termination. If we are not able to renew such hosting services agreements with the telecommunications carriers when they expire and are not able to enter into agreements with alternative carriers at commercially reasonable terms or at all, the quality and stability of our services may be adversely affected. In addition, our domain names are resolved into Internet protocol (IP) addresses by systems of third-party domain name registrars and registries. Any interruptions or failures of those service providers’ systems, which are beyond our control, could significantly disrupt our own services.

If we experience frequent or persistent system failures on ~~these markets, major Internet portal operators~~our websites, whether due to interruptions and failures of our own information technology and communications systems or those of third-party service providers we rely upon, our reputation and brand could be permanently harmed. The steps we take to increase the reliability and redundancy of our systems are expensive, may reduce our operating margin and may not be successful in ~~China, niche~~reducing the frequency or duration of service interruptions.

We also depend significantly on relationships with leading technology providers and the ~~telecom operators.~~

~~There are low barriers~~licenses that the technology providers have granted to entry for new competitors in the 2G, 2.5G and 3G services market and many of our competitors have longer operating histories in China, greater name and brand recognition, larger customer bases and databases, significantly greater financial, technological and marketing resources and superior access to original content than we have. Recently, certain of the telecom operators have begun offering WVAS directly to their customers. See “—us. Our revenue from WVAS may be adversely affected by the telecom operators providing their own full portfolio of 2G , 2.5G and 3G services that compete with our services” above. As a result, our existing or potential competitors may inestablish the ~~future achieve greater market acceptance and gain additional market share, which in turn could reduce our revenues.~~

~~With respect to our music business,~~same relationships as we face significant competition from two groups of competitors. The first group consists of traditional record companies, which are extending downstream to establish their own WVAS or Internet services companies in China. Such competitors include international record companies and independent labels based in Hong Kong, Taiwan and Mainland China, which have, longer operating histories, larger music libraries and greater pools of popular artists in comparison to our affiliated music companies. The second group of competitors consists of WVAS providers that focus on music-related products and have extended upstream to establish their own music production businesses in China. See Item 4.B. “Business Overview—Competition.”

~~We operate in rapidly evolving industries,~~ which may ~~make it difficult for investors to evaluate our business.~~

adversely affect us. We began commercially offering WVAS in China in 2001, and since that time, the technologies and services used in the WVAS industry in China have developed rapidly. Moreover, we have recently entered the music development, production, distribution and artist agency business in China, which is also rapidly evolving. As a result of this rapid and continual change, you should consider our prospects in light of the risks and difficulties frequently encountered by companies in an early stage of development. These risks include our ability to:

~~attract and retain users for our 2G, 2.5G and any upcoming 3G services,~~

~~expand the services that we offer,~~

~~respond effectively to rapidly evolving competitive and market dynamics and address the effects of mergers and acquisitions among our competitors,~~

~~effectively manage our new music businesses and leverage our music library,~~

~~maintain, expand and enhance our relationships with telecom operators so that they will allow us to offer our 2G, 2.5G and any upcoming 3G services over their networks, and~~

~~increase awareness of our brand and user loyalty.~~

~~Due to these factors, there can be no certainty that we will maintain or increase our current share of the highly competitive markets in which we operate.~~

We depend on key personnel for the success of our business. Our business may be severely disrupted if we lose the services of our key executives and employees or fail to add new senior and middle managers to our management.

Our future success is heavily dependent upon the continued service of our key executives, namely, Dr. Songzuo Xiang, our chief executive officer, Xiaoqing Guo, our chief financial officer and vice president, Ping Ji and Fan Yang, our senior vice presidents in charge of WVAS business, and Haoyu Yang, our senior vice president in charge of music companies. Our future success is also dependent upon our ability to attract and retain qualified senior and middle managers to our management team. If one or more of our current or future key executives or employees are unable or unwilling to continue in their present positions, we may not be able to ~~easily~~maintain these relationships or replace them on commercially attractive terms.
We have been and expect we will continue to be exposed to intellectual property infringement and other claims, including claims based on content posted on our ~~business~~website, which could be time-consuming and costly to defend and may ~~be severely disrupted. In addition, if any of these key executives~~ result in substantial damage awards and/or ~~employees joins a competitor or forms a competing company, we could lose customers and suppliers and incur additional expenses~~court orders that may prevent us from continuing to ~~recruit and train personnel. Each~~provide certain of our ~~executive officers has entered into an employment agreement and a confidentiality, non-competition and non-solicitation agreement with us. As we believe is customary~~existing services.
Our success depends, in ~~our industry in China, we do not maintain key-man life insurance for any of our key executives.~~

~~Rapid growth and a rapidly changing operating environment strain our limited resources. Our future growth could be adversely affected if we cannot manage our expansion effectively.~~

We have limited operational, administrative and financial resources, which may be inadequate to sustain the growth we want to achieve. If the user base of our WVAS increases or our affiliated music companies expands, we will need to increase our investment in our technology infrastructure, facilities and other areas of operations, in particular our product development, customer service and sales and marketing, which are important to our future success. If we are unable to manage our growth and expansion effectively, the quality of our services and our customer support could deteriorate and our business may suffer. For example, any such performance issue could prompt China Mobile, China Unicom, or China Telecom to cease offering our services over their networks. Our future success will depend on, among other things, our ability to:

develop and quickly introduce new WVAS, adapt our existing services and maintain and improve the quality of all of our services, particularly as the market for 2.5G and 3G services evolves and matures,

effectively maintain our relationships with China Mobile and China Unicom, enhance our relationships with China Telecom and establish new relationships with any other recipients of mobile licenses in China so that we are able to offer WVAS over their networks,

~~attract and retain popular artists for our music and artist agency businesses,~~

~~continue training, motivating and retaining our existing employees, including our senior management, and attract and integrate new employees,~~

~~develop and improve our operational, financial, accounting and other internal systems and controls, and~~

~~maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. securities laws, is complete and accurate.~~

~~Any failures of the mobile telecommunications network, the Internet or our technology platform may reduce use of our services and our revenues.~~

Our WVAS are offered through the networks of China Mobile, China Unicom and China Telecom. In addition, we use our website to promote our services and enable users to order them. Thus, both the continual accessibility of the telecom operators’ networks and the performance and reliability of China’s Internet infrastructure are critical to our ability to attract and retain users. Any server interruptions, break-downs or system failures, including failures caused by computer viruses, hacking or sustained power shutdowns, floods or fire causing loss or corruption of data or malfunctions of software or hardware equipment, or other events outside our control that could result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or our technology platform, could adversely impact our ability to provide our services to users and decrease our revenues.

~~Our corporate structure could be deemed to be in violation of current or future Chinese laws and regulations, which could adversely affect our ability to operate our business effectively or at all.~~

In connection with China’s entry into the World Trade Organization, or WTO, foreign investment in telecommunications and Internet services in China has been liberalized to allow for a maximum of 50% foreign ownership in value-added telecommunications and Internet services in China. To comply with these ownership requirements, we have implemented a structure which is similar to those used by several of our competitors such as Sina, Sohu, NetEase, Linktone and TOM Online by entering into various agreements with affiliated companies incorporated in China (which we refer to as our affiliated Chinese entities), including Hurray! Solutions Ltd. (“Hurray! Solutions”), Beijing WVAS Solutions Ltd. (“WVAS Solutions”), Beijing Enterprise Network Technology Co., Ltd. (“Beijing Network”), Beijing Palmsky Technology Co., Ltd. (“Beijing Palmsky”), Beijing Hutong Wuxian Technology Co., Ltd. (“Beijing Hutong”), Shanghai Magma Digital Technology Co., Ltd. (“Shanghai Magma”), Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”), Shanghai Saiyu Information Technology Co.,Ltd. (“Shanghai Saiyu”) and Henan Yinshan Digital Network Technology Co., Ltd.(“Henan Yinshan”) and their shareholders. Each of these affiliated Chinese entities is owned by various individuals in China.

We do not have any direct ownership interest in our affiliated Chinese entities but have entered into a series of agreements with these entities through which we intend to be able to assert a degree of control and management. In addition, we control Hurray! Digital Media through three of our affiliated Chinese entities, Hurray! Solutions, Beijing Network and Beijing Hutong. It is possible that the relevant Chinese authorities could, at any time, assert that our agreements with our affiliated Chinese entities or any portion or all of the existing or future ownership structure and businesses of each of our company, our wholly-owned subsidiary, Beijing Hurray! Times Technology Co., Ltd. (“Beijing Hurray! Times”), or our affiliated Chinese entities violate existing or future Chinese laws, regulations or policies. It is also possible that the new laws or regulations governing the telecommunication or Internet sectors in China that have been adopted or may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our, Beijing Hurray! Times’ or our affiliated Chinese entities’ current or proposed businesses and operations. In addition, these new laws and regulations may be retroactively applied. If any of our company, Beijing Hurray! Times and our affiliated Chinese entities is found to be in violation of any existing or future Chinese laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including, without limitation, the following:

~~levying fines,~~

~~confiscating the incomes of any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~revoking the business licenses of any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~shutting down servers or blocking websites maintained by any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~restricting or prohibiting our use of our financial assets to finance our business and operations in China,~~

~~requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to restructure our ownership structure or operations, and/or~~

~~requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to discontinue any portion of or all of their WVAS.~~

~~In any such case, we could be required to restructure our operations, which could adversely affect our ability to operate our business effectively or at all.~~

We depend upon agreements with our affiliated Chinese entities for the success of our business. These agreements may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.

Because we conduct substantially all our business in China, and because we are restricted to a certain extent by the Chinese government from owning telecommunications or Internet operations in China, we depend on our affiliated Chinese entities, in which we have no direct ownership interest, to provide those services through agreements. These agreements may not be as effective in providing control over our telecommunications or Internet operations as direct ownership of these businesses. For example, our affiliated Chinese entities could fail to take actions required to operate our business, such as renewing their business licenses or services permits or entering into service contracts with China Mobile, China Unicom or China Telecom. Moreover, the fees for our services are paid by the telecom operators directly to our affiliated Chinese entities, which are then obligated at our request to transfer substantially all of such fees to our wholly owned subsidiary, Beijing Hurray! Times. If our affiliated Chinese entities fail to perform their obligations under these agreements, we may have to rely on legal remedies under Chinese law, which we cannot assure you would be effective or sufficient. In particular, the legal environment in China is not as developed as in other jurisdictions, such as the United States. Thus, Chinese courts are often inexperienced in handling corporate disputes, and different courts may apply laws and procedures in different ways.

We do not believe that we have a reasonable basis to predict the likelihood of the occurrence of the foregoing risks. However, if there is such an occurrence, it could potentially have a significant adverse effectlarge part, on our ability to operate our business without infringing third-party rights, including third-party intellectual property rights. Internet companies, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights, trademarks and trade secrets, and they are frequently involved in litigation based on allegations of infringement or other violations of intellectual property rights or other related legal rights. There may be patents issued or pending that are held by others that cover significant aspects of our technologies, products, business methods or services.
We have been and may continue to be subject to claims for defamation, negligence, infringement of third-party copyright and other rights, such as privacy and image rights, or other claims based on the nature or content of videos or other information provided by Ku6 Holding or our users on our ~~financial condition.~~

~~We generate~~websites. Such claims, with or without merit, may cause us to incur significant costs and liabilities and could materially and adversely affect our ~~internal funds almost exclusively from Beijing Hurray! Times. If that company is restricted from paying dividends to us, we may lose almost all~~business, and also result in diversion of the attention of our ~~internal source~~management and our financial resources and negative publicity on our brand and reputation. Ku6 Holding recorded expenses relating to such claims of ~~funds.~~

~~Except for a certain amount of cash held by Hurray! Holding Co., Ltd. (approximately $39.5~~$1.6 million ~~as of December 31, 2008), we have no significant assets other than our equity interests in Beijing Hurray! Times~~ and Hurray! Media (through which we hold equity interests in Seed Music Group). We are a holding company, and we rely principally on dividends that may be paid from Beijing Hurray! Times and Hurray! Media from time to time and technical consulting and service fees, license fees and other fees paid to Beijing Hurray! Times by our affiliated Chinese entities for our cash requirements, including any debt we may incur. We are likely to lose all of our sources of funds if Beijing Hurray! Times or Hurray! Media is restricted from paying dividends to us.

Chinese legal restrictions, however, permit payment of dividends only out of net income as determined in accordance with Chinese accounting standards and regulations, which in turn restricts our ability to receive these revenues. Under Chinese law, Beijing Hurray! Times is also required to set aside a portion of its after-tax profit calculated under PRC generally accepted accounting principles, or PRC GAAP, for which$0.4 million during the legal minimum requirement is 10%, to a non-distributable general reserve fund beginning in its first profitable year after offsetting prior year’s cumulative losses and to certain other non-distributable funds at an amount determined by Beijing Hurray! Times. The amount of statutory reserves was nil as ofyears ended December 31, 2008 ~~since Beijing Hurray! Times~~and 2009, respectively, prior to the acquisition by us. After the acquisition in 2010, we recorded expenses relating to such claims of nil and $2.1 million during the years ended December 31, 2010 and 2011, respectively. We paid $1.0 million and $0.2 million to settle such claims during the years ended December 31, 2010 and 2011, respectively, and we recorded accrued litigation provision in the amounts of $0.7 million and $2.7 million in 2010 and 2011, respectively. In addition, third parties may make claims against us for losses incurred ~~an operating loss~~ in 2008. This reserve fund can only be used for specific purposes and is not distributable as cash dividends. Dividends paid to us by our subsidiaries in China will also be subject to withholding tax underreliance on the ~~new tax laws adopted in China. See “—Recent changes in PRC tax laws could have a material adverse effect~~information on our ~~operating results.” If further restrictions~~websites. We do not carry any liability insurance covering such risks.
Due to the significant number of videos uploaded by users, which currently amounts to an average of approximately 150,000 files on ~~payments of dividends by our subsidiary are implemented under Chinese law,~~a daily basis, we may not be able to ~~access~~identify all content that may infringe on third-party rights. Thus, our ~~internal source of funds.~~

~~Our revenues~~failure to identify unauthorized videos posted on our website may ~~fluctuate significantly and may adversely affect the market price of our ADSs.~~

~~Our revenues and results of operations have varied in the past~~subject us to, and may continue to ~~fluctuate~~subject us to, claims of infringement on third-party intellectual property rights or other rights. In addition, we may be subject to administrative actions brought by the National Copyright Administration of the PRC or its local branches for alleged copyright infringement.
Additionally, although we have not previously been subject to legal actions for copyright infringement in jurisdictions other than the PRC, it is possible that we may be subject to such claims in the future. ~~Many of~~Such other jurisdictions may impose different protections for copyrights, and the ~~factors that cause such fluctuation~~claims may result in potentially larger damages awards than have been imposed in the PRC. For example, although our operations are ~~outside~~in the PRC and our ~~control. Steady revenues~~site is targeted at audiences in Asia, our site includes some English-language content and ~~results of operations will depend largely on our ability to:~~

~~attract and retain~~is accessible by users in the ~~increasingly competitive WVAS market in China,~~

~~maintain~~United States and ~~grow our 2G~~elsewhere. There is a risk that a U.S. court may determine that it has jurisdiction over us for claims for U.S. copyrights. Although U.S. copyright laws, including the Digital Millennium Copyright Act (17 U.S.C. § 512), or the DMCA, provide safeguards from claims for monetary relief for copyright infringement for certain entities that host user-uploaded content and ~~2.5G market share and revenues, and successfully offer 3G services,~~

~~successfully implement our business strategies, including integrating our recent strategic acquisitions~~that comply with ~~our existing core business, and~~

~~update and develop our services, technologies and content, which is highly complex.~~

The WVAS industry in China is new and rapidly evolving, our experience in the music industry is limited and our business has experienced significant volatility in terms of financial results as a result of the factors stated above. Therefore, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Itspecified statutory requirements, it is possible that ~~future fluctuations may cause our results~~a U.S. court would conclude that it has jurisdiction and that we are not eligible for, or have not complied with all the statutory requirements to qualify for, the safeguards provided by the DMCA. Under such circumstances, it is possible that we could be subject to claims of ~~operations to be below~~copyright infringement in the ~~expectations of market analysts and investors. This could cause the market price of our ADSs to decline.~~

United States.
We may not be able to adequately protect our intellectual property rights, and ~~we may be exposed~~any failure to ~~infringement claims by third parties.~~protect our intellectual property rights could adversely affect our revenues and competitive position.

We believe ~~the copyrights, service marks,~~that trademarks, trade secrets, patents, copyrights and other intellectual property we use are important ~~components~~to our business. We rely on a combination of trademark, copyright, patent and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our ~~WVAS.~~intellectual property and our brand. We have invested significant resources to develop our own intellectual property and acquire licenses to use and distribute the intellectual property of others for our online video site; failure to maintain or protect these rights could harm our business. In addition, ~~our affiliated music companies are substantially dependent on their ability to protect their rights over their music content. Any~~any unauthorized use of ~~such~~our intellectual property by third parties may adversely affect our current and future ~~revenue from such services~~revenues and ~~software, as well as~~ our reputation. For example, rampant piracy in China has negatively affected offline sales of CDs and tapes by our affiliated music companies, and if piracy becomes a problem in online distribution channels, their financial results would be further materially adversely affected. We rely primarily on the intellectual property laws and contractual arrangements with our employees, clients, business partners and others to protect such intellectual property rights. Third parties may be able to obtain and use such intellectual property without authorization. Furthermore, the

The validity, enforceability and scope of protection available under intellectual property laws with respect to the Internet industry in China are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property ~~in the Internet, wireless value-added and music industries~~rights in China ~~is uncertain and still evolving, and these laws~~ may not ~~protect intellectual property rights to the same extent~~be as ~~the laws of some other jurisdictions. In particular, the intellectual property law in China is less developed than~~effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and ~~historically, China has often not protected private parties’~~expensive, and we may need to resort to litigation to enforce or defend patents issued to us or our other intellectual property or to determine the enforceability, scope and validity of our proprietary rights ~~to the same extent as~~or those of others. Such litigation and an adverse determination in any such ~~parties might enjoy in the United States. Moreover,~~ litigation, ~~may be necessary in the future to enforce our intellectual property rights, which~~if any, could result in substantial costs and diversion of ~~our~~ resources and management attention.

Changes in government policies or regulations may have a material and adverse effect on our business, financial condition, results of operations and cash flows.

Our online video business is subject to strict government regulations in the PRC. Under the current PRC regulatory scheme, a number of regulatory agencies, including the State Administration of Radio, Film, and Television, or SARFT, the Ministry of Culture, the Ministry of Industry and Information Technology, or MIIT, the General Administration of Press and Publication, or GAPP, and the State Council Information Office, or SCIO, jointly regulate all major aspects of the Internet industry, including the online video industry. Operators must obtain various government approvals and licenses, including an Internet content provider license, or ICP license, and an Internet audio/video program transmission license, prior to the commencement of online video operations. We have obtained the licenses and permits essential for our business operations. We have obtained the ICP license, the Internet audio/video program transmission license (currently covering the Internet user uploaded audio/video program service) and a permit from the Beijing Drug Administration to post approved non-prescription drug advertisement on our website We currently operate a current events channel on our website, which includes audio/video content relating to current topics and social events.

Any of these actions by the PRC government may have a material and adverse effect on our results of operations. In addition, the PRC government may promulgate regulations restricting the types and content of advertisements that may be transmitted online, which could have a direct adverse impact on our business.

Our ability to operate effectively could be impaired if we fail to attract and retain our executive officers.

Our success depends, in part, upon the continuing contributions of our executive officers. Although we have an employment agreement with our chief financial officer and the third-party human resources agency that we use has an employment agreement with our chief executive officer, we cannot assure you that we will be able to retain these executive officers. The loss of the services of any of our executive officers or the failure to attract other executive officers could have a material adverse effect on our business ~~overall financial condition and results of operations.~~

or our business prospects.

Due to the fact that we aggregate content and applications for our WVAS, and because our services may be used for the distribution of information through, for example, our wireless community services, claims may be filed against us for defamation, negligence, copyright or trademark infringement or other violations. In addition, third parties could assert claims against us for losses in reliance on information distributed by us. For example, if we are found to have infringed any intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative intellectual property. While the vast majority of claims that have been asserted against us in the past have not developed beyond the demand letter stage and do not ultimately result in liability to us, we may also incur significant costs in investigating and defending such claims. We have not purchased liability insurance for these risks.

We have limited business insurance ~~coverage, which could expose us to significant costs and business disruption.~~coverage.

~~The insurance industry in China is still at an early stage of development.~~
Insurance companies in China currently do not offer ~~limited business~~as extensive an array of insurance products ~~and~~as insurance companies do ~~not, to our knowledge, offer business liability insurance. As a result, we~~in more developed economies. We do not have any business liability or disruption insurance ~~coverage for~~to cover our operations. ~~Moreover, while business disruption insurance is available, we~~We have determined that the costs of insuring for these risks ~~of disruption~~ and ~~cost~~the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence of ~~the insurance are such that we do not require it at this time. Any~~ business disruption ~~litigation or natural disaster might~~may result in our incurring substantial costs and the diversion of resources, ~~particularly if~~which could have an adverse effect on our results of operations and financial condition.
Regulation and censorship of information disseminated over the Internet in China may adversely affect our business and subject us to liability for information displayed on or linked to our websites.
The PRC government has adopted 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 reactionary, obscene, superstitious, fraudulent or defamatory. Furthermore, Internet content providers are also prohibited from displaying content that may be deemed by relevant government authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content and other licenses and the closure of the concerned websites. In the past, failure to comply with such requirements has resulted in the closure of certain websites. The website operator may also be held liable for such censored information displayed on or linked to the website.
In addition, the MIIT has published regulations that subject website operators to potential liability for content displayed on their websites and the actions of users and others using their systems, including liability for violations of PRC laws and regulations 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 to block any Internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination over the Internet of information that it ~~affects~~believes to be socially destabilizing. The State Secrecy Bureau is also 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. Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches, our ~~technology platform which~~websites may be shut down and our business and ICP licenses may be revoked.
Although we ~~depend~~attempt to monitor the content in our websites, we are not 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. To the extent that PRC regulatory authorities find any content displayed on our websites objectionable, they may require us to limit or eliminate the dissemination of such information on our websites. If third-party websites linked to or accessible through our website operate unlawful activities such as online gambling on their websites, PRC regulatory authorities may require us to report such unlawful activities to relevant authorities and to remove the links to such websites, or they may suspend or shut down the operation of such websites. PRC regulatory authorities may also temporarily block access to certain websites for ~~delivery~~a period of time for reasons beyond our control. Any of these actions may reduce our user traffic and adversely affect our business. In addition, we may be subject to penalties for violations of those regulations arising from information displayed on or linked to our websites, including a suspension or shutdown of our ~~WVAS.~~

online operations.
~~We have a material weakness in our internal control over financial reporting.~~ If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on the effectiveness of such company’s internal control over financial reporting in its annual ~~report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting.~~report. In addition, an independent registered public accounting firm ~~for a public company~~ must ~~attest to and~~ report on ~~the effectiveness of the~~such company’s internal control over financial reporting. ~~Accordingly,~~

Our management concluded that our ~~management assessed~~internal control over financial reporting was effective as of December 31, 2011 and our ~~effectiveness of~~independent registered public accounting firm has issued an attestation report concluding that our internal control over financial reporting was effective in all material aspects. However, we had identified a material weakness in our internal control over financial reporting as of December 31, ~~2008 using~~2010 relating to a lack of sufficient competent accounting personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and prepare financial statements and related disclosures under U.S. GAAP and we cannot assure you that we will be able to maintain the ~~criteria set forth in the report “Internal Control — Integrated Framework” published by the Committee~~effectiveness of Sponsoring Organizations of the Treadway Commission (know as COSO). This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as temporary rules of the SEC permit us to provide only our management’s report in this annual report.

~~Our management has concluded that~~ our internal control over financial reporting was not effective as of December 31, 2008 due to the material weakness we identified. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The identified material weakness is that, while our affiliated music companies make an allowance for doubtful debts against trade receivables based on a review of each individual account, the management of these companies do not use a set of criteria (such as payment history and account activity) to determine whether an allowance for an individual account is necessary.

We have implemented measures to resolve the material weakness and improve our internal and disclosure controls and we do not believe that the material weakness identified had a pervasive impact on internal control over financial reporting. See Item 15. “Controls and Procedures - Management’s Report on Internal Control over Financial Reporting.” Nevertheless, we cannot assure you that these measures will be effective and that we will be able to resolve the material weakness in internal control over financial reporting in a timely and effective manner or that any significant material weakness in our internal control over financial reporting will not be identifiedcontinuing basis in the future. If, however, we fail to maintain the adequacy of our internal control, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, even if we conclude that our internal control over financial reporting is effective, our independent registered public accounting firm may still issue a report that is qualified if it is not satisfied with our internal control or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Furthermore,As effective internal control over financial reporting is necessary for us to produce reliable financial reports and isare important to help ~~us to manage the company effectively and~~ prevent ~~fraud. As a result, our~~fraud, any failure to ~~achieve and~~ maintain effective internal control over financial reporting could harm our business and result in a loss of investor confidence in the reliability of our financial statements, which in turn could ~~harm our business and~~ negatively impact the trading price of our ADSs.

Furthermore, we may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.

~~We believe that~~It is not clear whether we were a passive foreign investment company, ~~(“PFIC”)~~or PFIC, for taxable year 2011. Although we believe we were not a PFIC for taxable year 2010, we believe that we were a PFIC for taxable years 2006, 2007, ~~and~~ 2008 and ~~are likely a PFIC for the current taxable year of~~ 2009, which could result in adverse U.S. federal income tax consequences to U.S. investors.

We will be ~~classified as~~ a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is passive income or (b) 50% or more of the average ~~percentage~~quarterly value, generally determined by fair market value, of our assets during such taxable year consists of assets that either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets and (b) received directly a proportionate share of the other corporation’s income. ~~The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time.~~ We believe that we were a PFIC for taxable years 2006, 2007, ~~and~~ 2008 and ~~are likely~~2009 and it is not clear whether we were a PFIC for taxable year 2011.That determination is subject to uncertainty because of the uncertain characterization of our assets and income for purposes of the PFIC rules. If we were a PFIC for 2006, 2007, 2008, 2009 or 2011 and you held ordinary shares or ADSs during any such taxable years, we would continue to be ~~classified~~treated as a PFIC with respect to those ordinary shares or ADSs for ~~the current~~all succeeding years during which you hold them, even if we cease to be a PFIC in taxable years ending after 2011. Because our PFIC status for any taxable year ~~of 2009, although such determination cannot~~will not be ~~made with certainty~~determinable until after the end of the taxable year and will depend on the composition of our income and assets and the market value of our assets for such taxable year, which may be, in part, based on the market price of our ordinary shares or ADSs (which may be especially volatile), there can be no assurance we will not be a PFIC for any taxable year. Such characterization could result in adverse U.S. federal income tax consequences to a U.S. investor. ~~For example,~~In general, if we are a PFIC, then “excess distributions” to a U.S. investor and any gain realized by a U.S. investor on the sale or other disposition of our ordinary shares or ADSs will be allocated ratably over the U.S investor’s holding period for the ~~ADSs,~~ordinary shares or ADSs; the amount allocated to the ~~current~~ taxable year of receipt of the distribution or disposition and any year prior to our becoming a PFIC will be taxed as ordinary ~~income,~~income; and the amount allocated to each ~~of the~~ other taxable ~~years~~year will be subject to tax at the highest rate ~~of tax~~ in effect for the applicable class of taxpayer for that year. Additionally, an interest charge ~~for the deemed deferral benefit~~ will be imposed with respect to the resulting tax attributable to each such other taxable year and the U.S. investor will be subject to U.S. tax reporting requirements. ~~Some of these adverse tax consequences may be avoided~~Alternatively, if ~~the~~we are a PFIC and if our ADSs are “regularly traded” on a “qualified exchange,” a U.S. investor ~~makes~~could make a ~~“mark-to-market”~~mark-to-market election that would result in tax treatment different from the general tax treatment for ~~the ADSs.~~

~~Accordingly, the adverse U.S. federal income tax consequences~~PFICs described ~~above could apply to you if you are a U.S. investor.~~ above.
Given the complexity of the issues regarding our classification as a PFIC, U.S. investors are urged to consult their own tax advisors for guidance as to the U.S. federal, state and local and other tax consequences of our status as a PFIC in light of ~~the~~their particular circumstances, ~~applicable to such U.S. investor,~~ as well as the availability of and procedures for making a mark-to-market or other available election. For further discussion of the adverse U.S. federal income tax consequences of our classification as a PFIC, see ~~Item 10.E. “Additional Information—Taxation—United States~~“Taxation—U. S. Federal Income Taxation” below.

~~Anti-takeover provisions in our charter documents could make an acquisition of us, which~~We may be ~~beneficial~~deemed a PRC resident enterprise under the EIT Law and be subject to PRC taxation on our ~~shareholders, more difficult and may prevent attempts by our shareholders to replace~~worldwide income.

The PRC Enterprise Income Tax Law, or ~~remove our current management.~~

~~Our amended and restated articles~~the EIT Law, includes a provision specifying that legal entities organized outside China will be considered residents for PRC income tax purposes if their place of ~~association include two provisions, which could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace~~effective management or ~~remove our current management. First, our amended and restated articles of association provide~~control is within China. If legal entities organized outside China were considered residents for a classified board of directors. Second, our board of directors has the right to issue preference shares without shareholder approval, which could be used to institute a “poison pill” that would work to dilute a potential hostile acquirer’s ownership interest in our company, effectively preventing acquisitions that have not been approved by our board of directors.

Shareholder rights under Cayman Islands law may differ materially from shareholder rights in the United States, which could adversely affect the ability of us and our shareholders to protect our and their interests.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (2007 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, 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 in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law in this area may not be as clearly established asPRC income tax purposes, they would be ~~under statutes or judicial precedent in existence in some jurisdictions~~subject to the 25% enterprise income tax imposed by the EIT Law on their worldwide income. The implementation rules to the EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. reside within China. Although substantially all of our operational management is currently based in the ~~United States. In particular,~~PRC, it is uncertain whether we would be deemed a PRC tax resident enterprise under the ~~Cayman Islands has~~EIT Law and other related PRC laws and regulations. If we are deemed to be a ~~less developed body~~PRC tax resident enterprise, our global income will be subject to PRC enterprise income tax at the rate of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate laws. Moreover, our company could be involved in a corporate combination in25%, which ~~dissenting shareholders~~ would have a material adverse effect on our financial condition and results of operations.

Dividends that we receive from our PRC subsidiaries are subject to PRC withholding tax.

In accordance with the EIT Law and its implementation rules, dividends which arise from profits of foreign invested enterprises, or FIEs, earned after January 1, 2008, are subject to a 10% withholding tax. There are no ~~rights comparable to appraisal rights, which would otherwise ordinarily be~~undistributed earnings of our subsidiaries located in the PRC that are available ~~to dissenting shareholders~~for distribution as of United States corporations. Also, our Cayman Islands counsel is aware of only a few reported cases of derivative actions having been brought in a Cayman Islands court. Such actions are ordinarily available in respect of United States corporations in U.S. courts. Finally, Cayman Islands companies mayDecember 31, 2011. In addition, we (i) do not have ~~standing~~any present plan to ~~initiate shareholder derivative actions before the federal courts of the United States. As a result,~~pay any cash dividends on our public shareholders may face different considerations in protecting their interests in actions against the management, directors or our controlling shareholders than would shareholders of a corporation incorporated in a jurisdictionordinary shares in the ~~United States,~~foreseeable future and (ii) intend to retain most of our ~~ability to protect~~available funds and any future earnings for use in the operation and expansion of our ~~interests may be limited if we are harmed~~business in ~~a manner~~the PRC. Accordingly, no provision has been made for the PRC dividend withholding taxes that would ~~otherwise enable us~~be payable upon distributions of dividends by our PRC subsidiaries to ~~sue in a United States federal court.~~

us. Any future dividends that we will receive from our PRC subsidiaries will be subject to PRC withholding tax.

~~We believe that all~~All participants of our existing equity compensation plans who are PRC citizens are ~~currently~~ required to register with the State Administration of Foreign Exchange of the PRC, or SAFE, and the failure to so comply could subject us and such participants to penalties. ~~We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors and employees and other parties under PRC law.~~

On ~~April 6,~~March 28, 2007, ~~the capital account department of~~ SAFE issued theOperating Procedures for Administration of Domestic Individuals Participating in the Employee Stock ~~Option~~Ownership Plan or Stock Option Plan of an Overseas Listed Company,, or Circular 78. It is not clear at this time whether Circular 78 covers all forms of equity compensation plans, including restricted purchase share awards granted by us, or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company such as our company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings by July 5, 2007 if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. InOn May 29, 2007, ~~the General Affairs Department of~~ SAFE issued theNotice on Printing and Distributing the Operating Rules for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic Residents through Overseas Special Purpose Companies,, or Circular 106. ~~This notice also requires~~According to these regulations, PRC citizens who ~~hold~~participate in an employee stock ~~options pursuant to~~ownership plan or a ~~company’s equity incentive~~stock option plan in an overseas, publicly listed company are required to register with ~~SAFE.~~SAFE and complete certain other procedures. These participants should retain a PRC agent, which can be a subsidiary of the overseas listed company in China to handle various foreign exchange matters associated with these plans. In the case of an employee stock ownership plan, an overseas custodian bank should be retained by the PRC agent to hold in trusteeship all overseas assets held by such participants under the employee stock ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification in the jurisdiction where the overseas publicly-listed company is listed or a qualified institution designated by the overseas, publicly listed company is required to be retained by the PRC agent to handle matters in connection with the exercise or sale of stock options for the stock option plan participants. The PRC agents or employers should, on behalf of the PRC citizens, apply annually to SAFE or its competent local branches for a quota for the conversion and/or payment of foreign currencies in connection with the PRC citizens’ exercise of the employee stock options. The foreign exchange proceeds received by the PRC citizens from sale of shares under the stock option plans granted by the overseas listed companies must be remitted into the bank accounts in China opened by their employers or PRC agents. We and our PRC citizen employees who participate in the employee stock ownership plan or a stock option plan have not yet completed the required registration ~~on behalf of our stock option holders who are PRC citizens~~ with SAFE. Although Circular 78 has not yet been made publicly available nor has it been formally promulgated by SAFE, and we have submitted the registration with SAFE on behalf of our stock option holders who are PRC citizens pursuant to Circular 106, anyAny failure to comply with such ~~provisions~~regulations may subject us and the participants of our equity compensation plans who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our personnel which is currently a significant component of the compensation of many of our PRC employees, as a result of which our business operations may be adversely affected.

Risks Related to Our Corporate Structure

~~Recent~~If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in Internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in Internet business, including the provision of online video and online advertising services. Specifically, foreign ownership in an Internet content provider or other value-added telecommunication service providers may not exceed 50%. We conduct our operations in China principally through contractual arrangements among our PRC subsidiaries (Beijing WFOE, Tianjin WFOE and Tianjin Ku6 Network WFOE), our consolidated affiliated entities in the PRC (Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and Tianjin Ku6 Network), and their respective shareholders. Ku6 Information Technology holds the licenses and permits necessary to conduct our online video, online advertising and related businesses in China. Our contractual arrangements with Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and Tianjin Ku6 Network and their respective shareholders enable us to exercise effective control over these entities and hence treat them as our consolidated affiliated entities and consolidate their results. For a detailed discussion of these contractual arrangements, see Item 4.C. “Information on the Company—Organizational Structure.”

Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would hold the same view with us or these contractual arrangements comply with regulations or policies that may be amended or adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

We rely on contractual arrangements with our consolidated affiliated entities in China and their shareholders for our operations, which may not be as effective as direct ownership in providing operational control.

Since PRC laws restrict foreign equity ownership in companies engaged in online video and advertising businesses in China, we rely on contractual arrangements with our consolidated affiliated entities and their respective shareholders to operate our business in China. If we had direct ownership of Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and Tianjin Ku6 Network, we would be able to: (i) exercise our rights as a shareholder to effect changes in the board of directors of these entities, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations, and (ii) derive economic benefits from the operations of these entities by causing them to declare and pay dividends. However, under the current contractual arrangements, we rely on our consolidated affiliated entities and their respective shareholders’ performance of their contractual obligations to exercise effective control. In general, neither our consolidated affiliated entities nor their respective shareholders may terminate the contracts prior to the expiration date. However, the shareholders of Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural or Tianjin Ku6 Network may not act in the best interests of our company or may not perform their obligations under these contracts, including the obligation to renew these contracts when their initial terms expire. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated affiliated entities. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business” below. Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these consolidated affiliated entities.

Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.

Our consolidated affiliated entities and their respective shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective.

All of our contractual arrangements with them are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be adversely affected.

Contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements among our PRC subsidiaries, our consolidated affiliated entities in China and their respective shareholders were not entered into on an arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment to our tax liability. In addition, the PRC tax authorities may impose interest on late payments on our consolidated affiliated entities for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if our consolidated affiliated entities’ tax liabilities increase significantly or if they are required to pay interest on late payments.

The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business.

We conduct substantially all of our operations, and generate substantially all of our revenues, through our consolidated affiliated entities. Our control over these entities is based upon contractual arrangements with our consolidated affiliated entities and their shareholders that provide us with the substantial ability to control these entities. We provide no incentives to any of the shareholders of our consolidated affiliated entities for the purpose of encouraging them to act in the best interest of our company in such capacity. These shareholders may breach their contractual arrangements, or cause our consolidated affiliated entities to breach their contractual arrangements, with us or cause these contracts to be amended in a manner contrary to the interest of our company, if they believe such action furthers their own interest, or if they otherwise act in bad faith. We cannot assure you that, when conflicts arise, these shareholders will act in the best interest of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and any of these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

We rely on our PRC subsidiaries and our consolidated affiliated entities to fund our cash and financing requirements. Any limitation on the ability of our PRC subsidiaries and our consolidated affiliated entities to transfer funds to us could have a material adverse effect on our ability to grow or otherwise fund our cash and financing requirements.

We are a holding company and our operations are principally conducted through our PRC subsidiaries and our consolidated affiliated entities. As a result, the ability of our company to pay dividends and to finance debts depends upon service fees paid by our consolidated affiliated entities to our PRC subsidiaries and dividends and other distributions paid by our PRC subsidiaries to our company. If any of our subsidiaries or consolidated affiliated entities incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay service fees or dividends directly or indirectly to our company.

Under PRC laws and regulations, our PRC subsidiaries and our consolidated affiliated entities may pay dividends only out of their retained earnings as determined in accordance with PRC accounting standards and regulations. There is no significant difference between retained earnings as determined in accordance with PRC accounting standards and in accordance with U.S. GAAP. In addition, our PRC subsidiaries and our consolidated affiliated entities are required to set aside at least 10% of their after-tax net income each year, if any, to fund certain statutory reserves, which are not distributable as cash dividends, until the aggregate amount of such funds reaches 50% of their respective registered capital. As of December 31, 2011, the registered capital was $11,700,000 for Beijing WFOE, $60,000,000 for Tianjin WFOE and $30,000,000 for Tianjin Ku6 Network WFOE, respectively. As none of our PRC subsidiaries has made any profits to date, our PRC subsidiaries have not been subject to the statutory reserve fund requirements and have not set aside any money to fund the statutory reserve funds or staff welfare and bonus funds. Our PRC subsidiaries will not be able to pay dividends to us or our offshore subsidiaries until they generate accumulated profits and meet the requirements for statutory reserve funds. As a result of these and other restrictions under PRC laws and regulations, our PRC subsidiaries and consolidated affiliated entities are restricted in their ability to transfer a portion of their net assets to our company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $59.4 million, or 116.7% of our company’s total consolidated net assets as of December 31, 2011. In addition, our PRC subsidiaries and our consolidated affiliated entities may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These staff welfare and bonus funds are not distributable as cash dividends.

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.

Most of our revenues and operating ~~results.~~expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans.

Under existing PRC foreign exchange regulations, payments of current account items, including payment of dividends, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Our PRC subsidiaries may also retain foreign exchange in its current account, subject to a ceiling approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase and retain foreign currencies in the future.

Since a significant amount of our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.

Foreign exchange transactions under the capital account are subject to limitations and require registration with or approval by the relevant PRC governmental authorities. In particular, if we finance our PRC subsidiaries by means of foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with SAFE, and if we finance our PRC subsidiaries by means of capital contributions, those capital contributions must be approved by the Ministry of Commerce of the PRC, or MOFCOM. Our ability to use the U.S. dollar proceeds of the sale of our equity or debt to finance our business activities conducted through our PRC subsidiaries will depend on our ability to obtain these governmental registrations or approvals. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance our PRC operating companies’ operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all.

We may be unable to collect long-term loans extended to the shareholders of our consolidated affiliated entities.

~~In March 2007,~~

As of December 31, 2011, we made long-term, interest-free loans in an aggregate principal amount of RMB20.0 million ($3.2 million) to the ~~National People’s Congress~~shareholders of our consolidated affiliated entities to enable them to fund the initial capitalization and the subsequent financial requirements of our consolidated affiliated entities. The initial term for such loans is 10 years (in respect of loans to shareholders of Ku6 Information Technology and Ku6 Cultural) or 20 years (in respect of loans to shareholders of Tianjin Ku6 Network) and can be extended upon written agreement. We may in the future make additional loans to the shareholders of our consolidated affiliated entities in China ~~enacted a~~in connection with any increase in the capitalization or financial requirements of these entities to the extent necessary and permissible under applicable PRC laws and regulations. Our ability to collect these long-term loans will depend on the profitability and results of operations of these consolidated affiliated entities, which are uncertain.

The new ~~Enterprise Income Tax~~PRC Property Rights Law ormay affect the ~~New EIT~~perfection of the pledge in our equity pledge agreements with our consolidated affiliated entities and their individual shareholders.

Under the equity pledge agreements among our PRC subsidiaries, certain of our consolidated affiliated entities and the shareholders of our consolidated affiliated entities, the shareholders of our consolidated affiliated entities have pledged all of their equity interests in these entities to our relevant subsidiaries by recording the pledge on the shareholder registers of the respective entities. However, according to the PRC Property Rights Law, which became effective ~~on January~~as of October 1, ~~2008. In addition,~~2007, a pledge is not valid unless it is registered with the ~~Implementation Rules~~relevant local administration for industry and commerce. The SAIC and many of its local branches, including Shanghai Administration for Industry and Commerce and Tianjin Administration for Industry and Commerce, have adopted registration procedures with respect to the ~~New Enterprise Income Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation~~registration of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a preferential tax rate of 15%equity pledges according to the ~~then effective PRC Enterprise Income Law for Foreign-Invested Enterprise~~Property Rights Law. Ku6 Information Technology and ~~Foreign Enterprise tax laws~~Tianjin Ku6 Network have completed the registration of equity pledges on November 13, 2008 and ~~administrative regulations is subject to transitional rules as stipulated~~January 20, 2012, respectively. Ku6 Culture and Tianjin Ku6 Zheng Yuan are in the ~~Transitional Arrangements Notice. In addition, certain qualified enterprises may still~~process of registering the relevant equity pledges with the local administration for industry and commerce for the benefit from a preferential tax rate of up to15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state as set out in the Implementation Rules. As a result, if our PRC subsidiaries and VIEs qualify as high and new technology enterprises strongly supported by the state under the New EIT Law, they will continue to benefit from a preferential tax rate of up to 15%. Otherwise, the applicable tax rate of our PRC subsidiaries and VIEs is 25% starting from 2008 under the New EIT Law. Before the due date of the 2008 PRC EIT annual final settlement, four of our subsidiaries and VIEs were qualified as high and new technology enterprises and are entitled to the preferential tax rate, tax exemption or reduced rate according to the New EIT Law and transitional rules. While the high and new technology enterprise certificates are valid for three years, we believe based on currently available informationsubsidiaries. We cannot assure you that wethey will be able to ~~reapply~~register the equity pledges. If they are unable to do so, the pledges may be unenforceable under the PRC Property Rights Law. Until such pledge interests are registered, they are not considered perfected under the PRC law. Consequently, if any individual shareholder of our consolidated affiliated entities breaches his or her obligations under the contractual arrangements with respect to these entities, there is a risk that our PRC subsidiaries may not be able to successfully enforce the equity pledges and would need to resort to legal proceedings to enforce their contractual rights.

We may have conflicts of interest with Shanda Interactive or its affiliates. Because of Shanda Interactive’s controlling ownership interest in our company, we may not be able to resolve such conflicts on terms favorable to us.

As of December 31, 2011, Shanda Interactive beneficially owned approximately 66.4% of our outstanding equity interests. Conflicts of interest may arise between Shanda Interactive and us in a number of areas relating to our past and ongoing relationships. In addition to the conflicts of interests we have discussed in other risk factors, potential conflicts of interest that we have identified include the following:

•

Our board members or executive officers may have conflicts of interest. Mr. Tianqiao Chen, Ms. Grace Wu and Mr. Danian Chen, who are our directors, currently also serve as directors or officers of Shanda Interactive. Some of our directors also own equity interests in Shanda Interactive. Our board members may receive incentive share compensation from Shanda Games, a subsidiary of Shanda Interactive, from time to time. These relationships could create perceived or actual conflicts of interest when these persons are faced with decisions with potentially different implications for Shanda Interactive and us.

•

Potential competition with Shanda Interactive. Shanda Interactive may engage in certain transactions or businesses that directly or indirectly compete with our online video and audio businesses.

•

Business opportunities. Business opportunities may arise that both we and Shanda Interactive find attractive, and which would complement our respective businesses. Due to the controlling interest of Shanda Interactive and its leading market position and brand in China, we may not be able to pursue these business opportunities effectively if Shanda Interactive decides to take advantage of such opportunities itself.

•

Developing business relationships with Shanda Interactive’s competitors. So long as Shanda Interactive remains our controlling shareholder, we may be limited in our ability to do business with its competitors, such as other interactive entertainment media companies in China.

Although our company is a stand-alone entity, we expect to operate, for ~~the renewal~~as long as Shanda Interactive is our controlling shareholder, as a part of the ~~current certificates~~Shanda Group. Shanda Interactive may from time to time make strategic decisions that it believes are in the best interests of Shanda Group as a whole. These decisions may be different from the decisions that we ~~believe we will continue~~would have made on our own. Shanda Interactive’s decisions with respect to ~~meet~~us or our business may be resolved in ways that favor Shanda Interactive and therefore Shanda Interactive’s own shareholders, which may not coincide with the ~~published criteria. Accordingly, these four entities have used the reduced applicable tax rate in calculations~~interests of deferred tax balances for the foreseeable future. However, we cannot be certain that such applications will be successful. In addition, our qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture and Secular Bird, were entitled to tax exemption in 2008. We have used the new standard rates for our other ~~affiliated Chinese entities. Deferred taxes~~shareholders. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated shareholder. Even if both parties seek to transact business on terms intended to approximate those that could have been ~~calculated using the tax rates that apply~~achieved among unaffiliated parties, this may not succeed in practice.

Risks Related to ~~the relevant companies.~~

~~Under the New EIT Law, the rules for determining whether an entity is resident~~Doing Business in ~~the PRC for tax purposes have changed and the determination~~China

Substantially all of ~~residence depends among other things on the “place of actual management.” If Hurray! Holding Co., Ltd. or~~ our ~~non-PRC subsidiaries~~assets are determined to be a PRC resident for tax purposes, it or they, would be subject to tax in the PRC on our worldwide income including the income arising in jurisdictions outside the PRC. We have evaluated our resident status under the New EIT Law and related guidance and believe Hurray! Holding Co., Ltd. and our other non-PRC subsidiaries are not a PRC resident for PRC income tax purposes.

Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to the overseas holding companies by the PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterpriselocated in China ~~to its foreign investors who~~and substantially all of our revenues are ~~non-resident enterprises~~derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a ~~10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.~~

~~Aggregate undistributed earnings of our subsidiaries~~significant extent, to economic, political and ~~affiliates located~~legal conditions and developments in the PRC that are available for distribution to the Company at December 31, 2008 are considered to be indefinitely reinvested under APB opinion No. 23, “Accounting for Income Taxes — Special Areas,” and accordingly, no provision has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to Hurray! Holding Co., Ltd. The PRC tax authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.

~~LEGAL RISKS RELATED TO WIRELESS AND INTERNET SERVICES~~

China.

The telecommunication laws and regulations in China are evolving and subject to interpretation and will likely change in the future. If we are found to be in violation of current or future Chinese laws or regulations, we could be subject to severe penalties.

Our WVAS services are subject to general regulations regarding telecommunication services. The interpretation and application of newly issued Chinese laws and regulations and the possibility of new laws or regulations being adopted have created significant uncertainty regarding the legality of existing and future foreign investments in, and the businesses and activities of, Chinese companies providing WVAS services, including our affiliated Chinese entities. Many providers of WVAS services have obtained various value-added telecommunication services licenses.

Certain of our affiliated Chinese entities, Hurray! Solutions, Beijing Palmsky, Beijing Network, Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu and Henan Yinshan, have been granted an inter-provincial value-added telecommunication license by the MIIT that permits them to conduct inter-provincial operations. Our affiliated Chinese entity, WVAS Solutions, has been granted a value-added telecommunication service license issued by the local Beijing Municipal Telecommunications Administration Bureau. This license may not be sufficient to authorize WVAS Solutions to provide value-added telecommunication services on an inter-provincial basis. We cannot be certain that any local or national value-added telecommunication license requirements will not conflict with one another or that any given license will be deemed sufficient by the relevant governmental authorities for the provision of this category of service, due to the lack of a comprehensive body of laws and regulations governing our WVAS services. It is also possible that new national legislation might be adopted to regulate such services.

If we or our subsidiaries or affiliates are found to be in violation of any existing or future Chinese laws or regulations regarding our WVAS services or Internet access which is discussed in the following risk factor, the relevant Chinese authorities have the power to, among other things:

~~levy fines,~~

~~confiscate our income or the income of our affiliates,~~

~~revoke our business license or the business license of our affiliates,~~

~~shut down our servers or the servers of our affiliates and/or blocking any Web or WAP sites that we operate, and~~

~~require us to discontinue any portion or all of our WVAS services business.~~

The regulation of Internet website operators is also new and subject to interpretation in China, and our business could be adversely affected if we are deemed to have violated applicable laws and regulations.

Our affiliate, Hurray! Solutions, and some of our other affiliated Chinese entities operate Internet websites in China, which are one of the channels through which our services are offered. The interpretation and application of existing Chinese laws and regulations, the stated positions of the main governing authority, the MIIT, and the possibility of new laws or regulations being adopted have created significant uncertainty regarding the legality of existing and future foreign investments in, and the businesses and activities of, Chinese companies with Internet operations, including ours. In particular, the MIIT has stated that the activities of Internet content providers are subject to regulation by various Chinese government authorities, depending on the specific activities conducted by the Internet content provider. We cannot be certain that the commercial Internet content provider license issued by the relevant government agencies overseeing the telecommunications industry or any value-added telecommunication license held by Hurray! Solutions or our other affiliated Chinese entities will satisfy these requirements. Our failure to comply with applicable Chinese Internet regulations could subject us to severe penalties as noted in the prior risk factor.

In particular, regulatory and policy changes by MIIT and the telecom operators can be unpredictable and have caused operating channels to become increasingly unavailable for marketing and promotion. As a result, we have diversified our marketing and promotion channels and developed direct media advertising, Internet marketing alliances, handset vendor partnerships, as well as offline channels such as record stores and convenient stores. These new marketing and promotion methods can be costly and may not be entirely effective in developing new business, which in turn, may adversely affect our customer base and revenues.

~~RISKS RELATED TO DOING BUSINESS IN CHINA~~

~~The recent slowdown in the Chinese economy may slow down our growth and profitability.~~

The rate of growth of the Chinese economy has been uneven across geographic regions and economic sectors and has recently slowed due in part to the recent economic and financial downturn experienced in the United States and worldwide. The Chinese government has recently used macroeconomic tools and regulations, including the passage of an economic stimulus plan, to increase the rate of growth of the Chinese economy and may take similar measures in the future. There is no assurance that such steps will be successful. The general state of the Chinese economy affects our profitability as expenditures for wireless value-added and music content services may decrease due to slowing domestic demand. More specifically, increased penetration of WVAS in the less economically developed central and western provinces of China will depend on their achieving certain income levels so that mobile handsets and related services become affordable to a significant portion of the population. Moreover, sales of music content are substantially dependent on the level of discretionary consumer spending in China.

~~The Chinese~~PRC legal system embodies uncertainties which could limit the legal protections available to you and could also adversely affect our ability to operate our business.

The ~~Chinese~~PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in China over the past 20 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. In addition, the ~~Chinese~~PRC government may enact new laws or amend current laws that may be detrimental to our current contractual arrangements with respect to our ~~Chinese affiliates,~~consolidated affiliated entities, which may in turn have a material adverse effect on our ability to operate our business.

~~Any~~PRC regulations relating to the establishment of offshore special purpose vehicles, or SPVs, by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005, and which was supplemented by an implementing notice issued on November 24, 2005. We refer to them collectively as Notice 75. Under Notice 75, PRC residents and citizens must register with the relevant local SAFE branch prior to their establishment or control of an offshore entity established for the purpose of an overseas equity financing involving onshore assets or equity interests held by them, and must also make filings with SAFE thereafter upon the occurrence of ~~pandemic avian influenza~~certain material capital changes. The registration and filing procedures under Notice 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. Notice 75 also requires that if a PRC resident has established or gained control of an SPV and completed the return investment prior to the implementation of this Notice 75 but failed to complete the foreign exchange registration in relation with its overseas investment, it shall carry out such registrations with the local branch of SAFE in accordance with this Notice 75 by March 31, 2006. After the PRC resident has retroactively completed the foreign exchange registration in relation with its overseas investment, the local branch of SAFE may process the registration pertaining to foreign investment and foreign debt for the relevant PRC enterprises.

The failure or inability of our shareholders who are PRC citizens or PRC residents to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

The failure to comply with the regulations regarding the use of the foreign currency registered capital may subject us to severe monetary or other ~~widespread public health problem,~~penalties.

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC, unless it is provided for otherwise. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any ~~recurrence~~case be used to repay Renminbi loans if the proceeds of ~~severe acute respiratory syndrome,~~such loans have not been used. Failure to comply with SAFE Circular 142 could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including (i) being required to take appropriate remedial action, confiscation of any illegal income and imposition of a fine of up to 30% of the illegal amount involved and (2) in circumstances involving serious violations, a fine of between 30% and 100% of the illegal amount involved shall be imposed on the organization or ~~SARS, could adversely affect our business and results of operations.~~

~~An outbreak of pandemic avian influenza~~individual concerned. If we are found to violate SAFE Circular 142 or other ~~widespread public health problem, or a renewed outbreak of SARS~~laws in China, where most of our revenues are derived, and in Beijing, where our operations are headquartered, could have a negative effect on our operations. Further, in April 2009, H1N1, a new strain of flu virus commonly referred to as “swine flu,” was first discovered in North America and quickly spread to other parts of the world, including China. The continual widespread of H1N1 in China and in Beijing may adversely affect our business and operating results.

~~Our operations~~relation with foreign exchange, we may be ~~affected by a number of health-related factors, including the following:~~

~~quarantines or closures of some of our offices which would severely disrupt our operations,~~

~~the sickness or death of our key officers and employees, and~~

~~a general slowdown in the Chinese economy.~~

~~Any of the foregoing events~~subject to severe monetary or other ~~unforeseen consequences of public health problems could adversely affect our business and results of operations.~~

penalties.

We may incur substantial increases in labor cost due to the promulgation of the new labor contract law.

~~On June 29, 2007, the Standing Committee of the~~

The PRC National People’s Congress ~~of China enacted~~promulgated the Labor Contract Law, which became effective on January 1, 2008. ~~The~~Compared to previous labor laws, the Labor Contract Law ~~contains substantial provisions~~provides stronger protection for employees and imposes more obligations on employers. According to the Labor Contract Law, employers have the obligation to enter into written labor contracts with employees to specify the key terms of the employment relationship. The law also stipulates, among other things, (i) that all written labor contracts shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event shall be no longer than six months; (iii) that in certain circumstances, a ~~view toward improve job security~~labor contract shall be deemed to be without a fixed term and thus an employee can only be terminated with cause; and (iv) that there shall be certain restrictions on the circumstances under which employers may terminate labor contracts as well as the economic compensations to ~~protect~~employees upon termination of the ~~rights~~employee’s employment.

In addition, some of our employees, including our chief executive officer, are contracted through a third-party human resources agency that is responsible for managing, among others, payrolls, social insurance contributions and ~~interests~~local residency permits of these employees. We may be held jointly liable if the third-party agency fails to pay such employees their wages and other benefits or otherwise become liable to these employees for labor law violations. In order to fully comply with the legal requirements under the Labor Contract Law and other related laws, we may incur substantial increases in labor cost.

Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

We are required by PRC laws and regulations to participate in various government-sponsored employee benefit plans, including social insurance funds (namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan) and a housing provident fund and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. Employers who fail to report and pay social insurance funds in accordance with the relevant rules may be ordered to rectify the problem and pay the social insurance funds within a stipulated deadline. According to the Interim Regulation on the Collection and Payment of Social Insurance Premiums, if payment of certain social insurance funds is not made by the stipulated deadline, the relevant authority can charge a late fee payment of 0.2% per day from the original due date and fine the responsible persons of the employer up to RMB10,000. If an employer is found to be concealing the actual number of employees or the total amount of salaries from competent social insurance authorities, the employer may be subject to penalties. According to relevant PRC laws, for the failure to register or open housing provident fund accounts for employees, the employer may be required to rectify such breach within certain period and if such breach persists after such period, the employer may be subject to a fine ranging from RMB10,000 to RMB50,000. For the failure of payment of housing provident fund and failure to rectify such breach within certain period prescribed by the relevant authorities, the relevant housing provident fund authorities may apply for a court order requiring employers to make such payment.

A slowdown of the PRC economy may adversely affect our business, results of operations and financial condition.

Since we generate substantially all of our revenue from online advertising, a slowdown of the PRC economy could cause decreases or delays in advertising spending, a reduction in our revenue and a negative impact on our ability to grow our revenue. Further, any decreased collectability of accounts receivable or early termination of advertising agreements as a result of adverse economic conditions could negatively impact our results of operations.

Changes in China’s political and economic policies could harm our business.

The economy of China has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the ~~Chinese~~PRC government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the ~~Chinese~~PRC economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD. These differences include:

economic ~~structure,~~structure;

level of government involvement in the ~~economy,~~economy;

level of ~~development,~~development;

level of capital ~~reinvestment,~~reinvestment;

control of foreign ~~exchange,~~exchange;

methods of allocating ~~resources,~~resources; and

balance of payments position.

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the ~~Chinese~~PRC economy were similar to those of the OECD member countries.

Governmental control of currency conversion may affect the value of our ordinary shares and ADSs.

The PRC government imposes controls on currency conversion between Renminbi and foreign currencies and, in certain cases, the remittance of currency out of and into China. We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. Under our current corporate structure, the income of our company will be primarily derived from dividend payments from Beijing ~~Hurray! Times .~~WFOE and Tianjin WFOE. Shortages in the availability of foreign currency may restrict the ability of Beijing ~~Hurray! Times~~WFOE and Tianjin WFOE to remit sufficient foreign currency to pay dividends to us, or otherwise satisfy its foreign currency-dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, in most cases, particularly payments of capital accounts items, approval from appropriate governmental authorities is required where (i) Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of offshore bank loans denominated in foreign currencies or (ii) any foreign currency is to be converted into Renminbi for investment in China. 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 converting Renminbi into foreign currencies or vice versa, and obtaining sufficient Renminbi or foreign currency to satisfy our currency demands, our ability to transfer Renminbi to fund our business operations in China or to pay dividends in foreign currencies to our shareholders may be adversely affected.

Inflation in China and measures to contain inflation could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such austerity measures can lead to a slowing of economic growth. A slowdown in the PRC economy could also materially and adversely affect our business and prospects.

Our shareholders may face difficulties in effecting service of process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management.

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Any occurrence of pandemic avian influenza or other widespread public health problem, or any recurrence of severe acute respiratory syndrome, or SARS, could adversely affect our business and results of operations.

An outbreak of pandemic avian influenza or other widespread public health problem, or a renewed outbreak of SARS in China, where most of our revenues are derived, and in Beijing, where our operations are headquartered, could have a negative effect on our operations.

Our operations may be affected by a number of health-related factors, including the following:

quarantines or closures of some of our offices which would severely disrupt our operations,

the sickness or death of our key officers and employees, and

a general slowdown in the PRC economy caused by any public health problems.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations.

Risks Related to Our ADSs

The price of our ADSs has been volatile historically and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. The sale price of our ADSs on the NASDAQ Global Market ranged from $0.75 to $8.12 per ADS in 2011 and the last reported sale price on March 26, 2012 was $2.00.

Our ADS price may fluctuate in response to a number of events and factors, including among other factors:

announcements of technological or competitive developments;

regulatory developments in our target markets affecting us, our customers or our competitors;

announcements regarding intellectual property rights litigation;

actual or anticipated fluctuations in our quarterly operating results;

changes in financial estimates by securities research analysts;

changes in the economic performance or market valuations of our products;

addition or departure of our executive officers and key research personnel; and

sales or perceived sales of additional ordinary shares or ADSs.

In addition, the financial markets in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.

Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely affect the price of our ADSs.

If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our ordinary shares or ADSs, including those issued upon the exercise of our outstanding stock options, following this offering, the market price of our ADSs could fall. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. The ADSs offered in this offering will be eligible for immediate resale in the public market without restrictions, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions contained in Rule 144 and Rule 701 under the Securities Act of 1933, as amended, or the Securities Act, and the applicable lock-up agreements. If any existing shareholder or shareholders sell a substantial amount of ordinary shares after the expiration of the lock-up period, the prevailing market price for our ADSs could be adversely affected.

As a foreign private issuer with ADSs listed on the NASDAQ Global Market, we follow certain home country corporate governance practices instead of certain NASDAQ requirements.

As a foreign private issuer whose ADSs are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain NASDAQ requirements. A foreign private issuer that elects to follow its home country practice must submit to the NASDAQ Stock Market LLC a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each NASDAQ requirement with which it does not comply followed by a description of its applicable home country practice.

As a company incorporated in the Cayman Islands with ADSs listed on the NASDAQ Global Select Market, we intend to follow our home country practice instead of NASDAQ requirements that mandate that:

our board of directors be comprised of a majority of independent directors;

our directors be selected or nominated by a majority of the independent directors or a nomination committee comprised solely of independent directors;

our board adopt a formal written charter or board resolution addressing the director nominations process and such related matters as may be required under the U.S. federal securities laws;

the compensation of our executive officers be determined or recommended by a majority of the independent directors or a compensation committee comprised solely of independent directors; and

issuances of securities in connection with equity-based compensation of officers, directors, employees or consultants be approved by shareholders.

As we are a Cayman Islands company, our shareholders may face difficulties in protecting their interests, and our ability to protect our rights through the U.S. federal courts may be limited.

Our corporate affairs are governed by our memorandum and articles of association, by the Cayman Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, 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 in the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law in this area may not be as clearly established as they would be under statutes or judicial precedents in existence in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more developed and judicially interpreted bodies of corporate laws. Moreover, under the Cayman Companies Law, for mergers and consolidations involving two Cayman Islands companies or a Cayman Islands company and an overseas company, dissenting shareholders have the right to be paid the fair value of their shares (which, if not agreed to by the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to certain exceptions, and such rights may not be comparable to the appraisal rights that would ordinarily be available to dissenting shareholders of a U.S. company. Finally, Cayman Islands companies may not have standing to initiate shareholder derivative actions before any federal court of the United States.

In addition, most of our directors and officers are nationals and residents of countries other than the United States. Substantially all of our assets and a substantial portion of the assets of these persons are located outside the United States. There is some uncertainty as to the enforcement in the Cayman Islands, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon United States federal securities laws.

A final and conclusive judgmentin personam of a competent foreign court against our company based upon the agreements under which a definite sum of money is payable (not being a sum payable in respect of taxes or other charges of a like nature of, in respect of a fine or other similar penalty), may be the subject of enforcement proceedings in the Grand Court of the Cayman Islands under the common law doctrine of obligation by action on the debt evidenced by the judgment of such competent foreign court.

A final opinion as to the availability of this remedy should be sought when the facts surrounding the foreign court’s judgment are known, but, on general principles, it would be expected that such proceedings be successful provided that (a) the court which gave the judgment was competent to hear the action in accordance with private international law principles as applied in the Cayman Islands and (b) the judgment is not contrary to public policy in Cayman Islands, has not been obtained by fraud or in proceedings contrary to natural justice and is not based on an error in Cayman Islands law.

As a result of all of the above, our shareholders may have more difficulties in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a public company incorporated in a jurisdiction in the United States.

In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. As a result, our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited.

Our shareholders may have difficulties in enforcing judgments obtained against us.

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our shareholders to effect service of process within the United States upon these persons. It may also be difficult for our shareholders to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. 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 due to the lack of reciprocal treaty in the Cayman Islands or the PRC providing statutory recognition of judgments obtained in the United States. Furthermore, 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 who reside outside the United States predicated upon the securities laws of the United States or any state.

Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.

Our memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions, including, among other things, provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue additional ordinary shares, including ordinary shares represented by ADSs.

These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement.

A holder of our ADSs may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is five days. When a general meeting is convened, you may not receive sufficient notice of a general meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.

We ~~face foreign exchange and conversion risks, and fluctuation in the value of the Renminbi~~ may ~~have a material adverse effect~~be required to withhold PRC income tax on the ~~value~~dividends we pay you (if any), and any gain you realize on the transfer of our ordinary shares and ~~ADSs.~~ADSs may also be subject to PRC tax if we are treated as a PRC resident enterprise.

~~The value of~~

Pursuant to the ~~Renminbi against~~EIT Law, we may be treated as a PRC resident enterprise for PRC tax purposes. See “—Risks Related to Our Business—We may be deemed a PRC resident enterprise under the ~~U.S. dollar~~EIT Law and ~~other currencies may fluctuate and is affected~~be subject to PRC taxation on our worldwide income” above. If we are so treated by among other things, changes in the PRC’s political and economic conditions. The People’s Bank of China issued a public notice on July 21, 2005 increasing the exchange rate of the Renminbi against the U.S. dollar by approximately 2% to RMB8.11 per US$1.00. Further to this notice, the PRC ~~government reformed its exchange rate regime by adopting a managed floating exchange rate regime based~~tax authorities, we may be obligated to withhold PRC income tax on ~~market supply and demand with reference to a portfolio~~payments of ~~currencies. Under this regime, the Renminbi is no longer pegged to the U.S. dollar. We cannot predict how and to what extent the exchange rate of the Renminbi will fluctuate in the future.~~

~~To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect~~dividends on our ~~business, financial condition~~ordinary shares and ~~results of operations. Conversely, as we rely entirely on dividends paid~~ADSs to ~~us by Beijing Hurray! Times, any depreciation of~~investors that are non-resident enterprises because the ~~Renminbi may materially and adversely affect our cash flows, revenue and financial condition, and the value of, and any~~ dividends payable on our ordinary shares and ADSs may be regarded as being derived from sources within the PRC. A non-resident enterprise is an enterprise that does not have an establishment or place of business in ~~foreign currency terms.~~

the PRC or that has such establishment or place of business but its income is not effectively connected with the establishment or place of business. The withholding tax rate would generally be 10% on dividends paid to non-resident enterprises. In addition, any gain realized by investors who are non-resident enterprises from the transfer of our ordinary shares or ADSs may be regarded as being derived from sources within the PRC and be subject to a 10% PRC tax.

Moreover, under the PRC Individual Income Tax Law, or the IITL, if we are treated as a PRC resident enterprise, non-resident individual investors would be subject to PRC individual income tax at a rate of 20% on dividends paid to such investors and any capital gains realized from the transfer of our ordinary shares and ADSs if such dividends and gains are deemed income derived from sources within the PRC. A non-resident individual is an individual who has no domicile in the PRC and does not stay within the PRC or has stayed within the PRC for less than one year. Pursuant to the IITL and its implementation rules, for purposes of the PRC capital gains tax, the taxable income will be based on the total income obtained from the transfer of our ordinary shares or ADSs after deducting all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. If we were considered a PRC resident enterprise and dividends we pay with respect to our ordinary shares and ADSs and the gains realized from the transfer of our ordinary shares and ADSs were considered income derived from sources within the PRC by relevant PRC tax authorities, such dividends and gains earned by non-resident individuals would also be subject to PRC tax at a rate of 20% except in the case of individuals that qualify for a lower rate under a tax treaty. Under the PRC-U.S. tax treaty, a 10% rate will apply to dividends provided certain conditions are met.

The foregoing PRC taxes may reduce your investment return on our ordinary shares and ADSs and may also affect the price of our ordinary shares and ADSs.

You may be subject to limitations on transfer of your ADSs.

Your ADSs represented by American Depositary Receipts are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer, or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to our ADS holders in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective nor is it our current intention to do so. Moreover, we may not be able to rely on an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in future rights offerings, if any, and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

Item 4. Information on the Company

A. History and Development of the Company

We became an independent company in September 1999 when we were spun-off from UT Starcom Inc., a Nasdaq-listed company that manufactures telecommunication equipment in China. At that time, we focused on developing billing software and providing system integration services for telecommunications network operators in their fixed-line Internet infrastructure build-outs. In June 2001, members of our current management team conducted a management buy-in by purchasing a substantial equity interest in our company, at which time the team assumed management control of us with the purpose of developing products and services for 2.5G mobile networks. Prior to the management buy-in, a majority of the new management team had previously worked together in senior management positions at AsiaInfo Holdings, Inc, a Nasdaq-listed company and a leading provider of telecommunications software and system integration services in China.

In April 2002, we established a new holding company, Hurray! Holding Co., Ltd., in the Cayman Islands. We currently conduct our business in China through our wholly owned subsidiary, Beijing Hurray! Times. To comply with ownership requirements under Chinese law which imposes certain restrictions on foreign companies from investing in certain industries such as value-added telecommunication and Internet services, we have entered into a series of agreements with our nine affiliated Chinese entities and their respective shareholders. We hold no ownership interest in any such affiliated Chinese entities. See Item 7.B. “Related Party Transactions,” and Item 4.C. “Information on the Company — Organizational Structure.”

In 2005, we formed an affiliated Chinese entity, Hurray! Digital Media, and established a wholly owned Cayman Islands subsidiary, Hurray! Media, in order to implement our strategy of entering into the music development, production and distribution and artist development business. Subsequently, through Hurray! Digital Media, we acquired controlling or significant stakes in the following top tier independent record companies in China, Freeland Music, Huayi Brothers Music, New Run, and Secular Bird.

~~In September 2008,~~2007, we entered into ~~a definitive~~an agreement to ~~acquire, through Hurray! Media, a controlling stake~~sell our software and systems integration, or SSI, business to Taiwan Mobile, which assumed control over the management and assumed the risks of our SSI business in ~~Seed Music Group, a Taiwan-based company that focuses on artist development, music production and offline music distribution in the Asia Pacific, especially China, Taiwan and Hong Kong.~~August 2007. We completed the ~~acquisition and began to consolidate Seed Music Group into our financial statements from January 1, 2009.~~

Inremaining closing procedures in April 2008, we completed the sale of our software and system integration business unit, Hurray! Times Communications (Beijing) Co., Ltd., to a subsidiary of Taiwan Mobile, a leading telecommunications service provider in Taiwan.2008. This divestment ~~enables~~enabled us to ~~increase our~~ focus on our strategy of becoming a leading entertainment content production and distribution house in China.

~~We are currently reviewing~~ Before August 17, 2010, we conducted our ~~operations~~WVAS business in China and music development, production and distribution and artist development business in China and Taiwan. From 2007 to rationalize our business lines and business support services and to eliminate services that are unprofitable or low margin and are unlikely in the foreseeable future to achieve satisfactory profitability so as to better position us for a profitable future. In May 2009,2010, we ~~reduced the work force of~~expanded our WVAS and ~~digital~~recorded music businesses ~~by approximately one-third,~~both organically and ~~have~~through a series of acquisitions of controlling stakes in independent recorded ~~an expense of $0.3 million in severance costs in that year. This review is ongoing, and there can be no assurance that we will be successful in returning to profitability.~~

music companies.
In ~~addition,~~June 2009, we entered into a ~~Tender Offer Agreement~~tender offer agreement with Shanda Interactive ~~Entertainment Limited (“Shanda”) on June 8, 2009~~ under which Shanda ~~through a wholly-owned subsidiary,~~Interactive commenced a tender offer ~~on June 16, 2009~~ to acquire 51% of our ~~total~~ outstanding ordinary shares ~~on a fully diluted basis (including shares represented by our ADSs)~~ at ~~a price of US$0.04 per ordinary share (or US$4.00 per ADS). On June 16, 2009, we received~~ the ~~Offer to Purchase from Shanda and the related letters of transmittal.~~time. The tender offer ~~will remain open~~was successfully completed in July 2009.
In January 2010, we entered into the online video business through the acquisition of Ku6 Holding pursuant to a definitive share purchase agreement.
On May 28, 2010, we sold all of our 51% interest in Huayi Music to Huayi Brothers Media Corporation for an aggregate consideration of RMB34,450,000.
On August 17, 2010, we sold our WVAS and recorded music businesses to Shanda Interactive for $37,243,904 in cash, pursuant to a master transaction agreement entered into between us and Shanda Interactive on June 1, 2010. Concurrently, we acquired a 75% interest in Yisheng, an online audio business, from Shanda Interactive in exchange for 415,384,615 newly issued ordinary shares and the remaining 25% interest from a non-controlling shareholder in exchange for 138,461,539 newly issued ordinary shares.
On August 17, 2010, we changed our name from “Hurray! Holding Co., Ltd.” to “Ku6 Media Co., Ltd.”
On August 11, 2011, we disposed of a significant interest in Yisheng as a result of management’s review of our business strategies. After the disposal, our company ceases to control Yisheng and only retains a 20% interest in Yisheng.
We currently operate and focus on our online video business as our principal business. We derive substantially all of our revenues from online advertising services. As a result of management’s review and adjustment of our business strategies, beginning in the second quarter of 2011, we have engaged Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency using performance advertising under which advertisers pay only for measurable results. We have also shifted our focus from purchasing licensed video copyrights to relying on UGC.
Our principal executive offices are located at ~~least 20 business days and will expire on July 15, 2009~~Building 6, Zhengtongchuangyi Centre, No. 18, Xibahe Xili, Chaoyang District, Beijing 100020, People’s Republic of China. Our telephone number is +86 10 5758-6813. Our agent for service of process in the United States is Puglisi & Associates, located at ~~12:01 a.m., New York City time, unless extended. For further details, please refer to the Schedule TO, Schedule 14D-9 and other related filings filed with the Commission.~~

850 Library Ave, Suite 204, Newark, DE 19711.
B. Business Overview

Introduction

We are a leading online ~~distributor of music~~video company in China. Through our online brand Ku6 and ~~music-related products such as ringtones, ring-back-tones (“RBT”),~~our online video website www.ku6.com, we provide video information services and ~~true-tones~~entertainment to ~~mobile users~~viewers in ~~China through the full range of WVAS platforms over mobile networks~~China. As an online video portal, www.ku6.com offers news, reports and ~~through the Internet. Our company~~interactive entertainment programs and also provides a ~~wide range~~video platform for video-sharing and watching UGC.

Our online video business focuses on UGC and community-based content and we seek to be a strategically focused company with focuses on users’ experience and technology development. We provide a comprehensive selection of ~~other WVAS~~unique and differentiated UGC, in-house developed content and some licensed content on our websites. Our broad selection of online video content includes news, comedies, Channel V music videos, games, micro movies and sub-channels such as entertainment, sports, finance, fashion, technology, automobile, education and others. We also provide an online platform that allows users to ~~mobile~~share comments on videos, ensuring that our users enjoy a highly engaging and interactive experience on our websites. As of December 31, 2011, our content library had more than 55 million video clips. The volume of high-quality and differentiated content available on our website has allowed us to establish a valuable user base in China, ~~including games, pictures~~consisting primarily of young urban educated users between the ages of 18 and ~~animation, community, and other media and entertainment services.~~ 44, a particularly attractive demographic to advertisers.

We are also a leader in artist development, music production, offline distribution and event organization in China through our affiliated music companies Huayi Brothers Music, Freeland Music, New Run, Secular Bird, Seed Music Group and Fly Songs.

Traditionally, we focused on marketing directly through mobile operator provided services such as SMS and WAP. Due to regulatory and policy changes by the MIIT and the telecom operators, operator channels have become increasingly unavailable and subject to sudden changes in policies by the telecom operators. Since 2005, we have diversified our marketing and promotion channels and developed direct media advertising, Internet marketing and handset vendor partnerships, as well as offline channels such as record stores. Currently, we provide services through two major business lines: WVAS, whose revenue is reported under the WVAS segment in our consolidated financial statements, and Music and Artist Agency, whose revenue is reported under the Recorded Music segment in our consolidated financial statements.

~~Our WVAS Services~~

Wecurrently derive ~~most~~substantially all of our revenues from ~~WVAS,~~online advertising services primarily using performance advertising. Our advertising solutions present advertisers with a complete range of advertisement creation, matching, placement and presentation. Our online advertising services include in-video, display, sponsorship and other forms. We sell our advertising services primarily through Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency.
Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services and advertising businesses in China, we operate our business primarily through our consolidated affiliated entities in China. We do not hold equity interests in our consolidated affiliated entities. However, through a series of contractual arrangements with these consolidated affiliated entities and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these consolidated affiliated entities.
Our Video Platform
Our Website
In 2011, we moved our content focus from long-form videos to short-form videos. Users can access our website for short-form videos, including hot news and reports, first-hand information and entertainment videos, which ~~includes 2G services~~can be in-house produced or provided by users or our content partners. Our website still provides users access to some long-form videos, primarily in-house produced movies, variety shows and programs.
Our website has a series of user-friendly functions such as ~~SMS, IVR~~search tools and ~~RBT,~~recommendations. We also help users navigate our database and ~~2.5G services~~find videos of interest by creating popularity ranking indices and interest-based video channels, such as ~~WAP, MMS,~~ent.ku6.com for entertainment and ~~Java™, each of which is available~~sports.ku6.com for sports. We provide social features, such as community web pages and video sharing and commenting tools. We also offer a search history for frequent visitors to help them quickly locate recently viewed video clips. We present a chat box alongside videos so that users viewing the same video at the same time can have live, online chats. Users may create a playlist based on their preferences so that the ~~networks of China Mobile, China Unicom and China Telecom. Our WVAS business line consists mainly of the following product lines:~~

~~SMS Services~~. SMS is the largest and most mature wireless value-added service in China. It is the most basic form of mobile messaging service and is supported by substantially all mobile phone models currently sold. We have focused our activities in SMS on our strongest core services to maximize our revenues. These core services include chat and other community services, interactive television entertainment, quizzes and games. Users can purchase our SMS services through the networks of the telecom operators by respondingrequested video will be broadcast continuously. Registered visitors may upload video clips easily to our ~~broadcast messages advertising our services, or sending us a request via SMS using a specific code.~~

~~IVR Services~~~~. IVR services include chat services whereby~~website and comment on each video clip to share their opinions. We believe all these features help provide an enhanced user experience and reinforce user loyalty.
In addition, users can ~~chat with each other live over~~download our proprietary P2P software “Upload Speed” and install a Ku6 application on their mobile handsets in wireless public chat rooms. We believe this service is attractive to young mobile users in China as a cost-effective way to speak with their friends and to make new friends, although it may be less useful for business purposes because conversations in these chat rooms are open to anyone. Users can also utilize our IVR services to access music, greetings from famous Chinese celebrities, jokes and serial stories, such as detective stories, from theircomputer desktops or 3G mobile phones, ~~or send this content to the mobile phones of their friends or others.~~

~~RBT Services~~. RBT services allow a mobile phone user to customize the ringtone that callers hear when calling the user’s mobile phone. We offer a variety of entertaining content including pre-recorded messages, movie dialogues and soundtracks and a wide range of classical and popular music. RBT services are currently available on all 2G mobile phones. They are also one of the most effective platforms for mobile music products, which ~~have become one of our strategic focuses. Accordingly, we believe that they present significant growth potential.~~

~~WAP Services.~~~~WAP services~~ allows users to ~~browse content on their~~use one-step PC/ mobile ~~phones so that users can request~~application to shoot and ~~receive information in a manner similar~~upload video clips. As of December 31, 2011, “Upload Speed” has been downloaded approximately 1.0 million times and used to accessing information on Internet web sites through personal computers. The majority of our 2.5G services are WAP services and include ringtone downloads, picture downloads, community services, games, pop culture, news and finance and personal information management services.

~~MMS Services~~. MMS is a messaging service that allows multimedia content such as ringtones and pictures to be transmitted in a single message, compared to simple text via SMS. MMS can be downloaded on many 2.5G mobile phones in China, and is an effective way for mobile users to send and receive messages that contain sizeable multimedia content such as ringtones, pictures and animation.

~~Java™ Games.~~~~We offer a range of in-house developed games based on the Java~~^™ ~~platform, which offers an effective way to create sophisticated 2.5G games. In April 2004, we launched our first Java~~^™ ~~game through China Mobile’s WAP portal. Our affiliated Chinese entity, Shanghai Magma, is a top tier Java~~^™ ~~game developer and publisher in China with over 200 titles of Java~~^™ ~~games and a large pipeline of new games under development. We anticipate that the popularity of Java~~^™games will accelerate in the next several years, especially after the launch of 3G services. In 2008, we launched 34 new titles on China Mobile’s game portal, including “Motorcycle Hero,” “The Ancestor of Shaolin,” and “Battle of the Galaxy.”

~~Our Music and Artist Agency Business~~

~~The music industry in China has suffered from serious piracy issues for many years. Our management estimates that for every dollar of copyrighted CD sales, there are~~upload approximately five to ten dollars of pirated CD sales in China. Consequently, the industry is relatively small and fragmented, with over one hundred record companies of various sizes in China. Our management estimates that major international record companies such as Warner Music, Universal, EMI and Sony BMG account for approximately 30% of the market in China in terms of revenues in recent years, approximately one dozen Hong Kong- and Taiwan-based independent labels such as Empire International, Rock Music, Linfair, H.I.M and Ocean Butterfly account for approximately 20% of the market, six top tier domestic independent labels such as Taihe Rye, Huayi Brothers Music, the Freeland Group, Zhushu and Seed Music Group account for approximately 20% of the market, and approximately eighty second or third tier domestic independent labels account for the remaining 30% of the market. Due to piracy issues, record companies in China have traditionally relied on revenues not only from CD sales, but also from concert tours and corporate sponsorship.

Record companies in China began in 2005 to experience a rapid increase in revenues from sales of digital and mobile music rights to wireless value-added service providers (such as our company) and Internet music website operators. This music content can be used in such services as ringtones, RBT, and true-tone downloads and playbacks over mobile and Internet platforms. To capture more of this market opportunity, many record companies in China are increasingly focused on building their wireless and Internet distribution channels, including by offering their own WVAS or working directly with telecom operators.

Because music-related products represented an increasingly significant portion of our total WVAS revenues and we had been licensing an increasing amount of music rights from record companies in China, we determined in 2005 to become the first wireless value-added service provider to make a significant upstream investment in the music business by acquiring controlling or significant stakes in top tier local independent record companies in China.10.0 million video clips. We have ~~acquired~~also cooperated with Shanda Innovations to develop a number of music companies with diverse and complementary strengths. For example, Freeland Music is a pioneer in China in developing Internet-based singing talent and distributing their music through offline CD distribution as well as through Internet and mobile distribution. Huayi Brothers Music is well known in China for music production. Secular Bird has a relatively short history but has been successful in identifying and developing promising artists and producing top hit music. Freeland Music’s affiliate, Fly Songs, is well known for organizing various concerts and performances for top artists. Our newest acquisition, Seed Music Group, is a well-known music production companynew product Micro Cool which focuses on ~~artist development, music production and offline distribution~~short videos of ~~music in the Asia Pacific region, especially China, Taiwan and Hong Kong.~~

The acquisition of local independent record labels is an important part of our strategy to focus on building digital and mobile music production and distribution expertise and capabilities. Our management estimates that our affiliated music companies account for approximately 16% of the market in China in terms of revenues when compared against domestic competitors in China.

In order to enhance our brand recognition in the music industry, we began offering music and artist agency services in late 2008, which services include discovering, developing and representing recording artists and promoting, selling and licensing their works through designated third parties. We believe that our affiliated music companies have the relative size, experienced management teams, ability to respond to changes in industry and consumer trends, and established music and song libraries necessary to continue to build a successful roster of artists in China.

~~Network Service Agreements with Telecom Operators~~

~~General~~

China Mobile, China Unicom and China Telecom are the predominant telecom operators in the PRC following the restructuring of the industry which commenced in 2008. Given their market presence, our negotiating leverage with these telecom operators is limited, and our business is dependent on maintaining our relationships with them. See Item 3.D. “Risk Factors — Risks Related to Our Company— We depend on China Mobile, China Unicom and China Telecom, the three principal telecommunications network operators in China, for the major portion of our WVAS revenue, and any loss or deterioration of our relationship with China Mobile, China Unicom and China Telecom, due to expected government imposed restructurings or otherwise,not more than thirty seconds. Users may result in severe disruptions to our business operations and the loss of a major portion of our revenue” and “— The termination or alteration of our various agreements with the telecom operators and their provincial affiliates would materially and adversely impact our revenue and profitability.” Our affiliated Chinese entities have entered into network service agreements with the national and certain provincial offices of the telecom operators to offer our various services through their networks. Each of these agreements with each mobile operator covers a specific geographic area and/or service type without overlap. For 2008, we estimated that we derived approximately 57%, 25% and 12% of our total WVAS revenues from customers through China Mobile, China Unicom, China Telecom, respectively. The following is a summary of the material features of our contractual relationships with the telecom operators.

~~Fee Arrangements and Other Payment Considerations~~

Our network service agreements with China Mobile permit China Mobile to deduct a service fee ranging from 15% to 30%, varying from province to province, from the amounts China Mobile receives from customers for our services. China Mobile relies solely on its records for calculating the amounts of these service fees. We also pay China Mobile a network fee to the extent that the number of SMS messages sent by us over China Mobile’s network exceeds the number of messages our customers send to us. The network fee is on average RMB0.05 ($0.01) per message. In some provinces, the amount of network fees may vary according to the volume of the net balance of such incoming and outgoing messages.

Our network service agreements with China Unicom provide that China Unicom directly bills customers who use our services and, for collecting these fees and for their network services, deducts a service fee from the aggregate amounts paid by customers for our services. These service fees range from 15% to 50% of gross revenue for amounts received by provincial operators of China Unicom and vary from province to province. If there is a discrepancy between our billing records and China Unicom’s billing records and the discrepancy is 8% or less of total amounts billable to our customers, the calculation of service fees is based on China Unicom’s billing records. If the discrepancy exceeds 8%, the agreements provide that we and China Unicom reconcile our records to address the discrepancy.

Our network service agreements with China Telecom permit it to deduct a service fee between 20% to 50% of gross revenue, depending on the type of service, from the amounts it receives from customers for our services.

~~Obligations with Respect to Our Services~~

We must obtain the approval of China Mobile, China Unicom or China Telecom for our services and the pricing of our services before these services can be offered on their network. Our contracts with these telecom operators vary in the specific obligations they impose, but they generally require, among other things, that the telecom operators maintain records regarding transmission and billing matters, collect fees from their customers and remit amounts owed to us and notify us of any customer complaints unrelated to network problems. In turn, we must provide prompt customer support, handle any complaints which are unrelated to the operator’s network and ensure that our content complies with applicable laws and regulations and the policies of the operators and that we have appropriate licenses. For some contracts, we must satisfy operational or financial performance criteria which are established by the mobile operator and modified from time to time.

~~Term and Termination and Other Material Provisions~~

The term of our contracts with China Mobile, China Unicom and China Telecom is generally one or two years. We typically renew these contracts or enter into new ones when the prior contracts expire, but on occasion, the renewal or new contract can be delayed by periods of one month or more. The agreements can also be terminated in advance for a variety of reasons which vary among the individual contracts with the operators, including, for example, when we breach our obligations under the contract, a high number of customer complaints are made about our services or we cannot satisfy the operational or financial performance criteria established by the applicable operator.

Generally, our contracts with the telecom operators are silent on the arrangements relating to payment from the operators in the event such contracts are not renewed. Payment and billing disputes, if any, will therefore be resolved in accordance with the provision in the contracts that the parties resolve disagreements through amicable negotiation (where such provision survives the termination of the respective agreements) or through court proceedings if amicable resolution cannot be reached.

~~Music Copyright Agreements with the Telecom Operators and Service Providers~~

~~General~~

Our affiliated music companies have entered into music copyright agreements with the national and certain provincial offices of certain telecom operators, as well as various domestic service providers such as Kongzhong and Sina, to authorize the telecom operators and service providers to distribute music from our artists through their portals, websites or platforms and enable end users to download ~~the music. The following is a summary of the material features of our contractual relationships with the national and certain provincial offices of the telecom operators and certain service providers.~~

~~Fee Arrangements~~

Our music copyright agreements with telecom operators and service providers are usually copyright purchase and use authorization agreements. Telecom operators and service providers will pay service fees ranging from 40% to 60% of gross revenue for amounts received by distributing the music through their network. In some agreements, the amount of service fees may vary according to the popularity and commercial success of a music product and other various tangible and intangible factors.

~~Term and Termination and Other Material Provisions~~

The terms of our music copyright agreements with telecom operators and service providers are generally one or two years. We typically renew these contracts or enter into new ones when the prior contracts expire, but on occasion, the renewal or new contract can be delayed by periods of one month or more. The agreements can also be terminated in advance for a variety of reasons which vary among the individual agreements, including, for example, when certain obligations are breached under the agreements.

Payment and billing disputes are resolved in accordance with the provision in the agreements that the parties resolve disagreements through amicable negotiation or through court proceedings if amicable resolution cannot be reached.

~~Recording and Artist Agency Agreements with Artists~~

~~General~~

Our affiliated music companies have entered into recording and artist agency agreements with their recording artists including such popular singers in China as Michael Wong Kong Leong, Kenji Wu, Jing Han and Xiaolu Li. These agreements generally provide that the artists and our companies will collaborate to produce and publish a minimum number of albums and that the artists agree to perform at certain concert, promotional and other public events arranged by our affiliated music companies. The following is a summary of the material features of our contractual relationships with artists.

~~Fee Arrangements~~

Our recording and artist agency agreements are usually exclusive agreements that require the artist to refrain from making recordings for third parties or attempt to negotiate performance arrangements with third parties without the prior consent of our affiliated music companies. We pay artists royalties of an agreed proportion of gross revenue for amounts received through publishing, sale and licensing of recorded music in physical and digital formats. We are entitled to charge an agreed upon commission for our services to the artists. The amount of royalties and commission will vary according to the popularity of the particular artist and other factors.

~~Term and Termination and Other Material Provisions~~

The terms of our recording and artist agency agreements with artists are generally two or three years. Renewal of these contracts or entering into new ones on favorable terms depends to a large extent on our relationships with these artists. The agreements can also be terminated in advance for a variety of reasons, which vary among the individual agreements, including the breach of material obligations under those agreements.

Our recording and artist agency agreements generally provide that we hold the copyrights on all recordings. Some agreements include re-recording restrictions preventing the artists from re-recording tracks previously released by us.

~~Performance Agreements with Third Parties~~

~~General~~

Our affiliated music companies often enter into performance agreements with concert organizers and other third parties on behalf of their artists. The following is a summary of the material features of our contracts related to live musical performances.

~~Fee Arrangements~~

Such third parties retain our artists to provide live musical or theatrical performances at specified concerts in accordance with the terms of these agreements and agree to pay us an agreed amount as the price of the artists’ performance fee. Usually, payments shall be made before or immediately following the performance.

~~Other Material Provisions~~

Generally, the counterparty to these agreements shall use all means available to prevent the recording, reproduction or transmission of the performance without the written permission of the company. In the event that we or our artists fail to satisfy the requirements under any such contracts, our affiliated music companies are usually obligated to indemnify and hold harmless such third parties from and against all liability, loss, damages, claims, and expenses arising out of said breach.

~~Product and Content Development~~

~~Wireless Value-Added Services~~

We develop most of our content and applications for WVAS in-house through our approximately 53-member product development team as of April 30, 2009. Our product development team focuses primarily on developing new services such as WAP services and Java™ games, as well as developing 3G-compatible services.

In addition to in-house developed content, we also acquire rights to certain copyrighted content such as music, pictures, games, news and other information from a large number of content providers such as record companies, traditional media companies and original providers of news and information services. With the exception of music, content from international and domestic content providers has not contributed a significant portion of our 2G and 2.5G services revenues to date, and we do not expect it to do so for the foreseeable future. Nonetheless, we will continue to seek out content relationships with leading international and domestic content providers to further increase the variety of our services. Under our agreements with these content providers, we pay them a fixed licensing fee or a percentage of the revenue for our services, which we receive from the telecom operators after deducting service and network fees. For most of our agreements, the content providers receive 40% of such net amount, but in a few cases the providers receive between 40% and 50%.

We license music rights from international record companies such as Universal Music and from domestic record companies such as Taihe Rye and Ocean Butterfly. In addition, some music content that we use in our services is provided by our affiliated music companies.

~~Music Production, Concert Promotion and Artist Agency Services~~

We engage in music production through our affiliated music companies, Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group. These companies are domestic record labels in China and, in the case of Seed Music Group, also in Taiwan, with an aggregate of approximately 176 employees specializing in artist development, music production and music distribution. Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group currently have a total of 58 artists under contract.

Our affiliated music companies are pioneers in developing music artists and producing and distributing their songs in China and across Asia. Together, their portfolio of artists includes some of the most popular singers in China, such as Kenji Wu from Seed Music Group, Xiangxiang from Freeland Music, Kun Yang from Huayi Brothers, Nan He Wen Dou from New Run, and Jing Han from Secular Bird. Many songs produced by our affiliated music companies are top hits in ringtones, ring-back-tones and digital downloadsthis tool on mobile phones that provides a mobile community platform supporting video shooting, editing, uploading and the Internet in China and across Asia as measured by the number of downloads on both China Mobile’s music portal and the music search platform of Baidu.com, Inc., an online search platform in China. For example, ‘MagiK — Greatest Hits Plus New Songs’ by Kequn Wu, and ‘Cloud Nine’ (“Yun Duan”) by Yuan Shen, were among the most popular songs released by our recording artists on those services in 2008.

Many songs and albums produced by our affiliated music companies have also been honored in various music award ceremonies in Asia. For example, ‘Left Hand’ (“You Shou Bian”) by Liang Guang was awarded the “Best Debut Album’ in the 2008 Wireless Music Award sponsored by China Mobile.

sharing.
In ~~addition, Hurray! partnered with the Internet Society of China and successfully launched the “Passion for Internet” Theme Song at a charity event in~~ January 2008 dedicated to promoting the popularization of Internet usage in certain economically disadvantaged areas in western China. This charity event was the first of its kind for the Chinese Internet industry. Our senior management and artists participated in the charity alongside the senior management of well-known Chinese web portal companies, such as Tencent, Sina, Sohu and Shanda, generating substantial exposure for our company and our artists.

Pursuant to certain contractual arrangements, Hurray! Digital Media has the exclusive right to license and distribute via digital channels, including wireless and Internet-based platforms, all music content of Freeland Music worldwide and all music content of Huayi Brothers Music, New Run, Secular Bird and Seed Music Group in China. We have also agreed to allow Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group to directly distribute their respective music content via digital channels, in order to maximize the value of our affiliated music companies’ record labels.

If Hurray! Digital Media licenses the music content of our affiliated music companies to any other third party, then our affiliated music companies are entitled to receive a license fee from Hurray! Digital Media, which is equal to the amounts paid by the third party to Hurray! Digital Media, less any taxes payable on such amount by Hurray! Digital Media and a service fee which Hurray! Digital Media retains.

~~In addition, Freeland Music has~~2012, we entered into an agreement with YouTube, a renowned international video-sharing website owned by Google, which would allow our international users to view original videos from China on a new channel on YouTube’s website. In March 2012, we established a partnership arrangement with Channel V, a music video entertainment TV channel, to bring its content to our users on our website.
Mobile Platform
Users can use their 3G mobile phones to watch a large number of videos on ku6.com. We are also developing applications for a variety of major 3G mobile phones.
Our Content
UGC (User-Generated Content)
Our website allows Internet users to easily upload, watch and share UGC video clips. We offer creative talents, particularly the ~~affiliates~~younger Chinese generation, channels for artistic expression outside the traditional mainstream content formats such as television. Our UGC has experienced rapid growth in terms of the ~~Freeland Group pursuant~~number of users who upload video clips, the number and varieties of video clips uploaded every day, and the number of daily video views. In 2011, we delivered an average of over 30,000 new UGC video clips each day covering a wide range of subject matters from entertainment to news, comedies, sports, finance, fashion and beyond. UGC is well embraced by Internet users, particularly young Internet users, given its sharing and interactive qualities.
Our editorial team is responsible for communicating with users on the types of UGC we believe are popular and well demanded. We have also introduced the product New Weiguan which ~~such affiliates~~is designed to increase users’ attention to each other and increase viewership of UGC.
In order to encourage more users to upload UGC to our website, we have purchased the ~~exclusive right~~licensing rights to ~~publish~~some popular UGC, and ~~sell music tapes, records~~have started to share advertising revenues with individual users whose number of uploads exceed certain threshold. In August 2011, we established a revenues sharing program to target three types of users: contracted users, certified original content providers and ~~CDs~~general uploading users. We reward each type of ~~Freeland Music~~users in accordance with different revenues sharing criteria. For example, we pay contracted users certain fees based on the popularity of their videos and also a percentage of revenues based on the total video views as quarterly bonus. The quarterly bonus for a contracted user may range from RMB1,000 to RMB6,000 if its videos are viewed on our website for more than one million times. Contracted users contribute approximately one third of all the videos on our website.
In-house Developed Content
Our objective is to establish our company as not only a leading video content aggregator but also a leading media company in China. ~~The price paid~~In 2008, we obtained the “License for Audio-Visual Programs of Information Online Communication” issued by the ~~affiliates~~State Administration of Radio, Film and Television. In 2011, we offered our viewers in-house produced coverage on significant domestic and international events such as the ~~Freeland Group is determined~~Japan earthquake, the passing of Steve Jobs, the Libya conflict and the UK royal wedding. We also provide in-house produced online talk shows, celebrity interviews and reality shows to our viewers.
We determine the types of content to be produced generally based on our assessment of users’ preferences and information gathered by ~~Freeland Music, unless~~us from analyzing user data collected through our video platform.
We typically cooperate with third parties engaged in in-house production, taking advantage of talents of local production teams and their relatively low production costs. We also believe that our in-house production provides us with an attractive return on this as some of this content can achieve a large number of clip views at lower costs. We believe the ~~affiliates disagree with such price in which case the price~~success of in-house developed programs will further differentiate us from our competitors.
Licensed Content
In June 2011, we ceased purchasing copyrights of movies and TV dramas from professional studios and their distributors. Previously purchased movies and TV drama will be ~~highest retail price for~~shown on ku6.com through the products obtainable in the market. The Freeland Group affiliates have the right to determine the prices at which they sell the products to their customers, but they are required to provide Freeland Music information regarding sales prices, customer data and other sales related information. Huayi Brothers Music, New Run and Secular Bird handle the off-line distributionend of their ~~music content themselves. In~~license periods.
Our Users
We have an extensive user base for our video platform. Most users visit our website from direct navigation, with the case of Seed Music Group, its subsidiary, Seed Music Co., Ltd. (“Seed Music”) handles the off-line distribution of music content within Taiwan and its other subsidiary, Leguan Seed (Beijing) Culture Consulting Co., Ltd. (“Beijing Seed”), arranges for third partiesremainder from organic search results or third-party website links connecting to ~~publish and sell music tapes, records and CDs of Seed Music Group in China.~~

~~Sales and Marketing~~

~~Wireless Value-Added Services~~

We market and promote our WVAS and music-related products online and offline through channels controlled by the telecom operators in China as well as through non-operator channels such as direct media advertising, Internet marketing alliances, and handset vendor partnerships. We also sell and market our services through offline channels such as retail chains, convenience stores, newsstands, and large consumer goods outlets.

~~In addition, maintaining and expanding our relationships with China Mobile, China Unicom and China Telecom is central~~us. Our user base has increased significantly primarily due to our ~~sales and marketing activities. Our management team utilizes its extensive experience in China~~ability to develop close ties with the key personnel of the telecom operators at the central and provincial levels. As of December 31, 2008, we had 43 sales and marketing professionals strategically located in 25 provinces and municipalities concentrated in the eastern and southern regions of China to work closely with the telecom operators at the provincial level, where pricing and important marketing and operational decisions are made. Our sales and marketing professionals also oversee our sales and marketing activities, which are conducted separately from the telecom operators. These highly motivated professionals, whose bonuses are tied to the revenues each member generates and collects, are supervised by eight regional centers which each have their own sales, marketing, operations and customer service personnel toconsistently provide ~~prompt and responsive service~~appealing video content to users and ~~telecom operators.~~

our enhanced brand awareness. As the number of our users grows, the resulting network effect in turn attracts more users to join our established user community.
Our user base consists primarily of young urban educated users, between ages 18 and 44, which is a particularly attractive demographic to advertisers. Online ~~Sales~~viewers in China also represent a more affluent and ~~Marketing~~better-educated segment of the population in China. We have tracked and maintained extensive user data, including viewing history and information voluntarily provided by registered users. We use sophisticated statistical tools to analyze user data, to better understand users’ viewing preference and habits. This greatly facilitates our efforts in providing service to our advertising customers.
Advertising Services and Customers
We currently derive substantially all of our revenues from online advertising services primarily using performance advertising. By using the Application Advertisement, or AA, system, our advertising solutions provide advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia advertisements with interactivity and precise targeting capabilities of the Internet.
Our Advertising Services

Our online ~~sales~~advertising services include in-video, display, sponsorship and ~~marketing activities include:~~

other forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphic banners or text hyperlinks. Other forms of advertisements include product placements in our in-house produced web video series or sponsored live events.
Advertisers are increasingly seeking measurable results to maximize their return on investment. Our advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.
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~~Internet Marketing Alliances.~~Innovative Targeting. Some targeting solutions are unique to the online video platform and cannot be transplanted into other media platforms. We ~~create Internet marketing alliances with tens~~are able to track and monitor an advertiser’s campaign on a real-time basis and can make adjustments to enhance its effectiveness within parameters specified by the advertiser upfront. Our targeting strategies enable advertisers to reach targeted users based on any or a combination of thousands of small, niche or vertical websites in China to market, promote and distribute our WVAS products and content, particularly our music-related products, to Internet and mobile users. We share a portionstandards, including the demographic information about the user, the nature of the ~~revenues generated~~video’s content, the geographic location of the user, the time of day at which a video is being watched, or the keywords associated with the ~~operators~~video. Our video channels also help segregate videos based on users’ interested content, which allows us to deliver advertisements tailored to the viewers of ~~these websites when their users access to our website~~different channels; and ~~subscribe for our services.~~

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~~Handset Manufacturers Partnerships~~Product Placements. ~~We partner~~As an online video provider with ~~major handset manufacturers~~a permit for radio and television program production and operation, we are able to embed our services and service links into mobile handsets, which enables mobile users to directly access our services without having to go through the service portals operated by the telecom operators. We work with major global and domestic handset manufacturersproduce web-based content, such as ~~Motorola, Sony Ericsson, LG, Legend, TCL~~web serial dramas, interviews and ~~Konka.~~variety shows, with embedded product placements. If a program’s storyline is consistent with a brand’s or product’s marketing initiatives, a product placement can have strong branding effects on viewers.

The list prices of our advertising services depend on various factors, including the form of advertising, specific targeting requirements, duration of the time slot purchased and popularity of the content that the advertisements would be associated with. Prices for the aggregate time slots purchased by each advertiser or advertising agency are fixed under sales contracts, typically at a discount to our list prices. We review the list prices quarterly. In addition, we employ a cost per 1,000 impressions (CPM)-based model for our in-video advertisements. This approach is similar to that of traditional television in that the advertisements are priced based in part on the user reach and viewing frequency. It allows advertisers to better compare the online and offline advertising services at their disposal. It also enables us to better monetize our growing user base and provide measurable results to our advertisers.

We have an advertising tracking system which records and maintains the traffic statistics and other data relating to the effectiveness of advertisements. After the broadcasting of a customer’s advertisement, we will provide them with a report of advertising effectiveness either prepared in-house or by an independent research firm upon their request.

Advertising Sales

We engage in advertising sales primarily through Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency. As a relatively young media company, we intend to leverage Shengyue’s existing long-term relationships and network resources to increase our sales and expand our customer base.

We cooperate with Shengyue to provide current and prospective advertisers with comprehensive information about our services and the advantages of using our advertising solutions. The commission fee for Shengyue is based in part on the sales revenues it achieved. We believe that having a commission fee that is linked to advertising performance helps motivate Shengyue to generate sales for us.

Marketing and Brand Promotion

We have initiated various marketing activities to further promote our brand awareness among existing and potential users and customers, which include:

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~~Bundling of Products~~. We bundle certain of our products, primarily 2.5G products, together for a single fixed fee that is lower than what would be payable if the user had ordered those products separately. We often use bundled products together with a free trial period to attract new users by giving them a free or low-cost 2.5G experience. We also use bundled products to attract users that are price sensitive. In addition, bundling can be an effective way to maintain user interest in our services because they can choose from a number of services without incurring additional incremental cost and also to expose users to the wide range of quality services that we offer. Because the content coverage and product quality of individual products are better than those of the bundled products, we have not experienced migration of high-use customers from individual services to the bundled products.

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~~Cross-selling~~. We cross-sell among our various 2G and 2.5G services. Specific cross-selling activities include placing a tool bar on the first page of all our games. This enables users to easily try our other games without needing to return to the main China Unicom WAP portal, as well as promoting our website to potential users as a fun, easy-to-access place to learn about and request our wireless content and applications. We also focus on cross-selling to users of our 2G services to migrate them to our subscription-based, premium 2.5G services.

~~Offline Sales and Marketing~~

~~We also focus on offline sales and marketing activities, such as:~~

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Direct Advertising. We engage in direct advertising in print, radio and TV media to market and promote our ~~WVAS and music-related~~online video products. We believe that direct advertising is one of the most effective ways to market and promote our services to ~~mobile~~Internet users.

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~~Promotional Events.~~Online Advertising.We ~~maintain important marketing relationships~~engage in online advertising on other websites with ~~China Mobile, China Unicom and China Telecom, including hosting promotional events throughout China featuring~~user bases similar to our ~~pop singers~~own or ~~latest releases with the telecom operators. At these events, we create brand awareness by interacting with consumers~~likely to educate them about our mobile music services. In addition, our promotion of our innovative services, such as our “mobile novels” which feature various popular PRC titles in electronic format that are delivered to the mobile phones of subscribers in installments, which service we believe was the first of its kind in China, has resulted in significant media attention.watch online videos.

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~~Sales Co-promotion.~~Promotional Events.We ~~develop integrated sales campaigns~~organize and run a number of online promotional events which we believe help create brand awareness by associating the Ku6 brand with ~~traditional media companies~~well-known and ~~multinational corporations.~~respected organizations and events in China.

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~~Retail Promotion.~~We enter into partnerships with retailers of mobile handsets in certain provinces, whereby the retailers’ sales personnel recommend our services to customers and, in certain instances, offer free trials to these customers. In certain cases, we share the revenues generated through such promotions with the retailer.

~~Our Music~~
We also market our products and ~~Artist Agency Business~~

~~Record companies~~services by displaying our name and logo in ~~China~~Ku6 media player screens when users embed our content on third-party websites.
Technology and Infrastructure
We believe our proprietary technologies and infrastructure are critical to our success. We have ~~traditionally generated revenues from offline CD~~made significant investments in developing a proprietary, scalable technology platform that differentiates our online video distribution ~~concert tours and corporate sponsorship. Starting in 2005, record companies began to see rapid growth of~~system. In 2011, we established a new ~~revenue stream: music rights sales~~research and development department.
Architecture
Since 2008, we have invested significantly in CDN construction to support faster delivery of our online video content. As a pioneer in implementing this technology, we have established a more stable infrastructure and gained valuable CDN operations experience.
CDN Technology. CDN technology utilizes additional data storage to maintain copies of popular content at the “edge” of the Internet, which enables end-users to more quickly access that content. CDN technology facilitates faster responses to users’ requests for content, avoids buffering and ~~WVAS providers for music-related products such~~associated delays caused by low bandwidth and user congestion, and is therefore critical to the success of online video providers.
By hosting our Internet data centers along the major nodes of the transmission backbones operated by the local subsidiaries of China’s telecommunications carriers, we seek to maintain high standards in terms of delivery quality and speed as ~~ringtones, ring-back-tones, and MP3-quality true-tone downloads or playbacks. In addition~~video content is transmitted from our servers to marketing campaigns associated with major album or song releases, our affiliated music companies, Freeland Music, Huayi Brothers Music, New Run, Secular Bird and Seed Music Group, focus their sales and marketing activities in the following four areas:

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~~Online and mobile distribution.~~Our affiliated music companies have built dedicated teams to focus on licensing music rights to Internet and mobile services providers. Such licensing agreements typically involve an upfront minimum license fee, plus royalties paid to the record companies by the services provider based on usage. With the recent significant growth in the distribution of music via the Internet and WVAS and the increased attention by the Chinese government and business community to intellectual property protection, we believe that this new sales channel represents the largest growth potential for our affiliated music companies.

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~~Concert tours.~~We organize concert tours for our artists through our well-known concert promotion company, Fly Songs, and our other affiliated music companies. This is not only an effective way to raise the profile of our artistsusers throughout China. We had established approximately 2,760 servers nationwide ~~but also to generate revenues from concert ticket sales and corporate sponsorship.~~

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~~Corporate sponsorship.~~Frequently, the artists of our affiliated music companies appear in commercial advertising or serve as corporate image ambassadors on behalf of consumer products and services companies. Our affiliated music companies proactively seek out such opportunities to promote our artists and generate revenues from such corporate sponsorship.

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~~Offline CD distribution.~~Upon launching a new album, our affiliated music companies will distribute the album in CD format through traditional offline channels, which primarily consists of the tens of thousands of retail stores in China specializing in audio and video media products. As is customary in the industry, our affiliated music companies enter into distribution agreements with major offline distributors or retail chains. Such agreements typically include an upfront minimum license fee, plus royalties paid to the record companies based on sales. Offline CD distribution channels in China have been seriously affected, however, by piracy issues, and we believe that only a small portion of all CD sales in China are from copyrighted sales which generate royalty payments for the record companies.

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~~Music and Artist Agency Services.~~~~We endeavor through our music artist agency business to find, develop and retain recording artists who will achieve long-term profitable success.~~

~~Customer Service~~

We work to provide high quality customer service. This is an important factor for maintaining our relationships with the telecom operators in China as discussed above in “— Network Service Agreements with Operators.” Our dedicated customer service center in Beijing provides our users real-time support and employed 19 customer service representatives as of December 31, ~~2008.~~2011, which contribute significantly to our fast streaming speeds and reliable viewing experience. Our servers are located at service sites of the local subsidiaries of the major domestic telecommunications carriers, which provide a stable power supply and maintenance for our servers.
AA System
The AA system tracks the reach, delivery duration and frequency, targeting and quantity of advertisements delivered by our website. The system supports monitoring of our advertising efforts by enabling retrieval of real-time advertisement delivery data using certain system application interfaces. We ~~strive~~have also introduced an advertising results forecasting system that is used in an increasing number of large advertising campaigns on our website. This system is designed to ~~achieve~~help optimize our advertisers’ strategy by forecasting the ~~fastest response times and highest customer satisfaction levels~~results of a given campaign, factoring in the ~~industry. Our centralized customer service center~~covered audience and the frequency and reach of such campaign.
Content Monitoring and Copyright Protection
We are committed to the protection of third-party copyrights. The online video industry in China suffers from copyright infringement issues and online content providers are frequently involved in litigation based on allegations of infringement or other violations of copyrights. We have invested significantly in copyright protection technologies. We have a content screening team of over 38 contract employees dedicated to screening and monitoring the content uploaded on our website to help ensure that no content that may be deemed to be prohibited by government rules and regulations is ~~supported by our local customer service teams located~~posted and to promptly remove any allegedly infringing content once we receive proper notification from the legitimate copyright owner. We provide training to these employees and supervise and monitor their work. After a user registers and before each upload, we require the user to click a check box to confirm that the content to be uploaded is in ~~our four regional offices. We also maintain a dedicated billing and collection center, which works~~compliance with the ~~various offices of the telecom operators to ensure that we receive the correct fees for our services provided over their networks.~~

~~Infrastructure~~terms and ~~Technology~~

~~We have developed a reliable, flexible and scalable platform with open and adaptive technology through which we:~~

~~develop and deliver our 2G, 2.5G and any upcoming 3G services which are (or may~~conditions set forth in the ~~future be) provided through networks of China Mobile, China Unicom~~user agreement, to guarantee that he or she is the copyright owner or has obtained all necessary consents and ~~China Telecom~~authorizations for such content and

~~maintain our internal billing and transmission records.~~

Our platform supports multiple protocols, networks and billing solutions, with high scalability, load balancing, intelligent session management, and performance measurement. It also allows us to monitor our services and their delivery he or she is responsible for such content. Pursuant to the ~~telecom operators’ networks on~~user agreement, each user agrees to indemnify us for all damages arising from third-party claims against us caused by violating or infringing content uploaded or linked by the user. If we find a ~~real-time basis, which allows~~user has violated the user agreement, applicable laws or regulations or other parties’ legal rights, we may terminate the user account and block the user’s future uploads without prior notice.
We implemented monitoring procedures to remove infringing content, and such procedures include: (i) technology screening, where a video fingerprint system developed by us ~~to optimize the efficiency~~compares newly uploaded videos with fingerprint trails of copyrighted videos in our system and ~~quickly address any problems. The platform~~screens out those that have piracy issues, a text filtering system screens content based on pre-set key words, and another filtering system automatically screens out pornographic and obscene content based on colors and images; (ii) manual review, where the content that passes the technology screening is ~~equipped with an open application interface for rapid connectivity~~reviewed by ~~third party~~the content screening team on a 24-hour, 7-day basis, and the flagged content identified by our technology is reviewed and confirmed that it can be released; and (iii) back-office professional supervision, where certain professional content providers ~~and~~who we grant access to ~~multiple channels~~our back-office database can directly flag the infringing content for ~~SMS, IVR, RBT, WAP, MMS, Java™ and Web connectivity.~~

~~Our user database, which operates~~removal. Other content on our ~~proprietary software~~website are also monitored. For example, user-posted comments are typically screened by the text filtering system and are monitored by our screening team. Substantially all of the videos uploaded on our website are manually screened by our contract employees. All of the other content, primarily consisting of comments posted by users, are first screened by our filtering systems and the content containing prohibitive words or images is ~~an integral part~~manually screened by our contract employees.
Intellectual Property
We rely primarily on intellectual property laws and our contractual arrangements with our employees, clients, business partners and others to protect our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information relating to our customers, methods, business and trade secrets during and after their employment with us. Our employees are required to acknowledge and recognize that all inventions, trade secrets, works of authorship, developments and other processes, whether or not patentable or copyrightable, made by them during their employment are our ~~platform, allows us~~property. They also sign agreements to ~~store, analyze, retrieve~~substantiate our sole and ~~compare various statistical information~~exclusive right to those works and to ~~identify relevant trends. This database also supports~~transfer any ownership that they may claim in those works to us. We have registered our ~~customer service activities by providing our service professionals with real-time user data~~domain names, including ku6.com, juchang.com and ~~information regarding service delivery and billing. In addition, our platform can rapidly schedule, deploy and manage WAP pushes and SMS pushes to promote our services.~~

~~Our website and services are made available primarily through network servers located in the facilities of China Mobile, China Unicom and China Telecom. Such network servers run on Unix~~^™~~, Windows~~^™~~, or Linux~~^™~~-based operating systems.~~

juchang.cn.
Competition

~~Wireless Value-Added Services~~

The ~~market for WVAS~~online video industry in China is rapidly evolving and highly ~~fragmented with more than 1,000 service providers. Wireless service providers~~competitive. We believe the key competitive factors in the online video industry in China ~~can be principally categorized into four groups. The first group consists~~include brand recognition, demographic composition of ~~companies like ours, which focus primarily or entirely on this market~~users, robust technology platform, ability to acquire popular premium licensed content at a reasonable cost and ~~offer a wide~~create differentiated content in-house, ability to source creative UGC, ability to provide innovative advertising services to customers, relationships with advertising customers, advertising prices, as well as the range of ~~2G,~~services provided to advertising customers.

We face competition from other major online video companies. Among the independent or “pure-play” online video sites, our major competitors in China include Youku.com and ~~2.5G services (and are expected to offer a range of 3G services as 3G networks are launched in China). These include~~Tudou.com. Several large Chinese Internet companies, such as ~~Tom Online, KongZhong,~~SINA Corporation, Baidu, Inc., Sohu.com Inc., Tencent Holdings Limited, NetEase.com, Inc. and/or their affiliates, have launched online video websites. In addition, some of China’s TV networks, such as CCTV, Phoenix Satellite TV and ~~Linktone.~~Hunan Satellite TV, have launched their own video broadcasting websites. We also face competition from Internet video streaming platforms based on the P2P technology, such as PPS and PPTV.

Certain international online video sites, such as YouTube and Hulu, have large content portfolios and high brand recognition, particularly among users outside China. Currently, YouTube is not accessible by viewers in China. If China lifts the restrictions, YouTube may become our major competitor in China.

We also compete with traditional advertising media, such as television, radio, newspapers and magazines, and major out-of-home media, such as billboards, for advertisers’ advertising budgets. Large enterprises currently spend a relatively small percentage of their advertising budgets on online advertising as compared to the percentage they spend on traditional advertising media, but we expect the percentage spent on online advertising to increase in the future.

Seasonality

We experience seasonality in our online advertising business. Historically, in the China market, the fourth calendar quarter represents the best season for the general advertising market. This ~~group of competitors~~ is ~~generally characterized~~followed by ~~strong market knowledge~~the third and ~~in some cases, well developed relationships with~~second calendar quarters. The first calendar quarter is usually the ~~telecom operators on a provincial and national basis. Companies in this category also tend to focus on entertainment-related services.~~

~~The second group consists of the major Internet portal operators~~worst season in China including publicly-listed companies such as Sina, Sohu and Tencent. The Internet portals leverage their strong brand names and their existing strength in aggregating content, marketing and cross-selling wireless servicesdue to ~~their established Internet user base.~~

~~The third group consists of smaller service providers such as Rock Mobile and A8, who like us, are focused on music-related products.~~

~~The fourth group consists of~~ the telecom operators. In 2006, China Mobile began operating its own music WAP portal and procuring music content direct from music companies. This development has made China Mobile a competitor for offering music content through WAP services. China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers such as our company. See Item 3.D. “Risk Factors— Risks Related to Our Company— Risks Related to Our Wireless Value-added Services—Our revenue from WVAS may be adversely affected by the telecom operators providing their own full portfolio of 2G, 2.5G and any upcoming 3G services that compete with our services.”

Chinese New Year holidays.

~~Our Music and Artist Agency Business~~

We face significant competition to our music and artist agency business from two groups of competitors. The first group includes traditional record companies, which are extending downstream to establish their own WVAS or Internet services companies in China. These companies include international record companies such as Warner Music, Universal, EMI and Sony BMG and independent labels based in Hong Kong, Taiwan, and China such as Taihe Rye, Rock Music, Ocean Butterfly, and Zhushu. In comparison to our affiliated music companies, many of these competitors have longer operating histories in China and have accumulated larger libraries of songs and pools of popular artists. They also generally have more experience, expertise, resources and management capacity than us in the artist development and music production field.

The second group of competitors includes WVAS providers such as Rock Mobile, a subsidiary of Rock Music, and A8, which have recently focused on music-related products and extended upstream to establish their own music production businesses in China.

Government Regulation

The following is a summary of the principal governmental laws and regulations that are or may be applicable to companies such as ours in China. The scope and enforcement of many of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the ~~Chinese~~PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of ~~laws, particularly with regard to 2G and 2.5G services, which is an emerging industry in China.~~laws. For a description of the regulatory risks related to our business, ~~please~~ see Item 3.D. “Risk Factors — Legal Risks Related to Wireless and Internet Services — The telecommunication laws and regulations in China are evolving and subject to interpretation and will likely change in the future. If we are found to be in violation of current or future Chinese laws or regulations, we could be subject to severe penalties;” “— Legal Risks Related to Wireless and Internet Services — The regulation of Internet website operators is also new and subject to interpretation in China, and our business could be adversely affected if we are deemed to have violated applicable laws and regulations;” and “— Factors—Risks Related to Our ~~Company — Additional~~ Business—Changes in government policies or regulations may have a material and adverse effect on our business, financial condition and results of operations,” “—Risks Related to Our ~~Company — Our corporate structure could be deemed~~Corporate Structure” and “—Risks Related to beDoing Business in ~~violation of current or future Chinese laws and regulations, which could adversely affect our ability to operate our business effectively or at all.~~China.”

~~Regulation of Telecommunication~~Regulations on Value-Added Telecommunications Services

~~The telecommunications industry, including certain 2G and 2.5G services, is highly regulated in China. Regulations issued or implemented by~~
On September 25, 2000, the State Council promulgated the Telecommunications Regulations, or the Telecom Regulations. The Telecom Regulations draw a distinction between “basic telecommunication services” and “value-added telecommunication services.” Internet content provision services, or ICP services, is a subcategory of ~~China,~~value-added telecommunications businesses. Under the Telecom Regulations, commercial operators of value-added telecommunications services must first obtain an operating license from the MIIT ~~and other~~or its provincial level counterparts.
On September 25, 2000, the State Council issued the Administrative Measures on Internet Information Services, or the Internet Measures. According to the Internet Measures, commercial ICP service operators must obtain an ICP license from the relevant government authorities cover many aspects of telecommunications network operation, including entry into the telecommunications industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.

~~The principal regulations governing the telecommunication services we provide~~before engaging in ~~China include:~~

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~~Telecommunications Regulations~~~~(2000), or the Telecom Regulations, and the~~~~Administrative Measures for Telecommunications Business Operating License~~(2002), or the Telecom License Measures. The Telecom Regulations categorize all telecommunication services businesses in China as either infrastructure telecommunication services businesses or value-added telecommunication services businesses. The latter category includes WAP, SMS and other 2G and 2.5G services. Under the Telecom Regulations, certain services, including online data processing and transaction processing, call centers and Internet access, are classified as being of a value-added nature and require a commercial mobile operator to obtain an operating license in order to provide such services. The Telecom Regulations also set forth extensive guidelines with respect to different aspects of telecommunicationsany commercial ICP operations in China. Under the Telecom License Measures, an approved value-added telecommunication services provider must conduct its business in accordance with the specifications recorded on its value-added telecommunication services operating license. Certain of our affiliates, Hurray! Solutions, Beijing Palmsky, Beijing Network, Beijing Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu and Henan Yinshan, have been granted an inter-provincial value-added telecommunication services operating license for mobile information services (excluding fixed line information and Internet information services) by the MIIT that permits it to conduct nation-wide operations. Our affiliate, WVAS Solutions, has been granted a value-added telecommunication services operating license issued by the local Beijing Municipal Telecommunications Administration Bureau. This license may not be sufficient to authorize WVAS Solutions to provide value-added telecommunication services on a national basis.

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~~Regulations for the Administration of Foreign-Invested Telecommunications Enterprises~~ (2008, revised), or the FI Telecom Regulations. The FI Telecom Regulations set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecom enterprise. Under the FI Telecom Regulations, a foreign entity is prohibited from owning more than 50% of the total equity in any value-added telecommunication services business in China. To comply with these restrictions, we have entered into a series of agreements with each of our affiliated Chinese entities and their respective shareholders. We hold no ownership interest in any such affiliated Chinese entities.

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~~Notice on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services~~(2006). Under this notice, an operating company holding a value-added telecommunications license (and not its shareholders) must own all related Internet domain names and registered trademarks. In addition, such company’s business site and equipment should comply with its approved licenses, and the company should establish and audit its internal Internet and information security policies and standards and emergency management procedures.

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~~Notice Concerning Short Message Services~~(2004), Under this Notice, telecom operators may only cooperate with licensed information service providers for SMS. This Notice sets forth requirements for provision of SMS by information service providers with respect to pricing, content and method of service provision. Certain types of SMS require customer’s explicit confirmation on acceptance of charges before such services could be billed for. This Notice also sets forth a high standard for customer services provided by information service providers and requires the service providers to provide an easy and clear cancellation mechanism for their customers to cancel subscribed services.

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~~Notice Concerning the Pricing and Billing of Mobile Information Services~~(2006). Under this notice, the pricing and billing of WVAS must be accurate, clear and fair. In addition, a wireless value-added service provider cannot charge a customer unless the customer responds to two customer requests, and it must maintain detailed invoices for each customer for more than five months. In turn, the telecom operators are required to first deal with customer complaints, requests for refunds and related matters.

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~~Notice Concerning the Billing of Telecommunications Services~~(2007). Under this notice, no telecommunication enterprise may activate any service or function directly connected to their platforms, such as call reminder and voice inbox functions, unless the customer affirmatively consents to subscribing to them. For any free trial service subscribed by the mobile phone user, upon expiration of the free trial period, service providers may not charge the mobile phone user any fee for such service or function until the user re-confirms that it wishes to continue such service or function. When a customer calls the customer support line of a service provider, the service provider is prohibited from charging the customer a fee for such call unless the customer expressly confirms its consent to such charge regardless of whether automated or live support is provided. If automated support is provided, the customer is required to be furnished with pricing and billing information through a free voice notice.

In addition to regulations promulgated at the national level by the Chinese government, several provincial governments have issued provisional regulations requiring SMS service providers to obtain licenses from or register with Telecommunications Administration Bureau at the provincial level before providing SMS service within the ~~province.~~

~~Regulation for~~PRC. In November 2000, the MIIT promulgated the Administrative Measures on Internet ~~Publication.~~~~The State News and Publications Agency of the PRC,~~Electronic Messaging Services, or the ~~SNPA, is the government agency responsible for regulating publishing activities in China.~~ BBS Measures. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms.
On ~~June 27, 2002,~~December 26, 2001, the MIIT ~~and~~promulgated the ~~SNPA jointly promulgated the~~~~Internet Publication Tentative~~ Administrative Measures, on Telecommunications Business Operating License, or the ~~Internet Publication~~Telecom License Measures. On March 1, 2009, the MIIT issued revised Telecom License Measures, which took effect on ~~August 1, 2002.~~April 10, 2009. The ~~Internet Publication~~Telecom License Measures ~~require Internet publishers~~set forth the types of licenses required to secure approval from the SNPA to conduct Internet publication activities. The term “Internet publication” is defined as an act of online dissemination where Internet information service providers select, edit and process works created by themselves or others (including content from books, newspapers, periodicals, audio and video products, electronic publications, and other sources that have already been formally published or works that have been made public in other media) which they then post on the Internet or transmit to users via the Internet for browsing, use or downloading by the public. We currently do not conduct any Internet publication business. The SNPAoperate value-added telecommunications services and the ~~MIIT have not specified whether~~qualifications and procedures for obtaining such licenses. For example, an ICP operator providing value-added services in multiple provinces is required to obtain an inter-regional license, whereas an ICP operator providing the ~~approval required by the Internet Publishing Measures is applicable to the dissemination of works through SMS, WAP, Java~~^™~~, IVR or other wireless technologies. If,~~same services in the future, the SNPA and the MIIT confirm that the Internet Publishing Measures apply to wireless value-added telecommunication services operators or issue new regulations or rules regulating publishing through SMS, WAP, Java^™, IVR or other wireless technologies, we may need to apply for a license or permit from relevant governmental agencies in charge of publishing. We cannot assure you that such application would be approved by the relevant governmental agencies.

~~Regulation for Internet News Dissemination.~~On November 7, 2000, the State Council News Office and the MIIT promulgated the Internet News Measures, under which websites established by non-news organizations may only publish news released by certain official news agencies. In order to disseminate news, such websites must satisfy the relevant requirements and have acquired the requisite governmental approval. We currently do not conduct any online news dissemination business. The State Council News Office and the MIIT have not specified whether the Internet News Measures apply to the dissemination of news through SMS, WAP, Java^™, IVR or other wireless technologies. If, in the future, the State Council News Office and the MIIT clarify that the Internet News Measures apply to wireless value-added telecommunication services operators or issue regulations or rules regulating wireless news dissemination, we may need to apply for a license or permit from governmental agencies in charge of news dissemination. We cannot assure you that such application would be approved by the relevant governmental agencies.

~~Regulation for Internet Games and Culture Activities.~~~~On May 10, 2003, the Ministry of Culture of the PRC, or the MCC, promulgated the~~~~Internet Culture Administration Tentative Measures~~, or the Internet Culture Measures, which came into effect as of July 1, 2003. Pursuant to the Internet Culture Measures, if an Internet content provider engages in “Internet culture activities,” which include, among other things, online dissemination of “Internet cultural products” such as gaming products, the providerone province is required to obtain a ~~license for~~local license.
Regulations on Internet ~~Culture Business Operations from the MCC in accordance with the procedures set forth~~Content Services
National security considerations are an important factor in the ~~Internet Culture Measures. Hurray! Solutions and Beijing Hutong were granted such a license in August 2004 and December 2007, which license permits them to conduct an Internet games business.~~

~~Regulation for Internet Audiovisual Program Services~~~~. In December 2007, the State Administration of Radio, Film, and Television or SARFT and the MIIT jointly issued the~~~~Rules for the Administration~~regulation of Internet ~~Audiovisual Program Services~~which came into effect as of January 31, 2008. The rules apply to the provision of audiovisual program service via Internet (including mobile Internet) within the territory of the PRC. Providers of Internet audiovisual program services are required to obtain an Internet Audiovisual License or complete certain registration procedures. Providers are generally required to be either state-owned or state-controlled by the PRC government. However, in a press conference in February 2008, SARFT and the MIIT clarified that providers who engaged in Internet audiovisual program services prior to the promulgation of the rules and who have not violated any other laws or regulations shall be eligible to register their business and continue their operations. We cannot assure you that we will successfully complete such required registration procedures or be granted a Internet Audiovisual License.

~~Regulation of Music Production~~

~~The music industry, including the traditional record companies and the more recent digital music providers, is highly regulated~~content in China. ~~Laws and regulations issued or implemented by the NPC; the State Council of China; the~~The National Copyright Administration of China, or the NCAC; the MCC, the MIIT; and other relevant government authorities cover many aspects of the industry, including entry into the market, scope of permissible business activities, tariff policy and foreign investment.

~~The principal laws and regulations governing the music business in China include:~~

~~Copyrights.~~~~Under~~People’s Congress, the PRC’s ~~Copyright Law (1990), as revised in 2001, and its related Implementing Regulations (2002), creators of protected works enjoy personal and property rights~~national legislature, has enacted laws with respect to ~~publication, identification, alteration, reproduction, distribution, exhibition, performance, transmission, broadcasting~~maintaining the security of Internet operation and related activities. The term of a copyright is life plus 50 years for individual authors and 50 years for corporations. In consideration of the social benefits and costs of copyrights, China balances copyright protections with limitations that permit certain uses, such as for private study, research, personal entertainment and teaching, without compensationInternet content. According to the author or prior authorization. Section 2, “Performance,” and Section 3, “Phonogram,” of Chapter IV of the Copyright Law cover major aspects of our business related to both online and offline music distribution. These provisions grant performers and record production companies personal and property rights (neighboring rights), including the right to fair compensation for the use of originals or copies of their works. In addition, authors of lyrics and music composers have separate and independent rights with respect to any particular song. The term of the copyright is 50 years after the first performance or authorized publication.

~~In addition, arrangements for the compulsory collection of license fees and the allocation of such fees were standardized by two interim provisions in the NCAC’s~~~~Interim Provisions on Compulsory License of Performance~~and Phonogram (1993). In response to the changes posed by digital media, and in coordination with international treaties and agreements, the NPC took further action by amending the 1990 Copyright Law to specifically protect the online transmission of music (which is part of our music business). The newly added “digital” rights and responsibilities include a notice-and-takedown procedure for Internet service providers and certain anti-circumvention provisions. In combination, the Copyright Law, the Implementing Regulations, several administrative regulations and judicial interpretations constitute a relatively comprehensive legal framework for copyrights in China, although enforcement of such rights remains difficult. The~~Regulations on Protection of Information Network Transmission Right~~(July 1, 2006) stipulate that the digital transmission of copyrightable works by Internet or wireless means, including by making them available via interactive on-demand or similar services, is subject to the regulations described above. In addition, the Chinese National Standing Committee voted to enter into the framework of the World Intellectual Property Organization’s World Copyright Treaty and World Performance and Phonogram Treaty in 2006.

~~Certification and Licensing System.~~The music industry is administered by specific ministries or agencies in China. A set of rules and regulations has been established for nearly every aspect of the traditional music business, from market entry to daily operation. In particular, our distribution of music through traditional physical channels (e.g., retail stores or chain stores) requires a license under the~~Regulations of the Phonographic Products and the Measures on Wholesaling, Retailing and Renting of the Phonographic Products~~(2002), while distribution through digital means (e.g., Internet or wireless means) requires official approval or record-keeping of music and its permissible content transmitted within the PRC by MCC according to the~~Opinions on Regulation and Development of Music Transmitted via Network(2006). In addition, the~~~~Regulations on the Commercial Performance and its Implementing Provisions (2004) and Measures on the Professional Intermediaries~~(1998, revised) require professional performers and managers to obtain a license. The public performance of music also requires a license. These regulations are designed to enable the government to monitor the production, reproduction and publication of music,these laws, as well as the ~~operations of record companies.~~

~~Failure~~Internet Measures, violators may be subject to ~~comply with the foregoing legal requirements could subject our affiliated music companies to civil, administrative and~~penalties, including criminal ~~penalties.~~

~~Regulation of Artist Agency~~

The artist agency industry is highly regulated in China. Regulations issued or implemented by the State Council of China, the Ministry of Culture and other relevant government authorities cover many aspects of artist agency, including entry into the artist agency industry, the scope of permissible business activities, tariff policy and foreign investment. The~~Regulations~~sanctions, for ~~the Administration of Commercial Performances~~(2005), as revised in 2008, and its related Implementing Regulations (2005) are the primary governing law related to our artist agency services. These regulations set forth detailed requirements with respect to different aspects of commercial performances including live musical performances. Under the commercial performances regulations, commercial performances require a performance brokerage company to obtain a commercial performance license in order to provide intermediary, agency and brokerage for commercial performances. Foreign companies are prohibited from owning more than 50% of the total equity in such brokerage companies in China. In the event we host commercial performances, we are required to file an application with the culture administrative department at the county level of the place where the performances are hosted. Hurray! Digital Media has been granted a commercial performance license for commercial performances.

~~Other Laws and their Application~~

~~Regulation of~~ Internet content ~~services.~~We do not operate a significant Internet portal business, which typically requires the provision of extensive Internet content services, including Chinese language Web navigational and search capabilities, content channels, web-based communications and community services and a platform for e-commerce, such as auction houses.

that:
~~For the limited Internet content services we provide, we are prohibited from posting or displaying any content that:~~
opposes the fundamental principles ~~determined~~stated in ~~China’s Constitution;~~the PRC constitution;
compromises ~~state~~national security, divulges state secrets, subverts state power or damages national unity;
harms the dignity or interests of the state;
incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
~~sabotages China’s~~
undermines the PRC’s religious policy or propagates heretical teachings or feudal superstitions;
disseminates rumors, disturbs social order or disrupts social stability;
~~propagates~~
disseminates obscenity or pornography, encourages gambling, violence, murder or fear or incites the commission of ~~crimes;~~a crime;
insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or
~~includes other content~~
is otherwise prohibited by ~~laws~~law or administrative regulations.
~~Failure~~
ICP operators are required to monitor their websites. They may not post or disseminate any content that falls within these prohibited categories and must remove any such content from their websites. The PRC government may shut down the websites of ICP license holders that violate any of the above-mentioned content restrictions, order them to suspend their operations, or revoke their ICP licenses.
Restrictions on Foreign Ownership in Value-Added Telecommunications Services
According to the Provisions on Administration of Foreign Invested Telecommunications Enterprises, or the FITE Provisions, promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, the ultimate foreign equity ownership in a value-added telecommunications services provider must not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must demonstrate a good track record and experience in operating value-added telecommunications services. Foreign investors that meet these requirements must obtain approvals from the MIIT and MOFCOM or its authorized local branches, and the relevant approval application process usually takes six to nine months. We believe that it would be impracticable for us to acquire any equity interest in our consolidated affiliated entities without diverting management attention and resources. In addition, we believe that our contractual arrangements with these entities and their respective individual shareholders provide us with sufficient and effective control over these entities. Accordingly, we currently do not plan to acquire any equity interest in any of these entities.
On July 13, 2006, the MIIT issued the Notice of the MIIT on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication services providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According to this notice, either the holder of a value-added telecommunication business operating license or its shareholders must legally own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice further requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunication service providers are required to maintain network and Internet security in accordance with the standards set forth in relevant PRC regulations. If a license holder fails to comply with ~~these prohibitions may result~~the requirements in the ~~closing~~notice and cure such non compliance, the MIIT or its local counterparts have the discretion to take measures against such license holders, including revoking their valued-added telecommunication business operating licenses.
Regulations on Broadcasting Audio/Video Programs through the Internet
On July 6, 2004, the SARFT promulgated the Rules for the Administration of ~~our websites. In addition, the Supreme Court~~Broadcasting of China and the Supreme People’s Procuratorate of China have issued quantitative guidance to the courts in China regarding when criminal penalties should be imposed on persons who distribute or assist in the distribution of obscene contentAudio/Video Programs through the Internet and Other Information Networks, or ~~wireless services.~~
~~Regulation~~the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the launch, broadcasting, aggregation, transmission or download of ~~advertisements.~~~~The~~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 April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the Ministry of Culture and the GAPP to adopt detailed implementing rules according to these decisions.
On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of ~~Industry~~Internet Audio and ~~Commerce,~~Video Program Services, commonly known as Circular 56, which came into effect as of January 31, 2008. Circular 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 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 Circular 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 Circular 56 was issued. Such policies have been reflected in the Application Procedure for Audio/Video Program Transmission License. We have obtained an audio/video program transmission license, which is valid from June 2008 to June 2011.
On March 31, 2009, SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all movies and television shows released or published online must be in compliance with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre approved by SARFT and distributors of these movies and television shows must obtain an applicable permit before releasing any movie or television show.
On April 1, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), which classified Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately held entities.
Regulations on Internet News Publication
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 6, 2000, the SCIO and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.
On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no Internet news information service organizations may take the form of a foreign-invested enterprise, whether jointly or wholly owned by the foreign investment, and no cooperation between Internet news information service organizations and foreign-invested enterprise is allowed before the SCIO completes the security evaluation.
SCIO requires organizations operating Internet news services apply for and obtain the “Internet News Information Service Permit” from it. To our knowledge, in practice SCIO does not accept such application at present and we will submit an application once SCIO starts to accept. Currently in cooperation with some media companies and news agencies, we operate a current events channel on our website, which includes audio/video contents relating to current topics and social events.
Regulations for Internet Publication
The GAPP is responsible for nationwide supervision and administration of publishing activities in China. On June 27, 2002, the GAPP and the MIIT jointly promulgated the Internet Publication Tentative Administrative Measures, or the Internet Publication Measures, which took effect on August 1, 2002. Pursuant to the Internet Publication Measures, any entity engaged in Internet publishing activities must obtain the Internet Publication License from the GAPP before conducting any Internet publication activities.
The term “Internet publication” is defined as Internet transmission activity by which Internet information service providers publish on the Internet or transmit to end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading, use or downloading by the general public. The works in question primarily include (i) content that has already been published formally, such as books, newspapers, periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works concerning natural science, social science, engineering or other topics.
However, the Internet Publication Measures were promulgated in June 2002, which is approximately three years prior to the establishment of China’s first group of online audio/video websites. At the time of promulgation, these Measures were intended to regulate the traditional audio/video products and online gaming and did not consider the issues directly relevant to online audio/video business. Furthermore, the definition of “Internet publication” under these Measures is very broad and the GAPP has not provided any implementation rule or official interpretation as to the applicability of the Internet Publication Measures to a website such as Ku6.com that exclusively distributes audio/video content. To our knowledge, in practice no website exclusively providing online audio or video content has obtained an Internet publication license in China. Ku6 Information may apply for an Internet Publication License once this issue is clarified and confirmed officially.
Regulations on Internet Medical and Health Information Services
On May 1, 2009, the Ministry of Health promulgated the revised Internet Medical Information Measures, which became effective on July 1, 2009. The revised Internet Medical Information Measures require an ICP operator engaging in providing medical and health information to Internet users (which, among others, includes the provision of such information through the health channel on the operator’s website) to obtain a permit from the relevant provincial counterpart of the Ministry of Health. We obtained the Certificate of Internet Medical Information Service from the Beijing Drug Administration on June 2, 2008.
Regulations on Advertisements
The SAIC is the government agency responsible for regulating advertising activities in China. One provisional regulation issued by Shanghai municipal government prohibits service providers from sending SMS advertisements without the client’s consent.
On November 30, 2004, the SAIC issued the Administrative Regulations for Advertising Operation Licenses, taking effect as of January 1, 2005, granting a general exemption to enterprises (other than radio stations, television stations, newspapers and magazines, non-corporate entities and other entities specified in laws or administrative regulations) from the previous requirement to obtain an advertising operation license in addition to a business license. We conduct our online advertising business through Ku6 Information Technology and Tianjin Ku6 Zheng Yuan, each of which holds a business license that includes advertising in its business scope.
On January 26, 2005, the SAIC and the MIIT jointly promulgated a Circular Regarding the Prohibition of Advertisements for Voice Messages, SMS and other Information Services Which Contain Unhealthy Content, or the SMS Advertising Circular. The SMS Advertising Circular prohibits advertisement of information services with pornographic, obscene, superstitious and other unhealthy content, or advertisements that are misleading in pricing and payment terms of information services. The SMS Advertising Circular further provides that information service providers and advertising companies involved in the dissemination of advertisements for information services with pornographic, obscene, superstitious and other unhealthy content, or advertisements that are misleading in pricing and payment terms of information services will be subject to penalties by relevant authorities pursuant to PRC advertising regulations, and that information service providers providing unhealthy ~~contents~~content will be subject to administrative and other measures by telecommunications authorities, the public security authorities and national security authorities in accordance with Telecommunications Regulations (2000) and other applicable laws and regulations.
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~~As part~~Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the contents of ~~our non-mobile operator marketing activities, we have developed integrated marketing campaigns~~the advertisements they prepare or distribute are true and in full compliance with ~~traditional media companies~~applicable laws and ~~multinational corporations through~~regulations. In addition, where a special government review is required for certain ~~cross-selling efforts with companies. If~~categories of advertisements before publishing, the ~~SAIC were~~advertisers, advertising operators and advertising distributors are obligated to treat our integrated marketing campaigns or other activities as being advertising activities, we would need to apply to the local SAIC for an advertising license to conduct wireless advertising business (through SMS, for example). We cannot assure youconfirm that such ~~application would be approved by the SAIC. Failure to obtain such~~review has been performed and that relevant approval ~~could~~has been obtained. Violation of these regulations may result in penalties, including ~~being banned from~~fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the State Administration for Industry and Commerce or its local branches may force the violator to terminate its advertising operation or even revoke its business license. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties.
Regulations on foreign ownership in advertising business
The principal regulations governing foreign ownership in advertising businesses in China include:
The Foreign Investment Industrial Guidance Catalog (2011 Revision);
The Administrative Regulations on Foreign-invested Advertising Enterprises; and
The Circular Regarding Investment in the Advertising Industry by Foreign Investors through Equity Acquisition.
These regulations require foreign entities that directly invest in the PRC advertising industry to have at least a two-year track record with a principal business in the advertising industry outside China. Since December 2005, foreign investors have been permitted to directly own a 100% interest in advertising companies in China, but such foreign investors are also required to have at least a three-year track record with a principal business in the advertising industry outside China. PRC laws, rules and regulations do not permit the transfer of any approvals or licenses, including business licenses containing a scope of business that permits engagement in the advertising business.
As a result of current PRC laws, rules and regulations that impose substantial restrictions on foreign investment in the Internet and advertising businesses in China, we conduct this portion of our operations through a series of contractual arrangements among our PRC subsidiaries and our consolidated controlled entities. See “C. Organizational Structure.”
Regulations on Internet Culture Activities
On May 10, 2003, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures, which was revised on July 1, 2004. The Internet Culture Measures require ICP operators engaging in “Internet culture activities” to obtain a permit from the Ministry of Culture. The term “Internet culture activities” includes, among other things, online ~~advertising~~dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and cartoons) and the production, reproduction, importation, sale (wholesale or retail), leasing and broadcasting of Internet cultural products. We obtained the permit on June 20, 2009.
On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.
On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this notice, only “Internet culture operating entities” approved by the Ministry of Culture may engage in the production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music shall be reviewed by or filed with the Ministry of Culture. Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.
To comply with these laws and regulations, our content examination team reviews the music videos on our website as well as certain other content.
Regulations on Producing Audio/Video Programs
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of August 20, 2004. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit. Applicants for this permit must meet several criteria, including having a minimum registered capital of RMB3 million. Our current permit has expired and we are in the process of applying for a new one.
Regulations on Software Products
On October 27, 2000, the MIIT issued the Administrative Measures on Software Products, or the Software Measures, to strengthen the regulation of software products and to encourage the development of the PRC software industry. On March 1, 2009, the MIIT issued amended Software Measures, which became effective on April 10, 2009. The Software Measures provide a registration and filing system with respect to software products made in or imported into China. These software products may be registered with the competent local authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years, and the registration is renewable upon expiration.
In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, the National Copyright Administration of the PRC issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration. We have obtained and maintain four software copyright registrations.
Regulations on Intellectual Property Rights
China has adopted legislation governing intellectual property rights, including trademarks, patents and copyrights. China is a signatory to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.
Patent. The National People’s Congress adopted the Patent Law in 1984, and amended it in 1992, 2000 and 2008. The purpose of the Patent Law is to protect lawful interests of patent holders, encourage invention, foster applications of invention, enhance innovative capabilities and promote the development of science and technology. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds, substances obtained by means of nuclear transformation or a design which has major marking effect on the patterns or colors of graphic print products or a combination of both patterns and colors. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement of patent rights.
Copyright. The National People’s Congress adopted the Copyright Law in 1990 and amended it in 2001 and 2010, respectively. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge.
To address copyright issues relating to the Internet, the PRC Supreme People’s Court on December 19, 2000 adopted the Interpretations on Some Issues Concerning Applicable Laws for Trial of Disputes over Internet Copyright, or the Interpretations, which were subsequently amended on January 2, 2004 and November 22, 2006. The Interpretations establish joint liability for ICP operators if they participate in, assist in or incite infringing activities or fail to remove infringing content from their websites after knowing the infringement of copyrights conducted by Internet users through the Internet or receiving notice from the rights holder. In addition, ICP operators shall be liable for knowingly uploading, disseminating or providing any measures, facilities or materials intended to bypass circumvention technologies designed to protect copyrights. Upon request, the ICP operators must provide the rights holder with registration information of the alleged violator, provided that such rights holder has produced relevant identification, copyright certificate and evidence of infringement. A court shall not uphold the alleged infringer’s claim against an ICP operator for breach of contract if the ICP operator removes the alleged infringing content after receiving the rights holder’s notice accompanied with proper evidence.
To address the problem of copyright infringement related to the content posted or transmitted over the Internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.
This measure applies to situations where an ICP operator (i) allows another person to post or store any works, recordings, audio or video programs on the websites operated by such ICP operator or (ii) provides links to, or search results for, the works, recordings, audio or video programs posted or transmitted by such person, without editing, revising or selecting the content of such material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement harming public interest, the ICP operator could be subject to administrative penalties, including: cessation of infringement activities; confiscation by the authorities of all income derived from the infringement activities; and payment of a fine of up to three times the unlawful income or, in cases where the amount of unlawful income cannot be determined, a fine of up to RMB100,000. An ICP operator is also required to retain all infringement notices for a minimum of six months and to record the content, display time and IP addresses or the domain names related to the infringement for a minimum of 60 days. Failure to comply with this requirement could result in an administrative warning and a fine of up to RMB30,000.
On May 18, 2006, the State Council promulgated the Protection of the Right of Communication through Information Networks, which became effective on July 1, 2006. Under this regulation, with respect to any information storage space, search or link services provided by an Internet service provider, if the legitimate right owner believes that the works, performance or sound or video recordings pertaining to that service infringe his or her rights of communication, the right owner may give the Internet service provider a written notice containing the relevant information along with preliminary materials proving that an infringement has occurred, and requesting that the Internet service provider delete, or disconnect the links to, such works or recordings. The right owner will be responsible for the truthfulness of the content of the notice.
Upon receipt of the notice, the Internet service provider must delete or disconnect the links to the infringing content immediately and forward the notice to the user that provided the infringing works or recordings. If the written notice cannot be sent to the user due to the unknown IP address, the contents of the notice shall be publicized via information networks. If the user believes that the subject works or recordings have not infringed others’ rights, the user may submit to the Internet service provider a written explanation with preliminary materials proving non-infringement, and a request for the restoration of the deleted works or recordings. The Internet service provider should then immediately restore the deleted or disconnected content and forward the user’s written statement to the right owner.
An Internet service provider that provides information storage space to users through which users may provide works, performance or sound or video recordings to the public will be exempted from liability for compensation to right owners where the following conditions apply: (i) the Internet service provider has clearly indicated that the information storage space is provided to users, and published the name, contact person and IP address of the network service provider; (ii) it has not altered the works or recordings provided by users; (iii) it did not know, or could not reasonably have been expected to know, that the content provided by users infringed other’s rights; (iv) it has not received any direct financial gain from the users’ provision of the content; and (v) it deletes the allegedly infringing content upon receiving written notice from the rights owners. An Internet service provider that provides users with search or link services will be exempted from liability for compensation to right owner if the Internet service provider promptly disconnects the link to the infringing content after receiving the right owner’s notice. This exemption is not valid however if the Internet service provider knew or should know that the linked content infringed another’s rights; in that scenario, it will be jointly liable with the user who provided the content.
Since 2005, the National Copyright Administration, or the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns specifically aimed to crack down on Internet copyright infringement and piracy in China, which normally last for three to four months every year. According to theNotice of 2010 Campaign to Crack Down on Internet Infringement and Piracy promulgated by the NCA, the Ministry of Public Security and MIIT on July 19, 2010, one of the main targets, among others, of the 2010 campaign is Internet audio and video programs. Since the 2010 campaign commenced in late July, the local branches of NCA have been focusing on popular movies and television series, newly published books, online games and animation, music and software and illegal ~~earnings~~uploading or transmission of a third party’s works without proper license or permission, sales of pirated audio/video and ~~fines.~~

software through e-commerce platforms, providing search links, information storage, web hosting or Internet access services for third parties engaging in copyright infringement or piracy and the infringement by use of mobile media. In serious cases, the operating permits of the websites engaging in illegal activities may be revoked, and such websites may be ordered to shut down.
We have adopted measures to mitigate copyright infringement risks. For example, our policy is to remove links to web pages if we know these web pages contain materials that infringe third-party rights or if we are notified by the legitimate copyright holder of the infringement with proper evidence.
On December 26, 2009, the Standing Committee of the National People’s Congress adopted the Torts Liability Law, which became effective on July 1, 2010. Under this new law, both Internet users and Internet service providers may be liable for the wrongful acts of users who infringe the lawful rights of other parties. If an Internet user utilizes Internet services to commit a tortious act, the party whose rights are infringed may request the Internet service provider to take measures, such as removing or blocking the content, or disabling the links thereto, to prevent or stop the infringement. If the Internet service provider does not take necessary measures after receiving such notice, it shall be jointly liable for any further damages suffered by the rights holder. Furthermore, if an Internet service provider fails to take necessary measures when it knows that an Internet user utilizes its Internet services to infringe the lawful rights and interests of other parties, it shall be jointly liable with the Internet user for damages resulting from the infringement.
Trademark. The PRC Trademark Law, adopted in 1982 and revised respectively in 1993 and 2001, protects registered trademarks. The Trademark Office under the SAIC handles trademark registrations and grants a term of ten years to registered trademarks. Trademark license agreements must be filed with the Trademark Office for the record.
Domain Name. In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain names. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the Internet in China, or Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first tier domain name “.cn.” In February 2006, CNNIC issued the Measures on Domain Name Disputes Resolution and its implementing rules, pursuant to which CNNIC can authorize a domain name dispute resolution institution to decide disputes.
Regulations on Information Security
The National People’s Congress has enacted legislation that prohibits use of the Internet that breaches the public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.
According to other relevant regulations, ICP operators must complete mandatory security filing procedures and regularly update information security and censorship systems for their websites with local public security authorities, and must also report any public dissemination of prohibited content.
In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking state secrets or failing to comply with the relevant legislation regarding the protection of state secrets during online information distribution.
On January 13, 2006, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet Security Protection, or Internet Protection Measures. The Internet Protection Measures require all ICP operators to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations.
As an ICP operator, we are subject to the regulations relating to information security. We have taken measures to comply with such regulations. We are registered with the relevant government authority in accordance with the mandatory registration requirement. Our policy is to remove links to web pages and any content which to its knowledge contain information that would be in violation of PRC laws or regulations. In addition, we monitor our websites to ensure our compliance with such laws and regulations.
Regulations on Internet Privacy
The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of such rights. In recent years, PRC government authorities have enacted legislation on Internet use to protect personal information from any unauthorized disclosure. The Internet Measures prohibit an ICP operator from insulting or slandering a third party or infringing the lawful rights and interests of a third party. Pursuant to the BBS Measures, ICP operators that provide electronic messaging services must keep users’ personal information confidential and must not disclose such personal information to any third party without the users’ consent or unless required by law. The regulations further authorize the relevant telecommunications authorities to order ICP operators to rectify unauthorized disclosure. ICP operators are subject to legal liability if the unauthorized disclosure results in damages or losses to users. The PRC government, however, has the power and authority to order ICP operators to turn over personal information if an Internet user posts any prohibited content or engages in illegal activities on the Internet.
Foreign ~~exchange controls.~~Exchange Controls
For information regarding relevant foreign exchange controls, please refer to Item 10.D. “Exchange Controls.”

~~Intellectual Property~~Dividend Distribution

The principal regulations governing dividend distributions by wholly foreign-owned enterprises and ~~Proprietary Rights~~Sino-foreign equity joint ventures include the:

Wholly Foreign Owned Enterprise Law (1986), as amended;

Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended;

Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended;

Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended;

The Companies Law (2005);

The Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the PRC Enterprise Income Tax Law (2007);

PRC Enterprise Income Tax Law (2007); and

Implementation Rules of the PRC Enterprise Income Tax Law (2007).

Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.

Regulations on Employee Stock Options Plan

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, setting forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions, such as a PRC citizen’s participation in employee stock ownership plans or share option plans of an overseas, publicly listed company. On March 28, 2007, the State Administration of Foreign Exchange promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rules. The purpose of the Stock Option Rules is to regulate the foreign exchange administration of PRC domestic individuals who participate in employee stock holding plans and share option plans of overseas listed companies.

According to the Stock Option Rules, if a PRC domestic individual participates in any employee stock ownership plan or share option plan of an overseas listed company, a PRC domestic qualified agent or the PRC subsidiary of such overseas listed company must, among other things, file, on behalf of such individual, an application with SAFE or its local counterpart to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or share option exercises as PRC domestic individuals may not directly use overseas funds to purchase shares or exercise share options. Concurrent with the filing of such application with SAFE or its local counterpart, the PRC domestic qualified agent or the PRC subsidiary shall obtain approval from SAFE or its local counterpart to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of shares, any dividends issued on the stock and any other income or expenditures approved by SAFE or its local counterpart. The PRC domestic qualified agent or the PRC subsidiary is also required to obtain approval from SAFE or its local counterpart to open an overseas special foreign exchange account at an overseas trust bank with custody qualifications to hold overseas funds used in connection with any shares purchase.

Under the Foreign Currency Administration Rules, as amended in 2008, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions to be issued by SAFE. However, the implementing rules in respect of depositing the foreign exchange proceeds abroad have not been issued by SAFE. The foreign exchange proceeds from the sales of shares can be converted into RMB or transferred to such individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank. If share options are exercised in a cashless exercise, the PRC domestic individuals are required to remit the proceeds to special foreign exchange accounts.

Many issues with respect to the Stock Option Rules require further interpretation. We ~~rely primarily~~and our PRC employees who have participated in an employee stock ownership plan or share option plan are subject to the Stock Option Rules. If we or our PRC employees fail to comply with the Stock Option Rules, we and our PRC employees may face sanctions imposed by the PRC foreign exchange authority or any other PRC government authorities, including restriction on ~~intellectual property~~foreign currency conversions and additional capital contribution to our PRC subsidiaries.

In addition, the State Administration of Taxation has issued a few circulars concerning employee share options. Under these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and withhold the individual income taxes of employees who exercise their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.

Labor Laws and Social Insurance

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with fulltime employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise for serious violations.

In addition, employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.

To comply with these laws and regulations, we have caused all of our ~~contractual arrangements with our employees, clients, business partners and others to protect our intellectual property rights. We require our~~full-time employees to enter into ~~agreements requiring them to keep confidential all information relating to~~labor contracts and provide our ~~customers, methods, business~~employees with the proper welfare and ~~trade secrets during~~employment benefits.

Regulations on Concentration in Merger and ~~after their employment with us. Our employees are required to acknowledge~~Acquisition Transactions

The M&A Rule established additional procedures and ~~recognize~~requirements that ~~all inventions, trade secrets, works~~could make merger and acquisition activities by foreign investors more time-consuming and complex. These rules require, among other things, that MOFCOM be notified in advance of authorship, developments and other processes, whether or not patentable or copyrightable, made by them during their employment are our property. They also sign agreements to substantiate our sole and exclusive right to those works and to transfer any ~~ownership that they may claim~~change-of-control transaction in ~~those works to us.~~

~~While we actively~~which a foreign investor will 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. We have registered a number of domain names including but not limited to:~~Hurraymedia.com; Hurrayagency.com; Hurraymusic.com;Hurraygame.com; Hurraydigital.com~~~~and~~~~Hurraywireless.com~~~~in 2008.~~

We are in the process of applying for two additional trademarks with China’s Trademark Office relating to a charity event’s theme song, titled “Passion for Internet” (Ai Xin Hu Lian). China’s trademark law adopts a “first-to-file” system for obtaining trademark rights. As a result, the first applicant to file an application for registrationcontrol of a ~~mark will preempt all other applicants.~~PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior ~~use~~Notification of unregistered marks, except “well known” marks, is generally not a basis for legal action in China. We may not be able to successfully defend or claim any legal rights in that trademark for which application has been made but for which the Trademark Office has notConcentrations of Undertakings issued ~~a registration certificate.~~

In 2008, we filed a patent application with the State Intellectual Property Office of China relating to an offline method by which our customers can directly access our wireless value-added products. This application is currently under examination and our rights to this patent could be affected adversely if this application is rejected by the State ~~Intellectual Property Office of China.~~

~~Many parties~~Council on August 3, 2008 are ~~actively developing~~triggered. Complying with these requirements could affect our ability to expand our business or maintain our market share.
C. Organizational Structure
We conduct our operations in China principally through contractual arrangements among our PRC subsidiaries (Beijing WFOE, Tianjin WFOE and seeking patent protection for wireless services-related technologies. We expect these parties to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and that cover significant parts ofTianjin Ku6 Network WFOE, which was established on December 14, 2011), our ~~technology, business methods or services. Disputes over rights to these technologies are likely to arise~~consolidated affiliated entities in the ~~future. We cannot be certain that our products~~PRC (Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and services do not or will not infringe valid patents, 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, as discussed in “Risk Factors — Additional Risks Related to Our Company — We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.”

Our affiliated companies have retained recording and publishing rights with respect to the songs in their music libraries. They also own the applicable copyrights with respect to songs written and produced by their respective in-house artists. In addition, our affiliated music companies have either retained licenses to use or purchased the applicable copyrights with respect to songs written and produced by independent artists.

~~C. Organizational Structure~~

We principally conduct our business in China through our wholly owned subsidiary, Beijing Hurray! Times. To comply with ownership requirements under Chinese laws, which impose certain restrictions on foreign companies such as us, from investing in certain industries such as value-added telecommunication and Internet services, we have entered into a series of agreements with nine affiliated Chinese entitiesTianjin Ku6 Network), and their respective shareholders. ~~In June 2008,~~We have ceased to control Yisheng as a 100% controlled consolidated affiliated entity since August 11, 2011 when we ~~completed~~disposed of an 80% interest in Yisheng following the ~~dissolution~~completion of ~~our~~certain equity transfer to a former ~~affiliated Chinese entity, Beijing Cool Young Information Technology Co., Ltd.,~~employee and increases in Yisheng’s registered capital by two companies which ~~had no significant business prior to its dissolution.~~were at the time affiliates under common control by Shanda Interactive. We hold no ownership interest in any ~~such~~of our consolidated affiliated ~~Chinese~~ entities in the PRC, which are ~~discussed below:~~owned, directly or indirectly, by certain individuals as follows:
��
Ku6 Information Technology is 98% owned by Mr. Shanyou Li and 2% owned by Mr. Hailong Han;
1. ~~Hurray! Solutions is 85% and 15% owned by our chairman, Qindai Wang, and one of our directors and our chief executive officer, Songzuo Xiang, respectively.~~
Tianjin Ku6 Zheng Yuan is wholly owned by Ku6 Information Technology, which in turn is 98% owned by Mr. Shanyou Li and 2% owned by Mr. Hailong Han;
2. ~~Beijing Network is 50% owned by each of Li Xun and Hongmei Peng, two individuals in China.~~
Ku6 Cultural is 98% owned by Mr. Shanyou Li and 2% owned by Ms. Xingye Zeng; and
3. ~~WVAS Solutions is 99% owned by Beijing Network, with the remaining 1% equally owned by Hao Sun and Xiaoping Wang.~~
4. ~~Beijing Palmsky is 50% and 50% owned by two individuals in China, Hong Liu and Haoyu Yang.~~
5. ~~Beijing Hutong is 50% and 50% owned by two individuals in China, Wenqian Xu and Yi Cai.~~
6. ~~Shanghai Magma is 50% and 50% owned by two individuals in China, Yi Zhang and Aiqin Shang.~~
7. ~~Hengji Weiye is 50% and 50% owned by two individuals in China, Hong Pan and Xiaoqing Guo.~~
Tianjin Ku6 Network is 90% owned by Ms. Dongxu Wang and 10% owned by Mr. Qing Zhang.
8. ~~Shanghai Saiyu is 50% and 50% owned by two individuals in China, Liang Ruan and Yuqi Shi.~~
9. ~~Henan Yinshan is 50% and 50% owned by two individuals in China, Hua Wei and Yidan Jiang.~~
Through our ~~agreements~~contractual arrangements with these ~~Chinese affiliates,~~consolidated affiliated entities, we have the power to vote all the shares ~~of all~~held by the shareholders of ~~those companies on their matters,~~these entities, through ~~the general manager of Beijing Hurray! Times,~~our PRC subsidiaries, as well as the right to enjoy the economic benefits ~~of those companies~~derived from these entities, and the exclusive right to purchase equity interests from the shareholders of ~~those companies~~these entities to the extent permitted by ~~Chinese laws.~~
~~In addition, Hurray! Digital Media is 50% owned by Hurray! Solutions, 25% owned by Beijing Network,~~PRC law. For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see Item 4.B. “Information on the Company—Business Overview—Government Regulation.” For a detailed description of the risks associated with our corporate structure and 25% owned by Beijing Hutong. In turn, Hurray! Digital Media holds a 51% equity interest in Huayi Brothers Music, a 60% equity interest in Freeland Music, a 30% equity interest in New Run, a 65% equity interest in Secular Bird and Freeland Music owns a 51% equity interest in Fly Songs.
~~We conduct~~the contractual arrangements that support our ~~business in~~corporate structure, see Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure.”
Under the overseas Chinese language music market through our wholly owned subsidiary, Hurray! Media. Hurray! Media holds a 61.08% equity interest in Seed Music Group, which operates its business through its four subsidiariesguidance relating to the consolidation of Seed Music Co., Ltd. (“Seed Music”), Profita Publishing Limited (“Profita Publishing”), Dongyi Music Limited (“Dongyi Music”), each of which is incorporated in Taiwan, and Beijing Seed, which is incorporated in China. Seed Music and Profita Publishing are wholly owned by Seed Music Group. Seed Music wholly owns each of Dongyi Music and Beijing Seed.
~~Under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised), or FIN 46(R),~~consolidated affiliated entities, we are the primary beneficiary of the economic benefits of our ~~variable interest~~consolidated affiliated entities, namely, Ku6 Information, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and their subsidiaries, Hurray! Solutions, WVAS Solutions, Beijing Palmsky, Beijing Network, Beijing Hutong, Hengji Weiye, Shanghai Magma, Hurray! Digital Media, Shanghai Saiyu, Henan Yinshan, Huayi Brothers Music, Freeland Music, Secular Bird, New Run and Fly Songs. Accordingly, these entities are consolidated into our financial statements or, in the case of New Run, accounted for as an equity method investment from and after the date we became the primary beneficiary of each such entity.Tianjin Ku6 Network. Transactions among ~~the~~our consolidated affiliated entities, ~~and~~ our company and our subsidiaries are eliminated in consolidation.
39

The following diagram illustrates our corporate structure ~~showing our principal subsidiaries and variable interest entities~~ as of ~~May 1, 2009.~~

February 29, 2012:

D. Property, Plant and Equipment
Our ~~company and certain~~principal executive offices are located on premises with a gross floor area of ~~our non-music affiliates currently lease an approximate total of 3,389~~approximately 5,640 square meters ~~of office space~~ in ~~Beijing through various lease agreements. The aggregate monthly rent of such lease agreements was approximately $111,879 beginning in October 2008.~~Beijing. We also have ~~branches~~branch and representative offices in ~~Beijing, Shandong, Heilongjiang, Guangdong, Zhejiang, Liaoning, Chongqing, Shanghai, Henan and Sichuan.~~
Freeland Music, Huayi Brothers Music and New Run lease an approximate total of 1,610 square meters of office space in Beijing. Secular Bird leases an approximate total of 140 square meters of office space in Guangzhou. Seed Music Group and its subsidiaries lease approximately 100 square meters in Taiwan and also occupy approximately 509 square meters in Beijing.
Tianjin.
Item 4A. Unresolved Staff Comments
Not Applicable.
Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this annual report on Form 20-F. This ~~report~~discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act ~~of 1933~~ and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” ~~“believe,”~~“believe” or similar language. All forward-looking statements included in this ~~annual report~~prospectus are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Risk ~~Factors” in this annual report on Form 20-F.~~Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

A. OPERATING RESULTS

Overview
We ~~are a leading~~entered into the online ~~distributor of music and music-related products such as ringtones, ring-back-tones, and true-tones to mobile users in China~~video business through the ~~full range~~acquisition of ~~WVAS platforms over mobile networks and through the Internet.~~
~~We also provide a wide range of other WVAS to mobile users~~Ku6 Holding in China, including games, pictures and animation, community, and other media and entertainment services. Our services are offered through the various service platforms available on the 2G and 2.5G networks operated by the mobile telecommunication network operators in China, principally China Mobile, China Unicom and increasingly, China Telecom. ManyJanuary 2010.
In May 2010, we sold all of our ~~services are also available~~51% interest in Huayi Music to ~~users in China through our website. We are also a leader in artist development, music production and offline distribution in China through our affiliated music companies,~~ Huayi Brothers ~~Music, Freeland Music, New Run, Secular Bird and~~Media Corporation.
In August 2010, we disposed of our ~~recent acquisition, Seed Music Group, which also operates in Taiwan.~~
Our 2G services revenues are derived from our SMS, IVR services and RBT services. Our 2.5G services revenues are derived to a substantial extent from WAP services, the predominant 2.5G service available in China, and to a lesser extent from Java™ games and MMS. Users pay for our services by monthly subscription and/or on a per-use basis. We receive payments for these services principally in the form of payments from the telecom operators after the users have paid for our services and the operators have deducted their service and network fees.
We recorded net losses of $12.0 million for 2008 and $42.0 million for 2007 and net income of $5.8 million for 2006. For 2008, we generated $54.0 million in total revenues, compared to $60.5 million and $68.7 million for 2007 and 2006, respectively, representing a decline of 10.9 % and 21.5% respectively. For 2008, WVAS ~~revenue~~ and recorded music ~~accounted for 79.1%~~businesses to Shanda Interactive. We also acquired control of Yisheng, an online radio business, from Shanda Interactive in August 2010. These transactions were treated as transactions between entities under common control. Therefore the transactions were recorded at carryover basis and ~~20.9% of our revenues, respectively, compared to 82.7%~~any difference between the carrying value and ~~17.3%~~the amount received or paid are recorded in ~~2007 and 91.0% and 9.0% in 2006.~~shareholders’ equity. The ~~2008 decrease in revenue from WVAS was offset in part by an increase in recorded music revenues.~~
~~We had accumulated deficits of $10.0 million and $2.8 million as of December 31, 2008 and 2007, respectively, and retained earnings of $40.0 million as of December 31, 2006.~~
Although our net loss was $12.0 million in 2008, which included a foreign exchange loss of $9.0 million and an impairment charge of $7.5 million for goodwill, intangible assets and investment in a music affiliate, we had cash of approximately $59.5 million as of December 31, 2008, and accordingly, ouraccompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control on ~~a going concern basis.~~
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~~Factors Affecting Results of Operations~~August 31, 2009, and ~~Financial Condition~~
~~The major factors affecting our~~the operating results of ~~operations and financial condition include:~~
• ~~Growth of the WVAS Market in China and Changes in Mobile Operator Policies~~. Our financial results have been, and we expect them to continue to be, largely dependent on growth in the WVAS market in China. Historically, 2G services, such as SMS, have represented the predominant portion of the WVAS market in China and of our revenues. We commercially launched 2.5G services in September 2002 and began billing users for these services at the beginning of 2003. Since the launch of these 2G and 2.5G services, we initially experienced significant growth in revenues from these services, followed by a significant decline in revenues for these services over the past three years. The important factors causing this decline have been the changes in the telecom operator policies or the manner in which they are enforced in 2008. Such policy changes and their manner of enforcement have been frequent and unpredictable for the past three years and have caused our revenues to be volatile. See Item 3. “Risk Factors — Risks Related to Our Company— Unilateral changes in the policies of the MII, China Mobile and China Unicom and in their enforcement of their policies have resulted in service suspensions and our having to pay additional charges to the telecom operators, and further changes could materially and adversely impact our revenue and profitability in the future.” Although we have been adversely affected by recent changes in telecom operator policies and the delay in the expansion of 2.5G networks by the telecom operators in 2008 and in the launch of 3G networks in China, we continue to believe that our financial success in the near-term will depend on the growth of the market for our 2G and 2.5G services, especially services utilizing music content, where we have a leading position and, in the longer-term, on our ability to offer popular services on any new wireless technologies that are introduced in China such as 3G.
• ~~Positioning of Our Services on the WAP Portals of the Telecom Operators.~~A key component of our revenue growth is our ability to not only maintain access to China Unicom’s and China Mobile’s networks and now to China Telecom’s networks following that company’s acquisition of one of China Unicom’s networks, but also our ability to secure prominent positioning for our services at the top of the menu of services for each major service category on the telecom operators’ WAP portals so that users see our services first when opening the service menus. However, Beijing Network, one of our affiliated operating companies providing WAP services through China Mobile, was issued a sanction by China Mobile in effect in January 2006 for improper promotion of one of its WAP services. As part of the sanction, China Mobile downgraded all of Beijing Network’s WAP services to the bottom of the menu and temporarily suspended the approval of new service applications on all platforms by Beijing Network and joint promotions with Beijing Network. Our WAP revenue was adversely affected during this period.
• ~~Network Service Agreements with the Telecom Operators.~~Our results of operations are dependent on the terms of network service agreements with the telecom operators and the manner in which the telecom operators implement these agreements. Each of these agreements is non-exclusive, and has a limited term, generally one or two years. Renewal of them on favorable terms depends on our relationship with these telecom operators at both the national and provincial level, the popularity of our services and our ability to maintain adequate levels of performance. Any mobile operator could alter any of these terms or terminate the contracts for a variety of reasons in the future, including, for example, to increase their own service or network fees in order to enhance their profitability at the expense of service providers.
• ~~Billing and Transmission Failures~~. We do not recognize any revenues for services that are characterized as billing and transmission failures. We can not collect fees when these failures occur for our 2G services from telecom operators, which arise in a number of circumstances, including when the delivery of our services to a customer is prevented because the customer’s phone is off, the customer’s prepaid phone card has run out of value or a mobile operator experiences technical problems with its network. These situations are known in the industry as billing and transmission failures. The level of billing and transmission failures significantly affects revenues we record. The failure rate for 2G services has fluctuated significantly in the past, including in recent quarters, due in part to the recent restructuring of the telecom operators. The failure rate ranged on a monthly basis from 0.0% to 19.1% of the total billable messages which are reflected in our internal records during 2008. Although we do not experience the same type of billing and transmission errors for our 2.5G services as we do for our 2G services, we do experience a discrepancy between the revenues recorded by our internal system and the revenues that we receive from the telecom operators. This difference for 2.5G services ranged from 0.4% to 27.5% per month in 2008 and related to services that were provided but for a variety of reasons were not billed to the user due to the manner in which the telecom operators register new users or manage their internal billing reconciliation process, an issue that the 2008 telecom operator restructuring exacerbated.
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• ~~Acquisitions and Strategic Investments.~~Selective acquisitions and strategic investments, such as the ones described in Item 4.A. “History and Development of the Company” above, form part of our strategy to further expand our business. These acquisitions and investments may not produce the results that our management and board of directors anticipate, and may subject our company to unforeseen liabilities. In particular, our future revenue growth will depend on our ability to successfully operate our music development, production and distribution business, with which we have relatively limited experience.
• ~~Developing Artists, Sustaining a Pipeline of New Song Releases and Keeping up with Consumer Music Tastes.~~Through our acquisition of controlling and minority stakes in Huayi Brothers Music, Freeland Music, New Run and Secular Bird, and Seed Music Group, we have entered the business of artist development and music production. Artist development and music production is inherently a “hit” driven business, and its success depends to a large extent on our ability to maintain a large portfolio of talented singing artists and build a strong pipeline of new song releases. Further, the success of such new releases depends upon their acceptance by consumers with various and changing tastes. If our affiliated music companies fail to expand their portfolio of talented singing artists, sustain a pipeline of new releases, or keep abreast of changes in consumer music tastes, our business and financial condition may be adversely affected with respect to the financial performance of our affiliated music companies.
~~Revenues~~
We derive our revenues from our primary operating segments: WVAS and recorded music. Our revenues represent our total revenues from operations, net of certain business and value-added taxes. Our revenues from WVAS and recorded music ~~are~~have been presented as discontinued operations in the income statements for all periods presented. See Note 2(1) to our consolidated financial statements.
As a result of management’s review and adjustment of our business strategies, beginning in the second quarter of 2011, we have engaged Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency using performance advertising under which advertisers pay only for measurable results. We have also shifted our focus from purchasing licensed video copyrights to relying on UGC.
On April 1, 2011, we entered into agreements with Shanda Media, pursuant to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share) and $50,000,000 aggregate principal amount of senior convertible bonds at face value. Based on our working capital position, we redeemed the convertible bonds on September 30, 2011.
On August 11, 2011, we disposed of a significant interest in Yisheng. After the disposal, our company ceases to control Yisheng and only retains a 20% interest in Yisheng.
On December 30, 2011, we approved a share repurchase program to repurchase up to an aggregate of $3.2 million of our outstanding ADSs from time to time based on market conditions. Any repurchases may be effected through open market purchases or block trades, including the use of derivative instruments, and will be financed with our cash balance. As of February 29, 2012, we had not made any repurchases under this share repurchase program.
We currently operate our business as a single segment. We derive substantially all of our revenues from online advertising services. For the years ended December 31, 2010 and 2011, our revenues were $16.6 million and $19.2 million, respectively, and our net loss was $52.4 million and $49.4 million, respectively.
Discontinued Operations
Historically, we derived most of our revenues from the WVAS business, which included 2G services such as short message service, interactive voice response and ring back tone, and 2.5G services such as WAP, MMS, and Java™, each of which is available on the networks of principal telecom operators in China. We also had a recorded music business, which involves discovering, developing and representing recording artists and promoting, selling and licensing their works through designated third parties. In 2010, we made the strategic decision to divest our WVAS and recorded music businesses to focus on our online video business.
On May 28, 2010, we sold all of our 51% interest in Huayi Music to Huayi Brothers Media Corporation and recognized gain of $4.5 million from disposal of discontinued operations.
On August 17, 2010, we sold our WVAS and recorded music businesses to Shanda Interactive. As the transaction was treated as a transaction between entities under common control, no gain or loss was recognized. The difference of $13.6 million between the consideration received of $37.2 million and the carrying amount of the assets and liabilities of WVAS and recorded music business of $23.7 million and the corresponding cumulative translation difference of $10.3 million were accounted for as contribution by Shanda Interactive in additional paid-in capital in 2010.
According to Accounting Standards Codification, or ASC, 205, the reclassification of discontinued operations of WVAS and recorded music businesses for the year ended December 31, 2009 and the eight months ended August 31, 2010 has been accounted for retroactively. Results from these discontinued operations, net of tax, in 2009, 2010 and 2011 were a loss of $21.6 million, an income of $1.1 million (including a gain of $4.5 million from the disposal of our 51% interest in Huayi Music) and an income of nil, respectively.
Disposal of Interest in Online Audio Business
The acquisition of Yisheng’s online audio business from Shanda Interactive in 2010 was accounted for as a common control transaction as we were considered to be under the control of Shanda Interactive at the time of the acquisition. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since August 31, 2009, the date of inception of common control, which is the date on which we were consolidated into Shanda Interactive’s consolidated financial statements. Therefore total assets and liabilities as well as the non-controlling interests of Yisheng were recorded at their carrying amount as capital contribution from Shanda Interactive in the consolidated statements of changes in equity. The effect of accounting for the acquisition under common control has increased the net loss for the year ended December 31, 2009 by $0.7 million, which represents the net loss of this business from August 31, 2009 through December 31, 2009. The $12.5 million fair value of the 415,384,615 ordinary shares that we issued to Shanda Interactive was recorded through equity as a deemed distribution to Shanda Interactive in 2010.
The issuance of 138,461,539 ordinary shares to the 25% non-controlling shareholders of Yisheng in August 2010 was accounted for as an equity transaction in 2010 and the difference between fair value of the ordinary shares issued and carrying amount of the non-controlling interest was recognized as a decrease in additional paid-in capital attributable to us in accordance with ASC 810.
On August 11, 2011, we disposed of a significant interest in Yisheng as a result of management’s review of our business strategies. After the disposal, our company ceases to control Yisheng and only retains a 20% interest in Yisheng. This disposal gain was recognized as an increase in additional paid-in capital for the year ended December 31, 2011.
Factors Affecting Our Results of Operations
Our business, financial condition and results of operations have been and will continue to be subject to general conditions affecting the online video and online advertising industries in China. These conditions, among others, include the stability and growth of China’s economy, the growth of the Internet penetration rate in China, and the increasing acceptance of online video advertising by the advertisers. In addition, our business, financial condition and results of operations are affected by a ~~3.0%~~number of company-specific factors including our ability to:
maintain and ~~5.0%~~expand our user base;
obtain and produce popular video content cost-effectively;
procure Internet bandwidth cost-effectively;
provide effective advertising services;
control sales and marketing expenses; and
maintain leading brand and market position.
Description of Certain Statement of Operations Items
Net Revenues
We currently derive substantially all of our net revenues from online advertising services. Historically, we derived these revenues primarily from various third-party advertising agencies. Beginning in the second quarter of 2011, we have relied on Shengyue, an affiliate wholly owned by Shanda Interactive, as our advertising agency for sales to, and collection of payments from, a majority of our advertisers. Advertisers broadcast their online advertising through the AA system supplied by Shengyue. We pay the commission fee except for the commission free period and in the form of direct-deduction of the advertising revenue to the related party advertising agency and recognize revenues net of the commission fee. We expect that revenues from online advertising services will continue to be the primary source of our revenues in the foreseeable future.
We believe the most significant factors that directly or indirectly affect our advertising service revenues include the following:
the number of advertising customers;
the number of users visiting our website and the amount of time they spend on our website;
the prices of our performance advertising;
the commission fee for Shengyue; and
the perceived effectiveness of online video advertising as compared to advertising in more traditional media, particularly television.
The number of advertising customers during any period is affected by our services, our sales and marketing efforts and influenced by our market position and advertisers’ perception of the effectiveness of our online advertising services. The size of our advertising customer base is also driven by customer-specific factors such as the timing of the introduction of new advertising campaigns, our ability to maintain favorable demographic user base, seasonality of advertising customers’ operations and growth of business ~~tax, respectively.~~
sectors in which our advertising customers operate.
Cost of Revenues
Our cost of revenues consist of Internet bandwidth costs, amortization and write-down of licensed video copyrights, payroll costs associated with the platform operation and content, depreciation expenses, in-house developed content costs, and other costs. Our total cost of revenues amounted to $30.8 million for the year ended December 31, 2011.
   Year ended December 31,
   2009    2010    2011
   (in thousands of U.S. dollars)
Internet bandwidth costs
   534       10,279    9,025
Termination of long-form videos
   —         —      5,267
Payroll costs
   —         6,167    4,734
Depreciation of servers and other equipments
   —         2,503    2,528
Amortization of licensed video copyrights cost
   —         8,012    2,201
Impairment write-down of licensed video copyrights cost
   —         7,740    1,521
In-house developed content costs
   —         1,596    845
Other costs⁽¹⁾
   23       4,162    4,759






Total costs
   557       40,459    30,880






(1) Include primarily advertisement production costs and outside service fees and UGC costs.
Internet bandwidth costs. Internet bandwidth costs are the fees we pay to telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their Internet data centers. Bandwidth is a significant component of our cost of revenues and therefore an important factor affecting our profitability. The ~~following table sets forth certain historical consolidated revenues, by amount and~~bandwidth costs as a percentage of our ~~total~~net revenues decreased from 62.1% for the ~~periods indicated:~~

For the Year Ended December 31,
2008 2007 2006
Percentage Percentage Percentage
Amount of revenues Amount of revenues Amount of revenues
(in thousands of U.S. dollars, except percentages)
Revenues:

Wireless value-added services $ 42,672 79.1 % $ 50,038 82.7 % $ 62,512 91 %
Recorded music 11,287 20.9 % 10,489 17.3 % 6,203 9 %

Total revenues $ 53,959 100.0 % $ 60,527 100.0 % $ 68,715 100.0 %

year ended December 31, 2010 to 47.0% for the year ended December 31, 2011. This decrease was consistent with historical trends of decreasing unit cost of data hosting and transmission services.
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Termination of long-form videos.As a result of the termination of licensing contracts with certain content providers, we charged a one-time termination penalty of $5.3 million in 2011.
Payroll costs. Payroll costs consist of salaries and benefits for our platform operation and content personnel. As the change in business strategy in 2011 improved our cost structure and our operating efficiency, the payroll costs decreased from $6.2 million for the year ended December 31, 2010 to $4.7 million for the year ended December 31, 2011.
~~The following tables show our WVAS revenues~~Depreciation of servers and other equipment. We include depreciation expense for ~~2008, 2007~~servers and ~~2006 by product and mobile operator (including Personal Handy-phone System, or PHS, operators).~~

For the Year Ended December 31, 2008
China China China China
Mobile Unicom Telecom Netcom Others Total
(in millions of U.S. dollars)
SMS $ 9.5 $ 2.4 $ 0.4 $ 0.1 $ 0.9 $ 13.3
IVR 7.2 1.3 3.2 0.2 0.3 12.2
RBT 2.6 1.9 0.5 — — 5.0

2G Revenues 19.3 5.6 4.1 0.3 1.2 30.5

WAP 2.1 4.7 0.6 — — 7.4
MMS 0.8 0.5 0.1 — — 1.4
Java 2.2 — — — 0.1 2.3
WEB — — 0.2 — — 0.2

2.5G revenues 5.1 5.2 0.9 — 0.1 11.3

Other revenues — — — — 0.9 0.9

Total $ 24.4 $ 10.8 $ 5.0 $ 0.3 $ 2.2 $ 42.7

For the Year Ended December 31, 2007
China China China China
Mobile Unicom Telecom Netcom Others Total
(in millions of U.S. dollars)
SMS $ 7.0 $ 2.5 $ 0.2 $ 0.3 $ 1.0 $ 11.0
IVR 13.3 1.2 2.4 0.3 — 17.2
RBT 1.6 1.7 0.4 — — 3.7

2G Revenues 21.9 5.4 3.0 0.6 1.0 31.9

WAP 5.9 6.7 — — — 12.6
MMS 0.7 0.7 — — — 1.4
Java 1.4 — — — — 1.4
WEB — — 2.0 — — 2.0

2.5G revenues 8.0 7.4 2.0 — — 17.4

Other revenues 0.1 — — — 0.6 0.7

Total $ 30.0 $ 12.8 $ 5.0 $ 0.6 $ 1.6 $ 50.0

For the Year Ended December 31, 2006
China China China China
Mobile Unicom Telecom Netcom Total
(in millions of U.S. dollars)
SMS $ 11.3 $ 5.7 $ — $ 0.1 $ 17.1
IVR 5.2 2.5 2.5 0.6 10.8
RBT 2.0 1.3 0.1 — 3.4

2G Revenues 18.5 9.5 2.6 0.7 31.3

WAP 10.4 11.1 — — 21.5
MMS 3.5 0.5 — — 4.0
Java™ 4.4 — — — 4.4
WEB — — 1.3 — 1.3

2.5G revenues 18.3 11.6 1.3 — 31.2

Total $ 36.8 $ 21.1 $ 3.9 $ 0.7 $ 62.5

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~~Wireless Value-added Services~~~~. Our 2G and 2.5G services revenues~~other equipment that are ~~derived from services that we provide~~directly related to our ~~users primarily through the networks of China Unicom, China Mobile, China Telecom~~business operations and ~~China Netcom (prior to its merger with China Unicom). 2G SMS and 2.5G WAP services have historically been~~technical support in our ~~primary source~~cost of revenues. Our ~~sales~~depreciation expense increased significantly from nil in ~~2008~~2009 to $2.5 million in 2010 and $2.5 million in 2011 as we made substantial investments in building up our CDN infrastructure in 2010 after our acquisition of ~~2G SMS increased by 20.9% while IVR decreased by 29.1% as compared with 2007 primarily due to a decrease~~Ku6 Holding. We may invest in ~~promotion activities. Sales~~additional servers and other equipment in ~~2008 of 2.5G WAP and MMS decreased as compared to 2007 due in part to~~ the ~~impact during the year of marketing restrictions on our WVAS activities following the Sichuan earthquake in May and the restructuring of China Unicom in 2008.~~
~~Recorded Music~~. Our recorded music revenues are derived from artist development, music production, offline music distribution, and online music distribution through WVAS and the Internet, which accounted for approximately 20.9% of our total revenues in 2008.
~~Cost of Revenues~~
~~The following table sets forth certain historical consolidated cost of revenues data by amount for the periods indicated:~~

For the Year Ended December 31,
2008 2007 2006
(in thousands of U.S. dollars)
Cost of Revenues:

Wireless value-added services $ 32,840 $ 36,394 $ 40,672
Recorded music 6,730 6,233 3,553

Total cost of revenues $ 39,570 $ 42,627 $ 44,225

~~Wireless value-added services.~~The principal cost of revenues for our WVAS is the service and network fees paid to the telecom operators under our network service agreements with them. The cost of revenues also includes fees paid to our content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.
~~Recorded Music~~~~. Cost of revenues for our recorded music includes producing CD masters, artist and songwriter royalties, advertising and royalties payable to other parties for the use of their work.~~
~~Gross Profit Margin~~
~~The following table sets forth the historical consolidated gross profits and gross profit margin of our business activities for the periods indicated:~~

For the Year Ended December 31,
2008 2007 2006
(in thousands of U.S. dollars, except percentages)
Gross Profits:

Wireless value-added services $ 9,832 $ 13,644 $ 21,840
Recorded music 4,557 4,256 2,650

Total gross profits $ 14,389 $ 17,900 $ 24,490

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For the Year Ended December 31,
2008 2007 2006
Gross Profit Margin:

Wireless value-added services 23.0 % 27.3 % 34.9 %

Recorded music 40.4 40.6 42.7

Total gross profit margin 26.7 % 29.6 % 35.6 %

~~The gross profit margins for our WVAS declined in 2008 compared to 2007 due to sharply decreased revenues~~future, as a result of ~~sales declines~~which our depreciation expense may continue to increase.
Amortization and write-down of licensed video copyrights. The licensed video copyrights are carried at the lower of unamortized cost or net realizable value and are amortized over their respective licensing periods as there is no limit of the showings of the licensed videos and we cannot reliably estimate the future number of showings for the licensed videos. We estimate the expected cash inflows that are directly attributed to the contents licensed under the net realizable value approach. We write down the carrying value of the licensed content to net realizable value if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying value. Amortization and write-down expenses were $8.0 million and $7.7 million, respectively, for the year ended December 31, 2010 and $2.2 million and $1.5 million, respectively, for the year ended December 31, 2011. As of each of December 31, 2010 and 2011, the carrying value of licensed video copyrights was written down to nil. The decrease in ~~our WAP services caused in part by~~ the ~~restructuring~~amortization and write-down of China Unicom and the higher costs associated with developing new distribution channels. The gross profit margins for our recorded music remained relatively stable from 2006 to 2008, with slight decreases in 2007 and 2008 aslicensed video copyrights was primarily a result of the ~~national~~change in our business focus onfrom long-form videos to UGC.
In-house developed content costs. In-house developed content costs represent costs related to the ~~2008 Beijing Olympic Games which reduced music promotions~~production of our news, reports and ~~events.~~
interactive entertainment programs, but do not include any salaries and benefits paid to our employees. Video production (which mainly include direct production costs and production overhead) costs are capitalized, if meeting the capitalization criteria. During the year ended December 31, 2011, the video production costs did not meet the criteria for capitalization and as a result all the video production costs have been expensed as incurred. The decrease in in-house developed content costs was consistent with our cost structure under the new business model.
Operating Expenses
The following table sets forth certain historical consolidated operating expenses data, in terms of amount ~~and as a percentage~~ of our total revenues, for the periods indicated:

For the Year Ended December 31,
2008 2007 2006
Percentage Percentage Percentage
Amount of revenues Amount of revenues Amount of revenues
(in thousands of U.S. dollars, except percentages)
Operating Expenses:

Product development expenses (including stock-based compensation expense of $40, $1 and $80 for the years ended December 31, 2008, 2007 and 2006, respectively) $ 992 1.8 % $ 2,028 3.4 % $ 2,169 3.2 %
Selling and marketing expenses (including stock-based compensation expense of $621, $287 and $346 for the years ended December 31, 2008, 2007 and 2006, respectively) 9,132 16.9 11,514 19.0 11,014 16.0
General and administrative expenses (including stock-based compensation expense of $284, $155 and $118 for the years ended December 31, 2008, 2007 and 2006, respectively) 11,984 22.2 9,141 15.1 6,699 9.7
Provision for goodwill impairment 2,675 5.0 38,779 64.1 — —
Gain on reduction of Unicom liability (1,557 ) (2.9 ) — — — —
Gain from reversed litigation expenses (557 ) (1.0 ) — — — —

Total operating expenses $ 22,669 42.0 % $ 61,462 101.6 % $ 19,882 28.9 %

   Year Ended December 31,
   2009    2010    2011
   (in thousands of U.S. dollars)
Operating Expenses

Product development
   —         —         2,693
Selling and marketing
   665       16,196       11,817
General and administrative
   6,465       13,507       23,402






Total operating expenses
   7,130       29,703       37,912






Product Development ~~Expenses~~Expenses.. Product development expenses consist primarily ~~consist~~ of ~~research~~salaries and ~~development staff costs related to our WVAS business. Most of our~~benefits for product development expenses relate to enhancing our portfolio of 2G and 2.5G services. Product development expenses also include depreciation and amortization of computers and software related to the activities of our product development teams. We depreciate our computer equipment, software and other assets on a straight-line basis over their estimated useful lives, which are three to five years.
personnel, including share-based compensation costs.
Selling and Marketing ~~Expenses~~Expenses.. Selling and marketing expenses consist primarily ~~consist~~ of ~~staff costs related to managing the development of our service offerings. These expenses also include advertising,~~ sales and marketing personnel payroll compensation and related employee costs, advertising and market promotion expenses, ~~such as~~and other overhead expenses ~~associated with sponsoring promotional events, salaries~~incurred by our sales and ~~benefits for our direct sales force, free trial services we offer through, for example, certain retailers of mobile phones in China.~~
marketing personnel.
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General and Administrative ~~Expenses~~Expenses.. General and administrative expenses consist primarily ~~consist~~ of ~~stock-based compensation~~salary and benefits for our management, salaries for our finance and administrative personnel, professional service fees, lease expenses, other office expenses, expenses related to depreciation of equipment for general corporate purposes and expenses related to amortization of intangible assets from our acquisitions and any impairment write-downs of such assets.
~~We lease bandwidth from telecom operators’ provincial offices. Bandwidth and server custody fees, office rentals and depreciation charges allocated to our~~ general management, finance and administrative personnel, ~~are also included in general~~bad debt provision, litigation accrual, depreciation, amortization and ~~administrative expenses.~~
~~We depreciate leasehold improvements, which are recorded as general and administrative expenses on a straight-line basis over the relevant lease term.~~
~~Stock-based Compensation.~~We grant equity incentive awards to our employees and certain non-employees. Until February 2006, when we commenced granting non-vested shares, all of our equity incentive grants were in the form of stock options. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under this method, stock-based compensation expense recognized beginning January 1, 2006 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006 based on the fair market value as of the grant date, measured in accordance with SFAS 123, “Accounting for Stock-based Compensation,” and (b) compensation expense for all stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant date fair value estimated in accordance with the provisions of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies. We have applied SAB 107 in our adoption of SFAS 123(R). We recognize stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting period of the award.
On February 7, 2006, Hurray! granted awards of 330,000 ADSs, equal to 33,000,000 ordinary shares that vest over a period of time (which we refer to herein as “non-vested shares” ) to certain employees pursuant to its 2004 Share Incentive Plan (the “2004 Plan”). This resulted in stock-based compensation expense of $1.6 million to be recognized over the applicable vesting period. These non-vested shares vest on an annual basis equally over three years.
On June 20, 2006, Hurray! granted 75,000 ADSs, equal to 7,500,000 non-vested shares to certain employees which resulted in stock-based compensation expense of $0.3 million to be recognized over the applicable vesting period. These non-vested shares vest on an annual basis equally over 34 months.
On March 14, 2007, Hurray! granted 20,000,000 non-vested shares to its employees which resulted in stock-based compensation expense of $0.6 million to be recognized over the applicable vesting period. These non-vested shares vest over three years on an annual basis equally.
On November 23, 2007, Hurray! granted 19,500,000 non-vested shares to its employees which resulted in stock-based compensation expense of $0.4 million to be recognized over the applicable vesting period. These non-vested shares vest over three years on an annual basis equally.
~~The stock-based compensation expense was $ 0.9 million, 0.4 million, $0.5 million in 2008, 2007 and 2006, respectively.~~
~~Provision for Impairment of Goodwill and Intangible Assets.~~~~During the third quarter of 2008, we performed~~ impairment testing for our recorded music business due to ongoing challenging business conditions and a reduction in the number of concerts and other music events caused by the national focus on the 2008 Olympic Games in Beijing, coupled with the decline in the market price of the Company’s ADSs. At December 31, 2008, we again performed impairment testing. In aggregate, we recorded impairment charges for goodwill of $2.7 million and write-downs of intangible assets, ~~of $2.9 million for 2008. The valuation of the reporting units was arrived at using an income approach (discounted cash flows)~~professional service fees, share-based compensation, office rental fees, and ~~corroborated by a market value approach (with comparisons to selected publicly traded companies operating in the same industry).~~
In the second quarter of 2007, the telecom operators introduced various new policies that adversely impacted our WVAS business and introduced further uncertainties in our operating environment. By September 30, 2007, our market capitalization was lower than our net book value, thus indicating impairment of our long-lived assets. As of that date, we tested the carrying value of goodwill and acquired intangible assets and recorded a goodwill impairment charge of $9.6 million and an impairment charge to acquired intangibles of $0.6 million. In view of the further decline of Hurray’s market capitalization as of December 31, 2007 and continued difficult operating conditions, we recorded an additional goodwill impairment charge of $29.2 million and an additional impairment charge to acquired intangible assets of $1.9 million. The impairment charges of acquired intangibles are included in operating expenses according to their nature.
other expenses.
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~~Any continued adverse changes in the telecom operators’ policies or in the competitive environment could lead to additional impairment charges.~~
The valuations of the reporting units were arrived at using an income approach (discounted cash flows) and corroborated by a market value approach (with comparisons to selected publicly traded companies operating in the same industry).
~~Gain on Reduction of Unicom Liability.~~In the second quarter of 2008, the Company benefited from a waiver of $1.56 million in alliance membership fees we had accrued under a 2005 agreement with China Unicom in respect of promotional and marketing activities, which China Unicom terminated.
~~Gain from Reversed Litigation Expenses.~~~~In the fourth quarter of 2008, we reversed expenses amounting to $0.6 million for prior years’ litigation due to the expiration of a petition period for certain pending litigation.~~
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We have summarized our accounting policies below that we believe are both important to an understanding of our financial results and involve the need to make estimates about the effect of matters that are inherently uncertain. We also have other policies that we consider to be key accounting policies. However, these policies do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.
~~Revenue Recognition~~Business Combinations and Non-controlling Interests
~~Wireless value-added services.~~
We ~~contract with~~account for our business combinations using the ~~telecom operators for~~purchase method of accounting. This method requires that the ~~transmission~~acquisition cost to be allocated to the assets, including separately identifiable intangible assets, and liabilities we acquired based on their estimated fair values. Any non-controlling interest was reflected at historical cost. Where the consideration in an acquisition includes contingent consideration the payment of ~~wireless services~~which depends on the achievement of certain specified conditions post-acquisition, contingent consideration was not recorded until the contingency was resolved.
From January 1, 2009, we adopted ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”). Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as ~~for billing~~the contingent considerations and ~~collection services.~~all contractual contingencies as of the acquisition date. The ~~telecom operators provide us~~costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
Revenue Recognition
In accordance with ASC 605, “Revenue Recognition,” we recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.
Our revenues are derived principally from online brand advertising arrangements, where the advertisers (including third parties and related parties) pay to place their advertisements on our online video platform in different formats. Such formats generally include banners, buttons, links, pre-roll or post-roll video advertisements.
Advertising contracts are signed to establish the price and advertising services to be provided. Advertisements are charged either based on the agreed measurement numbers, including but not limited to impressions and clicks, or fixed during a ~~monthly statement that represents~~determined period of time. In the ~~principal evidence that~~former case, the delivery of service ~~has been delivered and triggers revenue recognition for a substantial portion of our revenue.~~occurs when those measurement numbers are achieved. In ~~certain instances, when a statement~~the latter case, the delivery is not ~~received within a reasonable period~~linked to advertisement displays, but occurs over time.
Under the arrangements with advertisers where the advertisement placement includes different formats to be delivered over different periods of time, ~~we make an~~our revenue is accounted for using the guidance under ASC 605-25 “Multiple Element Arrangements” as such revenue arrangements involve multiple deliverables to the advertisers. We sell the advertising services over a broad price range. We use our best estimate of the selling price of each component of bundled advertising arrangements for separate units of accounting.
Under the arrangements with our advertising agency Shengyue, an affiliate wholly owned by Shanda Interactive, components of the arrangement include an arrangement for guaranteed advertising revenue and an arrangement for sharing of excess advertising revenues ~~and cost~~after deducting commission fees earned by Shengyue based upon increasing percentage for additional tiers of ~~services earned during the period covered~~revenue. The guaranteed advertising revenues are recognized ratably over varying service periods as governed by the ~~statement based on its internally generated information, historical experience and/or other assumptions that are believed to be reasonable under the circumstances.~~
~~WVAS~~specific agreements with Shengyue. Any excess advertising revenues ~~are derived~~realized from ~~providing personalized media, games, entertainment and communication services to mobile phone customers of the various subsidiaries of the telecom operators. Fees for~~ these ~~services,~~arrangements, which are ~~negotiated in network~~not subject to any refundability or contingency provisions from us to Shengyue, would be recognized ratably over the remaining service ~~agreements with~~periods when a reliable estimate of excess revenues above the ~~telecom operators~~minimum guarantee is established. We report the revenues earned from both Shengyue and indicated in the message received on the mobile phone, are charged on a per-use basis or on a monthly subscription basis, and vary according to the type of services delivered. We recognized WVAS revenues in the period in which the services are performed net of business taxes of $1.4 million, $1.5 million and $1.7 million for 2008, 2007 and 2006, respectively.
~~We measure our revenues~~third-party advertising agencies based on the ~~total~~net amount ~~paid by mobile phone~~after considering the indicators to record revenues gross versus set forth in ASC 605-45.
We make credit assessments of customers to assess the collectability of contract amounts prior to entering into contracts. For those contracts for which ~~the telecom operators bill~~collectability was assessed as not reasonably assured, we recognize revenue only when cash is received and ~~collect on our behalf. Accordingly, the service fee paid to the telecom operators is included~~all revenue recognition criteria are met.
For revenue arrangements contracted with third-party advertising agencies, we provide cash incentives in the ~~cost~~form of ~~revenues. In addition, in respect of 2G services, the telecom operators charge us a network fee~~rebates based on volume and performance, and account for such incentives as a ~~per message fee, which varies depending on the volume~~reduction of ~~messages sent~~revenue in accordance with ASC 605-50-25. The cash incentives to third-party advertising agencies in the ~~relevant month, multiplied~~year ended December 31, 2010 and 2011 were $5.4 million and $1.4 million, respectively.
Allowances for Doubtful Accounts
We determine the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account an aging analysis of the ~~excess~~accounts receivable balances, historical bad debt records, repayment patterns in the prior year and other factors such as the policies of ~~messages sent over messages received. These network fees are likewise retained by the telecom~~ operators and are reflected as cost of revenues. The cost of revenues also includes fees paid to our content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.
~~We evaluate our cooperation arrangements with the telecom operators to determine whether to recognize our revenues on a gross basis or net~~financial condition of the service fees and net transmission charges paid to the telecom operators. Our determination is based upon an assessment of whether we act as a principal or agent when providing our services. We have concluded that we act as principal in the arrangement. Factors that support our conclusion mainly include:
~~we are the primary obligor in the arrangement;~~
~~we are able to establish prices within price caps prescribed by the telecom operators to reflect or react to changes in the market;~~
48
~~we determine the service specifications of the services we will be rendering;~~
~~we are able to control the selection of our content suppliers; and~~
the telecom operators usually will not pay us if users cannot be billed or if users do not pay the telecom operators for services delivered and, as a result, we bear the delivery and billing risks for the revenues generated with respect to our services.
Based on these factors, we believe that recognizing revenues on a gross basis is appropriate. However, as noted above, our reported revenues are net of bad debt charges that have been deducted by the telecom operators.
We recognize revenue for a portion of our 2G services (as well as for a smaller portion of our 2.5G services) on an accrual basis in order to report our quarterly earnings on a timely basis. This involves the use of estimates of monthly revenues based on our internal records for the month and prior monthly confirmation rates with the telecom operators in prior months if we are unable to obtain actual figures from the telecom operators before we finalize our financial statements. We expect the effect of these estimates on our financial results will be more significant on our quarterly results of operations than on our annual results, as we are less likely to receive confirmation on all of our 2G revenues before we disclose our quarterly results. To the extent that our revenues have not been confirmed by the telecom operators for any reporting period, we will need to adjust our revenues in the subsequent periods in which these revenues are confirmed. Forcustomer. During the years ended December 31, ~~2006, 2007~~2009, 2010 and ~~2008,~~2011, we recorded allowances for doubtful accounts of $3.8 million, $1.5 million and $3.5 million, respectively. As of December 31, 2011, the ~~differences between~~balance of our ~~recorded revenue based on such estimates~~allowance for doubtful accounts was $4.4 million.
Video Production and ~~actual revenue confirmed subsequently have been immaterial.~~
~~Recorded Music~~Acquisition Costs~~. We~~
Following the guidance under ASC 926-20-25, video production (which mainly include direct production costs and production overhead) and acquisition costs are incapitalized, if meeting the ~~business~~capitalization criteria, and stated at the lower of artist development, music production, offline music distribution and online distribution through WVAS and the Internet. Recorded music revenues are derived from live performances, corporate sponsorship and advertising, online and wireless sales, and offline CD sales.
~~We generate revenues from the sale of CDs either by providing the CD master~~unamortized cost or estimated fair value.
With respect to ~~a distributor or by directly arranging for the volume~~ production and ~~subsequent wholesale~~acquisition costs, until we can establish estimates of secondary market revenues, capitalized costs for each video produced are limited to the CDs. In the former case, we receive a fixed fee, have no further obligations and recognize the fee as revenue when the master CD is provided. In the latter case, we ship the produced CDs to retail distributors and recognize wholesaleamount of revenues ~~at the time of shipment less a provision~~contracted for ~~future estimated returns. In 2008, the estimated sales returns rate was approximately 19% based on past experience.~~
We recognize artist performance fees and corporate sponsorship or marketing event fees once the performance or the service has been completed. Where we act as the primary obligor in the transaction, revenues are recorded on a gross basis. Where we are considered an agent or where the artists separately contract with the event organizer, revenues are recorded on a net basis.
We license our music to third parties for guaranteed minimum royalty payments, normally received upfront and typically non-refundable. In such cases we recognize such fees as revenue on a straight-line basis over the life of the license and unrecognized revenues are included in liabilities. When the contract provides for additional payments if revenues exceed the minimum amount guaranteed, such amounts are included in revenues when we are notified of our entitlement to additional payments.
~~We incur~~that video. The costs in producing CD masters, volume CD production, artist and songwriter royalties, and royalties payable to other parties for the use of their work. The cost of record masters and volume CD productions, and royalties paid in advance are recorded in prepaid expenses and other current assets when the sales of the recording are expected to recover the cost and amortized as costexcess of revenues ~~over the revenue generating period, typically within one year. The decision to capitalize~~contracted for that video are expensed as incurred on an ~~advance to an artist, songwriter or other party requires significant judgment~~actual basis, and are not restored as ~~to the recoverability~~assets in subsequent periods. Once we can establish estimates of ~~these advances. Advances for royalties and other capitalized costs are regularly assessed for recoverability.~~
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~~Stock-based Compensation Cost~~
We grant equity incentive awards to our employees and certain non-employees. Until February 2006 when we commenced granting non-vested shares, all of our equity incentive grants were in the form of stock options.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method and therefore have not restated results for prior periods. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006 based on the fairsecondary market ~~value as of the grant date, measured~~revenues in accordance with ~~SFAS 123,~~ASC 926-20-35-5(b), we capitalize subsequent film costs.
Capitalized video production and ~~(b) compensation expense for all stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant-date fair value estimated~~acquisition costs are amortized in accordance with the ~~provisions~~guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of ~~SFAS 123(R).~~the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. We ~~recognize stock-based compensation~~estimate total revenues to be earned, or ultimate revenues, throughout the life of a video. Ultimate revenue estimates for the produced videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self-produced content are based upon assumptions about future demand and market conditions. The capitalized costs onare subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than its unamortized costs. During the year ended December 31, 2011, video production and acquisition costs did not meet the criteria for capitalization and as a ~~straight-line basis~~result all the video production costs have been expensed as incurred.
Licensed Video Copyrights
The licensed video copyrights are amortized over ~~the requisite service~~their respective licensing periods. The amortization period of the ~~award,~~licensed video copyrights mainly ranged from one year to three years for all periods presented.
The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, we determine the expected cash inflows that are directly attributed to the premium content category, which ~~is generally~~comprises the ~~vesting period~~expected revenues directly attributable to the content category less the direct costs to deliver the content to derive the net realizable value of the ~~award. Prior to~~asset. We write down the ~~adoption~~carrying value of ~~SFAS 123(R), we recognized stock-based compensation expense in accordance with APB 25. In March 2005,~~ the ~~SEC issued SAB 107 regarding~~licensed content if the ~~SEC’s interpretation of SFAS 123(R) and~~estimated net future direct cash inflows from the ~~valuation of stock-based payments for public companies. We have applied the provisions of SAB 107 in the adoption of SFAS 123(R).~~
~~We recognize the compensation costs net of a forfeiture rate and recognize the compensation costs for those options and non-vested shares expected to vest on a straight-line basis~~licensed video copyrights over the ~~requisite service~~licensing period ofare lower than the award, which is generally the vesting 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 share-based compensation expense to be recognized in future periods.
carrying amount.
Goodwill and Intangible Assets Impairment
We test goodwill for impairment by reporting unit on an annual basis or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of the goodwill below their carrying amount. We performperforming a two-step goodwill impairment test. The first step compares the calculated fair ~~values~~value of ~~each~~a reporting unit to its carrying amount, including goodwill. If ~~the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired~~ and ~~the second step will not be required. If~~only if the carrying amount of a reporting unit exceeds its fair value as per step one, the second step ~~compares~~is executed to compare the implied fair value of the affected reporting unit’s goodwill to the carrying value of ~~a reporting unit’s~~that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. ~~The impairment of goodwill is determined by us estimating~~When available, we use observable market data, including pricing on recent closed market transactions, to determine the fair value ~~based upon~~of the ~~present~~reporting units and compare with carrying amount of the reporting units to assess any goodwill impairment. The fair value of ~~future cash flows. In estimating~~reporting units was determined based on the ~~future cash flows~~market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, we measure the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach includes using financial metrics and ratios of comparable public companies. When the goodwill was determined to be impaired, we ~~have taken into consideration~~use income approach including discounted cash flow model for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the ~~overall and~~risk profile of the relating industry ~~economic conditions and trends, market risk~~to determine the amount of ~~our company and historical information.~~
any impairment.
We measure impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be ~~recoverable~~recoverable. When these events occur, we assess impairment by comparing the carrying value of the ~~long-lived~~intangible assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the intangible assets.
We measure the fair value of intangible assets based on an in-use premise using the discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the risk profile of the relating industry. If different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different.
During the second quarter of 2009, we performed impairment testing for the music business due to significantly lower than expected performance as a result of the continued challenging business conditions, reduction in number of concerts and other music events. This resulted in an impairment charge for acquired intangible assets of $3.5 million and goodwill of $3.0 million. During the annual goodwill impairment test on December 31, 2009, we also determined that our music segment was impaired due to the continued operation losses, thus necessitating a charge of $0.6 million. The impairment provided in 2009 relating to recorded music businesses have been included in the discontinued operations.
During the annual goodwill impairment test on December 31, 2010, we performed an impairment test at the reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, 2010.
During the second quarter of 2011, we performed impairment testing for the online video operations due to a change in our business strategy. This resulted in an impairment charge for acquired intangible assets of $1.4 million. During the annual impairment test on December 31, 2011, we performed an impairment test at reporting unit level relating to acquired intangible assets and goodwill and concluded that there was no additional impairment required as to the carrying value of intangible assets and goodwill as of December 31, 2011.
Business Tax and Related Surcharges
Our subsidiaries and consolidated affiliated entities are subject to business tax and related surcharges and value-added tax on the revenues earned for services provided in the PRC. The applicable business tax rate for advertising business is 5% based on the gross advertising revenue before deducting the advertising agencies rebate. In the accompanying consolidated statements of operations, business tax and related surcharges for advertising revenues are deducted from gross revenues to arrive at net revenues when incurred.
Share-based Compensation
We apply ASC 718 “Stock Compensation” (formerly referred to as Statement of Financial Accounting Standard 123(R), or SFAS123(R), which requires all share-based payments to employees and directors, including grants of employee stock options and restricted shares, to be recognized as compensation expense in the financial statements over the vesting period of the award based on the fair value of the award determined at the grant date. The valuation provisions of ASC 718 apply to new awards, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. Under ASC 718, the number of share-based awards for which the service is not expected to be rendered for the requisite period should be estimated, and the related compensation cost not recorded for that number of awards.
In accordance with ASC 718, we have recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions.
We grant equity incentive awards to our employees. We recorded share-based compensation expenses of $1.9 million and $1.8 million in 2010 and 2011, respectively. The share-based compensation expenses in 2010 included one-time compensation expenses of $1.3 million relating to incremental value of the ordinary shares issued by us to replace the options issued by Ku6 Holding before its acquisition by us. The share-based compensation expenses in 2011 included one-time compensation expenses of $0.5 million relating to the 20% interest in Yisheng that we gave to a former employee which is now the chief executive officer of Yisheng. Our share-based compensation expenses are included in our operating expenses as well as cost of revenue.
Income Taxes and Valuation allowances
Current income taxes are provided for on the taxable income of each subsidiary on the separate tax return basis in accordance with the relevant tax laws. Our PRC subsidiaries and consolidated affiliated entities are generally subject to a corporate income tax rate of 25% under the EIT Law. We are not subject to income tax under the Cayman Islands law.
Deferred income taxes are provided using the liability method in accordance with ASC 740 (formerly referred to as SFAS No. 109, “Income Taxes
~~Deferred~~”). Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ~~We determine whether or not a valuation allowance is required at the level of each taxable entity. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.~~
~~In June 2006, the Financial Accounting Standards Board (“FASB”) issued~~
ASC 740-10-25 (formerly referred to as Interpretation No. 48, (“or FIN ~~48”), “Accounting~~48, “Accounting for Uncertainty in Income ~~Taxes —~~ Taxes—an interpretation of FASB Statement No. ~~109”. FIN 48~~109”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ~~FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. Our company adopted FIN 48 effective January 1, 2007.~~ The adoption of ~~FIN 48~~ASC 740-10-25 did not result in a cumulative adjustment onto the opening balance of retained earnings as of January 1, ~~2007~~2007. We do not have any liabilities for unrecognized tax benefits as of December 31, 2010 or 2011. Were we to have such liabilities, interest and ~~had no~~penalties would be recognized for the tax purpose.
Contingency
We are subject to contingencies, such as legal proceedings and claims arising out of our business that cover a wide range of matters in the normal course of our business. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated by us. As of December 31, 2011, we estimated and accrued $2.7 million for liabilities arising from alleged copyright infringements.
Going Concern
We operate with significant ~~impact~~losses and negative cash flows from operations in recent years. As of December 31, 2011, our accumulated deficit was $132.4 million and our net current assets were $21.2 million. On April 1, 2011, we entered into agreements with Shanda Media, pursuant to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share) and $50,000,000 aggregate principal amount of senior convertible bonds at face value. Since mid-2011, we have adjusted our business strategy by substantially reducing our sales force and ceasing to purchase long-form videos. Based on the implementation result of our adjusted strategy in the second half of 2011, we anticipated that the cash outflow from both operations and investment would likely be substantially reduced in 2012. Based on our ~~accounting~~anticipated working capital position, we redeemed the convertible bonds on September 30, 2011. We believe that we have sufficient cash to fund operations and capital expenditures for at least the next 12 months. Accordingly, our consolidated financial statements have been prepared on a going-concern basis.
Results of Operations
As mentioned above in the section of “Critical Accounting Policies,” the financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control on August 31, 2009 and the operating results of WVAS and recorded music were presented as “Results of Discontinued Operations” in the income ~~taxes~~statements for the ~~year~~years ended December 31, ~~2007~~2009, 2010 and 2008. We did not incur any interest or penalties related to potential underpaid income tax expenses, and also do not expect to have a significant increase or decrease in our unrecognized tax benefits within 12 months from December 31, 2008.
2011.
50
In March 2007, the National People’s Congress of China enacted the New EIT Law, which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of 25% and unified tax deduction standards are applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a preferential tax rate of 15% according to the then effective PRC Enterprise Income Tax Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations are subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition, certain qualified enterprises may still benefit from a preferential tax rate of up to15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state as set out in the Implementation Rules. As a result, if our PRC subsidiaries and VIEs qualify as high and new technology enterprises strongly supported by the state under the new EIT Law, they will continue to benefit from a preferential tax rate of up to 15%. Otherwise, the applicable tax rate of our PRC subsidiaries and VIEs is 25% starting from 2008 under the New EIT system. At December 31, 2008, four of our subsidiaries and VIEs were approved as qualified high and new technology enterprises, which approvals entitle them to preferential tax rate tax exemption or reduced rate according to the New EIT Law and transitional rules ranging from 7.5% to 15% for the three years ending on December 31, 2010. While the high and new technology enterprise certificates are valid for three years, we believe based on currently available information that we will be able to reapply successfully for the renewal of the current certificates as we believe we will continue to meet the published criteria. Accordingly, these four entities have used the reduced applicable tax rate in calculations of deferred tax balances for the foreseeable future. However, we cannot be certain that such applications will be successful. In addition, our qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture and Secular Bird, were entitled to a tax exemption in 2008. We have used the new standard rates for our other affiliated Chinese entities. Deferred taxes have been calculated using the tax rates that apply to the relevant companies.
The EIT Law includes a provision specifying that legal entities organized outside China will be considered residents for Chinese income tax purposes if their place of effective management or control is within China. If legal entities organized outside China were considered residents for Chinese income tax purposes, they would become subject to the EIT Law on their worldwide income. This would cause any income generated by the legal entities organized outside China to be subject to China’s 25% EIT. The implementation rules to the EIT Law provide that non-resident legal entities will be considered to be China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. reside within China. Pursuant to the additional guidance released by the Chinese government on April 22, 2009, management does not believe that the legal entities organized outside China should be characterized as China tax residents for EIT Law purposes.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to the overseas holding companies by their PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation rules which became effective on January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors who are non-resident enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
~~Results of Operations~~
The following discussion of our results of operations for the years ended December 31, ~~2006, 2007~~2009, 2010 and ~~2008~~2011 is based upon our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.
However, since the results for the year ended December 31, 2009 did not include the results of our online video business and included only the results of our online audio business from August 31, 2009 to December 31, 2009, the results for the year ended December 31, 2010 included the results of our audio business for the full year and the results of our online video business from January 18, 2010 to December 31, 2010, and the results for the year ended December 31, 2011 included the results of our online video business for the entire year and the results of our online audio business from January 1, 2011 to August 2011 when we began to account for our retained portion of this business under the equity method, the following discussion may not be meaningful for you to understand the trends of our continuing operations. See “—Unaudited Consolidated Pro Forma Statements of Operations” for a supplemental comparison of 2009 and 2010 results on a pro forma basis.
Year Ended December 31, ~~2008~~2011 Compared to Year Ended December 31, ~~2007~~2010
Net Revenues.~~Our~~Net revenues ~~declined 10.9%~~increased by 16.1% to ~~$54.0~~$19.2 million in ~~2008~~2011 from ~~$60.5~~$16.6 million in ~~2007.~~2010. This ~~decrease~~increase was primarily due to a ~~decline~~growth in ~~demand~~revenues generated from performance advertising. We began to generate revenue from performance advertising in the second quarter of 2011, which contributed approximately 38% of our total net revenues in 2011. Net revenues for ~~WVAS in 2008.~~
~~Wireless Value-added Services~~~~. Revenues~~the year ended December 31, 2011 consisted of revenues generated from our ~~WVAS declined 14.7%~~online video business for the entire year and revenues generated from our online audio business from January 1, 2011 to ~~$42.7 million~~August 2011 when we began to account for ~~2008~~our retained portion of this business under the equity method. Net revenues for the year ended December 31, 2010 consisted of revenues generated from ~~$50.0 million~~our online video business since January 18, 2010 and revenues generated from our online audio business for ~~2007, primarily due to a decline in~~ the Company’s IVR and WAP services. IVR revenues were $12.2 million in 2008, a decline of 29.2% from $17.2 million for 2007. WAP revenues were $7.5 million in 2008, a decline of 40.6% from $12.6 million for 2007. SMS and Java™ revenues were $13.5 million and $2.2 million in 2008, an increase of 21.6% and 60.0% from $11.0 million and $1.4 million for 2007, respectively.
entire year.
51
~~Recorded Music.~~In 2007, we expanded our recorded music segment by acquiring 65% of Secular Bird, an independent record label in China, and through Freeland Music, 51% of Fly Songs, a performance and concert organizer and had a full year’s contribution from them in 2008. Revenue from recorded music was $11.3 million in 2008, an increase of 7.6% from $10.5 million for 2007.
Cost of Revenues.~~Our cost~~ Cost of revenues ~~declined 7.2%~~decreased by 23.7% to ~~$39.6~~$30.9 million in ~~2008~~2011 from ~~$42.6~~$40.5 million in 2007 due primarily to decreased costs for our WVAS as our WVAS revenues declined. Our decrease in cost of revenue was partly offset by increased costs of our recorded music business as that business grew.
~~Wireless value-added Services~~~~. Our cost of WVAS declined 9.8% to $32.8 million for 2008 from $36.4 million for 2007.~~2010. This ~~decrease resulted primarily from less amount paid to PRC telecommunications operators as our WVAS revenues decreased and less promotion costs~~
~~Recorded Music.~~Our cost of recorded music increased 8.0% to $6.7 million for 2008 from $6.2 million for 2007. This increase resulted primarily from increased commercial development and artists’ performance cost in 2008.
~~Gross Profits.~~Our gross profits decreased 19.6% to $14.4 million for 2008 from $17.9 million for 2007, mainly due to the decreased profits from WVAS. Our gross profit margins decreased to 26.7% for 2008 from 29.6% for 2007, due primarily to decreased margins for WVAS resulting from declining sales of our higher margin WAP services and increased marketing, promotion and distributions costs related to SMS and IVR services.
~~Operating Expenses~~. Operating expenses were $22.7 million for 2008, which included impairment for goodwill of $2.7 million and a write-down for intangible assets of $2.9 million, a gain on reduction of Unicom liability of $1.6 million and a gain from reversed litigation expenses of $0.5 million due to the expiration of a petition period for certain pending litigation, representing a decrease by 63.1% from $61.5 million for 2007, which included impairment charges of $41.3 million.
~~Product Development Expenses.~~Our product development expenses decreased 51.1% to $1.0 million in 2008 from $2.0 million in 2007, mainly due to the restructuring of our research and development departments in March 2008 which lowered our staff costs.
~~Selling and Marketing Expenses~~~~. Our selling and marketing expenses decreased 20.7% to $9.1 million in 2008 from $11.5 million in 2007. The~~ decrease was mainly attributable to (i) a decrease of $12.0 million in amortization and write-down of licensed video copyrights as we shifted our focus from long-form videos to UGC, (ii) a decrease of $1.4 million in payroll costs as the change in business strategy in 2011 improved our cost structure and our operating efficiency, and (iii) a decrease of $1.3 million in Internet bandwidth costs in 2011 compared to 2010. These were partially offset by a one-time charge of $5.3 million in termination of long-form videos in 2011 due to our change in our business strategy.
Gross Loss.As a result of the ~~fact that we recorded a write-down of $1.8 million for intangible assets of WVAS in 2007 compared~~foregoing, our gross loss decreased by 51.2% to ~~a write-down of $0.4~~$11.7 million in ~~2008.~~
2011 from $23.9 million in 2010.
~~General and Administrative Expenses~~Operating Expenses.~~. Our~~Operating expenses increased by 27.6% to $37.9 million in 2011 from $29.7 million in 2010. This increase was attributable to increases in general and administrative expenses ~~increased 31.1% to $12.0 million~~and product development expenses, partially offset by a decrease in ~~2008 from $9.1 million in 2007. This increase was mainly due to the write-down of intangible assets of $2.5 million in 2008.~~
~~Provision for Impairment of Goodwill~~selling and ~~Intangible Assets.~~We tested the carrying value of goodwill and acquired intangible assets for impairment and recorded an impairment charge of $5.6 million and $41.3 million in 2008 and 2007, respectively. See “-Operating Expenses — Provision for Impairment of Goodwill and Intangible Assets.”
marketing expenses.
•
Product Development Expenses. Product development expenses were $2.7 million in 2011 compared to nil in 2010. This increase was primarily due to payroll costs of $2.2 million for our research and development department newly established in 2011.
•
Selling and Marketing Expenses. Selling and marketing expenses decreased by 27.0% to $11.8 million in 2011 from $16.2 million in 2010. This decrease was primarily attributable to a decrease of $3.6 million in marketing commission and a decrease of $1.2 million in salaries and benefits of sales and marketing staff, partially offset by an increase due to the one-off severance payments of $0.9 million as a result of the restructuring of our sales department.
•
General and Administrative Expenses. General and administrative expenses increased by 73.3% to $23.4 million in 2011 from $13.5 million in 2010. This increase was primarily attributable to (i) a $2.4 million loss from disposal of network equipment due to technological upgrades, (ii) an increase of $2.1 million in provision for copyright lawsuits, (iii) increases of $1.4 million in bad debt provision and $1.4 million in impairment due to abandonment of intangible assets resulting from our changes in business strategies, and (iv) an increase of $1.2 million in annual bonus in 2011 compared to 2010.
Operating Loss from Continuing Operations.As a result of the foregoing, operating loss from continuing operations ~~was $8.3~~decreased by 7.5% to $49.6 million ~~for 2008 compared to loss~~in 2011 from ~~operations of $43.6~~$53.6 million ~~for 2007.~~
in 2010.
Interest ~~Income and Expense~~Income.. Interest income ~~was $1.6 million for 2008, compared to $2.3 million for 2007. Interest expense was nil for 2008 as compared~~increased to $0.2 million in ~~2007, which was related~~2011 from $0.1 million 2010 primarily due to a larger amount of interest-bearing loans provided to Shanda Games in 2011.
Interest Expense.Interest expense increased significantly to $1.1 million in 2011 from $31,134 in 2010 primarily due to the ~~acquisition payables for Shanghai Magma.~~
interest on the senior convertible notes accrued from the issuance date in June 2011 to the redemption date in September 2011 and a larger amount of interest-bearing loans from related parties in 2011.
~~Foreign Exchange loss.~~Other Income, Net.Other net income increased significantly to $1.3 million in 2011 from $3 in 2010. We ~~recorded a foreign exchange~~received government subsidies of $1.3 million in the form of cash subsidies in 2011, which were granted by the local government to encourage development of certain enterprises in the local special economic region.
Income Tax Benefit.Income tax benefit increased to $0.1 million in 2011 from $41,172 in 2010. These amounts represented the deferred income tax benefit from continuing operations.
Equity in Loss of Affiliated Company,Net of Tax. Equity in loss of ~~$9.0~~affiliated company, net of tax, was $0.3 million in ~~2008, arising from the depreciation in value of the Euro against the U.S. dollar.~~
~~Other Income~~~~. Other income, primarily government tax subsidies, was $0.2 and $0.5 million in 2008 and 2007, respectively.~~
~~Income Taxes.~~~~Income taxes were an expense of $0.5 million in 2008 and a benefit of $0.2 million in 2007.~~
~~Equity in Results of Affiliate~~~~. The equity in the income of New Run was $0.06 million in 2008 as~~2011 compared to ~~equity~~nil in ~~the~~2010. This loss was attributable to our disposal of ~~New Run of $0.06 million~~an 80% interest in ~~2007.~~
~~Impairment of Investment~~Yisheng in ~~Music Affiliate.~~August 2011. We ~~tested our investments in our affiliated music company, New Run, (which is~~ accounted for ~~using~~the retained 20% interest under the equity ~~method) for impairment and recorded~~method as we determined that we do not have a ~~write-down of $1.9 million~~controlling financial interest in, ~~2008.~~
but rather possess significant influence on, Yisheng.
52
~~Net~~ Loss from Continuing ~~Operations.~~Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd.Net loss from continuing operations attributable to our company decreased by 6.6% to $49.3 million in 2011 from $52.9 million in 2010.
Income from Discontinued Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd.Net income from discontinued operations attributable to our company was ~~$12.4~~nil in 2011 as we disposed of the discontinued WVAS and recorded music businesses in August 2010. In 2010, we had net income from discontinued operations attributable to our company of $1.3 million due to a net gain from disposal of Huayi Music of $4.5 million, partially offset by a net loss from operations of $3.4 million from the WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the net loss attributable to the non-controlling interests and redeemable non-controlling interests of $0.2 million in 2010.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Revenues. Net revenues increased significantly to $16.6 million in 2010 from $1.0 million in 2009. The increase was primarily attributable to our acquisition of the online video business of Ku6 Holding in January 2010. Revenues for the year ended December 31, 2010 consisted of revenues generated by our online video business since January 18, 2010 and revenues generated by our online audio business for the entire year. Revenues for the year ended December 31, 2009 consisted of revenues generated by our online audio business since August 31, 2009.
Cost of Revenues. Our cost of revenues increased significantly to $40.5 million in 2010 from $0.6 million in 2009. This increase was primarily the result of our acquisition of Ku6 Holding. The cost of revenues in 2010 consisted mainly of Internet bandwidth cost of $10.3 million, amortization and write-down of licensed video copyrights of $15.6 million, and payroll cost relating to platform operation and content of $6.2 million. The cost of revenues in 2009 consisted mainly of Internet bandwidth cost.
Gross Loss. As a result of the foregoing, we had a gross loss of $23.9 million in 2010, compared to a gross profit of $0.5 million in 2009.
Operating Expenses. Operating expenses increased significantly to $29.7 million in 2010 from $7.1 million in 2009. Operating expenses for the year ended December 31, 2010 consisted of operating expenses associated with our online video business since January 18, 2010 and operating expenses associated with our online audio business for the entire year. Operating expenses for the year ended December 31, 2009 consisted of operating expenses associated with our online audio business since August 31, 2009.
•
Selling and Marketing Expenses. Selling and marketing expenses increased significantly to $16.2 million in 2010 from $0.7 million in 2009. This increase was primarily attributable to Ku6 Holding’s higher advertising and marketing expenses, salaries and benefits of sales and marketing staff, sales commission to the sales team, and travelling and entertainment expenses.
•
General and Administrative Expenses. General and administrative expenses increased significantly to $13.5 million in 2010 from $6.5 million in 2009. This increase was primarily attributable to (i) an increase of $1.7 million in amortization of intangible assets arising from the acquisition of Ku6 Holding, (ii) an increase of $1.6 million in bad debt provision due to the expansion of our advertising business as a result of our acquisition of Ku6 Holding, (iii) an increase of $1.6 million in business tax for intercompany transactions, and (iv) an increase of $1.5 million in share-based compensation expenses primarily as a result of the one-time compensation expense of $1.3 million relating to the incremental value of the ordinary shares issued by us to replace the options issued by Ku6 Holding before its acquisition by us, partially offset by a decrease of $2.5 million in consulting and legal expenses which were incurred in 2009 mainly for the tender offer by Shanda Interactive.
Operating Loss from Continuing Operations. As a result of the foregoing, operating loss from continuing operations increased significantly to $53.6 million in 2010 from $6.6 million in 2009.
Loss from Continuing Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd. Net loss from continuing operations attributable to our company was $52.9 million in 2010 compared to $6.0 million in 2009.
Income (Loss) from Discontinued Operations, Net of Tax, Attributable to Ku6 Media Co., Ltd. We had a net income from discontinued operations attributable to our company of $1.3 million in 2010 due to a net gain from disposal of Huayi Music of $4.5 million, partially offset by a net loss from operations of $3.4 million from the WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the net loss attributable to the non-controlling interests and redeemable non-controlling interests of $0.2 million in 2010. In 2009, we had a net loss from discontinued operations attributable to our company of $17.4 million mainly due to a net loss from operations of $21.8 million from the WVAS and recorded music businesses, of which $4.2 million was attributable to the non-controlling interests and redeemable non-controlling interests.
Unaudited Consolidated Pro Forma Statements of Operations
The unaudited consolidated pro forma statements of operations for the years ended December 31, 2009 and December 31, 2010 present our consolidated results of operations giving pro forma effect to the Ku6 Holding and Yisheng acquisitions as if such transactions occurred on January 1, 2009, and after giving effect to purchase accounting adjustments. The unaudited consolidated pro forma financial information is included for informational purposes only and should not be relied upon as being indicative of our results of operations or financial condition had the Ku6 Holding and Yisheng acquisitions occurred on the date assumed. The unaudited consolidated pro forma financial information also does not project the results of operations or financial position for any future period or date.
The following table shows the pro forma statements of operations for the years ended December 31, 2009 and 2010:
   For the Year Ended December 31, 2009
   Ku6 Media
Co., Ltd. Ku6 Holding Yisheng⁽¹⁾ Pro Forma
Adjustments⁽²⁾ Pro Forma
Consolidation
   (in thousands of U.S. dollars, except for share and per share data)
Total net revenues
   1,037    6,225    985    —      8,247
Total cost of revenues
   (557 ) (10,018 ) (428 ) —      (11,003 )


Gross profit (loss)
   480    (3,793 ) 557    —      (2,756 )
Total operating expenses
   (7,130 ) (6,374 ) (1,203 ) (1,962 ) (16,669 )


Operating loss from continuing operations
   (6,650 ) (10,167 ) (646 ) (1,962 ) (19,425 )
Interest income
   356    8    —      —      364
Interest expense
   —      (40 ) (1 ) —      (41 )
Other income, net
   2    2    39    —      43
Foreigin exchange loss
   —      —      —      —      —
Fair value changes in warrant liabilities
   —      186    —      —      186


Loss before income tax benefit from continuing operations
   (6,292 ) (10,011 ) (608 ) (1,962 ) (18,873 )
Income tax benefit
   14    —      —      —      14


Loss from continuing operations, net of tax
   (6,278 ) (10,011 ) (608 ) (1,962 ) (18,859 )


Discontinued operations:

Loss from operations of discontinued operations, net of tax
   (21,778 ) —      —      —      (21,778 )
Gain from disposal of discontinued operations
   222    —      —      —      222


Loss from discontinued operations, net of tax
   (21,556 ) —      —      —      (21,556 )


Loss from continuing and discontinued operations, net of tax
   (27,834 ) (10,011 ) (608 ) (1,962 ) (40,415 )


Less: Net loss attributable to the non-controlling interests from continuing operations
   256    —      —      —      256
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations
   4,183    —      —      —      4,183


Net loss attributable to Ku6 Media Co., Ltd.
   (23,395 ) (10,011 ) (608 ) (1,962 ) (35,976 )


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (6,022 ) (10,011 ) (608 ) (1,962 ) (18,603 )
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (17,373 ) —      —      —      (17,373 )


Net loss attributable to Ku6 Media Co., Ltd.
   (23,395 ) (10,011 ) (608 ) (1,962 ) (35,976 )


(1) The above financial information of Yisheng reflects its results of operations for the period from January 1, 2009 to August 31, 2009, as its results of operations from September 1, 2009 have already been included in the consolidated results of Ku6 Media Co., Ltd.
(2) Represents the incremental amortization expense for the intangible assets resulting from the Ku6 Holding acquisition.
   For the Year Ended December 31, 2010
   Ku6 Media
Co., Ltd. Ku6 Holding (1) Pro Forma
Adjustments⁽²⁾ Pro Forma
Consolidation
Total net revenues
   16,556    232    —      16,788
Total cost of revenues
   (40,459 ) (3,956 ) —      (44,415 )


Gross loss
   (23,903 ) (3,724 ) —      (27,627 )
Total operating expenses
   (29,703 ) (641 ) (154 ) (30,498 )


Operating loss from continuing operations
   (53,606 ) (4,365 ) (154 ) (58,125 )
Interest income
   57    —      —      57
Interest expense
   (31 ) —      —      (31 )
Other income, net
   —      —      —      —
Foreigin exchange loss
   —      (4 ) —      (4 )
Fair value changes in warrant liabilities
   —      —      —      —


Loss before income tax benefit from continuing operations
   (53,580 ) (4,369 ) (154 ) (58,103 )
Income tax benefit
   41    —      —      41


Loss from continuing operations, net of tax
   (53,539 ) (4,369 ) (154 ) (58,062 )
Discontinued operations:

Loss from operations of discontinued operations, net of tax
   (3,382 ) —      —      (3,382 )
Gain from disposal of discontinued operations
   4,486    —      —      4,486


Loss from discontinued operations, net of tax
   1,104    —      —      1,104


Loss from continuing and discontinued operations, net of tax
   (52,435 ) (4,369 ) (154 ) (56,958 )
Less: Net loss attributable to the non-controlling interests from continuing operations
   681    —      —      681
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations
   244    —      —      244


Net loss attributable to Ku6 Media Co., Ltd.
   (51,510 ) (4,369 ) (154 ) (56,033 )


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (52,858 ) (4,369 ) (154 ) (57,381 )
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.
   1,348    —      —      1,348


Net loss attributable to Ku6 Media Co., Ltd.
   (51,510 ) (4,369 ) (154 ) (56,033 )


(1) The above financial information of Ku6 Holding reflects its results of operations for the period from January 1, 2010 to January 17, 2010, as the Ku6 Holding acquisition was completed on January 18, 2010.
(2) Represents the incremental amortization expense for the intangible assets resulting from the Ku6 Holding acquisition.
Year Ended December 31, 2010 (pro forma) Compared to Year Ended December 31, 2009 (pro forma)
Net Revenues. Our pro forma net revenues increased 104% to $16.8 million in 2010 from $8.2 million in 2009. The increase in pro forma net revenues was largely attributable to the growth of our advertising business in 2010, as a result of our marketing efforts, including offering a variety of integrated marketing package to brand advertisers, with the continuous expansion of user base.
Cost of Revenues. Our pro forma cost of revenues increased to $44.4 million in 2010 from $11.0 million in 2009.
   Year ended December 31, 2009
(in thousands)    Year ended December 31, 2010
(in thousands)
   Actual    Pro forma
Adjustments    Pro forma    Actual    Pro forma
Adjustments    Pro forma
Internet bandwidth costs
   534       4,137       4,671       10,279       497       10,776
Amortization and write-down of purchased video copyright cost
   —         1,747       1,747       15,619       2,852       18,471
Payroll cost
   —         2,506       2,506       6,167       350       6,517
In-house developed content costs
   —         —         —         1,596       —         1,596
Depreciation of servers and other equipments
   —         1,278       1,278       2,503       109       2,612
Other costs⁽¹⁾
   23       778       801       4,295       148       4,443












Total costs
   557       10,446       11,003       40,459       3,956       44,415












(1) Includes primarily advertisement production costs and outside service fees and UGC costs.
The $33.4 million increase in our pro forma cost of revenues from 2009 to 2010 was mainly due to (i) an increase from $1.7 million in 2009 to $18.5 million in 2010 of amortization and write-down of purchased video copyright costs, as a result of our significantly increased investment in professional content in 2010 compared to 2009, including licensed video copyrights related to the 2010 FIFA World Cup, the 2010 Asian Games and movies, TV series and other entertainment programs. As of December 31, 2010, the carrying value of our licensed video copyrights was written down to zero. Also, our pro forma bandwidth costs increased 154% from $4.2 million in 2009 to $10.8 million in 2010, due to the growth in our traffic volume as a result of our large content library established in 2010.
Gross Loss. We had a pro forma gross loss of $27.6 million in 2010, compared to a pro forma gross loss of $2.8 million in 2009. This increase in gross loss was largely due to our increases in costs related to both platform operation and content, including Internet bandwidth leasing costs, depreciation expenses, amortization and write-down of licensed video copyrights, in-house developed content costs and related employee costs.
Operating Expenses. Pro forma operating expenses were $30.5 million in 2010, representing an increase of 82.6% from $16.7 million in 2009.
•
Selling and Marketing Expenses. Our pro forma selling and marketing expenses increased to $16.8 million in 2010 from $5.0 million in 2009. The increase in pro forma selling and marketing expenses was the result of higher sales commissions to our sales team tied to sales performance and more marketing promotion activities in 2010 to enhance the reputation of our Ku6.com website.
•
General and Administrative Expenses. Our pro forma general and administrative expenses increased to $13.7 million in 2010 from $11.6 million in 2009 mainly due to the increase of $1.4 million in share-based compensation expenses including one-time compensation expenses of $1.3 million relating to the fair value of ordinary shares issued by us to replace the options issued by Ku6 Holding over the acquisition date fair value of those options attributable to the pre-combination portion in connection with the acquisition of Ku6 Holding. Also the increase of bad debt expenses of $1.6 million due to expansion of our advertising business, business tax of $1.7 million for the intercompany transactions within the group and rental and management expenses of $0.6 million due to relocation and expansion of our office building, was partially offset by the decrease of the consulting and legal expenses for the Shanda tender offer of $2.5 million.
Operating Loss from Continuing Operations. As a result of the foregoing, pro forma operating loss from operations was $58.1 million for ~~2008~~the year ended December 31, 2010 compared to $19.4 million for the year ended December 31, 2009.
Loss from Continuing Operations attributable to Ku6 Media Co., Ltd. Loss from continuing operations attributable to Ku6 Media Co., Ltd. was $57.4 million for 2010 compared to a net loss of ~~$41.5~~$18.6 million for ~~2007~~2009.
.
~~Net~~ Income (Loss) from Discontinued Operations attributable to Ku6 Media Co., Ltd.~~. Effective August 1, 2007, we accounted for our software and systems integration business (“SSI Business”) as a discontinued operation. The net income~~ Income from discontinued operations attributable to us was ~~$0.4 million in 2008 representing the gain recognized on the sale of the SSI Business, compared to net loss of $0.4 million in 2007.~~
~~Net Loss~~~~. As a result of the foregoing, net loss was $12.0~~$1.3 million for 2008, which included a foreign exchange loss of $9.0 million, an impairment charge of $2.7 million for goodwill, an impairment charge of $1.9 million for investment in the music affiliate, and a write-down of intangible assets of $2.9 million, as compared to net loss of $42.0 million for 2007, which included an impairment charge of $41.3 million.
~~Year Ended December 31, 2007 Compared to Year Ended December 31, 2006~~
Our results of operations for the year ended December 31, 2007 compared to the year ended December 31, 2006 were impacted by the inclusion of the operating results for 2007 of Shanghai Saiyu, Henan Yinshan, Secular Bird and Fly Songs, which were acquired in 2007.
~~Revenues.~~~~Our revenues declined 11.9% to $60.5 million in 2007 from $68.7 million in 2006. This decrease was primarily~~2010 due to a ~~decline in demand for WVAS in 2007.~~
~~Wireless Value-added Services~~~~. Revenues~~gain of $4.5 million from the disposal of Huayi Music, offset by a loss of $3.4 million from operations of our WVAS ~~declined 20.0%~~and recorded music businesses for the eight months ended August 31, 2010, after giving effect to ~~$50.0~~the loss attributable to the non-controlling and redeemable non-controlling interests of $0.2 million for ~~2007~~2010. Loss from ~~$62.5~~discontinued operations attributable to us was $17.4 million for 2006, primarily due to the decline in the market for SMS and WAP services. SMS revenues were $11.0 million in 2007, a decline of 35.7% from $17.1 million for 2006. WAP revenues were $12.6 million in 2007, a decline of 41.4% from $21.5 million for 2006. IVR and RBT revenues were $17.2 million and $5.7 million in 2007, an increase of 59.3% and 21.3% from $10.8 million and $4.7 million for 2006, respectively.
~~Recorded Music.~~Recorded music revenues became a new business line for us in 2006. We expanded our recorded music segment by acquiring 65% of Secular Bird, an independent record label in China, and through Freeland Music, 51% of Fly Songs, a performance and concert organizer. Revenue from recorded music was $10.5 million in 2007, an increase of 69.1% from $6.2 million for 2006.
~~Cost of Revenues.~~Our cost of revenues declined 3.6% to $42.6 million in 2007 from $44.2 million in 2006 due primarily to decreased costs for our WVAS as our WVAS revenues declined. Our decrease in cost of revenue was partly offset by increased costs of our recorded music business as that business grew organically and through acquisition.
~~Wireless value-added Services~~~~. Our cost of WVAS declined 10.5% to $36.4 million for 2007 from $40.7 million for 2006. This decrease resulted primarily from decreased promotion costs due to the market.~~
~~Recorded Music.~~Our costs of recorded music increased 75.4% to $6.2 million for 2007 from $3.6 million for 2006. This increase resulted primarily from increased commercial development and artists’ performance cost as well as from our music company acquisitions in 2007.
~~Gross Profits.~~~~Our gross profits decreased 26.9% to $17.9 million for 2007 from $24.5 million for 2006,~~2009 mainly due to ~~the decreased profits~~loss of $21.8 million from WVAS. Our gross profit margins decreased to 29.6% for 2007 from 35.6% for 2006, due primarily to decreased margins for WVAS, which mainly resulted from increased marketing, promotion and distributions costs related to SMS and WAP services.
~~Operating Expenses.~~~~Operating expenses sharply increased by 209.1% to $61.5 million for 2007 from $19.9 million for 2006, due primarily to impairment charges amounting to $38.8 million for~~operations of our WVAS ~~business~~ and ~~additional expenses associated with our new acquisitions in 2007.~~
~~Product Development Expenses.~~~~Our product development expenses decreased slightly to $2.0~~recorded music businesses for the full year of 2009, of which $4.2 million ~~in 2007 from $2.2 million in 2006.~~
~~Selling and Marketing Expenses~~~~. Our selling and marketing expenses slightly increased by 4.5% to $11.5 million in 2007 from $11.0 million in 2006.~~
53
~~General and Administrative Expenses~~~~. Our general and administrative expenses increased 36.4% to $9.1 million in 2007 from $6.7 million in 2006. This increase~~ was ~~mainly due~~attributable to the ~~increased professional service fees~~non-controlling and ~~additional expenses associated with our new acquisitions and to a lesser extent, increased bad debt expense and amortization expense of intangible assets.~~
~~Provision for Impairment of Goodwill and Intangible Assets.~~~~We tested the carrying value of goodwill and acquired intangible assets and recorded an impairment charge of $41.3 million in 2007.~~
~~(Loss)Income from Continuing Operations.~~~~As a result of the foregoing, loss from operations was $43.6 million for 2007 compared to income of $4.6 million for 2006.~~
~~Interest Income and Expense~~. Interest income was $2.3 million for 2007, compared to $2.5 million for 2006. Interest expense increased to $0.2 million for 2007 from $0.05 million in 2006. This increase related to the acquisition payables for Shanghai Magma.
~~Other Income~~~~. Other income, primarily government tax subsidies, was $0.5 and $0.3 million in 2007 and 2006, respectively.~~
~~Income Taxes.~~~~Income taxes were a benefit of $0.2 million in 2007 and an expense of $0.2 million in 2006.~~
~~Equity in Losses of Affiliate~~. In April 2007, we acquired a 30% interest in New Run, an independent record label in China, and it has been accounted for on the equity basis from April 1, 2007. The equity in the losses of New Run was $0.06 million in 2007.
~~Net (Loss) Income from Continuing Operations.~~~~Net loss from continuing operations was $41.5 million for 2007 compared to net income of $6.6 million for 2006.~~
~~Net Loss from Discontinued Operations~~. Effective August 1, 2007, we accounted for our SSI Business as a discontinued operation. Net loss from discontinued operations was reduced from $0.8 million in 2006, a full year’s operations, to $0.4 million in 2007, which included the benefit of income of $0.2 million representing the gain recognized on the sale of the SSI Business.
~~Net (Loss) Income~~. As a result of the foregoing, net loss was $42.0 million for 2007 compared to net income of $5.8 million for 2006. The decrease is mainly due to an impairment charge of $41.3 million for 2007. Our net loss in 2007 was offset by net income of approximately $0.6 million derived from our new acquisitions, mainly from Shanghai Saiyu.
redeemable non-controlling interests.
B. LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Working Capital
~~The following table sets forth our cash flows with respect to operating activities, investing activities and financing activities for the periods indicated:~~

For the Year Ended December 31,
2008 2007 2006
(in thousands of U.S. dollars)
Net cash (used in) provided by operating activities $ (5,553 ) $ (2,055 ) $ 17,636
Net cash used in investing activities (2,265 ) (8,120 ) (15,157 )
Net cash provided by (used in) financing activities 2 16 (4,399 )

Net (decrease) in cash and cash equivalents $ (7,816 ) $ (10,159 ) $ (1,920 )

Our net cash used in operating activities in 2008 was $5.6 million. This was primarily attributable to our net loss of $12.0 million, a gain of $5.0 million arising from a reduction of an acquisition payable, a gain of $1.6 million from a reduction of China Unicom liabilities and an increase in prepaid expenses and other current assets of $1.1 million, which was offset in part by an impairment charge of $2.7 million for goodwill, an impairment charge of $1.9 million for ouronline video business requires significant upfront capital expenditures as well as continuous, substantial investment in ~~New Run, a write-down of intangible assets of $2.9 million, $3.3 million~~content, technology and infrastructure. In order to implement our development strategies to expand our infrastructure and optimize our services across Internet-enabled devices, and further expand and diversify our revenue sources, we may incur additional capital needs in ~~depreciation and amortization as non-cash items, and a decrease in accounts receivable of $3.5 million. Our net~~the future. We may require additional cash used in operating activities in 2007 was $2.1 million. This was primarily attributable to our net loss of $41.9 million, as adjusted for an add-back of $41.3 million in impairment of goodwill and other intangible assets and $3.7 million in depreciation and amortization as non-cash items, which was offset in part by a $2.1 million increase in accounts receivable and $3.2 million increase in receivable from disposal of subsidiary. Our net cash provided by operating activities in 2006 was $17.6 million. This was primarily attributable to our net income of $5.8 million, as adjusted for an add-back of $3.5 million in depreciation and amortization as a non-cash item, $5.5 million decrease in accounts receivable and $3.1 million decrease in prepaid expenses and other current assets.
54
Net accounts receivable increased from $13.4 million as of December 31, 2006 to $14.7 million as of December 31, 2007 and decreased to $12.7 million as of December 31, 2008. The increase from 2006 to 2007 was primarily due to lengthened collection periods from the telecom operators. The decrease from 2007 to 2008 was primarilyresources due to the ~~decrease in WVAS revenues. The average collection time for our accounts receivable from WVAS was 71 days in 2006, increasing to 78 days in 2007 and to 93 days in 2008.~~
Net cash used in investing activities was $2.3 million in 2008, of which $4.7 million was used for the payments made in respect of the recent acquisition of Seed Music and payments relating to the earlier acquisitions of Shanghai Magma and Henan Yinshan; $1.7 million was used for the purchase of intangible assets and $0.3 million was used for the purchase of fixed assets, which amounts were partially offset by the proceeds from the disposal of a subsidiary of $4.5 million. Net cash used in investing activities was $8.1 million in 2007, of which $3.2 million was used in the acquisition of equity interests in Shanghai Saiyu, Henan Yinshan, Fly Songs and Secular Bird and $2.5 million was used in the acquisition of an equity affiliate, New Run. Net cash used in investing activities was $15.2 million in 2006, of which $12.6 million was used in the acquisition of equity interests in Huayi Brothers Music, Freeland Music and Shanghai Magma. Our total capital expenditures for computer hardware, software and office equipment for the years ended December 31, 2008, 2007 and 2006 were $0.3 million, $0.9 million and $1.0 million, respectively. Our capital divestitures are not material.
Net cash provided by financing activities was $1,500 for 2008 and $16,334 in 2007 resulting from the proceeds arising in connection with the exercise of stock options in 2008. Net cash used in financing activities was $4.4 million for 2006, mainly due to our repurchase and cancellation of 79,260,000 ordinary shares under our stock repurchase program in 2006 with a total cost of ~~$5.0 million.~~
~~We generally keep~~running our ~~cash in U.S. dollar~~online video business or RMB denominated bank accounts or short-term time deposits for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations. We adjust the amount of cash held in U.S. dollars and RMB from time to time to maximize our interest rate returns and to ensure that we have sufficient RMB for our operational needs, including for lease and other commitments. In the first half of 2008, we converted a significant portion of our U.S. dollar deposits into Euros, which were subsequently converted back into U.S. dollars. We have not historically used derivative instruments to hedge market risks. We recorded a foreign exchange loss of $4.5 million, arising from the decrease in the value of the Euro against the United States dollar in the third quarter of 2008. As a result of additional appreciation of the U.S. dollar, we recorded a further exchange loss in the fourth quarter of 2008 of $4.5 million. Currently we hold all non-Renminbi cash in United States dollars.
We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from our initial public offering will be sufficient to meet our anticipated cash needs, including for working capital, capital expenditures and various contractual obligations, for at least the next 12 months. We also believe that our recent investments in New Run, Shanghai Saiyu, Fly Songs, Secular Bird and Seed Music will have no material impact on our future liquidity or capital resources in the near term. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to issue debt securities or additional equity or to obtain bank borrowings. The issue of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict our operations and the placement of liens over some or all of our assets. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
~~Indebtedness~~
From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment, which may have a material effect upon our liquidity and capital resources. Based upon anticipated cash flow related to operating activities and our present cash balances and working capital position, we expect that we will have sufficient sources of cash to fund our needs for at least the next 12 months.
As of December 31, ~~2008, other than $24,002~~2011, we had cash and cash equivalents of $26.8 million. Our principal sources of liquidity have been our cash flows from operations and financing activities. The following table sets forth our cash flows with respect to operating activities, investing activities and financing activities for the periods indicated:
   Year Ended December 31,
   2009 2010 2011
   (in thousands of U.S. dollars)
Net cash used in operating activities
   (2,092 ) (29,570 ) (39,175 )
Net cash (used in) provided by investing activities
   (8,931 ) 2,168    (25,712 )
Net cash provided by financing activities
   1,448    4,616    63,328
Effect of exchange rate changes on cash and cash equivalents
   (154 ) 337    1,014
Net decrease in cash and cash equivalents
   (9,729 ) (22,449 ) (545 )
Operating Activities
Our net cash used in ~~respect~~operating activities in 2011 was $39.2 million. This was primarily attributable to (i) our net loss of ~~capital leasing~~$49.4 million, (ii) a decrease of $7.9 million in accounts payable due to more settlement of internet bandwidth costs and cash incentives to advertising agencies in 2011, and (iii) an increase of $3.9 million in the amount due from related parties under common control by Shanda Interactive, which were adjusted by (i) non-cash expenses of $5.2 million in depreciation and amortization, $3.7 million in amortization and write-down of licensed video copyrights, $3.5 million in bad debt provision due to changes in business strategy, and $3.0 million in loss from disposal of property and equipment due to technological upgrades, and (ii) a decrease of $3.8 million in accounts receivable as a result of the increased collection of advertising revenue in 2011.
Our net cash used in operating activities in 2010 was $29.6 million. This was primarily attributable to (i) our ~~Beijing office we did~~net loss of $52.4 million and (ii) an increase of $8.7 million in accounts receivable mainly due to the advertising revenue generated in the last quarter of 2010 not ~~have any indebtedness or any material~~received, most of which was still within the normal credit terms, which were adjusted by (i) non-cash expenses of $15.8 million in amortization and write-down of licensed video copyrights, $5.3 million in depreciation and amortization, $1.9 million in share-based compensation cost, and $1.5 million in bad debt ~~securities, mortgages or liens. In addition,~~provision, (ii) an increase of $8.8 million in accounts payable due to certain payables in connection with Internet bandwidth and cash incentives to advertising agencies not paid as of December 31, ~~2008, we did~~2010, and (iii) an increase of $6.0 million in accrued expenses and other current liabilities mainly due to the business tax and salesman commission not ~~have any material contingent liabilities. We may, however, be obligated~~paid as a result of the increase of the advertising revenue in 2010.
Our net cash used in operating activities in 2009 was $2.1 million. This was primarily attributable to ~~make~~our net loss of $27.8 million, which was adjusted by (i) non-cash expenses of $3.8 million in bad debt provision, $3.6 million in impairment of goodwill, and $1.8 million in depreciation and amortization, (ii) a decrease of $5.9 million in accounts receivable mainly due to the proceeds received from telecom operators, (iii) a decrease of $2.7 million in prepaid expenses and other current assets primarily due to the collection of miscellaneous receivables due from employees or artists and relating items expensed according to the beneficial period, and (iv) an increase of $2.3 million in accrued expenses and other current liabilities due to certain ~~earn-out payments~~accrued liabilities not paid as of December 31, 2009.
Investing Activities
Our net cash used in investing activities was $25.7 million in 2011. This consisted mainly of (i) the interest-bearing loans with an aggregate amount of $14.1 million provided to Shanda Games in 2011, (ii) $5.5 million used in payment for licensed video copyrights, (iii) our pledge of $3.6 million cash as collateral for the bank loan, and (iv) payment of $2.4 million for the purchases of property and equipment.
Our net cash provided by investing activities was $2.2 million in 2010. This was primarily attributable to (i) net cash of $12.3 million received from the disposal of the WVAS and recorded music businesses, (ii) a decrease of $10.0 million in short-term investments in connection with ~~our~~the maturity of time deposits, and (iii) net proceeds of $4.4 million from the disposal of Huayi Music, partially offset by (i) $15.0 million used in payment for licensed video copyrights, (ii) $6.6 million used in the purchase of property and equipment, and (iii) a $3.2 million loan paid to related parties under common control by Shanda Interactive.
Our net cash used in investing activities was $8.9 million in 2009. This was primarily attributable to (i) an increase of $10.0 million in short-term investments in ~~New Run, Freeland~~the form of time deposits and ~~Secular Bird,~~(ii) payment of $0.9 million for the purchase of fixed assets, partially offset by (i) net cash of $1.0 million received from the acquisition of Seed Music, (ii) net cash of $0.6 million received from the acquisition of Yisheng, and (iii) net proceeds of $0.3 million from the disposal of a subsidiary.
Financing Activities
Our net cash provided by financing activities was $63.3 million in 2011. This consisted mainly of (i) proceeds of $50.0 million from the issuance of ordinary shares to Shanda Media and $50.0 million from the issuance of senior convertible bonds to Shanda Media, (ii) net borrowings of $10.1 million from certain affiliates, and (iii) a domestic bank borrowing of RMB20.0 million ($3.2 million), partially offset by the full redemption of the $50.0 million senior convertible bonds based on our working capital position.
Our net cash provided by financing activities was $4.6 million in 2010. This consisted mainly of borrowings of $4.6 million from related parties under common control by Shanda Interactive.
Our net cash provided by financing activities was $1.4 million in 2009. This consisted mainly of capital injection of $1.4 million into Yisheng by Shanda Interactive and Yisheng’s non-controlling shareholder.
Restrictions on Cash Transfers to our Company
We are a holding company and our operations are principally conducted through our PRC subsidiaries and our consolidated affiliated entities. As a result, the ability of our company to pay dividends and to finance debts depends upon service fees paid by our consolidated affiliated entities to our PRC subsidiaries and dividends and other distributions paid by our PRC subsidiaries to our company. If any of our subsidiaries or consolidated affiliated entities incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay service fees or dividends directly or indirectly to our company.
In addition, under PRC laws and regulations, our PRC subsidiaries and our consolidated affiliated entities may pay dividends only out of their retained earnings as ~~discussed~~determined in accordance with PRC accounting standards and regulations. There is no significant difference between retained earnings as determined in accordance with PRC accounting standards and in accordance with U.S. GAAP. In addition, our PRC subsidiaries and our consolidated affiliated entities are required to set aside at least 10% of their after-tax net income each year, if any, to fund certain statutory reserves, which are not distributable as cash dividends, until the aggregate amount of such funds reaches 50% of their respective registered capital. As a result of these and other restrictions under ~~“Tabular Disclosure~~PRC laws and regulations, our PRC subsidiaries and consolidated affiliated entities are restricted in their ability to transfer a portion of ~~Contractual Obligations” below.~~
their net assets to our company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $59.4 million, or 116.7% of our company’s total consolidated net assets as of December 31, 2011. In addition, our PRC subsidiaries and our consolidated affiliated entities may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These staff welfare and bonus funds are not distributable as cash dividends. See note 21 to our audited consolidated financial statements and Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure—We rely on our PRC subsidiaries and our consolidated affiliated entities to fund our cash and financing requirements. Any limitation on the ability of our PRC subsidiaries and our consolidated affiliated entities to transfer funds to us could have a material adverse effect on our ability to grow or otherwise fund our cash and financing requirements.”
55Cash transfers from our PRC subsidiaries to our offshore subsidiary and our company are also subject to restrictions imposed by the PRC government’s currency conversion policy. See Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure—Restrictions on currency exchange may limit our ability to utilize our revenues effectively.”
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
See Item 4.B. “Information Onon the ~~Company —~~ Company—Business ~~Overview — Product~~Overview—Technology and ~~Content Development,” “—Infrastructure and Technology,”~~Infrastructure” and “—Intellectual ~~Property and Proprietary Rights.~~Property.”
Our research and development expenditures were ~~$1.0 million, $2.0 million~~nil, nil and ~~$2.2~~$2.7 million in ~~2008, 2007~~2009, 2010 and ~~2006,~~2011, respectively.

D. TREND INFORMATION
~~See Item 3.D. “Key Information — Risk Factors” and “—Operating Results” above.~~

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2010 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F. ~~TABULAR DISCLOSURE OF~~ CONTRACTUAL OBLIGATIONS
The following table sets forth certain information with respect to our contractual obligations as of December 31, ~~2008:~~

Payments Due by Period
Less than 1-3 3-5
Total 1 year years years
(in thousands of U.S. dollars)
Operating lease commitments $ 1,568 $ 1,452 $ 116 $ —
Other contractual commitments* 3,078 1,671 1,407 —

Total contractual obligations $ 4,646 $ 3,123 $ 1,523 $ —

* ~~Represents non-cancelable agency agreements with certain artists that provide for minimum payments.~~
The agreements entered into in connection with our acquisitions and strategic investments described in this annual report on Form 20-F include earn-out provisions pursuant to which the sellers will become entitled to additional consideration, which may be material and may in certain circumstances include either cash or additional equity interests, if the relevant business achieves specified performance measures.
~~Contingent Acquisition Payments~~
As of December 31, 2008, in connection with our recent acquisitions, we may make contingent payments of up to $0.8 million subject to the achievement of certain financial performance targets from 2008 to 2009. These contingent payments, if made, will be reflected in our financial statements as an increase of goodwill.
~~Holding Company Structure~~
We are a holding company with no operations of our own. Our operations are principally conducted through Beijing Hurray! Times. As a result, our ability to pay dividends and to finance any debt that we may incur is dependent upon service fees paid by our affiliated Chinese entities to Beijing Hurray! Times, and dividends and other distributions paid by those subsidiaries. If any of our subsidiaries or our affiliated Chinese entities incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay service fees or dividends to Beijing Hurray! Times or us. In addition, Chinese legal restrictions permit payment of dividends to us by our subsidiaries only out of the net income from our subsidiaries, if any, determined in accordance with Chinese accounting standards and regulations. Under Chinese law, our subsidiaries are also required to set aside a portion (at least 10%) of their after tax net income, if any, each year for certain reserve funds. These reserve funds are not distributable as cash dividends.
2011:
   Payments Due by Period
   Total    Less than 1
year    1-3 years    3-5 years
   (in thousands of U.S. dollars)
Operating lease commitments
   6,562       6,132       430

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~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~
~~Interest Rate Risk~~
~~Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits in banks.~~ We did not have ~~not used derivative financial instruments in our investment portfolio. Interest-earning instruments and floating rate~~any long-term debt carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. Our future interest income may fluctuate in line with changes in interest rates. However, the risk associated with fluctuating interest rates is principally confined to our cash deposits in banks, and, therefore, our exposure to interest rate risk is minimal and immaterial.
~~Foreign Exchange Risk~~
While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and costs are denominated in Renminbi and substantially all of our assets (other than the proceeds from our initial public offering) and liabilities are denominated in Renminbi. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in U.S. dollars in our financial statements will decline. We may also be exposed to foreign exchange risk in the event we hold other currencies in an effort to hedge against potential depreciation of the U.S. dollar. We recorded a loss of $ 9.0 million in 2008 from deposits held in Euros, which were subsequently converted back into U.S dollars.
Between 2002 and 2008, the exchange rate between Renminbi and U.S. dollars has varied by approximately17.6%. If the Renminbi had been 1% and 5% less valuable against the U.S. dollar than the actual rateobligations as of December 31, ~~2008 which was used~~2011.
On September 29, 2011, Tianjin WFOE obtained a bank loan from Shanghai Pudong Development Bank in ~~preparing~~ the ~~Company’s audited financial statements as~~amount of ~~and~~RMB20.0 million ($3.2 million) for ~~the~~one year ended December 31, 2008, our net asset value, as presented in U.S. dollars, would have been reduced by $0.05 million and $0.2 million, respectively. Conversely, if the Renminbi had been 1% and 5% more valuable against the U.S. dollar as of that date, then our net asset value would have increased by $0.05 million and $0.3 million, respectively.
~~Inflation~~
~~Inflation has not materially impacted our results of operations in recent years. However, in 2008, China experienced significantly increased inflation, which, if it continues~~until September 28, 2012 at ~~that level or increases further, could have~~ an adverse impact on our financial condition and result of operation in future periods. According to the China Statistical Bureau, China’s overall national inflation rate, as measured by the general consumer price index, was approximately 5.9%, 4.8% and 1.3% in 2008, 2007 and 2006, respectively.
~~TAXATION~~
In March 2007, the National People’s Congress of China enacted the New EIT Law, which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules, were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income taxinterest rate of ~~25% and unified tax deduction standards are applied equally~~6.888% per annum. The loan is pledged by an offshore deposit of $3.6 million.
We had other payables due to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a preferential tax rate of 15% according to the then effective PRC Enterprise Income Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations are subject to transitional rules as stipulatedrelated parties in the ~~Transitional Arrangements Notice. In addition, certain qualified enterprises may still benefit from a preferential tax rate~~amount of up to15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state as set out in the Implementation Rules. As a result, if our PRC subsidiaries and VIEs qualify as high and new technology enterprises strongly supported by the state under the new EIT Law, they will continue to benefit from a preferential tax rate of up to 15%. Otherwise, the applicable tax rate of our PRC subsidiaries and VIEs is 25% starting from 2008 under the New EIT Law. At December 31, 2008, four of our subsidiaries and VIEs were approved as qualified high and new technology enterprises, which approvals entitle them to preferential tax rate tax exemption or reducted rate according to the New EIT Law and transitional rules ranging from 7.5% to 15% for the three years ending on December 31, 2010. While the high and new technology enterprise certificates are valid for three years, we believe based on currently available information that we will be able to reapply successfully for the renewal of the current certificates as we believe we will continue to meet the published criteria. Accordingly, these four entities have used the reduced applicable tax rate in calculations of deferred tax balances for the foreseeable future. However, we cannot be certain that such applications will be successful. In addition, our qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture and Secular Bird, were entitled to a tax exemption in 2008. We have used the new standard rates for our other affiliated Chinese entities. Deferred taxes have been calculated using the tax rates that apply to the relevant companies.
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These preferential tax arrangements were originally to expire at various dates between 2006 and 2010. In 2005 and 2006 a number of our VIEs became subject to a higher tax rate as tax exemptions expired or were reduced. The aggregate dollar and per share effect of the tax holidays in 2008, 2007 and 2006 were $1.8 million, $1.9 million and $2.2 million and $0.0008, $0.0009 and $0.0010 per share, respectively.
Under the New EIT Law, the rules for determining whether an entity is resident in the PRC for tax purposes have changed and the determination of residence depends on, among other things, the “place of actual management.” If Hurray! Holding Co., Ltd. or our non-PRC subsidiaries are determined to be a PRC resident for tax purposes, it or they, would be subject to tax in the PRC on our worldwide income including the income arising in jurisdictions outside the PRC. We have evaluated our resident status under the new law and related guidance and believe Hurray! Holding Co., Ltd. is not a PRC resident for PRC income tax purposes. However, there can be no assurance that the PRC tax authorities would not challenge our position.
~~As a non-resident for PRC tax purposes, dividends paid to Hurray! Holding Co. Ltd out of profits earned after January 1, 2008 from its PRC subsidiaries would be subject to a withholding tax of 10%.~~
Aggregate undistributed earnings of our subsidiaries and affiliates located in the PRC that are available for distribution to the Company at December 31, 2008 are considered to be indefinitely reinvested under APB opinion No. 23, “Accounting for Income Taxes — Special Areas,” and accordingly, no provision has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to Hurray! Holding Co., Ltd. The PRC tax authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.
Our WVAS revenues are subject to a 3% business tax. Our recorded music services revenues are subject to a 5% business tax for royalties and advertising revenues and a 13% value-added tax for revenues from the sale of CDs. Our software and system integration services revenues, which have been classified as a discontinued operation on their sale in August 2007, were subject to a 17% value-added tax. Companies that develop their own software and register the software with the relevant authorities in China are generally entitled to a value-added tax rebate of 14%. Any service fees that Beijing Hurray! Times charges and subsequently collects pursuant to the exclusive technical and consulting service agreements with Hurray! Solutions and our other Chinese affiliates are subject to a 5% business tax.
~~Subject to the approval of the relevant tax authorities, Hurray! Solutions and other affiliated Chinese entities had total tax loss carryforwards of approximately $14.2 million and $4.2~~$13.6 million as of December 31, 2008 and 2007, respectively, for enterprise income tax purposes, which will expire by various years through 2013. These tax loss carryforwards give rise to potential deferred tax assets totaling $2.7 million and $1.1 million as of December 31, 2008 and 2007, respectively. For the gross deferred tax assets for Hurray! Solutions, based on the evidence obtained, it is more likely than not that all the deferred tax assets $0.15 million will be realized. Other affiliated Chinese entities may not record sufficient net income within the carryforward period to realize the full tax benefit2011. All of these ~~past net losses and, accordingly, we have established a valuation allowance for the full amount of these deferred tax assets except for Hurray! Solutions.~~
~~In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”)~~amounts were payable within one year. See Item 7.B., ~~“Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.~~“Related Party Transactions—Other Related Party Transactions.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not result in a cumulative adjustment on January 1, 2007 and had no significant impact on our accounting for income taxes for the year ended December 31, 2008. We did not incur any interest or penalties related to potential underpaid income tax expenses, and also do not expect to have a significant increase or decrease on the unrecognized tax benefits within 12 months from December 31, 2008.
We are subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. Our various tax years from 2003 to 2008 remain open in various taxing jurisdictions.
Hurray Technologies (HK) Ltd., (“Hurray Technologies”), our 99% owned subsidiary, is subject to income tax in Hong Kong. Hong Kong companies are generally subject to a 16.5% profit tax. Hurray Technologies has not, however, paid any income taxes in Hong Kong because to date it has not received any revenues.
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~~RECENTLY ISSUED ACCOUNTING STANDARDS~~
On June 12, 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”). SFAS 166 amends the derecognition guidance in Statement 140 and eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, a transferor will need to evaluate all existing QSPEs to determine whether they must now be consolidated in accordance with Statement 167. Statement 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. We are in the process of assessing the potential impact of the adoption of SFAS 166 on our consolidated financial position or results of operations.
On June 12, 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under Interpretation 46(R). While the Board’s discussion leading up to the issuance of Statement 167 focused extensively on structured finance entities, the amendments to the consolidation guidance affect all entities and enterprises currently within the scope of Interpretations 46(R), as well as QSPEs that are currently excluded from the scope of Interpretation 46(R). The Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2009. We are in the process of assessing the potential impact of the adoption of SFAS 167 on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FAS 157-4”). This statement provides additional guidance for estimating fair value measurement in accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased and provides guidance on identifying circumstances that indicate a transaction is not orderly. It emphasizes that despite significant decreases in volume and level of activity and regardless of the valuation technique(s) used for the asset or liability, the fair value measurement stay the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This issue is effective prospectively for interim and annual periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. We do not expect that the adoption of FSP FAS 157-4 will have a significant effect on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This statement amends FAS 107 to require entities to disclose, among other things, the methods and significant assumptions used to estimate the fair value of financial instruments in both interim and annual financial statements and amends APB Opinion No. 28 to require those disclosures in summarized financial information at interim reporting periods. This FSP applies to all financial instruments within the scope of FAS 107 held by publicly traded companies, as defined in Opinion 28. This issue is effective for interim and annual periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009 only if a reporting entity also early adopts FAS 157-4 and FAS FAS 115-2 and FAS 124-2. We do not expect that the adoption of FSP FAS 107-1 and APB 28-1 will have a significant effect on our consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This statement amends the other-than-temporary-impairments (“OTTI”) guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to OTTI of equity securities. It gives guidance on evaluating whether an impairment of a debt security is other-than-temporary and the determination of the amount of an OTTI recognized in earnings and other comprehensive income. We do not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a significant effect on our consolidated financial position or results of operations.
On April 1, 2009, the FASB issued FSP FAS 141(R)-1, which amends the guidance in FASB Statement No. 141(R), “Business Combinations”, to establish a model for pre-acquisition contingencies that is similar to the one entities used under Statement 141. The FSP is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of FSP FAS 141(R)-1 to have a significant effect on our consolidated financial position or results of operations.
At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in Issue No. 08-6 “Equity Method Investment Accounting Considerations” (“EITF 08-6”). Because of the significant changes to the guidance on subsidiary acquisitions and subsidiary equity transactions and the increased use of fair value measurements as a result of Statements 141(R) and 160, questions have arisen regarding the application of that accounting guidance to equity method investments. EITF 08-6 provides guidance for entities that acquire or hold investments accounted for under the equity method. This issue is effective for transactions occurring in fiscal years and interim periods beginning on or after December 15, 2008. Early adoption is not permitted. We do not expect the adoption of EITF 08-6 to have a significant effect on our consolidated financial position or results of operations.
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In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP gives guidance on the computation of earnings per share and the impact of share-based instruments that contain certain non-forfeitable rights to dividends or dividend equivalents. The FSP is effective for fiscal years beginning after December 31, 2008 and early application is prohibited. We do not expect the adoption of FSP 03-6-1 to have a significant effect on our consolidated financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position FAS142-3 “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset in this FSP shall be applied prospectively to intangible assets acquired after the effective date. We do not expect the adoption of FAS 142-3 to have a significant effect on our consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The standard requires disclosure of fair values of derivative instruments and their gains and losses in a tabular format as well as cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It also requires that more information be provided about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. SFAS No.161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect the adoption of SFAS No. 161 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No.141(R), “Business Combination,” to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. We do not expect the adoption of SFAS 141(R) to have a significant effect on our consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51”, or SFAS 160. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity on the financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest is required on the face of the financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Upon the adoption of SFAS 160, we reclassified the minority interest balance to the shareholder’s equity on January 1, 2009.
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Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management
The names of our current directors and executive officers, their ages as of ~~May 1, 2009~~February 29, 2012, and the principal positions with ~~the company~~us held by them are as follows:
Name

Age

Position
Bruno Wu⁽²⁾⁽³⁾    45    Independent Director and Chairman of the Board of Directors
Tianqiao Chen⁽¹⁾⁽²⁾
~~Name~~38    ~~Age~~Director
Danian Chen⁽¹⁾    ~~Position~~33    ~~Class~~Director
Grace Wu⁽¹⁾⁽²⁾    ~~Term of Office~~41 Director
~~Qindai Wang~~Haifa Zhu    39 Director
Haibin Qu 37 Director
Tongyu Zhou⁽³⁾ 43 Independent Director
Wenwen Niu⁽³⁾ 45 Independent Director
Yu Shi 34 Chief Executive Officer and Acting Chief Editor
Tony Shen    44    Chief Financial Officer
(1) ~~Director and Chairman~~Member of the ~~Board~~ ~~Class I~~ ~~1 years~~
~~Songzuo Xiang~~ 44 ~~Director~~compensation and ~~Chief Executive Officer~~ ~~Class II~~ ~~2 years~~
~~Thomas Ng~~
55 ~~Director~~ ~~Class I~~ ~~1 years~~
~~Robert Mao~~⁽¹⁾
65 ~~Director~~ ~~Class I~~ ~~1 years~~
~~Suberna Shringla~~⁽¹⁾
43 ~~Director~~ ~~Class II~~ ~~2 years~~
~~Alan Russell Powrie~~⁽¹⁾
58 ~~Director~~ ~~Class III~~ ~~3 years~~
~~Shudan Zhang~~ 49 ~~Director~~ ~~Class III~~ ~~3 years~~
~~Xiaoqing Guo~~ 38 ~~Chief Financial Officer and Vice President~~ — —
~~Ping Ji~~ 50 ~~Senior Executive Vice President~~ — —
~~Fan Yang~~ 44 ~~Senior Executive Vice President~~ — —
~~Haoyu Yang~~ 36 ~~Senior Executive Vice President~~ — —leadership development committee
(2) Member of the corporate development and finance committee
~~(1)~~ (3) Member of the audit committee ~~compensation committee and nominating committee.~~
~~Our Amended~~
Biographical Information
Bruno Wu. Mr. Wu has served as an independent director on our board of directors since September 1, 2009 and ~~Restated Memorandum and Articles of Association provide for the division~~has been Chairman of the board of directors into three classes: Class I directors (currently Qindai Wang, Thomas Ng and Robert Mao), Class II directors (currently Suberna Shringla and Songzuo Xiang) and Class III directors (currently Shudan Zhang and Alan Powrie). At each annual general meeting, directors who are elected will serve a three-year term until such director’s successor is elected and is duly qualified, or until such director’s earlier death, bankruptcy, insanity, resignation or removal. There are no family relationships among any of the directors or executive officers of our company.
~~Biographical Information~~
~~Qindai Wang.~~since August 17, 2010. Mr. ~~Wang~~Wu also has served as ~~Chairman~~a director of Shanda Interactive from October 2006 to August 2009. Mr. Wu is the ~~Board since June 2001. From June~~co-founder and chairman of The Sun Media Investment Holding Group of Companies, one of China’s largest privately held media groups. Mr. Wu served as co-chairman of SINA Corporation from 2001 to March 2009, Mr. Wang served as our Chief Executive Officer. From December 1999 to February 2001, Mr. Wang was President of AsiaInfo Technologies (China), the Chinese operating subsidiary of AsiaInfo Holdings, Inc. and a provider of telecom network integration and software solutions in China. Previously, Mr. Wang worked at Nortel Networks (China) from 1996 until 1999 as General Manager of the China Telecom account at Nortel. He served as Regional Director at Lucent Technologies (China) from 1995 to 1996 and as a Senior Group Manager at AT&T China from 1989 to 1995. Mr. Wang holds a Bachelor of Science degree in Engineering from the Chengdu Institute of Telecommunications Engineering.
~~Songzuo Xiang.~~Dr. Xiang has served on our board since July 2000 and was appointed as our Chief Executive Officer in March 2009. He was a visiting scholar at Columbia University from May 1999 to July 2000, and at Cambridge University from October 1998 to May 1999. He previously worked at the People’s Bank of China, Shenzhen branch, as the Deputy Director of the Fund Planning Department from 1995 to 19982002 and as the ~~Director~~chief operating officer of ATV, one of the ~~Non-Performing Loan Management Department~~two free-to-air networks in Hong Kong, from ~~1996 to 1998. Dr. Xiang was formerly an investment manager at Shenzhen Resources & Property Development (Group) Ltd.~~June 1998 until February 1999. Mr. Wu received a doctorate degree in international politics from Fudan University in 2001, a master of arts degree in international affairs from Washington University in Missouri in 1993, ~~to 1995. He holds~~ a ~~Master~~bachelor of ~~International Affairs~~science degree in business administration-finance from ~~Columbia University, a Ph.D~~Culver-Stockton College in ~~Economics~~Missouri in December 1990, and a ~~Master~~diploma of studies in ~~Management Science degree~~French civilization from ~~Renmin~~the University of ~~China, and a Bachelor degree~~Savoie in ~~Mechanical Engineering from HuaZhong University of Science and Technology.~~
France in 1987.
~~Thomas Ng.~~Tianqiao Chen.~~Dr. Ng~~ Mr. Chen has served on our board of directors since ~~September 2008. Dr. Ng is the co-founder of GGV Capital~~July 24, 2009 and was Chairman of the ~~founder~~board of ~~Venture TDF in Singapore and China (currently known as TDF Capital in China). In addition, Dr. Ng earned his Ph.D. in Bacteriology and Biochemistry in 1981~~directors from ~~the University of Wisconsin at Madison and was voted~~July 24, 2009 to August 17, 2010. Mr. Tianqiao Chen is one of the ~~most promising scientists by the ‘Who’s Who’ in 1981 and 1982~~co-founders of Shanda Interactive and has ~~numerous publications and patents worldwide. Dr. Ng currently serves on~~served as the ~~Board~~chairman of Directors for Sinosun, AAC, Boston-Power and MediaRing. He was a former board member of GNLB, SAVI (acquired by Lockheed), Oculex (acquired by Allergan), and served on the Dartmouth College Engineering advisory board, the MIT BPEC advisory board and the board of ~~Singapore National Science~~directors and ~~Technology.~~
~~Robert Mao.~~the chief executive officer of Shanda Interactive since its inception in December 1999. Mr. ~~Mao~~Chen also serves as a member of the board of directors of SinoMedia Holding Ltd., which is listed on the Hong Kong Stock Exchange, and Shanda Games Limited. Mr. Chen received a bachelor’s degree in economics from Fudan University. Mr. Tianqiao Chen is the brother of Mr. Danian Chen, one of our directors.
Danian Chen. Mr. Danian Chen has served on our board of directors since ~~March 2003. He also serves as chairman~~January 19, 2010. Mr. Danian Chen is one of the ~~board~~co-founders of ~~Augux Technology, a start up provider of high intensity LED lighting equipment and~~Shanda Interactive. Mr. Danian Chen has served in various capacities at Shanda Interactive, mostly recently as the chief operating officer beginning in April 2008. Mr. Chen is also a member of the board of ~~3Com Corporation. Mr. Mao previously~~directors of Shanda Interactive, a position which he has held ~~senior executive positions at Nortel, Alcatel and ITT. Mr. Mao holds a Master degree~~since its inception in ~~Management from the Massachusetts Institute of Technology as well as a Master of Science degree in Engineering~~1999, and a ~~Bachelor~~member of ~~Science degree in Engineering from Cornell University.~~
the board of directors of Shanda Games Limited. Mr. Danian Chen is Mr. Tianqiao Chen’s brother.
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~~Alan Russell Powrie.~~Grace Wu.~~Mr. Powrie~~ Ms. Wu has served on our board of directors since July 24, 2009. Ms. Wu has served as Shanda Interactive’s senior vice president since April 2008 and chief financial officer since November 2007. Ms. Wu previously served as a director of Shanda Interactive from December 2007 to February 2012, vice president from November 2007 to March 2008, and vice president of strategic investments from October 2007 to November 2007. Prior to joining Shanda Interactive, Ms. Wu spent five years with AU Optronics Corp., where she was responsible for financial planning and analysis, investor relations and capital markets activities. Prior to that, Ms. Wu worked at Goldman Sachs and Lehman Brothers where she divided her responsibilities between the equity capital markets and investment banking divisions. Ms. Wu received a master of international affairs degree in international banking and finance from Columbia University and a bachelor’s degree from National Taiwan University.
Haifa Zhu. Mr. Zhu has served on our board of directors since July 24, 2009. Mr. Zhu also served as our Acting Chief Executive Officer from March 14, 2011 to August 1, 2011. Mr. Zhu has served as chief investment officer and senior vice president of Shanda Interactive since April 2008. Mr. Zhu previously served as Shanda Interactive’s assistant vice president of investments, director of platform operations, director of central user platform and deputy director of new business center. Prior to joining Shanda Interactive, Mr. Zhu was responsible for investments at Nuovo Assets Investment Ltd. from 2001 to 2004. Prior to joining Nuovo Assets Investment Ltd., Mr. ~~Powrie was~~Zhu worked in technology management for the Shanghai Academy of Science from 1996 to 2001. Mr. Zhu received a ~~partner with Deloitte Touche Tohmatsu, Hong Kong, until his retirement~~master’s degree in business administration and a bachelor’s degree from Fudan University.
Haibin Qu. Mr. Qu has served on our board of directors since July 24, 2009. Mr. Qu has served as Shanda Interactive’s senior executive vice president since August 2005. Mr. Qu previously served as Shanda Interactive’s senior vice president from July 2003 to August 2005, vice president from September ~~2000. From October~~2002 to June 2003 and director of business development from February 2000 to ~~May 2001 and again from January 2002~~August 2002. Prior to ~~May 2002, he worked~~joining Shanda Interactive, Mr. Qu served as a ~~part-time advisor~~vice president of Shanghai Fuwei Technology Development Co., Ltd. from September 1996 to ~~Deloitte Touche Tohmatsu China.~~December 1999. Mr. ~~Powrie joined Deloitte Touche Tohmatsu~~Qu received a bachelor’s degree in ~~1971~~mechanics from Fudan University.
Tongyu Zhou. Ms. Zhou has served as an independent director on our board of directors since September 1, 2009. Ms. Zhou is the founder and ~~has worked with that firm in the United Kingdom, United States, Hong Kong and China. Mr. Powrie holds a Bachelor~~chairman of ~~Laws degree from the University of Edinburgh and~~Shanghai Weida Hi-Tech Group Co., Ltd. Ms. Zhou is a member of the ~~Institute~~national committee of ~~Chartered Accountants~~CPPCC and Chinese National Youth Union, vice president of ~~Scotland~~the Chinese Young Entrepreneurs’ Association and ~~the Hong Kong Institute~~Shanghai Chamber of ~~Certified Public Accountants.~~
Commerce. Ms. Zhou received a doctorate degree in economics from Fudan University in 2008 and a master’s degree in business administration from China Europe International Business School in 2002.
~~Suberna Shringla.~~Wenwen Niu.Mr. ~~Shringla~~Niu has served as an independent director on our board of directors since ~~February 2006.~~July 31, 2009. Mr. ~~Shringla~~Niu is ~~a founding partner~~the publisher and creator of Team Ventures, a boutique corporate finance advisory firm focused on media and communication sectors primarily in Hong Kong, China and Korea. From August 2000 to January 2002, Mr. Shringla served as Director and Head of Media and Technology Corporate Finance for SG Cowen, a subsidiary of Banque Societe Generale. Prior to that, Mr. Shringla served as Vice President and Head of Business Development of Turner Broadcasting Services International Asia Pacific/Time Warner and as a Manager of Business Development for Walt Disney Studios, Asia Pacific. Mr. Shringla holds a Masters of Business Administration degree from ENPC Paris“The Founder” magazine and a ~~Bachelor~~professional industry commentator. Mr. Niu joined Economic Daily Group in 1991 and was awarded “China News Prize” three times in two consecutive years. In 1999, Mr. Niu was the editor-in-chief of ~~Arts~~China Entrepreneur Magazine and he was also one of the adjudicators for “Top 10 Economic Leaders” of CCTV. In addition, Mr. Niu received a master’s degree ~~from St. Stephens College, Delhi. He is also an investment adviser licensed with~~in economics and completed the ~~Securities and Futures Commission in Hong Kong.~~
Executive MBA program at Cheung Kong Graduate School of Business.
~~Shudan Zhang.~~Yu Shi.Mr. Zhang has served on our board since 2000. From 1995 to 1999, he served as Vice President of Sales and Marketing at UTStarcom. Formerly, from 1991 to 1995, he served as Vice President of Sales and Marketing at Starcom, a company which he also co-founded. Mr. Zhang holds a Bachelor of Science degree from Beijing Polytechnic University.
~~Xiaoqing Guo.~~~~Ms. Guo~~Yu Shi has served as ~~Financial Controller, Senior Director,~~our Chief Executive Officer since August 1, 2011 and ~~Vice President~~our Acting Chief Editor since July 2011. Mr. Shi previously served as Shanda Interactive’s senior director of ~~Finance~~strategy and ~~Operation Planning Department~~integration from 2009 to July 2011. Prior to joining Shanda Interactive, Mr. Shi worked at Juneyao Group as deputy general manager of strategy planning and capital markets from September 2006 to July 2009 and at Arthur Andersen and KPMG Consulting from September 2000 to August 2006. Mr. Shi received a bachelor’s degree in ~~Hurray! since December 2003 and~~telecommunications from Shanghai Jiao Tong University.
Tony Shen. Mr. Shen has served as our Chief Financial Officer since September 27, 2010. Mr. Shen has more than 15 years of experience in finance and management. Most recently, he served at China BAK Battery, Inc., as chief financial officer, treasurer, and secretary from August 2007 to April ~~20, 2009. Previously, Ms. Guo worked in Pricewaterhouse Coopers, Beijing. Ms. Guo graduated~~2010, and as vice president of strategic development from ~~Capital University~~May 2007 to August 2007. He was acting chief financial officer of ~~Economics and Business with~~eLong Inc., from July 2006 to April 2007. Mr. Shen received a ~~Bachelor’s~~master’s degree in ~~Economics.~~business administration in finance from Columbia Business School and a bachelor of engineering degree in electrical engineering from Tsinghua University.
Terms of Directors and Executive Officers
Each of our directors shall be re-elected annually by our shareholders at a general meeting and until his or her successor is duly elected and qualified, or until his or her earlier removal, or earlier vacation of office. Our executive officers are appointed by and serve at the discretion of our board of directors.
Employment Agreements
We have entered into employment agreements with each of our executive officers. The initial term of these employment agreements is generally two to three years. Under these agreements, we may terminate the employment of an executive officer for cause at any time in case of certain acts by the executive officer. An executive officer may terminate the employment at any time upon thirty days to six months’ prior written notice.
Each executive officer has agreed to hold, both during and subsequent to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except to our other employees who have a need to know such information in connection with our business or except as required in the performance of his or her duties in connection with the employment. In addition, ~~Ms. Guo is a member~~each executive officer has agreed to be bound by non competition restrictions during the term of the ~~Institute of Certified Public Accountants of People’s Republic of China.~~
~~Ping Ji~~. Mr. Ji has served as our Senior Executive Vice President since April 2009. Mr. Ji also served as our Senior Vice President from 2001 to 2005. From January 2000 to February 2001 Mr. Ji was Vice President of Solutions Marketing at AsiaInfo Technologies (China). He previously worked for Cisco Systems (China) as a Product Marketing Director from 1998 to 2000employment agreement and for ~~Nortel Networks (China) as~~ a ~~Business Development Manager from 1994 to 1998. Mr. Ji formerly held a Project Manager position at~~certain period after the ~~Research Institute~~termination of Data Communication Technologies of the Chinese Ministry of Posts and Telecommunications from 1985 to 1994. He holds a Master of Communications degree in Data Communications from the Academy of Posts and Telecommunications and a Bachelor of Science degree in Computer Science from the University of Aeronautics and Astronautics.
~~Fan Yang.~~Mr. Yang has served as our Senior Executive Vice President since April 2009. Mr. Yang also served as our Senior Vice President from 2001 to 2005. From February 2000 to February 2001, he was Vice President of Sales at AsiaInfo Technologies (China). Mr. Yang formerly held a Senior Sales Manager position from 1994 to 2000 at Nortel Networks (China) and an engineering and managerial position from 1991 to 1994 at Lucky Electrical, a Hong Kong consumer electronics company. Mr. Yang holds both Master of Science and Bachelor of Science degrees in Engineering from Tsinghua University.
~~Haoyu Yang.~~Dr. Yang has served as our Senior Executive Vice President since April 2009. Dr. Yang also served as our Senior Vice President from 2001 to 2008. He worked as a chief software architect at Infospace, an Internet search and directory and mobile value-added services provider, from 2000 to 2001 and as a development manager at Prio, an e-commerce service provider, from 1999 to 2000. Prior to that, Dr. Yang worked as a software engineer at Insight Development Corporation, a software development firm. Dr. Yang holds a Ph.D. in Physics from the University of Miami and a Bachelor of Science degree in Physics from Beijing University.
his or her employment.
B. Compensation

Compensation of Directors and Executive Officers
~~In 2008,~~
For the year ended December 31, 2011, we paid aggregate compensation of $1.3 million to our directors and officers, including former officers and directors who resigned in 2011, namely, Shanyou Li, former director and Chief Executive Officer, Feng Chen, former Chief Editor and Vice President, and Liang Zhao, former Chief Technology Officer. For the year ended December 31, 2011, we granted options to purchase an aggregate of ~~approximately $476,410~~157,000,000 ordinary shares with various exercise prices from $0.0188 to $0.03092 per share and ~~$160,000 in compensation~~expiration dates at various times through 2017, to ~~our executive officers and non-executive directors, respectively.~~
Full-time employees of our company and our subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which pension benefits, medical care, unemployment insurance and other welfare benefits are provided to those employees. The total provision for such employee benefits, corresponding to the full amount of our company’s obligation in connection therewith was $1.6 million for 2008.
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~~We have entered into indemnification agreements with each of~~ our directors and officers. Other than share options granted under our 2010 Equity Compensation Plan, as well as fees paid to our independent directors for board services rendered, we only paid compensation to those directors who also served as executive officers under which we agree to indemnify each of them to the fullest extent permitted by Cayman Islands law, our articles of association and other applicable law, from and against all expenses and liabilities arising from any proceeding, to which the indemnitee is or was a party, witness or other participant. Upon the written request by a director or officer, we will, within 30 days after receipt of the request, advance funds for the payment of expenses, unless there has been a final determination that the director or officer is not entitled to indemnification for these expenses.in 2011. We also maintain director and executive officer insurance for our directors and executive officers.
~~Employment Agreements~~
~~We have entered into employment, invention assignment and confidentiality, and non-compete agreements with each of our executive officers as described below.~~
These employment agreements provide that our obligations to compensate each officer will terminate if that officer resigns other than for a good reason or is discharged by us for cause or gross negligence, as determined by a majority of our board of directors. However, if an officer is terminated without cause or resigns for good reason, we are obligated to provide severance compensation equivalent to six months of the officer’s annual gross base salary to that officer.
~~The term “cause” includes actions by the officer involving:~~
~~dishonesty,~~
~~fraud,~~
~~breach of trust,~~
~~physical harm to any person,~~
~~breach of the employment agreement, or~~
~~other similar conduct.~~
~~The term “good reason” includes:~~
~~changes in the officer’s position, which materially reduce his level of responsibilities, duties or stature, or~~
~~a reduction in the officer’s compensation.~~
The executive officers are also entitled to exercise their stock options, which have vested at the time of employment termination, if not for cause, for a period of thirty days thereafter (or such other period of time not exceeding three months as is determined by the board of directors).
In addition, if a change of control occurs with respect to our company and an officer is terminated without cause or resigns for good reason prior to the termination date of the officer’s employment agreement or the date on which either our company or the officer elects not to extend the agreement further by giving written notice to the other party, then we will be obligated to pay severance benefits in an amount equal to six times the monthly rate of annual gross base salary in effect immediately prior to the termination of employment.
Under the invention assignment and confidentiality agreements, each officer agrees, among other things, to assign all rights in company-related inventions to us and to keep our proprietary information confidential. The non-compete agreements prohibit each officer from being employed by, or participating in any manner in the management or operation of, any business that is or may reasonably become our competitor for a period of 12 months after termination of employment for any reason.

Summary of Stock Plans
~~2004 Share Incentive~~2010 Equity Compensation Plan
Our board of directors ~~and shareholders~~ adopted ~~our 2004 Share Incentive~~the 2010 Equity Compensation Plan, or ~~2004~~the 2010 Plan, which became effective in ~~July 2004.~~December 2010. A total of ~~180,740,200~~698,381,300 ordinary shares of our company are reserved for issuance under the ~~2004~~2010 Plan. A general description of the terms of the ~~2004~~2010 Plan is set forth ~~below.~~
below:
Plan Administration. Our board of directors or one or more committees appointed by our board acts as of the administrator of the 2010 Plan.
Types of ~~Awards.~~ Awards. The principal features of the various awards that ~~can~~may be granted under the ~~2004~~2010 Plan ~~consist of:~~
~~our ordinary shares,~~
~~options to purchase our ordinary shares,~~
are as follows:

•
Options. Options provide for the right to purchase a specified number of our ordinary shares at a specified exercise price subject to vesting.
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•
Share Appreciation Rights. Share appreciation rights provide for the right to receive a payment, in cash or ordinary shares, equal to the excess of the fair market value of a specified number of our ordinary shares on the date the share appreciation right is exercised over the base price as set forth in the award document.
•
Restricted Shares. Restricted shares are ordinary shares that are generally subject to restrictions on transfer and to vesting terms.
•
Restricted Share Units. Restricted share units represent the right to receive a specified number of our ordinary shares, subject to vesting. Restricted share units will be settled upon vesting, subject to the terms of the award agreement, either by our delivery to the holder of the number of ordinary shares represented by the vested restricted share units or by a cash payment to the holder that equals the then fair market value of the underlying ordinary shares.
~~dividend equivalent rights, the value of which is measured by the dividends paid with respect to our ordinary shares,~~
~~non-vested shares,~~
~~stock appreciation rights the value of which is measured by appreciation in the value of our ordinary shares, and~~
any other securities the value of which is derived from the value of our ordinary shares and which can be settled for cash, our ordinary shares or other securities or a combination of cash, our ordinary shares or other securities.
Under the 2004 Plan, we may also grant incentive stock options (also known as ISOs) within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, to employees who are located in the U.S., or who are U.S. tax payers.
~~Plan Administration.~~Award Document~~Our board currently administers the 2004 Plan, and may designate a committee to administer it in the future.~~
~~Eligibility.~~Under the 2004 Plan, awards may be issued to employees, directors or consultants of our company or our subsidiaries, although ISOs may only be issued to our employees or the employees of our subsidiaries.
~~Acceleration of~~. Awards ~~upon Corporate Transactions or Changes in Control.~~The 2004 Plan provides for acceleration of awards upon the occurrence of specified corporate transactions or changes in control. In the event of certain corporate transactions, including specified types of reorganizations and acquisition transactions, each outstanding award granted under the 2004 Plan will automatically become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to the award) and repurchase or forfeiture rights immediately prior to the specified effective date of the corporate transaction, unless the award is assumed or replaced by the successor company or its parent company in connection with the corporate transaction. Upon consummation of the corporate transaction, each outstanding award will terminate unless the award is assumed by the successor company or its parent company.
~~Awards.~~~~Awards under the 2004~~2010 Plan are evidenced by an award ~~agreement which contains, among other things, provisions concerning exercisability~~document that sets forth the terms and ~~forfeiture upon termination~~conditions applicable to each of ~~employment or consulting arrangement (by reason of death, disability or otherwise)~~these awards, as ~~have been~~ determined by ~~our board. In addition,~~the administrator in the case of stock options the award agreement also specifies whether the option constitutes an ISO or a non-qualified stock option (also known as NSOs) and may, but need not, include a provision whereby a grantee at any time during his or her employment with us may exercise any part or allits sole discretion.
Termination of the ~~award prior to full vesting~~2010 Plan. Without further action by our board of directors, the ~~award.~~
~~Exercise or Purchase Price and Term of Awards.~~An award may be exercised when a holder delivers a notice of such exercise to us. The exercise or purchase price must be paid at the time of exercise in full by cash, check or whole ordinary shares with a fair market value at least equal to the option price (or in another appropriate manner approved by us, such as in a combination of cash and whole ordinary shares or, with respect to options, by cashless exercise through a broker-dealer).
The exercise price of ISOs cannot be less than the fair market value of our ordinary shares on the date of grant. However, in the case of an ISO granted to a grantee, who, at the time the ISO was granted, owned stock possessing more than 10.0% of the combined voting power of all classes of our share capital or the share capital of any parent or subsidiary of us, the option price may not be less than 110.0% of the fair market value of our ordinary shares on the date of grant of such ISO. The term of an ISO cannot exceed 10 years. In addition, the term of an ISO granted to a person, who, at the time of grant, owns stock possessing more than 10.0% of the combined voting power of all classes of our share capital, is limited to five years from the date of the grant of the award. To the extent that the aggregate fair market value of our ordinary shares subject to options granted as ISOs under the 20042010 Plan which become exercisable for the first time by a recipient during any calendar year exceeds $100,000, then options represented by ordinary shares in excess of the $100,000 limitation shall be treated as NSOs.
The plan administrator will determine the term and exercise or purchase price, if any, of all other awards granted under our 2004 Plan. The exercise or purchase price for the awards is specified in the award agreement.
~~Transferability.~~Under the 2004 Plan, ISOs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the grantee only by the grantee. Other awards shall be transferable by will or by the laws of descent or distribution and to the extent provided in the award agreement. The 2004 Plan permits the designation of beneficiaries by holders of awards, including ISOs.
~~Termination of Service.~~The period following the termination of a grantee’s employment or service with us during which the grantee can exercise his or her option, if any, will be provided in the award agreement, and it cannot end later than the last day of the original term of the award. In the event a grantee’s employment or service with us is terminated without cause (as defined in the 2004 Plan), any awards which have become exercisable prior to the time of termination will remain exercisable for three months from the date of termination. In the event a grantee’s employment or service with us is terminated for cause, the grantee’s right to exercise his or her options will terminate concurrently with the termination of the grantee’s service. If termination is caused by death or disability, any awards which have become exercisable prior to the time of termination, will remain exercisable for six months from the date of termination.
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~~Amendment or Termination of 2004 Plan.~~~~Under the 2004 Plan, our board may at any time terminate, suspend, or amend the 2004 Plan~~ in any respect, except that no termination, suspension or amendment will be effective without shareholder approval if such approval is required to comply with any law, regulation or stock exchange rule and no such change may adversely affect any award previously granted without the consent of the recipient. The 2004 Plan will expire on the tenth anniversary of the date that it was approved by the shareholders.
~~C. Board Practices~~
For information regarding the terms of our current directors and the period during which our officers and directors have served in their respective positions, please refer to Item 6.A. “— Directors and Senior Management” above.
December 2020. Our board of directors ~~held four meetings and took action on 11 occasions by unanimous written consent during 2008. We have no specific policy~~may amend, suspend or terminate the 2010 Plan at any time, provided, however, that our board of directors must first seek the approval of the participants of the 2010 Plan if such amendment, suspension or termination would materially adversely affect the rights of participants with respect to ~~director attendance~~any of their existing awards.
C. Board Practices
Our board of directors currently consists of eight members. Our board of directors includes three independent directors who satisfy the “independence” requirements of the Nasdaq Stock Market Rules and meet the criteria for “independence” under Rule
10A-3 under the Exchange Act. This home country practice of ours was established by our board of directors by reference to similarly situated issuers and differs from the Nasdaq Stock Market Rules that require the board to be comprised of a majority of independent directors.
There are, however, no specific requirements under Cayman Islands law that the board must be comprised of a majority of independent directors.
We do not have regularly scheduled meetings at which only independent directors are present, or executive sessions. This home country practice of ours was established by our ~~annual general meetings~~board of ~~shareholders,~~directors by reference to similarly situated issuers and differs from the Nasdaq Stock Market Rules that require the company to have regularly scheduled executive sessions at which only independent directors are present. There are, however, no specific requirements under Cayman Islands law on executive sessions.
We have established three committees under our board of directors: an audit committee, a compensation and leadership development committee and a corporate development and finance committee. We have adopted a charter for each of the three committees. Each committee’s composition and functions are described below.
The members of the audit committees are Bruno Wu, Tongyu Zhou and Wenwen Niu, all of whom satisfy the “independence” requirements of the Nasdaq Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. In addition, our ~~directors attended the annual general meeting~~board of ~~shareholders held on September 10, 2008. Our board~~directors has determined that ~~four of our current board members, Messrs. Mao, Shringla, Powrie and Zhang, are “independent”~~Bruno Wu qualifies as ~~defined under applicable NASDAQ rules.~~
~~The board has three committees: the~~an audit committee financial expert under the ~~compensation committee~~applicable SEC rules and ~~the nominating committee.~~
~~In 2008, our~~as a financially sophisticated audit committee ~~held five meetings. Our~~member under Rule 5605(c)(2)(A) of the Nasdaq Stock Market Rules. The audit committee ~~charter pursuant to which the audit committee is~~will be responsible for, among other things, overseeing the accounting and financial reporting processes of our company, including the appointment, compensation and oversight of the work of our independent auditors, monitoring compliance with our accounting and financial policies and evaluating management’s procedures and policies ~~relative~~relating to the adequacy of our internal accounting ~~controls.~~
~~Our~~controls, and overseeing the performance of our internal audit function.
The members of the compensation and leadership development committee ~~held one meeting in 2008.~~are Tianqiao Chen, Danian Chen and Grace Wu. The compensation ~~committee’s functions are to review~~ and ~~make~~leadership development committee is responsible for, among other things, reviewing and making recommendations to our board of directors regarding our compensation policies and all forms of compensation to be provided to our executive officers and ~~directors.~~
~~No interlocking relationships~~directors, and identifying potential candidates for, and selecting members of our senior management team.
The members of the corporate development and finance committee are Tianqiao Chen, Bruno Wu and Grace Wu. The corporate development and finance committee is responsible for, among other things, reviewing and approving any proposed issues of debt including public and private debt, credit facilities with banks and others, and other credit arrangements such as capital and operating leases, and reviewing and approving any contract between us and Shanda Interactive or any affiliate of Shanda Interactive.
None of our directors have ~~existed between~~service contracts that provide for benefits upon termination of employment.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors ~~or compensation committee~~include, among others:
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
declaring dividends and distributions;
appointing officers and determining the ~~board~~term of ~~directors or compensation committee~~office of officers; and
exercising the borrowing powers of our company and mortgaging the property of our company.
Interested Transactions
A director may vote in respect of any ~~other company.~~
~~Our nominating committee held one meeting~~contract or transaction in ~~2008. The nominating committee~~which he or she is ~~responsible for~~interested,provided that the ~~assessment~~nature of the ~~performance~~interest of ~~the board of~~any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and ~~considering and making recommendations to the board of directors with respect to the nominations or elections of directors.~~
The audit, compensation and nominating committees operate under written charters setting forth the functions and responsibilities of each such committee. Copies of those charters are available on our website at~~www.hurray.com~~. The members of our audit, compensation and nominating committees are Robert Mao, Suberna Shringla and Alan Powrie, each of whom satisfies the “independence” and financial literacy requirements of the NASDAQ rules. Our board of directors has determinedany vote in that ~~Alan Powrie is an “audit committee financial expert” as that term is defined in Item 16A of Form 20-F.~~
matter.
D. Employees
As of December 31, ~~2008, 2007~~2009, 2010 and ~~2006,~~2011, we had ~~328, 444~~230, 816 and ~~471~~232 full-time employees, respectively. In addition, our affiliated music companies (Freeland Music, Huayi Brothers Music, New Run, and Secular Bird) had an aggregate of 132 employees as of December 31, 2008. Seed Music Group had 44 employees. None of our personnel are represented under collective bargaining agreements.

E. Share Ownership
The following table sets forth certain information known to us with respect to the beneficial ownership as of ~~May 1, 2009~~February 29, 2012 by:
all persons who are beneficial owners of five percent or more of our ordinary ~~shares,~~shares;
our current executive officers and ~~directors,~~directors; and
all current directors and executive officers as a group.
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As of ~~May 1, 2009, 2,196,186,640~~February 29, 2012, 5,019,786,036 of our ordinary shares were outstanding. The amounts and percentages of ordinary shares beneficially owned are reported on the basis of regulations of the ~~US Securities and Exchange Commission, or~~ SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares ~~“voting~~ power~~” which includes the power to vote or~~ to direct the voting ~~of such security,~~ or ~~“investment power,” which includes the power to dispose of or to direct~~ the disposition of ~~such~~the security or to receive the economic benefit of ownership of the security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. These securities, however, are not included in the computation of the percentage ownership of any other person. Under these rules, more than one person may be deemed a beneficial owner of securities as to which such person has no economic interest. Unless otherwise indicated in the footnotes that follow, the parties named below have sole voting and dispositive powers over the shares beneficially owned by them.

Number of Shares
Beneficially Owned
Name Number Percentage
5% and above Shareholders

Granite Global Ventures 265,115,480 12.07 %
2494 Sand Hill Road Suite 100 Menlo Park, CA 94025 United States⁽¹⁾

China Rock Capital Management 210,891,000 9.60 %
2804 One Exchange, 8 Connaught Place Central Hong Kong SAR⁽²⁾

Executive Officers and Directors⁽³⁾

Pleasant Season Ltd./Qindai Wang⁽⁴⁾
214,221,660 9.75 %
Thomas Ng⁽⁵⁾
265,115,480 12.07 %
Robert Mao⁽⁶⁾
2,000,000 *
Suberna Shringla — *
Xero Holdings Ltd./Songzuo Xiang⁽⁷⁾
106,859,620 4.87 %
Shudan Zhang 1,074,128 4.89 %
Alan Powrie⁽⁸⁾
600,000 *
P.N.L. Ltd./Ping Ji⁽⁹⁾
15,607,200 *
JJF International Ltd./Fan Yang⁽¹⁰⁾
45,600,000 2.08 %
Harrison Youth Ltd./Haoyu Yang⁽⁽¹¹⁾
77,791,300 3.54 %
Xiaoqing Guo⁽¹²⁾
1,653,400 *
All current directors and executive officers as a group (11 persons) 836,871,500 64.70 %

   Number of Shares
   Beneficially Owned
Name
   Number    Percentage
5% and Above Shareholders

Shanda Interactive Entertainment Limited⁽¹⁾
   3,334,694,602       66.4 %
Shanyou Li⁽²⁾
   274,077,076       5.5 %
Executive Officers and Directors

Bruno Wu
   *       *
Tianqiao Chen
   —         —
Danian Chen
   *       *
Grace Wu
   *       *
Haifa Zhu
   *       *
Haibin Qu
   *       *
Tongyu Zhou
   *       *
Wenwen Niu
   *       *
Yu Shi
   *       *
Tony Shen
   *       *
All current directors and executive officers as a group
   *       *
* Upon exercise of all options, this person would beneficially own less than 1% of our outstanding ordinary shares.
(1) ~~Granite Global Ventures is an investment adviser.~~
~~(2)~~ ~~China Rock Capital Management is an investment adviser. This share information is based solely on information filed by such shareholder with the SEC.~~
~~(3)~~ The address of our executive officers and directors is c/o Hurray! Holding Co., Ltd., 15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring, Chaoyang District, Beijing 100027, People’s Republic of China.
~~(4)~~ ~~Represents shares beneficially owned by Mr. Wang through a revocable trust in which he retains voting and dispositive power over such shares.~~
~~(5)~~ Represents 1,244,929 ADSs and 60 ordinary shares, 21,272 ADSs and 20 ordinary shares, 1,355,248 ADSs, and 29,705 ADSs held by Granite Global Ventures (Q.P.) L.P., Granite Global Ventures L.P., Granite Global Ventures III L.P., and GGV III Entrepreneurs Fund L.P., respectively. Mr. Ng is a managing director of Granite Global Ventures L.L.C., which is the general partner of Granite Global Ventures (Q.P.) L.P. and Granite Global Ventures L.P., and a managing director of Granite Global Ventures III L.L.C., which is the general partner of Granite Global Ventures III L.P. and GGV III Entrepreneurs Fund L.P. Mr. Ng disclaimsShanda Interactive’s beneficial ownership of our ordinary shares consists of (i) 1,155,045,300 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media, in connection with the tender offer completed in July 2009, (ii) 78,116,292 ordinary shares, including ordinary shares represented by ADSs, acquired by Shanda Media from certain selling shareholders in private transactions in September 2009, (iii) 47,389,700 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media under a 10b5-1 trading plan during the period from October 2009 to October 2010, (iv) 83,076,923 ordinary shares acquired by Shanda Media from Chris Anjun Chen in August 2010, (v) 17,220,214 ordinary shares acquired by Shanda Media from ITOCHU Corporation in September 2010, (vi) 415,384,615 ordinary shares issued to Shanda Interactive in connection with our acquisition from Shanda Interactive of its 75% interest in Yisheng in August 2010, and (vii) 1,538,461,538 ordinary shares issued to Shanda Media pursuant to a share purchase agreement dated April 1, 2011 between us and Shanda Media.
(2) Shanyou Li was our former Chief Executive Officer and a former director of our company. According to the Schedule 13G filed with the SEC on January 28, 2010, Shanyou Li held 16,970,900 ordinary shares, including ordinary shares represented by our ADSs, and may be deemed to beneficially own 257,106,176 ordinary shares held by ~~Granite Global Ventures (Q.P.) L.P., Granite Global Ventures L.P., Granite Global Ventures III L.P.,~~Kumella Holdings Limited, a British Virgin Islands company, as of January 18, 2010. Shanyou Li held approximately 88.3% of the equity interest of Kumella Holdings Limited and ~~GGV III Entrepreneurs Fund L.P.~~served as its sole director. He disclaims beneficial interest of those 257,106,176 ordinary shares except to the extent of his pecuniary ~~interests~~interest in those ~~ADSs and~~shares. We do not have any further information with respect to any changes in Shanyou Li’s beneficial ownership of our ordinary shares.
~~(6)~~ ~~Represents ordinary shares issuable upon the exercise of stock options. All of the options have an exercise price of $0.0705 per ordinary share and an expiration date of June 30, 2013.~~
~~(7)~~ ~~Represents ordinary shares beneficially owned by Dr. Xiang through a revocable trust in which he retains voting and dispositive power over such shares.~~
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~~(8)~~ ~~Represents ordinary shares issuable upon the exercise of stock options. All of the options have an exercise price of $0.1025 per ordinary share and an expiration date of January 1, 2014.~~
~~(9)~~ ~~Represents ordinary shares beneficially owned by Mr. Ji through a revocable trust in which he retains voting and dispositive power over such shares.~~
~~(10)~~ ~~Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which he retains voting and dispositive power over such shares.~~
~~(11)~~ ~~Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which he retains voting and dispositive power over such shares.~~
~~(12)~~ Represents 1,205,400 ordinary shares issuable upon exercise of stock option, which have a purchase price of $0.00005 per ordinary share, and an expiration date of November 23, 2010, and 4,480,000 ordinary shares issuable upon exercise of stock options, which have an exercise price of $0.1025 and $0.1175 per ordinary share and an expiration date of January 1, 2015, and January 1, 2014, respectively.
As of ~~May 1, 2009,~~February 29, 2012, based on public filings with the SEC, there are no major shareholders holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described above.
As of ~~May 1, 2009,~~February 29, 2012, approximately 802,430,983,200 of our ordinary shares were held in the U.S. by ~~two~~105 holders of record, excluding shares held by our ADS depositary bank, Citibank N.A., on behalf of our ADS holders. Citibank N.A. has advised us that as of that ~~date19,410,579~~date 14,044,121 ADSs, representing ~~1,941,057,900~~1,404,412,100 ordinary shares, were held of record by Cede & ~~Co and two other registered shareholder.~~Co. We have no further information as to ordinary shares held, or beneficially owned, by U.S. persons.
Our company’s major shareholders do not have different voting rights from each other or other shareholders of our company. To our knowledge, except as disclosed above, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any other natural or legal person or persons, severally or jointly. To our knowledge, there are no arrangements the operation of which may at a subsequent date result in usour undergoing a change in control.
Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders
Please refer to Item 6.E. “Directors, Senior Management and Employees—Share Ownership.”

B. Related Party Transactions
Contractual Arrangements with Respect to Our Consolidated Affiliated Entities
~~Related Party Transactions~~
We ~~currently~~ conduct our ~~business~~operations in China principally through contractual arrangements among our ~~wholly-owned subsidiary, Beijing Hurray! Times. To comply with ownership requirements under Chinese law, which impose certain restrictions on foreign companies from investing~~PRC subsidiaries (Beijing WFOE, Tianjin WFOE and Tianjin Ku6 Network WFOE), our consolidated affiliated entities in ~~certain industries such as value-added telecommunication~~the PRC (Ku6 Information Technology, Tianjin Ku6 Zheng Yuan, Ku6 Cultural and Internet services, Beijing Hurray! Times entered into a series of agreements with our affiliated Chinese entities, Hurray! Solutions, WVAS Solutions, Beijing Network, Beijing Palmsky, Beijing Hutong, Hengji Weiye, Henan Yinshan, Shanghai Saiyu, and Shanghai Magma (which are collectively referred to below as “our affiliated Chinese entities”)Tianjin Ku6 Network), and their respective shareholders. We hold no ownership interest in such affiliated Chinese entities. In addition, we control Hurray! Digital Media through three of our affiliated Chinese entities, Hurray! Solutions, Beijing Network and Beijing Hutong. See Item 4.C. “Information Onon the ~~Company —~~ Company—Organizational Structure.”
The principal terms of the agreements with respect to our consolidated affiliated ~~Chinese~~ entities are described as follows.
Loan Agreements:Each of our PRC subsidiaries entered into loan agreements with the shareholders of the relevant PRC consolidated affiliated entities (Ku6 Information Technology, Ku6 Cultural and Tianjin Ku6 Network), pursuant to which our PRC subsidiaries granted interest-free loans to these shareholders to fund their capital contributions to the consolidated affiliated entities. The total amount of these loans as of December 31, 2011 was RMB20.0 million ($3.2 million). The initial term of the loans is 10 years (in respect of loans to shareholders of Ku6 Information Technology and Ku6 Cultural) or 20 years (in respect of loans to shareholders of Tianjin Ku6 Network), with the earliest expiration date being April 11, 2017. The loans are repayable on demand, but the shareholders of our consolidated affiliated entities may not repay all or any part of the loans without the prior written consent of our PRC subsidiaries.
Exclusive Business Cooperation Agreements: Certain of our PRC subsidiaries (Beijing WFOE and Tianjin WFOE) entered into exclusive business cooperation agreements with the relevant consolidated affiliated entities (Ku6 Information Technology and Tianjin Ku6 Zheng Yuan), pursuant to which these consolidated affiliated entities agreed to respectively appoint our PRC subsidiaries as their exclusive providers of technical, consulting and other services for service fees equal to 100% of the net income of the consolidated affiliated entities. Our PRC subsidiaries are entitled to exclusive and proprietary rights and interests in any intellectual properties arising out of or created during the performance of these agreements. These agreements have an initial term of 10 years, with the earliest expiration date being June 23 2018, and will be renewable upon the request of our PRC subsidiaries. Our PRC subsidiaries have the right to terminate the agreements at any time upon giving prior written notice, but none of the consolidated affiliated entities or their shareholders may terminate the agreements prior to expiration.
Exclusive Consulting and Service Agreements: Certain of our PRC subsidiaries (Tianjin WFOE and Tianjin Ku6 Network WFOE) entered into exclusive consulting and service agreements with the relevant consolidated affiliated entities (Ku6 Cultural and Tianjin Ku6 Network), pursuant to which these consolidated affiliated entities agreed to respectively engage our PRC subsidiaries as their exclusive provider of consult and other services. The amount of service fees payable by these consolidated affiliated entities to our PRC subsidiaries shall be agreed upon by the parties based on the scope and complexity of the technologies involved, the content and duration of the services provided, and the prevailing market price for similar services. Our PRC subsidiaries will exclusively own any intellectual property arising from the performance of these agreements. Unless terminated earlier by our PRC subsidiaries, these agreements have an initial term of 20 years, with the earliest expiration date being May 27, 2030, and will be renewable upon the request of our PRC subsidiaries. Our consolidated affiliated entities may not terminate these agreements without cause unless they compensate our PRC subsidiaries for all losses caused by such early termination.
Business Operation Agreements: Certain of our PRC subsidiaries (Tianjin WFOE and Tianjin Ku6 Network WFOE) entered into business operation agreements with the relevant consolidated affiliated entities (Ku6 Cultural and Tianjin Ku6 Network) and their respective shareholders, which set forth the rights of these PRC subsidiaries to control the actions of these consolidated affiliated entities and their shareholders, including the rights to manage the daily operations of these consolidated affiliated entities and to appoint and remove the directors of these consolidated affiliated entities. In addition, the consolidated affiliated entities may not engage in any transactions that could materially affect their assets, liabilities, rights or operations without the prior consent of our PRC subsidiaries. These agreements have an initial term of 20 years, with the earliest expiration date being May 27, 2030, and will be renewable upon the request of our PRC subsidiaries. Our PRC subsidiaries have the right to terminate the agreements at any time upon giving prior written notice, but none of the consolidated affiliated entities or their shareholders may terminate the agreements prior to expiration.
Equity Pledge Agreements:Each of our PRC subsidiaries entered into equity pledge agreements with the shareholders of our consolidated affiliated entities (and, in some cases, together with our consolidated affiliated entities), pursuant to which these shareholders pledged their respective equity interests in our consolidated affiliated entities to our PRC subsidiaries as collateral to secure the obligations of these consolidated affiliated entities under the loan agreements, exclusive business cooperation agreements, exclusive consulting and service agreements, business operation agreements and equity disposition agreements, as applicable. The pledges shall remain effective until all obligations under the applicable agreements have been fully performed. During the term of the pledges, our consolidated affiliated entities are ~~described below.~~
entitled to any dividends in respect of the equity interests pledged. The shareholders may not transfer their equity interests without the prior consent of our PRC subsidiaries. In case of any event of default, our PRC subsidiaries will be entitled to dispose of the equity interests pledged and use the proceeds to make any payments due under the applicable agreements.
Powers of ~~Attorney.~~Attorney:Each of the shareholders of our consolidated affiliated ~~Chinese~~ entities has irrevocably designated Qindai Wang, in his capacity as General Manager of Beijing Hurray! Times, as attorney-in-fact, to vote on their behalf at shareholders meetings on matters on which they are entitled to vote with respect to Hurray! Solutions, WVAS Solutions, Beijing Network, Beijing Palmsky, Beijing Hutong, Hengji Weiye, Henan Yinshan, Shanghai Saiyu and Shanghai Magma, as the case may be,including matters relating to the transfer of any or all of their respective equity interests in our affiliated Chinese entities and the appointment of the directors of our affiliated Chinese entities. The term of each of the powers of attorney is ten years. These powers of attorney do not extend to votes by the shareholders of our company or subsidiaries.
~~Each such~~entered into a power of attorney byto irrevocably authorize the relevant PRC subsidiary as his, her or its ~~terms is valid only for so long as the designated attorney-in-fact remains the general manager of Beijing Hurray! Times. If the attorney-in-fact ceases to be the general manager, the power of~~agent and attorney ~~will terminate automatically and the succeeding general manager shall be designated.~~
67
~~Operating Agreements.~~~~Through Beijing Hurray! Times, we may provide guarantees to our affiliated Chinese entities of their contracts, agreements or transactions with third parties,~~on all matters pertaining to the ~~extent permitted under Chinese law. In return, our~~relevant consolidated affiliated ~~Chinese entities have granted us a security interest over~~entity and to exercise all of ~~their assets,~~his, her or its rights as a shareholder of such consolidated affiliated entity, including ~~all of their accounts receivable, which have not previously been encumbered by security interests. We also have~~ the right ~~of first refusal with respect~~ to ~~future loan guarantees. In addition, our affiliated Chinese entities and their shareholders have each agreed that they will not enter into any transaction, or fail~~attend shareholders’ meetings, to ~~take any action, that would substantially affect their assets,~~exercise voting rights and ~~obligations, or business without our prior written consent. They will also~~to appoint ~~persons designated by Beijing Hurray! Times as the~~ directors ~~officers~~ and other senior management ~~personnel~~of such consolidated affiliated entity. The power of attorney is irrevocable and will continue to be effective, (i) in the case of the shareholder of Ku6 Information Technology, as long as such shareholder continues to be its shareholder; (ii) in the case of the shareholder of Tianjin Ku6 Zheng Yuan, until the equity interest purchase option as set forth in the exclusive option agreement has been fully exercised; and (iii) in the case of the shareholder of Ku6 Cultural or Tianjin Ku6 Network, for a term of 20 years, renewable upon the request of the relevant PRC subsidiary.
Exclusive Option Agreements or Equity Disposition Agreements: Each of our affiliated Chinese entities, as well as accept the guidance of Beijing Hurray! Times regarding their day-to-day operations, financial management and the hiring and dismissal of their employees. While Beijing Hurray! Times has the right to terminate all of itsPRC subsidiaries entered into exclusive option agreements or equity disposition agreements with the relevant consolidated affiliated entities and their respective shareholders, pursuant to which our ~~affiliated Chinese entities if~~PRC subsidiaries or their designees are entitled to an exclusive right, exercisable at any ~~of our agreements with them expires or is terminated, our affiliated Chinese entities may not terminate the operating agreements~~time during the term of the agreements, ~~which is ten years.~~
~~Exclusive Technical Consulting~~to the extent permitted under PRC laws and ~~Services Agreements.~~~~Through Beijing Hurray! Times, we provide our affiliated Chinese entities with exclusive technical support and related consulting and information services. We are~~regulations, to purchase from the ~~exclusive provider~~shareholders of these ~~services.~~consolidated affiliated entities all or any part of their equity interests in the consolidated affiliated entities. The purchase price shall equal to the amount of the registered capital of the consolidated affiliated entities (in respect of Ku6 Information Technology and Tianjin Ku6 Zheng Yuan) or the lowest price permissible by the then-applicable PRC laws and regulations (in respect of Ku6 Cultural and Tianjin Ku6 Network). Without the prior written consent of our PRC subsidiaries, none of the consolidated affiliated entities or their shareholders may take actions that could materially affect the assets, liabilities, operations or equity of the consolidated affiliated entities, including distribution of dividends, transfer or mortgage of assets, incurrence or guarantee of any indebtedness, or merger or consolidation, and none of the shareholders may dispose of or allow any security interest to be encumbered on their equity interests in the consolidated affiliated entities except as otherwise agreed upon with our PRC subsidiaries. The initial term of these agreements is ~~ten years. The service fees are subject to adjustment from time to time based on~~10 years (in respect of Ku6 Information Technology and Tianjin Ku6 Zheng Yuan) or 20 years (in respect of Ku6 Cultural and Tianjin Ku6 Network), with the ~~services provided to~~earliest expiration date being March 21, 2019. These agreements will be renewable upon the request of our ~~affiliated Chinese entities, up to amounts equaling all of these entities’ revenues.~~
PRC subsidiaries.
~~Software Transfer Agreements and Software License Agreements.~~Exclusive Intellectual Property Option Agreement: Beijing ~~Palmsky also~~WFOE entered into ~~agreements~~an exclusive intellectual property option agreement with Ku6 Information Technology, pursuant to ~~transfer~~which Ku6 Information Technology irrevocably granted to Beijing ~~Hurray! Times~~WFOE or its ~~ownership rights in its games software, which Beijing Hurray! Times has licensed back for Beijing Palmsky’s use in its operations on a non-exclusive basis for a nominal license fee.~~
~~Contracts Relating to the Exclusive Purchase Right of Equity Interest.~~~~Under the Contracts Relating to the Exclusive Purchase Right of Equity Interest among us, our affiliated Chinese entities and each of their shareholders, we or our~~ designee ~~has~~ an exclusive ~~option~~right, exercisable at any time during the term of this agreement, to purchase from ~~each of their shareholders all or part of each such shareholder’s equity interest~~Ku6 Information Technology, in ~~our affiliated Chinese entities at book value,~~accordance with the price agreed upon by the parties and to the extent permitted under PRC laws and regulations, certain intellectual property rights. Without Beijing WFOE’s prior consent, Ku6 Information Technology may not transfer any of these intellectual property rights to any third party. This agreement has an initial term of 10 years and will be automatically renewed for another 10 years unless terminated by ~~Chinese law.~~Beijing WFOE.
Our Asset Transactions with Shanda Interactive
On June 1, 2010, we entered into a master transaction agreement with Shanda Interactive, pursuant to which we agreed to acquire certain online audio assets from Shanda Interactive in exchange for 415,384,615 newly issued ordinary shares in us and, concurrently, Shanda Interactive agreed to acquire our WVAS and recorded music businesses in exchange for an aggregate of $36,944,267 in cash, subject to adjustment based on the May 31, 2010 cash balances of the businesses being transferred to Shanda Interactive. On August 17, 2010, we and Shanda Interactive completed the asset transactions contemplated under the master transaction agreement. We issued 415,384,615 ordinary shares to Shanda Interactive in exchange for its 75% interest in an online audio business and issued 138,461,539 ordinary shares to the non-controlling shareholder in exchange for the remaining 25% interest in the online audio business. Shanda Interactive acquired our WVAS and recorded music businesses in exchange for an aggregate of $37,243,904 in cash.
Share Purchase Agreement with Shanda Media
On April 1, 2011, we entered into a share purchase agreement with Shanda Media, pursuant to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per ordinary share). Our shareholders approved the issuance of these ordinary shares at our extraordinary general meeting on June 24, 2011. We issued these ordinary shares to Shanda Media on June 29, 2011.
Convertible Bond Purchase Agreement with Shanda Media
On April 1, 2011, we entered into a convertible bond purchase agreement with Shanda Media, pursuant to which we agreed to sell to Shanda Media $50,000,000 aggregate principal amount of 3% senior convertible bond at face value. The convertible bonds were to mature in three years after issuance and bear interest at a rate of 3% per annum, payable semi-annually in arrears on June 30 and December 31 of each year, commencing December 31, 2011. Beginning six months after issuance and at any time before maturity, the convertible bonds would be convertible into our ordinary shares at a price of $0.03925 per ordinary share (or $3.925 per ADS). Our shareholders approved the issuance of these convertible bonds at our extraordinary general meeting on June 24, 2011, and we issued the convertible bonds on June 29, 2011. Based on our working capital position, we entered into a redemption agreement with Shanda Media on September 30, 2011, pursuant to which we agreed to redeem the entire $50,000,000 convertible bonds at face value plus accrued but unpaid interest. We redeemed the convertible bonds and paid the full redemption price to Shanda Media on September 30, 2011.
Proposed Acquisition of Pipi
On April 20, 2011, we entered into an equity purchase agreement with the shareholders of Hangzhou Soushi Networking Co., Ltd., or Pipi, a limited liability company established under the laws of the PRC, pursuant to which we agreed to acquire the equity interests in Pipi from its current shareholders in exchange for an aggregate of 2,212,114,257 of our ordinary shares. Shanghai Shanda Networking Co., Ltd., or Shanda Networking, a company established under the laws of the PRC and controlled by Shanda Interactive, holds 32% of the equity interest in Pipi. Pursuant to the equity purchase agreement, Shanda Networking agreed to transfer its 32% equity interest in Pipi to us or one or more of our designees, and in exchange, we agreed to issue 707,876,562 ordinary shares to Shanda Media. However, our shareholders did not approve this transaction at our extraordinary general meeting on June 24, 2011. As the closing of this transaction was conditional upon, among other things, the approval of our shareholders, this transaction was not consummated and the equity purchase agreement was terminated on July 5, 2011.
Disposal of Interest in Online Audio Business
In August 2011, we terminated our contractual arrangements with respect to the control of Yisheng, our online audio business operating entity, as a result of management’s review of our business strategies. After the completion of certain equity transfer and increase in registered capital by Beijing Sunshine Culture Communication Co., Ltd., or Sunshine, and Beijing Huaying Shengshi Cultural Communication Co., Ltd., both of which are subsidiaries of Shanda Interactive and limited liability companies established under the laws of the PRC, we hold a 20% economic interest, down from 100%, in Yisheng and have ceased to control Yisheng as a consolidated affiliated entity. All local government registrations relating to the above changes in the registered capital and shareholding of Yisheng were completed on August 11, 2011.
Other Related Party Transactions
In December 2010, Ku6 Information Technology borrowed RMB20.0 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in June 2011. The term of ~~these agreements is 10 years, renewable by us for~~the loan was subsequently extended to December 2011 and the interest rate was revised to 5.68%. This loan was fully repaid in December 2011.
In February 2011, Ku6 Information Technology borrowed RMB40.0 million ($6.4 million) on an ~~additional 10-year~~unsecured basis from Shanghai Shulong Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in August 2011. We repaid RMB250,000 ($39,721) and the term ~~at our sole discretion.~~
~~Equity Interests Pledge Agreements.~~~~Each~~ of the ~~shareholders~~loan with respect to the remaining amount of ~~our affiliated Chinese entities pledged their respective equity interests in such entities~~RMB39.8 million ($6.3 million) was subsequently extended to ~~guarantee~~February 2012. The interest rate was revised to 6.71% per year. In February 2012, we repaid RMB19.8 million ($3.1 million). We extended the ~~payment~~term of the ~~service fee~~loan with respect to the remaining amount of RMB20.0 million ($3.2 million) to August 2012 and the interest rate remained at 6.71% per year.
In June 2011, Ku6 Information Technology borrowed RMB43.0 million ($6.8 million) on an unsecured basis from Shanghai Shulong Computer Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carries an interest rate of 6.31% per year and is due in June 2012.
In December 2010, Ku6 Media Co., Ltd. provided a $3.2 million unsecured loan to Shanda Games Limited, a company controlled by ~~our affiliated Chinese entities under the Exclusive Technical Consulting~~Shanda Interactive, which carried an interest rate of 0.6% per year and ~~Services Agreements described above. If any~~was originally due in July 2011. In January 2011, Ku6 Media Co., Ltd. provided a $6.7 million unsecured loan to Shanda Games Limited, which carried an interest rate of ~~our affiliated Chinese entities breach any of their obligations under the Equity Interests Pledge Agreements, Beijing Hurray! Times is entitled to sell the equity interests held by such shareholders~~0.6% per year and ~~retain the proceeds of such sale or require any of them to transfer to us their equity interest~~was originally due in ~~the applicable affiliated entity.~~
~~We believe that the~~July 2011. The terms of these ~~agreements~~loans are ~~no less favorable~~in the process of being extended. In June 2011, Ku6 Media Co., Ltd. provided a $7.3 million unsecured loan to ~~us than~~Shanda Games Limited, which carries an interest rate of 1.37% per year and is due in May 2012.
On April 1, 2011, we ~~could obtain from disinterested parties. The material terms of the agreements among us,~~entered into an advertising agency agreement with Shengyue, an affiliate wholly owned by Shanda Interactive, pursuant to which Shengyue agreed to act as our respective affiliated Chinese entities and their shareholders are substantially identical except for the amount of license fees paid by each entity. We believe that the individual shareholders of each entity will not receive any personal benefits from these agreements, except as shareholdersadvertising agency in respect of our ~~company. As a result of~~website advertising space on www.ku6.com and generate advertising revenue for us by using the foregoing contractual arrangements, we effectively have financial control over our affiliated Chinese entities through our security interests over their assets, our ability to receive up to all of their revenue and our other rights described above. In turn, the general manager of Beijing Hurray! Times (currently Qindai Wang), who, as a matter of Chinese law, is subject to the direction of Beijing Hurray! Times’ board of directors, maintains control over all voting matters involving our affiliated Chinese entities.
AA system. We have also entered into certain agreements with Huayi Brothers Music and Freeland Music for online and offline distribution of music content which are described under Item 4.B. “Business Overview — Product and Content Development — Music Production.”
~~As part of the acquisition agreements for the purchase of Huayi Brothers Music, Freeland Music and New Run Entertainment, we~~ agreed to ~~use~~pay Shengyue certain commission fee accordingly. For the existing distribution and CD manufacturing operations, where appropriate, owned by the minority shareholders, or their related parties, of these companies. In addition, these parties may use the music or artists of Huayi Brothers Music, Freeland Music or New Run Entertainment and make royalty and other payments to Huayi Brothers Music, Freeland Music or New Run Entertainment. The term of such agreements is one year ~~although such agreements may be extended by the mutual agreement of both parties. During 2008,~~ended December 31, 2011, we ~~recognized~~received revenues of ~~$566,544~~$8.1 million from Shengyue and ~~made payments under these agreements of $104,281.~~
Inpaid nil commission fee to Shengyue as the ~~fourth quarter of 2008, Freeland Music advanced $162,721~~commission fee was either not required or waived during the period from April 1, 2011 to ~~its minority shareholder on an interest-free basis, As of March~~December 31, ~~2009, the balance was cleared.~~
2011.
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Item 8. Financial Information

A. Consolidated Statements and Other Financial Information
See Item 18. “Financial Statements” for our audited consolidated financial statements filed as part of this annual report on Form 20-F.
~~A.7~~ Legal Proceedings
From time to time, we have been involved in litigation relating to copyright infringement and other matters in the ordinary course of our business. We had an accrued litigation provision balance of $2.7 million as of December 31, 2011. The accrual was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 2011 but related to alleged copyright infringement arising before December 31, 2011. The accrual was based upon management’s best estimation according to the historical actual compensation amount per video of Ku6 Holding for the similar legal actions and the advice from PRC counsel. We are ~~not currently~~in the process of appealing certain judgments for which the loss has been accrued.
Our video content library may contain content in which others may claim to own copyrights or image rights or which others may claim to be defamatory or objectionable. Adverse results in legal proceedings against us may include awards of damages and may also result in, or even compel, a ~~party~~change in our business practices, which could impact our future financial results. Regardless of the outcome, however, any litigation can result in substantial costs and diversion of management resources and attention.
Although we have implemented and strengthened standard procedures to ~~any material~~delete video content, especially our UGC, that allegedly infringes on intellectual property rights of third parties, we have limited control over the nature or types of the content posted by our users. The infringement of intellectual property rights by our users may result in litigation against us and ~~are not aware~~harm our business and reputation. See “Risk Factors—Risks Related to Our Business—We have been and expect we will continue to be exposed to intellectual property infringement and other claims, including claims based on content posted on our website, which could be time-consuming and costly to defend and may result in substantial damage awards and/or court orders that may prevent us from continuing to provide certain of ~~any material litigation pending or threatened.~~
our existing services.”
~~A.8~~ Dividend Policy
We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and for the expansion of our business. Payments of dividends by our PRC subsidiaries ~~in China~~ to our company are subject to restrictions including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. There are no such similar foreign exchange restrictions in the Cayman Islands.

B. Significant Changes
~~See Item 5.A “Operating Results — Recent Developments” and Item 18 “Financial Statements” for information regarding significant changes to us since December 31, 2007.~~
None.
Item 9. The Offer and Listing
Not applicable except for Item 9.A.4. and Item 9.C.
American Depositary Shares, or ADSs, each representing 100 of our ordinary shares, have been listed on the Nasdaq Global Market since February 4, 2005. Our ADSs ~~trade~~were traded under the symbol ~~“HRAY.~~“HRAY” until August 16, 2010. On August 17, 2010, we changed our name to “Ku6 Media Co., Ltd.”
and changed our trading symbol on the Nasdaq Global Market from “HRAY” to “KUTV.”
The following table provides the high and low prices for our ADSs on the Nasdaq Global Market for (1) ~~each year since our initial public offering,~~the five most recent full financial years, (2) each full financial quarter in the two most recent full financial years and the ~~most recent quarter~~subsequent period, and (3) each of the most recent six months.

Sales Price
High Low
Annual highs and lows
2005 (February 4, 2005 through December 31, 2005) $ 11.80 $ 7.67
2006 $ 9.71 $ 4.70
2007 $ 6.53 $ 3.05
2008 $ 4.21 $ 1.08
2009 $ 2.28 $ 0.93

Quarterly highs and lows
First Quarter 2007 $ 6.53 $ 4.85
Second Quarter 2007 $ 5.62 $ 4.36
Third Quarter 2007 $ 6.04 $ 3.32
Fourth Quarter 2007 $ 6.04 $ 3.05
First Quarter 2008 $ 4.21 $ 2.36
Second Quarter 2008 $ 3.30 $ 2.61
Third Quarter 2008 $ 3.19 $ 2.21
Fourth Quarter 2008 $ 2.75 $ 1.08
First Quarter 2009 $ 2.04 $ 0.93
Second Quarter 2009 (April 1, 2009 through May 31, 2009) $ 3.10 $ 0.95

Monthly highs and lows
December 2008 $ 2.75 $ 1.19
January 2009 $ 2.04 $ 1.55
February 2009 $ 1.95 $ 1.07
March 2009 $ 1.50 $ 0.93
April 2009 $ 2.28 $ 0.95
May 2009 $ 3.10 $ 1.98

   Sales Price
   High    Low
   (in U.S. dollars)
Annual highs and lows

2007
   6.53       3.05
2008
   4.21       1.08
2009
   7.16       0.93
2010
   8.40       2.22
2011
   8.12       0.75
Quarterly highs and lows

First quarter 2010
   4.50       2.22
Second quarter 2010
   3.84       2.45
Third quarter 2010
   5.19       2.36
Fourth quarter 2010
   8.40       4.14
First quarter 2011
   5.25       2.59
Second quarter 2011
   8.12       2.83
Third quarter 2011
   3.68       1.70
Fourth quarter 2011
   2.10       0.75
Monthly highs and lows

September 2011
   2.15       1.73
October 2011
   2.10       1.69
November 2011
   1.88       1.12
December 2011
   1.39       0.75
January 2012
   4.04       1.03
February 2012
   2.30       1.75
March 2012 (through March 26, 2012)
   2.80       1.93
69
Item 10. Additional Information

A. Share Capital
Not applicable.

B. Memorandum and Articles of Association
~~Please see “Description~~
The following are summaries of ~~Share Capital”~~material terms and provisions of our current memorandum and articles of association, as well as certain provisions of the Cayman Companies Law insofar as they relate to the material terms of our ordinary shares. This summary is not complete and some of the terms in our memorandum and articles of association are subject to other rights, restrictions and obligations set out therein, and you should read in full our memorandum and articles of association, which was included as Exhibit 3.1 to our registration statement on Form F-1 (File No. 333-121987) filed with the SEC on January 12, 2005, as amended by the amendment passed by our shareholders by way of a special resolution on October 16, 2009, which was included as Exhibit 1.2 to our annual report on Form 20-F for the year ended December 31, 2009 (File No. 000-51116) filed with the ~~SEC.~~
SEC on April 30, 2010, and further amended by the amendment passed by our shareholders by way of a special resolution on June 24, 2011, which was included as Exhibit 1.3 to our annual report on Form 20-F for the year ended December 31, 2010 (File No. 000-51116) filed with the SEC on June 28, 2011.
General
We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association, the Cayman Companies Law and the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities law as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in the federal courts of the United States.
The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs.
Directors
Interested Transactions. A director may vote in respect of any contract or transaction in which he or she is interested,provided, however, that the nature of the interest of any director in any such contract or transaction shall be disclosed by him or her at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure, and after such general notice it shall not be necessary to give special notice relating to any particular transaction.
Remuneration and Borrowing. The directors may determine remuneration to be paid to the directors. The directors may exercise all the powers of our company to borrow money and to mortgage or charge our undertaking, property and uncalled capital or any part thereof, and to issue debentures, debenture stock and other securities whether outright or as security for any of our debts, liabilities, or obligations or those of any third party.
Qualifications. There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting.
Rights, Preferences and Restrictions of our Ordinary Shares
General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing our ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors.
Voting Rights. On a poll (if demanded), each ordinary share is entitled to one vote on all matters upon which our ordinary shares are entitled to vote, including the election of directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by our Chairman or any other shareholder present in person or by proxy. A quorum required for a meeting of shareholders consists of shareholders who hold at least one-third of our outstanding shares entitled to vote at the meeting present in person or by proxy.
Any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes attaching to our ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to our ordinary shares. A special resolution is required for matters such as a change of name. Holders of our ordinary shares may, by ordinary resolution, among other things, elect directors, appoint auditors, and increase our authorized share capital.
Liquidation. Without prejudice to the rights of holders of our shares issued upon special terms and conditions, if in a winding up, the assets available for distribution among our shareholders are insufficient to repay all of the paid-up capital, such assets will be distributed so that, as nearly as may be, the losses are borne by our shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. If in a winding up, the assets available for distribution among our shareholders is more than sufficient to repay all of the paid-up capital at the commencement of the winding up, the excess will be distributed among our shareholders in proportion to the capital paid up at the commencement of the winding up on our shares held by them respectively.
Calls on our Ordinary Shares and Forfeiture of our Ordinary Shares. Our board of directors may from time to time make calls upon shareholders in respect of any moneys unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Our ordinary shares that have been called upon and remain unpaid may be subject to forfeiture.
Redemption and Repurchase of our Ordinary Shares. The Cayman Companies Law provides that a company limited by shares may, if so authorized by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder. In addition, such a company may, if authorized to do so by its articles of association, purchase its own shares, including any redeemable shares. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any member of the company holding shares other than shares held as treasury shares. Under our memorandum of association, we may issue shares that are, or at our option or at the option of the holders are, subject to redemption on such terms and in such manner as we may, before the issue of the shares, determine by special resolution. We may also purchase our own shares, including any redeemable shares, provided that the manner of purchase has been authorized in a general meeting.
A Cayman Islands company may redeem or purchase its own shares out of profits, out of its share premium account, out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase or, provided the company will remain solvent, out of capital. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless, immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business. If and to the extent that a premium is to be paid on the redemption or purchase of a company’s shares, the premium must have been provided for out of either or both of the profits of the company or out of the company’s share premium account before or at the time the shares are redeemed or purchased, or, subject to the same solvency test, out of capital.
Shares that have been purchased or redeemed by a Cayman Islands company or surrendered to the company pursuant to the Cayman Companies Law shall not be treated as cancelled but shall be classified as treasury shares if the memorandum and articles of association of the company do not prohibit it from holding treasury shares, the relevant provisions of the memorandum and articles of association (if any) are complied with, and the company is authorized in accordance with the its articles of association or by a resolution of the directors to hold such shares in the name of the company as treasury shares prior to the purchase, redemption or surrender of such shares. Shares held by a company as treasury shares shall continue to be classified as such until such shares are either cancelled or transferred pursuant to the Cayman Companies Law. The company shall not be treated as a member for any purpose and shall not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void. A treasury share shall not be voted, directly or indirectly, at any meeting of the company and shall not be counted as issued shares at any given time, whether for the purposes of the company’s articles of association or the Cayman Companies Law. No dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share.
Shares with Preferred Rights
Our memorandum and articles of association provide for the authorization of issuance of shares with preferred rights. Subject to any direction that may be given by us in general meetings, and without prejudice to any special rights previously conferred on the holders of existing shares, our directors may allot, issue, grant options over or otherwise dispose of shares of our company, with or without preferred rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper. We have no immediate plans to issue any shares with preferred rights. The issuance of any of our shares with preferred rights could provide needed flexibility in connection with possible acquisitions and other corporate purposes. However, the issuance could also make it more difficult for a third party to acquire a majority of our outstanding voting shares or discourage an attempt to gain control of us. In addition, the board of directors, without shareholder approval, can issue shares with preferred rights with voting and conversion rights which could adversely affect the voting power and other rights of the holders of ordinary shares. These shares with preferred rights may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions. The listing maintenance requirements of the Nasdaq National Market, which apply so long as our ADSs are quoted on that market, require shareholder approval of certain issuances of our securities equal to or exceeding 20% of the then outstanding voting power of all our securities or the then outstanding number of our ordinary shares.
Variations of Rights of Shares
All or any of the special rights attached to any class of shares maybe varied, either with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
General Meetings of Shareholders
The directors may, whenever they think fit, and shall, on the requisition of our shareholders holding at the date of the deposit of the requisition not less than one-tenth of our paid-up capital, which as at the date of the deposit carries the right of voting at our general meetings, proceed to convene a general meeting of our company. If the directors do not, within 21 days from the date of the deposit of the requisition, duly proceed to convene a general meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of such 21 days.
At least five days’ notice shall be given of an annual general meeting or other general meeting. Every notice shall be exclusive of the day on which its given, or deemed to be given, and of the day for which it is given.
Limitations on the Right to Own Shares
There are no limitations on the right to own our shares, provided that we are prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of our securities.
Limitations on Transfer of Shares
There are no provisions in our memorandum or articles of association that would have an effect of delaying, deferring or preventing a change in control and that would operate only with respect to a merger, acquisition or corporate restructuring.
Disclosure of Shareholder Ownership
There are no provisions in our memorandum or articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Changes in Capital
We may, from time to time by ordinary resolution, increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe. The new shares shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. We may by ordinary resolution:
(a) consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;
(b) subdivide our existing shares, or any of them, into shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to the provisions of Section 13 of the Cayman Companies Law; or
(c) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person.
We may, by special resolution, reduce our share capital and any capital redemption reserve fund in any manner authorized by the Cayman Companies Law.
Differences in Corporate Law
The company law of the Cayman Islands is historically derived, for the most part, from the laws of England, and comprises the provisions of the Cayman Companies Law, many of which are drawn from pre-1948 Companies Acts of the United Kingdom. Other provisions are original Cayman Islands provisions, some of which relate to a certain class of companies, which are commonly used for the conduct of international business from the Cayman Islands. These provisions create the concept of the “exempted” company, which is a special corporate vehicle, the business and operation of which are required to be conducted mainly outside the Cayman Islands. Decisions of the superior courts of England constitute persuasive authority in the Cayman Islands courts. The Cayman Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Scheme of Arrangements, Compulsory Acquisition and Merger and Consolidation.
Schemes of arrangement are governed by specific statutory provisions under the Cayman Companies Law, whereby such arrangements may be approved by a majority in number representing 75% in value of members or creditors, depending on the circumstances, as are present at a meeting called for such purpose and thereafter sanctioned by the courts. While a dissenting member would have the right to express to the court his view that the transaction for which approval is being sought would not provide the members with a fair value for their shares, the courts are unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management; and if the transaction were approved and consummated, the dissenting member would have no rights comparable to the appraisal rights (i.e., the right to receive payment in cash for the judicially determined value of their shares) ordinarily available, for example, to dissenting members of a United States corporation.
Where an offer is made by a company for the shares of another company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer accept, the offeror may at any time within two months after the expiration of the said four months, by notice, require the dissenting members to transfer their shares on the terms of the offer. A dissenting member may apply to the court of the Cayman Islands within one month of the notice objecting to the transfer. The burden is on the dissenting member to show that the court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion, as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority members.
Two or more companies limited by shares and incorporated under the Cayman Companies Law, may, subject to any express provisions to the contrary in the memorandum and articles of association of any of such companies as well as certain requirements under the Cayman Companies Law, merge or consolidate. One or more companies incorporated under the Cayman Companies Law may also merge or consolidate with one or more overseas companies, subject to certain requirements. The directors of each constituent company that proposes to participate in a merger or consolidation are required, on behalf of the constituent company of which they are directors, to approve a written plan of merger or consolidation. A plan of merger or consolidation shall give particulars of matters as set forth in the Cayman Companies Law, and be authorized by each constituent company by way of: (a) a special resolution of the members of each such constituent company; and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The consent of each holder of a fixed or floating security interest of a constituent company in a proposed merger or consolidation will be required, or as determined by the Grand Court of the Cayman Islands. A dissenting member is required to give to the constituent company written objection before the vote on the merger or consolidation, and is entitled to payment of the fair value of his shares as determined in accordance with the procedures set forth under the Cayman Companies Law. Such objection shall include a statement that the member proposes to demand payment for his or her shares if the merger or consolidation is authorized by the vote.
Indemnification. Cayman Islands law does not (other than as set forth hereafter) limit the extent to which a company’s organizational documents may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own willful neglect or default.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4., “Information on the Company,” and Item 7.B., “Related Party Transactions,” or elsewhere in this annual report on Form 20-F.

D. Exchange Controls
Foreign currency exchange regulation in China is primarily governed by the following rules:
Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies;
Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; ~~and~~
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration ~~Rules.~~Rules; and
the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142.
Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is subject to the approval of SAFE.
Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by ~~the PRC Ministry of Commerce,~~MOFCOM, SAFE and the ~~NDRC.~~
National Development and Reform Commission of the PRC.
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which took effect on November 1, 2005. Notice 75 supersedes prior SAFE regulations promulgated in January and April of 2005. In May 2007, SAFE issued the Notice of the State Administration of Foreign Exchange on Operating Procedures Concerning Notice 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 Notice 106. Notices 75 and 106 require PRC residents to register with the relevant local SAFE branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them and direct investment through such an offshore entity in the PRC. The term “PRC residents,” as used in Notice 75, includes not only PRC citizens but also other persons who habitually reside in the PRC for economic benefit. Such PRC residents are required to register with the relevant SAFE branch before establishing or taking control of such an offshore entity and complete amended registrations with the relevant SAFE branch ~~upon~~upon: (i) injection of equity interests or assets of an onshore enterprise into the offshore ~~entity,~~entity; (ii) subsequent overseas equity financing by such offshore ~~entity,~~entity; or (iii) any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. The PRC residents who have already incorporated or gained control of offshore entities that had completed onshore investments in the PRC before Notice 75 took effect must register with the relevant local SAFE branch on or before March 31, 2006. In addition, such PRC residents are required to repatriate into the PRC all of their dividend profits or capital gains from their shareholdings in the offshore entity within 180 days of their receipt of such profits or gains.
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The registration and amendment procedures set forth by Notices 75 and 106 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investment or ~~shareholders~~shareholders’ loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction.
A number of terms and provisions in Notices 75 and 106 remain unclear. Because of uncertainty over how Notices 75 and 106 will be interpreted and implemented, we cannot predict how they will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as remitting dividends and foreign currency-denominated borrowings, may be subject to compliance with requirements of Notices 75 and 106 by the PRC resident holders of our ordinary shares and ADSs. Despite our effort to fully comply with the SAFE regulations, we cannot assure you that we will obtain, or receive waivers from, any necessary approvals or not be found in violation of the SAFE regulations or any other related foreign exchange regulations. In particular, we cannot assure you that we will be able to cause all the present or prospective PRC resident holders of our ordinary shares or ADSs to comply with all SAFE regulations. A failure by the PRC resident holders of our ordinary shares or ADSs to comply with Notices 75 and 106 or our inability to secure required approvals or registrations may subject us to fines or legal sanctions, limit our subsidiaries’ ability to make distributions or pay dividends, restrict our overseas or cross-border investment activities or affect our ownership structure, any of which could affect our business and prospects.

On August 29, 2008, SAFE promulgated SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority, and may not be used for equity investments within the PRC, unless it is provided for otherwise. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Failure to comply with SAFE Circular 142 could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including: (i) being required to take appropriate remedial action, confiscation of any illegal income and being fined up to 30% of the illegal amount involved; (2) in circumstances involving serious violations, a fine of between 30% and 100% of the illegal amount involved shall be imposed on the organization or individual concerned.
E. Taxation
The following summary of the material Cayman Islands, PRC and ~~United States~~U.S. federal income tax consequences relevant to the purchase, ownership or sale of our ordinary shares or ADSs is based upon laws and relevant interpretations thereof ~~in effect~~ as of the date of this annual report ~~all of~~on Form 20-F, which are subject to change. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, ~~beneficial owners~~holders of ordinary shares or ADSs should consult their own tax advisors regarding the application of the considerations discussed below to their particular situations and the consequences of the purchase, ownership or sale of our ordinary shares or ADSs, including those arising under U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.

Cayman Islands Taxation and Exchange Control
Pursuant to ~~section~~Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, our company has obtained an undertaking from the Governor-in-Council:
(i) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, or income, or gains or ~~appreciation~~appreciations shall apply to our company or its operations; and
(ii) in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of an estate duty or inheritance tax shall be payable by our company:
(a) on or in respect of the shares, debentures or other obligations of our company; or
(b) by way of withholding, in whole or in part, of any relevant payment as defined in ~~section~~Section 6(3) of the Tax Concessions Law (1999 Revision).
The undertaking for our company is for a period of twenty years starting from May 7, ~~May~~ 2002.
The Cayman Islands currently ~~levy~~levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of an estate duty or inheritance ~~tax or estate duty.~~tax. There are no other taxes likely to be material to ~~the company~~us levied by the Government of the Cayman Islands except for stamp duties, which may be applicable on instruments. ~~The Cayman Islands are not party to any double tax treaties.~~ There are no exchange control regulations or currency restrictions in the Cayman Islands.
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PRC Taxation
On January 1, 2008, the EIT Law became effective. The EIT Law provides that legal entities organized outside China will be considered PRC residents for Chinese income tax purposes if their place of effective management or control is within China. The implementation rules to the EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., reside within China. Under current PRC laws and regulations, it is uncertain whether we would be deemed a PRC resident enterprise under the EIT Law. If we are treated as a PRC resident enterprise, dividends paid by us to holders of our ordinary shares or ADSs that are non-resident enterprises would be subject to a 10% PRC withholding tax, and gains realized by these holders on the disposition of our ordinary shares or ADSs could be subject to a 10% PRC withholding tax.
Under the IITL, if we are treated as a PRC resident enterprise, non-resident individual investors would be subject to PRC individual income tax at a rate of 20% on dividends paid to such investors and any capital gains realized from the transfer of our ordinary shares and ADSs if such dividends and gains are deemed income derived from sources within the PRC. A non-resident individual is an individual who has no domicile in the PRC and does not stay within the PRC or has stayed within the PRC for less than one year. Pursuant to the IITL and its implementation rules, for purposes of the PRC capital gains tax, the taxable income will be based on the total income obtained from the transfer of our ordinary shares or ADSs after deducting all the costs and expenses that are permitted under PRC tax laws to be deducted from the income. If we were considered a PRC resident enterprise and dividends we pay with respect to our ordinary shares and ADSs and the gains realized from the transfer of our ordinary shares and ADSs were considered income derived from sources within the PRC by relevant PRC tax authorities, such dividends and gains earned by non-resident individuals would also be subject to PRC tax at a rate of 20% except in the case of individuals that qualify for a lower rate under a tax treaty. Under the PRC-U.S. tax treaty, a 10% rate will apply to dividends provided certain conditions are met.
~~United States~~U.S. Federal Income Taxation
The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ~~ADSs.~~ADSs by a U.S. Holder. The following ~~discussion~~summary is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended, ~~(the “Code”),~~or the Code, regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service, ~~(the “IRS”), and~~or the IRS, judicial decisions and the double taxation treaty between the PRC and the United States, or the Treaty, all as ~~currently in effect~~of the date hereof and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below.
This ~~discussion~~summary does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares or ADSs. ~~(See “Cayman Islands Taxation” above).~~ The United States does not have an income tax treaty with the Cayman Islands.
This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: ~~banks;~~certain financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; entities classified as partnerships for U.S. federal income tax purposes; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, Roth IRAs and other tax-deferred accounts; expatriates of the United States; persons subject to the alternative minimum tax; persons holding ordinary shares or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction; persons who enter into a constructive sale with respect to ordinary shares or ADSs; persons who acquired ordinary shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting stock; ~~and~~ U.S. ~~Holders (as defined below)~~persons whose functional currency for U.S. federal income tax purposes is other than the U.S. ~~dollar.~~
dollar; and persons holding ordinary shares or ADSs in connection with a trade or business conducted outside of the United States.
This ~~discussion~~summary is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of ordinary shares or ADSs. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ordinary shares or ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
This summary is directed solely to ~~persons~~U.S. Holders who hold their ordinary shares or ADSs as capital assets ~~within the meaning of Section 1221 of the Code,~~for U.S. federal income tax purposes, which generally means as property held for investment. For purposes of this ~~discussion,~~summary, the term “U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is, ~~any of the following:~~
for U.S. federal income tax purposes:
a citizen or resident of the United ~~States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;~~States;
a corporation, ~~(or~~or other entity taxable as a corporation, ~~for U.S. federal income tax purposes)~~ created or organized in or under the laws of the United States, any state ~~thereof,~~therein or the District of Columbia; or
an estate or trust, the income of which is subject to U.S. federal income taxation regardless of its ~~source;~~source.
~~a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all substantial decisions of the trust; or~~
~~a trust in existence on August 20, 1996 that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.~~
The term “Non-U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is not a U.S. Holder. As described in “Taxation of Non-U.S. Holders” below, the tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares or ADSs, the U.S. federal income tax consequences to a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares or ADSs that is a partnership, and the partners in such partnership, should consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ADSs.
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~~ADSs~~
~~As relates to the ADSs, this discussion~~This summary is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.
Generally, a holder of ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if the holder exchanges ADSs for the underlying ordinary shares represented by those ADSs. The holder’s adjusted tax basis in the ordinary shares will be the same as the adjusted tax basis of the ADSs surrendered in exchange therefor, and the holding period for the ordinary shares will include the holding period for the surrendered ADSs.
~~TAXATION OF~~
The U.S. ~~HOLDERS~~
Treasury has expressed concern that parties to whom American depositary shares are released before shares are delivered to the depositary, or pre-release, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of the American depositary shares. Accordingly, the creditability of any PRC taxes, described below, could be affected by actions taken by such parties or intermediaries.
Passive Foreign Investment Company
We
It is not clear whether we were a PFIC for taxable year 2011. That determination is subject to uncertainty because of the uncertain characterization of our assets and income for purposes of the PFIC rules. Although we believe that we were not a PFIC for taxable year 2010, we believe that we were a PFIC for taxable years 2006, 2007, ~~and~~ 2008 and ~~are likely to~~2009 and we may be ~~classified as~~ a PFIC for the ~~current~~taxable years ending after 2011. Because our PFIC status for any taxable year ~~of 2009. Because the PFIC determination is highly fact intensive and made at~~will not be determinable until after the end of ~~each~~the taxable year, and will depend on the composition of our income and assets and the market value of our assets for such taxable year, which may be, in part, based on the market price of our ordinary shares or ADSs (which may be especially volatile), there can be no assurance ~~that~~ we will not be a PFIC for ~~the current or~~ any future taxable year.
We generally will be a PFIC ~~under Section 1297 of the Code~~ if, for a taxable year, either (a) 75% or more of our gross income for such taxable year is passive income ~~(the “income test”)~~under the income test or (b) 50% or more of the average ~~percentage,~~quarterly value, generally determined by fair market value, of our assets during such taxable year consists of assets that either produce passive income or are held for the production of passive income ~~(the “asset test”).~~under the asset test. “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities and certain gains from commodities transactions.
Certain “look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we generally will be treated as if we (a) held directly a proportionate share of the other corporation’s assets and (b) received directly a proportionate share of the other corporation’s income.
In addition, ~~passive income does not include any interest, dividends, rents,~~we may, directly or ~~royalties that~~indirectly, hold equity interests in subsidiaries or other entities which are ~~received~~PFICs, or ~~accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to income of such related person that is not passive income.~~
Lower-tier PFICs. Under ~~the income and asset tests, whether or not~~attribution rules, if we are a PFIC, U.S. Holders will be ~~determined annually based upon the composition~~deemed to own their proportionate shares of ~~our income~~Lower-tier PFICs and ~~the composition and valuation of our assets, all of which are~~will be subject to ~~change.~~
~~Default~~U.S. federal income tax according to the rules described below on (i) certain distributions by a Lower-tier PFIC ~~Rules under Section 1291~~and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the ~~Code~~. U.S. Holder held such shares directly, even though holders have not received the proceeds of those distributions or dispositions directly.
If we are a PFIC for any taxable year during which a U.S. Holder holds ordinary shares or ADSs, we will generally continue to be treated as a PFIC with respect to ~~such U.S. Holder~~those ordinary shares or ADSs for all succeeding years during which such U.S. Holder holds ~~ordinary shares or ADSs,~~them, regardless of whether we actually continue to be a PFIC. ~~Since~~Because we believe that we were a PFIC for 2006, 2007, 2008 and ~~2008,~~2009, if you held ordinary shares or ADSs ~~in 2006, 2007 or 2008,~~during any of those taxable years, we ~~will~~would continue to be treated as a PFIC with respect to ~~you~~those ordinary shares or ADSs for all succeeding years during which you hold ~~ordinary shares or ADSs. Even~~them. Similarly, if you ~~only began holding~~first acquired ordinary shares or ADSs in ~~the current taxable year of 2009, if it turns out that~~2010 and we ~~are~~became a PFIC ~~for 2009,~~in a subsequent year, we ~~will continue to~~would be treated as a PFIC with respect to ~~you~~those ordinary shares or ADSs for all succeeding years during which you hold ~~ordinary shares or ADSs.~~them. You may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the default ~~tax~~PFIC rules ~~of Section 1291 of the Code~~ discussed below) as if your ordinary shares or ADSs had been sold on the last day of the last taxable year for which we were a PFIC.
If we are treated as a PFIC with respect to the ordinary shares or ADSs that you hold, the U.S. federal income tax consequences to you of the ownership and disposition of ordinary shares or ADSs will depend on whether you make ~~an election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or~~ a mark-to-market ~~election under Section 1296 of the Code (a “Mark-to-Market Election”).~~election. If you owned or own ordinary shares or ADSs while we were or are a PFIC and have not made ~~either~~ a ~~QEF Election or a Mark-to-Market Election,~~mark-to-market election, you will be referred to in this summary as a “Non-Electing U.S. Holder.”
If you are a Non-Electing U.S. Holder, you will be subject to the default ~~tax~~PFIC rules ~~of Section 1291 of the Code~~ with respect to:
any “excess distribution” paid on ordinary shares or ADSs (or by a Lower-tier PFIC to its shareholders that is deemed to be received by a U.S. Holder), which means the excess (if any) of the total distributions received (or deemed received) by you during the current taxable year over 125% of the average distributions received (or deemed received) by you during the three preceding taxable years (or during the portion of your holding period for the ordinary shares or ADSs prior to the current taxable year, if shorter); and
any gain ~~recognized~~realized on the sale or other ~~taxable~~ disposition (including a pledge) of ordinary shares or ~~ADSs.~~
ADSs (or on an indirect disposition of shares of a Lower-tier PFIC).
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Under these default tax rules:
any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares or ADSs;
the amount allocated to the ~~current~~ taxable year of receipt of the excess distribution or disposition and any period prior to the first day of the first taxable year in which we were a PFIC will be treated as ordinary income in the ~~current~~ taxable ~~year;~~year to which it is allocated;
the amount allocated to each ~~of the~~ other ~~years~~taxable year will be treated as ordinary income and taxed at the highest applicable tax rate in effect for that year; and
the resulting tax liability from any such ~~prior~~other taxable years will be subject to the interest charge applicable to underpayments of tax.
In addition, notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates applicable to QDI (as discussed below in “Distributions on Ordinary Shares or ADSs”) if we are a PFIC either in the taxable year of the distribution or the preceding taxable year, but will instead be taxable at rates applicable to ordinary income.
~~Special rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits with respect to foreign taxes imposed on distributions on ordinary shares or ADSs.~~
If we are treated as a PFIC in any year with respect to you, you will be required to file an annual return on IRS Form 8621 regarding distributions received on ordinary shares or ADSs and any gain realized on the disposition of ordinary shares or ADSs. Since we believe that we were a PFIC for 2008, if you held ordinary shares or ADSs in 2008, you are required to file IRS Form 8621 for 2008 and for all succeeding years during which we continue to be treated as a PFIC with respect to you. Alternatively, even if you only began holding ordinary shares or ADSs in the current taxable year of 2009, if it turns out that we are a PFIC for 2009, you will be required to file IRS Form 8621 for 2009 and for all succeeding years during which we continue to be treated as a PFIC with respect to you.
~~QEF Election~~. If you own (or owned) ordinary shares or ADSs while we are (or were) a PFIC and make a QEF Election, you generally will not be subject to the default rules of Section 1291 of the Code discussed above. Instead, you will be subject to current U.S. federal income tax on your pro rata share of our ordinary earnings and net capital gain, regardless of whether such amounts are actually distributed to you by us. However, you can make a QEF Election only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.
~~Mark-to-Market Election.~~~~U.S. Holders may make a Mark-to-Market Election, but only if our~~ ordinary shares or ADSs are ~~marketable stock. Our~~“regularly traded” on a “qualified exchange,” a U.S. Holder of ordinary shares ~~are not currently listed on any exchange, but our~~or ADSs may make a mark-to-market election that would result in tax treatment different from the default PFIC rules described above. The ordinary shares or ADSs will be ~~“marketable stock”~~treated as ~~long as they remain listed on the Nasdaq Global Market and are regularly traded. Stock is~~ “regularly traded” ~~for~~in any calendar year ~~during~~in which ~~it is traded (other~~more than ina de minimis ~~quantities)~~quantity of the ordinary shares or ADSs are traded on a qualified exchange on at least 15 days during each calendar quarter. ~~There can~~NASDAQ, on which the ordinary shares or ADSs are listed, is a qualified exchange for this purpose. U.S. Holders should consult their tax advisors regarding the availability and advisability of making a mark-to-market election in their particular circumstances. In particular, U.S. Holders should consider carefully the impact of a mark-to-market election with respect to their ordinary shares or ADSs, given that the election may not be ~~no assurances, however, that our ADSs will be treated, or continue~~available with respect to ~~be treated, as regularly traded.~~
any Lower-tier PFICs.
If ~~you own (or owned) ADSs while we are (or were)~~ a ~~PFIC and make a Mark-to-Market Election, you~~U.S. Holder makes the mark-to-market election, the holder generally will ~~not be subject to the default rules of Section 1291 of the Code discussed above. Rather, you generally will be required to~~ recognize as ordinary income ~~for~~ any ~~increase in~~excess of the fair market value of the ordinary shares or ADSs ~~for~~at the end of each taxable year ~~that we are a PFIC. You~~over their adjusted tax basis, and will ~~also be allowed to deduct as~~recognize an ordinary loss in respect of any ~~decrease in~~excess of the adjusted tax basis of the ordinary shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net ~~marked-to-market gain~~amount of income previously included ~~in prior years. Your adjusted~~as a result of the mark-to-market election). If a U.S. Holder makes the election, the holder’s tax basis in the ordinary shares or ADSs will be adjusted to reflect the ~~amount included~~income or ~~deducted.~~
~~The Mark-to-Market Election~~loss amounts recognized. Any gain recognized on the sale or other disposition of ordinary shares or ADSs in a year when we are a PFIC will be ~~effective~~treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). Distributions paid on ordinary shares or ADSs will be treated as discussed below under “Distributions on Ordinary Shares or ADSs.”
We do not intend to provide information necessary for U.S. Holders to make a qualified electing fund election, which, if available, could result in a materially different tax treatment of the ownership and disposition of ordinary shares or ADSs to an electing U.S. Holder.
Furthermore, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year ~~for~~in which ~~the election is made and all subsequent taxable years, unless our ADSs cease to be marketable stock~~we paid a dividend or the ~~IRS consents to~~prior year, the ~~revocation of the election. You should consult your own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.~~
One or more of Hurray! Holding Co., Ltd.’s subsidiaries may also be classified as PFICs now or in the future, and furthermore, Hurray! Holding Co., Ltd. or one or more of its subsidiaries may invest in the equity of other foreign corporations that are PFICs. In such cases, U.S. Holders will be subject to the PFIC rulesreduced dividend rates with respect to ~~their indirect ownership interests in such PFICs.~~the dividends paid to certain non-corporate U.S. Holders ~~will~~would not apply.
If we were a PFIC for any taxable year during which a U.S. Holder held ordinary shares or ADSs, such U.S. Holder may be ~~able~~required to ~~make~~file a ~~QEF Election or a Mark-to-Market Election with respect to Hurray! Holding Co., Ltd.’s subsidiaries that are PFICs, and there can be no assurance that~~report containing such information as the U.S. ~~Holders will be able to make such elections with respect to any other PFICs in which Hurray! Holding Co., Ltd. or one or more of its subsidiaries invests.~~
~~Since~~Treasury may require.
Because the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ADSs.
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~~U.S. Federal Income Tax Consequences If We Are Not Treated as a PFIC~~
The discussion in “Distributions on Ordinary Shares or ADSs” and “Dispositions of Ordinary Shares or ADSs” below describes the applicable U.S. federal income tax consequences to a U.S. investor in the event that we are not treated as a PFIC for U.S. federal income tax purposes. For a discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment Company” above.
Distributions on Ordinary Shares or ADSs
~~General~~.
Subject to the discussion in “Passive Foreign Investment Company” above, if you actually or constructively receive a distribution on ordinary shares or ADSs (other than certain pro rata distributions of ordinary shares), you must include the distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the depositary’s) receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign tax withheld. Dividends paid by us ~~generally~~ will not be eligible for the ~~dividends received~~dividends-received deduction allowed to corporations with respect to dividends received from certain domestic ~~corporations. Dividends paid by us may or~~corporations and may not be eligible for ~~preferential~~the reduced tax rates ~~applicable to qualified dividend income, as described below.~~
on dividends received by certain non-corporate U.S. Holders.
To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the ordinary shares or ADSs, and thereafter as capital gain. Preferential tax rates for long-term capital gain may be applicable to non-corporate U.S. Holders.
We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported to U.S. Holders as a dividend, even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
~~Qualified Dividend Income~~. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), for taxable years beginning before January 1, 2011, dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate
The amount of 15%. However, we believe that we are likely a PFIC for the current taxable year of 2009 and were a PFIC for the taxable year of 2008. As a result, dividends paid by us will likely not be treated as QDI.
~~Foreign Currency Distributions.~~Aany dividend paid in Renminbi or any other foreign currency ~~(for example, Renminbi) must~~will be ~~included in your income as a~~the U.S. dollar amount ~~based on~~calculated by reference to the exchange rate in effect on the date ~~such dividend is received,~~of receipt, regardless of whether the payment is in fact converted tointo U.S. dollars. If the dividend is converted tointo U.S. dollars on the date of receipt, ~~you generally will~~a U.S. Holder should not be required to recognize a foreign currency gain or ~~loss. However, if you convert~~loss in respect of the dividend income. A U.S. Holder may have foreign currency ~~to U.S. dollars on a later date, you must include in income any~~ gain or loss ~~resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount you included in income when~~if the dividend ~~was received and (ii)~~is converted into U.S. dollars after the ~~amount that you receive on the conversion~~date of ~~the foreign currency~~receipt.
As discussed in “—PRC Taxation” above, dividends paid with respect to ~~U.S. dollars. Such gain or loss will generally be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.~~
~~In-Kind Distributions~~~~. Distributions to you of new~~our ordinary shares or ADSs ~~or rights~~may be subject to ~~subscribe for new~~PRC withholding tax, and the amount of a dividend will include any amounts withheld in respect of PRC taxes. The amount of the dividend will be treated as foreign-sourced dividend income to U.S. Holders. Subject to applicable limitations, some of which vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, PRC income taxes withheld from dividends on ordinary shares or ADSs ~~that are received as part of~~at a ~~pro rata distribution to all of our shareholders will~~rate not ~~be subject to U.S. federal income tax. The adjusted tax basis of~~exceeding the ~~new ordinary shares or ADSs or rights so received~~rate provided by the Treaty will be ~~determined by allocating your adjusted tax basis in~~creditable against the old ordinary shares or ADSs between the old ordinary shares or ADSs and the new ordinary shares or ADSs or rights received, based on their relative fair market values on the date of distribution. However, in the case of a distribution of rights to subscribe for ordinary shares or ADSs, the adjusted tax basis of the rights will be zero if the fair market value of the rights is less than 15% of the fair market value of the old ordinary shares or ADSs on the date of distribution and you do not make an election to determine the adjusted tax basis of the rights by allocation as described above. Your holding period for the new ordinary shares or ADSs or rights will generally include the holding period for the old ordinary shares or ADSs on which the distribution was made.
~~Foreign Tax Credits.~~~~Subject to certain conditions and limitations, any foreign taxes paid on or withheld from distributions from us and not refundable to you may be credited against your~~U.S. Holder’s U.S. federal income tax ~~liability or, alternatively, may~~liability. PRC taxes withheld in excess of the rate applicable under the Treaty will not be ~~deducted from your taxable income. This election is made on~~eligible for credit against a ~~year-by-year basis and applies to all foreign taxes paid by you or withheld from you that year.~~
~~Distributions will constitute foreign source~~U.S. Holder’s federal income ~~for foreign~~ tax ~~credit limitation purposes.~~liability. The foreign tax credit limitation is calculated separately with respect to specific classes of income. For this purpose, distributions characterized as dividends distributed by us will generally constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).
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Special rules may apply to individuals whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return).
~~Since the~~ rules governing foreign tax credits are complex, ~~you~~and U.S. Holders should consult ~~your own~~their tax ~~advisor~~advisors regarding ~~the availability of foreign tax credits in your particular circumstances.~~
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the preferential tax rates applicable to QDI, as defined above. Accordingly, the creditability of foreign taxes ~~and the availability of such preferential tax rates could be affected by future actions that may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.~~
in their particular circumstances.
Dispositions of Ordinary Shares or ADSs
Subject to the discussion in “Passive Foreign Investment Company” above, you generally will ~~recognize~~realize taxable gain or loss ~~realized~~ on the sale or other ~~taxable~~ disposition of ordinary shares or ADSs equal to the difference between the U.S. dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the ordinary shares or ~~ADSs.~~ADSs disposed of. Such gain or loss will be capital gain or loss.
If you have held the ordinary shares or ADSs for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for taxable years beginning before January 1, ~~2011)~~2013) will apply to non-corporate U.S. Holders. If you have held the ordinary shares or ADSs for one year or less, such capital gain or loss will be short-term capital gain or loss, taxable as ordinary income at your marginal income tax rate. The deductibility of capital losses is subject to limitations.
~~Generally, any~~
As discussed in “—PRC Taxation” above, gains realized on the disposition of our ordinary shares or ADSs could be subject to PRC tax. Any gain or loss recognized by a U.S. Holder on a disposition of our ordinary shares or ADSs will ~~not give rise to foreign source~~generally be treated as U.S.-source income or loss for ~~U.S.~~ foreign tax credit limitation purposes.
A U.S. Holder that is eligible for the benefits of the Treaty may be able to elect to treat disposition gain that is subject to PRC taxation as foreign-source gain and claim a credit in respect of the tax. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances.
You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the disposition of ordinary shares or ADSs.

Information Reporting and Backup Withholding
Generally, information reporting requirements will apply to distributions on ordinary shares or ADSs or proceeds from the disposition of ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt ~~recipient, such as a corporation.~~recipient. Furthermore, backup withholding (currently at 28%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements. A U.S. Holder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
~~TAXATION OF NON-U.S. HOLDERS~~
~~Distributions on Ordinary Shares or ADSs~~
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on distributions received on ordinary shares or ADSs, unless the distributions are effectively connected with your conduct of a trade or business in the United States (and, if an applicable income tax treaty so requires, attributable to a permanent establishment that you maintain in the United States).
If distributions are effectively connected with a U.S. trade or business (and, if applicable, attributable to a U.S. permanent establishment), you generally will be subject to tax on such distributions in the same manner as a U.S. Holder, as described in “Taxation of
Certain U.S. Holders — Distributions on Ordinary Shares or ADSs” above. In addition, any such distributions received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
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~~Dispositions of Ordinary Shares or ADSs~~
Subject to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on any gain recognized on a sale or other taxable disposition of ordinary shares or ADSs, unless (i) the gain is effectively connected with your conduct of a trade or business in the United States (and, if an applicable income tax treaty so requires, attributable to a permanent establishment that you maintain in the United States), or (ii) youwho are ~~an individual and are present in the United States for at least 183 days in the taxable year of the disposition, and certain other conditions are met.~~
If you meet the test in clause (i) above, you generally will be subject to tax on any gain that is effectively connected with your conduct of a trade or business in the United States in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders — Dispositions of Ordinary Shares or ADSs” above. Effectively connected gain realized by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
~~If you meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate on the amount by which your U.S. source capital gain exceeds your U.S. source capital loss.~~
~~Information Reporting and Backup Withholding~~
Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares or ADSs are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holderindividuals may be required to ~~establish that exemption~~report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by ~~providing certification of non-U.S. status on an appropriate IRS Form W-8.~~
~~Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against your~~a U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
~~Enforcement of Civil Liabilities~~
Wefinancial institution). Certain U.S. Holders who are ~~incorporated in the Cayman Islands because of the following benefits found there:~~
~~political and economic stability;~~
~~an effective judicial system;~~
~~a favorable tax system;~~
~~the absence of exchange control or currency restrictions; and~~
~~the availability of professional and support services.~~
~~However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:~~
~~(1) The Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and~~
~~(2) Cayman Islands companies may not have standing to sue before the federal courts of the United States.~~
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders be arbitrated.
A substantial portion of our current operations is conducted in China through our wholly-owned subsidiaries which are incorporated in China. All or most of our assets are located in China. We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
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Appleby, our counsel as to Cayman Islands law, has advised us and we are of the understanding as to Chinese law, that there is uncertainty as to whether the courts of the Cayman Islands or China would:
(1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or
(2) entertain original actions brought in the Cayman Islands or China against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Appleby has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges,entities may be subject to ~~enforcement proceedings as a debt~~similar rules in the ~~courts of~~future. U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to the ~~Cayman Islands under the common law doctrine of obligation.~~
We are further of the understanding that the recognition and enforcement of foreign judgments are provided for under Chinese Civil Procedures Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of Chinese Civil Procedures Law based either on treaties between China and the country where the judgment is madeordinary shares or ~~on reciprocity between jurisdictions.~~
ADSs.
F. Dividends and Paying Agents
Not applicable.

G. Statement by Experts
Not applicable.

H. Documents on Display
We have ~~previously~~filed this annual report, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the ~~Commission a registration statement on Form F-1 and prospectus, and a registration statement on Form F-6, under~~SEC. This means that we can disclose important information to you by referring you to another document filed separately with the ~~Securities Act~~SEC. The information incorporated by reference is considered to be part of ~~1933, as amended, with respect to our ordinary shares represented by ADSs, as well as the ADSs.~~
this annual report.
We are subject to ~~the~~ periodic reporting and other informational requirements of the ~~Securities~~ Exchange Act ~~of 1934,~~ as ~~amended, or the Exchange Act. Under the Exchange Act,~~applicable to foreign private issuers. Accordingly, we ~~are~~will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than six months after the close of each fiscal year, which is December 31 of each year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., 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 website at~~www.sec.govthat contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.~~ As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
Our annual reports and other information so filed can be inspected and copied at the public reference facility maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility. Our SEC filings will also be available to the public on the SEC’s Internet Web site at http://www.sec.gov.
Our financial statements have been prepared in accordance with US GAAP.
We will make available to our shareholders annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with US GAAP.

I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
~~Please refer~~
Interest Rate Risk
Our exposure to ~~Item 5. “Operating~~market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits in banks. We have not used derivative financial instruments in our investment portfolio. Interest-earning instruments and ~~Financial Review~~floating rate debt carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. Our future interest income may fluctuate in line with changes in interest rates. However, the risk associated with fluctuating interest rates is principally confined to our cash deposits in banks, and, ~~Prospects—Quantitative~~therefore, our exposure to interest rate risk is minimal and ~~Qualitative Disclosures About Market Risk.”~~
immaterial.
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Foreign Exchange Risk
While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and costs are denominated in Renminbi and substantially all of our assets (other than the proceeds from our initial public offering) and liabilities are denominated in Renminbi. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in U.S. dollars in our financial statements will decline. We may also be exposed to foreign exchange risk in the event we hold other currencies in an effort to hedge against potential depreciation of the U.S. dollar or otherwise.
If the Renminbi had been 1% and 5% less valuable against the U.S. dollar than the actual rate as of December 31, 2011 which was used in preparing our audited financial statements as of and for the year ended December 31, 2011, our net asset value, as presented in U.S. dollars, would have been increased by $0.2 million and $1.0 million, respectively. Conversely, if the Renminbi had been 1% and 5% more valuable against the U.S. dollar as of that date, then our net asset value would have reduced by $0.2 million and $1.1 million, respectively.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China decreased by 0.7% in 2009 and increased by 3.3% and 5.4% in 2010 and 2011, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
Item 12. Description of Securities Other than Equity Securities
~~Not Applicable.~~
D. American Depositary Shares
Citibank, N.A. is the depositary of our ADSs. The depositary’s office is located at 111 Wall Street, New York, NY 10043, U.S.A. Each of our ADSs, evidenced by American depositary receipts, or ADRs, represents 100 ordinary shares, par value $0.00005 per share.
ADR Fees Payable by Investors
The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay:
For:
A fee not in excess of $5.00 per 100 ADSs
• Issuance of ADSs, including issuances resulting from a distribution of ordinary shares or rights or other property
• Cancellation or withdrawals of ADSs
• Distributions of securities other than ADSs or rights to purchase additional ADSs
A fee not in excess of $2.00 per 100 ADSs
• Distributions of cash dividends or other cash distributions to holders of ADRs
• Annual depositary services, except to the extent of any cash dividend fee(s) charged
A fee not in excess of $1.50 per ADR
• Transfers of ADRs
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or ordinary shares underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
• As necessary
Any charges, fees or expenses incurred by the depositary or its agents for servicing the deposited securities
• As necessary
Payments Received
For the year ended December 31, 2011, the Depositary made payments on our behalf to third parties of approximately $39,521 (approximately $2,829 for legal expenses, $9,410 for account maintenance and $27,282 for proxy expenses), which is deducted from the amount of reimbursements made by the Depositary to us.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
~~Item 14.~~ Item 14. Material Modifications to the Rights of Security Holders and ~~Use of Proceeds~~
Use of Proceeds
Use of Proceeds
The following “Use of Proceeds” information relates to ~~the~~our registration statement on Form F-1 (File No. 333-121987) ~~(the “Registration Statement”)~~ for our initial public offering of 6,880,000 ~~American Depositary Shares, each representing 100 of our ordinary shares,~~ADSs, which were sold by us and certain selling shareholders for an aggregate offering price of $70.5 million. ~~Our Registration Statement~~This registration statement was declared effective by the SEC on February 3, 2005.
We received net proceeds of approximately $59.4 million from our initial public offering (taking into account underwriting discounts of approximately $4.9 million, transaction expenses of approximately $3.8 million and payments to selling shareholders of approximately $2.4 million)~~. None~~, all of ~~the transaction expenses included payments to directors or officers of our company or their associates, persons owning 10% or more of our equity securities or our affiliates.~~
~~As of December 31, 2008, we~~which have been used ~~approximately $18.0 million in net proceeds from our initial public offering~~ to acquire certain businesses and fund expenses, primarily for general corporate purposes, product development, software and technology infrastructure products and other capital expenditures. None of the net proceeds ~~from the initial public offering~~ were paid, directly or indirectly, to, and none of the transaction expenses included payments to, any ~~of our directors~~director or ~~officers~~officer of our company or their associates, persons owning 10% or more of our equity securities or our affiliates.
~~Citigroup Global Markets Inc., Piper Jaffray Co. and Think Equity Partners LLC were the underwriters for our initial public offering.~~
Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
~~Our chief executive officer~~
As of the end of the period covered by this annual report on Form 20-F, our Chief Executive Officer, Chief Financial Officer and ~~chief financial officer~~Vice President of Finance and Controller have ~~conducted~~performed an evaluation of the effectiveness ~~of the design and operation~~ of our disclosure controls and procedures as defined inand required under Rules 13a-15(e) and 15d-15(e) ~~under~~of the Securities Exchange Act of 1934, as ~~of the end of December 31, 2008.~~amended. Based onupon this evaluation, our ~~chief executive officer~~Chief Executive Officer, Chief Financial Officer and ~~chief financial officer~~Vice President of Finance and Controller concluded ~~that, as of December 31, 2008,~~ our company’s disclosure controls and procedures were ~~not effective primarily because of the material weakness described below under “Management’s Report on Internal Control over Financial Reporting.”~~
effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting ~~(as~~as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange ~~Act).~~Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with ~~generally accepted accounting principles and~~U.S. GAAP. Internal control over financial reporting 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)~~ that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are made only in accordance with authorizations of management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of ~~a company’s~~ assets that could have a material effect on the ~~consolidated~~ financial statements.
79
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
~~A material weakness is a deficiency, or a combination~~
Under the supervision and with the participation of ~~deficiencies, in~~our management, including our Chief Executive Officer, Chief Financial Officer and Vice President of Finance and Controller, we conducted an assessment of the effectiveness of our internal control over financial reporting ~~such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.~~
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our management assessed the effectiveness of internal control over financial reporting as of December 31, 2008 using thebased upon criteria ~~set forth in the report “Internal Control—Integrated Framework” published~~established by the Committee of Sponsoring Organizations of the Treadway Commission, ~~(known as COSO).~~or COSO, in Internal Control—Integrated Framework. Based on this ~~evaluation,~~assessment, management ~~concluded~~determined that our internal control over financial reporting was effective as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, our independent registered public accounting firm, as stated in its report included on page F-2.
Changes in Internal Control over Financial Reporting
In 2011, we shifted our content focus from long-form videos to short-form videos. In order to encourage more users to upload UGC to our website, we have purchased the licensing rights to some popular UGC, and have also started to share advertising revenues with individual users whose numbers of video uploads exceed certain thresholds.
In connection with the business process changes resulting from this advertising revenue sharing program, as well as the generation of advertising revenues through an arrangement with Shengyue, an affiliate wholly owned by Shanda Interactive, we implemented further enhancements to the design and documentation of our internal control processes in the form of comprehensive process documentation, coupled with testing of the operating effectiveness of controls, to help ensure the effectiveness of internal controls over financial reporting.
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting, except as described above.
Remediation of Material Weaknesses Reported in Prior Year
Based on management’s assessment of internal control over financial reporting in the prior year, management determined that our internal control over financial reporting was not effective as of December 31, ~~2008~~2010 due to a lack of sufficient competent accounting personnel with appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues and prepare financial statements and related disclosures under U.S. GAAP.
During the ~~following material weakness.~~
~~Our affiliated music companies make~~year ended December 31, 2011, our management took remediation measures which included but were not limited to the following: (a) we hired an ~~allowance for doubtful debts against trade receivables based on~~Associate Director of Finance who is a review of each individual account. However, the management of these companies do not use a set of criteria (such as payment history and account activity) to determine whether an allowance for an individual account is necessary.
After the material weakness was reported to our audit committee, the audit committee agreed on an action plan to require the responsible management to remediate the weakness. The steps so far taken include:
~~(1)~~ ~~establishing general guidelines based on aging of trade receivables within the music companies as to when an allowance should be made (as we have in our other operations); and~~
~~(2)~~ ~~developing a list of criteria that management should consider when determining whether other allowances are required against specific accounts.~~
~~We do not believe that the material weakness identified above had a pervasive impact on internal control over financial reporting.~~
~~Upon identification~~member of the ~~material weakness,~~American Institute of Certified Public Accountants and a licensed CPA with appropriate knowledge and experience in U.S. GAAP; (b) we hired a Vice President of Finance and Controller who worked at PricewaterhouseCoopers Zhong Tian CPAs Limited Company and KPMG Huazhen CPAs Limited Company for a combined total of over 12 years with appropriate knowledge and experience in U.S. GAAP; (c) our ~~management examined each material trade receivable~~Chief Financial Officer attended specific relevant training courses; (d) we provided in-depth training on U.S. GAAP to accounting and other relevant personnel; and (e) we hired an Associate Director of Internal Audit who is a Certified Internal Auditor with appropriate knowledge and experience in the music companies and, having regard to the payment history up to the date of this annual report on Form 20-F, determined that no material adjustment was required to the draft financial statements contained in this report.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting as temporary rules of the Securities and Exchange Commission that permit us to provide only our management’s report in this annual report.
U.S. GAAP.
~~Changes in Internal Control Over Financial Reporting~~
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. ~~Alan Powrie~~Bruno Wu qualifies as an ~~Audit Committee Financial Expert as defined by~~audit committee financial expert in accordance with the ~~applicable rules~~terms of Item 16A of Form 20-F. Mr. Wu satisfies the “independence” requirements of the ~~SEC~~NASDAQ Stock Market Rules and ~~that Mr. Powrie is “independent” as defined~~meets the criteria for “independence” under ~~applicable Nasdaq rules.~~
Rule 10A-3 under the Exchange Act.
Item 16B. Code of Ethics
We have adopted a Code of Business Conduct which applies to our employees, officers and non-employee directors, including our ~~principal executive officer, principal financial officer, principal accounting officer or controller,~~Chief Executive Officer, Chief Financial Officer, Vice President of Finance and Controller, and persons performing similar functions. This code is intended to qualify as a “code of ethics” within the meaning of the applicable rules of the SEC.
The Code of Business Conduct is available on our investor relations website at~~www.hurray.com~~. http://www.mzcan.com/us/KUTV/irwebsite. To the extent required by law, any amendments to, or waivers from, any provision of the Code of Business Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be provided to any shareholder upon written request ~~to the~~to: Legal Counsel, ~~15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring,~~Building 6, Zhengtongchuangyi Centre, No. 18, Xibahe Xili, Chaoyang District, Beijing ~~100027,~~100020, People’s Republic of China.
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Item 16C. Principal Accountant Fees and Services

Disclosure of Fees Charged by Independent Accountants
The following table summarizes the fees charged by ~~Deloitte Touche Tohmatsu CPA Ltd. (our~~PricewaterhouseCoopers Zhong Tian CPAs Limited Company, our independent accountants, ~~from 2001 until the present time)~~ for certain services rendered to our company during ~~2008~~2010 and ~~2007.~~

For the year ended
December 31,
2008 2007
Audit fees⁽¹⁾
$ 437,132 $ 648,260
Audit related fees⁽²⁾
— —
Tax fees⁽³⁾
$ 96,455 —
All other fees⁽⁴⁾
— —
2011.
   For the year ended
December 31,
   2010    2011
   (in thousands of U.S. dollars)
Audit fees⁽¹⁾
   1,027       873
Audit-related fees⁽²⁾
   —         —
Tax fees⁽³⁾
   30       —
All other fees⁽⁴⁾
   —         4
(1) “Audit fees” means the aggregate fees incurred in each of the fiscal years listed for our calendar year audits and reviews of financial statements.
(2) “Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for professional services related to the audit of our financial statements that are not reported under “Audit fees” and consultation on accounting standards or transactions.
(3) “Tax fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered for tax compliance, tax advice and tax planning.
(4) “All other fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered other than those reported under “Audit fees,” “Audit-related fees,” and “Tax fees.”

Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and non-audit services to be provided by ~~Deloitte Touche Tohmatsu CPA Ltd.~~PricewaterhouseCoopers Zhong Tian CPAs Limited Company before ~~that firm~~it is retained for such services. The pre-approval procedures are as follows:
Any audit or non-audit service to be provided to us by the independent accountant must be submitted to the audit committee for review and approval, with a description of the services to be performed and the fees to be charged.
The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through written resolutions or in the minutes of meetings, as the case may be.
Item 16D. Exemptions from the Listing Standards for Audit Committees
We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
~~None.~~
On December 30, 2011, we approved a share repurchase program to repurchase up to an aggregate of $3.2 million of our outstanding ADSs from time to time based on market conditions. Any repurchases may be effected through open market purchases or block trades, including the use of derivative instruments, and will be financed with our cash balance. As of February 29, 2012, we had not made any repurchases under this share repurchase program.
Item 16F. Changes in Registrant’s Certifying Accountant
~~None.~~
Not applicable.
Item 16G. Corporate Governance
Pursuant to ~~NASDAQ’s Marketplace~~the NASDAQ Stock Market Rules, foreign private issuers such as our company may follow home-country practice in lieu of certain NASDAQ corporate governance requirements. We have notified NASDAQ that a majority of our ~~intention to adopt~~directors do not qualify as independent directors, we do not have a ~~non-conforming practice~~nominations committee, nor is independent director involvement required in the selection of ~~posting~~director nominees or in the determination of executive compensation. Issuances of securities in connection with equity-based compensation of officers, directors, employees or consultants will be permitted without obtaining prior shareholder approval and we will post our annual reports to shareholders ~~on our corporate website~~ in lieu of mailing physical copies to record holders and beneficial owners of our ADSs and ordinary shares. ~~Under the laws~~This home-country practice of ours differs from Rules 5605(b), (d) and (e), 5635(c) and 5615(a)(3) of the ~~Cayman Islands,~~NASDAQ Stock Market Rules, because there are no ~~express provisions requiring our company to furnish annual reports to our shareholders. We adopted this practice~~specific requirements under Cayman Islands law on director independence or on the establishment of a nominations committee, and neither are there any requirements on independent directors’ involvement in ~~2007 to avoid~~ the ~~considerable expense associated with such mailing.~~
selection of director nominees nor in the determination of executive compensation.
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Item 16H. Mine Safety Disclosure
Not applicable.
PART III
Item 17. Financial Statements
~~The Company has elected to provide financial statements pursuant to Item 18.~~
Not applicable.
Item 18. Financial Statements
The consolidated financial statements for ~~Hurray! Holding~~Ku6 Media Co., Ltd. and its subsidiaries are included at the end of this annual report on Form 20-F.
Item 19. Exhibits
Exhibit
Number

Document
~~Exhibit~~
~~Number~~ ~~Document~~
1.1    Amended and Restated Memorandum and Articles of Association of ~~the Company~~our company (incorporated herein by reference to Exhibit 3.1 to our registration statement on Form F-1 ~~(Registration~~(File No. 333-121987) filed with the ~~Commission~~SEC on January 12, 2005).
1.2    Amendment to the Amended and Restated Memorandum and Articles of Association of our company adopted on October 16, 2009 (incorporated herein by reference to Exhibit 1.2 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on April 30, 2010).
1.3    Amendment to the Amended and Restated Memorandum and Articles of Association of our company as adopted on June 24, 2011 (incorporated herein by reference to Exhibit 1.3 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
2.1    Specimen Share Certificate.
2.2    Specimen American Depositary Receipt of ~~the Company (incorporated by reference to Exhibit 4.1 to our registration statement on Form F-6 (Registration No. 333-122004) filed with the Commission on January 13, 2005).~~
~~2.2~~ ~~Specimen Share Certificate of the Company~~Ku6 Media Co., Ltd. (incorporated herein by reference to Exhibit ~~4.2~~2.1 to our ~~registration statement~~annual report on Form ~~F-1 (Registration~~20-F (File No. ~~333-121987)~~000-51116) filed with the ~~Commission~~SEC on ~~January 12, 2005)~~June 28, 2011).
2.3    Form of Deposit Agreement ~~dated February 9, 2005~~ among ~~the Company,~~us, Citibank N.A. and holders of the American Depositary Receipts issued thereunder (incorporated by reference to Exhibit 3(a) to our registration statement on Form F-6 (Registration No. 333-122004) filed with the ~~Commission~~SEC on January 13, 2005).
4.1    2010 Equity Compensation Plan (incorporated herein by reference to Exhibit 4.41 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
~~4.1~~
4.2    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (File No. 333-121987) filed with the ~~Commission~~SEC on January 12, 2005).
4.3    Form of Employment Agreement.
4.4
~~4.2~~ ~~Translation~~English translation of ~~Equity Transfer~~Loan Agreement bybetween Ku6 (Beijing) Technology Co., Ltd. and ~~among Zhang Yi, Shang Aiqin, Wang Jiang, Xu Hongyan, Xie Peifu, He Ming and Chen Yixiao~~Shanyou Li dated ~~December 30, 2005~~April 11, 2007 (incorporated herein by reference to Exhibit ~~4.13 of our annual report on Form 20-F filed with the Commission on June 15, 2006).~~
~~4.3~~ Translation of Equity Transfer and Capital Increase Agreement by and among Beijing Huayi Brothers Advertising Co., Ltd., Beijing Qixin Weiye Culture Development Co., Ltd. and Hurray! Digital Music Technology Co., Ltd. dated December 12, 2005 (incorporated by reference4.8 to ~~Exhibit 4.15 of our annual report on Form 20-F filed with the Commission on June 15, 2006).~~
~~4.4~~ Translation of Cooperation Agreement by and among Hurray! Solutions, Ltd., Beijing Enterprise Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio & Video Distribution Co., Ltd. and Hong Kong Freeland Movie Industry Group Co., Ltd. dated November 14, 2005 (incorporated by reference to Exhibit 4.16 of our annual report on Form 20-F filed with the Commission on June 15, 2006).
~~4.5~~ Translation of Data Service Cooperation Agreement between Beijing Enlight Times Info Co., Ltd and Hurray! Solutions Ltd. (incorporated by reference to Exhibit 10.21 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
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~~Exhibit~~
~~Number~~ ~~Document~~
~~4.6~~ Translation of Agreement for Transfer of Entitlement to Dividends between Qindai Wang and Hurray! Holding Co., Ltd. dated August 15, 2003 (incorporated by reference to Exhibit 10.24 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.7~~ Translation of Software Assignment Agreement between Hurray! Solutions Ltd. and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.27 of our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on January 12, 2005).
~~4.8~~ Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004(incorporated by reference to Exhibit 10.28 of our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on January 12, 2005).
~~4.9~~ Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.31 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.10~~ Translation of Authorization Agreement by Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.32 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.11~~ Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.33 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.12~~ Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Hurray! Solutions Ltd., Qindai Wang and Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.34 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.13~~ Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Hurray! Solutions Ltd. and Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.35 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.14~~ Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Hurray! Solutions Ltd. and Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.36 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.15~~ Translation of Equity Interests Pledge Agreement between Qindai Wang and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.37 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.16~~ Translation of Equity Interests Pledge Agreement between Songzuo Xiang and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.38 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.17~~ Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.39 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.18~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.46 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
83
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.19~~ Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.53 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.20~~ Translation of Authorization Agreements by each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.55 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.21~~ Translation of Authorization Agreement by Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.56 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.22~~ Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.57 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.23~~ Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit 10.58 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.24~~ Translation of Contracts Relating to Exclusive Purchase Right of Equity Interest between Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.59 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.25~~ Translation of Contract Relating to Exclusive Purchase Right of Equity Interest between Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.60 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.26~~ Translation of Equity Interests Pledge Agreements between Hurray! Times Communications (Beijing) Ltd. and each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.61 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.27~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.62 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.28~~ Translation of Software Assignment Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.65 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.29~~ Translation of Software License Agreement between Hurray! times Communications (Beijing) Ltd. and Beijing Palmsky Technology Col, Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.66 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.30~~ Translation of Authorization Agreement by Yang Haoyu dated October 1, 2004 (incorporated by reference to Exhibit 10.69 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
84
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.31~~ Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.71 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.32~~ Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing Palmsky Technology Co., Ltd., Yang Haoyu and Wang Jianhua dated October 1, 2004 (incorporated by reference to Exhibit 10.72 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.33~~ Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Yang Haoyu and Beijing Palmsky Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.73 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.34~~ Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Wang Jianhua and Beijing Palmsky Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.74 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.35~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Yang Haoyu dated October 1, 2004 (incorporated by reference to Exhibit 10.75 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.36~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Wang Jianhua dated October 1, 2004 (incorporated by reference to Exhibit 10.76 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.37~~ Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.79 of our registration statement on Form F-1 (file No. 333-121987) filed with the Commission on January 12, 2005).
~~4.38~~ Translation of Authorization Agreement by Sun Hao dated August 15, 2004 (incorporated by reference to Exhibit 10.81 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.39~~ Translation of Authorization Agreement by Wang Xiaoping dated August 15, 2004 (incorporated by reference to Exhibit 10.82 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.40~~ Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.83 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.41~~ Translation of Operating Agreement between Hurray! Times Communications (Beijing) Ltd., Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang Xiaoping dated August 15, 2004 (incorporated by reference to Exhibit 10.84 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.42~~ Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Wang Xiaoping and Beijing Enterprise Network Technology Co., Ltd. dated August 15, 2004 (incorporated by reference to Exhibit 10.85 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
85
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.43~~ Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Sun Hao and Beijing Enterprise Network Technology Co., Ltd. dated August 15, 2004 (incorporated by reference to Exhibit 10.86 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.44~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Sun Hao dated October 1, 2004 (incorporated by reference to Exhibit 10.87 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.45~~ Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Wang Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit 10.88 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.46~~ Translation of Agreement on Transfer of Shares of Beijing Enterprise Network Technology Co., Ltd. between Sun Hao and Wang Xiaoping and Hurray! Solutions Ltd. and Wang Qindai dated July 19, 2004 (incorporated by reference to Exhibit 10.89 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.47~~ Translation of Software License Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.97 of our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2006)~~28, 2011).
4.5
~~4.48~~ ~~Translation~~English translation of ~~Software Assignment~~Loan Agreement ~~by and~~ between ~~Shanghai Magma Digital~~Ku6 (Beijing) Technology Co., Ltd. and ~~Hurray! Times Communications (Beijing) Ltd.~~Shanyou Li dated ~~January 12, 2006~~June 23, 2008 (incorporated herein by reference to Exhibit ~~4.98 of~~4.9 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2006)~~28, 2011).
4.6
~~4.49~~ ~~Translation~~English translation of ~~Authorization~~Loan Agreement ~~by Shang Aiqin~~between Ku6 (Beijing) Technology Co., Ltd. and Hailong Han dated ~~January 12, 2006~~April 11, 2007 (incorporated herein by reference to Exhibit ~~4.101 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).~~
~~4.50~~ ~~Translation of Authorization Agreement by Zhang Yi dated January 12, 2006 (incorporated by reference~~4.10 to ~~Exhibit 4.102 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).~~
~~4.51~~ Translation of Exclusive Technical Consulting and Services Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.103 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
~~4.52~~ Translation of Operating Agreement by and among Hurray! Times Communications (Beijing) Ltd., Shanghai Magma Digital Technology Co. Ltd., Zhang Yi and Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit 4.104 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
~~4.53~~ Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and among Hurray! Holding Co., Ltd., Shang Aiqin and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.105 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
~~4.54~~ Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and among Hurray! Holding Co., Ltd., Zhang Yi and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.106 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
86
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.55~~ Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Zhang Yi dated January 12, 2006 (incorporated by reference to Exhibit 4.107 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
~~4.56~~ Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit 4.108 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).
~~4.57~~ ~~2004 Share Incentive Plan (incorporated by reference to Exhibit 10.95 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~
~~4.58~~ Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing Enterprise Network Technology Co., Ltd. among Hurray! Holding Co., Ltd., Qindai Wang, Yu Qin and Zhang Chen dated November 4, 2004 (incorporated by reference to Exhibit 10.96 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.59~~ Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing Enterprise Mobile Technology Co., Ltd. among Hurray! Holdings Co., Ltd., Funway Investment Holdings Ltd. and I-mode Technology Ltd. dated November 4, 2004 (incorporated by reference to Exhibit 10.97 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.60~~ Translation of Loan Agreement between Beijing Enterprise Network Technology Co., Ltd. and Yu Qin dated November 4, 2004 (incorporated by reference to Exhibit 10.98 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.61~~ Translation of Loan Agreement between WVAS Solutions Ltd. and Yu Qin dated November 4, 2004 (incorporated by reference to Exhibit 10.99 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).
~~4.62~~ Translation of Supplemental Agreement dated January 25, 2005 to certain Equity Interests Pledge Agreements (incorporated by reference to the registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 28, 2005).
~~4.63~~ Translation of Cooperation Agreement between Hurray! Digital Media Technology Co., Ltd., Lan Gang, Chen Jianzhong, Hu Li, and Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd, dated March 12, 2007 (incorporated by reference to Exhibit 4.120 of our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2007)~~28, 2011).
4.7
~~4.64~~ ~~Translation~~English translation of ~~Supplemental~~Exclusive Business Cooperation Agreement between ~~Hurray Holdings~~Ku6 (Beijing) Technology Co., Ltd. and ~~Magma Digital International Limited,~~Ku6 (Beijing) Information Technology Co., Ltd dated ~~September 1, 2006~~June 23, 2008 (incorporated herein by reference to Exhibit ~~4.121 of~~4.11 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2007)~~28, 2011).
4.8
~~4.65~~ ~~Translation~~English translation of ~~Supplemental~~Share Pledge Agreement ~~between Hurray Solutions, Ltd., Beijing Enterprise Mobile~~among Ku6 (Beijing) Technology Co., Ltd., ~~Beijing Hutong Wuxian~~Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd., Hong Kong Freeland Movie Industry Group Co., Ltd. and Beijing Freeland Wu Xian Digital Music Technology Co., Ltd.,Ltd dated July ~~30, 2006~~8, 2009 (incorporated herein by reference to Exhibit ~~4.122 of~~4.12 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2007)~~28, 2011).
87
4.9
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.66~~ ~~Translation~~English translation of ~~Supplemental~~Share Pledge Agreement ~~between Hurray Solutions, Ltd., Beijing Enterprise Mobile~~among Ku6 (Beijing) Technology Co., Ltd., ~~Beijing Hutong Wuxian~~Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd. and Hong Kong Freeland Movie Industry Group Co., Ltd dated ~~November 30, 2006~~April 11, 2007 (incorporated herein by reference to Exhibit ~~4.123 of~~4.13 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~15, 2007)~~28, 2011).
4.10
~~4.67~~ ~~Translation~~English translation of Supplementary Agreement to the Share ~~Transfer~~Pledge Agreement ~~between TWM Holding, Hurray! Holding~~among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and ~~Hurray! Times Communications~~Ku6 (Beijing) ~~Ltd.~~Information Technology Co., Ltd dated ~~October 8, 2007~~June 23, 2008 (incorporated herein by reference to Exhibit ~~4.84 of~~4.14 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~19, 2008)~~28, 2011).
4.11
~~4.68~~ ~~Translation~~English translation of ~~Equity Transfer Agreement~~Power of ~~Shanghai Saiyu Information Technology Co., Ltd. among Liang Ruan, Yuqi Shi, Jie~~Attorney by Shanyou Li ~~and Jianmei Wan,~~ dated ~~February 12, 2007~~July 8, 2009 (incorporated herein by reference to Exhibit ~~4.85 of~~4.15 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~19, 2008)~~28, 2011).
4.12
~~4.69~~ ~~Translation~~English translation of Transfer Agreement between Hurray! Times Communications (Beijing) Co., Ltd., Beijing WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Xiaoping Wang, Hao Sun and Beijing Hurray! Times Technology Co., Ltd.,Power of Attorney by Hailong Han dated ~~May, 2007~~June 23, 2008 (incorporated herein by reference to Exhibit ~~4.86 of~~4.16 to our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June ~~19, 2008)~~28, 2011).
4.13    English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd dated July 8, 2009 (incorporated herein by reference to Exhibit 4.17 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.14    English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated April 11, 2007 (incorporated herein by reference to Exhibit 4.18 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
~~4.70~~
4.15    English translation of Supplementary Agreement to the Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.20 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
~~Translation~~
4.16 English translation of Exclusive Intellectual Property Option Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008 (incorporated herein by reference to Exhibit 4.19 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.17 English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li dated May 27, 2010 (incorporated herein by reference to Exhibit 4.21 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.18 English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.22 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.19 English translation of Exclusive Consulting And Service Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Ku6 (Beijing) Cultural Media Co., Ltd dated May 27, 2010 (incorporated herein by reference to Exhibit 4.23 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.20 English translation of Business Operation Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Cultural Media Co., Ltd., Shanyou Li and Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.24 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.21 English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li dated May 27, 2010 (incorporated herein by reference to Exhibit 4.27 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.22 English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.28 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.23 English translation of Power of Attorney by Shanyou Li dated May 27, 2010 (incorporated herein by reference to Exhibit 4.25 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.24 English translation of Power of Attorney by Xingye Zeng dated May 27, 2010 (incorporated herein by reference to Exhibit 4.26 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.25 English translation of Equity Disposition Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Shanyou Li, Xingye Zeng and Ku6 (Beijing) Cultural Media Co., Ltd. dated May 27, 2010 (incorporated herein by reference to Exhibit 4.29 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.26 English translation of Exclusive Business Cooperation Agreement ~~on Monternet WAP Services~~ between ~~China Mobile Communications Group Corporation~~WeiMoSanYi (Tianjin) Technology Co., Ltd., and ~~Beijing Enterprise Network~~Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009 (incorporated herein by reference to Exhibit 4.38 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June ~~18, 2008.~~28, 2011).
4.27
~~4.71~~ ~~Translation~~English translation of ~~Mobile Value-added Service (WAP1.2) Cooperation~~Equity Interest Pledge Agreement ~~between China Telecommunications Corporation~~among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and ~~Beijing Hengji Weiye Electronic Commerce~~Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated ~~October 1, 2008.~~March 21, 2009 (incorporated herein by reference to Exhibit 4.39 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.28    English translation of Power of Attorney by Ku6 (Beijing) Information Technology Co., Ltd dated March 21, 2009 (incorporated herein by reference to Exhibit 4.40 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.29
~~4.72~~ ~~Investment~~English translation of Exclusive Option Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and ~~Shareholders’ Agreement between, among others, Seed Music Group Limited and Hurray! Music Holding~~Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated ~~September 24, 2008.~~March 21, 2009 (incorporated herein by reference to Exhibit 4.37 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.30    English translation of Loan Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Dongxu Wang dated December 14, 2011.
Exhibit
Number

Document
~~4.73~~
4.31    ~~Translation~~English translation of ~~Supplemental Agreement of Asset, Business and Personnel Transfer~~Loan Agreement between ~~Beijing Secular Bird Culture~~Kusheng (Tianjin) Technology Co., Ltd. and ~~Art Development Centre~~Qing Zhang dated December 14, 2011.
4.32 English translation of Exclusive Consulting and ~~Guangzhou Secular Bird Culture~~Services Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Tianjin Ku6 Network Communication Technology Co., Ltd. dated ~~August 2008.~~December 14, 2011.
4.33    English translation of Business Operation Agreement among Kusheng (Tianjin) Technology Co., Ltd., Tianjin Ku6 Network Communication Technology Co., Ltd., Dongxu Wang and Qing Zhang dated December 14, 2011.
4.34    English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Dongxu Wang dated December 14, 2011.
~~4.74~~
4.35    English translation of Share Pledge Agreement between Kusheng (Tianjin) Technology Co., Ltd. and Qing Zhang dated December 14, 2011.
~~Translation~~
4.36 English translation of ~~Supplemental~~Power of Attorney by Dongxu Wang dated December 14, 2011.
4.37 English translation of Power of Attorney by Qing Zhang dated December 14, 2011.
4.38 English translation of Equity Disposition Agreement among Kusheng (Tianjin) Technology Co., Ltd., Dongxu Wang, Qing Zhang and Tianjin Ku6 Network Communication Technology Co., Ltd. dated December 14, 2011.
4.39 English translation of Equity Transfer Agreement dated May 17, 2010, between Hurray! Digital Media Technology Co., Ltd. and Huayi Brothers Media Corporation relating to the equity interest in Beijing ~~Secular Bird Culture and Art Development Centre dated August 2008.~~Huayi Brothers Music Co., Ltd. (incorporated herein by reference to Exhibit 4.1 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.40
~~4.75~~ ~~Translation of Supplemental~~Master Transaction Agreement ~~among Seed Music Group~~between Shanda Interactive Entertainment Limited and Hurray! ~~Media~~ Holding Co., Ltd., ~~Tien, Ting-Feng,~~dated June 1, 2010 (incorporated by reference to Exhibit 99.2 to our press release on Form 6-K (File No. 000-51116) furnished with the SEC on June 2, 2010).
4.41 Share Purchase Agreement between Ku6 Media Co., Ltd. and ~~Huang, Tien-Zan~~Shanda Media Group Limited dated ~~2009.~~April 1, 2011 (incorporated herein by reference to Exhibit 4.43 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.42 Senior Convertible Bond Purchase Agreement between Ku6 Media Co., Ltd. and Shanda Media Group Limited dated April 1, 2011 (incorporated herein by reference to Exhibit 4.44 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.43 Redemption Agreement between Ku6 Media Co., Ltd. and Shanda Media Group Limited dated September 30, 2011.
Exhibit
Number
Document
  4.44*    English Translation of Ku6 Advertising Agency Agreement dated April 1, 2011 between Shanghai Shengyue Advertising Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd.
4.45    English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated December 27, 2010 (incorporated herein by reference to Exhibit 4.6 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
~~4.76~~
4.46    English Translation of ~~Supplemental~~Loan Agreement ~~among Hurray!~~between Ku6 Media ~~Technologies~~ Co., Ltd.~~, Xiongbing Zhong, Guangdong Freeland Movie~~ and ~~Television Production~~Shanda Games Limited dated January 25, 2011 (incorporated herein by reference to Exhibit 4.7 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.47 English Translation of Loan Agreement between Ku6 Media Co., Ltd.~~, Beijing Shiji Freeland Movie~~ and ~~Television Distribution~~Shanda Games Limited dated June 8, 2011 (incorporated herein by reference to Exhibit 4.49 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.48 English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd., and Shanghai ~~Hai Le Audio and Video Distribution Co., Ltd., and Hongkong Freeland Movie Industry Group~~Dongfang Branch of China Merchants Bank Co., Ltd. dated ~~2008.~~February 10, 2011 (incorporated herein by reference to Exhibit 4.5 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
4.49    English Translation of Loan Renewal Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated August 14, 2011.
4.50    English Translation of Loan Renewal Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Co., Ltd. dated March 6, 2012.
~~8.1~~
4.51    English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Co., Ltd. dated June 16, 2011 (incorporated herein by reference to Exhibit 4.48 to our annual report on Form 20-F (File No. 000-51116) filed with the SEC on June 28, 2011).
8.1    List of Significant Subsidiaries and Affiliates.
88
~~Exhibit~~
~~Number~~ ~~Document~~
11.1    Code of Business Conduct (incorporated by reference to Exhibit 11.1 of our annual report on Form 20-F (File No. 000-51116) filed with the ~~Commission~~SEC on June 15, 2006).
12.1    Certification of Chief Executive Officer Required by Rule 13a-14(a).
12.2    Certification of Chief Financial Officer Required by Rule 13a-14(a).
12.3    Certification of Vice President of Finance and Controller Required by Rule 13a-14(a).
13.1    Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
13.2    Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
15.1    Consent of ~~Deloitte Touche Tohmatsu CPA Ltd.,~~PricewaterhouseCoopers Zhong Tian CPAs Limited Company, Independent Registered Public Accounting Firm.
*
~~15.2~~ ~~Consent~~Confidential treatment has been requested for portions of ~~Appleby.~~this exhibit.
89
SIGNATURES
~~SIGNATURES~~
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KU6 MEDIA CO., LTD.
By:
/s/ Yu Shi
Name: Yu Shi
~~HURRAY! HOLDING CO., LTD.~~

Title: ~~By:~~  Chief Executive Officer
Date: March 29, 2012
KU6 MEDIA CO., LTD.
INDEX TO FINANCIAL STATEMENTS
~~/s/ Songzuo Xiang~~
   ~~Dr. Songzuo Xiang~~ Page
~~Chief Executive Officer~~

~~Date: June 25, 2009~~
90
~~INDEX TO FINANCIAL STATEMENTS~~
~~HURRAY! HOLDING CO., LTD.~~
~~Page~~
Report of Independent Registered Public Accounting Firm
~~F-1~~
~~Consolidated Balance Sheets as of December 31, 2008 and 2007~~
   F-2
Consolidated ~~Statements~~Balance Sheets as of ~~Operations for the years ended~~ December 31, ~~2008, 2007~~2010 and ~~2006~~2011
   F-3
Consolidated Statements of ~~Shareholders’ Equity~~Operations and Comprehensive ~~Income~~Loss for the years ended December 31, ~~2008, 2007~~2009, 2010 and ~~2006~~2011
   ~~F-5~~F-4
Consolidated Statements of Changes in Equity for the years ended December 31, 2009, 2010 and 2011
   F-6
Consolidated Statements of Cash Flows for the years ended December 31, ~~2008, 2007~~2009, 2010 and ~~2006~~2011
~~F-6~~
~~Notes to the Consolidated Financial Statements~~
   F-7
Notes to the Consolidated Financial Statements

~~Additional Information — Financial Statement Schedule 1~~
~~F-36~~F-9
91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
~~To the Board of Directors and Shareholders of~~
~~Hurray! Holding Co.~~
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
KU6 MEDIA CO., ~~Ltd.~~
~~Beijing, the People’s Republic of China~~
~~We have audited~~LTD.:
In our opinion, the accompanying consolidated balance sheets ~~of Hurray! Holding Co., Ltd. and its subsidiaries and variable interest entities (the “Company”) at December 31, 2008 and 2007,~~ and the related consolidated statements of operations ~~shareholders’~~and comprehensive loss, of changes in equity and ~~comprehensive income (loss)~~of cash flows present fairly, in all material respects, the financial position of Ku6 Media Co., Ltd. (the “Company”) and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2008, 2007~~2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and ~~2006, and related~~for its assessment of the effectiveness of internal control over financial ~~statement schedule~~reporting, included in ~~Schedule 1. These financial statements and related financial statement schedule are the responsibility of the Company’s management.~~Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express ~~an opinion~~opinions on these ~~consolidated~~ financial statements and ~~related~~on the Company’s internal control over financial ~~statement schedule~~reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the ~~audit~~audits to obtain reasonable assurance about whether the financial statements are free of material ~~misstatement. The Company 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~~misstatement and whether effective internal control over financial reporting ~~as a basis for designing audit procedures that are appropriate~~was maintained in ~~the circumstances, but not for the purpose of expressing an opinion on the effectiveness~~all material respects. Our audits of the ~~Company’s internal control over~~ financial ~~reporting. Accordingly, we express no such opinion. An audit also includes~~statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, ~~as well as~~and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our ~~opinion.~~
~~In our opinion, such consolidated~~opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements ~~present~~for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in ~~all~~accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material ~~respects,~~effect on the financial ~~position~~statements.
Because of ~~Hurray! Holding Co., Ltd. and~~ its ~~subsidiaries and variable interest entities at December 31, 2008 and 2007 and the results~~inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of ~~their operations and their cash flows for the above stated~~any evaluation of effectiveness to future periods ~~in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation~~are subject to the ~~basic consolidated financial statements taken as a whole, presents fairly,~~risk that controls may become inadequate because of changes in ~~all material respects,~~conditions, or that the ~~information set forth therein.~~
~~As described in Note 2 to~~degree of compliance with the consolidated financial statements, effective January 1, 2007, the Company adopted the recognition and measurement methods under Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes— An Interpretation of FASB Statement No.109”.
policies or procedures may deteriorate.
/s/ ~~Deloitte Touche Tohmatsu CPA Ltd.~~
~~Deloitte Touche Tohmatsu CPA Ltd.~~
~~Beijing,~~PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, the People’s Republic of China
~~June 25, 2009~~
~~F-1~~March 29, 2012
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
CONSOLIDATED BALANCE SHEETS

December 31,
2008 2007
(in U.S. dollars, except number of shares)
Assets

Current assets:
Cash $ 59,472,703 $ 65,978,884
Accounts receivable, net of allowance of $826,026 and $699,525 as of December 31, 2008 and 2007, respectively 12,658,287 14,691,160
Prepaid expenses and other current assets 4,170,323 3,120,050
Amount due from related parties 745,351 464,410
Inventories 254,589 292,655
Current deferred tax assets 363,330 748,049
Receivable on disposal of subsidiary 46,860 4,151,400

Total current assets 77,711,443 89,446,608
Property and equipment, net 980,060 1,636,089
Acquired intangible assets, net 1,945,322 4,970,920
Investment in equity affiliate 824,579 2,420,522
Goodwill 3,156,664 5,620,906
Deposits and other long-term assets 719,977 848,588
Prepaid acquisition costs 1,907,400 —
Investment at cost 600,038 —
Non-current deferred tax assets 478,919 650,091

Total assets
$ 88,324,402 $ 105,593,724

Liabilities and shareholders’ equity

Current liabilities:
Accounts payable 2,454,064 3,575,410
Acquisitions payable 14,657 7,101,498
Accrued expenses and other current liabilities 3,018,203 2,906,400
Amount due to related parties 207,879 256,058
Income tax payable 123,626 210,548
Current deferred tax liabilities 497,283 416,835

Total current liabilities 6,315,712 14,466,749
Long-term payable 24,002 32,304
Non-current deferred tax liabilities 292,194 844,610

Total liabilities
6,631,908 15,343,663

Commitments and contingencies (Note 22)
Minority interests 4,783,209 4,667,402

Shareholders’ equity:
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,193,343,740 and 2,174,784,440 shares issued and outstanding as of December 31, 2008 and 2007, respectively) 109,617 108,689
Additional paid-in capital 75,012,693 74,066,839
Statutory reserve 1,791,324 6,502,849
Accumulated deficit (9,991,663 ) (2,750,592 )
Accumulated other comprehensive income 9,987,314 7,654,874

Total shareholders’ equity 76,909,285 85,582,659

Total liabilities, minority interests and shareholders’ equity
$ 88,324,402 $ 105,593,724

   Note December 31, 2010 December 31, 2011
   (in U.S. dollars, except number of shares)
Assets

Current assets:

Cash and cash equivalents
   2(8) 27,294,819    26,750,427
Restricted cash
   2(9), 11 —      3,600,000
Accounts receivable, net of allowance for doubtful accounts
   18(2) 8,135,195    777,393
Accounts receivable due from related parties
   13 325,757    2,740,179
Prepaid expenses and other current assets
   5 3,487,327    884,344
Other receivables due from related parties
   13 5,532,248    19,539,269
Inventories
   31,038    —


Total current assets
   44,806,384    54,291,612


Property and equipment, net
   6 8,003,474    3,592,745
Acquired intangible assets, net
   7 27,264,283    24,111,111
Investment in equity affiliate
   8 —      255,281
Goodwill
   9 6,896,340    6,232,770
Deposits and other non-current assets
   —      306,741


Total assets
   86,970,481    88,790,260


Liabilities and shareholders’ equity

Current liabilities:

Short-term borrowings
   11 —      3,177,680
Accounts payable
   15,502,901    6,364,753
Accounts payable due to related parties
   1,664,570    10
Accrued expenses and other current liabilities
   12 11,462,241    10,016,650
Other payables due to related parties
   13 7,776,698    13,552,080


Total current liabilities
   36,406,410    33,111,173


Non-current deferred tax liabilities
   2(26), 14 4,925,538    4,826,059


Total liabilities
   41,331,948    37,937,232


Commitments and contingencies
   20
Equity:

Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2010 and 2011, respectively)
   174,008    250,939
Additional paid-in capital
   130,100,153    184,874,259
Accumulated deficits
   (83,105,464 ) (132,449,371 )
Accumulated other comprehensive loss
   (1,422,414 ) (1,822,799 )


Total Ku6 Media Co., Ltd. shareholders’ equity
   45,746,283    50,853,028
Non-controlling interests
   (107,750 ) —


Total equity
   45,638,533    50,853,028


Total liabilities and shareholders’ equity
   86,970,481    88,790,260


The accompanying notes are an integral part of these consolidated financial statements.
~~F-2~~
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Year ended December 31,
2008 2007 2006
(in U.S. dollars, except number of shares)
Revenues:

Wireless value-added services $ 42,671,588 $ 50,038,014 $ 62,512,483
Recorded music 11,286,812 10,488,613 6,203,418

Total revenues 53,958,400 60,526,627 68,715,901

Cost of revenues:
Wireless value-added services 32,839,642 36,394,300 40,672,113
Recorded music 6,729,725 6,232,728 3,553,144

Total cost of revenues 39,569,367 42,627,028 44,225,257

Gross profit 14,389,033 17,899,599 24,490,644

Operating expenses:
Product development (including stock-based compensation expense of $40,102, $921 and $79,587 for the years ended December 31, 2008, 2007 and 2006, respectively) 991,689 2,028,265 2,169,124
Selling and marketing (including stock-based compensation expense of $621,094, $286,885 and $346,456 for the years ended December 31, 2008, 2007 and 2006, respectively) 9,132,374 11,513,850 11,014,215
General and administrative (including stock-based compensation expense of $284,086, $155,169 and $117,514 for the years ended December 31, 2008, 2007 and 2006, respectively) 11,983,973 9,141,381 6,699,607
Provision for goodwill impairment 2,675,211 38,778,584 —
Gain on reduction of Unicom liability (1,557,153 ) — —
Gain from reversed litigation expenses (557,167 ) — —

Total operating expenses 22,668,927 61,462,080 19,882,946

Operating (loss) income from continuing operations (8,279,894 ) (43,562,481 ) 4,607,698
Interest income 1,613,078 2,313,576 2,529,419
Interest expense — (179,062 ) (44,765 )
Other income, net 247,156 465,825 315,210
Gain on reduction of acquisition payable 5,000,000 — —
Foreign exchange loss (8,990,067 ) — —

(Loss) income before provision for income taxes, earnings in equity investments, gain from disposal of subsidiary, minority interest and discontinued operations (10,409,727 ) (40,962,142 ) 7,407,562
Income tax expense (credit) 486,250 (182,370 ) 204,980

   Note Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011

(Adjusted)
(Note 2(1))

   (in U.S. dollars, except number of shares)
Net revenues:
   2(19)
Advertising

Third parties
   757,723    15,853,948    11,145,833
Related parties
   279,341    701,732    8,076,155


Total net revenues
   1,037,064    16,555,680    19,221,988


Cost of revenues:
   2(15)
Advertising

Third parties
   (556,639 ) (40,082,758 ) (30,500,596 )
Related parties
   —      (376,302 ) (379,465 )


Total cost of revenues
   (556,639 ) (40,459,060 ) (30,880,061 )


Gross profit/(loss)
   480,425    (23,903,380 ) (11,658,073 )


Operating expenses:

Product development
   2(20) —      —      (2,692,884 )
Selling and marketing
   2(22) (665,131 ) (16,195,539 ) (11,817,758 )
General and administrative
   2(21) (6,465,080 ) (13,507,701 ) (23,401,769 )


Total operating expenses
   (7,130,211 ) (29,703,240 ) (37,912,411 )


Operating loss from continuing operations
   (6,649,786 ) (53,606,620 ) (49,570,484 )


Interest income
   356,167    57,464    169,854
Interest expense
   13 —      (31,134 ) (1,119,429 )
Other income, net
   2(32) 1,783    3    1,294,135


Loss before income tax benefit from continuing operations
   (6,291,836 ) (53,580,287 ) (49,225,924 )
Income tax benefit
   2(26), 14 13,721    41,172    99,479
Equity in loss of affiliated company, net of tax
   8 —      —      (263,313 )


Loss from continuing operations, net of tax
   (6,278,115 ) (53,539,115 ) (49,389,758 )


Discontinued operations:

Loss from operations of discontinued operations, net of tax
   4 (21,778,174 ) (3,382,438 ) —
Gain from disposal of discontinued operations, net of tax
   221,899    4,486,786    —


(Loss) income from discontinued operations, net of tax
   (21,556,275 ) 1,104,348    —


Net loss
   (27,834,390 ) (52,434,767 ) (49,389,758 )
Less: Net loss attributable to non-controlling interests from continuing operations
   256,654    680,837    45,851
Less: Net loss attributable to non-controlling interests and redeemable non-controlling interests from discontinued operations
   4,182,875    243,666    —


Net loss attributable to Ku6 Media Co., Ltd.
   (23,394,861 ) (51,510,264 ) (49,343,907 )


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (6,021,461 ) (52,858,278 ) (49,343,907 )
(Loss) income from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.
   (17,373,400 ) 1,348,014    —


Net loss attributable to Ku6 Media Co., Ltd.
   (23,394,861 ) (51,510,264 ) (49,343,907 )


~~F-3~~The accompanying notes are an integral part of these financial statements.

Year ended December 31,
2008 2007 2006
(in U.S. dollars, except number of shares)
Net (loss) income from continuing operations after income taxes before minority interests (10,895,977 ) (40,779,772 ) 7,202,582
Minority interests (337,455 ) 688,440 562,189
Equity in income (loss) of affiliate 64,293 (62,756 ) —
Impairment for investment in equity affiliate 1,870,897 — —
Net (loss) income from continuing operations (12,365,126 ) (41,530,968 ) 6,640,393

Discontinued operations:
Net (loss) income from discontinued operations, net of tax — (612,170 ) (836,448 )
Gain from disposal of discontinued operations 412,530 192,943 —

Net income (loss) from discontinued operations, net of tax 412,530 (419,227 ) (836,448 )

Net (loss) income $ (11,952,596 ) $ (41,950,195 ) $ 5,803,945

(Loss) income from continuing operations per ADSs:
Basic $ (0.57 ) $ (1.91 ) $ 0.30

Diluted $ (0.57 ) $ (1.91 ) $ 0.30

Income (loss) from discontinued operations per ADSs:
Basic $ 0.02 $ (0.02 ) $ (0.04 )

Diluted $ 0.02 $ (0.02 ) $ (0.04 )
��
(Loss) income per ADSs
Basic $ (0.55 ) $ (1.93 ) $ 0.26

Diluted $ (0.55 ) $ (1.93 ) $ 0.26

Weighted average shares used in calculating basic (loss) income per share 2,185,615,129 2,172,208,190 2,189,748,563

Weighted average ADSs used in calculating basic (loss) income per ADS 21,856,151 21,722,082 21,897,486

Weighted average shares used in calculating diluted (loss) income per share 2,185,615,129 2,172,208,190 2,208,758,636

Weighted average ADSs used in calculating diluted (loss) income per ADS 21,856,151 21,722,082 22,087,586

~~F-4~~
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’ EQUITY~~
OPERATIONS AND COMPREHENSIVE ~~INCOME~~LOSS


Note
(cont’d)
   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011

(Adjusted)
(Note 2(1))

      (in U.S. dollars, except number of shares)
Net loss
      (27,834,390 ) (52,434,767 ) (49,389,758 )
Other comprehensive loss:

Currency translation adjustments of subsidiaries
      (36,057 ) (809,654 ) (624,595 )


Comprehensive loss
      (27,870,447 ) (53,244,421 ) (50,014,353 )
Comprehensive loss attributable to non-controlling interests and redeemable non-controlling interests
      4,443,959    921,701    49,390


Comprehensive loss attributable to Ku6 Media Co., Ltd.
      (23,426,488 ) (52,322,720 ) (49,964,963 )


Loss per share-basic and diluted
   17
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders
      (0.00 ) (0.02 ) (0.01 )
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders
      (0.01 ) 0.00    —


Net loss attributable to Ku6 Media Co., Ltd. common shareholders
      (0.01 ) (0.02 ) (0.01 )


Weighted average shares used in per share calculation-basic and diluted
      2,196,291,947    3,096,421,097    4,265,277,638


Loss per ADS-basic and diluted (1ADS = 100 shares):
   17
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders
      (0.27 ) (1.71 ) (1.16 )
(Loss) income from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders
      (0.79 ) 0.04    —


Net loss attributable to Ku6 Media Co., Ltd. common shareholders
      (1.06 ) (1.67 ) (1.16 )


Weighted average ADS used in per ADS calculation-basic and diluted
      21,962,919    30,964,211    42,652,776


The accompanying notes are an integral part of these financial statements.
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Retained earnings Accumulated other Total
Ordinary shares Additional Statutory (Accumulated comprehensive shareholders’ Comprehensive
Shares Amount paid-in capital reserve deficit) income (loss) equity income (loss)
(in U.S. dollars, except shares data)

Balance as of January 1, 2006 2,229,754,340 $ 111,488 $ 77,335,532 $ 5,287,057 $ 34,611,450 $ 1,273,504 $ 118,619,031
Issuance of ordinary shares related to acquisition of Shanghai Magma (see Note 3) 8,955,200 448 539,552 — — — 540,000
Repurchase and cancellation of ordinary shares (79,260,000 ) (3,963 ) (5,030,785 ) — — — (5,034,748 )
Forward contract at fair value (See Note 3) — — 124,918 — — — 124,918
Stock-based compensation expense — — 543,557 — — — 543,557
Exercise of stock options 3,582,200 129 95,343 — — — 95,472
Provision for statutory reserve — — — 374,004 (374,004 ) — —
Foreign currency translation adjustment — — — — — 2,127,845 2,127,845 $ 2,127,845
Net income — — — — 5,803,945 — 5,803,945 5,803,945

Balance as of December 31, 2006 — — — 5,661,061 40,041,391 3,401,349 122,820,020 $ 7,931,790

Stock-based compensation expense — — — — — — 442,975
Exercise of stock options 653,400 33 16,301 — — — 16,334
Provision for statutory reserve — — — 841,788 (841,788 ) — —
Foreign currency translation adjustment — — — — — 4,253,525 4,253,525 $ 4,253,525
Net loss — — — — (41,950,195 ) (41,950,195 ) (41,950,195 )

Balance as of December 31, 2007 2,174,784,440 108,689 74,066,839 6,502,849 (2,750,592 ) 7,654,874 85,582,659 $ (37,696,670 )

Stock-based compensation expense 18,499,300 925 944,357 — — — 945,282
Exercise of stock options 60,000 3 1,497 — — — 1,500
Transfer statutory reserve to retained earnings — — — (4,711,525 ) 4,711,525 — —
Foreign currency translation adjustment — — — — — 2,332,440 2,332,440 $ 2,332,440
Net loss — — — — (11,952,596 ) — (11,952,596 ) (11,952,596 )

Balance as of December 31, 2008 2,193,343,740 $ 109,617 $ 75,012,693 $ 1,791,324 $ (9,991,663 ) $ 9,987,314 $ 76,909,285 $ (9,620,156 )

xx xx xx xx xx xx xx xx xx
Ordinary shares
($0.00005 par value) Additional
paid-in
capital Statutory
reserves Accumulated
deficits Accumulated
other
comprehensive
income / (loss) Total Ku6 Media
Co., Ltd.
shareholders’
equity Non-controlling
interests Total
equity
Shares Amount
(in U.S. dollars, except shares data)
Balance as of December 31, 2008
2,193,343,740    109,617    75,012,693    1,791,324    (9,991,663 ) 9,987,314    76,909,285    4,783,209    81,692,494
Stock-based compensation expense
6,500,300    324    168,986    —      —      —      169,310    —      169,310
Exercise of stock options
350,000    18    8,732    —      —      —      8,750    —      8,750
Online audio business (“Yisheng”) contributed by Shanda Interactive Entertainment Limited (“Shanda”)
—      —      1,415,547    —      —      —      1,415,547    (43,533 ) 1,372,014
Capital contribution to Yisheng by non-controlling shareholders
—      —      —      —      —      —      —      362,773    362,773
Cumulative currency translation adjustments of subsidiaries
—      —      —      —      —      (31,627 ) (31,627 ) (4,430 ) (36,057 )
Net loss
—      —      —      —      (23,394,861 ) —      (23,394,861 ) (3,240,927 ) (26,635,788 )

Balance as of December 31, 2009 (Adjusted (Note 2(1)))
2,200,194,040    109,959    76,605,958    1,791,324    (33,386,524 ) 9,955,687    55,076,404    1,857,092    56,933,496

Stock-based compensation expense
3,000,100    150    607,014    —      —      —      607,164    —      607,164
Exercise of stock options
450,000    22    20,328    —      —      —      20,350    —      20,350
Issuance of ordinary shares related to acquisitions of Ku6 Holding Limited
723,684,204    36,185    28,838,816    —      —      —      28,875,001    —      28,875,001
Disposal of Huayi Brothers Music Co., Ltd.
—      —      —      (74,246 ) 74,246    (221,315 ) (221,315 ) (209,736 ) (431,051 )
Contribution by Shanda related to Yisheng
—      —      663,570    —      —      —      663,570    —      663,570
Issuance of ordinary shares for Yisheng to Shanda
415,384,615    20,769    12,440,769    —      —      —      12,461,538    —      12,461,538
Deemed distribution to Shanda related to Yisheng
—      —      (12,461,538 ) —      —      —      (12,461,538 ) —      (12,461,538 )
Purchase of additional equity interests of Yisheng from non-controlling shareholders
138,461,539    6,923    (520,181 ) —      —      —      (513,258 ) 513,258    —
Disposal of WVAS and recorded music businesses to Shanda
—      —      23,905,417    (1,717,078 ) 1,717,078    (10,344,330 ) 13,561,087    (1,464,169 ) 12,096,918
Cumulative currency translation adjustments of subsidiaries
—      —      —      —      —      (812,456 ) (812,456 ) 2,802    (809,654 )
Net loss
—      —      —      —      (51,510,264 ) —      (51,510,264 ) (806,997 ) (52,317,261 )

Balance as of December 31, 2010
3,481,174,498    174,008    130,100,153    —      (83,105,464 ) (1,422,414 ) 45,746,283    (107,750 ) 45,638,533

Issuance of ordinary shares to Shanda
1,538,461,538    76,924    49,923,076    —      —      —      50,000,000    —      50,000,000
Exercise of stock options
150,000    7    3,743    —      —      —      3,750    —      3,750
Stock-based compensation expense (Note 2(1)(a), 15)
—      —      1,754,170    —      —      —      1,754,170    —      1,754,170
Disposition of equity interests in Yisheng (Note 2(1)(a))
—      —      1,373,190    —      —      220,671    1,593,861    157,140    1,751,001
Liabilities waived by Shanda (Note 13)
—      —      1,719,927    —      —      —      1,719,927    —      1,719,927
Currency translation adjustments of subsidiaries
—      —      —      —      —      (621,056 ) (621,056 ) (3,539 ) (624,595 )
Net loss
—      —      —      —      (49,343,907 ) —      (49,343,907 ) (45,851 ) (49,389,758 )

Balance as of December 31, 2011
5,019,786,036    250,939    184,874,259    —      (132,449,371 ) (1,822,799 ) 50,853,028    —      50,853,028

The accompanying notes are an integral part of these consolidated financial statements.
~~F-5~~
KU6 MEDIA CO., LTD. (FORMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,
2008 2007 2006
(In U.S. dollars)
Operating activities:

Net (loss) income $ (11,952,596 ) $ (41,950,195 ) $ 5,803,945
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Impairment of goodwill 2,675,211 38,778,584 —
Loss on impairment of investment in music affiliate 1,870,897 — —
Impairment of acquired intangible assets 2,850,714 2,480,253 —
Stock-based compensation 945,282 442,975 543,557
Depreciation and amortization 3,327,798 3,644,095 3,481,415
Bad debt provision 1,012,738 453,674 269,235
Minority interests (337,455 ) 688,440 562,189
Equity in (income) loss of affiliate (64,293 ) 62,756 —
Gain from disposal of subsidiary (412,530 ) (192,943 ) —
Receivable from disposal of subsidiary (net of cash disposed of $771,570 in 2007) — (3,186,887 ) —
Loss on disposal of property and equipment 112,745 74,300 1,155
Gain on reduction of acquisition payable (5,000,000 ) — —
Gain on reduction of Unicom liability (1,557,153 ) — —
Gain from reversed litigation expenses (557,167 ) — —
Changes in assets and liabilities net of effect of businesses acquired and sold:
Accounts receivable 3,492,068 (2,069,378 ) 5,518,845
Prepaid expenses and other current assets (1,142,954 ) (138,548 ) 3,113,531
Amount due from related parties (245,724 ) (273,618 ) (164,008 )
Deposits and other long-term assets 183,003 (147,543 ) (258,610 )
Inventories 56,833 (81,422 ) 268,556
Current deferred tax assets 412,916 (414,011 ) (289,651 )
Non-current deferred tax assets 210,257 (285,660 ) (221,599 )
Accounts payable (761,068 ) (140,809 ) (222,881 )
Accrued expenses and other current liabilities (71,705 ) 305,097 (899,530 )
Amount due to related parties (63,140 ) 245,379 (204,420 )
Income tax payable (102,057 ) (299,897 ) 387,148
Current deferred tax liabilities 41,653 64,060 86,212
Non-current deferred tax liabilities (477,155 ) (114,325 ) (139,229 )

Net cash (used in) provided by operating activities
(5,552,882 ) (2,055,623 ) 17,635,860

Investing activities:

Purchases of property and equipment (349,233 ) (863,603 ) (956,972 )
Proceeds from disposal of property and equipment — — 30,229
Acquisitions of intangible assets (1,718,340 ) (1,535,436 ) (1,714,198 )
Proceeds from disposal of subsidiary 4,517,070 — —
Payments related to acquisitions consummated (net of cash acquired of nil, $1,398,709, and $441,147 for the years ended December 31, 2008, 2007 and 2006, respectively) (2,207,132 ) (3,237,834 ) (12,515,544 )
Payments related to acquisition not yet consummated (1,907,400 ) — —
Investment in cost affiliate (600,038 ) — —
Investment in equity affiliate — (2,483,277 ) —

Net cash used in investing activities
(2,265,073 ) (8,120,150 ) (15,156,485 )

Financing activities:

Proceeds from exercise of options 1,500 16,334 95,472
Proceeds from the issuance of ordinary shares — — 540,000
Repurchase of ordinary shares — — (5,034,748 )

Net cash provided by (used in) financing activities
1,500 16,334 (4,399,276 )

Net decrease in cash
(7,816,455 ) (10,159,439 ) (1,919,901 )
Cash, beginning of year
65,978,884 74,596,978 75,958,964
Effect of exchange rate changes
1,310,274 1,541,345 557,915

Cash, end of the year
$ 59,472,703 $ 65,978,884 $ 74,596,978

Supplemental disclosure of cash flow information:

Income taxes paid $ 385,501 $ 854,864 $ 287,266

   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011

(Adjusted)
(Note 2(1))

   (in U.S. dollars)
Net loss
   (27,834,390 ) (52,434,767 ) (49,389,758 )
Adjustments to reconcile net loss to net cash used in operating activities:

Share-based compensation
   169,310    607,164    1,231,919
Share-based compensation cost in relation to disposition of Yisheng
   —      —      522,251
Share based compensation cost in relation to acquisition of Ku6
   —      1,284,766    —
Depreciation and amortization
   1,798,396    5,266,212    5,197,444
Amortization and write-down of licensed video copyrights
   —      15,751,814    3,721,696
Impairment for goodwill
   3,592,933    —      —
Impairment for investment in affiliated company
   209,848    —      —
Impairment for intangible assets
   3,542,071    —      1,365,376
Bad debt provision
   3,819,894    1,474,568    3,459,826
Inventory provision
   238,370    84,481    —
Exchange loss (gains)
   17,198    (898,682 ) 292,296
Equity in losses of affiliated companies
   704,224    —      263,313
Gain from disposal of subsidiary
   (221,899 ) (4,486,786 ) —
Losses (gain) on disposal of property and equipment
   (5,843 ) 196,969    2,977,098
Change in fair value of contingent consideration
   (352,217 ) —      —
Changes in assets and liabilities, net of acquisitions and dispositions:

Accounts receivable
   5,883,070    (8,678,575 ) 3,815,524
Prepaid expenses and other current assets
   2,737,066    (796,237 ) (1,519,380 )
Amount due from related parties
   732,563    (2,836,461 ) (3,913,409 )
Deposits and other non-current assets
   439,859    (414 ) (306,741 )
Inventories
   (130,333 ) (94,101 ) 31,038
Deferred taxes
   (530,190 ) (72,985 ) (99,479 )
Accounts payable
   579,864    8,753,566    (7,906,294 )
Notes payable
   22,901    (54,218 ) —
Accrued expenses and other current liabilities
   2,283,336    5,976,116    621,237
Amount due to related parties
   (78,307 ) 1,408,305    461,247
Income tax payable
   290,670    (20,633 ) —


Net cash used in operating activities
   (2,091,606 ) (29,569,898 ) (39,174,796 )


Investing activities:

(Increase)/decrease of short-term investments
   (10,000,000 ) 10,000,000    —
Purchases of property and equipment
   (867,061 ) (6,586,819 ) (2,362,785 )
Proceeds from disposal of property and equipment
   80,498    —      —
Purchase of intangible assets
   (66,258 ) —      —
Payment for licensed video copyright
   —      (15,046,257 ) (5,529,949 )
Proceeds (cash-out) from disposal of subsidiaries, net of cash disposed (nil, $669,705 and $111,597 for the years ended December 31, 2009, 2010 and 2011, respectively)
   254,102    4,376,048    (111,597 )
Acquisition of subsidiaries, net of cash acquired ($1,034,308, $329,743 and nil for the years ended December 31, 2009, 2010 and 2011, respectively)
   1,034,308    329,743    —
Cash received upon consolidation of a subsidiary contributed by Shanda
   633,424    —      —
Proceeds from disposal of wireless value-added service and recorded music businesses to Shanda, net of cash disposed ($24,948,577 for the year ended December 31, 2010)
   —      12,295,323    —
Restricted cash for pledge of bank loans
   —      —      (3,600,000 )
Loan to related parties under common control by Shanda
   —      (3,200,000 ) (14,108,019 )


Net cash provided by (used in) investing activities
   (8,930,987 ) 2,168,038    (25,712,350 )


   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011

(Adjusted)
(Note 2(1))

   (in U.S. dollars)
Financing activities:

Proceeds from exercise of stock options
   2,500    20,350    3,750
Proceeds from issuance of ordinary shares to Shanda
   —      —      50,000,000
Proceeds from issuance of convertible bond to Shanda
   —      —      50,000,000
Cash paid for redemption of convertible bond to Shanda
   —      —      (50,000,000 )
Cash injection into VIE subsidiary by Shanda
   1,083,057    —      —
Borrowings from bank
   —      —      3,177,680
Borrowings from related parties under common control by Shanda
   —      4,596,001    13,335,896
Repayment for loans from related parties under common control of Shanda
   —      —      (3,189,527 )
Cash injection in VIE subsidiary by non-controlling shareholders
   362,773    —      —


Net cash provided by financing activities
   1,448,330    4,616,351    63,327,799


Effect of exchange rate changes on cash and cash equivalents
   (154,506 ) 336,394    1,014,955


Net decrease in cash and cash equivalents
   (9,728,769 ) (22,449,115 ) (544,392 )
Cash and cash equivalents, beginning of year
   59,472,703    49,743,934    27,294,819


Cash and cash equivalents, end of the year
   49,743,934    27,294,819    26,750,427


Supplemental disclosure of cash flow information:

Loan interest paid
   —      30,903    703,108
Income taxes paid
   465,696    23,047    —


Supplemental disclosure of non-cash investing and financing activities:

Accounts payable related to purchase of property and equipment
   —      2,045,032    —
Accounts payable related to licensed video copyright
   —      2,946,304    1,108,057
Issuance of ordinary shares to Shanda for Yisheng
   —      12,461,538    —
Purchase of additional equity interests of Yisheng from non-controlling shareholders
   —      4,153,846    —
Issuance of ordinary shares related to acquisition of Ku6 Holding Limited
   —      28,875,000    —


The accompanying notes are an integral part of these consolidated financial ~~statements.~~
statements
~~F-6~~
~~HURRAY! HOLDING CO., LTD.~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006~~
~~(in U.S. dollars, unless otherwise stated)~~
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Ku6 Media Co., Ltd. (formerly known as Hurray! Holding Co., Ltd. ~~(“Hurray!~~, “Hurray!” or the “Company”), a Cayman Islands corporation, ~~and its consolidated subsidiaries, its variable interest entities and equity associate (collectively the “Company”) provide~~originally provided wireless value-added services (“WVAS”) to mobile phone users delivered over the wireless networks of the three telecommunication operators in the People’s Republic of China (“PRC”) and also engaged in music production and distribution in the ~~PRC. The Company specializes in the development, marketing~~PRC and ~~distribution of music and entertainment oriented consumer wireless value-added services.~~
~~At December 31, 2008, Hurray!’s~~Taiwan through its consolidated subsidiaries, ~~and~~its variable interest entities (“VIEs”) ~~are as follows (unless otherwise stated, all of these entities are incorporated in the PRC~~and an equity affiliate before August, 2010. Following certain acquisition and disposition transactions and the 2010 Reorganization described below, the Company primarily provides online advertising services on its online video sharing platform, www.ku6.com, namely through its subsidiaries and VIEs in China (together with the Company collectively referred to as the “Group”) further described within this note.
As of December 31, 2011, the Group’s ownership structure is ~~entitled to the whole benefit of these entities’ economic interest ):~~
summarized as follows.
Names of Major Subsidiaries, Variable Interest Entities and Affiliate
Date of
incorporation

Percentage of
ownership

Subsidiaries
~~Date of~~ ~~Percentage of~~
~~incorporation or~~ ~~effective ownership~~
~~Name of Subsidiaries~~ ~~establishment~~ ~~by Hurray!~~
~~Wireless value-added services (“WVAS”) business segment:~~
~~Subsidiaries~~
~~Beijing Hurray! Times~~
Ku6 (Beijing) Technology Co., Ltd. (“Beijing ~~Hurray Times”~~Technology”)
~~June 27, 2002~~ ~~100~~ %
~~Hurray Technologies (Hong Kong) Ltd.(incorporated in Hong Kong)~~ ~~July 23, 2003~~ 99 %
~~Invest China Group Limited (incorporated in the British Virgin Islands)~~ ~~April 1,~~March 5, 2007 100 %
~~Beijing Hand-in-Hand Media~~
Wei Mo San Yi (Tianjin) Science and Technology Co., Ltd. (“Tianjin Technology”)
~~April 1, 2007~~December 23, 2008 100 %
~~Shanghai Fuming Information~~
Kusheng (Tianjin) Technology Co., Ltd. (“Kusheng”)
~~January 1, 2006~~August 26, 2011 100 %
Variable Interest Entities (“VIEs”)

~~Hurray! Solutions Ltd.~~ ~~September 21, 1999~~ ~~100~~ %
~~Beijing Enterprise Network Technology Co., Ltd.~~ ~~March, 31, 2004~~ ~~100~~ %
~~Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”)~~ ~~October 1, 2005~~ ~~100~~ %
~~Beijing Hutong Wuxian~~
Ku6 (Beijing) Information Technology Co., Ltd. (“Beijing ~~Hutong”~~Information”)
April ~~1, 2005~~20, 2006 ~~100~~N/A %
~~Beijing Palmsky~~
Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. (“Tianjin Information”)
March ~~31, 2004~~20, 2009 ~~100~~N/A %
~~Henan Yinshan Digital~~
Tianjin Ku6 Network Communication Technology Co., Ltd. (“Ku6 Network”)
December14, 2011 N/A
Affiliate
Shanghai Yisheng Network Technology Co., Ltd. (“~~Henan Yinshan”~~Yisheng”)
~~June 30,~~November 22, 2007 ~~100~~20 %
~~Shanghai Magma Digital Technology Co., Ltd. (“Shanghai Magma”)~~ ~~January 1, 2006~~ ~~100~~ %
~~Shanghai Saiyu Information Technology Co., Ltd. (“Saiyu”)~~ ~~April 1, 2007~~ ~~100~~ %
~~Subsidiaries of Variable Interest Entities~~
~~Beijing WVAS Solutions Ltd.~~ ~~October 10, 2001~~ ~~100~~ %
~~Recorded music business segment:~~
~~Subsidiary~~
~~Hurray! Media Co., Ltd. ( incorporated in the Cayman Islands)~~ ~~August 19, 2005~~ ~~100~~ %
~~Subsidiaries of Variable Interest Entities~~
~~Hurray! Digital Media Technology Co., Ltd. (“Hurray Digital Media”)~~ ~~November 10, 2005~~ ~~100~~ %
~~Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”)~~ ~~December 31, 2005~~ 51 %
~~Beijing Huayi Brothers Music Broker Co., Ltd.~~ ~~April 17, 2007~~ 51 %
~~Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”)~~ ~~January 1, 2006~~ 60 %
~~Beijing Hurray! Freeland Culture Development Co., Ltd.~~ ~~January 8, 2007~~ 60 %
~~Beijing Hurray! Fly Songs International Culture Co., Ltd. (“Beijing Hurray! Fly Songs”)~~ ~~August 21, 2007~~ ~~30.6~~ %⁽¹⁾
~~Guangzhou Hurray! Secular Bird Art Co., Ltd. (“Secular Bird”)~~ ~~May 30, 2007~~ 65 %
~~(1)~~ Hurray holds a 30.6% effective interest in Beijing Hurray! Fly Songs through a holding of 60% interest in Freeland Music. Freeland Music owns a 51% of equity interest in Beijing Hurray! Fly Songs. Therefore, Beijing Hurray! Fly Songs is a consolidated entity of the Company.
In July, 2009, Shanda Interactive Entertainment Limited (“Shanda”), a leading interactive entertainment media company in China, and Shanda Music Group Limited (“Shanda Music”), a wholly owned subsidiary of Shanda, announced its completion of a tender offer of totaling $46.2 million for 1,155,045,300 ordinary shares, par value $0.00005 per ordinary share (“Shares”), of the Company, including Shares represented by American Depositary Shares (“ADSs,” each representing 100 Shares) at a purchase price of $0.04 per Share (equivalent to $4.00 per ADS) in cash, without interest and subject to any applicable withholding taxes. Immediately after giving effect to the acquisition of Shares (including Shares represented by ADSs) in the tender offer, Shanda held approximately 51% of the Company’s total outstanding Shares calculated on a fully-diluted basis as of December 31, 2009.
~~F-7~~
In January, 2010, the Company completed the acquisition of 100% of the equity interests of Ku6 Holding Limited (“Ku6 Holding”), a leading online video portal in China, pursuant to the share purchase agreement entered into by and among Hurray!, Ku6 Holding and the shareholders of Ku6 Holding dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares. After the closing of the acquisition of Ku6 Holding, Shanda’s equity interest in the Company was diluted to 41.97%.
In May, 2010, the Company sold all of its 51% equity interest in Beijing Huayi Brothers Music Co., Ltd. including its wholly owned subsidiary of Beijing Huayi Brothers Music Broker Co., Ltd. (collectively referred to as “Huayi Music”) to Huayi Brothers Media Corporation (“Huayi Media”) for aggregate consideration of RMB 34,450,000 (equivalent to $5,045,754).
In August 2010, the Company completed (1) the disposal of all of its subsidiaries and VIEs related to WVAS and recorded music businesses as well as the equity investment in an affiliated company to Shanda for $37,243,904 in cash and (2) acquisition of 75% of the equity interest of Yisheng, an online audio business, from Shanda in exchange for 415,384,615 newly issued ordinary shares (collectively the “2010 Reorganization”). In connection with the acquisition of 75% of the equity interests in Yisheng from Shanda, the Company issued 138,461,539 ordinary shares to acquire the remaining 25% of equity interests in Yisheng from the non-controlling shareholders in August 2010. The 2010 Reorganization was approved by a committee comprised of three independent directors after receiving a fairness opinion on the proposed transaction from its independent financial advisor. Following the 2010 Reorganization, the Company changed its name to Ku6 Media Co., Ltd. and changed its trading symbol on the Nasdaq Global Market from HRAY to KUTV. At December 31, 2010, Shanda’s equity interest in the Company was 51.65%.
~~To comply~~In April 2011, the Company entered into agreements with ~~PRC laws~~Shanda Media Group Ltd., a wholly owned subsidiary of Shanda, pursuant to which the Company issued 1,538,461,538 ordinary shares for an aggregate purchase price of $50 million and ~~regulations~~$50 million aggregate principal amount of senior convertible bond at face value (“Convertible Bond”). The Convertible Bond would mature in three years after issuance and would bear an interest of 3% per annum. The closing date of the ordinary shares and Convertible Bond issuance was June 29, 2011. Based on the Company’s working capital position, the Company redeemed the Convertible Bond in September 2011 at its issue price.
In August 2011, the Company disposed of a significant interest in Yisheng to the related entities and a then employee of Ku6. After the disposal, the Company retains a 20% interest in Yisheng. This transaction is further described in Note 2(1)(a).
At December 31, 2011, Shanda’s equity interest in the Company was 66.43%.
The Group has adjusted its business strategy in 2011. The adjustments primarily refer to 1) the appointment of Shanghai Shengyue Advertising Ltd (“Shengyue”), a wholly owned subsidiary of Shanda, as its primary agency of the online advertising services, and 2) the change in business focus from purchasing the long-form licensed video contents to relying more on the user generated contents and short-form video contents. Shengyue operates the advertising system of Application Advertisement (“AA”) and charges the advertisement fees from its customers based on the advertising effects, including but not limited to views, clicks, responses and etc., (“performance advertisement”). After the appointment of Shengyue as its primary agency, the Group primarily relies on Shengyue to sell the online advertising service, therefore, the Group significantly reduced its sales forces and recorded the severance payments of $0.9 million through the general and administrative expenses ($0.15 million) and selling expenses ($0.75 million) in 2011. The intangible asset of the customer list of $1.46 million, representing the customer relationships under the original business model, has also been abandoned and recorded through the general and administrative expenses in 2011 (Note 7). In relation to the cease of purchasing the long-form licensed video copyrights, the Group has exited two long-term licensed contents purchase agreements with the content providers by paying a one-time termination fee of $5.3 million, which was recorded into the cost of revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Basis of presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
As a result of the disposal of Huayi Music in May 2010 and the 2010 Reorganization, the Company adjusted its consolidated financial statements for the years ended December 31, 2009 and 2010 for the above mentioned transactions to present the WVAS and recorded music businesses as discontinued operations and to reflect the Yisheng merger as a common control transaction.
(a)Acquisition under common control
The acquisition of Yisheng’s online audio business from Shanda was accounted for as a common control transaction as Hurray! was under the control of Shanda since the Company was acquired by Shanda in July 2009. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control, which is the date that ~~restrict direct foreign ownership~~Hurray! was consolidated into Shanda’s consolidated financial statements on August 31, 2009. Therefore, total assets and liabilities, as well as the non-controlling interests of ~~telecommunication service~~Yisheng, were recorded at the carrying amount as capital contribution from Shanda in the consolidated statements of changes in equity at the inception of common control. The effect of accounting for the acquisition under common control increased the net loss for the year ended December 31, 2009 by $736,969, which represented the net loss of this business from August 31, 2009 through December 31, 2009. The fair value of the 415,384,615 ordinary shares issued by the Company amounting to $12,461,538 was recorded through equity as a deemed distribution to Shanda in 2010.
In connection with the acquisition of 75% of the equity interests in Yisheng from Shanda, the Company issued 138,461,539 ordinary shares to acquire the remaining 25% of the equity interests in Yisheng from non-controlling shareholders in August 2010. This transaction was accounted for as an equity transaction in 2010 and the difference between the fair value of the ordinary shares issued amounting to $4,153,846 and carrying amount of the non-controlling interest was recognized as a decrease in additional paid-in capital attributable to the Company in accordance with ASC 810.
In August 2011, the Company disposed of 80% of its (previously 100%) equity interest in Yisheng by contributing a 60% stake in Yisheng to affiliates of Shanda. A remaining 20% stake, to arrive at the 80% disposed, was granted to a then-employee of Ku6 (20%). The Company’s remaining interest in Yisheng was 20% as at December 31, 2011. As a result of the previous capital transaction related to Yisheng and the loss of a controlling financial interest, the Company deconsolidated Yisheng and recorded its remaining interest in Yisheng as an investment subject to the equity method of accounting (Note 8).
Given the presence of common control from parent Shanda, the disposition of the 60% to the related Shanda entities was accounted for as a common control transaction. Therefore, the gain on deconsolidation of Yisheng amounting to $1,373,190 (a gain due to the de-recognition of the net liabilities of the Yisheng business) was recorded in stockholders’ equity as a contribution from Shanda in 2011. At the time of deconsolidation, a Shanda affiliate receiving a portion of the contributed stake also made a capital investment of cash in Yisheng resulting in a higher equity fair value ascribed to Yisheng immediately prior to the deconsolidation. The 20% equity interest in Yisheng transferred to the then-employee of Ku6 was recorded as a compensation charge of $522,251 based on Yisheng’s equity fair value subsequent to the injection of capital from a Shanda affiliate, and was included in general and administrative expenses.
(b) Disposal of WVAS and recorded music businesses
As mentioned above, the Company completed the disposal of Huayi Music to Huayi Media for RMB 34,450,000 (equivalent to $5,045,754) in cash in May, 2010 and the corresponding disposal gain of Huayi Music recognized in 2010 was $4,486,786. The disposal of WVAS and recorded music businesses under common control was consummated in August, 2010. The difference of $13,561,087 between the cash consideration received from Shanda of $37,243,904 and the carrying amount of the assets, liabilities and non-controlling interests and redeemable non-controlling interest of WVAS and recorded music business of $23,682,817 and the corresponding cumulative translation difference of $10,344,330 was accounted for as a contribution by Shanda in additional paid in capital in 2010. No gain or loss was recognized in 2010.
A summary of the major financial information for the discontinued operations of the WVAS and recorded music businesses for the year ended December 31, 2009 and the eight month period ended August 31, 2010 is set out below:

Year ended
December 31,
2009

Eight months
ended August 31,
2010

Net revenues:

Wireless value added services revenue
   20,169,110    5,385,985
Recorded music revenue
   14,473,185    9,458,423


Total net revenues
   34,642,295    14,844,408


Wireless value added services cost
   (15,331,675 ) (3,799,581 )
Recorded music cost
   (12,625,139 ) (6,118,305 )


Total cost of revenues
   (27,956,814 ) (9,917,886 )


Gross profit
   6,685,481    4,926,522
Product development
   (466,543 ) (444,581 )
Selling and marketing
   (6,211,334 ) (3,397,797 )
General and administrative
   (17,469,445 ) (4,544,460 )
Goodwill impairment
   (3,592,933 ) —


Total operating expenses
   (27,740,255 ) (8,386,838 )


Loss from operations
   (21,054,774 ) (3,460,316 )
Interest income
   98,770    42,627
Interest expense
   (13,681 ) —
Other income
   339,869    9,667


Loss before income tax benefit (expense), equity in (loss) earnings of affiliated company, impairment for investment in affiliated company
   (20,629,816 ) (3,408,022 )
Income tax benefit (expense)
   (234,286 ) 25,584
Equity in loss and impairment of affiliated company
   (914,072 ) —
Impairment for investment in affiliated company
   —      —


Net loss
   (21,778,174 ) (3,382,438 )
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest
   4,182,875    243,666


Net loss from discontinued operations, net of tax
   (17,595,299 ) (3,138,772 )
Gain from disposal of Huayi Music, net of tax
   —      4,486,786


Total net (loss) income from discontinued operations
   (17,595,299 ) 1,348,014


According to ASC 205, the effect of discontinued operations has been accounted for retroactively in the consolidated statement of operations and comprehensive loss for all the periods presented.
(c) Liquidity
The Company has a short operating history in a new and unproven market, which makes it difficult to evaluate future prospects and may increase the risk that the Company will not be successful if the market does not develop as expected. The Company entered the online video business in January 2010 with the acquisition of Ku6 Holding. The Company subsequently disposed of the WVAS and recorded music businesses in August 2010 and an 80% interest in the ~~PRC,~~online audio business in August 2011. Accordingly, the Company ~~conducts~~is currently operating the online video business as its principal business and generates substantially all of its ~~business through several VIEs.~~ revenues from online advertising. This short operating history makes it difficult to effectively assess Ku6’s future prospects.
The ~~VIEs have~~Company has incurred significant net losses and negative cash flows from operations in recent years. As of December 31, 2011, the accumulated deficit of the Company was ($132,449,371) and the excess of current assets over current liabilities (working capital) was $21,180,439. In April 2011, the Company entered into ~~various~~ agreements with ~~one~~Shanda Media to issue 1,538,461,538 ordinary shares for an aggregate purchase price of ~~Hurray!’s subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a wholly owned PRC subsidiary, Beijing Hurray! Times,~~$50 million and $50 million of convertible debt (Note 1). Based on the Company’s working capital position, the Company redeemed the debt in September 2011. The Company has in the past obtained significant financing from its parent, Shanda, and may do so again in the future. As mentioned in Note 13, the Company’s forecasted revenue in 2012 is ~~the exclusive provider of technical~~primarily derived from its primary agency and consulting services to the VIEs. In return, the VIEs are required to pay Beijing Hurray! Times’ service fees for the technical and consulting services received. The technical and consulting service fees can be, and are, adjusted at Hurray!’s discretioncash collection from this revenue source is primarily depending on the ~~level~~contractual credit terms agreed with this agency.
The Company believes that there is sufficient cash to find operations and capital expenditures for at least the next 12 months, considering various changes in strategy and cost reduction measures that were adopted in 2011. Accordingly, the consolidated financial statements have been prepared on a going-concern basis.
(2) Use of ~~service provided. Beijing Hurray! Times is entitled~~estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to ~~receive service fees~~make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Significant accounting estimates reflected in ~~an amount up to all~~the Company’s financial statements include accrual for sales rebates, allowances for doubtful accounts, assessment of impairment for long-lived assets and goodwill, assessment of the net ~~income~~realizable value of licensed video copyrights, the ~~VIEs In addition, Beijing Hurray! Times has been assigned all voting rights by~~useful lives for intangible assets and property and equipment, share-based compensation expense, the ~~direct~~recognition and ~~indirect owners~~measurement of deferred taxes, and loss contingencies. Actual amounts may differ from these estimates under different assumptions or conditions.
(3) Consolidation
The consolidated financial statements include the VIEs through agreements which are valid for ten years and are renewable indefinitely and cannot be amended or terminated except by written consent of all parties. Finally, Beijing Hurray! Times has the option to acquire the equity interest of the VIEs. The Company also has extended loans without interest to the registered shareholders to finance their investments in the VIEs. Each of the registered shareholders is a related partyfinancial statements of the Company, ~~acting as de facto agent~~its subsidiaries and VIEs. All inter-company transactions and balances have been eliminated upon consolidation. Affiliated company in which the Company has partial ownership and controls more than 20% but less than 50% of the investment is accounted for using the ~~Company.~~equity method of accounting. The ~~direct~~Company’s share of earning (loss) of such equity ~~interest~~investment is included in ~~these entities has been pledged as collateral for~~ the ~~loans~~accompanying consolidated statements of operations and ~~when permitted under Chinese laws,~~comprehensive loss.
The Company follows the ~~loans are to be repaid by transferring the direct equity interest in these entities~~guidance relating to the ~~Company. Therefore, no minority interest was recorded for the registered capital from the registered shareholders.~~
~~Hurray! is the sole beneficiary~~consolidation of ~~the~~ VIEs ~~because all the variable interests are held by Hurray!. Accordingly, the Company consolidates the VIEs under Financial~~in Accounting ~~Standard Board~~Standards Codification (“~~FASB”~~ASC”) ~~Interpretation (“FIN”) No. 46 (revised), “Consolidation of Variable Interest Entities,”~~810-10, which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
Pre-2010 Reorganization
Prior to the 2010 Reorganization, to comply with PRC laws and regulations that restrict direct foreign ownership of telecommunication service businesses in the PRC, the Company conducted substantially all of its WVAS and recorded music businesses through several VIEs. The ~~following financial statement amounts~~VIEs had entered into various agreements with one of Hurray!’s subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a wholly owned PRC subsidiary, Beijing Hurray! Times Technology Co., Ltd. (“Beijing Hurray! Times”), was the exclusive provider of technical and ~~balances of Hurray !’s~~consulting services to the VIEs. In return, the VIEs were ~~included~~required to pay Beijing Hurray! Times’ service fees for the technical and consulting services received. The technical and consulting service fees could be, and were, adjusted at Hurray!’s discretion depending on the level of service provided. Beijing Hurray! Times was entitled to receive service fees in an amount up to all of the net income of the VIEs. In addition, Beijing Hurray! Times had been assigned all voting rights by the direct and indirect owners of the VIEs through agreements which were valid for ten years and were renewable indefinitely and could not be amended or terminated except by written consent of all parties. Finally, Beijing Hurray! Times had the option to acquire the equity interests of the VIEs if and when legal to do so under PRC laws and regulations. The Company also had extended loans without interest to the registered shareholders to finance their investments in the ~~accompanying~~VIEs. Each of the registered shareholders was a related party of the Company acting as de facto agent for the Company. The direct equity interests in these entities had been pledged as collateral for the loans and when permitted under Chinese laws, the loans were to be repaid by transferring the direct equity interest in these entities to the Company. Therefore, no minority interest was recorded for the registered capital from the registered shareholders.
Hurray! was the considered the primary beneficiary of the VIEs of the WVAS and recorded music businesses because of all the variable interests held by Hurray! and the Company had the power to direct the activities of the VIEs. Therefore the Company consolidated ~~financial statements~~the results of operations of the VIEs of the WVAS and recorded music businesses before they were disposed in 2010.
Post-2010 Reorganization
After the 2010 Reorganization, to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide advertising services and hold Internet Content Provider (“ICP”) licenses and/or Licenses for Transmission of Audio-Visual Programs through the Internet (“the Licenses”), the Company conducts substantially all of its advertising business through its VIEs. The paid-in capitals of the Beijing Information and Ku6 Network were funded by the Company through loans extended to the authorized individuals (“nominee shareholders”) and Tianjin Information was incorporated by the Beijing Information.
The Company has various agreements with its VIEs, through which the Company holds all the variable interests of the VIEs and has the power to direct the activities of the VIEs. Consequently the Company is the primary beneficiary of these VIEs. Details of certain key agreements with the VIEs are as follows:
Loan Agreements: Beijing Technology and Kusheng have granted interest-free loans to the nominee shareholders with the sole purpose of providing funds necessary for the capital injection of the Beijing Information and Ku6 Network. The portions of the loans for subsequent capital injection are eliminated with the capital of the Beijing Information and Ku6 Network during consolidation. The interest-free loans to the nominee shareholders of the Beijing Information and Ku6 Network as of December 31, 2011 were RMB9 million and RMB10 million, respectively. Beijing Technology and Kusheng are able to require the nominee shareholders to settle the loan amount through the entire equity interest of the Beijing Information and Ku6 Network and nominate someone else to hold the shares on Beijing Technology and Kusheng’s behalf.
Proxy Agreement: The nominee shareholders of the VIEs irrevocably appointed the Subsidiaries’ officers to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in the VIEs, making all the operational, financial decisions and the appointment of the directors, general managers and other senior management of the VIEs.
Equity Interest Pledge Agreements: The nominee shareholders of the VIEs have pledged their respective equity interests in the VIEs as collateral to secure the nominee shareholders’ obligations under other agreements and for the ~~years ended December 31:~~

December 31,
2008 2007
Total assets $ 47,698,645 $ 53,453,523
Total liabilities $ 6,342,451 $ 8,187,804

Years ended December 31,
2008 2007 2006
Revenues $ 53,958,400 $ 60,526,627 $ 68,715,901
Net (loss) income (6,876,064 ) (40,902,941 ) 6,320,966
payment by the VIEs under the exclusive technical consulting and services agreements and the loan agreements. The ~~difference between~~nominee shareholders of the ~~consolidated net income (loss) and that of~~ VIEs ~~was derived~~cannot sell or pledge their equity interests to others without the approval from the ~~foreign exchange loss, the gain from disposal of discontinued operations, the gain on reduction of acquisition payable, interest income~~Subsidiaries, and the ~~operating expenses~~nominee shareholders of ~~Hurray!,~~ the ~~holding company.~~
VIEs cannot receive any dividends without the approval of Subsidiaries.
~~F-8~~
~~2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~
~~(a) Basis~~Exclusive Call Option Agreements: The nominee shareholders of ~~presentation~~
~~The consolidated financial statements~~the VIEs granted the Subsidiaries the exclusive and irrevocable right to purchase from the nominee shareholders, to the extent permitted under PRC laws and regulations or at the request of the Company, ~~have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).~~
~~(b) Basis of consolidation~~
The consolidated financial statements include the financial statements of Hurray!, its subsidiaries and VIEs . All inter-company transactions and balances have been eliminated upon consolidation. The affiliated company in which the Company controls more than 20% but less than 50% of the investment is accounted for using the equity method of accounting. The Company’s share of earnings (losses)all of the equity ~~investment is included~~interests in these entities for a purchase price equal to the ~~accompanying consolidated statements~~amount of ~~operations.~~
~~(c) Fair value~~
~~The Group adopted SFAS No. 157 “Fair Value Measurements” on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized~~the registered capital or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
~~SFAS 157 defines fair value as 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~~lowest price permitted by PRC laws and regulations. The Subsidiaries may exercise such options at any time. In addition, the ~~fair value measurements for assets~~VIEs and ~~liabilities required~~their nominee shareholders agreed that without the Subsidiaries’ prior written consent, they will not transfer or ~~permitted~~otherwise dispose of the equity interests or declare any dividends.
Exclusive Business Cooperation Agreements: The Subsidiaries are the exclusive provider of the technical, consulting and related services and information of the VIEs. Under these arrangements, the Subsidiaries have the unilateral right to ~~be recorded at fair value,~~charge service fees to the VIEs to recover substantially all of the VIEs’ profits.
As a result of the above contractual agreements, the Company ~~considers~~determined that it has the ~~principal or~~power to control the economic activities most ~~advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.~~
SFAS 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the ~~fair value measurement. SFAS 157 establishes three levels of inputs that may be used to measure fair value:~~
~~Level 1~~
~~Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.~~
~~Level 2~~
~~Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for~~VIEs and is 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~~
~~Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement~~primary recipient of the ~~fair value~~economic rewards or risks, as the case may be. As such, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) 810-10, Consolidation).
At December 31, 2011 and 2010 and for each of the ~~assets or liabilities.~~
three years in the period ended December 31, 2011, the summarized financial information of the VIEs is as follows:
   December 31, 2010    December 31, 2011
Total assets
   14,021,798       8,159,494
Total liabilities
   26,520,629       47,309,685
Deficits
   12,498,831       39,150,191
   Year ended
December 31, 2009    Year ended
December 31, 2010    Year ended
December 31, 2011
Net Revenue
   1,037,064       41,570,566       18,744,535
Net loss
   6,278,115       8,037,455       25,011,099
As of December 31, ~~2008,~~2011, the total assets of the consolidated VIEs were $8.2 million (2010: $14.0 million), mainly comprising cash and cash equivalents, accounts receivable, other receivable, fixed assets, and other long term assets. These balances are reflected in Company’s consolidated financial statements with intercompany transactions eliminated. Under the contractual arrangements with the VIEs, the Company ~~did~~has the power to direct activities of the VIEs, and can have assets freely transferred out of the VIEs without any restrictions. Therefore, the Company considers that there is no asset in any of its consolidated VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC additional paid-in capital of the VIEs in the amount of $3.3 million as of December 31, 2011 (2010: $4.0 million). As all the consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have ~~any financial assets and liabilities or nonfinancial assets and liabilities that are measured at fair value on a recurring basis.~~
~~(d) Use of estimates~~
~~The preparation of financial statements in conformity with US GAAP requires management~~recourse to ~~make estimates and assumptions that affect~~ the ~~reported amounts of assets and liabilities at the dates~~general credit of the Company for any of the liabilities of the consolidated VIEs. As of December 31, 2011, the total liabilities of the consolidated VIEs were $47.3 million (2010: $26.5 million), mainly comprising accounts payable of $24.0 million (2010: $15.7 million), tax payables of $1.0 million (2010: $2.1 million), other payables and other accrued liabilities of $9.3 million (2010: $2.7 million) and long term borrowings from the intra-group entities and related parties of $13.1 million (2010: $6.1 million). As of December 31, 2011, the total deficits of the consolidated VIEs were $39.2 million (2010: $12.5 million).
For the year ended December 31, 2011, the total net revenue and net loss of the consolidated VIEs were $18.8 million and $25.0 million respectively. For the year ended December 31, 2010, the total net revenue and net loss of the consolidated VIE were $41.6 million and $8.0 million respectively. For the year ended December 31, 2009, the total net revenue and net loss of the consolidated VIE were $1.0 million and $6.3 million, respectively.
Currently there is no contractual arrangement that requires the Company to provide additional financial ~~statements~~support to the VIEs. However, as the Company is conducting the online advertising business substantially through the VIEs, the Company has, in the past, provided and will continue to provide financial support to the VIEs considering the business requirements of the VIEs and the ~~reported amounts of revenues and expenses~~Company’s own business objectives in the ~~reporting periods. Significant accounting estimates reflected in~~future, which could expose the ~~Company’s financial statements include accruals~~Company to a loss.
Please refer to “Contingencies” under Note 20 for revenue and cost of revenue adjustments, allowance for doubtful accounts, sales returns and allowances, inventory reserves, valuations of acquired intangible assets and goodwill, valuation of equity method investee, the ~~useful lives for intangible assets and property and equipment, stock based compensation, and deferred income tax assets valuation allowances.~~
risks relating to the VIE arrangements.
~~F-9~~
~~(e)~~(4) Significant risks and uncertainties
The Company participates in ~~industries with rapid changes in regulations,~~a dynamic high technology ~~trends, customer demand and competition~~industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations or cash flows: i) changes in the overall demand for ~~entertainment-oriented wireless value-added services;~~services and products; ii) changes in business offerings; iii) competitive pressures due to new entrants; iv) advances and new trends in new technologies and industry standards; v) changes in ~~key~~bandwidth suppliers; ~~changes in certain strategic relationships or customer relationships;~~vi) relying on Shengyue as the primary advertisement agency; vii) regulatory ~~or other factors; risks associated with the ability to maintain strategic relationships with the telecommunication operators; risks associated with attracting~~considerations; viii) copyright regulations; and ~~retaining music artists, accessing songs and songwriters, and managing the Company’s new music businesses; and~~ix) risks associated with the Company’s ability to attract and retain ~~other~~employees necessary ~~employees~~ to support its growth.
~~(f)~~
(5) Fair value
The Company follows Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures”. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under US GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value.
The Company measures the financial assets and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels are as follows:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect management’s judgments about the assumptions that market participants would use in pricing the assets or liabilities. Management develops these inputs based on the best information available, including their own data.
(6) Business combinations and non-controlling interests
The Company accounts for its business combinations using the purchase method of accounting. This method requires that the acquisition cost be allocated to the assets, including separately identifiable intangible assets, and liabilities the Company acquired based on their estimated fair values.
The Company follows ASC Topic 805 with respect to business combinations. Pursuant thereto, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest(s) in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although the Company believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.
The Company follows guidance in ASC Topic 810, “Consolidation,” regarding non-controlling interests. Non-controlling interests are classified as a separate component within equity except for any redeemable securities that are subject to the guidance in ASC Topic 268 regarding redeemable securities. Consolidated net income on a total enterprise basis is adjusted within the statement of operations and comprehensive loss for net income attributed to non-controlling interests and consolidated comprehensive income is adjusted to for comprehensive income attributed to non-controlling interests.
(7) Foreign currency translation
The functional currency and reporting currency of the parent company is the United States dollar (“U.S. dollar”). The Company’s subsidiaries and VIEs use Renminbi (“RMB”) as their functional currency.
Assets and liabilities of the Company’s subsidiaries and VIEs are translated at the current exchange rates quoted by the Federal Reserve Bank of New York in effect at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period to USD. Translation adjustments resulting from foreign currency translation to reporting currency are reported as cumulative translation adjustments and recorded in accumulated other comprehensive income (loss) in the consolidated statements of changes in equity for the years presented.
Transactions denominated in currencies other than the Company’s or its subsidiaries’ or VIEs’ functional currencies are translated into the functional currencies at the exchange rates quoted by the People’s Bank of China prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive loss. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencies using the applicable exchange rates quoted by the People’s Bank of China at the balance sheet dates. All such exchange gains and losses are included in the statements of operations and comprehensive loss.
Pursuant to the People’s Republic of China State Administration of Foreign Exchange (“SAFE”), the conversion of United States dollars to Renminbi is governed as to amount and a uniform exchange rate is set by the People’s Bank of China on a daily basis pegged to a basket of major currencies. Correspondingly, Renminbi to USD conversion does not carry the same ease as conversion may with other major currencies. The rates of exchange for the U.S. dollar quoted by the Federal Reserve Bank of New York were RMB 6.6000 on December 31, 2010 and RMB 6.2939 on December 30, 2011, respectively.
(8) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid investments ~~which are unrestricted as~~placed with bank or other financial institutions with no restriction to withdrawal or use, ~~and~~ which have original maturities of three months or less.
~~(g)~~
Included in the cash and cash equivalents are cash balances denominated in Renminbi (“RMB”) of approximately RMB137,735,942 and RMB34,714,100 (equivalent to approximately $21,884,037 and $5,259,707) as of December 31, 2011 and 2010, respectively.
(9) Restricted cash
Restricted cash mainly represents cash that is pledged for the loan borrowed from a PRC bank (Note 11), and the pledge period is the same as the loan period.
(10) Allowances for doubtful accounts
The Company determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account an aging analysis of the accounts receivable balances, historical bad debt records, repayment patterns in the prior year, and other factors such as the policies of operators and financial condition of the customer.
(11) Inventories
Inventories represent music compact discs (“CDs”) and related music products and are stated at the lower of cost, determined using the first-in, first-out method, or ~~market.~~
~~(h)~~market price. The Company provided an estimated inventory allowance for excess, slow moving and/or obsolete inventories, as well as inventory whose carrying value is in excess of net realizable value.
(12) Investments in affiliated companies
Affiliated companies (partially owned affiliates) are entities over which the Company has significant influence, but which it does not control. Investments in affiliated companies are accounted for by the equity method of accounting. Under this method, the Company’s share of the post-acquisition profits or losses of affiliated companies is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Company and its affiliated companies are eliminated to the extent of the Company’s interest in the affiliated companies; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in an affiliated company equals or exceeds its interest in the affiliated company, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the affiliated company.
The Company continually reviews its investments in affiliated companies to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry specific or investee specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the investment is written down to fair value. There were no impairments of such investments during the three year period ended December 31, 2011.
(13) Property and equipment, net
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:
Furniture and office equipment
3 years
~~Motor vehicles~~    ~~5 years~~
Telecommunications equipment
3 years
Leasehold improvements
Lesser of original lease term or estimated useful life
~~(i)~~
Expenditures for maintenance and repairs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations.
(14) Acquired intangible assets, net
An intangible asset is required to be recognized separately from goodwill based on its estimated fair value if such asset arises from contractual or legal right or if it is separable as defined by ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”, (“SFAS No. 141(R)”)). Acquired intangible assets ~~consists~~consist of intangible assets, as detailed in Note 8,7, acquired through direct purchases and various business acquisitions and are amortized on a straight-line basis over their ~~expected~~estimated useful economic ~~life.~~
~~(j)~~lives.
The estimated useful economic lives by major intangible asset category used by the Company are as follows.
Trademark
20 years
Technology
7 years
Customer List
5 years
Software technology
5 years
(15) Video production and acquisition costs and licensed video copyrights
The Company contracts third parties for the production of, self produces and self-generates video copyrights for content to exhibit on its websites, and also licenses copyrights from other parties for content distribution on its websites ku6.com.
Video production and acquisition costs
Following the guidance under ASC 926-20-25, video production (which mainly includes direct production costs and production overhead) and acquisition costs are capitalized, if the capitalization criteria are met, and are stated at the lower of unamortized cost or estimated fair value.
With respect to production and acquisition costs, the Company has established capitalization criteria whereby until the Company can establish estimates of market revenues associated with a video, capitalized costs for each video produced are limited to the amount of revenues specifically contracted for that video. Revenues contracted for a video consist of advertising revenues specifically associated with particular videos. The costs in excess of revenues contracted for that video are expensed as incurred on an actual basis, and are not restored as assets in subsequent periods. Once the Company can establish estimates of secondary market revenues in accordance with ASC 926-20-35-5(b), it capitalizes subsequent film costs.
Capitalized video production costs are amortized in accordance with the guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. The Company estimates total revenues to be earned (“ultimate revenues”) throughout the life of a video. Ultimate revenue estimates for the produced or acquired videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self produced content are based upon assumptions about future demand and market conditions. The capitalized costs are subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than unamortized cost.
During each of the three years ended December 31, 2011, video production and acquisition costs did not meet the criteria for capitalization (defined in the second paragraph above regarding capitalization limited to the amount of revenues contracted for a video) and as a result all the video production costs were expensed as incurred.
Licensed video copyrights
The licensed video copyrights are amortized over their respective licensing periods, which range from 1 to 3 years for all periods presented.
The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, the Company determines the expected cash inflows that are directly attributed to the content category which comprise of the expected revenues directly attributable to the content category less the direct costs to deliver the content to derive the net realizable value of the asset. The Company writes down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount.
Amortization and write-down expenses for the year ended December 31, 2011 were $2,200,535 (2010: $8,012,252) and $1,521,161 (2010: $7,739,562), respectively.
(16) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed as a result of the Company’s acquisitions.
The Company tests goodwill for impairment by reporting unit on an annual basis or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of the goodwill below its carrying amount. The Company performsperforming a two-step goodwill impairment test. The first step compares the calculated fair ~~values~~value of ~~each~~a reporting unit to its carrying amount, including goodwill. If, ~~the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired~~ and ~~the second step will not be required. If~~only if, the carrying amount of a reporting unit exceeds its fair value as per step one, the second step ~~compares~~is executed to compare the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
~~F-10~~
An impairment provision relating to goodwill amounting to approximately $3.6 million was recognized in discontinued operations (Note 2(1)) in the year ended December 31, 2009. No goodwill impairment was recognized in the years ended December 31, 2010 and 2011.
~~(k)~~(17) Impairment of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash ~~flow~~flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.
~~(l)~~ The Company uses estimates and judgments in its impairment tests and if different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different. An impairment provision relating to intangible assets amounting to approximately $3.5 million was recognized in the year ended December 31, 2009, included in discontinued operations. No impairment provision was recognized during the year ended December 31, 2010; impairment of $1.4 million was recognized in 2011 as further discussed in Note 7.
(18) Financial instruments
Financial instruments include cash and cash equivalents, accounts receivable, prepayments and other current assets, amounts due from/to related parties, accounts payable and accrued expenses and other current liabilities. As of December 31, 2010 and 2011, their carrying values approximated their fair values because of their generally short maturities. There were no other financial assets or liabilities that are being measured at fair value at December 31, 2010 or December 31, 2011, except for the contingent consideration in relation to the acquisition of Seed Music (Note 3) in January 2009 which was disposed of in full along with contingent consideration obligations in August 2010 (Note 2(1)). This contingent consideration was recorded at fair value and was classified within Level 3 of the fair value hierarchy.
(19) Revenue recognition and cost of revenues
In accordance with ASC Topic 605, Revenue Recognition, the Company recognizes revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.
Online advertising services (post-2010 Reorganization business model)
The Company’s revenues are derived principally from online advertising services, where the advertisers (including third parties and related parties) pay to place their advertisements on the Company’s online video platform in different formats. Such formats include but are not limited to banners, buttons, links, pre-roll or post-roll video advertisements.
Advertising contracts are signed to establish the price and advertising services to be provided. Advertisements are charged either based on the agreed measurement numbers, including but not limited to impressions and clicks, or fixed during a determined period of time. In the former case, the delivery of service occurs when those measurement numbers are achieved. In the latter case, the delivery is not linked to advertisement displays but occurs over time.
Under the arrangements with advertisers where the advertisement placement includes different formats to be delivered over different periods of time, the Company’s revenue is accounted for using the guidance under ASC 605-25 “Multiple Element Arrangements” as such revenue arrangements involve multiple deliverables to the advertisers. The Company sells the advertising services over a broad price range. The Company uses its best estimate of the selling price of each component of bundled advertising arrangements for separate units of accounting.
Under the arrangement with the related party advertising agency (Note 1 & 13), components of the arrangement include an arrangement for guaranteed advertising revenue and an arrangement for sharing of excess advertising revenues after deducting commission fees earned by the related party advertising agency based upon increasing percentages for additional tiers (layers) of revenue. The guaranteed advertising revenues are recognized ratably over varying service periods as governed by the specific agreements with the affiliated advertising agency. Further, any excess advertising revenues realized from these arrangements, which are not subject to any refundability or contingency provisions from the Company to the affiliated advertising agency, would be recognized ratably over the remaining service periods when a reliable estimate of excess revenues above the minimum guarantee is established. The Company reports the revenue earned from both related and third party ad agencies based on the net amount after considering the indicators to record revenue gross versus set forth in ASC 605-45.
The Company makes credit assessments of customers to assess the collectability of contract amounts prior to entering into contracts. For those contracts for which collectability is assessed as not reasonably assured, the Company recognizes revenue only when cash is received and all revenue recognition criteria are met.
For revenue arrangements contracted with third-party advertising agencies, the Company provides cash incentives in the form of rebates based on volume and performance, and accounts for such incentives as a reduction of revenue in accordance with ASC 605-50-25. The cash incentives to third-party advertising agencies in the years ended December 31, 2010 and 2011 were $5,440,054 and $1,374,030, respectively.
Costs of advertising revenues consist primarily of employee costs associated with platform operations and share based compensation, depreciation expense, internet bandwidth leasing costs, video production costs, and amortization and write-down of licensed video copyrights.
Wireless value-added services (pre-2010 Reorganization—discontinued operations (Note 2(1)
)
Wireless value-added service revenues ~~are~~were derived from providing personalized media, games, entertainment and communication services to mobile phone and personal handy phone (collectively “mobile phones”) customers of the various subsidiaries of the three major Chinese operators of telecommunication networks, China United Telecommunications Corporation (“China Unicom”), China Mobile Communications Corporation (“China Mobile”) and China Telecommunications Corporation (collectively, the “Telecom Operators”). Fees for these services, negotiated by a network service ~~agreement~~agreements with the Telecom Operators and indicated in the ~~message~~messages received on ~~the~~ mobile ~~phone, are~~phones, were charged on a per-use basis or on a monthly subscription basis, and ~~vary~~varied according to the type of services delivered.
The Company ~~contracts~~contracted with the Telecom Operators ~~(defined above)~~ for the transmission of wireless services as well as for billing and collection services. The Telecom Operators ~~provide~~provided the Company with a monthly ~~statement~~statements that ~~represents~~represented the principal evidence that service ~~has~~had been delivered and ~~triggers~~triggered revenue recognition for a substantial portion of the Company’s revenue. In certain instances, when a statement iswas not received within a reasonable period of time, the Company ~~makes~~made an estimate of the revenues and cost of services earned during the period covered by the statement based on its internally generated information, historical experience and/or other assumptions that ~~are~~were believed to be reasonable under the circumstances.
The Company ~~recognizes all revenues in the period in which the services are performed net of business taxes of $1,402,507, $1,506,002 and $1,664,706 for 2008, 2007 and 2006, respectively.~~
~~The Company measures~~measured its revenues based on the total amount paid by mobile phone customers, for which the Telecom Operators ~~bill~~billed and ~~collect~~collected on the Company’s behalf. Accordingly, the service ~~fee~~fees paid to the Telecom Operators iswere included in the cost of revenues. In addition, in respect of 2G services, the Telecom Operators ~~charge~~charged the Company a network ~~fee~~fees based on a per message fee, which ~~varies~~varied depending on the volume of messages sent in the relevant month, multiplied by the excess of messages sent over messages received. These network fees ~~are~~were likewise retained by the Telecom Operators and ~~are~~were reflected as cost of revenues. The cost of revenues also ~~includes~~included fees paid to ~~our~~ content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.
The Company ~~evaluates~~evaluated its cooperation arrangements with the Telecom Operators to determine whether to recognize the Company’s revenues on a gross basis or net of the service fees and net transmission charges paid to the Telecom Operators. The Company’s determination iswas based upon an assessment of whether it ~~acts~~acted as a principal or agent when providing its services. The Company ~~has~~ concluded that it ~~acts~~acted as a principal in each of the ~~arrangement.~~arrangements. Factors that support the Company’s conclusion mainly ~~include:~~included:
the Company was the primary obligor in the arrangement;
• ~~the Company is the primary obligor in the arrangement;~~
• ~~the Company is able to establish prices within price caps prescribed by the telecommunications operators to reflect or react to changes in the market;~~
• ~~the Company determines the service specifications of the services it will be rendering;~~
• ~~the Company is able to control the selection of its content suppliers; and~~
• the Telecom Operators usually will not pay the Company if users cannot be billed or if users do not pay the Telecom Operators for services delivered and, as a result, the Company bears the delivery and billing risks for the revenues generated with respect to its services.
the Company was able to establish prices within price caps prescribed by the telecommunications operators to reflect or react to changes in the market;
the Company determined the service specifications of the services it will be rendering;
the Company was able to control the selection of its content suppliers; and
The Telecom Operators usually would not pay the Company if users could not be billed or if users did not pay the Telecom Operators for services delivered and, as a result, the Company bore the delivery and billing risks for the revenues generated with respect to its services.
Based on these factors, the Company ~~believes~~believed that recognizing revenues on a gross basis iswas appropriate. However, as noted above, the Company’s reported revenues ~~are~~were net of bad debt charges that ~~have~~had been deducted by the Telecom Operators.
~~F-11~~
Recorded Music (pre-2010 Reorganization—discontinued operations (Note 2(1)
)
The Company iswas in the business of artist development, music production, offline music distribution, and online distribution through ~~wireless value-added services~~WVAS and the Internet. Recorded music revenues ~~are~~were derived from live performances, corporate sponsorship and advertising, online and wireless sales, and offline CD ~~sales~~
sales.
The Company ~~generates~~generated revenues from the sale of CDs either by providing the CD master to a distributor or by directly arranging for the volume production and subsequent wholesale of the CDs. In the former case, the Company ~~receives~~received a fixed fee, ~~has~~had no further obligations and ~~recognizes~~recognized the fee as revenue when the master CD iswas provided. In the latter case, the Company ~~ships~~shipped the produced CDs to retail distributors and ~~recognizes~~recognized wholesale revenues at the time of shipment less a provision for future estimated returns. ~~In 2008, the estimated sales returns rate is approximately 19% based on past experience.~~
The Company ~~recognizes~~recognized artist performance fees and corporate sponsorship or marketing event fees once the performance or the service ~~has~~had been completed. In accordance with the relevant accounting standards for revenue recognition, corporate sponsorship arrangements involving multiple deliverables are broken into single-element arrangements using residual method for revenue recognition purpose. The Company recognized revenue on the service elements delivered and deferred the recognition of revenue for larger of the contractual cash holdback or the fair value of the undelivered service elements until the remaining obligations had been satisfied. The Company determined the fair value of undelivered service elements based on the price charged for the similar performance or marketing events on a standalone basis. Where the Company ~~acts~~acted as the primary obligor in the transaction, revenues ~~are~~were recorded on a gross basis. Where the Company iswas considered an agent or where the artists separately contract with the event organizer, revenues ~~are~~were recorded on a net basis.
The Company ~~licenses~~licensed its music to third parties for guaranteed minimum royalty payments and normally received non-refundable upfront ~~and typically non-refundable.~~licensing fees. In such cases the Company ~~recognizes~~recognized revenue on a straight-line basis over the ~~life of the~~ license period and unrecognized revenues ~~are~~were included in liabilities. When the contract ~~provides~~provided for additional payments if revenues exceed the minimum amount guaranteed, such amounts ~~are~~were included in revenues when the Company iswas notified of its entitlement to additional payments.
The Company ~~incurs~~incurred costs in producing CD masters, volume CD production, artist and songwriter royalties based on certain percentage of the revenue, and royalties payable to other parties for the use of their work. The cost of record masters, ~~and~~ volume CD productions, and royalties paid in advance ~~are~~were recorded in prepaid expenses and other current assets when the sales of the recording ~~are~~were expected to recover the cost and amortized as ~~an expense~~expenses over the revenue generating period, typically within one year. The decision to capitalize an advance to an artist, songwriter or other party ~~requires~~required significant judgment as to the recoverability of these advances. Advances for royalties and other capitalized costs ~~are~~were regularly assessed for recoverability.
~~(m) Foreign currency translation~~
~~Hurray! uses~~ The costs of ongoing royalties relating to the ~~United States dollar (“U.S. dollar”)~~live performance, corporate sponsorship and advertising, online and wireless sales and offline CD sales to retail distributors were recognized as ~~its functional~~incurred.
Business tax and reporting currency. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates of exchange prevailing at the balance sheet date. Transactions in currencies other than U.S. dollars during the year are converted into U.S. dollars at the applicable rates of exchange prevailing at the last day of the month transactions occurred. Transaction gains and losses are recognized in the statements of operations and in 2008 the Company incurred losses of $ 8,990,067 following the conversion into Euros and subsequent conversion back into U.S dollars of a significant portion of therelated surcharges
The Company’s ~~U.S dollar deposits arising from the high volatility in the currency markets.~~
~~The financial records of certain of Hurray!’s~~ subsidiaries and VIEs are ~~maintained~~subject to business tax and related surcharges and value-added tax on the revenues earned for services provided in ~~Renminbi (“RMB”), which~~the PRC. The applicable business tax rate varies from 3% to 5% for the WVAS and recorded music services except for the offline CD distribution and the rate of value added tax is ~~their functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and~~13% on revenues ~~expenses, gains and losses are translated using the average~~from offline CD distribution. The applicable business tax rate for advertising business is 5% based on the ~~period. Translation adjustments are reported as cumulative translation adjustments and are reflected as a separate component of comprehensive income in~~gross advertising revenue before deducting the advertising agencies rebate. In the accompanying consolidated statements of ~~shareholders’ equity.~~
~~RMB is not fully convertible into U.S. dollars. The rate of exchange~~operations, business tax and related surcharges for ~~the U.S. dollar quoted by the Federal Reserve Bank of New York was RMB 6.8225, RMB 7.2946~~revenues derived from WVAS and ~~RMB 7.8087 on December 31, 2008, 2007~~recorded music revenues and ~~2006, respectively.~~
~~(n)~~advertising revenues are deducted from gross revenues to arrive at net revenues when incurred.
(20) Product development expenses
Product development expenses consist primarily of ~~content~~salaries and benefits for product development ~~expenses~~personnel, including share-based compensation ~~and related costs for employees associated with the development and programming of mobile data content related to WVAS business.~~costs. These costs are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. To date, the Company has essentially completed its development concurrently with the establishment of technological feasibility, and, accordingly, no costs have been capitalized.
Product development expenses began to be incurred in 2011 with the changes in the Company’s business strategy which drove development efforts towards new technologies.
~~F-12~~
(21) General and administrative expenses
General and administrative expenses consist primarily of salary and benefits for general management, finance and administrative personnel, bad debt provision, litigation accrual, depreciation, amortization and impairment of intangible assets, professional service fees, share-based compensation, office rental fees, and other expenses.
(22) Sales and marketing
~~(o)~~Sales and marketing expenses consist primarily of sales and marketing personnel payroll compensation and related employee costs, advertising and market promotion expenses, and other overhead expenses incurred by the Company’s sales and marketing personnel.
(23) Advertising costs
The Company expenses advertising costs as incurred. Total advertising expenses were $4,191,045 and $210,987 for the years ended December 31, 2009 and 2010 pertaining to discontinued operations, respectively, and have been included in selling and marketing expenses and cost of revenues in discontinued operations. Total advertising expenses related to continuing operations were $153,633, $6,086,030, and $2,493,901 for the years ended December 31, 2009, 2010 and 2011, respectively, and have been included in selling and marketing expenses within continuing operations.
(24) Stock-based compensation
~~Effective January 1, 2006, the~~
The Company ~~adopted the fair value recognition provisions~~applies ASC Topic 718, which requires all share-based payments to employees and directors, including grants of ~~Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method~~employee stock options and ~~therefore has not restated results for prior periods. Under this transition method, stock-based~~restricted shares, to be recognized as compensation expense ~~recognized beginning January 1, 2006 includes: (a) compensation expense for all stock-based compensation~~in the financial statements over the vesting periods of the awards ~~granted prior to, but not yet vested as of January 1, 2006~~ based on the fair ~~market value as~~values of the awards determined at the grant ~~date, measured~~date. The valuation provisions of ASC 718 apply to awards granted after the adoption of ASC 718, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period(s) if actual forfeitures differ from initial estimates.
In accordance with ~~SFAS 123,~~ASC 718, the Company has recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and ~~(b) compensation expense~~service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions. See Note 15 for further information on stock-based compensation.
(25) Leases
Leases where substantially all ~~stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant-date fair vale estimated in accordance~~the rewards and risks of ownership of assets remain with the ~~provisions~~leasing company are accounted for as operating leases. Other leases, meaning those meeting the capitalization criteria in ASC Topic 840, “Leases,” are accounted for as capital leases. Payments made under operating leases, net of ~~SFAS 123(R). In March 2005,~~any incentives received by the ~~SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding~~Company from the ~~SEC’s interpretation~~leasing company, are charged to the consolidated statement of ~~SFAS 123(R)~~operations and ~~the valuation of stock-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company recognizes stock-based compensation costs~~comprehensive loss on a straight-line basis over the ~~requisite service period~~lease periods, as specified in the lease agreements, with reference to the actual number of users of the ~~award, which is generally~~leased assets, as appropriate.
(26) Taxation
Current income taxes are provided for on the ~~vesting period~~taxable income of each subsidiary on the ~~award.~~
~~Prior to the adoption of SFAS 123(R), the Company recognized stock-based compensation expense~~separate tax return basis in accordance with ~~Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and had adopted~~ the disclosure-only alternative of SFAS 123 and SFAS No. 148, “Accounting for Stock-based Compensation — Transition and Disclosure”. In accordance with APB 25 and related interpretations, stock-based compensation expense was not recorded in connection with share-based awards granted with exercise prices equal to or greater thanrelevant tax laws.
Deferred income taxes are provided using the ~~fair market value of the underlying shares on the date of grant.~~
~~Share-based payment transactions with non-employees are accounted for as share based compensation expenses~~liability method in accordance with ~~EITF 96-18 “Accounting for Equity Instruments that Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services”.~~
~~See Note 17 to the Consolidated Financial Statements for further discussion on stock-based compensation.~~
~~(p) Taxation~~
~~Income taxes — Deferred~~ASC Topic 740, “Income Taxes.” Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ~~Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.~~
Value added taxes — The Company’s PRC subsidiaries and VIEs are subject to value-added tax on sales, which is calculated at a rate of 13% on revenues from offline CD distribution. In addition, the Company’s software and system integration service operations in the PRC, which were sold in August 2007, were up to that date subject to value-added tax at a rate of 17% on revenues from sales of hardware and software as well as the installation and system integration services which are deemed as mixed-sale of goods and thus subject to VAT. Revenue is recorded net of VAT.
Business taxes — The Company’s PRC subsidiaries and VIEs are also subject to business tax at a rate of 3-5% on wireless value-added services revenues. Business taxes are recorded as a deduction of revenue when incurred.
~~In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48~~
ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax ~~position~~positions taken or expected to be taken in a tax return. ~~FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted.~~ The Company ~~adopted FIN 48 effective January 1, 2007.~~ does not have any liabilities for unrecognized tax benefits as of December 31, 2010 or 2011. Were the Company to have such liabilities, interest and penalties would be recognized in tax expense.
(27) Statutory reserves
The ~~adoption~~Company’s subsidiaries incorporated in the PRC and the VIEs are required on an annual basis to make appropriations of ~~FIN 48 did not result~~retained earnings set at certain percentage of after-tax profit determined in accordance with PRC accounting standards and regulations (“PRC GAAP”).
The Company’s subsidiaries must make appropriations to (i) general reserve and (ii) enterprise expansion fund in accordance with the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the company’s registered capital; enterprise expansion fund appropriation is at the PRC subsidiaries’ directors’ discretion. The Company’s VIEs, in accordance with the China Company Laws, must make appropriations to a ~~cumulative adjustment on January 1, 2007~~(i) statutory reserve fund and ~~had no significant impact on~~(ii) discretionary surplus fund. The statutory reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the ~~Company’s accounting~~company’s registered capital; other fund appropriation is at the VIEs’ directors’ discretion.
The general reserve fund and statutory reserve fund can only be used for ~~income taxes~~specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. The enterprise expansion fund was mainly used to expand the production and operation; it also may be used for increasing the ~~year~~registered capital.
Appropriations to these funds are classified in the consolidated balance sheets as statutory reserves. No appropriations were made during the years ended December 31, ~~2008. The~~2009, 2010 and 2011. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company ~~did not incur any interest or penalties related to potential underpaid income tax expenses, and also~~ does not ~~expect to have a significant increase or decrease in~~do so.
(28) Contingencies
In the ~~unrecognized tax benefits within 12 months from December 31, 2008.~~
~~The~~normal course of business, the Company is subject to ~~taxation in PRC~~contingencies, such as legal proceedings and ~~other tax jurisdictions. There~~claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is ~~no ongoing examination by taxing authorities at this time. Various tax years during 2002~~probable that a liability has been incurred and ~~2008 of some~~the amount of the ~~Company’s subsidiaries and VIEs remain open in the relevant taxing jurisdictions.~~
~~(q) Comprehensive income (loss)~~
~~Comprehensive income (loss) includes foreign currency translation adjustments. Comprehensive income (loss) is reported in the statements of shareholders’ equity.~~
assessment can be reasonably estimated. See Note 20.
~~F-13~~
~~(r) Fair value of financial instruments~~
Financial instruments include cash and cash equivalents, accounts receivable, equity method investment, accounts payable and accrued expenses and other current liabilities. The carrying values of cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities and other current liabilities approximate their fair values due to their short-term maturities.
~~(s) Advertising costs~~
The Company expenses advertising costs as incurred. Total advertising expenses were $5,895,995, $5,269,550 and $5,404,935 an in 2008, 2007 and 2006, respectively, and have been included in selling and marketing expenses and cost of revenues.
~~(t) (Loss) income~~(29) Loss per share
Basic ~~(loss) income~~net loss attributable to the Company’s ordinary shareholders per share is computed by dividing ~~income~~net loss attributable to the Company’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted ~~(loss) income~~net loss attributable to the Company’s ordinary shareholders’ per ~~ordinary~~ share ~~reflects~~is computed using the ~~potential dilution that could occur if securities or other contracts to issue~~weighted average number of ordinary shares ~~were exercised or converted into~~and, if dilutive, potential ordinary ~~shares. The~~shares outstanding during the year. Potential ordinary shares consist of shares issuable upon the conversion of convertible debt (using the “if-converted method”) and upon the exercise of stock options for the purchase of ordinary shares and the settlement of restricted share units (using the “treasury stock method”). Potential ordinary shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.
For each of the three years in the period ended December 31, 2011, the dilutive effect of potential ordinary shares was not factored into the ~~stock options~~calculation of diluted earnings per share as a consolidated net loss was incurred in each period.
(30) Comprehensive loss
Comprehensive loss is defined as the change in equity of a company during the period from transactions and ~~non-vested stock units is computed using treasury stock method.~~
~~(u) Recently issued~~other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive loss, as presented on the accompanying consolidated balance sheets, consists of cumulative foreign currency translation adjustments.
(31) Recent accounting ~~standards~~
~~On June 12, 2009,~~pronouncements
In May 2011, the FASB issued ~~SFAS 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”). SFAS 166 amends the derecognition guidance~~Accounting Standards Update 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in ~~Statement 140~~U.S. GAAP and eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs). As a result, a transferor will need to evaluate all existing QSPEs to determine whether they must now be consolidated in accordance with Statement 167. Statement 166 is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company is in the process of assessing the potential impactIFRSs.” Key provisions of the ~~adoption~~amendments in ASU 2011-04 include: (1) a prohibition on grouping financial instruments for purposes of ~~SFAS 166 on its consolidated financial position or results of operations.~~
On June 12, 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under Interpretation 46(R). While the Board’s discussion leading up to the issuance of Statement 167 focused extensively on structured finance entities, the amendments to the consolidation guidance affect all entities and enterprises currently within the scope of Interpretations 46(R), as well as QSPEs that are currently excluded from the scope of Interpretation 46(R). The Statement is effective asdetermining fair value, except in limited cases; (2) an extension of the ~~beginning~~prohibition against the use of the first fiscal year that begins after November 15, 2009. The Company is in the process of assessing the potential impact of the adoption of SFAS 167 on its consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significant Decreased and Identifying Transactions That Are Not Orderly”. This statement provides additional guidance for estimatinga blockage factor to all fair value ~~measurement in accordance with FAS 157 when the volume~~measurements; and ~~level of activity~~(3) a requirement that for ~~the asset or liability have significantly decreased and provides guidance on identifying circumstances that indicate~~recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a ~~transaction is not orderly. It emphasizes that despite significant decreases in volume and level of activity and regardless~~description of the valuation ~~technique(s)~~process used and qualitative details about the sensitivity of the measurements. For items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the ~~asset or liability,~~level within the fair value hierarchy that applies to the fair value measurement stay the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.disclosed. This issue is effective prospectively for interim and annual periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 will have a significant effect on the Company’s consolidated financial position or results of operations.
On April 9, 2009, the FASB issued the FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This Statement amends FAS 107 to require entities to disclose, among other things, the methods and significant assumptions used to estimate the fair value of financial instruments in both interim and annual financial statements and amends APB Opinion No. 28 to require those disclosures in summarized financial information at interim reporting periods. This FSP applies to all financial instruments within the scope of FAS 107 held by publicly traded companies, as defined in APB Opinion 28. This issueAccounting Standards Update is effective for interim and annual periods ~~ending~~beginning after ~~June~~December 15, ~~2009. Early adoption is permitted for periods ending after March 15, 2009 only if a reporting entity also early adopts FAS 157-4 and FAS FAS 115-2 and FAS 124-2.~~2011. The Company will adopt this ASU for the fiscal year commencing January 1, 2012 and does not ~~expect~~anticipate any changes as a result thereof given the ~~adoption~~nature and extent of ~~FSP FAS 107-1 and APB 28-1 will have a significant effect on~~ the Company’s ~~consolidated financial position or results of operations.~~
~~On April 9, 2009,~~assets and liabilities subject to fair value measurement principles.
In June 2011 the FASB issued ~~the FSP FAS 115-2 and FAS 124-2, “Recognition and~~Accounting Standards Update 2011-05, “Comprehensive Income: Presentation of ~~Other-Than-Temporary Impairments” (“OTTI”)~~Comprehensive Income”. ~~This Statement amends the OTTI guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure~~The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of ~~OTTI on debt and equity securities~~comprehensive income or in ~~the financial~~two separate but consecutive statements. This ~~FSP does not amend existing recognition~~guidance is effective retrospectively for interim periods and ~~measurement guidance related~~annual periods beginning after December 15, 2011. While the Company will be subject to OTTI of equity securities. It gives guidance on the evaluating whether an impairment of a debt security is other-than-temporary and the determination of Amount of an OTTI recognized in earnings and other comprehensive income. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 will have a significant effect on the Company’s consolidated financial position or results of operations.
~~F-14~~
~~On April 1, 2009, the FASB issued FSP FAS 141(R)-1, which amends~~ the guidance in ~~FASB Statement No. 141(R), “Business Combinations”, to establish a model for pre-acquisition contingencies that is similar to~~accordance with the one entities used under Statement 141. The FSP is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of FSP FAS 141(R)-1transition provisions, there will ~~have a significant effect on the Company’s consolidated financial position or results of operations.~~
At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in Issue No. 08-6: “Equity Method Investment Accounting Considerations” (“EITF 08-6”). Because of the significantbe no changes ~~to the guidance on subsidiary acquisitions and subsidiary equity transactions and the increased use of fair value measurements~~ as a result of ~~Statements 141(R)~~adoption as the Company already reports items of comprehensive income (loss) in a continuous statement of operations and ~~160, questions~~comprehensive loss for all periods and plans to do so prospectively. Further, the component of the issued standard regarding detailed presentation reclassifications from other comprehensive income to net income has been subject to indefinite deferral by the FASB.
In September 2011, the FASB issued Accounting Standards Update 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08). Under the revised guidance, entities testing for goodwill impairment have ~~arisen regarding~~an option of performing a qualitative assessment before calculating the ~~application~~fair value for the reporting unit, (i.e., Step 1 of the traditional goodwill impairment test). If an entity determines, on a basis of qualitative factors, that ~~accounting guidance~~the fair value of the reporting unit is more likely than not less than the carrying amount, the first step of the two-step impairment test would be required. If it is not more likely than not that the fair value of the reporting unit is less than the carrying value, then goodwill is not considered to ~~equity method investments. EITF 08-6 provides guidance~~be impaired. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill at least annually for ~~entities that acquire or hold investments accounted for under the equity method.~~impairment. This ~~issue~~ASU is effective for ~~transactions occurring in fiscal years~~interim and ~~interim~~annual periods beginning on or after December 15, 2008. Early adoption is not permitted. The Company does not expect the adoption of EITF 08-6 will have a significant effect on the Company’s consolidated financial position or results of operations.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP gives guidance on the computation of earnings per share and the impact of share-based instruments that contain certain non-forfeitable rights to dividends or dividend equivalents. The FSP is effective for fiscal years beginning after December 31, 2008 and early application is prohibited. The Company does not expect the adoption of FSP 03-6-1 will have a significant effect on the Company’s consolidated financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position FAS142-3, “Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This FSP is effective for fiscal years beginning after December 15, ~~2008, and interim periods within those fiscal years. Early~~2011 with early adoption ~~is prohibited.~~permitted. The Company early-adopted this guidance for ~~determining the useful life~~its annual goodwill impairment test performed as of ~~a recognized intangible asset in this FSP shall be applied prospectively to intangible assets acquired after the effective date.~~December 31, 2011. The ~~Company does not expect the~~early adoption of ~~FAS 142-3 will~~this guidance did not change, nor would it be expected to change, the conclusions reached in the impairment evaluation for goodwill, which is further described in the Goodwill footnote to the financial statements.
(32) Government Subsidies
Government subsidies represent discretionary cash subsidies granted by the local government to encourage the development of certain enterprises that are established in the local special economic region. The cash subsidies may be received in the form of (i) a fixed cash amount determined and provided by the municipal government to an operating subsidiary for product and service innovation, or (ii) an amount determined as a percentage of the income tax and business tax actually paid by an operating subsidiary.
Cash subsidies have ~~a significant effect~~no defined rules and regulations to govern the criteria necessary for companies to enjoy the benefits and are recognized as other income when received.
For the years ended December 31, 2009, 2010 and 2011, cash subsidies of $1,783, $58,025 and $1,265,182 were recognized as other income, respectively.
(33) Segment reporting
Based on the ~~Company’s consolidated financial position or results of operations.~~
~~In March 2008, the FASB issued~~criteria established by ASC 280 (formerly referred to as SFAS No. ~~161,~~131, “Disclosures about ~~Derivative Instruments~~Segments of an Enterprise and ~~Hedging Activities,”~~Related Information”), the Company currently operates and manages its business as a single operating segment—online advertising. As the Company generates its revenues primarily from customers in the PRC, no geographical segments are presented.
3. BUSINESS COMBINATIONS
(a) 2010 acquisition
On January 18, 2010, the Company completed the acquisition of Ku6 and its subsidiaries and VIEs, a leading online video portal in China, pursuant to ~~improve~~the share purchase agreement entered into by and among Hurray!, Ku6 and the shareholders of Ku6 dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares, of which 44,438,100 replaced the options issued by Ku6 and immediately vested without substantive future service requirements. After the completion of this acquisition, the Company owned 100% of the equity interests of Ku6 and its subsidiaries and VIEs. The total fair value of the shares issued approximated $28.9 million based on the share price on the closing date and the difference amounting to $1,284,766 between the fair value of the 44,438,100 shares issued and the fair value of options issued by Ku6 at acquisition date attributable to the pre-combination portion was recorded as share based compensation expense in the consolidated statement of operations and comprehensive loss. Since the Company has unilateral control of Ku6, the Company started to consolidate the financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. statements of Ku6 from February 1, 2010.
The ~~standard requires disclosure of~~following table summarizes the estimated fair values of derivative instruments and their gains and losses in a tabular format as well as cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It also requires that more information be provided about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. SFAS No.161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect the adoption of SFAS No. 161 to have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No.141(R), “Business Combination,” to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed at the date of acquisition and the purchase price allocation.
Total purchase price:
Ordinary shares issued to acquired all of the outstanding shares of Ku6
27,101,920
Ordinary shares issued to replace the options issued by Ku6
1,773,080
Share based compensation related to post combination portion
(1,284,766 )
27,590,234
Amortization period
Aggregate purchase price allocation –Ku6:
Cash and cash equivalents
329,743
Accounts receivable
3,264,513
Other current assets
811,845
Acquired intangible assets:
Trademark
24,901,940 20 years
Software technology
2,197,230 7 years
Customer base
1,464,820 5 years
Non-current deferred tax liability
(4,826,059 )
Goodwill
6,232,770
Property and equipment, net
3,652,599
Other non-current assets
937,485
Current liabilities
(11,376,652 )
Total
27,590,234
Total identifiable intangible assets acquired upon consolidation mainly included trademark(s), software technology, and customer base, which have a weighted average amortization period of 18.2 years.
Goodwill primarily represented the expected synergies from combining operations of the Company and Ku6, which are complementary in a way to each other, and any other intangible benefits that do not qualify for separate recognition. Such goodwill is not deductible for tax purposes. The fair value of intangible assets was measured primarily by the income approach taking into consideration historical financial performance and estimates of future performance of Ku6’s business.
Ku6 is subject to claims and litigation which may arise in the ~~transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired~~normal course of business. As of and ~~liabilities assumed; and requires the acquirer~~subsequent to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date on January 18, 2010, Ku6 was involved in a number of cases in various courts and arbitrations. These cases are substantially related to alleged copyright infringement arising before the acquisition. Accordingly, liabilities from contingencies assumed of $1,631,359 in relation to those cases have been recognized in the current liabilities upon acquisition. The compensation amount was based on judgments handed down by the court and out-of-court settlements or management’s best estimation based on the historical actual compensation amount in recent years and the advice from PRC counsel. There are no accruals for any additional losses related to unasserted claims as there was no manifestation of claims and the amount cannot be reasonably estimated.
The Company completed its acquisition of Ku6 on January 18, 2010 and began to consolidate the financial statements of Ku6 upon unilateral control from February 1, 2010. The amount of Ku6’s consolidated revenue and net loss for the eleven months ended December 31, 2010 included in the statements of operations and comprehensive loss was $14,101,171 and $45,165,985.
The following unaudited pro forma consolidated financial information reflects the results of operations for the years ended December 31, 2009 and 2010, as if the acquisition of Ku6 had occurred as of January 1, 2009 and after giving effect to purchase accounting adjustments primarily relating to the amortization of intangibles. The following pro forma financial information has been prepared for comparative purpose only and is ~~on or after~~not necessarily indicative of the results that would have been had the acquisitions been completed at the beginning of the ~~first annual reporting~~ period ~~beginning~~presented, nor is it indicative of future operating results.
   Year Ended
December 31, 2009 Year Ended
December 31, 2010
   (unaudited) (unaudited)
Net revenues
   7,261,708    16,787,493
Net loss attributable to Ku6 Media Co., Ltd.
   (35,258,520 ) (56,033,640 )
Loss per ADS- Basic and Diluted:
   (1.61 ) (1.81 )
The pro forma net losses for the years ended December 31, 2009 and 2010 include $1,851,951 and $1,851,951, respectively, for the amortization of identifiable intangible assets arising from the acquisition of Ku6.
(b) 2009 acquisition
Acquisition of Seed Music Group Limited (disposed in August 2010 and presented in discontinued operations (Note 2(1))
In September 2008, the Company entered into a definitive agreement to acquire, through Hurray! Media Co., Ltd, a controlling stake in Seed Music Group Limited (“Seed Music”) and its subsidiaries including Seed Music Co., Ltd., Profita Publishing Limited and Leguan Seed (Beijing) Culture Consulting Co., Ltd. (collectively referred to as “Seed Music Group”), a Taiwan based company that focuses on ~~or after December 15, 2008. Early adoption is prohibited.~~artist development, music production and offline music distribution in Asia Pacific, especially in China. The Company ~~does not expect the adoption~~paid an advance of ~~SFAS 141R will have a significant effect on the Company’s consolidated financial position or results of operations.~~
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-An Amendment of ARB No. 51”, or SFAS 160. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity and should be reported as equity on the financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net income attributable$1,907,400 to the ~~parent~~selling shareholders to acquire an approximately 47.58% equity interest of Seed Music in 2008 and ~~to the noncontrolling interest is required on the face of the financial statements. SFAS 160 is effective~~such payment was recorded as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. Upon the adoption of SFAS 160, the Company reclassified the minority interest balance to the shareholder’s equity on January 1, 2009.
~~F-15~~
~~3. ACQUISITIONS~~
~~In 2007 and 2006, the Company made a number of acquisitions of businesses directly or through its VIE companies. Each~~prepaid acquisition has been recorded using the purchase method of accounting, and accordingly the acquired assets and liabilities were recorded at their fair values on the dates of acquisitions and the results of their operations have been included in our operations since their respective acquisition dates. The fair values of the assets and liabilities acquired were estimated using a combination of valuation methods, such as “income approach,” “market approach,” and “cost approach” methods, considering, among other factors, forecasted financial performance of the acquired business, market performance, and market potential of the acquired business in China.
~~The acquisitions payable~~cost as of December 31, 2008 ~~represents~~as this transaction had not closed as of that date. Concurrent with this transaction, the ~~payable~~Company subscribed for ~~the acquisition of Henan Yinshan of $14,657 and~~an additional 7,813 shares, representing a 13.5% ownership interest, from Seed Music for $600,038 in 2008, which was recorded as an investment at cost at December 31, ~~2007 represented~~2008, as that portion of the ~~payables for~~transaction had been consummated by that date. The acquisition of the 47.58% equity interest was completed and the Company began to consolidate Seed Music on January 1, 2009. The Company’s total ownership in Seed Music was 61.08% after the closing of the acquisition and subscription of ~~Shanghai Magma, Henan Yinshan and Saiyu, and Beijing Hutong of $6,000,000, $1,089,160 and $12,338, respectively.~~
~~(a) 2007 acquisitions~~
~~Acquisition of Henan Yinshan and Saiyu~~
~~In April and June of 2007,~~Seed Music shares.
According to the ~~Company acquired 100% of the equity of Saiyu and Henan Yinshan, for a total cash consideration of $5,328,699, including transaction costs of $21,021,~~agreements, there were further contingent payments based on Seed Music’s operating performance. The contingent payments were to further expand the Company’s portfolio of wireless value-added services in China. Of the total consideration, at December 31, 2007, an amount of $1,089,160 was deferred until certain conditions were fulfilled and $1,074,503 wasbe paid in ~~2008. The remaining $14,657 is payable once~~cash if Seed Music exceeded the performance target. If not, the selling holders were obligated to transfer certain ~~conditions are fulfilled. In 2008, the Company made an additional payment of $60,483~~Seed Music shares or make cash payments to the ~~selling shareholders of Henan Yinshan~~Company. Such contingent payments were recorded as contingent consideration based on the ~~amended agreement,~~fair value of $352,217, which was classified within Level 3 of the fair value hierarchy and was measured on a recurring basis (Note 10). The contingent consideration was settled by June 30, 2010. As the actual performance of Seed Music did not meet the specified earnings objectives, the Company was not required to make any further payments.
The non-controlling shareholders had options to sell their shares to the Company at a price based on a formula which included Seed Music’s operating performance. Therefore, from the date of consolidation to the derecognition on disposal, the non-controlling interests were presented as redeemable non-controlling interests on the balance sheet and such amounts were accreted to the redemption value if the redemption was probable. Since the operating performance of Seed Music did not meet the specified target, the Company considered the redemption was not probable. In addition, the non-controlling shareholders granted call options to the Company to subscribe for all or part of their remaining shares in Seed Music. The embedded put and call options were not derivatives that required bifurcation as separate financial instruments and were accounted for together with ~~transaction costs of $20,021, is recorded as a corresponding increase in goodwill.~~ the non-controlling interest.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation ~~has been~~was finalized.

Total purchase price:
Cash consideration $ 5,307,678
Transaction costs 21,021

$ 5,328,699

Amortization
period
Aggregate purchase price allocation — Saiyu and Henan Yinshan:
Cash and cash equivalents $ 1,311,572
Accounts receivable 45,451
Other current assets 1,226
Acquired intangible assets:
Agreements with China Mobile 1,946,402 5 years
WVAS license 24,763 3 years
Goodwill allocated to WVAS segment 2,134,375 N/A
Property and equipment, net 9,496 3-5 years
Other assets 17,751
Current liabilities (71,652 )
Non-current deferred tax liabilities (90,685 )

Total $ 5,328,699

Total purchase price:
Cash consideration
2,507,438
Contingent consideration (Note 10)
352,217
Fair value of redeemable non-controlling interests
1,569,808
4,429,463
~~F-16~~
Amortization period
Aggregate purchase price allocation –Seed Music:
Cash and cash equivalents
1,034,308
Inventory
53,504
Other current assets
891,723
Acquired intangible assets:
Artist contracts
1,717,846 7.1~9.0 years
Trademarks
1,569,808 20 years
Non-compete agreement
183,218 4.5 years
Copyrights
5,863 0.4 years
Non-current deferred tax liability
(869,184 )
Goodwill (allocated to music segment)
2,535,523
Property and equipment, net
50,084
Other non-current assets
51,526
Current liabilities
(2,216,292 )
Other non-current liabilities
(578,464 )
Total
4,429,463
~~Acquisition~~Goodwill primarily represented the expected synergies from combining operations of ~~Secular Bird and Beijing Hurray! Fly Songs~~
~~During 2007,~~ the Company ~~expanded its recorded music segment~~and Seed Music, which were complementary in a way to each other, and any other intangible benefits that did not qualify for separate recognition. Such goodwill was not deductible for tax purposes. The fair value of intangible assets was measured primarily by ~~acquiring 65%~~the income approach taking into consideration historical financial performance and estimates of ~~Secular Bird, an independent record label in China,~~future performance of Seed Music’s business.
The fair value of redeemable non-controlling interests was determined using the income approach including discounted cash flow modeling and ~~through its Freeland Music joint venture,~~unobservable inputs including assumptions of projected revenue, expenses, capital spending, other costs and a 51% interest in Beijing Hurray! Fly Songs, a concert and performance organizer in China, for a total consideration of $576,066, all paid in 2007. The following table summarizes the estimated fair values acquired and liabilities assumed at the dates of acquisition. The purchase price allocation has been finalized.

Amortization
period
Aggregate purchase price allocation — Secular Bird and Beijing Hurray! Fly Songs
Cash and cash equivalents $ 87,138
Inventory 10,747
Other current assets 116,559
Acquired intangible assets:
Artist management contract 32,293 4.6 years
Trademarks 24,644 20 years
Copyright for songs 17,846 1.9 years
Non-complete contract 4,249 3.8 years
Goodwill allocated to recorded music segment 253,705 N/A
Property and equipment, net 53,375 3-5 years
Other assets 1,402
Current liabilities (11,108 )
Non-current deferred tax liabilities (14,784 )

Total $ 576,066

~~In 2008, the Company made an additional payment under an earn-out agreement of $189,255,~~discount rate with ~~a corresponding increase in goodwill. Additional contingent consideration of a capital injection in cash to Secular Bird and additional cash payments~~regards to the ~~original selling shareholders are~~non-controlling discount in recent share transactions made at arm’s length close to ~~be determined based~~the acquisition date, taking into consideration other factors, as appropriate. The net fair value of the embedded call and put options was not material.
The Company completed its acquisition of Seed Music on ~~specified earnings objectives for the twelve-month period ending August 31,~~January 1, 2009 and ~~if the objectives are met will be payable in 2009.~~
began to consolidate Seed Music Group’s consolidated financial statements from then on. The ~~following unaudited pro forma information summarizes the results~~amount of ~~operations~~Seed Music Group’s revenue and net loss for the year ended December 31, 2007 and 2006 assuming the acquisitions of Saiyu, Henan Yinshan, Secular Bird and Beijing Hurray! Fly Songs occurred as of January 1, 2006 and 2007. The following pro forma financial information has been prepared for comparative purpose only and is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of that period, nor is it indicative of future operating results:

Year ended December 31,
2007 2006
(unaudited) (unaudited)
Pro forma total revenue $ 60,897,824 $ 69,617,966
Pro forma net (loss) income attributable to holders of ordinary shares (42,565,473 ) 5,783,149
Pro forma net (loss) income per share:
- basic $ (0.02 ) $ 0.00
- diluted $ (0.02 ) $ 0.00
Weighted average shares used in calculation of pro forma net (loss) income per share:
- basic 2,172,208,190 2,189,748,563
- diluted 2,172,208,190 2,208,758,636
~~F-17~~
~~(b) 2006 acquisitions~~
~~Acquisition of Shanghai Magma~~
Effective January 1, 2006, the Company acquired 100% of the outstanding equity of Shanghai Magma, a leading developer and publisher of wireless Java™ Games in China and Shanghai Magma has been consolidated since that date. Under the acquisition agreements, the Company made an initial cash payment of $4,185,009 and agreed to pay additional amounts based on Shanghai Magma’s financial performance in 2006 and 2007 with a maximum total consideration, including the initial payment, of $22,000,000. In September 2006, the Company agreed with the selling shareholders to fix the additional amounts at a total of $10,500,000 payable in two installments of $4,500,000 in October 2006 and $6,000,000 in December 2007. As part of the amended agreements certain selling shareholders agreed to subscribe $1,250,000 of the payments received2009 included in the ~~issue~~statements of ~~Hurray!’s ordinary shares at a price based on the 5 -day average price of Hurray!’s shares prior~~operations and comprehensive loss was approximately $6.7 million and $1.0 million. Total net loss attributable to ~~signing the revised agreements. Such right of subscription~~redeemable non-controlling interests was ~~fair valued at $124,918 using the option valuation model.~~$1,198,591. As of December 31, ~~2006,~~2009, the balance of redeemable of non-controlling interests was reduced to $370,870 as a result of share of loss and after giving effect to the impact of foreign currency translation.
4. DISCONTINUED OPERATIONS
Disposal of WVAS and recorded music businesses (2010 Reorganization)
In May 2010, the Company ~~had made the payment~~disposed of ~~$4,500,000~~Huayi Music to Huayi Media for RMB 34,450,000 (equivalent to $5,045,754) in cash and ~~selling shareholders subscribed $540,000 of the payments received~~ in the issue of Hurray!’s ordinary shares. On December 31, 2007, the amount payable under these agreements was $6,000,000, out of which $710,000 was to be used by the selling shareholders for subscription of Hurray!’s shares at a price of $6.03 per share. In February 2008,August 2010, the Company and the selling shareholders agreed to further amend the agreements to reduce the consideration payable to $1,000,000 and cancelled the option granted to the selling shareholders. The amount of $1,000,000 was paid in March 2008. The gain on reduction of $5,000,000 in the purchase liability was recognized as other operating income in the first quarter of 2008. The purchase price allocation has been finalized.

Total purchase price:
Cash consideration $ 14,246,746
Fair value of share purchase right 124,918
Transaction costs 438,263

$ 14,809,927

Amortization
period
Purchase price allocation:
Cash and cash equivalents $ 393,425
Accounts receivable 564,291
Other current assets 1,156,492
Acquired intangible assets:
Partnership agreement with China Mobile 418,826 4 years
Trademarks 147,456 20 years
Software 59,478 5 years
Website 21,065 4.5 years
WVAS license 9,913 4.5 years
Non-compete agreement 63,196 4 years
Game content 76,826 0.17 years
Goodwill allocated to WVAS segment 12,168,190 N/A
Property and equipment, net 25,289 3-5 years
Current liabilities (191,214 )
Non-current deferred tax liabilities (103,306 )

Total $ 14,809,927

~~Acquisition of Freeland Music~~
Effective January 1, 2006, the Company acquired 60% of Freeland Music from the Freeland group, which is a group of affiliated companies in China engaged in the production and distribution of audio and video music products and Freeland Music has been consolidated from that date. In this acquisition the Freeland group injected its music business in a newly formed company, Freeland Music, owned 60% by the Company and 40% by the Freeland group. The initial consideration was $7,560,000 in cash, of which $2,160,000 was payable to the existing shareholders of the business and $5,400,000 was payable into Freeland Music as a capital injection to fund its operation.
~~F-18~~
The final consideration payable by the Company and the respective ownership interests of the shareholders of Freeland Music were subject to adjustment based on the financial performance of Freeland Music in 2006. Subsequent to the acquisition, the Company and the Freeland group agreed to amend the terms of the agreements to extend the performance period to the 2007 financial year. If the actual net income of Freeland Music in that year exceeds $1,530,000 (RMB 12,000,000), the Company would contribute the full amount of the remaining purchase consideration as a capital injection into Freeland Music. If the actual net income is between $1,280,000 (RMB10,000,000) and $1,530,000, the Company would contribute 50% of the remaining purchase consideration, equal to $1,350,000, as a capital injection. As the actual net income of Freeland Music for 2007 was less than $1,280,000, the Company was not required to make any further capital injection. In 2008, the Company and the Freeland group again agreed to amend the terms of the agreements to extend the performance period to the end of the 2009 financial year. If the actual net income of Freeland Music in these two years exceeds $1,540,000 (RMB10,500,000), the Company would contribute no more than $940,000 in cash as a capital injection into Freeland Music or make additional payment of $375,000 in cash to the original selling shareholders. The purchase price allocation has been finalized.

Total purchase price:
Cash consideration $ 4,320,000 ⁽¹⁾
Transaction costs 265,113

$ 4,585,113

Amortization
period
Purchase price allocation:
Cash and cash equivalents $ 47,722
Accounts receivable 43,568
Acquired intangible assets:
Artist contracts 1,406,890 5 years
Trademarks 215,932 8 years
Exclusive WVAS agreement 42,464 5 years
Exclusive copyright agreement 12,543 3 years
WVAS contracts 249,845 5 years
Copyright contracts 99,954 4 years
Goodwill allocated to recorded music segment 2,538,962 N/A
Property and equipment, net 14,540 3-5 years
Current liabilities (57,469 )
Non-current deferred tax liabilities (29,838 )

Total $ 4,585,113

~~(1)~~ The initial consideration was $7,560,000 in cash, of which $5,400,000 was payable into Freeland Music as a capital injection to fund its operation. Since the Company owned 60% of total shares in Freeland, only the capital injection shared by minorities was treated as consideration.
~~4. DISCONTINUED OPERATIONS~~
In 2007, the Company signed an agreement to sell its software and systems integration (“SSI”) business unit, Hurray! Times, to a subsidiary of Taiwan Mobile, a shareholder of Hurray!. With this sale the Company was able to focus on its music and other entertainment services. The business was disposed on August 1, 2007, when the acquiring company took over the management and risks of this business. The consideration of the sale is approximately $4,816,837. Of the total consideration, $1,425,645 is contingent upon the receipt of the accounts receivable of the SSI business as of August 1, 2007. In addition, the Company is entitled to further payments if the performance of the business sold exceeds specified profit targets in 2007, 2008 and 2009. As the SSI business did not achieve the specified profit target for 2007 and 2008, no additional consideration was received in respect of these years.
Gains from disposal of the SSI are recognized based on payment to the Company by the purchaser of their collection of the accounts receivable. At December 31, 2008, approximately 79% of trade receivables for SSI business had been collected. Under the terms of the sale after that date any collections of the remaining balance of the trade receivables will not be refunded to the Company. In the first quarter of 2009, the Company received a further $221,899 in respect of amounts collected by the purchaser before December 31, 2008 and this has been recorded as a gain in 2009. By the end of April 2009, all of ~~the consideration~~its WVAS and ~~trade receivables the Company is entitled from Taiwan Mobile had been collected.~~
remaining recorded music businesses to Shanda for $37,243,904 in cash. See Note 2(1).
~~F-19~~
A summary of the major financial information for the discontinued operations of WVAS and recorded music businesses as of August 31, 2010 and for the year ended December 31, ~~2008~~2009 and eight months ended August ~~1, 2007~~31, 2010 is set out below:

August 1,
2007
Unaudited
(in U.S. dollars)
Current assets of discontinued operations

Cash $ 771,746
Accounts receivable, net of allowance 1,868,593
Prepaid expenses and other current assets 18,942
Amount due from related parties 4,918,631
Inventories 1,397

$ 7,579,309

Non-current assets of discontinued operations:

Property and equipment, net 49,842
Rental deposits 462

$ 50,304

Current liabilities of discontinued operations

Accounts payable 270,843
Accrued expenses and other current liabilities 605,739
Dividend payable 3,002,588

$ 3,879,170

Year ended December 31,
2008 2007 2006
(in U.S. dollars)
Revenues $ — $ 227,391 $ 1,177,053
Operating loss — (643,151 ) (1,173,424 )
Income taxes — 178 (83,650 )

Net loss from discontinued operations, net of tax — (612,170 ) (836,448 )
Gain from disposal of SSI 412,530 192,943 —

Total net income (loss) from discontinued operations $ 412,530 $ (419,227 ) $ (836,448 )

August 31, 2010
Current assets:
Cash
24,948,577
Accounts receivable, net of allowance
5,402,738
Prepaid expenses and other current assets
2,610,863
32,962,178
Non-current assets:
Property and equipment, net
943,258
Intangible assets
766,847
Goodwill
1,998,821
Other non-current assets
300,532
4,009,458
Current liabilities:
Accounts payable
4,337,542
Accrued expenses and other current liabilities
7,034,894
11,372,436
Non-current liabilities:
Non-current deferred tax liabilities
186,528
Other non-current liabilities
12,322
198,850
Non-controlling interests and redeemable non-controlling interests:
1,717,533

Year ended
December 31, 2009
Eight months ended
August 31, 2010
Total net revenues
   34,642,295    14,844,408
Loss from operations
   (21,054,774 ) (3,460,316 )
Income tax benefit (expense)
   (234,286 ) 25,584
Net loss
   (21,778,174 ) (3,382,438 )
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests
   4,182,875    243,666


Net loss from discontinued operations, net of tax
   (17,595,299 ) (3,138,772 )
Gain from disposal of Huayi Music, net of tax
   —      4,486,786


Total net (loss) income from discontinued operations
   (17,595,299 ) 1,348,014


5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of:

December 31,
2008 2007
Staff advances and other receivables $ 1,174,104 $ 690,005
Advances to suppliers 1,492,019 1,042,427
Prepaid expenses 1,406,157 632,893
Prepaid artist costs 98,043 754,725

$ 4,170,323 $ 3,120,050

   December 31, 2010    December 31, 2011
Prepaid expenses
   282,290       431,560
Advances to suppliers
   454,273       242,932
Staff advances and other receivables
   1,028,156       209,852
Prepaid licensing fee of video copyright
   1,722,608       —




   3,487,327       884,344




~~F-20~~
~~Prepaid artist costs mainly represented the prepayment for artists’ cost related to recorded music product.~~
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, ~~consist~~consists of:

December 31,
2008 2007
Furniture and office equipment $ 3,066,923 $ 2,924,803
Motor vehicles 290,335 244,813
Telecommunications equipment 4,556,290 4,500,285
Leasehold improvements 663,307 1,132,946

8,576,855 8,802,847

Less: accumulated depreciation and amortization (7,596,795 ) (7,166,758 )

$ 980,060 $ 1,636,089

   December 31, 2010 December 31, 2011
Furniture and office equipment
   1,208,434    1,055,377
Telecommunications equipment
   10,627,167    3,450,208
Leasehold improvements
   1,368,677    1,230,327


   13,204,278    5,735,912
Less: accumulated depreciation and amortization
   (5,200,804 ) (2,143,167 )


   8,003,474    3,592,745


Depreciation expense for the years ended December 31, ~~2008, 2007~~2009, 2010 and ~~2006~~2011 was ~~$990,072, $1,269,203~~$881,633, $3,265,975, and ~~$1,580,005,~~$3,409,647 respectively.

The Company acquired $2,428,694 in additional property, plant, and equipment in 2011 in support of business strategy changes.
Total equipment disposal loss in 2011 was $3,043,006 (zero proceeds less remaining net book value), which was mainly comprised of computers and servers in relation to technological upgrades and replacements following the Company’s business strategy adjustment. The Company has recorded the disposal loss in general and administrative expenses.
7. ACQUIRED INTANGIBLE ASSETS, NET

December 31, 2008
Gross carrying Accumulated Intangible assets Net carrying
amount amortization impairment amount
WVAS Segment:

Amortizable intangible assets

WVAS licenses $ 514,765 $ 397,440 $ 117,325 $ —
Customer agreements with Telecom Operators 2,851,304 780,518 2,070,786 —
Non-compete agreement 989,375 355,590 633,785 —
Business transaction codes 196,995 164,163 32,832 —
Platform⁽¹⁾
474,020 434,643 39,377 —
Software 95,273 95,273 — —
Trademarks 174,423 9,690 164,733 —

5,296,155 2,237,317 3,058,838 —

Recorded Music Segment:

Amortizable intangible assets

Artist contracts⁽²⁾
4,917,694 1,938,859 1,739,848 1,238,987
Copyrights 692,435 527,163 145,147 20,125
Exclusive WVAS agreements 584,873 52,465 214,000 318,408
Exclusive copyright agreements 12,543 11,497 1,046 —
VAS contracts 249,845 249,845 — —
Non-compete agreement 135,506 8,117 65,000 62,389
Software 6,434 3,146 — 3,288
Trademarks 694,826 100,701 292,000 302,125

7,294,156 2,891,793 2,457,041 1,945,322

$ 12,590,311 $ 5,129,110 $ 5,515,879 $ 1,945,322

   December 31, 2011
   Gross carrying
amount    Accumulated
amortization Intangible assets
impairment
(Note 2(17)) Net carrying
amount
Online advertising segment:

Trademark
   24,901,940       (2,386,436 ) —      22,515,504
Technology
   2,197,230       (601,623 ) —      1,595,607
Customer list
   1,464,820       (415,032 ) (1,049,788 ) —
Software technology
   823,273       (507,685 ) (315,588 ) —




   29,387,263       (3,910,776 ) (1,365,376 ) 24,111,111




~~F-21~~
   December 31, 2010
   Gross carrying
amount    Accumulated
amortization Net carrying
amount
Online advertising segment:

Trademark
   24,901,940       (1,141,339 ) 23,760,601
Technology
   2,197,230       (287,733 ) 1,909,497
Customer list
   1,464,820       (268,550 ) 1,196,270
Software technology
   823,273       (425,358 ) 397,915




   29,387,263       (2,122,980 ) 27,264,283




December 31, 2007
Gross carrying Accumulated Intangible assets Net carrying
amount amortization impairment amount
WVAS Segment:

Amortizable intangible assets

WVAS licenses $ 482,551 $ 332,564 $ 52,010 $ 97,977
Customer agreements with Telecom Operators 2,666,773 705,785 1,840,399 120,589
Non-compete agreement 925,344 323,870 566,648 34,826
Business transaction codes 184,246 138,185 — 46,061
Platform 443,343 280,399 36,828 126,116
Software 89,107 36,678 — 52,429
Trademarks 163,135 — — 163,135

4,954,499 1,817,481 2,495,885 641,133

Recorded Music Segment:

Amortizable intangible assets

Artist contracts 3,172,460 1,027,576 — 2,144,884
Producing cost 1,418,847 853,993 — 564,854
Copyrights 616,744 348,738 — 268,006
Exclusive WVAS agreements 584,872 16,986 — 567,886
Exclusive copyright agreements 12,543 8,362 — 4,181
Non-compete agreement 135,506 652 — 134,854
Software 6,018 1,739 — 4,279
Trademarks 694,826 53,983 — 640,843

6,641,816 2,312,029 — 4,329,787

$ 11,596,315 $ 4,129,510 $ 2,495,885 $ 4,970,920

~~(1)~~ ~~The Platform represents the Wireless Application Protocol site owned by Hurray! Solutions and the SMS Platform owned by Hengji Weiye.~~
~~(2)~~ ~~The carrying amount of artist contracts represents the payments for agency agreements with certain artists.~~
~~During the third quarter of 2008, we performed impairment testing~~Amortization expense for the ~~music~~years ended December 31, 2009, 2010 and 2011 were $916,763, $2,000,237 and $1,787,796, respectively.
Following the Company’s business ~~due~~strategy adjustment during the year 2011, the Company appointed Shengyue as its primary agency of the online advertising services. As a result, the customer list intangible asset associated with the original business model was no longer of use to the ~~continued challenging business conditions and reduction in number of concerts and other music events because~~Company; therefore the unamortised balance of the ~~focus on the Olympic Games in Beijing. This resulted in a $2,460,467 write-down of the intangible assets, which~~customer list was ~~included in the~~recorded as an impairment within general and administrative ~~expenses.~~
~~The Company again performed impairment testing at December 31, 2008 and recorded a write-down~~expense.
In relation to the deconsolidation of ~~$390,247 for~~Yisheng (Note 2(1)(a)), the software technology intangible assets related to ~~WVAS segment for the year ended December 31, 2008 included in operating expenses due to the continued operation losses.~~
In the second quarter of 2007, the mobile operators introduced various new policies that adversely impacted the Company’s wireless value-added business and introduced further uncertainties in the Company’s operating environment. By September 30, 2007, the market capitalization of Hurray! was lower than the Company’s net book value, which was an indicator of impairment. At that date the Company tested the carrying value of goodwill and acquired intangible assets and recorded an impairment of acquired intangible assets of $575,205. In viewYisheng were fully impaired. The unamortised balance of the ~~further decline of Hurray!’s market capitalization at December 31, 2007~~software technology was recorded through general and ~~continued difficult operating conditions, the Company recorded a further impairment of acquired intangible assets of $1,905,048. The impairment charges of acquired intangibles are included~~administrative expense in ~~operating expenses according to their nature.~~
2011.
Assuming no subsequent impairment of the identified intangible assets recorded as of December 31, ~~2008,~~2011, amortization expenses for the net carrying amount of intangible assets isare expected to be as follows in future years. If the Company acquires additional intangible assets in the future, the operating expenses or cost of revenue will be increased by the amortization of those assets.

2009 $ 755,494
2010 473,247
2011 167,544
2012 76,160
2013 and later 472,877

$ 1,945,322

~~F-22~~
2012
   1,558,992
2013
   1,558,992
2014
   1,558,992
2015
   1,558,992
2016 and later
   17,875,143


   24,111,111


8. ~~INVESTMENT~~INVESTMENTS IN EQUITY ~~AFFILIATE~~
AFFILIATES
In April 2007, the Company acquired a 30% equity interest in Beijing New Run Entertainment Development Co., Ltd.(“ (“New Run”), an independent record label in China, and it ~~has been~~was accounted for onusing the equity ~~basis~~method from April 1, ~~2007.~~2007 forward. The total acquisition cost iswas $2,483,277 in cash, including transaction costs. ~~At December 31, 2008, the Company’s share of New Run Entertainment’s income since acquisition was $1,537.~~
~~The Company presents below summarized financial information in relation to New Run:~~

As of December 31,
2008 2007
(unaudited) (unaudited)
Current assets $ 2,435,157 $ 1,706,961
Non-current assets 309,529 397,886

Total assets $ 2,744,686 $ 2,104,847

Current liabilities 490,841 211,536
Non-current liabilities — —

Total liabilities $ 490,841 $ 211,536

Year ended December 31,
2008 2007
(unaudited) (unaudited)

Revenue $ 2,612,019 $ 1,419,969
Cost of sales 936,595 901,212

Gross profit $ 1,675,424 $ 518,756

Net (loss) income $ 225,438 $ (209,441 )

The Company regularly evaluates the impairment of the equity method investment based on performance and the financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value of the investment would then become the new cost basis of the investment. The Company recorded an other-than-temporary impairment charge totaling $1,870,897 during the third quarter of 2008. No impairment charges were recorded for the New Run investment during the year ended December 31, ~~2007.~~
2009. As of December 31, ~~2008, the book value of~~2009, the investment in New Run ~~is $824,579.~~had been reduced to nil as a result of equity share of losses and impairment charges and after giving effect to the impact of foreign currency translation. The ~~amount~~investment in New Run was also disposed of in August 2010 as part of the ~~underlying~~2010 Reorganization (Note 1).
In August 2011, the Company disposed of an 80% equity interest to related parties and a then-employee of the Company, and retained a 20% equity interest in the ~~net assets of New Run is $676,153.~~Yisheng online audio business (see Note 2(1)(a) for further details). The ~~difference between these two amounts of $148,426 is included~~Company evaluated its remaining interest in Yisheng under relevant guidance in ASC 810 and ASC 323 pertaining to consolidation and equity method accounting, respectively. The Company determined that it does not have a controlling financial interest in the ~~book~~investee, but rather possesses significant influence. Accordingly, the Company has accounted for this investment under the equity method. The investment was recorded based on the interest percentage of Yisheng's equity fair value ~~and is not amortized.~~
after reflecting a capital contribution by an affiliate of Shanda to Yisheng.
   Balance at
December 31, 2010    Equity
investment    Share of
loss Translation
Difference Balance at
December 31, 2011
Equity interest in Yisheng
   —         522,252       (263,313 ) (3,658 ) 255,281






9. GOODWILL

Year ended December 31, 2008
WVAS Recorded Music Total
Balance as of January 1,2007 $ 34,751,293 $ 4,870,201 $ 39,621,494

Effect of exchange rate changes 2,389,916 — 2,389,916
Goodwill arising from acquisitions during the year 2,134,375 253,705 2,388,080
Goodwill impairment (38,778,584 ) — (38,778,584 )

Balance as of December 31, 2007 497,000 5,123,906 5,620,906

Effect of exchange rate changes (58,790 ) — (58,790 )
Goodwill arising from additional payments for acquisitions made in prior years 80,504 189,255 269,759
Goodwill impairment (518,714 ) (2,156,497 ) (2,675,211 )

Balance as of December 31, 2008 $ — $ 3,156,664 $ 3,156,664

The following table portrays gross balances and accumulated amortization or impairments of goodwill for the Company’s reportable segments. Pre-2010 Reorganization, reportable segments included WVAS and Recorded Music. Post-2010 Reorganization, the Company’s single reportable segment is Online Advertising.

Gross amount of goodwill    WVAS Recorded
Music Online
Advertising Total
Balance as of January 1, 2010
   41,890,391    7,848,655    —      49,739,046
Goodwill arising from acquisitions
   —      —      6,232,770    6,232,770
Goodwill contributed by Shanda
   —      —      663,570    663,570
Goodwill transferred out due to disposal
   (42,148,288 ) (7,848,655 ) —      (49,996,943 )
Effect of exchange rate changes
   257,897    —      —      257,897


Balance as of December 31, 2010
   —      —      6,896,340    6,896,340
Goodwill distributed to Shanda due to disposal
   —      —      (663,570 ) (663,570 )


Balance as of December 31, 2011
   —      —      6,232,770    6,232,770


Accumulated goodwill impairment    WVAS Recorded
Music Online
Advertising Total
Balance as of January 1, 2010
   (41,890,391 ) (5,749,365 ) —      (47,639,756 )
Impairment transferred out due to disposal
   42,148,288    5,749,365    —      47,897,653
Effect of exchange rate changes
   (257,897 ) —      —      (257,897 )


Balance as of December 31, 2010
   —      —      —      —
Impairment
   —      —      —      —


Balance as of December 31, 2011
   —      —      —      —


Net carrying amount as of December 31, 2010
   —      —      6,896,340    6,896,340


Net carrying amount as of December 31, 2011
   —      —      6,232,770    6,232,770


~~F-23~~
~~SFAS No. 142~~Goodwill arising from the business combinations completed in 2010 has been allocated to the single reporting unit of the Company. ASC 350 requires that the goodwill impairment assessment be performed at the reporting unit level. Due to the continued challenging business conditions and reduction in number of concerts and other music events because of the focus on the Olympic Games in Beijing, coupled with the decline in the market price of the Company’s common stock, the
The Company performed a goodwill impairment test in the third quarter of 2008 and determined that the goodwill allocated to recorded music segment was impaired, thus necessitating a charge of $1,710,000. The Company re-evaluated the goodwill impairment at its annual goodwillan impairment test at the reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, ~~2008~~2010 and ~~recorded a further impairment charge of $446,497 related to goodwill allocated to recorded music segment. During the annual goodwill impairment test at December 31, 2008,~~2011.
When available, the Company ~~determined that its WVAS segment was impaired due~~uses observable market data, including pricing on recent closed market transactions, to ~~the continued operation losses, thus necessitating a charge of $518,714.~~
~~The Company estimated~~determine the fair ~~values~~value of its reporting unit(s) and compares such data with carrying amounts of its reporting unit(s) to assess any potential goodwill impairment. The fair value of reporting units was determined based on the market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, the Company measures the fair value of each reporting ~~units~~unit primarily using the income approach ~~valuation methodology that includes the discounted cash flow method, taking into consideration~~and using the market approach ~~and certain market multiples~~ as a validation of the ~~values~~value derived from income approach. The market approach included using financial metrics and ratios of comparable public companies. When the goodwill is determined to be impaired, the Company uses an income approach including discounted cash flow methodology. The discounted cash flows for each reporting unit were based on discrete five year financial forecasts developed by management for planning purposes. The value beyond the five-year discrete forecast was estimated using a terminal value calculation, which incorporated historical and forecasted financial trendsmodeling for each reporting unit and ~~considered long-term earnings growth rates for publicly traded peer companies. Specifically, the income approach valuations included reporting unit cash flow~~unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate ~~at approximately 19% and 21.5%. Publicly available information regarding~~calculated based on the ~~market capitalization~~risk profile of the ~~Company was also considered in assessing~~related industry to determine the ~~reasonableness~~amount of any impairment.
10. FAIR VALUE MEASUREMENTS
As of December 31, 2010 and December 31, 2011, the carrying amount of the ~~cumulative~~Company’s cash and restricted cash approximates fair ~~values~~value due to the short maturity of ~~our reporting units estimated~~these instruments. The carrying value of the Company’s various receivable and payable balances approximate their market value based on their short-term maturities. There are no other financial assets or liabilities that are being measured at fair value on a recurring basis at December 31, 2010 or December 31, 2011. As described in the Discontinued Operations footnote, the level 3-classified contingent consideration liability arising out of the acquisition of Seed Music in 2009, which was $352,217 at December 31, 2009, was extinguished by June 30, 2010.
The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The Company measures the fair value of long-lived assets based using ~~the~~ discounted cash flow ~~methodology.~~
Inmodelling and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the ~~second quarter~~risk profile. See Note 7 to the Consolidated Financial Statements for additional information of ~~2007,~~ the ~~mobile operators introduced various new policies that adversely impacted~~impairment provision relating to the Company’s wireless value-added business and introduced further uncertainties in the Company’s operating environment. By September 30, 2007, the market capitalization of Hurray! was lower than the Company’s net book value, which was an indicator of impairment. At that date the Company tested the carrying value of goodwill and acquired intangible assets and recorded a goodwill impairment charge of $9,613,953. In view of the further decline of Hurray!’s market capitalization at December 31, 2007 and continued difficult operating conditions, the Company recorded an additional goodwill impairment charge of $29,164,630.
~~10. PREPAID ACQUISITION COST~~
Inassets.
11. SHORT-TERM BORROWINGS
On September ~~2008,~~28, 2011, the Company entered into an agreement with a ~~definitive agreement~~PRC bank to acquire, through Hurray! Media, a controlling stake in Seed Music Group Limited (“Seed Music”), a Taiwan based company that focuses on artist development, music production and offline music distribution in the Asia Pacific, especially in China. The Company paid $1,907,400 to the selling shareholders of Seed Music in 2008. The acquisition was completed and the Company began to consolidate Seed Music into financial statements on January 1, 2009. Such payment was recorded as prepaid acquisition cost.
Concurrent with this transaction, the Company subscribed for an additional 7,813 shares, representing a 13.5% ownership interest, from Seed Music for $600,038 in 2008. Such payment was recorded as an investment at cost. The Company’s total ownership in Seed Music is 61.08% after the closing of the acquisition and subscription of Seed Music shares.
~~F-24~~
There are further contingent payments according to the agreements based on Seed Music’s operating performance. The contingent payments will be paid in cash if Seed Music exceeds the performance target. If not, the selling holders are obligated to transfer certain shares or make cash payments to the Company. Such contingent payments are recorded as contingent consideration. In addition, the non-controlling interests have options to sell their shares to the Company at a price based on a formula which includes Seed’s operating performance. Therefore from the date of consolidation the non-controlling interests are presented as redeemable non-controlling interests on the balance sheet and such amount will be accreted to the redemption value if the redemption is probable. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Total purchase price:
Cash consideration $ 1,907,400
Carrying value of the Company’s investment at cost 600,038
Variable (contingent payable net receivable ) 352,217

Amortization
period
Aggregate purchase price allocation -Seed Music:

Cash and cash equivalents $ 1,034,308
Inventory 53,504
Other current assets 891,723

Acquired intangible assets:
Artist management contract 1,717,846 7.1~9.0 years
Trademarks 1,569,808 20 years
Copyright for songs 5,863 0.4 years
Non-compete contract 183,218 4.5 years
Goodwill (allocated to music segment) 1,710,312 N/A
Property and equipment, net 50,084 3-5 years
Other assets 876,737
Current liabilities (2,216,292 )
Non-current deferred tax liability (869,184 )
Other non-current liabilities (578,464 )
Non-controlling interest in Seed Music (1,569,808 )

Total $ 2,859,655

~~11. SHORT-TERM BORROWINGS~~
Interest expense and the average interest rate for 2007 and 2006 were $179,062, and 3.875%, and $44,765 and 3.875%, respectively. Interest expense in 2007 represents the imputed interest on the amount payable on the balance owedborrow RMB20 million ($3,177,680) for the ~~acquisition~~period from September 29, 2011 to September 28, 2012. Interest rate is 6.89% per annum. The loan is pledged by a certificate of ~~Shanghai Magma.~~
deposit of $3.6 million.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of:

December 31,
2008 2007
Accrued payroll $ 157,714 $ 406,608
Value-added tax payable 104,435 177,556
Other accrued expenses 1,494,616 1,231,384
Accrued welfare benefits 165,402 119,957
Business tax payable 955,901 857,062
Other taxes payable 140,135 113,833

$ 3,018,203 $ 2,906,400

   December 31, 2010    December 31, 2011
Accrued litigation provision
   748,299       2,683,968
Accrued payroll
   2,127,951       2,675,282
Accrued welfare benefits
   1,731,403       1,297,147
Accrued professional service fees
   1,524,890       978,602
Advances from customers
   609,442       722,553
Other accrued expenses
   2,278,758       713,719
Other taxes payable
   718,668       472,845
Business tax payable
   1,722,830       472,534




   11,462,241       10,016,650




13. RELATED PARTY TRANSACTIONS AND BALANCES
Related Parties of Ku6 Media Co., Ltd. (both pre- and post-2010 Reorganization)
Entity
Relationship to Ku6 Media Co., Ltd.
Shanda Interactive Entertainment Limited (“Shanda”)
Controlling shareholder
Shanda Computer (Shanghai) Co., Ltd. (“Shanda Computer”)
Wholly owned affiliate of Shanda
Shanghai Shulong Computer Technology Co., Ltd. (“Shanghai Shulong Computer”)
Wholly owned affiliate of Shanda
Shanghai Shulong Technology Co., Ltd. (“Shanghai Shulong”)
Wholly owned affiliate of Shanda
Chengdu Jisheng Technology Co., Ltd. (“Chengdu Jisheng”)
Wholly owned affiliate of Shanda
Shanghai Shengyue Advertising Co., Ltd. (“Shengyue”)
Wholly owned affiliate of Shanda
Shanda Media Group Ltd. (“Shanda Media”)
Wholly owned affiliate of Shanda
Shanda Games Ltd. (“Shanda Games”)
Affiliate under common control of Shanda
Hurray! Media Co., Ltd.
Wholly owned affiliate of Shanda
Seed Music Group Limited
Wholly owned affiliate of Shanda
Hurray! Solutions Ltd.
Wholly owned affiliate of Shanda
Post-2010 Reorganization Related Party Activity
Following the Reorga2010 Reorganization, the Company provides advertising business to and receives promotional services from companies under common control by Shanda. Accordingly, certain revenues from the sale of advertising business to sister entities, and related costs of revenue, are separately classified in the consolidated statement of operations and comprehensive loss.
Pre-2010 Reorganization Related Party Activity
As ~~part~~a result of the acquisition ~~agreements for the purchase~~ of ~~the equity interests in~~ Huayi ~~Brothers~~ Music, Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”) and New Run, ~~Entertainment,~~which were disposed in August 2010 and presented in discontinued operations (Note 2(1)), the Company agreed to use the existing distribution and CD manufacturing operations, where appropriate, owned by the other shareholders, or their related parties, of these music companies. In addition, these parties ~~may~~were able to use the music or artists of these companies and ~~make~~made royalty and other payments to Huayi ~~Brothers~~ Music, Freeland Music or New ~~Run Entertainment.~~Run. These agreements ~~are~~were for ~~duration~~durations of one year but ~~may be extended~~were extendable by the mutual agreement of both parties.
Annual Related Party Activity
During ~~2008~~the years ended December 31, 2009, 2010 and ~~2007~~2011, significant related party transactions occurring during the annual periods were as follows.
Year Ended
December 31, 2009 Year Ended
December 31, 2010 Year Ended
December 31, 2011
Related party transactions in discontinued operations:
Consulting, production and marketing service fee from Huayi Brothers Times Culture Broker Co., Ltd.
281,580 —   —
CD distribution revenue from Beijing Century Freeland Film Media Co., Ltd.
52,248 —   —
   Year Ended
December 31, 2009    Year Ended
December 31, 2010    Year Ended
December 31, 2011
Related party transactions in continuing operations:

Advertising revenue received from companies under common control by Shanda
   279,341       701,732       8,076,155
Promotion service fee paid to companies under common control by Shanda
   —         376,302       379,465
Loan payable to Shanda Computer (Shanghai) Co., Ltd.
   —         1,565,290       —
Loan payable to Shanghai Shulong Computer Technology Co., Ltd.
   —         —         6,832,012
Loan payable to Shanghai Shulong Technology Co., Ltd.
   —         3,030,711       6,503,884
Loan repayment to Shanghai Shulong Technology Co., Ltd.
   —         —         3,189,527
Loan receivable from Shanda Games Limited
   —         3,200,000       14,108,019
Convertible Bond issued to Shanda Media (Note 1)
   —         —         50,000,000
Convertible Bond redeemed from Shanda Media (Note 1)
   —         —         50,000,000
Interest expense of Convertible Bond issued to Shanda Media (Note 1)
   —         —         375,000
Interest expense for loan from companies under common control by Shanda
   —         —         688,952
The Company ~~recognized revenues~~entered into a cooperative agreement with Shengyue, a wholly owned subsidiary of ~~$566,544~~Shanda, in 2011. Under this agreement, Shengyue was appointed as Ku6’s primary agency to secure advertisements from various advertisers. Ku6 will provide advertising space (i.e. headlines, banners, short video, etc) to Shengyue on its online video portal. This cooperative agreement covers a period of 1 year and ~~$645,134, respectively, and had expenses of $104,281 and $96,725, respectively, under these agreements. In 2006 prior~~9 months commencing April 1, 2011. During the testing period from April 1, 2011 to June 30, 2011, Shengyue did not guarantee a minimum revenue stream to Ku6, nor is Ku6 obligated for any commission fee. Following the testing period, the “commission free period” ran from July 1, 2011 to December 31, 2011; during this period Shengyue guaranteed a minimum advertising revenue for each fiscal quarter to Ku6, however, the commission fee was waived in this period. Commencing January 1, 2012, in addition to the ~~acquisition of the interest in New Run Entertainment, Huayi Brothers Music acquired copyrights from that company amounting~~guaranteed minimum revenue, Ku6 is obligated for commission fees to ~~$175,783. In the fourth quarter of 2008 Freeland Music advanced $162,721 to its minority shareholder~~Shengyue based on ~~an interest free basis. As of March 31, 2009, the balance was cleared.~~ certain tiered percentages which gradually increase with additional incremental tiers (layers) advertising revenue volume.
Year-End Related Party Balances
At December 31, ~~2008~~2010 and ~~2007,~~December 31, 2011, the amounts receivable from and payable to ~~and receivable from~~ related parties included in the consolidated balance sheet mainly represent the outstanding amounts arising from ~~such transactions.~~
~~F-25~~
~~14. FOREIGN EXCHANGE LOSS~~
~~We recorded a foreign exchange loss of $4.5 million, arising from~~ the ~~drop~~transactions described in the ~~value~~preceding section, except for the payable for licensed video copyrights amounting to $1,664,570 due to a related party at December 31, 2010.
Accounts receivable balances due from related parties are mainly as follows:
   December 31, 2010    December 31, 2011
Shanghai Shengyue Advertising Co., Ltd.
   —         2,649,385
Chengdu Jisheng Technology Co., Ltd.
   219,697       —
Other companies under common control by Shanda
   106,060       90,794




   325,757       2,740,179




Other balances with related parties are mainly as follows:
   December 31, 2010    December 31, 2011
Other receivables due from related parties

Shanda Games Limited
   3,200,000       17,308,019
Hurray! Media Co., Ltd.
   1,246,641       1,246,641
Seed Music Group Limited
   980,000       980,000
Other companies under common control by Shanda
   105,607       4,609




   5,532,248       19,539,269




In December 2010, Ku6 Media Co., Ltd. provided a $3.2 million unsecured loan to Shanda Games Limited, a company controlled by Shanda Interactive, which carried an interest rate of 0.6% per year and was originally due in July 2011. In January 2011, Ku6 Media Co., Ltd. provided another $6.7 million unsecured loan to Shanda Games Limited, which carried an interest rate of 0.6% per year and was originally due in July 2011. The terms of these loans are in the process of being extended. In June 2011, Ku6 Media Co., Ltd. provided a further $7.3 million unsecured loan to Shanda Games Limited, which carries an interest rate of 1.37% per year and is due in May 2012.
All amounts due from related parties are non-interest bearing, unsecured and receivable on demand except for the receivables due from Shanda Games Limited described above with an annual interest rate of 0.6%.
   December 31, 2010    December 31, 2011
Other payables due to related parties

Shanghai Shulong Computer Technology Co., Ltd
   —         6,832,012
Shanghai Shulong Technology Co. Ltd
   3,030,711       6,345,068
Shanda Computer (Shanghai) Co., Ltd.
   3,030,300       —
Hurray! Solutions Ltd.
   1,586,899       —
Other related parties
   128,788       375,000




   7,776,698       13,552,080




In June 2011, Ku6 Information Technology borrowed $6.8 million on an unsecured basis from Shanghai Shulong Computer Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carries an interest rate of 6.31% per year and is due in June 2012.
In December 2010, Ku6 Information Technology borrowed $3.0 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in June 2011. The term of the ~~Euro against~~loan was subsequently extended to December 2011 and the ~~United States Dollar~~interest rate was revised to 5.68%. This loan was fully repaid in December 2011.
In February 2011, Ku6 Information Technology borrowed $6.4 million on an unsecured basis from Shanghai Shulong Technology Co., Ltd., pursuant to an entrusted loan agreement. This loan carried an interest rate of 5.05% per year and was originally due in August 2011. Ku6 Information Technology repaid $39,721 in 2011 and the term of the loan with respect to the remaining amount of $6.3 million was subsequently extended to February 2012. The interest rate was revised to 6.71% per year. In February 2012, $3.1 million was repaid. The term of the loan with respect to the remaining amount of $3.2 million was extended to August 2012 and the interest rate remained at 6.71% per year.
Amounts due to related parties are non-interest bearing, unsecured, and payable on demand (except as mentioned in the ~~third quarter of 2008. Earlier~~preceding paragraphs for specific borrowings) with interest rates ranging from 5.05% to 6.71%.
The payables to Hurray! Solutions Ltd. and other related parties amounting to $1,719,927 were waived and recorded as additional paid-in capital in ~~the year we converted a substantial~~2011 as part of our dollar cash balances into Euro term deposits to improve yield as well as to protect against further dollar weakening. The recent highly volatile markets have seen the dollar strengthen as investors and financial institutions de-leveraged and we recorded a further exchange loss in the fourth quarter of $4.5 million. Currently we hold all non-Renminbi cash in United States dollars.
~~15.~~common control transactions involving parent Shanda.
14. INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands.
The subsidiaries ~~incorporated~~or VIEs in the PRC are ~~generally~~ subject to PRC Enterprise Income Tax at a corporate income tax rate of ~~33% prior to January 1, 2008 or~~ 25% ~~post that date except for those subsidiaries that enjoy~~.
Basic and diluted earnings from continuing operations per share effects of tax holidays orand preferential tax ~~treatment, as discussed below.~~
Effective from January 1, 2008, a new Enterprise Income Tax Law, or the New EIT Law combines the previous income tax laws for foreign invested and domestic invested enterprises in China by adopting a unified tax rate of 25% for most enterprises. Certain qualified high and new technology enterprises met the definition of “qualified high and new technology enterprise” strongly supported by the state could benefit from a preferential tax rate of 15%
The Company conducts substantially all its business through its PRC subsidiaries and VIEs. They are generally subject to the New EIT Law at a statutory rate of 25%. Four of these subsidiaries and VIEs are qualified as high technology enterprises in accordance with the New EIT Law and they are subject to a preferential tax rate of 15%. Three out of these four qualified high technology enterprises are also entitled to a 50% reduction in tax rate according to the previous treatment and transitional rules. While the high and new technology enterprise certificates are valid for three years, the Company believes based on currently available information that the Company will be able to reapply successfullyrates for the renewal of the current certificates as the Company believes the Company will continue to meet the published criteria. Accordingly, these four entities have used the reduced applicable tax rate in calculations of deferred tax balances for the foreseeable future.
The companies acquired in 2007, Saiyu and Henan Yinshan continued to be entitled to an Enterprise Income Tax rate of 25% of the calculated taxable income, which is based on 10% of the revenues. Qualified new cultural enterprises, Huayi Brothers Broker, Hurray! Freeland Culture and Secular Bird, are also entitled to a tax exemption in 2008.
~~F-26~~
These preferential tax arrangements will expire at various dates between 2008 and 2010. In 2006 a number of VIEs became subject to a higher tax rate as tax exemptions expired or were reduced. The aggregate dollar and per share effect of the tax holidays in 2008, 2007 and 2006 were $1,773,897, $1,904,064 and $2,218,713 and $0.0008, $0.0009 and $0.0010 per share, respectively. A summary of the tax concessions available to the PRC entities for the yearyears ended December 31, ~~2008 is as follows:~~

Chinese Concession from Year of
income tax Chinese Statutory commencement
PRC Entities rate income tax of tax holiday
(%)
Beijing Hurray Times 25 None N/A
Beijing Hand-in-Hand Media Technology Co., Ltd. 25 None N/A
Shanghai Fuming information technology Co., Ltd. 25 None N/A
Hurray! Solutions Ltd. 15 qualified high and new technology enterprise 2008
Beijing Enterprise Network Technology Co., Ltd. 7.5 qualified high and new technology enterprise, 50% tax relief in 2008 2003
Hengji Weiye 25 None N/A
Beijing Hutong 7.5 qualified high and new technology enterprise, 50% tax relief in 2008 2004
Beijing Palmsky Technology Co., Ltd. 7.5 qualified high and new technology enterprise, 50% tax relief in 2008 2004
Henan Yinshan 25 None N/A
Shanghai Magma 25 None N/A
Saiyu 25 None N/A
Beijing WVAS Solutions Ltd. 25 None N/A
Hurray! Digital Media 25 None N/A
Huayi Brothers Music 25 None N/A
Beijing Huayi Brothers Music Broker Co., Ltd. 0 qualified new cultural enterprise exempt in 2008 2007
Freeland Music 25 None N/A
Beijing Hurray! Freeland Culture Development Co., Ltd. 0 qualified new cultural enterprise exempt in 2008 2007
Beijing Fly Songs 25 None N/A
Secular Bird 0 qualified new cultural enterprise exempt in 2008 2007
2009, 2010 and 2011 are nil for each year.
Provision (credit) for income taxes ~~consists of:~~

Year ended December 31,
2008 2007 2006
Current $ 298,579 $ 576,774 $ 685,597
Deferred 187,671 (759,144 ) (480,617 )

$ 486,250 $ (182,370 ) $ 204,980

is comprised as follows for each annual period.
Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31,2011
Current income taxes from discontinued operations
750,705    6,229    —
Deferred income taxes from discontinued operations
(516,419 ) (31,813 ) —
Current income taxes from continuing operations
—      —      —
Deferred income taxes from continuing operations
(13,721 ) (41,172 ) (99,479 )

220,565    (66,756 ) (99,479 )

The principal components of ~~the~~ deferred tax assets and liabilities are as follows:

December 31,
2008 2007
Deferred tax assets:
Cost and expenses accruals $ 363,330 $ 748,049

Current deferred tax assets $ 363,330 $ 748,049

Depreciation and amortization $ 330,035 $ 347,877
Net operating loss carry forwards 2,690,142 1,051,308
Less: valuation allowance (2,541,258 ) (749,094 )

Non-current deferred tax assets $ 478,919 $ 650,091

Deferred tax liabilities:
Revenue recognition $ (497,283 ) $ (416,835 )

Current deferred tax liabilities $ (497,283 ) $ (416,835 )

Intangible assets $ (292,194 ) $ (844,610 )

Non-current deferred tax liabilities $ (292,194 ) $ (844,610 )

   December 31, 2010 December 31, 2011
Current deferred taxes:

Cost and expense accruals
   4,714,262    2,810,508
Revenue recognition
   (1,217,957 ) (173,502 )
Less: valuation allowance
   (3,496,305 ) (2,637,006 )


Current deferred tax assets
   —      —


Non-current deferred taxes:

Depreciation and amortization
   1,899,375    1,748,889
Net operating loss carry forwards
   13,727,221    18,450,814
Less: valuation allowance
   (15,626,596 ) (20,199,703 )


Non-current deferred tax assets
   —      —


Intangible assets
   (4,925,538 ) (4,826,059 )


Non-current deferred tax liabilities
   (4,925,538 ) (4,826,059 )


~~F-27~~
A reconciliation between the PRC statutory income tax rate of 25% and the Company’s effective tax rate is as follows. The primary driver of the Company’s effective tax rate in each annual period are adjustments to the valuation allowance for deferred tax assets that are, as assessed under ASC Topic 740, more likely than not to not be realized.
   Year ended Year ended Year ended
   December 31, 2009 December 31, 2010 December 31, 2011
Statutory tax rate
   25.0 % 25.0 % 25.0 %
Differential statutory tax rates
   0.2 % (3.3 %) (7.9 %)
Non-deductible expenses
   (6.2 %) 0.4 % (7.9 %)
Non-taxable income
   —      —      —
Change in enterprise income tax rate
   —      —      —
Change in valuation allowance
   (19.8 %) (22.0 %) (9.0 %)


Effective tax rate
   (0.8 %) 0.1 % 0.2 %


The movement of valuation allowances were as follows:

Year Ended December 31,
2008 2007 2006
Statutory tax rate 25.0 % 33.0 % 33.0 %
Effect of tax holidays 10.1 % 0.3 % (34.2 )%
Non-deductible expenses (19.9 %) (38.3 %) 11.9 %
Non-taxable income 15.9 % 45.0 % (9.0 )%
Change in enterprise income tax rate 0.0 % (8.6 %) —
Change in valuation allowance (37.3 %) (13.8 %) 0.2 %
Impairment loss on intangibles (6.8 %) (9.2 %) —

Effective tax rate (13.0 %) 8.4 % 1.9 %

   December 31, 2009 December 31, 2010 December 31, 2011
At beginning of year
   (7,772,515 ) (8,309,621 ) (19,122,901 )
Acquisition of Ku6
   —      (6,123,900 ) —
Acquisition of Yisheng
   (167,418 ) —      —
Current year additions
   (1,029,311 ) (14,292,925 ) (4,452,155 )
Current year reversals
   655,761    1,404,205    1,591,018
Transferred out due to disposal of WVAS and recorded music businesses
   —      8,433,935    —
Effect of exchange rate changes
   3,862    (234,595 ) (852,671 )


   (8,309,621 ) (19,122,901 ) (22,836,709 )


At December 31, ~~2008,~~2010 and 2011, tax loss carry forwards (on a gross basis prior to measurement via the tax rate) amounted to approximately ~~$14.2~~$54.9 million and $73.8 million, respectively, which will expire by various years through ~~2013.~~2016. The Company’s tax loss carry forwards exist only in the PRC, where the carry forward period is limited to five years. The Company determines whether or not a valuation allowance is required at the level of each taxable ~~entity.~~entity within a tax jurisdiction. A valuation allowance of ~~$2,541,258~~$19,122,901 and ~~$749,094~~$22,836,709 has been established as of December 31, ~~2008~~2010 and ~~2007,~~2011, respectively, in respect of certain deferred tax assets as it is considered more likely than not that the relevant deferred tax ~~asset~~assets will not be realized in the foreseeable future.
~~In June 2006,~~ At both December 31, 2010 and 2011, all of the ~~Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”)~~Company’s net deferred tax assets, excluding the impact of non-current deferred tax liabilities associated with intangible assets which have indefinite reversal patterns, were fully reserved through valuation allowances.
As noted in Note 2(26), ~~“Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement attribute~~the Company accounts for the financial statement effects of uncertain tax positions under the provisions of ASC 740-10. At December 31, 2010 and 2011, there were no liabilities for unrecognized tax benefits as the Company did not have any significant uncertain tax positions requiring recognition and measurement ~~of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006,~~under ASC 740-10.
In accordance with ~~early adoption permitted. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not result in a cumulative adjustment on January 1, 2007 and had no significant impact on~~ the Company’s accounting for income taxes for the year ended December 31, 2007 and 2008. The Company did not incur any interest or penalties related to potential underpaid income tax expenses, and also does not expect to have a significant increase or decrease in the unrecognized tax benefits within 12 months from December 31, 2008.
~~The Company is subject to taxation in~~ PRC ~~and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. The Company’s various tax years from 2003 to 2008 remain open in various taxing jurisdictions.~~
~~The~~ EIT Law, ~~includes a provision specifying that legal entities organized outside China will be considered residents for Chinese income tax purposes if their place~~dividends which arise from profits of effective management or control is within China. If legal entities organized outside China were considered residents for Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income. This would cause any income legal entities organized outside Chinaforeign invested enterprises (“FIEs”) earned to be subject to China’s 25% EIT. The implementation Rules to EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. resides within China. Pursuant to the additional guidance released by Chinese government on April 22, 2009, management does not believe that the legal entities organized outside China should be characterized as China tax residents for EIT Law purposes.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to the overseas holding companies by the PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law and its implementation rules which became effective on January 1, 2008, dividends generated after January 1, 2008, ~~and payable by a foreign-invested enterprise in China to its foreign investors who are non-resident enterprises~~ are subject to a 10% withholding income tax ~~unless any such~~if and when remitted. In addition, under tax treaties between the PRC and Hong Kong, if the foreign ~~investor’s jurisdiction of incorporation has~~investor is incorporated in Hong Kong and qualifies as a Hong Kong tax ~~treaty with China that provides for a different~~resident, the applicable withholding ~~arrangement.~~
tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less than 25% in the FIE.
~~F-28~~
~~Aggregate~~Since there are no undistributed earnings of the ~~Hurray!’s~~Company’s subsidiaries located in the PRC ~~that are available for distribution to the Company~~ at December 31, ~~2008 are considered to be indefinitely reinvested under APB opinion No. 23, “inside basis differences within foreign~~2010 and 2011 given the accumulated loss positions of the Company’s subsidiaries, ~~and foreign corporate joint ventures” because~~no provision has been made for withholding taxes. Further, the Company does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its ~~business. Accordingly, no provision has been made for~~business in the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.
~~16. SHAREHOLDERS’~~PRC.
15. EQUITY
On October 1, 2006, Hurray! issued 89,552 ADSs, represented by 8,955,200 ordinary shares, at a price of $6.03 per ADS, to former shareholders of Shanghai Magma pursuant to the amended purchase agreements.
In February 2006, the Board of Directors (“Board”) of Hurray! approved a stock repurchase program whereby Hurray! may repurchase up to $15.0 million of its issued and outstanding ADSs in open-market transactions. Under this program, in 2006, Hurray! purchased and cancelled 792,600 ADSs, equivalent to 79,260,000 ordinary shares, at an average cost of $6.35 per ADS for a total consideration of $5,034,748.
~~17. STOCK~~ COMPENSATION PLANS
2004 Share Incentive Plan
Stock ~~option~~options
~~Hurray!’s~~
Ku6 Media’s 2004 ~~stock option plans (the “Plans”~~Share Incentive Plan (“2004 Plan”) ~~allow~~allows the Company to offer incentive awards to employees, directors, consultants or external service advisors of the Company. Under the terms of the ~~Plans,~~Plan, options are generally granted at prices equal to or greater than the fair market value on the grant date, expire 10 years from the date of grant, and generally vest over 3-4 years.
Stock options under these plans were all granted prior to 2006 and as of January 1, 2006 all granted stock options were vested. There were ~~47,367,700~~44,584,700 and ~~74,266,200~~43,746,700 options outstanding as of December 31, ~~2008~~2010 and ~~2007,~~2011, respectively. ~~No stock options have been granted since January 1, 2006. As~~Pursuant to the resolution of the Company’s Board on December ~~31, 2008 and 2007, 180,115,900 and 137,930,600~~3, 2010, the 185,550,800 remaining ordinary shares ~~were~~ available for future grants ~~respectively.~~
~~A summary~~under the 2004 Plan were terminated and unavailable for future use.
The movements in stock options under the 2004 Share Incentive Plan as of and for the years ended December 31, 2009, 2010, and 2011 are set out below:
   Options
Outstanding Weighted
Average
Exercise Price    Weighted
Average
Remaining
Contractual Life    Aggregate
Intrinsic Value
   $       $
Outstanding at December 1, 2009
   47,367,700    0.080       —         —
Granted
   —      —         —         —
Exercised
   (350,000 ) 0.025       —         —
Cancelled or Expired
   (1,435,000 ) 0.115       —         —



Outstanding at December 31, 2009
   45,582,700    0.080       3.63       147,478
Granted
   —      —         —         —
Exercised
   (450,000 ) 0.045       —         —
Cancelled or Expired
   (548,000 ) 0.113       —         —



Outstanding at December 31, 2010
   44,584,700    0.080       2.63       226,985
Granted
   —      —         —         —
Exercised
   (150,000 ) 0.025       —         —
Cancelled or Expired
   (688,000 ) 0.096       —         —






Outstanding at December 31, 2011
   43,746,700    0.079       1.62       —






Vested and expected to vest at December 31, 2011
   43,746,700    0.079       1.62       —






Vested and exercisable at December 31, 2011
   43,746,700    0.079       1.62       —






The aggregate intrinsic values are calculated as the differences between the market value of $0.0405, $0.0495 and $0.0120 of ordinary shares as of December 31, 2009, 2010, and 2011, respectively, and the exercise prices of the ~~stock option activity is as follows:~~

Ordinary shares
Weighted average
Number of options exercise price
Options outstanding at January 1, 2006 99,573,700 $ 0.088
Exercised (3,582,200 ) $ 0.037
Forfeited (15,484,900 ) $ 0.109

Options outstanding at December 31, 2006 80,506,600 $ 0.085
Exercised (653,400 ) $ 0.027
Forfeited (5,587,000 ) $ 0.106

Options outstanding at December 31, 2007 74,266,200 $ 0.084
Exercised (60,000 ) $ 0.025
Forfeited (26,838,500 ) $ 0.094

Options outstanding at December 31, 2008 47,367,700 $ 0.080

~~F-29~~
shares. The ~~following table summarizes information with respect to stock~~total intrinsic value of options ~~outstanding at~~exercised during the years ended December 31, ~~2008(all outstanding options are exercisable):~~

Options outstanding
Weighted
average
remaining Weighted average exercise
Exercise Prices Number outstanding contractual life price Aggregated Intrinsic value
Ordinary shares:
$0.0250 9,864,700 3.75 $ 0.03 $ 246,618
$0.0705 16,433,000 4.5 $ 0.07 $ 1,158,527
$0.1170 15,354,000 5 $ 0.12 $ 1,796,418
$0.1405 350,000 5.25 $ 0.14 $ 49,175
$0.1025 5,366,000 6 $ 0.10 $ 550,015

Total 47,367,700 $ 3,800,753

2009, 2010 and 2011 was approximately $0.5 million, nil and nil, respectively.
Non-vested shares
Since 2006, the Company has granted restricted purchase share awards, in lieu of stock options, under ~~Hurray!’s~~the 2004 Share Incentive Plan ~~(the “2004 Plan”)~~ to certain officers and senior management.
~~On February 7, 2006, Hurray! granted 33,000,000~~
Share-based compensation expense related to non-vested stock units ~~to its employees pursuant to~~granted by the Company under the 2004 Plan ~~at offering price of par value which resulted in stock-based compensation expense of $1.6 million~~amounted to ~~be recognized over~~$169,310, $84,233 and nil for the ~~applicable vesting period. The~~years ended December 31, 2009, 2010 and 2011.
There are no outstanding non-vested stock units ~~vest on an annual basis equally over three years.~~
~~On June 20, 2006, Hurray! granted 7,500,000 non-vested stock units to its employees at offering price~~as of par value which resulted in stock-based compensation expense of $0.3 million to be recognized over the applicable vesting period. The non-vested stock units vest on an annual basis equally over 34 months.
On March 14, 2007, Hurray! granted 20,000,000 non-vested stock units to its employees at offering price of par value which resulted in stock-based compensation expense of $0.61 million to be recognized over the applicable vesting period. The non-vested stock units vest on an annual basis equally over three years.
On November 23, 2007, Hurray! granted 19,500,000 non-vested stock units to its employees at offering price of par value which resulted in stock-based compensation expense of $0.36 million to be recognized over the applicable vesting period. The non-vested stock units vest on an annual basis equally over three years.
December 31, 2011 and 2010.
A summary of non-vested ~~shares’~~stock unit activity is as ~~follows:~~
~~Non-vested shares~~
~~Outstanding~~
~~Non-vested stock units outstanding at January 1, 2006~~ —
~~Granted~~ ~~40,500,000~~
~~Forfeited~~ ~~(8,666,700~~ )
~~Non-vested stock units outstanding at December 31, 2006~~ ~~31,833,300~~
~~Granted~~ ~~39,500,000~~
~~Forfeited~~ ~~(10,400,200~~ )
~~Vested~~ ~~(11,099,300~~ )
~~Non-vested stock units outstanding at December 31, 2007~~ ~~49,833,800~~
~~Forfeited~~ ~~(17,834,200~~ )
~~Vested~~ ~~(18,499,300~~ )
~~Non-vested stock units outstanding at December 31, 2008~~ ~~13,500,300~~
~~F-30~~
~~The following table summarizes information with respect to non-vested shares outstanding at~~of December 31, ~~2008:~~

Non-vested shares outstanding
Number Aggregate
outstanding intrinsic value
Grant date
February 7, 2006 2,834,200 $ 214,832

November 23, 2007 10,666,100 333,849

Total 13,500,300 $ 548,681

~~The weighted average fair value per share~~2009, 2010 and 2011 is presented below:
   Number
outstanding Weighted
average grant
date fair value
Non-vested stock units    $
Outstanding at January 1, 2009
   13,500,300    0.0406
Granted
   —      —
Vested
   (6,500,300 ) 0.0313
Forfeited
   (3,999,900 ) 0.0507


Outstanding at December 31, 2009
   3,000,100    0.0313
Granted
   —      —
Vested
   (3,000,100 ) 0.0313
Forfeited
   —      —


Outstanding at December 31, 2010
   —      —
Granted
   —      —
Vested
   —      —
Forfeited
   —      —


Outstanding at December 31, 2011
   —      —


2010 Equity Compensation Plan
In December 2010, the Company authorized an equity compensation plan (“2010 Equity Compensation Plan”) that provides for issuance of options to purchase up to 698,381,300 ordinary shares of the ~~non-vested~~Company. Under the 2010 Equity Compensation Plan, the directors may, at their discretion, grant any officers (including directors) and employees of the Company and/or its subsidiaries, and individual consultants or advisors (i) options to subscribe for ordinary shares, ~~awarded~~(ii) share appreciation rights to receive payment, in ~~2008 was $0.04, calculated based on~~cash and/or the Company’ ordinary shares, equals to the excess of the fair market value of the ~~underlying stock~~Company’ ordinary shares, or (iii) other types of compensation based on the ~~respective grant dates. The terms~~performance of the ~~issue~~Company’ ordinary shares.
On December 4, 2010, the Company granted stock options to purchase up to 516,750,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0568 per share equivalent to the average market value in the previous fifteen trading days of the ~~non-vested~~grant dates to its employees, senior management and directors. Of all the stock options granted, 272,850,000 were granted to senior management and 243,900,000 were granted to directors and employees. The contract term of the options granted to the directors and employees is six years and the contract term of the options granted to senior management is seven years.
On February 24, 2011, the Company granted stock options to purchase up to 62,000,000 ordinary shares dounder the 2010 Equity Compensation Plan at an exercise price of $0.0392 per share to its employees, senior management and directors. Of all the stock options granted, 9,000,000 ordinary shares were granted to directors of the Company and 53,000,000 were granted to the senior management and employees of Shanda. The contract term of the options is six years.
On July 6, 2011, the Company granted stock options to purchase up to 147,643,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.03083 per share to its employees. The contract term of the options is six years.
On August 23, 2011, the Company granted stock options to purchase up to 162,500,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0227 per share to its employees, senior management and directors. Of all the stock options granted, 112,000,000 were granted to senior management of the Company, 15,000,000 were granted to directors of the Company, and 35,500,000 were granted to the senior management and employees of Shanda. The contractual term of the options is six years.
On October 14, 2011, the Company granted stock options to purchase up to 21,000,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0188 per share to its senior management. The contract term of the options is six years.
As of December 31, 2011, 295,555,300 ordinary shares were available for future grants under the 2010 Equity Compensation Plan.
The options granted to directors and employees vest over a four year period, with 25% of the options to vest on each of the first, second, third and fourth anniversaries of the grant date as stipulated in the stock option agreements.
The options granted to senior management vest in 16 instalments. The first 2 of 16 instalments—options earned in the first two quarters after the grant date—shall vest and become exercisable at the first anniversary of the grant date. There are no performance conditions attached to the first 2 instalments. For each quarter during the four-year period after the grant date (the “Performance Period Start Date”), one 1/16th instalment of the total options have the opportunity to be earned for each quarter contingent on the achievement of positive quarterly operating income for the quarter, provided the aggregate number of options earned in the Performance Period shall not ~~require~~exceed 14 of the 16 instalments comprising the total options granted. On each of the first, fourth, eighth and twelfth quarter earnings release dates from the first quarter of the Performance Period, all of the earned options during the four quarters preceding such earnings release date shall vest and become exercisable, in each case, provided that the employment with the Company remains on such vesting date.
In relation to the business strategy adjustments in 2011 (Note 1), the Company significantly reduced its sales forces, and certain directors, senior management and employees resigned from the Company. Accordingly, the options granted to ~~make any payments. The~~such directors, senior managements and employees were forfeited. Accordingly, in the fourth quarter of 2011, the Company recorded a $1.0 million reversal of amounts previously recorded in the first three quarters of 2011 in stock-based compensation expense to adjust the estimated forfeiture rate to the much higher actual forfeiture rate.
In accordance with ASC 718, the Company recognizes share-based compensation expense for the options granted to directors and employees as well as the options to senior management vested only based on passage of time and continued employment with the Company, net of a forfeiture rate, using the straight-line method. For the options granted to senior management earned contingent on the achievement of quarterly performance target, the Company recognized share-based compensation expenses ~~of $945,282, $442,975 and $543,557~~ for the ~~years~~options earned in each quarter during the Performance Period using the graded-vesting attribution method when the Company concluded that it is probable that the performance targets will be achieved, net of a forfeiture rate.
Share-based compensation expense related to the stock options granted by the Company to its employees, senior management and directors under the 2010 Equity Compensation Plan amounted to $522,931 and $1,231,919 for the year ended December 31, ~~2008, 2007~~2010 and ~~2006~~2011, respectively. ~~The amount of unvested stock-based~~Share-based compensation ~~currently estimated to be expensed from 2009 through 2010~~expense related to ~~unvested share-based payment~~the option awards atgranted by the Company to the senior management and employees of Shanda under the 2010 Equity Compensation Plan amounted to nil and $257,230 for the year ended December 31, ~~2008 is $368,325. This amount will be~~2010 and 2011, respectively, which was recognized as ~~presented~~a dividend distributed to Shanda.
The movements in stock options under the 2010 Equity Compensation Plan as of and for the year ended December 31, 2011 are set out below.
   Options
Outstanding Weighted
Average
Exercise Price    Weighted
Average
Remaining
Contractual Life    Aggregate
Intrinsic Value
   $       $
Outstanding at January 1, 2010
   —      —         —         —
Granted
   516,750,000    0.0568       —         —
Exercised
   —      —         —         —
Cancelled or Expired
   —      —         —         —






Outstanding at December 31, 2010
   516,750,000    0.0568       6.46       —






Granted
   393,143,000    0.0281       —         —
Exercised
   —      —         —         —
Cancelled or Expired
   (507,067,000 ) 0.0517       —         —






Outstanding at December 31, 2011
   402,826,000    0.0352       5.47       —






Vested and expected to vest at December 31, 2011
   373,995,600    0.0342       5.49       —






Vested and exercisable at December 31, 2011
   18,742,500    0.0568       5.00       —






The intrinsic value as of December 31, 2010 and 2011 is calculated as the difference between the market value of $0.0495 and $0.0120 of ordinary shares as of December 31, 2010 and 2011 and the exercise prices of the options.
The weighted average grant-date fair value of options granted during the year ended December 31, 2010 and 2011 was $0.0483 and $0.0151, respectively. Options vested during the year ended December 31, 2010 and 2011 was nil and 27,142,500, respectively.
As of December 31, 2010 and 2011, there was $15.4 million and $5.43 million, respectively, of unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options granted by the ~~following table.~~

2009 $ 223,709
2010 144,616

$ 368,325

~~That~~Company to its employees, senior management and directors under the 2010 Equity Compensation Plan. This cost is expected to be recognized over a ~~weighted-average~~weighted average period of ~~1.52~~4.2 and 3.4 years. ~~The Company recognizes the~~Total compensation costs net of a forfeiture rate and recognizes the compensation costs for those options and non-vested shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The estimate of forfeitures willcost may be adjusted ~~over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes~~for future changes in estimated forfeitures and the probability of the achievement of performance conditions. As of December 31, 2010 and 2011, there was nil and $1.21 million, respectively, of unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options granted by the Company to the employees of Shanda under the 2010 Equity Compensation Plan, which will be recognized ~~through~~as a ~~cumulative catch-up adjustment~~dividend distributed to Shanda.
The Black-Scholes option pricing model is used to determine the fair value of the stock options granted under the 2010 Equity Compensation Plan. The Black-Scholes model requires the input of highly subjective assumptions. The risk-free rate for periods within the contractual lives of the options is based on the U.S. Treasury yield curve in effect at the ~~period~~time of ~~change and will also impact~~grant. The fair values of stock options were estimated using the ~~amount of share-based compensation expense to be recognized in future periods.~~
~~18.~~following weighted-average assumptions:
   Options Granted
in 2010    Options Granted
in 2011
Fair value of ordinary shares ($)
   0.0800           0.0186~0.0367
Exercise price ($)
   0.0568           0.0188~0.0392
Expected volatility (%) (4)
   60%~65%       75%~82%
Expected dividend yield (%) (3)
   0%       0%
Expected term (years) (2)
   4~5           3.5~5
Risk-free interest rate (per annum) (%) (1)
   1.9407%~2.6565%       1.2680%~1.9933%
(1) The risk-free interest rate for periods within the contractual life of the share option is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards.
(2) The expected term of stock options granted is developed giving consideration to vesting period, contractual term and historical exercise pattern of options granted by the Company.
(3) The Company has no history or expectation of paying dividends on its common stock.
(4) Expected volatility is estimated based on the historical volatility of comparable companies’ stocks and of the Company’s common stock for a period equal to the expected term preceding the grant date.
16. SEGMENT INFORMATION
The Company follows the provisions of ~~SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”,~~ ASC 280,Segment Reporting,which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
Pre-2010 Reorganization
The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. ~~The~~Prior to the disposal of the WVAS and recorded music businesses in August 2010 (Note 2(1)), which have been presented as discontinued operations for all the periods presented herein, the Company ~~operates~~operated and ~~manages~~managed two principal operating segments ~~wireless value-added services (“WVAS”)~~(each of which were reportable segments), WVAS and ~~recorded music.~~Recorded Music. The ~~wireless value-added services are~~WVAS were delivered through the 2.5G mobile networks, which comprise Wireless Application Protocol (“WAP”) services, Multimedia Messaging Services (“MMS”), Java™ services, and WEB, and through 2G technology platforms, which comprise Short Messaging Services (“SMS”), Interactive Voice Response services (“IVR”), and Color Ring Back Tones (“CRBT”). Recorded ~~music~~Music services ~~are~~were delivered through the Company’s majority-controlled music companies and their parent company, Hurray Digital Media Technology Co., Ltd., which ~~contracts~~contracted with music artists and composers to perform and produce music. Corporate assets are related to the bank ~~balance~~balances of overseas companies that are not directly attributable to the ~~other~~ reportable segments. The Company uses gross profit as the key performance measure of each reportable segment. ~~Expenses~~Corporate expenses are not allocated to each segment.
The financial information for ~~each~~the business ~~segment~~segments which were disposed of in 2010 (Note 2(1)) and included in discontinued operations reflects that information which is specifically identifiable or which is allocated based on an internal allocation method. Selected financial information by ~~operating segment~~reportable segments is as ~~follow:~~

December 31,
2008 2007
Assets

WVAS $ 28,952,925 $ 30,285,978
Recorded music 16,977,258 21,718,157
Reconciling amounts 42,394,219 53,589,589

Total assets $ 88,324,402 $ 105,593,724

Reconciling assets :

Corporate assets $ 42,394,219 $ 53,589,589

Investment in equity method investee
$ 824,579 $ 2,420,522

follows.

~~F-31~~
Total assets by reportable segment December 31, 2009 December 31, 2010
WVAS
24,400,482    —
Recorded music
9,863,363    —
Corporate assets
33,904,432    —

Total assets
68,168,277    —

Capital expenditures for additions to long-lived assets by reportable segment Year ended
December 31, 2009 Year ended
December 31, 2010
WVAS
599,254    402,710
Recorded music
79,028    84,613

Total capital expenditures
678,282    487,323

Revenues, cost of revenues, and gross profit by reportable segment Year ended
December 31, 2009 Year ended
December 31, 2010
Revenues

WVAS
20,169,110    5,385,985
Recorded music
14,473,185    9,458,423

Total revenues
34,642,295    14,844,408

Cost of revenues

WVAS
15,331,675    3,799,581
Recorded music
12,625,139    6,118,305

Total cost of revenues
27,956,814    9,917,886

Gross profit

WVAS
4,837,435    1,586,404
Recorded music
1,848,046    3,340,118

Total gross profit
6,685,481    4,926,522

Year ended December 31,
2008 2007 2006
Total expenditures for additions to long-lived assets

WVAS $ 228,431 $ 755,921 $ 712,363
Recorded music 120,802 107,682 244,609

Total capital expenditure $ 349,233 $ 863,603 $ 956,972

Year ended December 31,
2008 2007 2006
Revenues

WVAS $ 42,671,588 $ 50,038,014 $ 62,512,483
Recorded music 11,286,812 10,488,613 6,203,418

Total revenue $ 53,958,400 $ 60,526,627 $ 68,715,901

Cost of revenues

WVAS $ 32,839,642 $ 36,394,300 $ 40,672,113
Recorded music 6,729,725 6,232,728 3,553,144

Total cost of revenues $ 39,569,367 $ 42,627,028 $ 44,225,257

Gross profit

WVAS $ 9,831,946 $ 13,643,714 $ 21,840,370
Recorded music 4,557,087 4,255,885 2,650,274

Total gross profit $ 14,389,033 $ 17,899,599 $ 24,490,644

Revenues from the WVAS segment by product and service are shown in the table below:

Year ended December 31,
2008 2007 2006
Revenues
SMS $ 13,319,011 $ 10,948,524 $ 17,088,669
IVR 12,207,136 17,325,223 10,830,530
RBT 4,960,624 3,719,470 3,379,643

2G revenues $ 30,486,771 $ 31,993,217 $ 31,298,842

WAP 7,434,197 12,530,200 21,534,724
MMS 1,355,441 1,313,397 4,011,527
JAVA 2,244,010 1,399,193 4,400,083
WEB 218,810 2,029,298 1,267,307

2.5G revenues $ 11,252,458 $ 17,272,088 $ 31,213,641

Other revenues 932,359 772,709 —

Total WVAS revenue $ 42,671,588 $ 50,038,014 $ 62,512,483

Recorded music revenue 11,286,812 10,488,613 6,203,418

Total revenues $ 53,958,400 $ 60,526,627 $ 68,715,901

   Year ended
December 31, 2009    Year ended
December 31, 2010
Revenues

SMS
   5,307,435       456,968
IVR
   3,943,733       545,890
RBT
   4,447,918       2,493,929




2G revenues
   13,699,086       3,496,787




WAP
   3,145,885       565,205
MMS
   1,692,585       170,281
JAVA
   1,541,618       902,194
WEB
   11,794       —




2.5G revenues
   6,391,882       1,637,680




Other revenues
   78,142       251,518




Total WVAS revenue
   20,169,110       5,385,985




Recorded music revenue
   14,473,185       9,458,423




Total revenues
   34,642,295       14,844,408




For recorded music revenue included in discontinued operations, the Company cannot break down the revenue by service or product line without undue costs.
~~F-32~~
Post-2010 Reorganization
Following the 2010 Reorganization (the disposal of the WVAS and recorded music businesses (Note 2(1)) in August 2010 presented in discontinued operations for all the periods presented herein), the Company has only one operating segment (and reportable segment) made up of Ku6’s online advertising business (“Online Advertising”), which is presented in the continuing operations section of our consolidated statement of operations.
Geographic Information
The Company primarily operates in the PRC and all of the Company’s long-lived assets are located in the PRC.
~~19. (LOSS) INCOME~~ Accordingly, enterprise-wide disclosures are not necessary.
17. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net ~~(loss) income~~loss per ~~share:~~

Year ended December 31,
2008 2007 2006
Net (loss) income from continuing operations (numerator), basic and diluted $ (12,365,126 ) $ (41,530,968 ) $ 6,640,393
Net income (loss) from discontinued operations, net of tax (numerator), basic and diluted 412,530 (419,227 ) (836,448 )
Net (loss) income (numerator), basic and diluted $ (11,952,596 ) $ (41,950,195 ) $ 5,803,945

Weighted average shares (denominator):
Weighted average ordinary shares outstanding used in computing basic income per share 2,185,615,129 2,172,208,190 2,189,748,563
Dilutive effect of non-vested shares, stock options and warrants — — 19,010,073

Weighted average ordinary shares outstanding used in computing diluted income per share 2,185,615,129 2,172,208,190 2,208,758,636

Net (loss) income from continuing operations per share, basic and diluted $ (0.01 ) $ (0.02 ) $ 0.00
Net income (loss) from discontinued operations per share, basic and diluted (0.00 ) (0.00 ) (0.00 )

Net (loss) income per share, basic and diluted $ (0.01 ) $ (0.02 ) $ 0.00

~~Ordinary~~ share ~~equivalents~~(1 ADS = 100 Shares):
   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011
Numerator:

Net loss attributable to Ku6 Media Co., Ltd. ordinary shareholders from continuing operations
   (6,021,461 ) (52,858,278 ) (49,343,907 )
Net income (loss) attributable to Ku6 Media Co., Ltd. ordinary shareholders from discontinued operations
   (17,373,400 ) 1,348,014    —


Net loss attributable to Ku6 Media Co., Ltd.
   (23,394,861 ) (51,510,264 ) (49,343,907 )


Denominator:

Weighted-average ordinary shares outstanding for basic calculation
   2,196,291,947    3,096,421,097    4,265,277,638
Dilutive effect of restricted shares, convertible debt, and stock options
   —      —      —


Weighted average ordinary shares outstanding for diluted calculation
   2,196,291,947    3,096,421,097    4,265,277,638


Weighted-average ADS used in per basic ADS calculations
   21,962,919    30,964,211    42,652,776
Dilutive effect of restricted shares, convertible debt, and stock options
   —      —      —


Weighted-average ADS used in per diluted ADS calculations
   21,962,919    30,964,211    42,652,776


Loss per share – basic and diluted

Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted
   (0.00 ) (0.02 ) (0.01 )
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted
   (0.01 ) 0.00    —


Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted
   (0.01 ) (0.02 ) (0.01 )


Loss per ADS – basic and diluted

Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted
   (0.27 ) (1.71 ) (1.16 )
Income (loss) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted
   (0.79 ) 0.04    —


Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted
   (1.06 ) (1.67 ) (1.16 )


��

Incremental ordinary shares with dilutive effect are calculated using the treasury stock ~~method.~~method with respect to restricted shares and stock options. Under the treasury stock method, the proceeds from the assumed conversion of options ~~warrants~~ and non-vested shares are used to repurchase outstanding ordinary shares using the average ~~fair value~~share price for the period.
For incremental ordinary shares associated with convertible debt, dilution is calculated (if necessary) using the if-converted method, which assumes conversion at the beginning of the annual period (or date of issuance of the related debt, if later).
For all periods presented, all potentially dilutive securities associated with the Company’s convertible bond which was issued in Q2 2011 and extinguished in Q3 2011 (Note 1) and all stock options (Note 15) have not been reflected in the dilutive calculations pursuant to ASC 260, “Earnings Per Share,” due to the presence of a net loss in each period as the inclusion of such potential common shares would be anti-dilutive.
18. CONCENTRATIONS
(1) Dependence on related party revenue
The Company ~~had~~entered into a ~~weighted-average~~cooperative agreement with Shengyue, a wholly owned subsidiary of ~~47,539,004, 63,931,948~~Shanda in 2011. Under this agreement, Shengyue is appointed as Ku6’s primary agency to secure advertisement from various advertisers. In 2011, 38% of net revenues were derived from Shengyue and 71,626,000 ordinary share options outstanding during the years ended December 31, 2008, 2007 and 2006, respectively, which were excluded in the computation of diluted income per share, as their effect would have been antidilutive, as their exercise prices were above the average market values in such periods.
~~20. CONCENTRATIONS~~
~~(a) Dependence on Telecom Operators~~
~~The revenues of~~ the Company are substantially derived from network service agreements with the Telecom Operators. These companies are entitled to a service and network fee for the transmission of wireless value-added services as well as for the billing and collection of services.expects that this percentage will increase in 2012. If the ~~contractual relationships~~relationship with ~~one or more of the Telecom Operators in the PRC are~~Shengyue is terminated or scaled-back, or if ~~these companies~~Shengyue alter the ~~network service agreements~~agency agreement in a way that is adverse to the Company, the Company’s ~~wireless value-added service business~~revenue would be adversely affected.
~~Revenues generated~~
(2) Credit risk
As of December 31, 2010 and 2011, accounts receivable of the online advertising business are typically unsecured and are derived from ~~the mobile phone~~revenue earned from customers ~~through China Unicom~~ and ~~China Mobile, the principal operators that~~agencies in China. The risk with respect to accounts receivable is mitigated by credit evaluations the Company ~~dealt with~~performs on its customers and its ongoing monitoring process of outstanding balances. No individual customer accounted for more than 10% of net advertising revenues, or related receivables, during ~~2006, 2007~~the year ended and ~~2008, were~~ as ~~follows:~~

Year ended December 31,
2008 2007 2006
Revenues % Revenues % Revenues %
China Unicom $ 10,775,358 20 % $ 12,789,026 21 % $ 21,144,096 31 %
China Mobile 24,352,344 45 % 29,921,502 49 % 36,756,895 53 %
of December 31, 2010. Shengyue accounted for 38% and 75% of net revenues and net account receivables during the year ended and as of December 31, 2011 (Note 13).

   Year ended
December 31, 2010 Year ended
December 31, 2011
Accounts receivable
   10,572,374    5,194,099
Allowance for doubtful accounts
   (2,437,179 ) (4,416,706 )


Accounts receivable, net of allowance for doubtful accounts
   8,135,195    777,393


~~F-33~~
~~Accounts receivable due from the mobile phone customers through China Mobile and China Unicom were as follows:~~

December 31
2008 2007
Accounts receivable % Accounts receivable %
China Unicom $ 2,632,764 21 % $ 5,289,178 36 %
China Mobile 5,458,929 43 % 4,699,399 32 %
~~(b) Credit risk~~
The Company depends on the billing systems of the Telecom Operators to charge the mobile phone customers through mobile phone bills and to collect payments from customers for WVAS business. Recorded music services are delivered through the Company’s majority-controlled music companies, which contracts with music artists and composers to perform and produce music and collects receivables from music customers. The Company generally does not require collateral for its accounts receivable. The movements of the allowance for doubtful accounts were as follows:

Movement of allowance for doubtful accounts

Year ended December 31,
2008 2007

Balance at beginning of the period $ 699,525 $ 284,402
Provisions 1,087,565 661,504
Reversed (190,860 ) (233,057 )
Written off (770,204 ) (13,324 )

Balance at the end of the period $ 826,026 $ 699,525

~~21.~~
The Company has not presented movements in the allowance for doubtful accounts for 2009 in the below table as such activity relates solely to discontinued operations for which there are no remaining receivable or allowance amounts.

   Year ended
December 31, 2010 Year ended
December 31, 2011
Balance at beginning of the year
   4,015,145    2,437,179
Acquisition of Ku6
   101,484    —
Provisions
   1,976,053    3,637,147
Reversed
   (501,485 ) (177,321 )
Written off
   (53,563 ) —
Transferred out due to disposal of WVAS and recorded music businesses
   (3,100,455 ) —
Transferred out due to disposal of Yisheng
   —      (1,480,299 )


Balance at the end of the year
   2,437,179    4,416,706


As part of the Group’s change in the business strategy (Note 1), the Company laid off majority of its sales force and appointed Shengyue as its primary advertisement agency. As a result of this change, the relationship with some of previous advertisement customers was terminated and the Group provided additional allowance for doubtful accounts to reflect the expected uncollectibilty.
19. MAINLAND CHINA CONTRIBUTION PLAN ~~AND STATUTORY RESERVE~~
Full time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees’ salaries. The total ~~provisions~~amounts charged to the statements of operations and comprehensive loss for such employee benefits were ~~$2,157,825, $2,434,409~~$2,692,679, $3,660,438 and ~~$2,396,079~~$2,554,561 for the years ended December 31, 2009, 2010 and 2011, respectively.
20. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company entered into leasing arrangements relating to office area and internet bandwidth in 2009, 2010 and 2011. Leasing expenses for the years ended December 31, 2009, 2010 and 2011 were $2,768,340, $11,785,743 and $10,614,276, respectively.
Future minimum lease payments under non-cancellable operating lease agreements are as follows:
Within 1 year
6,132,154
Between 1 and 2 years
429,706
Between 2 and 3 years
—
Between 3 and 4 years
—
Total
6,561,860
Litigation
The Company is subject to claims and litigation, which may arise in the normal course of business. The Company is involved in a number of cases pending in various courts and arbitration as of December 31, 2011. These cases are substantially related to alleged copyright infringement. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a change in the Company’s business practices, which could impact the Company’s future financial results.
The Company has recorded an accrual balance of $2,683,968 in “Accrued expenses and other liabilities” in the consolidated balance sheet as of December 31, 2011 (Note 12). The accrual was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 2011 but related to alleged copyright infringement arising before December 31, 2011. The accrual was based upon management’s best estimation according to the historical actual compensation amount per video of Ku6 for similar legal actions in the past and the advice from PRC counsel. The Company is in the process of appealing certain judgments for which the loss has been accrued.
There are no accruals for any additional losses related to unasserted claims or any other amounts.
Contingencies
The Company accounts for loss contingencies in accordance with ASC 450, “Contingencies,” and other related guidance. Set forth below is a description of certain loss contingencies as well as the opinion of management as to the likelihood of loss.
Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in Internet business, including the provision of online video and online advertising services. Specifically, foreign ownership in an Internet content provider or other value-added telecommunication service providers may not exceed 50%. Since the Company is incorporated in the Cayman Islands, neither the Company nor its PRC subsidiary is eligible to engage in Internet business. To comply with PRC laws and regulations, the Company conducts its operations in China through a series of contractual arrangements entered into among its wholly owned PRC subsidiaries, Beijing Technology, Tianjin Technology and Kusheng. (collectively “wholly owned PRC subsidiaries”), and the consolidated affiliated entities in the PRC, namely Beijing Information, Tianjin Information, Ku6 (Beijing) Cultural Media Co., Ltd. (“Ku6 Cultural”), Yisheng and Ku6 Network (collectively “consolidated affiliated entities in the PRC”) and their respective shareholders.
Under the equity pledge agreements among our PRC subsidiaries, certain of our consolidated affiliated entities and the shareholders of our consolidated affiliated entities, the shareholders of our consolidated affiliated entities have pledged all of their equity interests in these entities to our relevant subsidiaries by recording the pledge on the shareholder registers of the respective entities. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, a pledge is not valid unless it is registered with the relevant local administration for industry and commerce. Ku6 Information Technology and Tianjin Ku6 Network have completed the registration of equity pledges on November 13, 2008 ~~2007~~ and ~~2006,~~January 20, 2012, respectively.
Ku6 Cultural and Tianjin information are in the process of registering the relevant equity pledges with the local administration for industry and commerce for the benefit of our PRC subsidiaries.
Beijing Information, Tianjin Information, Ku6 Cultural, Yisheng and Ku6 Network hold the licenses and permits necessary to conduct our online video, online advertising and related businesses in China. In the opinion of management, (i) the ownership structure of the Company, its wholly owned PRC subsidiaries and the consolidated affiliated entities in the PRC are in compliance with existing PRC laws and regulations; (ii) the contractual arrangements with the consolidated affiliated entities in the PRC are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (iii) the Company’s business operations are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot be assured that PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and its contractual arrangements with the consolidated affiliated entities in the PRC were found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changing and new PRC laws and regulations.
Under PRC Ministry of Commerce (“MOFCOM”) security review rules promulgated in September 2011, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investment, leases, loans, control through contractual arrangements, or offshore transactions. Management has concluded there is no need to submit the existing contractual arrangements with the consolidated affiliated entities in the PRC and their shareholders to the MOFCOM for national security review based upon analysis of the rules. However, there are substantial uncertainties regarding the interpretation and application of the MOFCOM security review rules, and any new laws, rules, regulations or detailed implementation measures in any form relating to such rules. Therefore, the Company cannot be assured that the relevant PRC regulatory authorities, such as the MOFCOM, would not ultimately take a contrary view to the opinion of management and the Company’s PRC legal counsel. If the MOFCOM or other PRC regulatory authority determines that the Company needs to submit the existing contractual arrangements with the consolidated affiliated entities in the PRC and their shareholders for national security review, the Company may face sanctions by the MOFCOM or other PRC regulatory authority, which may include, among others, requiring the Company to restructure its ownership structure, discontinuation or restriction of operations in the PRC, or invalidation of the agreements that the wholly owned PRC subsidiaries have entered into with the consolidated affiliated entities in the PRC and their shareholders.
In such case, the Company may not be able to operate or control business in the same manner as it currently does, and therefore, may not be able to consolidate the affiliated entities in the PRC. In addition, the relevant regulatory authorities would have broad discretion in dealing with such violations which may adversely impact the financial statements, operations and cash flows of the Company (including restrictions ~~permit payments~~on the Company to carry out business).
If the consolidated affiliated entities in the PRC and their shareholders fail to perform their respective obligations under the current contractual arrangements, the Company may have to incur substantial costs and expend significant resources to enforce those arrangements and rely on legal remedies under PRC laws. The PRC laws, rules and regulations are relatively new, and because of ~~dividends by~~the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations involve substantial uncertainties. These uncertainties may impede the ability of the Company to enforce these contractual arrangements, or suffer significant delay or other obstacles in the process of enforcing these contractual arrangements and may materially and adversely affect the results of operations and the financial position of the Company.
In the opinion of management, the likelihood of loss in respect of the Company’s current ownership structure or the contractual arrangements with the consolidated affiliated entities in the PRC is remote.
21. RESTRICTED NET ASSETS
Relevant PRC laws and regulations permit PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. ~~Prior to payment of dividends, pursuant to the laws applicable to the PRC’s Foreign Investment Enterprises,~~Additionally, the Company’s VIE subsidiaries ~~and VIEs in~~can only distribute dividends upon approval of the shareholders after they have met the PRC ~~must make appropriations from after-tax profit~~requirements for appropriation to non-distributable reserve funds as determined by the Board of Directors of each company. These reserve funds include (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, thestatutory reserves. The statutory general reserve fund requires annual appropriations of 10% of net after-tax ~~profit (as determined under generally accepted accounting principles in the PRC at each year-end); the other fund appropriations are at the Company’s discretion. These reserve funds can only~~income to be ~~used for specific purposes~~set aside prior to payment of ~~enterprise expansion and staff bonus and welfare and are not distributable as cash~~any dividends. Certain of the Company’s PRC subsidiaries and VIEs reversed the general reserve fund of $4,711,525 for the year ended December 31, 2008 to make up for the accumulated deficit as permitted by the PRC law, and made appropriations to the general reserve fund of $841,788 and $374,004 for the years ended December 31, 2007 and 2006, respectively. The PRC subsidiaries and VIEs elected not to make any appropriations to the enterprise expansion fund and staff bonus and welfare fund in any of the periods presented. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and ~~VIEs~~affiliates are restricted ~~from transferring~~in their ability to transfer a portion of their net assets to the ~~Company. Restricted~~Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $56.1 million, or 110.3% of the Company’s total consolidated net assets ~~were approximately $79.1 million and $75.6 million,~~ as of December 31, ~~2008~~2011. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and ~~2007, respectively.~~affiliates for working capital and other funding purposes as all business is principally conducted inside the PRC, the Company may in the future require additional cash resources from our PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely to declare and pay dividends to or distributions to the Company’s ordinary shareholders. Accordingly, the Company has included Schedule 1I in accordance with Regulation S-X promulgated by the United States Securities and Exchange Commission.

~~F-34~~
~~22. COMMITMENTS AND CONTINGENCIES~~
~~Operating leases as lessee~~
The Company leases certain office premises under non-cancelable leases, of which the principal one expires in 2009. Rent expense under operating leases for 2008, 2007 and 2006 was $1,931,102, $1,862,610 and $1,455,640, respectively.
~~Future minimum lease payments under non-cancelable operating lease agreements were as follows:~~

December 31,
2009 $ 1,452,183
2010 96,852
2011 18,756

Total $ 1,567,791

~~Artist contracts~~
~~Huayi Brothers Music, Secular Bird and Freeland Music have non-cancelable agency agreements with certain artists that provide for minimum payments. Future minimum payments were as follows:~~

December 31,
2009 $ 1,670,944
2010 703,555
2011 703,555

Total $ 3,078,054

~~Contingent considerations for business acquisitions~~
In connection with the acquisition of Freeland Music, other than the initial consideration of $7,560,000 in cash, the Company agreed to contribute up to $940,000 in cash as a capital injection into Freeland Music, or make additional payment of $375,000 to the original selling shareholders in cash, or decrease the Company’s share percentage in Freeland Music from 60% to 56%KU6 MEDIA CO., ~~at the selling shareholders’ option, contingent upon the attainment of specific earnings objectives for the twelve-month period ending December 31, 2009.~~
In connection with the acquisition of Secular Bird and Beijing Hurray! Fly Songs, other than the initial consideration of $576,066 in cash, the Company agreed to make capital injections of up to $626,287 into Secular Bird and make additional payment of up to $223,346 to the original selling shareholders, contingent upon the attainment of specific earnings objectives for the twelve-month period ending August 2009.
~~23. SUBSEQUENT EVENTS~~
~~Restructuring plan~~
In May 2009, the Company reduced the work force of our WVAS and digital music businesses by approximately one-third, and have recorded an expense of $0.3 million in severance costs. This review is ongoing, and there can be no assurance that the Company will be successful in returning to profitability.
~~Shanda to Purchase Majority Share Stake of the Company~~
On June 8, 2009, the Company entered into a tender offer agreement with Shanda Interactive Entertainment Limited (“Shanda”) under which Shanda, through a wholly-owned subsidiary, commenced a tender offer on June 16, 2009 to acquire 51% of the Company’s total outstanding ordinary shares on a fully diluted basis (including shares represented by our ADSs) at a price of US$0.04 per ordinary share (or US$4.00 per ADS). On June 16, 2009, the Company received the offer to purchase from Shanda and the related letters of transmittal. The tender offer will remain open for at least 20 business days and will expire on July 15, 2009 at 12:01 a.m., New York City time, unless extended.
~~F-35~~
LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~
BALANCE ~~SHEETS~~
~~(In U.S. dollars)~~

December 31,
2008 2007
(in U.S. dollars, except share data)
Assets

Current assets:
Cash $ 39,519,423 $ 49,061,529
Prepaid expenses and other current assets 168,233 224,297

Total current assets 39,687,656 49,285,826
Receivable on disposal of subsidiary 46,860 4,151,400
Prepaid investment cost 1,907,400 —
Investment at cost 600,038 —
Investments in subsidiaries and variable interest entities 35,131,851 39,681,837
Investment in equity affiliate 150,000 150,000

Total assets
77,523,805 93,269,063

Liabilities and shareholders’ equity

Current liabilities:
Accrued expenses and other current liabilities 272,844 595,648
Amounts due to subsidiaries and variable interest entities 341,676 530,756
Acquisitions payable — 6,560,000

Total current liabilities 614,520 7,686,404

Shareholders’ equity:
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,193,343,740 and 2,174,784,440 shares issued and outstanding as of December 31, 2008, and 2007, respectively) 109,617 108,689
Additional paid-in capital 75,012,693 74,066,839
Statutory reserve 1,791,324 6,502,849
Accumulated deficit (9,991,663 ) (2,750,592 )
Accumulated other comprehensive income 9,987,314 7,654,874

Total shareholders’ equity 76,909,285 85,582,659

Total liabilities and shareholders’ equity
$ 77,523,805 $ 93,269,063

SHEET

~~F-36~~
   December 31, 2010 December 31, 2011
   (in U.S. dollars, except number of shares)
Assets

Current assets:

Cash
   11,048,500    7,754,457
Prepaid expenses and other current assets
   241,017    434,230
Amount due from related parties
   3,841,766    19,534,641


Total current assets
   15,131,283    27,723,328
Investments in subsidiaries and variable interest entities
   31,959,213    27,155,056


Total assets
   47,090,496    54,878,384


Liabilities and shareholders’ equity

Accrued expenses and other current liabilities
   1,266,380    942,423
Amounts due to subsidiaries and variable interest entities
   77,833    2,707,933
Amount due to related parties
   —      375,000


Total current liabilities
   1,344,213    4,025,356


Shareholders’ equity:

Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2010 and 2011, respectively)
   174,008    250,939
Additional paid-in capital
   130,100,153    184,874,259
Accumulated deficit
   (83,105,464 ) (132,449,371 )
Accumulated other comprehensive income (loss)
   (1,422,414 ) (1,822,799 )


Total shareholders’ equity
   45,746,283    50,853,028


Total liabilities and shareholders’ equity
   47,090,496    54,878,384


KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~
STATEMENT OF OPERATIONS
~~(In U.S. dollars)~~

Year ended December 31,
2008 2007 2006
(in U.S. dollars, except share data)
Operating expenses
Product development (represents stock-based compensation expense of $40,102, $921 and $79,587 for the years ended December 31, 2008, 2007 and 2006, respectively) $ 105,283 $ 9,385 $ 79,587
Selling and marketing (including stock-based compensation expense of $621,094, $286,885 and $346,456 for the years ended December 31, 2008, 2007 and 2006, respectively) 622,846 286,885 346,211
General and administrative (including stock-based compensation expense of $284,086, $155,169 and $117,514 for the years ended December 31, 2008, 2007 and 2006, respectively) 1,666,532 2,440,417 1,757,720

Total operating expenses 2,394,661 2,736,687 2,183,518

Loss from operations (2,394,661 ) (2,736,687 ) (2,183,518 )
Interest income 1,429,837 2,082,629 2,372,585
Interest expense — (179,062 ) (44,765 )
Other income, net 5,000,000 105,485 —
Foreign exchange loss (8,990,067 ) — —
Gain from disposal of subsidiary 412,530 192,943 —
Equity in earnings (loss) of subsidiaries, variable interest entities and affiliate (7,410,235 ) (41,415,503 ) 5,659,643

Net (loss) income $ (11,952,596 ) $ (41,950,195 ) $ 5,803,945

~~F-37~~
   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011
   (in U.S. dollars, except number of shares)
Operating expenses:

Product development
   —      150,584    603,879
Selling and marketing
   118,521    160,231    (31,880 )
General and administrative
   5,520,453    4,072,134    2,433,905


Total operating expenses
   5,638,974    4,382,949    3,005,904


Loss from operations
   (5,638,974 ) (4,382,949 ) (3,005,904 )
Interest income
   355,616    9,404    112,416
Interest expense
   —      —      (375,000 )
Other income
   —      205,043    —
Foreign exchange loss (gain)
   1,085    (38,767 ) (9 )
Gain from disposal of subsidiary
   221,899    —      —
Equity in loss of subsidiaries, VIEs and affiliate
   (18,334,487 ) (47,302,995 ) (46,075,410 )


Net loss
   (23,394,861 ) (51,510,264 ) (49,343,907 )


KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.
)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~
STATEMENTS OF CASH FLOWS
~~(In U.S. dollars)~~

Year ended December 31,
2008 2007 2006
(in U.S. dollars)
Cash flows from operating activities:

Net (loss) income $ (11,952,596 ) $ (41,950,195 ) $ 5,803,945
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation expense 945,282 442,975 543,557
Equity in (losses) earnings of subsidiaries, variable interest entities and affiliate 7,410,235 41,415,503 (5,659,643 )
Gain from disposal of subsidiary (412,530 ) (192,943 ) —
Receivable from disposal of subsidiary (net of cash disposed of $771,570) — (3,186,887 ) —
Gain on reduction of acquisition payable (5,000,000 ) — —
Changes in assets and liabilities:
Prepaid expenses and other current assets 56,064 226,001 (19,649 )
Amounts due from subsidiaries and variable interest entities — 5,843,380 792,290
Accrued expenses and other current liabilities (322,804 ) 403,512 (243,793 )
Amounts due to subsidiaries and variable interest entities (189,080 ) 530,756 (1,243,090 )
Payroll withholding taxes payable — — (504,945 )

Net cash (used in) provided by operating activities
(9,465,429 ) 3,532,102 (531,328 )

Investing activities:

Payments related to acquisitions consummated (1,987,930 ) (2,833,658 ) (7,475,860 )
Payments related to acquisitions not yet consummated (1,907,400 ) — —
Proceeds from disposal of subsidiary 4,517,070 — —
Investment in cost affiliate (600,038 ) — —
Purchase of equity affiliate — (150,000 ) —

Net cash provided by (used in) investing activities
21,702 (2,983,658 ) (7,475,860 )

Financing activities:

Proceeds from exercise of stock options 1,500 16,334 95,472
Proceeds from the issuance of ordinary shares — — 540,000
Payment to repurchase ordinary shares — — (5,034,748 )

Net cash provided by (used in) financing activities
1,500 16,334 (4,399,276 )

Net (decrease) increase in cash and cash equivalents
(9,442,227 ) 564,778 (12,406,464 )
Effect of change in exchange rate
(99,879 ) — —
Cash and cash equivalents, beginning of year
49,061,529 48,496,751 60,903,215

Cash and cash equivalents, end of year
$ 39,519,423 $ 49,061,529 $ 48,496,751

   Year ended
December 31, 2009 Year ended
December 31, 2010 Year ended
December 31, 2011
   (In U.S. dollars)
Operating activities:

Net loss
   (23,394,861 ) (51,510,264 ) (49,343,907 )
Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation
   169,310    1,891,931    1,231,919
Stock-based compensation cost in relation to disposition of Yisheng
   —      —      522,251
Equity in profit of subsidiary companies
   18,334,487    47,302,995    46,075,410
Gain from disposal of subsidiary
   (221,899 ) —      —
Prepaid expenses and other current assets
   40,047    (106,581 ) (193,214 )
Amount due from related parties
   —      (942,919 ) (1,692,875 )
Other payables and accruals
   1,008,149    4,738    (323,957 )
Amounts due to subsidiaries and variable interest entities
   34,929    2,381    (77,833 )
Amounts due to related parties
   —      —      375,000


Net cash provided by (used in) operating activities
   (4,029,838 ) (3,357,719 ) (3,427,206 )


Investing activities:

Decrease/(Increase) of short-term investments
   (10,000,000 ) 10,000,000    —
Proceeds from disposal of subsidiary
   268,759    37,243,901    —
Loan to subsidiaries
   —      (53,418,876 ) (5,762,569 )
Loan to related parties
   —      (3,200,000 ) (14,108,019 )
Investment in subsidiary
   (2,000,000 ) —      (30,000,000 )
Purchase of equity affiliate
   —      —      —


Net cash used in investing activities
   (11,731,241 ) (9,374,975 ) (49,870,588 )


Financing activities:

Proceeds from exercise of options
   2,500    20,350    3,750
Proceeds from issuance of ordinary shares to Shanda
   —      —      50,000,000
Proceeds from issuance of Convertible Bond to Shanda
   —      —      50,000,000
Cash paid for redemption of Convertible Bond to Shanda
   —      —      (50,000,000 )


Net cash provided by financing activities
   2,500    20,350    50,003,750


Effect of exchange rate changes on cash and cash equivalents
   —      —      —
Net decrease in cash and cash equivalents
   (15,758,579 ) (12,712,344 ) (3,294,043 )
Cash and cash equivalents, beginning of year
   39,519,423    23,760,844    11,048,500


Cash and cash equivalents, end of the year
   23,760,844    11,048,500    7,754,457


Note
Basis for Preparation
The Financial Information of the Parent Company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the Company has used the equity method to account for its investment in its subsidiaries and its variable interest entities.

~~F-38~~F-60
~~EXHIBIT INDEX~~
~~Exhibit~~
~~Number~~ ~~Document~~
~~4.70~~ ~~Translation of Cooperation Agreement on Monternet WAP Services between China Mobile Communications Group Corporation and Beijing Enterprise Network Technology Co., Ltd. dated June 18, 2008.~~
~~4.71~~ ~~Translation of Mobile Value-added Service (WAP1.2) Cooperation Agreement between China Telecommunications Corporation and Beijing Hengji Weiye Electronic Commerce Co., Ltd. dated October 1, 2008.~~
~~4.72~~ ~~Investment and Shareholders’ Agreement between, among others, Seed Music Group Limited and Hurray! Music Holding Co., Ltd. dated September 24, 2008.~~
~~4.73~~ Translation of Supplemental Agreement of Asset, Business and Personnel Transfer Agreement between Beijing Secular Bird Culture and Art Development Centre and Guangzhou Secular Bird Culture Communication Co., Ltd. dated August 2008.
~~4.74~~ ~~Translation of Supplemental Agreement between Hurray! Digital Media Technology Co., Ltd. and Beijing Secular Bird Culture and Art Development Centre dated August 2008.~~
~~4.75~~ ~~Translation of Supplemental Agreement among Seed Music Group Limited, Hurray! Media Holding Co., Ltd., Tien, Ting-Feng, and Huang, Tien-Zan dated 2009.~~
~~4.76~~ Translation of Supplemental Agreement among Hurray! Media Technologies Co., Ltd., Xiongbing Zhong, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd., and Hongkong Freeland Movie Industry Group Co., Ltd. dated 2008.
~~8.1~~ ~~List of Significant Subsidiaries and Affiliates.~~
~~12.1~~ ~~Certification of Chief Executive Officer Required by Rule 13a-14(a).~~
~~12.2~~ ~~Certification of Chief Financial Officer Required by Rule 13a-14(a).~~
~~13.1~~ ~~Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.~~
~~13.2~~ ~~Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.~~
~~15.1~~ ~~Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm.~~
~~15.2~~ ~~Consent of Appleby.~~


Title of each class		Name of each exchange and on which registered
Ordinary Shares, par value $0.00005 per share		Nasdaq Global Market*


PART III			103

Item 17. Financial Statements			82103

Item 18. Financial Statements			82103

Item 19. Exhibits			104

~~Item 19. Exhibits~~Exhibit 2.1			82
Exhibit 4.3
Exhibit 4.30
Exhibit ~~4.70~~4.31
Exhibit ~~4.71~~4.32
Exhibit ~~4.72~~4.33
Exhibit ~~4.73~~4.34
Exhibit ~~4.74~~4.35
Exhibit ~~4.75~~4.36
Exhibit ~~4.76~~4.37
Exhibit 4.38
Exhibit 4.43
Exhibit 4.44
Exhibit 4.49
Exhibit 4.50 Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 12.3
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
~~Exhibit 15.2~~

¨
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

x
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


~~Large Accelerated Filer~~o		~~Accelerated Filer~~o		~~Non-Accelerated Filer~~þ


~~INTRODUCTION~~
		Page
~~PART I~~INTRODUCTION	1

PART I	2

Item 1. Identity of Directors, Senior Management and ~~Advisers~~Advisors	32

Item 2. Offer Statistics and Expected Timetable	32

Item 3. Key Information	42

Item 4. Information on the Company	2535

Item 4A. Unresolved Staff Comments	4155

Item 5. Operating and Financial Review and Prospects	4155

Item 6. Directors, Senior Management and Employees	6175

Item 7. Major Shareholders and Related Party Transactions	6781

Item 8. Financial Information	6985

Item 9. The Offer and Listing	6985

Item 10. Additional Information	7086

Item 11. Quantitative and Qualitative Disclosures About Market Risk	7898

Item 12. Description of Securities Other than Equity Securities	7999

PART II	100
~~PART II~~

Item 13. Defaults, Dividend Arrearages and Delinquencies	79100

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	79100

Item 15. Controls and Procedures	79100

Item 16. Reserved	102
~~Item 16. Reserved~~			80

Item 16A. Audit Committee Financial Expert	80102

Item 16B. Code of Ethics	80102

Item 16C. Principal Accountant Fees and Services	81102

Item 16D. Exemptions from the Listing Standards for Audit Committees	81103

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	81103

Item 16F. Changes in Registrant’s Certifying Accountant	81103

Item 16G. Corporate Governance	81103

Item 16H. Mine Safety Disclosure	103


	For the Year Ended December 31,
	2008			2007			2006			2005⁽¹⁾			2004⁽¹⁾
	(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Statement of Operations Data
Revenues:
Wireless value-added services	$	42,672		$	50,038		$	62,512		$	56,063		$	43,173
Recorded music		11,287			10,489			6,203			—			—

Total revenues		53,959			60,527			68,715			56,063			43,173

Cost of revenues:
Wireless value-added services		32,840			36,394			40,672			28,635			18,053
Recorded music		6,730			6,233			3,553			—			—

Total cost of revenues		39,570			42,627			44,225			28,635			18,053

Gross profit		14,389			17,900			24,490			27,428			25,120
Operating expenses		22,669			61,462			19,882			14,277			10,436

Operating (loss) income from continuing operations		(8,280	)		(43,562	)		4,608			13,151			14,684
Interest income		1,613			2,313			2,529			1,390			28
Interest expense		—			(179	)		(45	)		(27	)		(312	)
Gain on reduction of acquisition payable		5,000			—			—			—			—
Foreign exchange loss		(8,990	)		—			—			—			—
Other income, net		247			466			315			330

(Loss) income before provision for income taxes, earnings in equity investments, minority interest and discontinued operations		(10,410	)		(40,962	)		7,407			14,844			14,400
Income tax expense (credit)		486			(182	)		205			(323	)		—

Net (loss) income from continuing operations after income taxes before minority interests		(10,896	)		(40,780	)		7,202			14,521			14,400
Minority interests		337			(688	)		(562	)		—			—
Equity in earnings (losses) of affiliate		64			(63	)		—			—			—
Impairment for Investment in equity affiliate		(1,871	)		—			—			—			—

Net (loss) income from continuing operations		(12,366	)		(41,531	)		6,640			14,521			14,400


	As of December 31,
	2007		2008		2009		2010			2011
	(in thousands of U.S. dollars, except for share data)
Historical Condensed Consolidated Balance Sheet Data
Cash and cash equivalents		65,979		59,473		49,744		27,295			26,750
Restricted cash		—		—		—		—			3,600
Short term investments		—		—		10,000		—			—
Accounts receivable, net		14,691		12,658		4,062		8,461			3,517
Other current assets		8,777		5,580		2,155		9,051			20,424
Property and equipment, net		1,636		980		1,472		8,003			3,593
Goodwill		5,621		3,157		2,099		6,896			6,233
Other assets		8,890		6,476		1,976		27,264			24,673

Total assets		105,594		88,324		71,508		86,970			88,790

Current liabilities		14,467		6,316		13,783		36,406			33,111
Non-current liabilities		877		316		421		4,926			4,826

Total liabilities		15,344		6,632		14,204		41,332			37,937
Redeemable non-controlling interests		—		—		371		—			—
Ordinary shares ($0.00005 par value; 12,000,000,000 shares authorized; 2,174,784,440, 2,193,343,740, 2,200,194,040, 3,481,174,498 and 5,019,786,036 shares issued and outstanding as of December 31, 2007, 2008, 2009, 2010 and 2011, respectively)		109		110		110		174			251
Other Ku6 Media Co., Ltd. shareholders’ equity		85,474		76,799		54,966		45,572			50,602
Non-controlling interests		4,667		4,783		1,857		(108	)		—

Total liabilities, redeemable non-controlling interests and shareholders’ equity		105,594		88,324		71,508		86,970			88,790


~~(1)~~		The amounts of share-based compensation included in operating expenses for 2006, 2007 and 2008 reflect the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) effective January 1, 2006. Had we applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in prior periods, we would have reported net income of $16,511 thousand and $17,007 thousand for 2004 and 2005, respectively, and net income per share (diluted) of $0.01 for both 2004 and 2005.


	As of and for the Year Ended December 31,
	2008		2007		2006		2005		2004
	(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Balance Sheet Data
Cash	$	59,473	$	65,979	$	74,597	$	75,959	$	8,714
Accounts receivable, net		12,658		14,691		13,449		18,089		11,883
Other current assets		5,580		8,777		3,342		2,297		2,133
Property and equipment, net		980		1,636		1,954		2,536		2,617
Goodwill		3,157		5,621		39,621		23,869		20,412
Other assets		6,476		8,890		7,027		4,953		705

Total assets	$	88,324	$	105,594	$	139,990	$	127,703	$	46,464


~~(1)~~		(Loss) income from continuing operations margin, net (loss) income from continuing operations margin and net (loss) income margin are the (loss) income from continuing operations, net (loss) income from continuing operations and net (loss) income as a percentage of our total revenues.


	Exchange Rate
Period	Period End		Average⁽¹⁾		High		Low
	(RMB per US$1.00)
2007		7.2946		7.5806		7.8127		7.2946
2008		6.8225		6.9193		7.2946		6.7800
2009		6.8259		6.8295		6.8470		6.8176
2010		6.6000		6.7603		6.8330		6.6000
2011		6.2939		6.4475		6.6364		6.2939
September		6.3780		6.3885		6.3975		6.3780
October		6.3547		6.3710		6.3825		6.3534
November		6.3765		6.3564		6.3839		6.3400
December		6.2939		6.3482		6.3733		6.2939
2012
January		6.3080		6.3172		6.3330		6.2940
February		6.2935		6.2997		6.3120		6.2935
March (through March 23, 2012)		6.3021		6.3145		6.3315		6.2982


	Noon Buying Rate
	RMB per US$1.00
	High		Low
December 2008		6.8842		6.8225
January 2009		6.8403		6.8225
February 2009		6.8470		6.8241
March 2009		6.8438		6.8240
April 2009		6.8361		6.8180
May 2009		6.8265		6.8176


	Average Noon Buying Rate
	RMB per US$1.00
2004		8.2768
2005		8.1826
2006		7.9579
2007		7.5806
2008		6.9193
2009 (through May 30)		6.8326

	3.		~~WVAS Solutions is 99% owned by Beijing Network, with the remaining 1% equally owned by Hao Sun and Xiaoping Wang.~~

	4.		~~Beijing Palmsky is 50% and 50% owned by two individuals in China, Hong Liu and Haoyu Yang.~~

	5.		~~Beijing Hutong is 50% and 50% owned by two individuals in China, Wenqian Xu and Yi Cai.~~

	6.		~~Shanghai Magma is 50% and 50% owned by two individuals in China, Yi Zhang and Aiqin Shang.~~

	7.		~~Hengji Weiye is 50% and 50% owned by two individuals in China, Hong Pan and Xiaoqing Guo.~~


	Year ended December 31,
	2009			2010	2011
	(in thousands of U.S. dollars)
Internet bandwidth costs		534	10,279			9,025
Termination of long-form videos		—	—			5,267
Payroll costs		—	6,167			4,734
Depreciation of servers and other equipments		—	2,503			2,528
Amortization of licensed video copyrights cost		—	8,012			2,201
Impairment write-down of licensed video copyrights cost		—	7,740			1,521
In-house developed content costs		—	1,596			845
Other costs⁽¹⁾		23	4,162			4,759

Total costs		557	40,459			30,880


	For the Year Ended December 31, 2008
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Others		Total
	(in millions of U.S. dollars)
SMS	$	9.5	$	2.4	$	0.4	$	0.1	$	0.9	$	13.3
IVR		7.2		1.3		3.2		0.2		0.3		12.2
RBT		2.6		1.9		0.5		—		—		5.0

2G Revenues		19.3		5.6		4.1		0.3		1.2		30.5


WAP		2.1		4.7		0.6		—		—		7.4
MMS		0.8		0.5		0.1		—		—		1.4
Java		2.2		—		—		—		0.1		2.3
WEB		—		—		0.2		—		—		0.2

2.5G revenues		5.1		5.2		0.9		—		0.1		11.3

Other revenues		—		—		—		—		0.9		0.9

Total	$	24.4	$	10.8	$	5.0	$	0.3	$	2.2	$	42.7


	For the Year Ended December 31, 2007
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Others		Total
	(in millions of U.S. dollars)
SMS	$	7.0	$	2.5	$	0.2	$	0.3	$	1.0	$	11.0
IVR		13.3		1.2		2.4		0.3		—		17.2
RBT		1.6		1.7		0.4		—		—		3.7

2G Revenues		21.9		5.4		3.0		0.6		1.0		31.9

WAP		5.9		6.7		—		—		—		12.6
MMS		0.7		0.7		—		—		—		1.4
Java		1.4		—		—		—		—		1.4
WEB		—		—		2.0		—		—		2.0

2.5G revenues		8.0		7.4		2.0		—		—		17.4

Other revenues		0.1		—		—		—		0.6		0.7

Total	$	30.0	$	12.8	$	5.0	$	0.6	$	1.6	$	50.0


	For the Year Ended December 31, 2006
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Total
	(in millions of U.S. dollars)
SMS	$	11.3	$	5.7	$	—	$	0.1	$	17.1
IVR		5.2		2.5		2.5		0.6		10.8
RBT		2.0		1.3		0.1		—		3.4

2G Revenues		18.5		9.5		2.6		0.7		31.3

WAP		10.4		11.1		—		—		21.5
MMS		3.5		0.5		—		—		4.0
Java™		4.4		—		—		—		4.4
WEB		—		—		1.3		—		1.3

2.5G revenues		18.3		11.6		1.3		—		31.2

Total	$	36.8	$	21.1	$	3.9	$	0.7	$	62.5


	For the Year Ended December 31, 2009
	Ku6 Media Co., Ltd.			Ku6 Holding			Yisheng⁽¹⁾			Pro Forma Adjustments⁽²⁾			Pro Forma Consolidation
	(in thousands of U.S. dollars, except for share and per share data)
Total net revenues		1,037			6,225			985			—			8,247
Total cost of revenues		(557	)		(10,018	)		(428	)		—			(11,003	)

Gross profit (loss)		480			(3,793	)		557			—			(2,756	)
Total operating expenses		(7,130	)		(6,374	)		(1,203	)		(1,962	)		(16,669	)

Operating loss from continuing operations		(6,650	)		(10,167	)		(646	)		(1,962	)		(19,425	)
Interest income		356			8			—			—			364
Interest expense		—			(40	)		(1	)		—			(41	)
Other income, net		2			2			39			—			43
Foreigin exchange loss		—			—			—			—			—
Fair value changes in warrant liabilities		—			186			—			—			186

Loss before income tax benefit from continuing operations		(6,292	)		(10,011	)		(608	)		(1,962	)		(18,873	)
Income tax benefit		14			—			—			—			14

Loss from continuing operations, net of tax		(6,278	)		(10,011	)		(608	)		(1,962	)		(18,859	)

Discontinued operations:
Loss from operations of discontinued operations, net of tax		(21,778	)		—			—			—			(21,778	)
Gain from disposal of discontinued operations		222			—			—			—			222

Loss from discontinued operations, net of tax		(21,556	)		—			—			—			(21,556	)

Loss from continuing and discontinued operations, net of tax		(27,834	)		(10,011	)		(608	)		(1,962	)		(40,415	)

Less: Net loss attributable to the non-controlling interests from continuing operations		256			—			—			—			256
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations		4,183			—			—			—			4,183

Net loss attributable to Ku6 Media Co., Ltd.		(23,395	)		(10,011	)		(608	)		(1,962	)		(35,976	)

Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(6,022	)		(10,011	)		(608	)		(1,962	)		(18,603	)
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		(17,373	)		—			—			—			(17,373	)

Net loss attributable to Ku6 Media Co., Ltd.		(23,395	)		(10,011	)		(608	)		(1,962	)		(35,976	)


	For the Year Ended December 31, 2010
	Ku6 Media Co., Ltd.			Ku6 Holding (1)			Pro Forma Adjustments⁽²⁾			Pro Forma Consolidation
Total net revenues		16,556			232			—			16,788
Total cost of revenues		(40,459	)		(3,956	)		—			(44,415	)

Gross loss		(23,903	)		(3,724	)		—			(27,627	)
Total operating expenses		(29,703	)		(641	)		(154	)		(30,498	)

Operating loss from continuing operations		(53,606	)		(4,365	)		(154	)		(58,125	)
Interest income		57			—			—			57
Interest expense		(31	)		—			—			(31	)
Other income, net		—			—			—			—
Foreigin exchange loss		—			(4	)		—			(4	)
Fair value changes in warrant liabilities		—			—			—			—

Loss before income tax benefit from continuing operations		(53,580	)		(4,369	)		(154	)		(58,103	)
Income tax benefit		41			—			—			41

Loss from continuing operations, net of tax		(53,539	)		(4,369	)		(154	)		(58,062	)
Discontinued operations:
Loss from operations of discontinued operations, net of tax		(3,382	)		—			—			(3,382	)
Gain from disposal of discontinued operations		4,486			—			—			4,486

Loss from discontinued operations, net of tax		1,104			—			—			1,104

Loss from continuing and discontinued operations, net of tax		(52,435	)		(4,369	)		(154	)		(56,958	)
Less: Net loss attributable to the non-controlling interests from continuing operations		681			—			—			681
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations		244			—			—			244

Net loss attributable to Ku6 Media Co., Ltd.		(51,510	)		(4,369	)		(154	)		(56,033	)

Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(52,858	)		(4,369	)		(154	)		(57,381	)
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		1,348			—			—			1,348

Net loss attributable to Ku6 Media Co., Ltd.		(51,510	)		(4,369	)		(154	)		(56,033	)


	Year ended December 31, 2009 (in thousands)						Year ended December 31, 2010 (in thousands)
	Actual		Pro forma Adjustments		Pro forma		Actual		Pro forma Adjustments		Pro forma
Internet bandwidth costs		534		4,137		4,671		10,279		497		10,776
Amortization and write-down of purchased video copyright cost		—		1,747		1,747		15,619		2,852		18,471
Payroll cost		—		2,506		2,506		6,167		350		6,517
In-house developed content costs		—		—		—		1,596		—		1,596
Depreciation of servers and other equipments		—		1,278		1,278		2,503		109		2,612
Other costs⁽¹⁾		23		778		801		4,295		148		4,443

Total costs		557		10,446		11,003		40,459		3,956		44,415


	Payments Due by Period
			Less than		1-3		3-5
	Total		1 year		years		years
	(in thousands of U.S. dollars)
Operating lease commitments	$	1,568	$	1,452	$	116	$	—
Other contractual commitments*		3,078		1,671		1,407		—

Total contractual obligations	$	4,646	$	3,123	$	1,523	$	—


*		~~Represents non-cancelable agency agreements with certain artists that provide for minimum payments.~~


Name	Age	Position
Bruno Wu⁽²⁾⁽³⁾	45	Independent Director and Chairman of the Board of Directors
Tianqiao Chen⁽¹⁾⁽²⁾
~~Name~~38	~~Age~~Director
Danian Chen⁽¹⁾	~~Position~~33	~~Class~~Director
Grace Wu⁽¹⁾⁽²⁾	~~Term of Office~~41	Director
~~Qindai Wang~~Haifa Zhu	39	Director
Haibin Qu	37	Director
Tongyu Zhou⁽³⁾	43	Independent Director
Wenwen Niu⁽³⁾	45	Independent Director
Yu Shi	34	Chief Executive Officer and Acting Chief Editor
Tony Shen	44	Chief Financial Officer

(1)	~~Director and Chairman~~Member of the ~~Board~~	~~Class I~~	~~1 years~~
~~Songzuo Xiang~~		44		~~Director~~compensation and ~~Chief Executive Officer~~	~~Class II~~	~~2 years~~
~~Thomas Ng~~		55		~~Director~~	~~Class I~~	~~1 years~~
~~Robert Mao~~⁽¹⁾		65		~~Director~~	~~Class I~~	~~1 years~~
~~Suberna Shringla~~⁽¹⁾		43		~~Director~~	~~Class II~~	~~2 years~~
~~Alan Russell Powrie~~⁽¹⁾		58		~~Director~~	~~Class III~~	~~3 years~~
~~Shudan Zhang~~		49		~~Director~~	~~Class III~~	~~3 years~~
~~Xiaoqing Guo~~		38		~~Chief Financial Officer and Vice President~~	—	—
~~Ping Ji~~		50		~~Senior Executive Vice President~~	—	—
~~Fan Yang~~		44		~~Senior Executive Vice President~~	—	—
~~Haoyu Yang~~		36		~~Senior Executive Vice President~~	—	—leadership development committee


	Number of Shares
	Beneficially Owned
Name	Number		Percentage
5% and above Shareholders
Granite Global Ventures		265,115,480		12.07	%
2494 Sand Hill Road Suite 100 Menlo Park, CA 94025 United States⁽¹⁾

China Rock Capital Management		210,891,000		9.60	%
2804 One Exchange, 8 Connaught Place Central Hong Kong SAR⁽²⁾

Executive Officers and Directors⁽³⁾
Pleasant Season Ltd./Qindai Wang⁽⁴⁾		214,221,660		9.75	%
Thomas Ng⁽⁵⁾		265,115,480		12.07	%
Robert Mao⁽⁶⁾		2,000,000		*
Suberna Shringla		—		*
Xero Holdings Ltd./Songzuo Xiang⁽⁷⁾		106,859,620		4.87	%
Shudan Zhang		1,074,128		4.89	%
Alan Powrie⁽⁸⁾		600,000		*
P.N.L. Ltd./Ping Ji⁽⁹⁾		15,607,200		*
JJF International Ltd./Fan Yang⁽¹⁰⁾		45,600,000		2.08	%
Harrison Youth Ltd./Haoyu Yang⁽⁽¹¹⁾		77,791,300		3.54	%
Xiaoqing Guo⁽¹²⁾		1,653,400		*
All current directors and executive officers as a group (11 persons)		836,871,500		64.70	%

(1)		~~Granite Global Ventures is an investment adviser.~~

~~(2)~~		~~China Rock Capital Management is an investment adviser. This share information is based solely on information filed by such shareholder with the SEC.~~

~~(3)~~		The address of our executive officers and directors is c/o Hurray! Holding Co., Ltd., 15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring, Chaoyang District, Beijing 100027, People’s Republic of China.

~~(4)~~		~~Represents shares beneficially owned by Mr. Wang through a revocable trust in which he retains voting and dispositive power over such shares.~~

~~(5)~~		Represents 1,244,929 ADSs and 60 ordinary shares, 21,272 ADSs and 20 ordinary shares, 1,355,248 ADSs, and 29,705 ADSs held by Granite Global Ventures (Q.P.) L.P., Granite Global Ventures L.P., Granite Global Ventures III L.P., and GGV III Entrepreneurs Fund L.P., respectively. Mr. Ng is a managing director of Granite Global Ventures L.L.C., which is the general partner of Granite Global Ventures (Q.P.) L.P. and Granite Global Ventures L.P., and a managing director of Granite Global Ventures III L.L.C., which is the general partner of Granite Global Ventures III L.P. and GGV III Entrepreneurs Fund L.P. Mr. Ng disclaimsShanda Interactive’s beneficial ownership of our ordinary shares consists of (i) 1,155,045,300 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media, in connection with the tender offer completed in July 2009, (ii) 78,116,292 ordinary shares, including ordinary shares represented by ADSs, acquired by Shanda Media from certain selling shareholders in private transactions in September 2009, (iii) 47,389,700 ordinary shares, including ordinary shares represented by our ADSs, acquired by Shanda Media under a 10b5-1 trading plan during the period from October 2009 to October 2010, (iv) 83,076,923 ordinary shares acquired by Shanda Media from Chris Anjun Chen in August 2010, (v) 17,220,214 ordinary shares acquired by Shanda Media from ITOCHU Corporation in September 2010, (vi) 415,384,615 ordinary shares issued to Shanda Interactive in connection with our acquisition from Shanda Interactive of its 75% interest in Yisheng in August 2010, and (vii) 1,538,461,538 ordinary shares issued to Shanda Media pursuant to a share purchase agreement dated April 1, 2011 between us and Shanda Media.

(2)	Shanyou Li was our former Chief Executive Officer and a former director of our company. According to the Schedule 13G filed with the SEC on January 28, 2010, Shanyou Li held 16,970,900 ordinary shares, including ordinary shares represented by our ADSs, and may be deemed to beneficially own 257,106,176 ordinary shares held by ~~Granite Global Ventures (Q.P.) L.P., Granite Global Ventures L.P., Granite Global Ventures III L.P.,~~Kumella Holdings Limited, a British Virgin Islands company, as of January 18, 2010. Shanyou Li held approximately 88.3% of the equity interest of Kumella Holdings Limited and ~~GGV III Entrepreneurs Fund L.P.~~served as its sole director. He disclaims beneficial interest of those 257,106,176 ordinary shares except to the extent of his pecuniary ~~interests~~interest in those ~~ADSs and~~shares. We do not have any further information with respect to any changes in Shanyou Li’s beneficial ownership of our ordinary shares.

~~(6)~~		~~Represents ordinary shares issuable upon the exercise of stock options. All of the options have an exercise price of $0.0705 per ordinary share and an expiration date of June 30, 2013.~~

~~(7)~~		~~Represents ordinary shares beneficially owned by Dr. Xiang through a revocable trust in which he retains voting and dispositive power over such shares.~~


~~(8)~~		~~Represents ordinary shares issuable upon the exercise of stock options. All of the options have an exercise price of $0.1025 per ordinary share and an expiration date of January 1, 2014.~~

~~(9)~~		~~Represents ordinary shares beneficially owned by Mr. Ji through a revocable trust in which he retains voting and dispositive power over such shares.~~

~~(10)~~		~~Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which he retains voting and dispositive power over such shares.~~

~~(11)~~		~~Represents ordinary shares beneficially owned by Mr. Yang through a revocable trust in which he retains voting and dispositive power over such shares.~~

~~(12)~~		Represents 1,205,400 ordinary shares issuable upon exercise of stock option, which have a purchase price of $0.00005 per ordinary share, and an expiration date of November 23, 2010, and 4,480,000 ordinary shares issuable upon exercise of stock options, which have an exercise price of $0.1025 and $0.1175 per ordinary share and an expiration date of January 1, 2015, and January 1, 2014, respectively.