UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,

Washington, D.C. 20549

FORMForm 20-F

 

(Mark One)

¨Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
xAnnual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014.
or
¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
or
For the transition period from                    to
¨Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act ofREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017.

or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

or

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

 

For the transition period from _______________ to _______________

Commission file number: 001-35147

Renren Inc.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

5/F, North Wing

18 Jiuxianqiao Middle Road

Chaoyang District, Beijing 100016

People’s Republic of China

(Address of principal executive offices)

Thomas Jintao Ren, Chief Financial Officer

Telephone: +86 (10) 8448-1818

Email: ir@renren-inc.com

5/F, North Wing

18 Jiuxianqiao Middle Road

Chaoyang District, Beijing 100016

People’s Republic of China

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

1/F, North Wing

18 Jiuxianqiao Middle Road

Chaoyang District, Beijing 100016

People’s Republic of China

(Address of principal executive offices)

Ashley Kwok Wai Law, acting Chief Financial Officer

Telephone: +86 (10) 8448-1818

Email: ir@renren-inc.com

1/F, North Wing

18 Jiuxianqiao Middle Road

Chaoyang District, Beijing 100016

People’s Republic of China

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Each Exchange on Which Registered

American depositary shares, each

representing three15 Class A ordinary shares

Class A ordinary shares, par value US$0.001

per share*

The New York Stock Exchange

 

 *Not*               Not for trading, but only in connection with the listing on The New York Stock Exchange of American depositary shares (“ADSs”). Currently, each ADS represents three15 Class A ordinary shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

(Title of Class)

 

Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

As of December 31, 2017, 726,549,453 Class A ordinary shares, par value US$0.001 per share and 305,388,450 Class B ordinary shares, par value US$0.001 per share were outstanding.

As of December 31, 2014, 720,040,971 Class A ordinary shares, par value US$0.001 per share and 305,388,450 Class B ordinary shares, par value US$0.001 per share were outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨      YesNo  x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨      YesNo  x No

 

Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x      YesNo  ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x      YesNo  ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer, and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer¨Accelerated filerxNon-accelerated filer¨Emerging growth company      ¨

If a an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.       ¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAPxInternational Financial Reporting Standards as issued by
the International Accounting Standards Board¨
Other¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

¨Item 17      ¨

Item 18¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨      YesNo  x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

¨Yes  ¨      No¨

 

 
 

 

TABLE OF CONTENTS

 

INTRODUCTION1
FORWARD-LOOKING STATEMENTS1
PART I2
Item 1.Identity of Directors, Senior Management and Advisers2
Item 2.Offer Statistics and Expected Timetable2
Item 3.Key Information2
Item 4.Information on the Company39
Item 4A. Unresolved Staff Comments71
Item 5.Operating and Financial Review and Prospects6271
Item 6.Directors, Senior Management and Employees9093
Item 7.Major Shareholders and Related Party Transactions102105
Item 8.Financial Information104107
Item 9.The Offer and Listing105108
Item 10.Additional Information106109
Item 11.Quantitative and Qualitative Disclosures About Market Risk115118
Item 12.Description of Securities Other than Equity Securities117119
PART II118120
Item 13.Defaults, Dividend Arrearages and Delinquencies118120
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds118120
Item 15.Controls and Procedures119121
Item 16.Reserved122123
Item 16A. Audit Committee Financial Expert123
Item 16B. Code of Ethics123
Item 16C. Principal Accountant Fees and Services123
Item 16D. Exemptions from the Listing Standards for Audit Committees124
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers124
Item 16F. Change in Registrant’s Certifying Accountant124
Item 16G. Corporate Governance124
Item 16H. Mine Safety Disclosure124
PART III124
Item 17.Financial Statements124
Item 18.Financial Statements124
Item 19.Exhibits124
SIGNATURESItem 19. Exhibits130125

 

i

 

INTRODUCTION

 

In this annual report, except where the context otherwise requires and for purposes of this annual report only:requires:

 

·“Activated users” refers to the number of Renren user accounts that have been registered and activated. Our users may register with us through their mobile phone number or their email address. Following registration by mobile phone number, the mobile phone will receive an SMS verification code, which must be entered to activate the account. Following registration by email address, an email containing an activation link will automatically be sent to the user’s email address, and the user must then activate by clicking the link. Not all registered users activate the accounts they register with us.

 

·“ADSs” refers to our American depositary shares, each of which represents threefifteen Class A ordinary shares. Except as otherwise indicated, all ADS and per ADS data in this annual report give retroactive effect to the change in the number of ordinary shares represented by each ADS from three to fifteen that became effective on February 6, 2017.

 

·“Monthly unique log-in users” refers to the number of different user accounts from which Renren Mobile App orrenren.com has been logged onto during a given month.

 

·The “PRC” or “China” refers to the People’s Republic of China, excluding, for purposes of this annual report only, Hong Kong, Macau and Taiwan.

·“Preferred shares” refers to our previously issued and outstanding series A and series B convertible preferred shares and series C and series D convertible redeemable preferred shares, par value US$0.001 per share.

 

·“Shares” or “ordinary shares” refer, collectively, to following the completion of our initial public offering in May 2011, collectively, our Class A and Class B ordinary shares, par value US$0.001 per share, and, prior to the completion of our initial public offering, our ordinary shares, par value US$0.001 per share; and exceptshare. Except as otherwise indicated, all share and per share data in this annual report givesgive retroactive effect to the ten-for-one share split that became effective on March 25, 2011.

 

·“SNS” refers to social networking services.

 

·“We,” “us,” “our company,” and “our” refer to Renren Inc. and its subsidiaries, its consolidated affiliated entities, and subsidiaries of its consolidated affiliated entities.

 

Our financial statements are expressed in U.S. dollars, which is our reporting currency. Certain Renminbi figures in this annual report are translated into U.S. dollars solely for the reader’s convenience. Unless otherwise noted, all convenience translations from Renminbi to U.S. dollars in this annual report were made at a rate of RMB6.2046RMB 6.5063 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2014.29, 2017. 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, at the rate stated above, or at all.

 

FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements that reflect our current expectations and views of future events. These forward looking statements are made under the “safe-harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements.

 

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. These forward-looking statements include statements relating to:

 

·our goals and strategies;

 

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

·our ability to complete the transaction that we announced on April 30, 2018;

·expected changes in our revenues and certain cost and expense items;

 

·the expected growth of the SNS online games, online advertising and internet financeused automobile businesses in China;

 

·our expectations regarding demand for and market acceptance of our services;

 

·our expectations regarding the retention and strengthening of our relationships with advertisers;

·changes in technology affecting our business, and our company’s responses to these changes;

 

·our investment plans to enhance our user experience, infrastructure and service offerings;

 

·competition in our industry in China;

 

·the performance of our strategic and financial investments; and

 

·relevant government policies and regulations relating to our industry.

 

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, and business strategy. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect, and our actual results could be materially different from our expectations. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should read thoroughly this annual report and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements with these cautionary statements.

 

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

PART I

 

Item 1.Identity of Directors, Senior Management and Advisers

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.Offer Statistics and Expected Timetable

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.Key Information

Item 3. Key Information

 

A.Selected Financial Data

 

Selected Consolidated Financial Data

 

The following selected consolidated statement of operations data for the three years ended December 31, 2012, 20132015, 2016 and 20142017 and the selected consolidated balance sheet data as of December 31, 20132016 and 20142017 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statement of operations data for the years ended December 31, 20102013 and 20112014 and our selected consolidated balance sheet data as of December 31, 2010, 20112013, 2014 and 2012, except for the impact of retrospective adjustments for the deconsolidation of nuomi.com, our social commerce business, which we ceased to control on October 26, 2013, Qingting, our automobile advertisement business, which we ceased to control on October 31, 2013, and 56.com, our online video business, which we ceased to control on December 1, 2014, both of which have been classified as discontinued operations,2015 have been derived from our audited consolidated financial statements not included in this annual report.report, except for the impact of retrospective adjustments for56.com, our online video business, which we ceased to control on December 1, 2014, and our online games business, which we ceased to control on March 31, 2016, all of which have been classified as discontinued operations.

2

The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5—Operating and Financial Review and Prospects” in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Due to the retrospective adjustments, our results of operations for the years ended December 31, 2010, 2011, 20122013 and 20132014 and financial positions as of December 31, 2010, 2011, 20122013 and 20132014 are not directly comparable to the financial data reported in our previously filed annual reports.

 

Our historical results do not necessarily indicate results expected for any future periods.

 

  Year ended December 31, 
  2010  2011  2012  2013  2014 
  (in thousands of US$, except for share, per share and per ADS data) 
Summary Consolidated Statement of Operations Data:                    
Net revenues $75,328  $109,510  $154,827  $147,947  $82,954 
Cost of revenues  16,596   24,536   49,794   54,280   47,972 
Gross profit  58,732   84,974   105,033   93,667   34,982 
Operating expenses(1):                    
Selling and marketing  20,115   37,420   47,926   62,198   38,340 
Research and development  22,949   37,234   71,558   77,956   50,675 
General and administrative  7,400   15,299   33,577   49,275   51,429 
Impairment of intangible assets  739   446      208   714 
Impairment of goodwill              46,864 
Restructuring cost           3,475   6,354 
Total operating expenses  51,203   90,399   153,061   193,112   194,376 
(Loss) income from operations  7,529   (5,425)  (48,028)  (99,445)  (159,394)
Other income     2,338   2,446   1,039   636 
Change in fair value of warrants  (74,364)            
Exchange (loss) gain on dual currency deposit/offshore bank accounts  3,781   7,753   (1,769)  1,476   (2,277)
Interest income  328   9,577   20,029   12,778   12,677 
Realized gain on short-term investments     50,911   4,317   56,022   139,265 
Gain on disposal of cost method investment  40             
Impairment of short-term investments           (2,098)   
Impairment of equity method investments           (23,025)   
Impairment of cost method investment     (79)         
(Loss) income before provision of income tax and earnings (loss) in equity method investments and noncontrolling interest, net of income taxes  (62,686)  65,075   (23,005)  (53,253)  (9,093)
Income tax (expenses) benefit  1,364   (640)  (1,384)  3,980   (6,517)
  Year ended December 31, 
  2010  2011  2012  2013  2014 
  (in thousands of US$, except for share, per share and per ADS data) 
(Loss) income before earnings (loss) in equity method investments and noncontrolling interest, net of income taxes  (61,322)  64,435   (24,389)  (49,273)  (15,610)
Earnings (loss) in equity method investments, net of income taxes     1,320   (7,471)  20,317   49,015 
Income (loss) from continuing operations  (61,322)  65,755   (31,860)  (28,956)  33,405 
Loss from the operations of the discontinued operations, net of income taxes  (4,174)  (24,751)  (43,193)  (40,068)  (30,809)
Gain on disposal of discontinued operations, net of income taxes  1,341             
Gain on deconsolidation of the subsidiaries, net of income taxes           132,665   489 
Gain on disposal of equity method investment, net of income taxes              56,993 
Gain (loss) from discontinued operations, net of income taxes  (2,833)  (24,751)  (43,193)  92,597   26,673 
Net income (loss)  (64,155)  41,004   (75,053)  63,641   60,078 
Net loss attributable to the noncontrolling interest     252   27   92   382 
Net income (loss) from continuing operations attributable to Renren Inc.  (61,322)  66,007   (31,833)  (28,864)  33,787 
Net income (loss) from discontinued operations attributable to Renren Inc.  (2,833)  (24,751)  (43,193)  92,597   26,673 
Net income (loss) attributable to Renren Inc. $(64,155) $41,256  $(75,026) $63,733  $60,460 
Net income (loss) per share:                    
Net income (loss) per share from continuing operations attributable to Renren Inc. shareholders:                    
Basic $(0.30) $0.08  $(0.03) $(0.03) $0.03 
Diluted $(0.30) $0.07  $(0.03) $(0.03) $0.03 
Net income (loss) per share from discontinued operations attributable to Renren Inc. shareholders:                    
Basic $(0.01) $(0.03) $(0.04) $0.08  $0.03 
Diluted $(0.01) $(0.03) $(0.04) $0.08  $0.03 
Net income (loss) per share attributable to Renren Inc. shareholders:                    
Basic $(0.31) $0.05  $(0.07) $0.06  $0.06 
Diluted $(0.31) $0.05  $(0.07) $0.06  $0.06 
Net income (loss) attributable to Renren Inc. shareholders per ADS(2):                    
Basic $(0.94) $0.15  $(0.20) $0.17  $0.17 
Diluted $(0.94) $0.14  $(0.20) $0.17  $0.17 
  Year ended December 31, 
  2010  2011  2012  2013  2014 
  (in thousands of US$, except for share, per share and per ADS data) 
Weighted average number of shares used in calculating net income (loss) per ordinary share from continuing operations attributable to Renren Inc. shareholders:                    
Basic  244,613,530   850,670,583   1,151,659,545   1,118,091,879   1,059,446,436 
Diluted  244,613,530   901,340,381   1,151,659,545   1,118,091,879   1,067,631,709 
Weighted average number of shares used in calculating net income (loss) per ordinary share from discontinued operations attributable to Renren Inc. shareholders:                    
Basic  244,613,530   850,670,583   1,151,659,545   1,118,091,879   1,059,446,436 
Diluted  244,613,530   901,340,381   1,151,659,545   1,130,739,922   1,067,631,709 
  Year ended December 31, 
  2013  2014  2015  2016  2017 
  (in thousands of US$, except for share, per share and per ADS data) 
Summary Consolidated Statement of Operations Data:                    
Net revenues $64,050  $46,668  $41,111  $63,364  $202,102 
Cost of revenues  32,970   34,663   36,720   51,767   184,398 
Gross profit  31,080   12,005   4,391   11,597   17,704 
Operating expenses(1):                    
Selling and marketing  43,166   34,593   30,502   21,276   28,954 
Research and development  54,716   42,697   32,392   20,750   23,678 
General and administrative  38,021   48,764   46,803   42,584   52,949 
Impairment of goodwill     46,864          
Total operating expenses  135,903   172,918   109,697   84,610   105,581 
Loss from operations  104,823   160,913   105,306   73,013   87,877 
Other income (expenses)  2,455   (3,629)  (7,058)  12,888   (1,369)
Interest income  12,769   12,569   2,190   919   2,029 
Interest expense        (2,041)  (12,439)  (10,185)
Realized gain (loss) on short-term investments  56,022   139,265   (98,112)  552   (100)
Realized gain on disposal of long-term investments             37,311
Impairment of short-term investments  (2,098)            
Impairment of long-term investments  (23,025)     (4,258)  (102,307)  (113,073)
Loss before provision of income tax and earnings (loss) in equity method investments and noncontrolling interest, net of income taxes  (58,700)  (12,708)  (214,585)  (173,400)  (173,264)
Income tax benefit (expenses)  3,959   (6,517)  (3,124)  (2,470)  (4,479)
Loss before earnings (loss) in equity method investments and noncontrolling interest, net of income taxes  (54,741)  (19,225)  (217,709)  (175,870)  (177,743)
Earnings (loss) in equity method investments, net of income taxes  20,317   49,015   (5,468)  (18,183)  67,240 
(Loss) income from continuing operations  (34,424)  29,790   (223,177)  (194,053)  (110,503)
(Loss) income from the operations of the discontinued operations, net of income taxes  (34,600)  (27,194)  1,520   391    
Gain on deconsolidation of the subsidiaries, net of income taxes  132,665   489      8,310    
Gain on disposal of equity method investment, net of income taxes     56,993          
Income from discontinued operations, net of income taxes  98,065   30,288   1,520   8,701    
Net income (loss)  63,641   60,078   (221,657)  (185,352)  (110,503)
Net loss attributable to the noncontrolling interest  92   382   1,529      76 
Net (loss) income from continuing operations attributable to Renren Inc.  (34,332)  30,172   (221,648)  (194,053)  (110,427)
Net income from discontinued operations attributable to Renren Inc.  98,065   30,288   1,520   8,701    
Net income (loss) attributable to Renren Inc. $63,733  $60,460  $(220,128) $(185,352) $(110,427)
Net (loss) income per share:                    
Net (loss) income per share from continuing operations attributable to Renren Inc. shareholders:                    
Basic $(0.03) $0.03  $(0.22) $(0.19) $(0.11)
Diluted $(0.03) $0.03  $(0.22) $(0.19) $(0.11)
Net income per share from discontinued operations attributable to Renren Inc. shareholders:                    
Basic $0.09  $0.03  $0.00  $0.01  $ 
Diluted $0.09  $0.03  $0.00  $0.01  $ 

 

(1)          Including share-based compensation expenses as set forth below:

3

 

  Year ended December 31, 
  2010  2011  2012  2013  2014 
  (in thousands of US$) 
Allocation of Share-based Compensation Expenses:                    
Cost of revenues $  $  $  $184  $83 
Selling and marketing  121   414   356   155   201 
Research and development  572   1,628   1,511   889   1,072 
General and administrative  2,105   3,227   7,820   13,306   19,513 
   2,798   5,269   9,687   14,534   20,869 
Expenses from the discontinued operations     254   1,210   1,604   2,735 
Total share-based compensation expenses $2,798  $5,523  $10,897  $16,138  $23,604 

  Year ended December 31, 
  2013  2014  2015  2016  2017 
  (in thousands of US$, except for share, per share and per ADS data) 
Net income (loss) per share attributable to Renren Inc. shareholders:                    
Basic $0.06  $0.06  $(0.22) $(0.18) $(0.11)
Diluted $0.06  $0.06  $(0.22) $(0.18) $(0.11)
Net income (loss) attributable to Renren Inc. shareholders per ADS(2):                    
Basic $0.86  $0.86  $(3.24) $(2.72) $(1.61)
Diluted $0.85  $0.85  $(3.24) $(2.72) $(1.61)
Weighted average number of shares used in calculating net (loss) income per ordinary share from continuing operations attributable to Renren Inc. shareholders:                    
Basic  1,118,091,879   1,059,446,436   1,019,378,556   1,022,664,396   1,028,537,406 
Diluted  1,118,091,879   1,067,631,709   1,019,378,556   1,022,664,396   1,028,537,406 
Weighted average number of shares used in calculating net (loss) income per ordinary share from discontinued operations attributable to Renren Inc. shareholders:                    
Basic  1,118,091,879   1,059,446,436   1,019,378,556   1,022,664,396   1,028,537,406 
Diluted  1,130,739,922   1,067,631,709   1,027,236,202   1,027,176,963   1,028,537,406 

 

(2)          Each ADS represents three Class A ordinary shares.

(1)Including share-based compensation expenses as set forth below:
(2)Each ADS represents 15 Class A ordinary shares.

 

  As of December 31, 
  2010  2011  2012  2013  2014 
  (in thousands of US$) 
Summary Consolidated Balance Sheet Data:                    
Cash and cash equivalents $136,063  $284,643  $207,438  $154,308  $183,025 
Term deposits     702,680   550,000   492,699   494,065 
Short-term investments  62,318   53,393   147,045   301,995   29,384 
Accounts receivable, net  12,815   14,911   18,402   15,958   18,044 
Total current assets  437,519   1,116,970   952,734   1,122,587   763,203 
Total assets  456,474   1,278,008   1,201,813   1,385,686   1,149,153 
Total current liabilities  25,391   60,487   90,119   115,262   46,044 
Total liabilities  25,907   67,463   96,683   115,418   46,774 
Series C convertible redeemable preferred shares  28,520             
Series D convertible redeemable preferred shares  571,439             
Total equity (deficit) $(169,392) $1,210,545  $1,105,130  $1,270,268  $1,102,379 
  Year ended December 31, 
  2013  2014  2015  2016  2017 
  (in thousands of US$) 
                
Allocation of Share-based Compensation Expenses:                    
Selling and marketing  138   193   243   770   598 
Research and development  404   916   781   1,363   1,092 
General and administrative  9,608   18,983   25,481   21,411   26,326 
   10,150   20,092   26,505   23,544   28,016 
Expenses from the discontinued operations  5,988   3,512   1,736   

   

 
Total share-based compensation expenses $16,138  $23,604  $28,241  $23,544  $28,016 

  As of December 31, 
  2013  2014  2015  2016  2017 
  (in thousands of US$) 
Summary Consolidated Balance Sheet Data:                    
Cash and cash equivalents $149,511  $166,652  $56,226  $79,370  $128,595 
Term deposits  492,699   494,065          
Restricted cash        122,316   30,390   47,253 
Short-term investments  301,995   29,384   2,619   410    
Accounts receivable, net  15,865   11,599   4,044   4,702   6,260 
Financing receivable, net     6,285   144,457   301,773   125,478 
Total current assets  1,122,587   763,203   403,938   450,813   468,005 
Total assets  1,385,686   1,149,153   1,267,833   1,176,844   1,194,164 
Total current liabilities  115,262   46,044   208,751   270,223   370,547 
Total liabilities  115,418   46,774   338,445   438,378   485,418 
Total equity $1,270,268  $1,102,379  $929,388  $738,466  $674,804 

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

4

D.Risk Factors

 

Risks Related to Our Business and Industry

We have a history of losses from operations, and our new business initiatives may not be successful.

We have made significant changes to our business scope in recent years. The portfolio of services we offer has evolved from SNS, historically the core of our company’s business, to include a financing business, a used automobile business and other new initiatives. We have also disposed of some of our existing businesses in order to focus on new business opportunities, and we are planning on disposing of Beijing Zhenzhong Interactive Information Technology Co., Ltd., which is the wholly owned subsidiary of one of our consolidated affiliated entities and operates our ZenZone advertising agency business. In the year ended December 31, 2017, 59.8% of our net revenues were derived from our used automobile sales business, and 12.5% of our net revenues were derived from our business of providing credit financing to used automobile dealers. The profitability of our new initiatives has yet to be proven. We had net revenues of US$41.1 million, US$63.4 million and US$202.1 million in 2015, 2016 and 2017, respectively, and losses from operations of US$105.3 million, US$73.0 million and US$87.9 million, respectively, over the same period. Expansion into new businesses may present operating and marketing challenges that are different from those that we currently encounter, and we cannot assure you that our new business initiatives will be successful enough to justify the time, effort and resources that we devote to them. If our used automobile business and our financing business do not continue to grow as rapidly as we hope or if we cannot control costs effectively as the business grows, we may not be able to achieve profitability.

If we are deemed an “investment company” under the Investment Company Act of 1940, it would adversely affect the price of our ADSs and ordinary shares and could have a material adverse effect on our business.

As part of our business transition, we previously implemented a strategy to acquire or invest in complementary businesses in order to gain access to or develop new technologies, know-how or services. For example, we invested more than US$240 million in Social Finance Inc., or SoFi, a privately held company that operates a social finance business in the United States similar to the business that we have been establishing in China. As of December 31, 2017, our balance sheet included US$565.4 million in long-term investments in some 57 portfolio companies and investment funds. We may be deemed to be an investment company within the meaning of the Investment Company Act based on the value of the investment securities we hold and on other factors relevant to the definition of an investment company under the Investment Company Act. See “Item 4A. Unresolved Staff Comments.”

On April 30, 2018, we announced that Oak Pacific Investment, or OPI, a wholly-owned subsidiary of Renren Inc., would be conducting a private placement. In addition to our advertising agency business, OPI holds our shares in 44 portfolio companies and our interests in 6 investment funds. These portfolio companies and investment funds have an aggregate book value of US$530.6 million as of December 31, 2017, and represent the great majority of our long-term investments in terms of both book value and fair market value. After the completion of the private placement, Renren would not longer hold any shares of OPI. We refer to this transaction as the Transaction. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” The disposition of OPI is scheduled to occur on June 21, 2018.

If the Transaction is not completed as planned and we are deemed to be an investment company within the meaning of the Investment Company Act, we would become unable to comply with our reporting obligations as a public company in the United States, which would lead to our being delisted from the New York Stock Exchange. Delisting would have a material adverse effect on the liquidity and value of our ADSs and Class A ordinary shares. We would also be unable to raise capital through the sale of securities in the United States or to conduct business in the United States. In addition, we may be subject to SEC enforcement action or purported class action lawsuits for alleged violations of U.S. securities laws. Defending ourselves against any such enforcement action or lawsuits would require significant attention from our management and divert resources from our existing businesses and could have a material adverse effect on our results of operations and financial condition.

5

The Transaction will leave us with less cash and fewer investment assets that can be readily converted into cash, which may restrict our growth in the future.

As we announced on April 30, 2018, we will pay a cash dividend in an amount in the aggregate from US$nil up to approximately US$131 million in connection with the Transaction. In addition, we will dispose of a wholly-owned subsidiary, OPI, which holds the great majority of our long-term investments in terms of both book value and fair market value. Once the Transaction has closed, we no longer own OPI and we have paid the cash dividend to our shareholders, we will have less cash on hand and fewer investment assets that can be readily converted into cash, which will restrict our options if we require more cash in the future. If we are unable to raise cash as required from new offerings of equity or debt or from bank loans or other sources, we may have insufficient cash to fund or expand our business, and our future growth, our results of operations and our financial position may be materially and adversely affected.

U.S. Holders may suffer adverse tax consequences as a result of the Transaction.

We believe we were classified as a passive foreign investment corporation, or PFIC, for U.S. federal income tax purposes for each of the past seven taxable years ending on December 31 and we expect, but cannot guarantee, that we will be treated as a PFIC for the current taxable year. As a result, U.S. Holders (as defined in “Item 10.E—Additional Information—Taxation—United States Federal Income Tax Considerations—General”) who are shareholders as of the record date of the cash dividend payable pursuant to the Transaction may recognize ordinary income from the cash dividend and could be subject to an additional penalizing tax on certain U.S. federal income taxes deemed deferred to the extent the cash dividend is treated as an “excess distribution” under the PFIC rules. The additional tax is generally equivalent to an interest charge on U.S. federal income taxes that are deemed due during the period the U.S. Holder owned our ADSs or ordinary shares, computed by assuming that the excess distribution was taxed in equal portions at the highest applicable tax rate throughout the holder’s period of ownership. Shareholders who have made a timely “mark-to-market” election would not be subject to this additional tax with respect to the cash dividend. U.S. Holders may also be deemed to recognize as ordinary income subject to the “excess distribution” rules a proportionate share of any gain deemed to be realized by Renren Inc. as a result of the private placement of shares by Oak Pacific Investment, or OPI, a wholly-owned subsidiary of Renren Inc. that we expect to be treated as a PFIC, under special rules applicable to “indirect dispositions” of PFICs if a U.S. Holder’s (direct or indirect) interest in OPI is reduced as a result of the Transaction.

If, contrary to our current expectation, we are not treated as a PFIC for the current taxable year, any ADSs or ordinary shares acquired during the year would not be considered PFIC stock and therefore cash received with respect to such ADSs or ordinary shares would not be subject to the PFIC “excess distribution” regime described above and may be eligible for the reduced rate for qualified dividend income and any gain resulting from an “indirect disposition” of our PFIC subsidiaries, such as OPI, would generally not be required to be recognized with respect to such ADSs or ordinary shares.

For further information concerning the PFIC rules and the U.S. federal income tax consequences of dividends paid by us and direct or indirect dispositions of PFICs, see “Item 10.E—Additional Information—Taxation—United States Federal Income Tax Considerations.” For further information concerning the Transaction, see “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” Holders of ours ADSs or ordinary shares are urged to consult their tax advisors as to the tax consequences of the Transaction to them, including as a result of the application of the PFIC rules.

Our dealerships conduct many aspects of our used automotive sales business, and we face risks associated with these relationships, their employees and other personnel.

We rely on our dealerships to conduct significant aspects of our used automotive sales business. As of March 31, 2018, we had 14 dealerships across China. Our dealerships and their employees directly interact with consumers, other dealerships and other platform participants, and their performance directly affects our reputation and brand image. If our service personnel or those of our dealerships fail to satisfy the needs of consumers, respond effectively to their complaints, or provide services to their satisfaction, our reputation and the loyalty of our customers could be negatively affected. As a result, we may lose customers or experience a decrease in our business volume, which could have a material adverse effect on our business, financial condition and results of operations. We do not directly supervise the services provided by our franchisee partners and may not be able to successfully maintain and improve the quality of their services. Our dealerships may also fail to implement sufficient control over their sales, maintenance and other personnel. As a result, we may suffer financial losses, incur liabilities and suffer reputational damages. In addition, while violation of laws and regulations by dealerships had not led to any material claims against us in the past, we cannot assure you that such claim will not arise in the future which may harm our brand or reputation or have other adverse impacts.

6

Further, suspension or termination of a dealership’s services in a particular geographic area may cause interruption to or failure in our services in the corresponding geographic area. A dealership may suspend or terminate its services voluntarily or involuntarily due to various reasons, including disagreement or dispute with us, failure to make a profit, failure to maintain requisite approvals, licenses or permits or to comply with other governmental regulations, and events beyond our or its control, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. Due to the intense competition in our industry, our existing dealerships may also choose to discontinue their cooperation with us and work with our competitors instead. We may not be able to promptly replace our dealerships or find alternative ways serve their geographic areas in a timely, reliable and cost-effective manner, or at all. As a result of any service disruptions associated with our dealerships, customer satisfaction, brand, reputation, operations and financial performance may be materially and adversely affected.

Other dealers with which our dealerships collaborate could take actions that could harm our business and that of our dealerships.

For our used automotive sales business, pursuant to our arrangements with our dealerships, we may permit the dealerships to develop and operate other dealership locations in their defined geographic areas. Accordingly, certain dealerships may elect to cooperate with third parties to develop and operate dealerships in the geographic area covered by the relevant agreement. Such agreements contractually obligate our dealerships to operate in accordance with specified standards, including synchronization of their operations on our platform and integration in our system. As a result, the ultimate success and quality of any additional location rests with our dealership. If these additional dealerships do not successfully operate in a manner consistent with required standards, their performance, the performance of our dealerships and ultimately, our performance could be adversely affected and our brand image and reputation may be harmed, which could materially and adversely affect our business and operating results.

For our used automotive sales business, our success depends upon the continued contributions of our salespeople.

Our salespeople are the driving force behind our success. We believe that one of the things that sets us apart is a culture centered on valuing all salespeople. Our failure to maintain this culture or to continue recruiting, developing and retaining the salespeople that drive our success could have a material adverse effect on our business, sales and results of operations. We also face risks related to the loyalty of our sales people. Referrals of leads by salespeople to friends or others in side deals is common phenomenon in our industry in China, and if our sales people sought to profit themselves personally at the expense of our company, this could hurt our business and results of operations. Our ability to recruit salespeople while controlling related costs is subject to numerous external and internal factors, including unemployment levels, prevailing wage rates, our growth plans, changes in employment legislation and competition for qualified employees in the industry and regions in which we operate and for qualified service technicians in particular. Our ability to recruit salespeople while controlling related costs is also subject to our ability to maintain positive associate relations. If we are unable to do so, or if, despite our efforts, we become subject to successful unionization efforts, it could increase our costs, limit our ability to respond to competitive threats and have a material adverse effect on our business, sales and results of operations.

The success of our used automotive sales business also depends upon the continued contributions of our store, region and corporate management teams. Consequently, the loss of the services of any of key salespeople could have a material adverse effect on our business, sales and results of operations. In addition, an inability to build our management bench strength to support store growth could have a material adverse effect on our business, sales and results of operations.

The success of our used automotive sales business depends on our ability to attract prospective car buyers.

The growth of our used automotive sales business depends on our ability to attract prospective car buyers. We primarily purchase car models based on our insights as to car buyers, feedback from registered dealers and market analysis as to perception and demand for such models, will appeal to car buyers in lower-tier cities. We price cars based on our massive amount of automotive transaction data associated with providing automotive financing solutions as well as data from facilitating other automotive transactions such as automobile trading between dealers to efficiently facilitate their sale. We have limited experience in the purchase of cars for sale to dealers, and there is no assurance that we will be able to do so effectively. Demand for the type of cars that we purchase can change significantly between the time the cars are purchased and the date of sale. Demand may be affected by new car launches, changes in the pricing of such cars, defects, changes in consumer preference and other factors, and dealers may not purchase them in the quantities that we expect. We may also need to adopt more aggressive pricing strategies for these cars than originally anticipated. We face inventory risk in connection with the car purchased, including the risk of inventory obsolescence, a decline in values, and significant inventory write-downs or write-offs. If we were to adopt more aggressive pricing strategies, our profit margin may be negatively affected as well. We may also face increasing costs associated with the storage of these cars. Any of the above may materially and adversely affect our financial condition and results of operations.

7

In order to expand our base of car buyers, we must continue to invest significant resources in the development of new solutions and services and build our relationships with financial institutions, auto dealers and other platform participants. Our ability to successfully launch, operate and expand our solutions and services and to improve user experience to attract prospective car buyers depends on many factors, including our ability to anticipate and effectively respond to changing interests and preferences of car buyers, anticipate and respond to changes in the competitive landscape, and develop and offer solutions and services that address the needs of car buyers on our platform. If our efforts in these regards are unsuccessful, our base of car buyers may not increase at the rate we anticipate, and it may even decrease. As a result, our business, prospects, financial condition and results of operations may be materially and adversely affected. In addition, in order to attract prospective car buyers, we must also devote significant resources to enhancing the experience of car buyers on our platform on an ongoing basis. We must enhance the functionality and ensure the reliability of our platform. If we fail to provide superior customer service or address complaints of car buyers on our platform in a timely manner, we may fail to attract prospective car buyers as to our solutions and services, the number of financing transactions we facilitate may decline. In addition, the models offered by our dealerships may not be popular among prospective car buyers, which could materially and adversely affect our business, results of operations and financial condition.

In the meantime, we also seek to maintain our relationships with existing car buyers and cross-sell new solutions and services, such as insurance and wealth management products. However, there can be no assurance that we will be able to maintain or deepen such relationships.

Automotive retailing is highly competitive. Failure to develop and execute strategies to grow our business could adversely affect our business, sales and results of operations.

Automotive retailing is a highly competitive and highly fragmented industry. Our competition includes publicly and privately owned used and new car dealers and online and mobile sales platforms, as well as millions of private individuals. Competitors buy and sell the same or similar makes of vehicles that we offer in the same or similar markets at competitive prices. Some of our competitors have announced plans for rapid expansion, including into markets with our locations, and some of them have begun to execute those plans. The online availability of used vehicle information from other sources, including pricing information, could make it more difficult for us to differentiate our customer offering from competitors’ offerings. Our competitive standing may also be affected by companies, including search engines and online classified sites, that are not direct competitors but that may direct online traffic to the websites of competing automotive retailers. The increasing use of the internet to facilitate consumers’ sales or trade-ins of their current vehicles could have a material adverse effect on our ability to source vehicles. If we fail to respond effectively to competitive pressures or to changes in the used vehicle marketplace, it could have a material adverse effect on our business, sales and results of operations.

The automotive retail industry in general and our used automotive sales business in particular are sensitive to economic conditions. These conditions could adversely affect our business, sales, results of operations and financial condition.

We are subject to national and regional economic conditions. These conditions include, but are not limited to, recession, inflation, interest rates, unemployment levels, the state of the PRC housing market, gasoline prices, consumer credit availability, consumer credit delinquency and loss rates, personal discretionary spending levels, and consumer sentiment about the economy in general. These conditions and the economy in general could be affected by significant national or international events such as acts of terrorism. When these economic conditions worsen or stagnate, it can have a material adverse effect on consumer demand for vehicles generally, on demand from particular consumer categories or demand for particular vehicle types. It can also negatively impact availability of credit to finance vehicle purchases for all or certain categories of consumers. This could result in lower sales, decreased margins on units sold, and decreased profits for our used automotive sales business. Worsening or stagnating economic conditions can also have a material adverse effect on the supply of late-model used vehicles, as automotive manufacturers produce fewer new vehicles and consumers retain their current vehicles for longer periods of time. This could result in increased costs to acquire used vehicle inventory and decreased margins on units sold. Any significant change or deterioration in economic conditions could have a material adverse effect on our business, sales, results of operations and financial condition.

Our used automotive sales business is sensitive to changes in the prices of used vehicles.

Any significant changes in retail prices for used vehicles could have a material adverse effect on the sales and results of operations of our used automotive sales business. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to our customers than buying a used vehicle, which could have a material adverse effect on sales and results of operations and could result in decreased used margins. Manufacturer incentives could contribute to narrowing this price gap. In addition, any significant changes in wholesale prices for used vehicles could have a material adverse effect on our results of operations by reducing wholesale margins.

8

Our used automotive sales business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.

Adverse conditions affecting one or more automotive manufacturers could have a material adverse effect on the sales and results of operations of our used automotive sales business and could impact the supply of vehicles, including the supply of late-model used vehicles. Manufacturer recalls are a common occurrence that have accelerated in frequency and scope in recent years. Because we do not have manufacturer authorization to complete recall-related repairs, some vehicles we sell may have unrepaired safety recalls. Such recalls, and our lack of authorization to make recall-related repairs, could adversely affect used vehicle sales or valuations, could cause us to temporarily remove vehicles from inventory, could force us to incur increased costs and could expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, sales and results of operations.

Our used automotive sales business is dependent upon access to vehicle inventory. Obstacles to acquiring inventory, whether because of supply, competition, or other factors, or a failure to expeditiously liquidate that inventory could have a material adverse effect on our used automotive sales business, sales and results of operations.

A reduction in the availability of or access to sources of inventory could have a material adverse effect on our business, sales and results of operations. Although the supply of late-model used vehicles has been increasing, there can be no assurance that this trend will continue or that it will benefit us.

As our used automotive sales business is dependent on our appraisal of the value of inventory we purchase, if we fail to adjust appraisal offers to stay in line with broader market trade-in offer trends, or fail to recognize those trends, or if our appraisal process is not accurate, it could adversely affect our ability to acquire inventory. It could also force us to purchase a greater percentage of our inventory from third-party auctions, which is generally less profitable for us. Our appraisal process could also be affected by competition, both from used and new car dealers directly and through third-party websites driving appraisal traffic to those dealers. Our ability to source vehicles from third-party auctions could be affected by an increase in the number of closed auctions that are open only to new car dealers who have franchise relationships with automotive manufacturers.

We also source a portion of our vehicles through our crowd-sourcing strategy, in which we rely on third-party partners, such as individuals or small dealerships to acquire used automobiles. We may be unable to maintain relationships with these third parties or may experience issues with the vehicles they provide to us, each of which could harm our business, sales and results of operations.

Used vehicle inventory is subject to depreciation risk. Accordingly, if we develop excess inventory, the inability to liquidate such inventory at prices that allow us to meet margin targets or to recover our costs could have a material adverse effect on our results of operations.

We depend on third parties for supplies of spare parts and accessories

Our used automotive sales business depends on auto manufacturers and independent local third-party suppliers for certain spare parts and accessories we sell. The success of our value-added services is dependent on these suppliers’ abilities to anticipate changes in consumer tastes, preferences and requirements and deliver to us in sufficient quantities and on a timely basis the desirable, high-quality and price competitive mix of accessories. Our suppliers’ products may fail to meet our customers’ expectations due to changes of consumer preferences. We may be unable to maintain a sufficient stock. Our suppliers may increase their prices due to increasing demand for their products from other dealership stores. If we cannot or opt not to procure spare parts and accessories from such third-party suppliers, our profit margin for after-sales services might be adversely affected. Moreover, the spare parts supplied by our suppliers may fail to function properly and as a result, our customers may make claims against us, in which case we may be required to make repairs or pay damages. In the event of any of the above, our margins of these products may be affected, which in turn could adversely affect our results of operations and financial condition.

If our financing services do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

Our financing business currently focuses on credit financing of used automobile dealers. Funds for this business are provided by our issuance of asset-backed securities collateralized by that credit financing and by peer-to-peer platforms. Many elements of our financing business are relatively unproven, and the internet finance market in China is relatively new, rapidly developing and subject to significant challenges. Although we intend to devote significant resources to expanding our financing business and to develop and offer more innovative products to our clients, we have limited experience with this business model and cannot assure you of its future success. If we fail to address the needs of financing customers, adapt to rapidly evolving market trends or continue to offer innovative products and services, there may not be significant market demand for our financing products and services. In addition, our financing business will continue to encounter risks and difficulties that early stage businesses frequently experience, including the potential failure to cost-effectively expand the size of our customer base, maintain adequate management of risks and expenses, implement our customer development strategies and adapt and modify them as needed, develop and maintain our competitive advantages and anticipate and adapt to changing conditions in China’s internet financing industry resulting from mergers and acquisitions involving our competitors or other significant changes in economic conditions, competitive landscape and market dynamics. We have not yet proven the essential elements of profitable operations in our financing business.

9

Our financing services could fail to attain sufficient market acceptance for many reasons, including but not limited to:

·failure to predict market demand accurately and supply loan products that meet this demand in a timely fashion;

·failure to properly price new loan products;

·defects, errors or failures on our platform;

·negative publicity about our loan products or our platform’s performance or effectiveness;

·views taken by regulatory authorities that new products or platform changes do not comply with PRC laws, rules or regulations applicable to us; and

·the introduction or anticipated introduction of competing products by our competitors.

If our financing services do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.

We have limited experience in operating a finance business and assessing credit risk. Failure to assess and manage our credit risks or a significant deterioration in the credit quality of our loan portfolio may have a material adverse effect on our business, results of operations and financial condition.

Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations on agreed upon terms. The degree of credit risk will vary based on many factors including the size of the loan, the credit characteristics of the borrower, the contractual terms in the loan documents and the availability and quality of collateral. Credit risk management is based on analyzing the creditworthiness of the borrower, the adequacy of underlying collateral given current events and conditions and the existence and strength of any guarantor support. We have limited experience in designing and operating credit risk control systems, and we may be unable to properly analyze and mitigate the credit risks inherent in our business.

The overall credit quality of our loan portfolio is impacted by factors outside of our control, such as the performance of the Chinese economy. In addition, our credit risk is concentrated heavily in a single small segment of the economy, used automobile dealerships, which may do poorly even as the overall economy is doing well. Economic trends that negatively affect the Chinese economy as a whole or used automobile dealerships in particular could result in deterioration in credit quality of our loan portfolio. A deterioration in the credit quality of our loan portfolio may require us to increase our provision of financing receivable, which increases our cost of revenues and decreases our gross profit.

Our loans to used automobile dealerships are secured by the used automobiles which they hold as inventory. However, foreclosing on collateral and attempting to liquidate it would cause us to incur additional expenses, and the value of the collateral may be impaired by the same economic factors that caused the borrowers to default on their loans, such as reduced demand for used automobiles. In addition, there is constant turnover in the inventory of our borrowers, and we must ensure that the quality of the collateral does not deteriorate. We cannot assure you that the collateral for our loans will be sufficient to significantly mitigate any losses we may suffer from defaulted loans.

We face significant competition in almost every aspect of our business. If we fail to compete effectively, we may lose market share and our business, prospects and results of operations may be materially and adversely affected.

We face significant competition in almost every aspect of our business. In our social networking business that provides multiple services, including live streaming service and other value-added services, we compete with companies and services such as Tencent’s WeChat, QQ mobile, and Q-zone, SINA’s Weibo, Momo, YY, Huajiao and Douyu. Competition with these services in the mobile landscape is as intense as with their PC counterparts, if not more so. In our financing business, we primarily compete with the companies of providing financing services to individual consumers and dealerships in automobile financing services. In relation to our used automobile sales business, our competitors primarily include the publicly and privately owned used and new car dealers, online and mobile sales platforms, as well as millions of private individuals.

10

Some of our competitors have significantly larger user bases and more established brand names and may be able to effectively leverage their user bases and brand names to provide integrated internet communication, online games, social networking and other products and services available over the internet via mobile devices and personal computers and increase their market share. We may also face competition from global social networking service providers that seek to enter the China market. Some of our competitors may have longer operating histories and significantly greater financial, technical and marketing resources than we do, and so in turn may have an advantage in attracting and retaining users. If we are not able to effectively compete, our user base and level of user engagement may decrease, which may reduce the number of paying users that purchase our internet value-added services, or IVAS. Similarly, we may be required to spend additional resources to further increase our brand recognition and promote our services in order to compete effectively, especially with respect to marketing other new services to capture market share, which could adversely affect our profitability.

Furthermore, failure of our new financing business to achieve or maintain more widespread market acceptance against our competitors could harm our business and results of operations. Some of our competitors may enjoy greater name recognition or have access to lower cost of funds than we do, particularly commercial banks in China. If we are not able to develop services that are attractive to our target customers and compete effectively, we may not be able to grow our customer base or maintain our margins, which could adversely affect our financial results.

 

If we fail to continually anticipate user preferences and provide attractive services and applications, we may not be able to increase the size and level of engagement of our SNS user base.

 

The success of our business depends in part on our ability to grow our SNS user base and keep our users highly engaged. In order to attract and retain users, we must continue to innovate and introduce services and applications that our users find enjoyable. If we fail to anticipate and meet the needs of our users, the size and engagement level of our user base may decrease.decrease, as it has done in the last several years. Furthermore, because of the viral nature of social networking, users may switch to our competitors’ services more quickly than in other online sectors, despite the fact that it would be time-consuming for them to restart the process of establishing connections with friends and post photos and other content via one of our competitor’s services.

We suffered a significant drop in monthly unique log-in users in 2013, and then in average amount of time that unique log-in users spent on our platform in 2014. Our monthly unique log-in users decreased from approximately 5641 million in December 20122015 to approximately 4535 million in December 20132016 and then increasedfurther to approximately 4632 million as ofin December 2014.2017. The average amount of time that unique log-in users spent on our platform increaseddecreased from approximately 7.61.8 hours in 20122015 to approximately 7.71.4 hours in 20132016 and then decreasedincreased to approximately 4.01.6 hours in 2014. A decrease2017. Decreases in the number of our users or the amount of time they spend on our platform would render our services less attractive to users and advertisers and may decrease our revenues, which may have a material and adverse effect on our business, financial condition and results of operations.

 

In addition, since a substantial number of users of our new services and products over the years had already been users ofrenren.comand Renren Mobile App, the two components of our SNS platform, we believe that the new services we may pursue will depend upon our ability to maintain and increase the user base for our SNS platform, the level of user engagement on our platform and the stickiness of our platform. If we are unable to maintain or increase the size and level of engagement of our user base for our SNS platform, the performance of our new services may be materially and adversely affected.

 

We face significant competition in almost every aspect of our business. If we fail to compete effectively, we may lose market share and our business, prospects and results of operations may be materially and adversely affected.

We face significant competition in almost every aspect of our business. In our social networking business, we compete with companies and services such as Tencent’s WeChat, QQ mobile, and Q-zone, SINA’s Weibo, and Momo. In our online games business, we primarily compete with companies such as Tencent, Qihu360 and Kunlun. Competition with these services in the mobile landscape is as intense as with their PC counterparts, if not more so. We also compete for online advertising revenues with other websites that sell online advertising services in China.

Some of our competitors have significantly larger user bases and more established brand names and may be able to effectively leverage their user bases and brand names to provide integrated internet communication, online games, social networking and other products and services available over the internet via mobile devices and personal computers and increase their respective market shares. We may also face potential competition from global social networking service providers that seek to enter the China market. Some of our competitors may have longer operating histories and significantly greater financial, technical and marketing resources than we do, and in turn may have an advantage in attracting and retaining users and advertisers. If we are not able to effectively compete, our user base and level of user engagement may decrease, which could make us less attractive to advertisers and materially and adversely affect our ability to maintain and increase revenues from online advertising, and which may also reduce the number of paying users that purchase our internet value-added services, or IVAS. Similarly, we may be required to spend additional resources to further increase our brand recognition and promote our services in order to compete effectively, especially with respect to marketing other new services to capture market share, which could adversely affect our profitability.

In addition, we compete for advertising budgets with traditional advertising media in China, such as television and radio stations, newspapers and magazines, and major out-of-home media. If online advertising as a new marketing channel does not become more widely accepted in China, we may experience difficulties in competing with traditional advertising media.

We started our internet finance business in 2014 and we primarily compete with established banks and lending companies in China such as Qufenqi.com and Fenqile.com in online consumer financing services. Failure of our internet finance business to achieve or maintain more widespread market acceptance against our competitors could harm our business and results of operations. If we are not able to develop services that attracted to our target customers and compete effectively, we may not be able to grow our user base and may be required to incur significant expenses for user acquisition, which could adversely affect our financial results.

We may not be able to successfully expand and monetize our mobile internet services.

An important element of our strategy is to continue to expand our mobile internet services. We have made significant efforts in recent years to develop new mobile applications to capture a greater share of the growing number of users that access social networking, online games and other internet services through smart phones and other mobile devices. The mobile percentage of our monthly total user time spent onrenren.com was 69.1%, 79.2% and 87.9% in December 2012, 2013 and 2014, respectively, and the number of our monthly unique mobile users who accessed Renren SNS decreased from 17.8 million in December 2012 to 14.7 million in December 2013 before subsequently increasing to 20.5 million in December 2014. If we are unable to attract and retain a substantial number of mobile device users, or if we are slower than our competitors in developing attractive services that are adapted for such devices, we may fail to capture a significant share of an increasingly important portion of the market for our services or lose existing users, either of which may have a material adverse effect on our business, financial condition and results of operations.

Furthermore, aside from mobile games, we are in the midst of experimenting with multiple early monetization strategies for our mobile internet services. Advertisers currently spend significantly less on advertising on mobile devices as compared to advertising on personal computers, and we cannot assure you that advertisers will in the future increase their spending on advertising on mobile devices. As our users continue to allocate more time on our mobile services instead of our traditional PC services, mobile monetization will become increasingly important as a path to profitability. Accordingly, if we are unable to successfully implement monetization strategies for our mobile users and if our users continue to increasingly access our services through mobile devices as a substitute for access through personal computers, our revenue and financial results may be negatively affected.

We may not be able to further grow our online games business.

We rely on our online games business for a substantial percentage of our revenues. Net revenues from our online games business accounted for 57.8%, 57.8% and 44.7% of our total net revenues in 2012, 2013 and 2014, respectively. Going forward, we expect that revenues from the online games business will continue to be a significant percentage of our total net revenues. Reliance on the online games business subjects us to a number of risks:

·Continuing to source new games that appeal to our game players is an important part of our business expansion plans. Our ability to source and distribute successful new games further depends on our ability to anticipate and effectively respond to changing game player interests and preferences and technological advances in a timely manner, to attract, retain and motivate talented game development personnel and to execute effectively our game distribution plans. There can be no assurance that we will be successful in each of these areas.

·We are dependent on hit titles as a large percentage of our online game revenues. For example, in 2012, 2013 and 2014 our top five games contributed 68.4%, 69.3% and 68.4% of our online games revenues, respectively, which comprised 35.1%, 37.6% and 30.6% of our total revenues for 2012, 2013 and 2014, respectively. Online games have a finite commercial lifespan and tend to become less popular after a few years. Furthermore, we are shifting most of our focus onto mobile games, and mobile games typically have shorter life spans than PC games. If our hit titles start to decrease in popularity and we do not have follow-up hit titles in our pipeline, our revenues may be negatively affected.

·While we have been operating in the online games business since 2007, including PC-only plus cross-platform PC and mobile games, our shift to focus primarily on the operation and distribution of mobile and cross-platform games and new gaming genres puts us in a very competitive sector that involves many inherent risks. There can be no assurance that our strategy of providing mobile games and cross-platform games will be successful.

·Our users download our mobile games from direct-to-consumer digital storefronts such as Apple’s App Store and Google’s Play Store. The terms and conditions between the store operators and the application developers governing the promotion, distribution and operation of applications, including mobile games, are normally standardized and non-negotiable. If the store operators believe the terms and conditions have been violated, they have the right to suspend or terminate a developer’s account. In addition, if we are unable to maintain a good relationship with each platform, or if our mobile games were unavailable on these platforms for any prolonged period of time, our business may suffer. For example, our games were temporarily removed from Apple’s Appstore in 2012. After communicating with Apple to address their inquiries, these games were restored. We have since enhanced our internal processes to ensure inquiries or concerns from store operators are responded to quickly and properly.

·If we are unable to successfully capture and retain a significant portion of the growing number of Android users that accesses online games, we may lose users, which may have a material adverse effect on our business.

·We have shifted from developing games in-house to licensing games from third-party design studios, reducing the size of our gaming team in the process. We depend upon our licensors to provide technical support necessary for the operation of the licensed games. We must maintain good relationships with our licensors to continue to source new games with reasonable revenue-sharing terms and ensure the continued smooth operation of our licensed games. We may incur additional costs and may face significant risks when we license our games outside of China and seek to expand our operations to select markets, such as the United States and Asia. If we fail to successfully manage these risks, our growth and business prospects could be materially and adversely affected.

Our strategy to acquire or invest in complementary businesses and establish strategic alliances involves significant risk and uncertainty that may prevent us from achieving our objectives and harm our financial condition and results of operations.

As part of our plan to continue to grow our user base and improve our user experience, from time to time we consider opportunities to acquire, invest in or partner with other companies that bring us complementary or new users, technologies or services. Strategic acquisitions and investments may subject us to uncertainties and risks, including:

·costs and difficulties associated with integrating acquired businesses and managing a larger business;

·potentially significant goodwill impairment charges;

·potential ongoing financial obligations and unforeseen or hidden liabilities;

·failure to achieve our intended objectives, benefits or revenue-enhancing opportunities;
·high acquisition and financing costs;

·potential claims or litigation regarding our board’s exercise of its duty of care and other duties required under applicable law in connection with any of our significant acquisitions or investments approved by the board; and

·diversion of our resources and management attention.

Failure to address these uncertainties and risks could have a material adverse effect on our liquidity, financial condition and results of operations. In addition, we may from time to time attempt to achieve our objectives of enhancing our user experience, broadening the appeal of our platform and increasing the number of our users by establishing strategic alliances with various third parties, including through our Renren Open Platform program. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business and results of operations.

The business opportunities for social networking, online games, internet finance and other internet services in China are continually evolving and may not grow as quickly as expected, in ways that are consistent with other markets, or at all.

 

Our business and prospects depend on the continual development of emerging internet business models in China, including those for social networking online games and internet finance. Our main internet services have distinct business models which may differ from models for these businesses in other markets, such as the United States, and that are in varying stages of development and monetization. We cannot assure you that the industries in which we operate in China will continue to grow as rapidly as they have in the past, in ways that are consistent with other markets, or at all. With the development of technology, new internet services may emerge which may render our existing service offerings less attractive to users. The growth and development of the social networking online game and internet finance industries is affected by numerous factors, such as the macroeconomic environment, regulatory changes, technological innovations, development of internet and internet-based services, users’ general online experience, cultural influences and changes in tastes and preferences. If these internet industries do not grow as quickly as expected or at all, or if we fail to benefit from such growth by successfully implementing our business strategies, our business and prospects may be adversely affected.

 

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If we fail to keep up with the technological developments and users’ changing requirements, our business and prospects may be materially and adversely affected.

 

The social networking online game and internet finance industries are subject to rapid and continual changes in technology, user preferences, such as the movement of our user base from personal computers to mobile devices, the nature of services offered and business models. Our success will depend on our ability to keep up with the changes in technology and user behavior resulting from technological developments. If we do not adapt our services to such changes in an effective and timely manner, we may suffer from decreased user traffic, which may result in a reduced number of advertisers for our online advertising services or a decrease in their advertising spending.traffic. In addition, if we adopt new technologies which turn out to be less proven, and user experience suffers as a result, our users may use our platform less often. Furthermore, changes in technologies may require substantial capital expenditures in product development as well as in modification of products, services or infrastructure. We may not successfully execute our business strategies due to a variety of reasons such as technical hurdles, misunderstanding or erroneous prediction of market demand or lack of necessary resources. Failure to keep up with technological developments may result in our platform being less attractive, which in turn may materially and adversely affect our business and prospects.

 

The laws and regulations governing the internet finance businessfinancing services in China are developing and evolving and subject to changes.

Due If our practices are deemed to the relatively short history of the internet finance business in China, the PRC government has not adopted a clear regulatory framework governing the industry. As a result, substantial uncertainties exist regarding the evolution of the regulatory system and the interpretation and implementation of current and futureviolate any PRC laws andor regulations, applicable to the internet finance services industry. If new PRC internet financing regulations promulgated in the future require us to comply with additional requirements in order to continue to conduct any aspect of our business operations, we may not be able to comply in a timely fashion, or at all. In addition, we cannot guarantee that our current practices comply with regulations that may be promulgated in the future, and we may be required to change our business practices, fined or penalized by regulators, or ordered to cease operations due to any non-compliance in the future. If any of these situations occur, our business, financial conditionconditions and prospects would be materially and adversely affected.

We have experienced net losses in the past, and you should consider our prospects in light of the risks and uncertainties fast-growing companies in evolving industries with limited operating histories, such as ours, may be exposed to or encounter.

We had a loss from continuing operations of US$31.9 million and US$29.0 million in 2012 and 2013, respectively. Our net loss from continuing operations in 2012 was primarily due to substantial investments in research and development, particularly those related to mobile initiatives, as well as investment in our video sharing business 56.com, which we acquired in October 2011, and loss in equity method investments, net of income taxes, due to investments we made in 2011 and 2012. Our net loss from continuing operations in 2013 was mainly due to increased investment in our business operations, particularly mobile-related initiatives, and impairment of our investments in equity method investments. We expect that, for the foreseeable future, investments in mobile and internet finance initiatives will continue to constitute significant expenses decreasing our income or increasing our loss from continuing operations.

In addition to the foregoing, our results of operations for the past three years were affected by costs and expenses required to build, operate and expand our SNS platform, grow our user base, promote our Renren brand, develop our own products and services, license third-party products and applications, and make other strategic investments. We expect that we will continue to incur significant research and development, marketing and other costs to launch new services and grow our user and advertiser bases. In particular, our plan to continue focusing our strategy on mobile opportunities and internet finance business, with increasing effort to experiment with different monetization models, including mobile games, mobile advertising and online consumer financing services, will result in significant costs and expenses. The profitability of these strategies has yet to be proven.

We recorded net income from continuing operations of US$33.4 million in 2014. Our ability to maintain net income from continuing operations is affected by various factors, some of which are beyond our control. For example, revenues and the profitability of our online games business depend on our ability to license and distribute games from third parties that are attractive to our user base. In addition, our revenues and profitability depend on the continuous development of the online advertising industry in China and advertisers’ allocation of more of their budgets to SNS websites. We cannot assure you that online advertising will become more widely accepted in China or that advertisers will increase their spending on SNS websites. In 2014 we have begun to provide internet finance services via an online market place by offering installment purchase plans to college students to shop on our platform and various e-commerce platforms in China, but it is still at a very early stage and remains relatively small. We may incur net losses in the future and you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies, and companies following the migration of their users from PC to mobile, in evolving industries such as the SNS, online games and internet finance industries in China.

We rely on online advertising for a sizeable proportion of our revenues. If the online advertising industry in China or advertisers’ willingness to advertise on our SNS platform grow slower than expected or decline, our revenues, profitability and prospects maywould be materially and adversely affected.

 

China has tightened regulation of internet financing services since mid-2015. The PRC government and relevant regulatory authorities have issued various laws and regulations governing the internet financing service. See “Regulation—Regulations Relating to Internet Financing Service” for details of regulations in this industry.

In 2012, 2013July 2015, ten PRC regulatory agencies, including the People’s Bank of China, the Ministry of Industry and 2014, online advertising accounted for 31.7%, 28.1%Information Technology, or the MIIT, and 32.4%, respectively,the China Banking Regulatory Commission, jointly issued the Guidelines on Promoting the Healthy Development of our total net revenues. Consequently, our profitabilityInternet Finance, or the Guidelines. In August 2016, four PRC regulatory agencies, including the China Banking Regulatory Commission, the MIIT, the Ministry of Public Security and prospects depend in partCyberspace Administration of China, jointly published the Interim Measures on the continuous developmentAdministration of Business Activities of Peer-to-Peer Lending Information Intermediaries, which we refer to as the Interim Measures. According to the Guidelines and the Interim Measures, intermediaries that provide online lending information services may not engage in certain activities, including, among others, (i) fund-raising for the online lending information intermediaries themselves, (ii) holding investors’ funds or setting up capital pools with investors’ funds, (iii) providing security or guarantee to investors as to the principals and returns of the investment, (iv) issuing or selling any wealth management products, (v) splitting the terms of any financing project, (vi) securitization, (vii) promoting its financial products on physical premises and (viii) equity crowd-funding. The Interim Measures also require the intermediaries that provide online advertising industrylending information services to strengthen their risk management and enhance screening and verifying efforts on the customers’ and investors’ information.

Notice on Regulating and Rectifying “Cash Loan” Business, which was released in December 2017, requires network micro loan companies to suspend the funding of micro-loans with no specific consumption scenario or designated use of loan proceeds, gradually reduce the volume of the existing business relating to such loans and take rectification measures in a period to be separately specified by the competent governmental authorities. The Notice on Regulating and Rectifying “Cash Loan” Business also prohibits online lending information intermediaries from facilitating loans with no designated use of loan proceeds. The banking financial institutions are also prohibited from providing loans with no designated use of loan proceeds under the relevant PRC laws and regulations. With respect to the loans that are facilitated through our services and are impacted bynot borrowed to finance a particular customer purchase, we and lenders require borrowers to select in their loan applications one of the amountspecified permissible uses of our advertising clients’ budgets which are devoted to advertising on social networking services in China. Advertising on social networking services is a fairly new marketing channel in China, and those companies which are willing to begin advertising online may decide to utilize more established methods or channels for online advertising,loan proceeds, such as purchase of cars, and we have started to take reasonable measures to track the more established Chinese internet portals or search engines. As social network users in China continue to spendactual use of the majorityloans. However, it is unclear whether such personal loans would be deemed as loans with no designated use of their time on mobile, the pace at which advertisers adopt SNS mobile advertising solutions will also largely impact the success of our business. We believe the reduction in our advertising revenue in 2013loan proceeds and 2014 was due in partthus be subject to the intensified competition for users across China’s SNS landscape,foregoing requirement of the Notice on Regulating and Rectifying “Cash Loan” Business. If such personal loans were deemed as loans with no designated use of loan proceeds, the financial institution lenders would also need to take necessary measures to track the actual use of loans and may require us to cooperate with them and upgrade our major competitors’ increasing market share, the continuing shiftsystem, both of our user timewhich could cause us to mobile, whichincur substantial additional expenses. If we did not begin to monetize until late 2013, and the increasingly competitive landscape for online advertising revenue among the major websites in China offering SNS and other mobile communication services. Further, we may bewere unable to respond adequatelyeffectively implement the foregoing or other rectification measures, we might need to changing trends in online advertisingreduce or advertiser demands or preferences, technological innovationeven cease the funding and improvements in the measurementfacilitation of user trafficsuch personal loans, which would cause material and online advertising, and technological developments more generally. In this regard, the migration of our user traffic from PC to mobile, which ramped up in 2012 and further increased since then, has had an adverse impact on our online advertising revenues, as advertisers have,loan facilitation service business.

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In addition to date, spent considerably less money advertisingthe Guidelines, the Interim Measures and the Notice on mobile devices. IfRegulating and Rectifying “Cash Loan” Business, there are certain other rules, laws and regulations relevant or applicable to the internet financing service industry, including the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. See “Regulation—Regulations on Internet Finance Services.” Due to the lack of detailed rules and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry, we cannot be certain if any of our existing practices would be deemed to be within the scope of such rules, laws and regulations relevant or applicable to the online advertising marketpeer-to-peer lending service industry and, as such, would not be deemed to violate any existing or future rules, laws and regulations.

The size particularly the mobile advertising market, does not increase from current levels, we are unable to successfully compete and capture a sufficient share of that market or we are unable to generate meaningful advertising revenues from mobile devices, our ability to maintain or increase our current level of online advertising revenues and our profitability and prospects could be materially and adversely affected.

Renren user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control.

 

There is no guarantee that popular mobile devices will continue to feature Renren, or that mobile device users will continue to use Renren rather than competing products. We are dependent on the interoperability of Renren with popular mobile operating systems that we do not control, such as iOS, Android and Windows, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect Renren usage on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use Renren on their mobile devices, or if our users choose not to access or use Renren on their mobile devices or use mobile products that do not offer access to Renren, our user growth and user engagement could be harmed.

 

If we fail to maintain and enhance our Renren and other brands, or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.

 

We believe that maintaining and enhancing our Renren and other brands is of significant importance to the success of our business. Well-recognized brands are critical to increasing the number and the level of engagement of our users and, in turn, enhancing our attractiveness to advertisers.users. Since we operate in a highly competitive market, maintaining and enhancing our brands directly affects our ability to maintain our market position.

We have developed our reputation and established our leading market position in the social networking industry in China by providing our users with a superior online experience. We have conducted and may continue to conduct various marketing and brand promotion activities, both through cooperation with our business partners and through more traditional methods, such as television advertisements. We cannot assure you, however, that these activities will be successful or that we will be able to achieve the brand promotion effect we expect. In addition, any negative publicity in relation to our services or products, regardless of its veracity, could harm our brands and the perception of our brands in the market.

 

During the course of the audit of our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. If we fail to re-establish and maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our ADSs may be adversely impacted.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, adopted rules pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting.

We and our independent registered public accounting firm, in connection with the preparation and external audit of our consolidated financial statements for the year ended December 31, 2015, identified two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified were related to (i) lack of implementation of adequate supervisory review controls over the accounting and measurement of complex investments; and (ii) lack of implementation of effective control activities over the then newly launched internet finance business to ensure the timely communication of sufficient information to the financial reporting team for certain accounting matters. Accordingly, we hired additional staff with relevant accounting experience, skills and knowledge in the preparation of financial statements under the requirement of U.S. GAAP to internet finance business, and updated our internet finance accounting policies and procedures manual in accordance with U.S. GAAP in 2015.

We and our independent registered public accounting firm, in connection with the preparation and external audit of our consolidated financial statements for the year ended December 31, 2016, identified a material weakness related to inadequate controls designed over the accounting and measurement of investments and the proposed complex transactions relating to the disposition of investment assets, to ensure that these transactions are accounted for in conformity with U.S. GAAP. We refer to these proposed complex transactions as the Transaction. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” Following the identification of the material weakness, we took measures to remedy it. Specifically, on December 22, 2016, our board of directors formed a special committee to evaluate the fairness of the Transaction and ultimately to decide whether to approve it, and the special committee further retained an external financial advisor and external U.S. counsel to review the Transaction and to ensure that the measurement of the investments involved was performed properly. Accordingly, as of December 31, 2017, we concluded that the material weakness related to the measurement of investment assets and the Transaction had been remediated.

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We and our independent registered public accounting firm, in connection with the preparation and external audit of our consolidated financial statements for the year ended December 31, 2017, identified a material weakness related to inadequate controls designed over the accounting of significant, unusual and complex transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP. See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” Measures that we implement to address this material weakness and other control deficiencies in our internal control over financial reporting might not fully address them, and we might not be able to conclude that they have been fully remedied.

Failure to correct the material weakness and other control deficiencies or failure to discover and address any other control deficiencies could result in inaccuracies in our consolidated financial statements and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Due to the material weakness in our internal control over financial reporting as described above, our management concluded that our internal control over financial reporting was not effective as of December 31, 2017. This could adversely affect the market price of our ADSs due to a loss of investor confidence in the reliability of our reporting processes.

In addition, we excluded certain recent acquisitions from the scope of our management’s evaluation of internal control over financial reporting, in line with SEC guidance and as described in “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” If we had not done so, it is possible that we would have had more than one material weakness as of December 31, 2017. If we do not identify and resolve any material weaknesses that may be related to these acquisitions, then we may be unable to conclude that our internal control over financial reporting is effective as of December 31, 2018.

The continuing and collaborative efforts of our senior management, key employees and highly skilled personnel are crucial to our success, and our business may be harmed if we were to lose their services.

Our success depends on the continuous effort and services of our experienced senior management team, in particular Mr. Joseph Chen, our founder, chairman and chief executive officer, and Mr. James Jian Liu, our executive director and chief operating officer. If one or more of our executive officers or other key personnel are unable or unwilling to continue to provide us with their services, we may not be able to replace them easily or at all. Our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected. Competition for management and key personnel is intense and the pool of qualified candidates is limited. We may not be able to manageretain the services of our expansion effectively.executive officers or key personnel, or attract and retain experienced executive officers or key personnel in the future. If any of our executive officers or key employees join a competitor or forms a competing company, we may lose know-how and key professionals and staff members. Each of our executive officers and key employees has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between us and our executive officers or key employees, these agreements may not be enforceable in China, where these executive officers and key employees reside, in light of uncertainties relating to China’s laws and legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

 

We have experienced rapid expansion inOur performance and future success also depend on our business scope in recent years. The portfolio of services we offer has expanded from real name SNS, which has historically been the coreability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our company’s business,organization. Competition in the SNS and used automobile industries for qualified employees, including technical personnel capable of designing innovative services and products, is intense, and if competition in these industries further intensifies, it may be more difficult for us to online gameshire, motivate and other new initiatives such as online consumer financing. In addition,retain highly skilled personnel. If we do not succeed in recent yearsattracting additional highly skilled personnel or retaining or motivating our existing personnel or if we have developedmust incur significantly greater expenses to recruit, train and launched versions of our services for mobile devices as well as personal computers. Not all of our effortsretain personnel, we may be unable to expand our business have lived up to our expectations, and on two occasions in recent years we have disposed of businesses after operating them for several years. We launched Nuomi’s social commerce business in June 2010 but eventually sold it to Baidu in two stages in October 2013 and February 2014, and we acquired the user generated content online video sharing website 56.com in October 2011 but eventually sold it to Sohu.com in December 2014. We cannot assure you that future efforts to expand our business will be successful enough to justify the time, effort and resources that we devote to them.grow effectively or at all.

 

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We expect to continue to grow our user base and our business operations, including launching new services and mobile applications. Our expansion may expose us to new challenges and risks. To manage the further expansion of our business and the expected growth of our operations, we will need to continuously expand and enhance our infrastructure and technology and improve our operational and financial systems, procedures and controls. We may need to increase the number of our research and development, sales and other personnel and train, manage and motivate them. In addition, we will need to maintain and expand our relationships with advertisers, advertising agencies, third-party developers of online games and applications offered on our platform and other third parties. We cannot assure you that our current and planned personnel, infrastructure, systems, procedures and controls will be adequate to support our expanding operations, that our new service lines or mobile applications will experience the synergies we expect, or that we will be able to successfully monetize the mobile versions of our services. Furthermore, expansions into new services may present operating and marketing challenges that are different from those that we currently encounter. If we fail to manage our expansions effectively, our business, results of operations and prospects may be materially and adversely affected.

Content posted or displayed on our websites may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.

 

The PRC government has adopted regulations governing internet access and the distribution of 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 the public interest, or is 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 fines, the revocation of licenses to provide internet content and other licenses, the closure of the concerned websites and reputational harm. In April 2015, we were fined RMB50,000RMB 50,000 (US$8,059)7,685) after certain user uploaded content was deemed to be obscene. The website operator may also be held liable for such censored information displayed on or linked to their website. For a detailed discussion, see “Item 4.B—Business Overview—Regulation—Regulations on Value-Added Telecommunications Services,” “Item 4.B—Business Overview—Regulation—Regulations on Internet Content Services” and “Item 4.B—Business Overview—Regulation—Regulations on Information Security.”

 

Through our SNS platform, we allow users to upload content on our platform, including via message boards, blogs, email, chat rooms, or image-sharing webpages, and also allow users to share, link to and otherwise access audio, video and other content from other websites. In addition, we allow users to download, share and otherwise access games and other applications on and through our platform, including through our online games business and Renren Open Platform program. After a user registers and before each upload, we require the user to click a box to confirm that the user has read and agreed to be bound by our copyright agreement. Pursuant to the copyright agreement, the user warrants that the content to be uploaded does not violate any laws or regulations or any third-party rights. If we discover that any uploaded content is inappropriate, we can delete or revise the content, or terminate the user account. In addition, we remove user uploads when we are notified or made aware, by copyright owners or from other sources, of copyright infringements or other illegal uploads. For a description of how content can be accessed on or through our SNS platform, and what measures we take to lessen the likelihood that we will be held liable for the nature of such content, see and “—Risks Related to Our Business and Industry—We have been and may continue to be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our websites or distributed to our users, which may materially and adversely affect our business, financial condition and prospects.”

Our live streaming services enable performers to broadcast their performances live over the internet. We have a team of employees who monitor the content of these performances to identify and shut down any performances that violate the applicable laws or regulations. If we fail to identify an illegal performance as it is occurring or fail to take appropriate action at that time, we may be held liable for it.

 

Failure to identify and prevent illegal or inappropriate content from being displayed on or through our websites for internet users or mobile users may subject us to liability or reduce our revenues. In addition, these laws and regulations are subject to interpretation by the relevant authorities, and it may not be possible to determine in all cases the types of content that could result in our liability as a website operator. To the extent that PRC regulatory authorities find any content displayed on or through our websites objectionable, they may require us to limit or eliminate the dissemination or availability of such content on our websites in the form of take-down orders or otherwise. Such regulatory authorities may also impose penalties on us based on content displayed or made available through our websites in cases of material violations, including a revocation of our operating licenses or a suspension or shutdown of our online operations, which would materially and adversely affect our business, results of operations and reputation. Moreover, the costs of compliance with these regulations may continue to increase as a result of more content being uploaded or made available by an increasing number of users and third-party partners and developers.

 

Concerns about collection and use of personal data could damage our reputation and deter current and potential users from using our services.

 

As of December 31, 2014,2017, our platform had accumulated a total of approximately 6.67.5 billion photos and 44.545.5 billion comments or reviews. Under our privacy policy, we will not provide any of our users’ personal information to any unrelated third party without our users’ prior consent. While we strive to comply with our privacy guidelines as well as all applicable data protection laws and regulations, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving, and future regulatory or user concerns about the extent to which personal information can be shared may adversely affect our ability to share certain data with advertisers, which may limit certain methods of targeted advertising.data. Concerns about the security of personal data could also lead to a decline in general internet usage, which could lead to lower user traffic on our platform. A significant reduction in user traffic could lead to lower advertising revenues or lower IVAS revenues, which could have a material adverse effect on our business, financial condition and results of operations.

 

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15 

We could be liable for any breach of security relating to our payment platforms or the third-party online payment platforms we use, and concerns about the security of internet transactions could damage our reputation, deter current and potential users from using our platform and have other adverse consequences to our business.

 

Currently, we sell a substantial portion of our virtual currency and other paid services and applications to our users and game players through third-party online payment platforms using the internet or mobile networks. In all these online payment transactions, secured transmission of confidential information over public networks is essential to maintain consumer confidence. In addition, we expect that an increasing amount of our sales will be conducted over the internet as a result of the growing use of online payment systems. As a result, associated online fraud will likely increase as well. Our current security measures and those of the third parties with whom we transact business may not be adequate. We must be prepared to increase and enhance our security measures and efforts so that our users and game players have confidence in the reliability of the online payment systems that we use, which will impose additional costs and expenses and may still not guarantee complete safety. In addition, we do not have control over the security measures of our third-party online payment vendors. Although we have not in the past experienced material security breaches of the online payments that we use, , such security breaches could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of the online payment systems that we use.

 

Spammers and malicious applications may make our services less user-friendly, and distort the data used for advertising purposes, which could reduce our ability to attract advertisers.user-friendly.

 

Spammers may use our platform and services to send targeted and untargeted spam messages to users, which may embarrass or annoy users and make usage of our services and networks more time-consuming and less user-friendly. As a result, our users may use our services less or stop using them altogether. As part of fraudulent spamming activities, spammers typically create multiple user accounts, such as accounts being set-up for the purposes of sending spam messages. Although we have technologies and employees that attempt to identify and delete accounts created for spamming purposes, we may not be able to eliminate all spam messages from being sent on our platform.

In addition, we have limited ability to validate or confirm the accuracy of information provided during the user registration process. Inaccurate data with respect to the number of unique individuals registered and actively using our services may cause advertisers to reduce the amount spent on advertising through our websites. In addition, use of applications that permit users to block advertisements may become widespread, which could make online advertising less attractive to advertisers. Any such activities could have a material adverse effect on our business, financial condition and results of operations.

 

Advertisements shown on our websites may subject us to penalties and other administrative actions.

 

Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our websites to ensure that such content is true and 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. 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 by us, PRC governmental authorities may force us to terminate our advertising operations or revoke our licenses.

 

While significant efforts have been made to ensure that the advertisements shown on our websites are in full compliance with applicable PRC laws and regulations, we cannot assure you that all the content contained in such advertisements or offers is true and accurate as required by the advertising laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be harmed, which may have a material and adverse effect on our business, financial condition, results of operations and prospects.

Online communications among our users may lead to personal conflicts, which could damage our reputation, lead to government investigation and have a material and adverse effect on our business.

 

Our users engage in highly personalized exchanges over our platform. Users who have met online through our services may become involved in emotionally charged situations and could suffer adverse moral, emotional or physical consequences. Such occurrences could be highly publicized and have a significant negative impact on our reputation. Government authorities may require us to discontinue or restrict those services that would have led, or may lead, to such events. As a result, our business may suffer and our user base, revenues and profitability may be materially and adversely affected.

 

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We rely on third parties to provide a number of important services in connection with our business, and any disruption to the provision of these services to us could materially and adversely affect our business and results of operations.

 

Our business is to a significant extent dependent upon services provided by third parties and business relationships with third parties. Substantially all

In our financing business, we work with third parties who provide us data concerning creditworthiness, identification and other relevant information that we use to review and select qualified borrowers. If this information becomes more expensive to access or becomes unavailable, our costs would increase or we may need to find alternative sources. If this information is outdated, incomplete or inaccurate, we might incorrectly judge borrowers’ actual creditworthiness, and we might approve unqualified borrowers or disapprove qualified borrowers. As a result, we may inaccurately price the loans that we facilitated and our control over our default rates would be adversely affected, which would harm our business.

To strengthen risk control, we also outsource some functions of our online advertising revenues are generated throughbusiness to third parties. They verify the authenticity of the materials borrowers provide, perform due diligence on target companies, do examinations after providing loans, do asset supervision and collect late payments. These partners may not perform as expected under our agreements entered into with various third-party advertising agencies,them, and it is difficult for us to monitor and supervise their performance. If they increase the price they charge to work with us, our costs would increase or we rely on these agencieswould have to look for sales to,other partners. There is also a risk of unclear allocation of responsibilities, which could cause inefficiencies and collection of payment from, our advertisers. We do not have long-term cooperation agreements or exclusive arrangements with these agencies and they may elect to direct business opportunities to other advertising service providers, including our competitors.delays. If we fail to retain and enhance the businesscannot maintain effective relationships with these third-party advertising agencies, we may suffer from a loss of advertisers andthird parties, our business financial condition and results of operations maywill also be materially and adversely affected.

In addition, a significant portion of our revenues are generated from online games and applications developed by third parties, and if we are unable to obtain or renew licenses to such games or attract application developers to our platform, our revenues could decline.harmed.

 

If the third parties on whom we rely fail to provide their services effectively, terminate their service or license agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations. Certain third-party service providers could be difficult and costly to replace, and any disruption to the provision of these services to us may have a material adverse effect on our business, financial condition and results of operations.

 

Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers 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 fixed telecommunications networks provided by telecommunication service providers. 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. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

 

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially and adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

Changes in the policies, guidelines or practice of mobile network operators or the PRC government with respect to mobile applications and other content may negatively affect our business operations for mobile applications.

 

We rely on PRC mobile network operators, directly and indirectly, to distribute our products to our users. The mobile telecommunication business in China is highly concentrated and major mobile network operators, such as China Mobile, may from time to time issue new policies or change their business practices, requesting or stating their preferences for certain actions to be taken by all mobile service providers using their networks. In addition, the PRC government may also implement new policies or change existing policies regulating the mobile telecommunication business. Such new policies or changes may negatively affect our business operations for mobile applications.

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Problems with our network infrastructure or information technology systems could impair our ability to provide services.

 

Our ability to provide our users with a high quality online experience depends on the continuing operation and scalability of our network infrastructure and information technology systems. We face a number of risks in this area. For example, our systems are potentially vulnerable to damage or interruption as a result of natural disasters, power loss, telecommunications failures and similar events. We may also encounter problems when upgrading our systems or services and undetected programming errors could adversely affect the performance of the software we use to provide our services. In addition, we rely on servers, data centers and other network facilities provided by third parties, and the limited availability of third-party providers with sufficient capacity to house additional network facilities and broadband capacity in China may lead to higher costs or limit our ability to offer certain services or expand our business.

 

These and other events have led and may in the future lead to interruptions, decreases in connection speed, degradation of our services or the permanent loss of user data and uploaded content. If we experience frequent or persistent service disruptions, whether caused by failures of our own systems or those of third-party service providers, our reputation or relationships with our users or advertisers may be damaged and our users and advertisers may switch to our competitors, which may have a material adverse effect on our business, financial condition and results of operations.

 

Computer malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations.

 

Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems in the future. For example, in December 2011, through hacking a third-party CDN provider, a computer hacker was able to access the data of over six million internet users from a number of major internet websites in China, including our website. We responded to this incident by notifying our users of the incident and advising them to change their log-in details. Because the techniques used by hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Any failure to maintain performance, reliability, security, and availability of our products and technical infrastructure to the satisfaction of our users may harm our reputation and our ability to retain existing users and attract new users. Our business could be subject to significant disruption and our results of operations may be affected.

 

In addition, spammers attempt to use our products to send targeted and untargeted spam messages to users, which may embarrass or annoy users and make our internet platform less user-friendly. We cannot be certain that the technologies and employees that we have to attempt to defeat spamming attacks will be able to eliminate all spam messages from being sent on our platform. As a result of spamming activities, our users may use our internet platform less or stop using our products altogether.

 

We have been and may continue to be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our websites or distributed to our users, which may materially and adversely affect our business, financial condition and prospects.

 

Internet, technology and media companies are frequently involved in litigation based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation and other violations of other parties’ rights. The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in China, are uncertain and still evolving. As we face increasing competition and as litigation becomes more common in China in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims. For example, in November 2014, a digital entertainment copyright agency company filed a complaint with Apple’s Appstore claiming copyright infringement of their clients’ musical works byrenren.comrenren.com’s’s Renren Radio service. Pursuant to Apple’s dispute resolution policy, our Renren Mobile App was temporarily removed from Apple’s Appstore, and it was restored after our timely response to the claimant resolved the dispute.

Intellectual property claims and litigation are expensive and time-consuming to investigate and defend, and may divert resources and management attention from the operation of our business. Such claims, even if they do not result in liability, may harm our reputation. Any resulting liability or expenses, or changes required to our websites to reduce the risk of future liability, may have a material adverse effect on our business, financial condition and prospects.

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We may be subject to patent infringement claims with respect to our SNS platform.

 

Our technologies and business methods, including those relating to our SNS platform, may be subject to third-party claims or rights that limit or prevent their use. Certain U.S.-based companies have been granted patents in the United States relating to SNS platforms and similar business methods and related technologies. While we believe that we are not subject to U.S. patent laws since we conduct our business operations outside of the United States, we cannot assure you that U.S. patent laws would not be applicable to our business operations, or that holders of patents relating to a SNS platform would not seek to enforce such patents against us in the United States or China. For example, we are aware that Facebook applied for a number of patents relating to its social networking system and methodologies, platform and other related technologies. In addition, many parties are actively developing and seeking protection for internet-related technologies, including seeking patent protection in China. There may be patents issued or pending that are held by others that relate to certain aspects of our technologies, products, business methods or services. Although we do not believe we infringe third-party patents, the application and interpretation of China’s patent laws and the procedures and standards for granting patents in China are still evolving and involve uncertainty. Any patent infringement claims, regardless of their merits, could be time-consuming and costly to us. If we were sued for patent infringement claims with respect to our SNS platform and were found to infringe such patents and were not able to adopt non-infringing technologies, we may be severely limited in our ability to operate our SNS platform, which would have a material adverse effect on our results of operations and prospects.

 

Our own intellectual property rights may be infringed, which could materially and adversely affect our business and results of operations.

 

We rely on a combination of monitoring and enforcement of trademark, patent, copyright and trade secret protection laws in the PRC and other jurisdictions, as well as through confidentiality agreements and procedures, to protect our intellectual property rights. Despite our precautions, third parties may obtain and make unauthorized use of our intellectual property, which includes trademarks related to our brands, products and services, patent applications, registered domain names, copyrights in software and creative content, trade secrets and other intellectual property rights and licenses. Historically, the legal system and courts of the PRC have not protected intellectual property rights to the same extent as the legal system and courts of the United States, and companies operating in the PRC continue to face an increased risk of intellectual property infringement. Furthermore, the validity, application, enforceability and scope of protection of intellectual property rights for many internet-related activities, such as internet commercial methods patents, are uncertain and still evolving in China and abroad, which may make it more difficult for us to protect our intellectual property and could have a material adverse effect on our business, financial condition and results of operations. For example, other companies have in the past copied the concepts, the look and feel and even material parts of the online games that we have developed. In such instances, we have filed and may in the future from time to time file lawsuits for copyright infringement.

 

The revenue models we adopt for our online games and other entertainment and services may not remain effective, which may materially and adversely affect our business, financial condition and results of operations.

We currently operate substantially all of our online games using the virtual item-based revenue model, whereby players can play games for free but have the option to purchase virtual in-game items such as in-game accessories and pets and items that improve the strength of their game character. We have generated, and expect to continue to generate, a substantial majority of our online games revenues using this revenue model. However, the virtual item-based revenue model requires us to develop or license online games that not only attract game players to spend more time playing but also encourage them to purchase virtual items. The sale of virtual items requires us to track game players’ tastes and preferences closely, especially as to in-game consumption patterns. If we fail to develop or offer virtual items which game players purchase, we may not be able to effectively convert our game player base into paying users. In addition, the virtual item-based revenue model may raise additional concerns with PRC regulators that have been implementing regulations designed to reduce the amount of time that the Chinese youth spend playing online games and limit the total amount of virtual currency issued by online game operators and the amount purchased by an individual game player. A revenue model that does not charge for playing time may be viewed by the PRC regulators as inconsistent with this goal. Furthermore, we may change the revenue model for some of our online games if we believe the existing revenue models are not optimal. We cannot assure you that the revenue model that we have adopted for any of our online games will continue to be suitable for that game, or that we will not need to switch our revenue model in the future or introduce a new revenue model for that game. A change in revenue model could result in various adverse consequences, including disruptions of our game operations, criticism from game players who have invested time and money in a game and would be adversely affected by such a change, decreases in the number of our game players or decreases in the revenues we generate from our online games. Therefore, such changes in revenue models may materially and adversely affect our business, financial condition and results of operations. Further, there can be no assurance that the revenue models we have used in the PC-based versions of our services will be successful in their mobile counterparts, or that we will otherwise be able to design revenue models that successfully monetize our mobile user base.

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The continuing and collaborative efforts of our senior management, key employees and highly skilled personnel are crucial to our success, and our business may be harmed if we were to lose their services.

Our success depends on the continuous effort and services of our experienced senior management team, in particular Mr. Joseph Chen, our founder, chairman and chief executive officer, and Mr. James Jian Liu, our executive director and chief operating officer. If one or more of our executive officers or other key personnel are unable or unwilling to continue to provide us with their services, we may not be able to replace them easily or at all. Our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected. Competition for management and key personnel is intense and the pool of qualified candidates is limited. We may not be able to retain the services of our executive officers or key personnel, or attract and retain experienced executive officers or key personnel in the future. If any of our executive officers or key employees join a competitor or forms a competing company, we may lose advertiser customers, know-how and key professionals and staff members. Each of our executive officers and key employees has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between us and our executive officers or key employees, these agreements may not be enforceable in China, where these executive officers and key employees reside, in light of uncertainties relating to China’s laws and legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Our performance and future success also depend on our ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in the SNS, online games and internet finance industries for qualified employees, including technical personnel capable of designing innovative services and products, is intense, and if competition in these industries further intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel. If we do not succeed in attracting additional highly skilled personnel or retaining or motivating our existing personnel or if we must incur significantly greater expenses to recruit, train and retain personnel, we may be unable to grow effectively or at all.

The performance of our investments, which include currency deposits, equity interests in companies that are not our subsidiaries and derivative financial instruments, could materially affect our financial condition and results of operations.

Historically, we have held large cash balances in currencies other than U.S. dollars, mainly Renminbi for our business operations and treasury purposes. Fluctuations in exchange rates and changes in the investment environment can affect market prices and the income from our deposits and other investments, and we could suffer substantial losses as a result of these deposits and other investments, which may materially affect our financial condition and results of operations. For a detailed discussion of our exposure to fluctuations in the value of the Renminbi against the U.S. dollar, see “—Risks Related to Doing Business in China—Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment” and for a discussion of our foreign exchange risk in general, see “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk.”

We also hold marketable securities, including a variety of equity and debt investments in corporations that we do not control, as well as derivative financial instruments, including interest rate swaptions and interest rate swaps. If these investments perform poorly, we may suffer substantial losses, which could materially affect our financial condition and results of operations.

Furthermore, we recorded the values of our investments in equity interests in companies that are not our subsidiaries in our financial statements at carrying value, which reflect our historical cost for these investments and are not intended to reflect or otherwise estimate the fair market value of these investments. See “Item 5.A—Operating Results—Critical Accounting Policies—Long-term Investments.” The amount, if any, that we ultimately realize on any of these investments, and the timing of any such realization, is inherently uncertain and the amount realized with respect to any particular investment may be materially less than or materially more than the value of such investment currently presented on our financial statements. Numerous factors, many of which are beyond our control, could affect the amount and timing of any realizations we ultimately receive, including: factors specific to the companies in which we have invested; factors relating to the industries, markets and geographies in which the companies in which we have invested operate; international, national, regional and local economic conditions; the conditions in international or national financial and capital markets, including foreign exchange rates, and the ability of the companies in which we have invested to raise additional capital, conduct public offerings or develop ready markets for the buying and selling of their securities; and the ability of the companies in which we have invested to engage in mergers and acquisitions and other transactions that provide potential liquidity to shareholders. Although we believe the fair market value of these investments to have been equal to or greater than the carrying value as of the dates presented in our financial statements, we cannot assure you that the fair market value will not decline before we realize any of our investments. There can be no assurances as to the timing or amount of realizations, if any, on any of our investments, and the amount or timing of any such realizations, or the lack thereof, could be material to our financial condition.

We have granted, and may continue to grant, share options and restricted shares under our equity incentive plans, which may result in increased share-based compensation expenses.

 

We have adopted fourfive equity incentive plans for Renren Inc. in 2006, 2008, 2009, and 2011 and one equity incentive plan for Link224 Inc. in 2013. The Link224 Inc. plan is specifically for employees in our Games segment.2016. As of February 28, 2015,2018, options to purchase a total of 113,615,141149,711,391 ordinary shares of Renren Inc. and 3,683,272 ordinary shares of Link224 Inc. were outstanding. For the years ended December 31, 2012, 20132015, 2016 and 2014,2017, we recorded US$10.928.2 million, US$16.123.5 million and US$23.628.0 million, respectively, in share-based compensation expenses. As of December 31, 2014,2017, we had US$52.122.1 million of unrecognized share-based compensation expenses relating to share options, which are expected to be recognized over a weighted average vesting period of 3.11.7 years, and US$7.010.3 million of unrecognized share-based compensation expenses relating to non-vested restricted shares, which are expected to be recognized over a weighted average vesting period of 3.442.1 years. On August 24, 2017, our compensation committee approved a reduction in the exercise price for all outstanding options previously granted by our company with an exercise price higher than $0.478 per ordinary share to $0.478 per share. We accounted for this reduction as a share option modification which required the remeasurement of these share options at the time of the modification. The total incremental cost as a result of the modification was US$10.4 million. The incremental cost related to vested options amounted to US$7.4 million and was recorded in the consolidated statements of operations during the year ended December 31, 2017. The incremental cost related to unvested options amounted to US$3.0 million and will be recorded over the remaining service period. We believe the granting of share options and restricted shares is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share options and restricted shares to key personnel and employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

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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 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 enhance user experience and maintain and increase user traffic;

 

·the quality and the number of games we offer on our platform in a given quarter;

·our ability to attract and retain advertisers or recognize online advertising revenues in a given quarter;

·the growth of the social networking industry in China;

 

·our ability to monetize the mobile versions of our applications and services;

 

·our ability to develop internet financefinancing services;

 

·the growth of the internet finance industry in China;

·the growth of the used automobile industry in China;

 

·competition in our industries in China;

 

·changes in government policies or regulations, or their enforcement;

 

·geopolitical events or natural disasters such as war, threat of war, earthquake or epidemics; and

 

·losses from or impairment of our equity method investments.investments; and

 

·decreases in market value or impairment of our marketable securities.

Seasonal fluctuations and industry cyclicality have affected, and are likely to continue to affect, our online advertising services. We generally generate less revenue from online advertising during national holidays in China, in particular duringfinancing business. See “Item 4. Information on the first quarter of each year due to the slowdown of business during the Chinese New Year holiday season that lasts approximately two weeks. To a lesser extent, we also typically generate less revenues from online advertising during the fourth quarter of each year. This seasonality in revenues is due to the fact that a large concentration of our advertising customers are in the consumer sector, with many of them purchasing more of our advertising services in the spring and summer seasons due to the fact that certain of their major products sell better during those seasons. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of our advertisers.Company—Seasonality.” We expect that seasonal fluctuations and industry cyclicality will continue to cause our quarterly and annual operating results to fluctuate.

If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud maybe adversely affected, and investor confidence and the market price of our ADSs may be adversely impacted.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, adopted rules pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. During the process of preparing our consolidated financial statements for the year ended December 31, 2012, a significant deficiency was identified related to the preparation and disclosure of segment reporting information. We have taken actions to remediate it and we concluded that, as of December 31, 2013, this significant deficiency had been remediated.

If we fail to maintain effective internal control over financial reporting in the future, we and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Failure to discover, address or correct any other control deficiencies in the future could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to help prevent fraud. Failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our ADSs.

 

We have limited business insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence of business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

The leasehold interests of some of our consolidated affiliated entities might not be fully protected by the terms of the relevant lease agreements due to defects in or the landlord’s failure to provide certain title documents with respect to some of our leased properties.

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As of March 31, 2015, our consolidated affiliated entities leased properties in China covering a total floor area of approximately 26,072 square meters, primarily for use as offices. All such properties are leased from independent third parties. In respect of approximately 1,108 square meters of these properties, the lessors either do not have or have failed to provide proper title documents. In the event of a dispute related to the legal title of any of these properties, our consolidated affiliated entities could be compelled to vacate the properties on short notice and relocate to different facilities. As a result, the operations of our consolidated affiliated entities could be disrupted or otherwise adversely affected.

Risks Related to Our Corporate Structure and the Regulation of our Business

 

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

 

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in internet businesses, including the provision of social networking services, online advertising services and online game services. Specifically, foreign ownership of internet service providers or other value-added telecommunication service providers may not exceed 50%. In addition, according to the Several Opinions on the Introduction of Foreign Investment in the Cultural Industry promulgated by the Ministry of Culture, the State Administration of Radio, Film and Television, or the SARFT, the General Administration of Press and Publication, or the GAPP, the National Development and Reform Commission and the Ministry of Commerce in June 2005, foreign investors are prohibited from investing in or operating any internet cultural operating entities.

 

We conduct our SNS and live streaming operations in China principally through two sets of contractual arrangements. The firsta set of contractual arrangements is between our wholly owned PRC subsidiary, Qianxiang Shiji Technology Development (Beijing) Co., Ltd., or Qianxiang Shiji, and its consolidated affiliated entity, Beijing Qianxiang Tiancheng Technology Development Co., Ltd., or Qianxiang Tiancheng, and Qianxiang Tiancheng’s shareholders. Qianxiang Tiancheng’s wholly owned subsidiaries include Beijing Qianxiang Wangjing Technology Development Co., Ltd., or Qianxiang Wangjing, is Qianxiang Tiancheng’s wholly owned subsidiary and the operator of ourrenren.comwebsite and holds the licenses and permits necessary to conduct our SNS and online advertising business in China.

We conduct our financing business operations in China principally through a set of contractual arrangements between our wholly owned PRC subsidiary, Shanghai Renren Automobile Technology Development Co., Ltd., or Renren Automobile, and its consolidated affiliated entity, Shanghai Qianxiang Changda Internet Information Technology Development Co., Ltd., or Qianxiang Changda.Changda, and Qianxiang Wangjing is the operator of ourrenren.com website and holds the licenses and permits necessary toChangda’s shareholders.

We conduct our SNS, online advertising and online games businessused automobile dealership operations in China. Qianxiang Changda is an online advertising company that holds the licenses and permits necessary to conduct our SNS services in China.

The secondChina principally through a set of contractual arrangements isbetween Renren Automobile and its consolidated affiliated entity, Shanghai Jieying Automobile Sales Co., Ltd., or Shanghai Jieying, and Shanghai Jieying’s shareholders.

We hold most of our minority equity investments in the PRC through another set of contractual arrangements between our wholly owned PRC subsidiary, Renren Games NetworkQianxiang Lianhe Technology Development (Shanghai)(Beijing) Co., Ltd., or Renren Network,Qianxiang Lianhe, and its consolidated affiliated entity, Shanghai Renren GamesBeijing Qianxiang Yixin Technology Development Co., Ltd., or Renren Games,Qianxiang Yixin, and Renren Games’sQianxiang Yixin’s shareholders. Renren Games is the operator of our online games website and holds the licenses and permits necessary to conduct our online game services in China.

Our contractual arrangements with Qianxiang Tiancheng, Renren Games and their respective shareholdersdescribed above enable us to exercise effective control over Qianxiang Tiancheng, Renren GamesQianxiang Changda, Shanghai Jieying and Qianxiang Tiancheng’sYixin, as well as their respective subsidiaries, and hence we treat Qianxiang Tiancheng, Renren Games and Qianxiang Tiancheng’s subsidiariesthese entities 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—Contractual Arrangements with Our Consolidated Affiliated Entities.”

On September 28, 2009, the GAPP, together with the National Copyright Administration and the National Office of Combating Pornography and Illegal Publications, jointly issued a Notice on Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games, or the GAPP Notice. The GAPP Notice restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies or contractual or technical arrangements. However, the GAPP Notice does not provide any interpretation of the term “foreign investors” or make a distinction between foreign online game companies and companies with a corporate structure similar to ours (including those listed Chinese internet companies that focus on online game operation). Thus, it is unclear whether the GAPP will deem our corporate structure and operations to be in violation of these provisions.

 

Based on the advice of TransAsia Lawyers, our PRC legal counsel, the corporate structure of our consolidated affiliated entities and our subsidiaries in China comply with all existing PRC laws and regulations. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, (including the MIIT Notice and the GAPP Notice described above), we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could:

·revoke the business and operating licenses of our subsidiaries, our consolidated affiliated entities and their subsidiaries;

 

·discontinue or restrict any related-party transactions between our subsidiaries, our consolidated affiliated entities and their subsidiaries;

 

·impose fines on us or impose additional conditions or requirements on us with which we may not be able to comply;

 

·require us to revise our ownership structure or restructure our operations; and

 

·restrict or prohibit our use of the proceeds of any additional public offering to finance our business and operations in China.

 

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The imposition of any of these penalties may result in a material and adverse effect on our ability to conduct our business. If any of these penalties results in our inability to direct the activities of our consolidated affiliated entities and the subsidiaries that most significantly impact their economic performance, or results in our failure to receive the economic benefits from our consolidated affiliated entities and their subsidiaries, we may not be able to consolidate the consolidated affiliated entities and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. In the fiscal years ended December 31, 2012, 20132015, 2016 and 2014,2017, our consolidated affiliated entities and their subsidiaries contributed in the aggregate 98.6%94.9%, 96.6%97.8% and 94.5%89.7%, respectively, of our consolidated net revenues.

 

We rely on contractual arrangements with consolidated affiliated entities for our China operations, which may not be as effective in providing operational control as direct ownership. Any failure by our affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business and financial condition.

 

We have relied and expect to continue to rely on contractual arrangements with our affiliated entities to operate our businesses in China. For a description of these contractual arrangements, see “Item 4.C—Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities.” These contractual arrangements may not be as effective in providing us with control over these affiliated entities as direct ownership. If we had direct ownership of our consolidated affiliated entities, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of each of these entities, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on the performance by our consolidated affiliated entities and their respective shareholders of their obligations under their respective contracts to exercise control over our affiliated entities. Therefore, our contractual arrangements with our affiliated entities may not be as effective in ensuring our control over our China operations as direct ownership would be.

 

If our consolidated affiliated entities or their respective shareholders fail to perform their respective obligations under the contractual arrangements of which they are a party, we may have to incur substantial costs and resources to enforce our rights under the contracts, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of our consolidated affiliated entities were to refuse to transfer their equity interests in our consolidated affiliated entities to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to perform their respective contractual obligations.

 

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our affiliated entities, and our ability to conduct our business may be severely and negatively affected.

Contractual arrangements our subsidiaries have entered into with our consolidated affiliated entities may be subject to scrutiny by the PRC tax authorities, and a finding that we or our consolidated affiliated entities owe additional taxes could substantially reduce our consolidated net income and the value of your investment.

 

Under PRC laws and regulations, arrangements and transactions between related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our wholly owned subsidiaries in China and our consolidated affiliated entities in China do not represent arm’s-length prices and consequently adjust our consolidated affiliated entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our consolidated affiliated entities for PRC tax purposes, which could in turn increase their respective tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on our consolidated affiliated entities for any unpaid taxes. Our consolidated net income may be materially and adversely affected if our affiliated entities’ tax liabilities increase or if they are subject to late payment fees or other penalties.

 

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

 

The shareholders of our consolidated affiliated entities include Ms. Jing Yang, and Mr. James Jian Liu, whoMr. Thomas Jintao Ren and Ms. Rita Rui Yi. Ms. Jing Yang is a shareholder of Qianxiang Tiancheng, Qianxiang Changda and Qianxiang Yixin; Mr. James Jian Liu is a shareholder of Qianxiang Tiancheng, Qianxiang Changda, Qianxiang Yixin and Guangzhou Xiuxuan Brokers Co., Ltd., or Guangzhou Xiuxuan; and Mr. Thomas Jintao Ren and Ms. Rita Rui Yi are the shareholders of Qianxiang Tiancheng, and Mr. Chuan He and Mr. James Jian Liu, who are the shareholders of Renren Games. Shanghai Jieying.

Ms. Jing Yang is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer.officer; Mr. James Jian Liu is our executive director and chief operating officer.officer; Mr. Thomas Jintao Ren is our chief financial officer; and Ms. Rita Rui Yi is our vice president in charge of human resources.

 

Conflicts of interest may arise between the dual rolesrole of Mr. James Jian Liu Ms. Zhouas a director and Mr. He as officers or employeesofficer of our company and as shareholdersshareholder of our consolidated affiliated entities. entities Qianxiang Tiancheng, Qianxiang Changda, Qianxiang Yixin and Guangzhou Xiuxuan.

Conflicts of interest may also arise between the interests of Ms. Jing Yang as a shareholder of Qianxiang Tiancheng, Qianxiang Changda and Qianxiang Yixin and as the wife of our founder and chief executive officer. Furthermore, if Ms. Jing Yang experiences domestic conflict with Mr. Joseph Chen, she may have little or no incentive to act in the interest of our company, and she may not perform her obligations under the contractual arrangements she has entered into with Qianxiang Shiji.Shiji, Renren Automobile and Qianxiang Lianhe.

Conflicts of interest may arise between the dual role of both Mr. Thomas Jintao Ren and Ms. Rui Yi as officers of our company and as shareholders of our consolidated affiliated entity Shanghai Jieying.

 

Officers of our company owe a duty of loyalty and care to our company and to our shareholders as a whole under Cayman Islands law. We cannot assure you, however, that when conflicts arise, shareholders of our consolidated affiliated entities will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and 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.

 

Substantial uncertainties exist with respect to the enactment timetable, final scope, interpretation and implementation of the draft PRC Foreign Investment Law published for public comments and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce is currently solicitingsolicited comments on this draft andin 2015, but no timetable has been published as to when it will be enacted. As such, substantial uncertainties exist with respect to its enactment timetable, final scope, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of "actual control"“actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Counsel later, if the FIE is engaged in the industry listed in the negative list. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance by the Ministry of Commerce, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

 

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The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See “—If“If the PRC government finds that the agreements that establish the structure for operating our services in China do not comply with PRC governmental restrictions on foreign investment in internet businesses, 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.” and “Item 4.C—Information on the Company—Organizational Structure.” Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the “negative list,” the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal. There are uncertainties as to whether the Foreign Investment Law, once it is enacted, will have retrospective effect on existing VIE structures such as ours, or whether it will grant real and full grandfathering and grace periods for such existing VIE structures.

 

It is likely that we would not be considered as ultimately controlled by Chinese parties, as our U.S. record shareholders hold over 50% of our total voting power. The draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties, while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the internet industry, in which our variable interest entities operate, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued. The value-added telecommunication services, which we conduct through our VIEs, is subject to foreign investment restrictions set forth in the Catalogue for the Guidance of Foreign Investment Industries issued by the National Development and Reform Commission and the Ministry of Commerce in March, 2015,2017, or the Catalogue. It is unclear whether the new “negative list” will be different from the Catalogue. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as Ministry of Commerce market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, we face substantial uncertainties as to whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected.

 

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company, and we may rely on dividends and other distributions on equity to be paid by our wholly owned PRC subsidiaries, particularly Qianxiang Shiji, and Renren Network, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our wholly owned PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

 

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC such as Qianxiang Shiji and Renren Network may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprisesenterprise such as Qianxiang Shiji and Renren Network areis required to set aside at least 10% of their accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of their registered capital. At their discretion, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

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Any limitation on the ability of our wholly owned 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. See “—Risks Related to Doing Business in China—Discontinuation of any of the preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.

 

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using funds that we hold offshore to make loans to our PRC subsidiaries and consolidated affiliated entities or to make additional capital contributions to our PRC subsidiaries, which may materially and adversely affect our liquidity and our ability to fund and expand our business.

 

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and consolidated affiliated entities. We may make loans to our PRC subsidiaries and consolidated affiliated entities, or we may make additional capital contributions to our PRC subsidiaries.

 

Any loans by us to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly owned PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. If we decide to finance our wholly owned PRC subsidiaries by means of capital contributions, these capital contributions must be approved by the Ministry of Commerce or its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our consolidated affiliated entities, which are PRC domestic companies. Further, we are not likely to finance the activities of our consolidated affiliated entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in social networking services, online advertising online games and related businesses.

 

In 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 RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB 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. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. Furthermore, SAFE promulgated a circular onin November 19, 2010, known as Circular No. 59, which tightens the examination of the authenticity of settlement of net proceeds from our initial public offering and requires that the settlement of net proceeds shall be in accordance with the description in the prospectus included in our registration statement on Form F-1 (Registration No. 333-173548), which was filed with the SEC in connection with our initial public offering. In March 2015, SAFE issued the Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises may either continue to follow the current payment-based foreign currency settlement system or choose to follow the “conversion-at-will” system for foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will system for foreign currency settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its Renminbi registered capital converted from foreign currencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises like our PRC subsidiaries are still not allowed to extend intercompany loans to our VIEs. In addition, as SAFE Circular 19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this circular by relevant authorities.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 142, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or consolidated affiliated entities or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use funds we hold offshore including any funds that remain unused from our initial public offering, to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

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

 

Our real name social networking services and online games businesses are subject to strict government regulations in the PRC. Under the current PRC regulatory scheme, a number of regulatory agencies, including the MIIT, the Ministry of Culture, the State Administration for Press, Publication, Radio, Film and Television and the State Council Information Office jointly regulate all major aspects of the internet industry, including the SNS and online game industries.industry. Operators must obtain various government approvals and licenses prior to the commencement of SNS and online game operations, including an internet content provider license, or ICP license, an online culture operating permit, and a value-added telecommunication services license and an internet publishing license.

 

We have obtained a value-added telecommunication service license, an ICP license, and an online culture operating permit and an online drug information license for online games and advertisements on our SNS website. In addition, Qianxiang Changda has obtained an internet publishing license, permitting it to engage in internet game publication activities. In connection with the corporate restructuring of our online games business, which was completed in March 2013, we have obtained an online culture operating permit and an ICP license for the online games business. We have filed with the GAPP and the Ministry of Culture certain online games that we developed and the imported games available on our SNS website, and will continue to make such filings for these types of games. However, we cannot assure you that our understanding of the applicability and scope of such filings and filing requirements is correct, as the interpretation and enforcement of the applicable laws and regulations by the GAPP and the Ministry of Culture are still evolving. If our current practices are challenged by the GAPP and any of our online games fail to be examined and filed by relevant authorities or are found to be in violation of applicable laws, we may be subject to various penalties, including fines and the discontinuation of or restrictions on our operations.

If the PRC government promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of SNS online games and/or other services we plan to launch, to the extent we may not be able to obtain these licenses, our results of operations may be materially and adversely affected. 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.

 

Currently there is no law or regulation specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online game operators may have for virtual assets.

In the course of playing online games, some virtual assets, such as special equipment and other accessories, are acquired and accumulated. Such virtual assets can be important to online game players and have monetary value and in some cases are sold among players for actual money. In practice, virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other users and occasionally through data loss caused by a delay of network service, a network crash or hacking activities. Currently, there is no PRC law or regulation specifically governing virtual asset property rights. As a result, there is uncertainty as to who is the legal owner of virtual assets, whether and how the ownership of virtual assets is protected by law, and whether an operator of online games such as us would have any liability to game players or other interested parties (whether in contract, tort or otherwise) for loss of such virtual assets. In case of a loss of virtual assets, we may be sued by our game players and held liable for damages, which may negatively affect our reputation and business, financial condition and results of operations.

Based on recent PRC court judgments, the courts have typically held online game operators liable for losses of virtual assets by game players, and in some cases have allowed online game operators to return the lost virtual items to game players in lieu of paying damages.

Compliance with the laws or regulations governing virtual currency may result in us having to obtain additional approvals or licenses or change our current business model.

 

The issuanceIn October 2007, we launched “Renren Beans,” a virtual currency that can be used to purchase any of our IVAS or other paid services and useapplications for users, and in March 2016, we also launched “Renren Points,” a virtual currency that can be used to purchase any of “virtual currency”our mobile live streaming services. Due to the relatively short history of virtual currency in China, the regulatory framework governing the industry is still under development. Currently, the PRC government has been regulated since 2007 in responsenot promulgated any specific rules, laws or regulations to directly regulate virtual currency, except for online game virtual currency. The Notice on the growthStrengthening of the Administration on Online Game Virtual Currency, jointly issued by the Ministry of Culture and the Ministry of Commerce in 2009, broadly defined virtual currency as a type of virtual exchange instrument issued by internet game operation enterprises, purchased directly or indirectly by the game users by exchanging legal currency at a certain exchange rate, saved outside the game programs, stored in servers provided by the internet game operation enterprises in electronic record format and represented by specific numeric units. Virtual currency is used to exchange internet game services provided by the issuing enterprise for a designated extent and time, and is represented by several forms, such as online games industry in China. The Interim Administration Measuresprepaid game cards, prepaid amounts or internet game points, and does not include game props obtained from playing online games. In 2009, the Ministry of Culture further promulgated the Filing Guidelines on Online Games require companiesGame Virtual Currency Issuing Enterprises and Online Game Virtual Currency Trading Enterprises, which specifically defines “issuing enterprise” and “trading enterprise” and stipulates that (i) issuea single enterprise may not operate both types of business. There are uncertainties as to how these online game virtual currency (including prepaid cards and/or pre-payment or prepaid card points), or (ii)regulations would apply to Renren Beans as well as to Renren Points. Further, although we believe we do not offer online game virtual currency transactiontrading services, to apply for the Internet Culture Business Permit from provincial branches of the Ministry of Culture. The regulations prohibit companies that issue online game virtual currency from providing services that would enable the trading of such virtual currency. Any company that fails to submit the requisite application will be subject to sanctions, including but not limited to termination of operation, confiscation of incomes and fines. The regulations also prohibit online game operators from allocating virtual items or virtual currency to players based on random selection through lucky draw, wager or lottery that involves cash or virtual currency directly paid by the players. In addition, companies that issue online game virtual currency must comply with certain specific requirements, for example, online games virtual currency can only be used for products and services related to the issuance company’s own online games. Although we believe that we do not engage in any of the above-mentioned prohibited activities, we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours, and deem such feature as prohibited by the Virtual Currency Notice, thereby subjecting us to penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoing could materially and adversely affect our business and results of operations.

We issue virtual currency to our users for them to purchase various virtual items or time units to be used in our online games and online social video platform. We have adjusted the content of our online games and online social video platform, but we cannot assure you that our adjustments will be sufficient to comply with relevant laws and regulations. Moreover, although we believe we do not offer online game and virtual stage virtual currency transaction services, we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours. For example, certain virtual items we issue to users based on in-game milestones they achieve or time spent playing games are transferable and exchangeable for our virtual currency or the other virtual items we issue to users. If the PRC regulatory authorities deem such transfer or exchange to be a virtual currency transaction, then in addition to being deemed to be engaged in the issuance of virtual currency, we may also be deemed to be providing transaction platform services that enable the trading of such virtual currency. Simultaneously engaging in both ofwhich case these activities is prohibited and we may be required to cease either our virtual currency issuance activities or such deemed “transaction service” activities and may be subject to certain penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoingregulations could have a materialan adverse effect on our “Renren Beans” and “Renren Points” related revenues.

Substantial uncertainties exist with respect to the interpretation and implementation of the Cyber Security Law as well as any impact it may have on our business operations.

In July 2015, the Standing Committee of the National People’s Congress of China issued the National Security Law, which came into effect on the same day. The National Security Law provides that the state shall safeguard sovereignty, security and resultsdevelopment interests of operations.cyberspace in the state, and the state shall establish a national security review and supervision system to review including foreign investment, key technologies, internet and information technology products and services and other important activities that are likely to impact the national security of China.

The Cyber Security Law, which was issued by the Standing Committee of the National People’s Congress of China and became into effect on June 1, 2017, is the first Chinese law that focuses exclusively on cyber security. The Cyber Security Law provides that network operators must set up internal security management systems that meet the requirements of a classified protection system for cybersecurity, including appointing dedicated cybersecurity personnel, taking technical measures to prevent computer viruses, network attacks and intrusions, taking technical measures to monitor and record network operation status and cybersecurity incidents, and taking data security measures such as data classification, backup and encryption. The Cybersecurity Law also imposes a relatively vague but broad obligation to provide technical support and assistance to the public and state security authorities in connection with criminal investigations or for reasons of national security. The Cybersecurity Law also requires network operators that provide network access or domain name registration services, landline or mobile phone network access, or that provide users with information publication or instant messaging services, to require users to provide a real identity when they sign up.

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The Cyber Security Law sets high requirements for the operational security of facilities deemed to be part of the PRC’s “critical information infrastructure.” These requirements include data localization, i.e., storing personal information and important business data in China, and national security review requirements for any network products or services that may have an impact on national security. Among other factors, “critical information infrastructure” is defined as critical information infrastructure that will, in the event of destruction, loss of function or data leak, result in serious damage to national security, the national economy and people’s livelihood, or the public interest. Specific reference is made to key sectors such as public communication and information services, energy, transportation, water-resources, finance, public service and e-government. However, no official guidelines as to the scope of “critical information infrastructure” have been formally issued.

We do not believe that we are an operator of “critical information infrastructure” as defined in the Cyber Security Law. However, there is no assurance that we may not be considered an operator of “critical information infrastructure” in the future as the definition is not precise, and there are substantial uncertainties as to the law’s ultimate interpretation and implementation. If we were considered an operator of “critical information infrastructure” in the future, this could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.

 

If we are required to pay U.S. taxes, the value of your investment in our company could be substantially reduced.

 

If, pursuant to a plan or a series of related transactions, a non-United States corporation, such as our company, acquires substantially all of the assets of a United States corporation, and after the acquisition 80% or more of the stock, by vote or value, of the non-United States corporation, excluding stock issued in a public offering related to the acquisition, is owned by former shareholders of the United States corporation by reason of their ownership of the United States corporation, the non-United States corporation will be considered a United States corporation for United States federal income tax purposes. Based on our analysis of the facts related to our corporate restructuring in 2005 and 2006, we do not believe that we should be treated as a United States corporation for United States federal income tax purposes. However, as there is no direct authority on how the relevant rules of the Internal Revenue Code might apply to us, our company’s conclusion is not free from doubt. Therefore, our conclusion may be challenged by the United States tax authorities and a finding that we owe additional United States taxes could substantially reduce the value of your investment in our company. You are urged to consult your tax advisor concerning the income tax consequences of purchasing, holding or disposing of ADSs or ordinary shares if we were to be treated as a United States domestic corporation for United States federal income tax purposes.

 

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Our operations may be adversely affected by the implementation of anti-fatigue-related regulations.We rely on contractual obligations rather than government filings to ensure our continued title to vehicles managed under our vehicle leasing program.

 

The PRC government may decideOur loans to adopt more stringent policies to monitorused automobile dealerships are structured on a sale-and-leaseback basis, whereby the online games industry as a result of adverse public reaction to perceived addiction to online games, particularly by minors. In 2011,entity lessor sells us the Ministry of Culture,vehicle before leasing it back from us. However, upon completing the MIIT and six other central government authorities jointly issued a circular entitled Implementation of Online Game Monitor Systempurchase of the Guardianssubject vehicle, we do not formally transfer the registration of Minors, or the Monitor System Circular. Undervehicle into our name. We also do not file mortgage registrations relating to the Monitor System Circular, online game operators are required to adopt various measures to maintain a system to communicatelease of the vehicle. Instead, our contract with the parents or other guardians of minors playing online gameslessor obligates them not to take any action that could undermine our title to the vehicle. In addition, we retain in our control all documents relating to the vehicle and online game operators are requiredtitle, and provide markings for the vehicle identifying it as owned by us. However, these steps would not prevent a good-faith third-party buyer from taking legal title to monitor the online game activities of minors, and must suspendvehicle if the account of a minor if so requested bylessor attempted to sell the minor’s parents or guardians.vehicle without our knowledge. In 2011,such event, we would face costs attempting to recover from the GAPP,lessor our losses from the MIIT, the Ministry of Education and five other governmental authorities issued the Notice on Initializing the Verification of Real-name Registration for Anti-Fatigue System on Internet Games to strengthen the implementationunauthorized sale of the anti-fatigue systemvehicle, and real-name registration. The notice’s main focus is to prevent minors from using an adult ID to play internet games and, accordingly, it imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration measures properly and effectively. The most severe punishment under the notice is to require termination of the operation of the online game if the operator is found to be in violation of the notice or of the Anti-Fatigue Notice or Monitor System Circular. These restrictions could limit our ability to increase our online games business among minors. Furthermore, if these restrictions were expanded to apply to adult game players in the future, our online games businesswe could be materially and adversely affected.

We might not be able to obtainan Audio/Video Program Transmission License andan Online Culture Operating Permit for Woxiu.

In December 2014, a subsidiary of Sohu.com Inc. acquired 100% of the equity interest of Guangzhou Qianjun Internet Technology Co., Ltd, or Qianjun Technology, a wholly-owned subsidiary of ours that possesses an Audio/Video Program Transmission License. We have started to apply for an Audio/Video Program Transmission License through Beijing Wole Shijie Information Technology Co., Ltd., a wholly-owned subsidiary of ours. As of the date of this annual report, the application has not been approved yet. If we fail to obtain an Audio/Video Program Transmission License, some audio/video content generated and shared by our users ofrenren.com andwoxiu.com may not be allowed to be transmitted over the internet and our revenue and financial performance may be significantly impacted.unsuccessful in recovering any such costs.

 

Risks Related to Doing Business in China

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

 

Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

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The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past few years, the PRC government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results. For example, in the event of unanticipated adverse changes in the economy, the credit quality of the customer of our financing business may materially decreases, and our results of operations could be materially adversely affected.

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct our business primarily through our PRC subsidiaries and consolidated affiliated entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are foreign-invested enterprises and are subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. For example, China enacted an Anti-Monopoly Law in 2008. Because the Anti-Monopoly Law and related regulations have been in effect for only a few years, there have been very few court rulings or judicial or administrative interpretations on certain key concepts used in the law. As a result, there is uncertainty how the enforcement and interpretation of the new Anti-Monopoly Law may affect our business and operations.

 

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, which may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet business and companies.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC government regulation of the internet industry include, but are not limited to, the following:

 

·We only have contractual control over our websites. We do not own the websites due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet content provision services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

 

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·There are uncertainties relating to the regulation of the internet industry in China, including evolving licensing practices. This means that permits, licenses or operations at some of our companies may be subject to challenge, or we have failed to obtain permits or licenses that applicable regulators may deem necessary for our operations or we may not be able to obtain or renew certain permits or licenses to maintain their validity. The major permits and licenses that could be involved include the ICP license, the online culture operating permit, the value-added telecommunication services operation permit and the internet publishing license.

 

·New laws and regulations may be promulgated that will regulate internet activities, including social networking services online games and online advertising businesses. If these new laws and regulations are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

In 2006, the MIIT, the predecessor of which is the Ministry of Information Industry, issued the Notice of the Ministry of Information Industry 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 services operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice also 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. Currently, our PRC consolidated affiliated entities own the related domain names and trademarks and hold the ICP licenses necessary to conduct our operations for websites in China.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain any new licenses if required by any new laws or regulations. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of China’s regulation of the internet industry.

 

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

 

Substantially all of our revenues and costs are denominated in RMB. The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. AfterSince June 2010, the RMB began to appreciatehas fluctuated against the U.S. dollar, again, although there have been some periods when itat times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has lostdepreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar as it did for example during 2014.in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the valueSignificant revaluation of the RMB against the U.S. dollar.may have a material and adverse effect on your investment. To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

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Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, Qianxiang Shiji and Renren Network areis able to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Certain regulations in the PRC may make it more difficult for us to pursue growth through acquisitions.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective in 2006 and was amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. The M&A Rule established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. These rules require, among other things, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor will take control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council in 2008 are triggered. These rules also prohibit any transactions attempting to bypass such security review, including by controlling entities through contractual arrangements. We believe that our business is not in an industry related to national security. However, we cannot assure you that the Ministry of Culture or other government agencies will not publish interpretations contrary to our understanding or broaden the scope of such security review in the future.

 

We may grow our business in part by directly acquiring complementary businesses in China. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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

 

SAFE has promulgated several regulations, including the Notice on Relevant Issues Concerning Foreign Exchange Control of Domestic Residents’ Overseas Investment and Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 37, issued in 2014, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated by the SAFE onin October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

Mr. Joseph Chen, our founder, chairman and chief executive officer, is not a PRC citizen, but resides in China and has established and maintains a major shareholding in our company. Based on our oral inquiry with the relevant local branch of SAFE, neither the requirements for registration under SAFE Circular 75 nor the requirements for registration under SAFE Circular 37 are applicable to Mr. Chen.

 

Mr. James Jian Liu, our executive director and chief operating officer, and a few other senior management personnel of our company, all of whom are PRC residents, became shareholders of our company as a result of the exercise of employee share options. Based on our inquiry with the relevant local branch of SAFE, any application to such local SAFE branch with respect to the registration of Mr. Liu and the other PRC resident shareholders’ holdings of shares in our offshore holding company under SAFE Circular 75 or SAFE Circular 37 and related rules will not be officially accepted or examined because they became shareholders of our offshore holding company as a result of their exercise of employee share options.

However, we cannot conclude that SAFE or its local branch responsible for our PRC subsidiary’s foreign exchange registrations will not later alter their position on and interpretation of the applicability of these foreign exchange regulations to Mr. Chen, Mr. Liu or the other PRC resident shareholders of our company. In the event that the registration procedures set forth in these foreign exchange regulations becomes applicable to Mr. Chen, Mr. Liu or any of the PRC resident shareholders of our company, we will urge these individuals to file necessary registrations and amendments as required under SAFE Circular 37 and related rules. However, we cannot assure you that all of these individuals can successfully file or update any applicable registration or obtain the necessary approval required by these foreign exchange regulations. We can provide no assurance that we will in the future continue to be informed of the identities of all PRC residents holding direct or indirect interests in our company. The failure or inability of such individuals 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 subsidiary’s 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.

 

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

Failure to comply with PRC regulations regarding the registration requirements for employee share ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In 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 the employee share ownership plans or share option plans of an overseas publicly listed company. In 2007, also SAFE 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.

 

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In February 2012, SAFE promulgated the Notice on the Administration of Foreign Exchange Matters for Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies, or the Stock Option Notice. This Stock Option Notice replaced the previous Stock Option Rules. The Stock Option Notice simplifies the requirements and procedures for the registration of stock incentive plan participants, especially in respect of the required application documents and the absence of strict requirements on offshore and onshore custodian banks, as were stipulated in the earlier Stock Option Rules. Under these rules, for PRC resident individuals who participate in stock incentive plans of overseas publicly listed companies, which includes employee stock ownership plans, stock option plans and other incentive plans permitted by relevant laws and regulations, a PRC domestic qualified agent or the PRC subsidiary of such overseas listed company must, among other things, file, on behalf of such resident, 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 the stock holding or share option exercises as PRC residents may not directly use oversea funds to purchase shares or exercise share options. In addition, within three months after any substantial changes to any such stock incentive plan, including for example any changes due to merger or acquisition or changes to the domestic or overseas custodian agent, the domestic agent must update the registration with SAFE.

 

As our company became listed on the New York Stock Exchange, or the NYSE, in May 2011, we and our PRC citizen employees who participate in an employee share ownership plan or a share option plan are subject to these regulations. If we or our PRC optionholders fail to comply with these regulations, we or our PRC optionholders may be subject to fines and other legal or administrative sanctions. See “Item 4.B—Business Overview—Regulation—Regulations on Employee Stock Options Plans.”

We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

PursuantThe State Administration of Taxation has issued several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on Strengthening Administration of EnterpriseCertain Corporate Income Tax for Share TransfersMatters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises issued in February 2015 and amended in 2017, or SAT Circular 698, issued7. Pursuant to these rules and notices, except for a few circumstances falling into the scope of the safe harbor provided by the State AdministrationSAT Circular 7, such as open market trading of Taxationstocks in 2009 with retroactive effect from January 1, 2008,public companies listed overseas, if a non-resident enterprise transfers the equity interests of a PRCnon-PRC resident enterprise indirectly transfers PRC taxable properties (i.e. properties of an establishment or a place in the PRC, real estate properties in the PRC or equity investments in a PRC tax resident enterprise) by disposing of the equity interests ofinterest or other similar rights in an overseas holding company, without a reasonable commercial purpose then itand resulting in the avoidance of PRC enterprise income tax, such indirect transfer should be deemed as a direct transfer of PRC taxable properties and gains derived from such indirect transfer may be subject to the PRC withholding tax at a rate of up to 10% from gains derived from this indirect transfer.

Although the SAT issued the Notice on Several Issues on the Administration of Enterprise Income Tax of Non-PRC Resident Enterprises in 2011, or SAT Circular 24, to provide further clarification on how SAT Circular 698 and its relevant provisions should be implemented, there remain uncertainties as to how “reasonable commercial purpose” is defined or determined or whether transactions conducted as part of an internal restructuring may be immune to re-characterization. On February 3, 2015, the State Administration of Taxation issued SAT Notice on the Collection of Corporate Income Tax by Indirect Transfer of Assets by Non-Resident Companies, or. SAT Circular 7 which attemptssets out several factors to clarifybe taken into consideration by tax authorities in determining whether an indirect transfer has a reasonable commercial purpose, such as whether the meaningmain value of “reasonableequity interest in an overseas holding company is derived directly or indirectly from PRC taxable properties. An indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial purpose”purpose and abolishes certain clausesbe taxable under PRC law without considering other factors set out by SAT Circular 7: (i) 75% or more of both Circular 698the equity value of the intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and Circular 24.risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC taxable properties is lower than the potential PRC income tax on the direct transfer of such assets. SAT Circular 7 also expands the concept of indirect transfer from equity interests to movable and immovable property in China and provides safe harbor rules for the public trading of shares in a listed company holding taxable China assets and for indirect transfers resulting from a corporate restructuring. Further, SAT Notice 7 replaces the compulsory reporting requirement set forth in SAT Circular 698 with a voluntary reporting regime. SAT Circular 7 providesintroduces an interest regime by providing that where an indirect transfer occurs, both partiesa transferor fails to file and pay tax on time, and where a withholding agent fails to withhold the indirect transfer must submit the relevant documents to the competent tax, authority for tax filing purposes, and enterprise income taxinterest will be payable aftercharged on a daily basis. If the transferor has provided the required documents and information or has filed and paid the tax within 30 days from the date that the share transfer contract or agreement comes into effectis signed, then interest shall be calculated based on the benchmark interest rate; otherwise, the benchmark interest rate plus 5% will apply. Both the foreign transferor and the registration oftransferee, and the share transfers is completed. Indirect transfers occurring before SAT Circular 7 but for whichPRC tax matters have not been resolved will be governedresident enterprise whose equity interests are being transferred may voluntarily report the transfer by submitting the documents required in SAT Circular 7.

 

ThereAlthough SAT Circular 7 provides clarity in many important areas, such as reasonable commercial purpose, there are still uncertainties ason the tax reporting and payment obligations with respect to future private equity financing transactions, share exchange or other transactions involving the interpretation and implementationtransfer of SAT Notice 7.shares in non-PRC resident companies. The PRC tax authorities have discretions under SAT Circular 698 and SAT Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investments. We may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-residentnonresident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of these transactions under Circular 698 and SAT NoticeCircular 7, our income tax expenses associated with such potential acquisitions will increase, which may adversely affect our financial condition and results of operations.

 

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In 2013 we submitted a filing in respect of an internal transfer of our equity interest in our subsidiary, Nuomi (HK) Technology Development Co. Limited, and in 2014 we submitted another filing in respect of the sales of our equity interest in Nuomi Holdings Inc. to Baidu Holdings Limited. We have not received the final assessment for either filing and we cannot ascertain at this time if the potential tax liability we have booked for these transactions will be deemed sufficient.

  

Discontinuation of any of the preferential tax treatments or impositionImposition of any additional taxes could adversely affect our financial condition and results of operations.

The Enterprise Income Tax Law applies a uniform statutory income tax rate of 25% to enterprises in China. The Enterprise Income Tax Law and the implementation rules promulgated under it provide that “software enterprises” enjoy an income tax exemption for two years beginning with their first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years. Renren Games has been qualified as a “software enterprise” by the Shanghai Municipal Commission of Science and Technology and, accordingly, was exempt from enterprise income tax rate in 2013 and 2014 and will enjoy a tax reduction of 50% from 2015 to 2017. Furthermore, certain enterprises may still benefit from a preferential tax rate of 15% under the Enterprise Income Tax Law if they qualify as a “High and New Technology Enterprise” subject to certain general factors described in the Enterprise Income Tax Law and the related regulations. Tianjin Joy Interactive Technology Development Co., Ltd. is entitled to a preferential tax rate of 15% due to its qualification as a “High and New Technology Enterprise” from October 21, 2014 to October 20, 2017.

There are uncertainties surrounding the interpretation and implementation of the Enterprise Income Tax Law and its implementation rules. We cannot assure you that the qualification of Renren Games as a “software enterprise” or Tianjin Joy Interactive Technology Development Co., Ltd. as a “High and New Technology Enterprise” by the relevant tax authority will not be challenged in the future by their supervising authorities and be repealed, or that there will not be future implementation rules that are inconsistent with current interpretation of the Enterprise Income Tax Law. If the tax benefits that Renren Games enjoys as a “software enterprise” are revoked prior to expiration of their term, and we are otherwise unable to qualify these companies for other income tax exemptions or reductions, our effective income tax rate will be adversely affected. In addition, we may have to pay additional taxes to make up any previously unpaid tax. As a result, our results of operations could be materially and adversely affected. Our global income and the dividends that we may receive from our PRC subsidiaries, dividends distributed to our non-PRC shareholders and ADS holders, and gain recognized by such shareholders or ADS holders, may be subject to PRC taxes under the Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.

 

Under the Enterprise Income Tax Law and its implementation rules, both of which became effective on January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, in 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. See “Item 5—Operating and Financial Review and Prospects—Taxation—PRC.” Although SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a resident enterprise and may therefore be subject to enterprise income tax at a rate of 25% on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

 

Pursuant to the Enterprise Income Tax Law and its implementation rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors, which are non-PRC tax resident enterprises without an establishment in China, or whose income has no connection with their institutions and establishments inside China, are subject to withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a Cayman Islands holding company and we conduct substantially all of our operations in China through contractual arrangements between our wholly owned PRC subsidiaries and our consolidated affiliated entities. As long as our offshore holding companies are considered non-PRC resident enterprises, dividends that they respectively receive from our PRC subsidiaries may be subject to withholding tax at a rate of 10%. See “Item 5—Operating and Financial Review and Prospects—Taxation—PRC.”

 

As uncertainties remain regarding the interpretation and implementation of the Enterprise Income Tax Law and its implementation rules, we cannot assure you that if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would not be subject to any PRC withholding tax at a rate of up to 10%. Similarly, any gain recognized by such non-PRC shareholders or ADS holders on the sale of shares or ADSs, as applicable, may also be subject to PRC withholding tax. If we are required under the Enterprise Income Tax Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise shareholders and ADS holders, or on gain recognized by such non-PRC shareholders or ADS holders, such investors’ investment in our ordinary shares or ADSs may be materially and adversely affected.

 

The leasehold interests of some of our consolidated affiliated entities might not be fully protected by the terms of the lease agreements due to defects in the title documents or the landlord’s failure to provide title documents.

We lease offices from third parties for our operations in China. Any defects in lessors’ title to the leased properties may disrupt our use of our offices, showrooms or warehouse, which may in turn adversely affect our business operations. For example, certain buildings and the underlying land are not allowed to be used for industrial or commercial purposes without the authorities’ approval, and the lease of such buildings to companies like us may subject the lessor to pay premium fees to the PRC government. We cannot assure you that the lessor has obtained all or any of approvals from the relevant governmental authorities. In addition, some of our lessors have not provided us with documentation evidencing their title to the relevant leased properties. We cannot assure you that title to these properties we currently lease will not be challenged. In addition, we have not registered any of our lease agreements with the PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, we may not be able to defend these leases against bona fide third parties. If third parties who purport to be property owners or beneficiaries of the mortgaged properties challenge our right to use the leased properties, we may not be able to protect our leasehold interest and may be ordered to vacate the affected premises, which could in turn materially and adversely affect our business and operating results.

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The audit report included in this annual report is prepared by auditors who arean auditor that is not inspected by the Public Company Accounting Oversight Board, and, as such, you are deprived of the benefits of such inspection.

 

TheOur independent registered public accounting firm that issues the audit reports included in ourthis annual reportsreport filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the United States Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms'firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

Starting in 2011 the Chinese affiliates of the "big four"“big four” accounting firms, (includingincluding our independent registered public accounting firm)firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

 

In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, (includingincluding our independent registered public accounting firm).firm. A first instance trial of the proceedings in July 2013 in the SEC'sSEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

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Risks Related to Our ADSs

If the market price for our ADSs falls below US$1.00 for an extended period of time, or to US$0.16 at any time, our ADSs may be delisted from the NYSE.

As we announced on April 30, 2018, we will pay a cash dividend in an amount in the aggregate from US$nil up to approximately US$131 million in connection with the Transaction. In addition, we will dispose of a wholly-owned subsidiary, OPI, which holds our advertising agency business as well as the great majority of our long-term investments in terms of both book value and fair market value. Once the Transaction has closed, we no longer own OPI and we have paid the cash dividend to our shareholders, we will have less cash on hand and few assets aside from our those assets that we are using in our used automobile sales, financing and SaaS businesses. We expect the market price of our ADSs to fall significantly on the ex-dividend date to reflect the value that will have been removed from our company and transferred to our shareholders. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction” for a description of the proposed transactions. Pursuant NYSE Rule 802.01C, a company will be considered to be below compliance standards if the average closing price of a security as reported on the consolidated tape is less than US$1.00 over a consecutive 30 trading-day period. Once notified, the company must bring its share price and average share price back above US$1.00 by six months following receipt of the notification. The company can regain compliance at any time during the six-month cure period if on the last trading day of any calendar month during the cure period the company has a closing share price of at least US$1.00 and an average closing share price of at least US$1.00 over the 30 trading-day period ending on the last trading day of that month. In the event that at the expiration of the six-month cure period, both a US$1.00 closing share price on the last trading day of the cure period and a US$1.00 average closing share price over the 30 trading-day period ending on the last trading day of the cure period are not attained, the NYSE will commence suspension and delisting procedures. In addition, we understand that the NYSE has a policy to suspend trading immediately and commence delisting procedures if the market price of securities falls to US$0.16 or less. While we believe that the value of our SNS business and our used automobile business together with the $90 million debt that OPI will owe us and the value of the cash that we will have on hand after the payment of any special dividend will exceed US$1.00 per ADS, we cannot assure you that our ADSs will remain in compliance with the NYSE listing rules. If our ADSs are delisted from the NYSE, the liquidity and value of an investment in our ADSs will be materially and adversely affected.

 

The market price for our ADSs has fluctuated and may continue to be volatile.

 

The market price for our ADSs has fluctuated significantly since we first listed our ADSs. Since our ADSs became listed on the NYSE on May 4, 2011, the closing prices of our ADSs have ranged from US$2.396.15 to US$18.0190.05 per ADS, andincluding retrospective adjustments for the change in the number of ordinary shares represented by each ADS that occurred on February 6, 2017. The last reported trading price on April 13, 2015May 11, 2018 was US$2.78.78 per ADS.

 

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

·regulatory developments in our industry affecting us our advertisers or our competitors;

 

·announcements of studies and reports relating to the quality of our services or those of our competitors;

 

·changes in the economic performance or market valuations of other companies that provide SNS online games, online advertising or social commerceused automobile services, or other internet companies;

 

·actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

·changes in financial estimates by securities research analysts;

 

·conditions in the SNS online game and online advertising industriesindustry or the internet industry in general;

·changes in the internet finance industry or in the used automobile industry;
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·announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;

 

·additions to or departures of our senior management;

 

·fluctuations of exchange rates between the RMB and the U.S. dollar; and

 

·sales or perceived potential sales of additional ordinary shares or ADSs.ADSs;

·the payment of a special dividend.

 

In addition, the stock market in general, and the market prices for internet-related companies and companies with operations in China in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Broad market and industry fluctuations may adversely affect our operating performance. Volatility or a lack of positive performance in our ADS price may also adversely affect our ability to retain key employees, most of whom have been granted options or other equity incentives.

 

Our dual-class voting structure allows our two largest shareholders to significantly influence our actions over important corporate matters, will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

 

We have a dual-class voting structure which consists of Class A ordinary shares and Class B ordinary shares. Subject to certain exceptions, in respect of matters requiring the votes of shareholders, holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.

We issued Class A ordinary shares represented by our ADSs in our initial public offering in May 2011. Mr. Joseph Chen, who is our founder, chairman and chief executive officer, and SB Pan Pacific Corporation are our only shareholders who hold Class B ordinary shares. As of February 28, 2018, Mr. Joseph Chen, our founder, chairman and chief executive officer, beneficially owns approximately 22.8% of our outstanding Class A ordinary shares and approximately 55.8% of our outstanding Class B ordinary shares, representing in aggregate 48.9% of our total voting power, and SB Pan Pacific Corporation beneficially owns approximately 37.1% of our outstanding Class A ordinary shares and approximately 44.2% of our outstanding Class B ordinary shares, representing in aggregate 42.9% of our total voting power.

Due in large part to the disparate voting powers attached to the two classes of ordinary shares, Mr. Chen and SB Pan Pacific Corporation beneficially own approximately 48.0% and 43.0%, respectively, of the aggregate voting power of our company as of February 28, 2015 and have controlling power over matters requiring shareholder approval, subject to certain exceptions. As between Mr. Chen and SB Pan Pacific Corporation, the approvals of SB Pan Pacific Corporation are required for certain important matters relating to our company. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares—Voting Rights.” Consequently, these shareholders are able to significantly influence matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentration of ownership and voting power in the hands of Mr. Chen and SB Pan Pacific Corporation may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs. In addition, these persons could divert business opportunities away from us to themselves or others.

 

Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.

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We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

  

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

 

Sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of February 28, 2015,2018, not including options, we have 1,021,240,8061,034,254,008 ordinary shares outstanding comprised of (i) 385,751,202455,987,265 Class A ordinary shares represented by ADSs, which ADSs are freely transferable without restriction or additional registration under the Securities Act, (ii) 330,101,154272,878,293 Class A ordinary shares not represented by ADSs, which are available for sale subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act, and (iii) 305,388,450 Class B ordinary shares which, following conversion to Class A ordinary shares by the holder of the Class B ordinary shares, are available for sale subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.

 

Certain holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

Except as described in this annual report and in the deposit agreement, dated as of May 4, 2011, and amendment No. 1 to the deposit agreement, dated as of February 6, 2017, by and among our company, Citibank, N.A., as depositary, and the holders and beneficial owners of American depositary shares, holders of our ADSs will not be able to exercise voting rights attaching to the Class A ordinary shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the Class A ordinary shares represented by the ADSs. Upon receipt of your voting instructions, the depositary will vote the underlying Class A ordinary shares in accordance with these instructions.

 

Pursuant to our amended and restated memorandum and articles of association, we may convene a shareholders’ meeting upon seven calendar days’ notice. If we give timely notice to the depositary under the terms of the deposit agreement, which is 30 days’ notice, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the Class A ordinary shares underlying your ADSs, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the Class A ordinary shares underlying your ADSs are not voted as you requested. In addition, although you may directly exercise your right to vote by withdrawing the Class A ordinary shares underlying your ADSs, you may not receive sufficient advance notice of an upcoming shareholders’ meeting to withdraw the Class A ordinary shares underlying your ADSs to allow you to vote with respect to any specific matter.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

 

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

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. For example, the depositary is expected to close its transfer books temporarily in connection with the cash dividend that we announced on April 30, 2018. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and substantially all of our directors and officers reside outside the United States.

 

We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries and consolidated affiliated entities. Most of our directors and officers reside outside the United States and a substantial portion of the assets of such directors and officers are located outside of the United States. As a result, it may be difficult or impossible for you to effect service of process within the United States upon us or these persons, or to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognitionenforcement in the Cayman Islands of judgments obtained in the United States, although a final and conclusive judgment in the federal or state courts of the United States under(and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which a sum of moneythe judgment has been given, (c) is payable, other than a sum payablefinal, (d) is not in respect of taxes, fines, penaltiesa fine or similar charges,a penalty, and (e) was not obtained in a manner and is not of a kind the enforcement of which was neither obtained by fraud or in proceedingsis contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands may be subjectcourts are unlikely to enforcement proceedings asenforce a debt injudgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands under the common law doctrine of obligation without any re-examinationto give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the merits ofCayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the underlying dispute.Cayman Islands.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2013(2018 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority. 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 the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

 

As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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Our amended and restated memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.

 

Our amended and restated memorandum and articles of association contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

 

Our two largest shareholders are able to significantly influence our actions over important corporate matters, which may deprive you of an opportunity to receive a premium for your shares and reduce the price of our ADSs.

As of February 28, 2015, Mr. Joseph Chen, our founder, chairman and chief executive officer, beneficially owns approximately 15.6% of our outstanding Class A ordinary shares and approximately 55.8% of our outstanding Class B ordinary shares, representing in aggregate 48.0% of our total voting power, and SB Pan Pacific Corporation beneficially owns approximately 37.8% of our outstanding Class A ordinary shares and approximately 44.2% of our outstanding Class B ordinary shares, representing in aggregate 43.0% of our total voting power. As between Mr. Chen and SB Pan Pacific Corporation, the approvals of SB Pan Pacific Corporation are required for certain important matters relating to our company. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares—Voting Rights.” Consequently, these shareholders are able to significantly influence matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs. In addition, these persons could divert business opportunities away from us to themselves or others.

We may be a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse United States income tax consequences.

 

Depending upon the value of our ordinary shares and ADSs and the nature of our assets and income over time, we could be a passive foreign investment company, or PFIC for United States federal income tax purposes. A non-United States corporation will be treated as a PFIC for any taxable year if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income, or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce passive income or are held for the production of passive income. Passive income is any income that would be foreign personal holding company income under the Internal Revenue Code of 1986, as amended, including, without limitation, dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producing such income, net gains from commodity transactions, net foreign currency gains and income from notional principal contracts.

 

We believe we were classified as a PFIC for each of the past seven taxable years ending on December 31, 2012, December 31, 2013 and December 31, 2014. Our31. Although our PFIC status for the current taxable year will not be determinable until after the close of the year, we expect, but cannot guarantee, that we will be treated as a PFIC for the current taxable year. Because we currently hold,year due to our ownership of and expect to continue to hold, a substantial amount of cash and otherincome from significant assets treated as passive assets and, because, as a public company,under the PFIC rules. Our PFIC classification for any particular year will depend on the value of our assets for this purpose is determined in part by reference toordinary shares and ADSs, the market pricesnature of our ADSsassets and outstanding ordinary shares, thereincome over time, and the nature of our business. There can be no assurance that we will not be a PFIC for the current or any future taxable year.year, even if we hold fewer passive investment assets as a result of planned disposition of assets.

 

If we are a PFIC for any taxable year in which you hold our ADSs or ordinary shares and you are a U.S. Holder (as defined in “Item 10.E—Additional Information—Taxation—United States Federal Income Tax Considerations—General”), you generally will become subject to increased U.S. federal income tax liabilities and special U.S. federal income tax reporting requirements, unless you make a timely “mark-to-market” or, potentially, a “Qualified Electing Fund” election to mitigate some of the applicable consequences. For more information on the U.S. federal income tax consequences to you that would result from our classification as a PFIC, see “Item 10.E Additional Information—Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

Item 4.Information on the Company

Item 4. Information on the Company

 

A.History and Development of the Company

 

We began our operations in China in 2002 through Beijing Qianxiang Tiancheng Technology Development Co., Ltd., or Qianxiang Tiancheng, which has subsequently become one of our consolidated affiliated entities through the contractual arrangements described below. CIAC/ChinaInterActiveCorp, or CIAC, was incorporated in August 2005 in the Cayman Islands. CIAC wholly owns Qianxiang Shiji Technology Development (Beijing) Co., Ltd., or Qianxiang Shiji, a company established in Beijing and one of the subsidiaries through which we operate our business in China in reliance on a series of contractual arrangements.

 

Our current holding company, Renren Inc., was incorporated in February 2006 in the Cayman Islands under our prior name, Oak Pacific Interactive. Through a corporate restructuring in March 2006, CIAC’s shareholders exchanged all of their outstanding ordinary and preferred shares of CIAC for ordinary and preferred shares of Oak Pacific Interactive on a pro rata basis. As a result, Oak Pacific Interactive acquired all of the equity interests in CIAC and CIAC became a wholly owned subsidiary of Oak Pacific Interactive. In December 2010, we changed our corporate name from Oak Pacific Interactive to Renren Inc.

 

On March 25, 2011, we implemented a ten-for-one share split. Except as otherwise indicated, all information in this annual report concerning share and per share data gives retroactive effect to the ten-for-one share split.

 

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In May 2011, we completed our initial public offering, wherein we issued and sold 50,863,711 ADSs, and certain selling shareholders sold 10,201,289 ADSs, at an initial offering price of US$14.00 per ADS.ADS (without giving retroactive effect to the change in the number of ordinary shares represented by each ADS from three to fifteen that became effective on February 6, 2017). On May 4, 2011, we listed our ADSs began trading on the NYSE under the symbol “RENN.” In addition, concurrently with our initial public offering, we sold an aggregate of 23,571,426 Class A ordinary shares to certain unrelated third-party investors in a private placement, at a price of US$4.67 per Class A ordinary share.

In October 2011, we completed the acquisition of 100% of the equity interest in Wole Inc., a Cayman Islands limited liability company. Wole Inc. operated56.com, a leading user generated content online video sharing website in China, through a set of contractual arrangements between Wole Inc.’s PRC subsidiary, WoleBeijing Woxiu Information Technology Development Co., Ltd., and Guangzhou Qianjun Internet Technology Co., Ltd., or Qianjun Technology. We agreed to sell Qianjun Technology, the operator of the 56.com business, to Sohu.com Inc. in October 2014, with the transaction being completed on December 1, 2014.

 

In March 2013, we completed a corporate restructuring wherein we moved our online games business to Shanghai Renren Games Technology Development Co., Ltd., or Renren Games, a PRC company incorporated in November 2012. Through a set of contractual arrangements between Renren Network, one of our wholly owned PRC subsidiaries, and Renren Games, we effectively control and receive substantially all of the economic benefits of Renren Games. See “Item 4.C—Information on the Company—Organizational Structure” for more information.

 

In October 2013, Baidu Holdings Limited, a subsidiary of Baidu, Inc., acquired approximately 59% of the equity interest of Nuomi Holdings Inc., or Nuomi, a wholly-ownedwholly owned subsidiary of ours and a leading provider of group-buying services in China. In January 2014, Baidu Holdings Limited entered into a share purchase agreement with us and Nuomi to acquire all of our remaining equity interest in Nuomi. This transaction was completed on February 28, 2014.

 

In October 2014, Tianjin Jinhu Culture Development Co., Ltd, a subsidiary of Sohu.com Inc., acquired 100% of the equity interest of Guangzhou Qianjun Internet Technology, Co., Ltd, a wholly-ownedwholly owned subsidiary of ours and operator of the56.com website. This transaction was completed on December 1, 2014.

 

In November 2015, our board of directors approved the disposition of our online game business. The disposition was subsequently completed in March 2016.

On February 6, 2017, we changed the number of ordinary shares represented by each ADS from three to fifteen. Except as otherwise indicated, all ADS and per ADS data in this annual report give retroactive effect to this change.

In August 2017, we acquired 100% of Geographic Farming, LLC, a 360° real estate marketing and media service provider. Geographic Farming provides fully customizable lead capture landing pages that offer multiple home value estimates.

In December 2017, we acquired 100% of Trucker Path Inc., a transportation network company specializing in online and mobile services for the trucking industry in the United States. Trucker Path operates a large American online trucking community with over one million installs on its application on Google Play Store.

Our principal executive offices are located at 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Chaoyang District, Beijing, 100016, the People’s Republic of China. Our telephone number at this address is +86 (10) 8448-1818. Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our telephone number at this address is +1 345-949-8066. We also have offices in 2733 other cities in China, including Shanghai, Guangzhou and Wuhan. Our agent for service of processWuhan, as well as 4 offices in the United States and 1 office in connectionthe Philippines.

The Transaction

On June 10, 2015, our board of directors received a non-binding proposal letter from Mr. Joseph Chen, the chairman of our board of directors and our chief executive officer, and Mr. James Jian Liu, a member of our board of directors and our chief operating officer, proposing a “going-private” transaction. We have taken no formal action with respect to this non-binding proposal.

On September 30, 2016, we announced that we intended to spin off a newly formed subsidiary that would hold our Woxiu business and most of our investments in minority stakes in our investee companies. Our plan was to distribute rights to our shareholders on a pro rata basis that would be exercisable for shares in the entity that would hold these assets, and to distribute cash in lieu of fractional rights and cash to holders of rights who could not exercise or who chose not to exercise their rights.

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On December 22, 2016, we announced that our board of directors had formed a special committee to review the terms of the proposed spin-off and that Mr. Tianruo Pu, Mr. Stephen Tappin and Ms. Hui Huang had been appointed by the board of directors to be the members of the special committee. We further announced that our board of directors had received a preliminary non-binding proposal from Mr. Chen, Mr. Liu and SoftBank Group Capital Limited to purchase shares of the entity that would hold the assets in the proposed spin-off.

These earlier proposals have all been superseded and are no longer currently under consideration.

On April 30, 2018, we announced a cash dividend payable to all holders of ordinary shares (including ordinary shares represented by ADSs). At the same time, we also announced that Oak Pacific Investment, or OPI, a wholly-owned subsidiary of Renren Inc., would be conducting a private placement in which it would offer its ordinary shares solely to shareholders of Renren, for which the waiver of the cash dividend would be the sole form of payment that would be accepted. We refer to the cash dividend, the private placement, and the ancillary agreements and actions as the Transaction.

As of December 31, 2017, our balance sheet included US$565.4 million in long-term investments in some 57 unconsolidated subsidiaries and investment funds. The Transaction is being undertaken to reduce the number and aggregate size of these investments in order to mitigate the risk of being deemed to be an investment company within the meaning of the Investment Company Act. As of the date of this annual report, OPI holds one active business, which is our ZenZone advertising agency business. OPI also holds shares in 44 portfolio companies and interests in 6 investment funds. These portfolio companies and investment funds have an aggregate book value of US$530.6 million as of December 31, 2017, and represent the overwhelming majority of our long-term investments in terms of both book value and fair market value.

The private placement is scheduled to close on June 21, 2018. The one share in OPI currently held by Renren Inc. will be redeemed for no value as part of the Transaction, and OPI will be entirely owned by the purchasers in the private placement. Renren will cease to have any ownership interest in OPI and OPI will cease to be consolidated in our financial statements. Immediately prior to the closing of the private placement, OPI will issue a note to Renren as part of the Transaction. The principal amount of the note will be US$90,000,000, the interest rate will be 8% per year, and the term will be the earlier of five years and the date upon which OPI and its subsidiaries no longer hold any shares of SoFi.

We have furnished an amended and restated offering circular for the private placement to the SEC on Form 6-K on May 14, 2018, together with unaudited pro forma condensed consolidated financial statements of Renren. The unaudited pro forma condensed consolidated balance sheet has been prepared as though the Transaction occurred on December 31, 2017, and the unaudited pro forma condensed consolidated income statements have been prepared as though the Transaction occurred on January 1, 2015.

The special committee may amend or modify the Transaction for any reason at any time prior to the closing, including by extending the deadline for the acceptance of the offer in the private placement or by postponing the closing, and the Transaction may be cancelled for any reason at any time prior to the closing of the private placement. If the private placement is cancelled, the cash dividend will also be cancelled.

We are not disposing of our SNS or used automobile businesses, and we plan to remain listed on the NYSE after the completion of the proposed transactions. We believe that the value of our SNS and used automobile businesses, together with the registration statement on Form F-1value of the note to be issued by OPI and other assets that will remain in our company after the proposed transactions, will be more than sufficient to meet the continued listing requirements of the NYSE. However, if the market price of our ADSs falls further than we expect after we have paid one or more special cash dividends, it is possible that we may be unable to maintain our listing. See “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry—If the market price for our initial public offering in May 2011 is Law Debenture Corporate Services Inc., locatedADSs falls below US$1.00 for an extended period of time, or to US$0.16 at 400 Madison Avenue, 4th Floor, New York, New York 10017.any time, our ADSs may be delisted from the NYSE.”

 

B.Business Overview

 

Overview

 

Renren operates a leading real name social networking service (SNS) business, a used automobile business and a SaaS business.

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Our Renren SNS revenues today consist primarily of internet value-added services, or IVAS, relating to virtual items and VIP memberships in connection with live streaming services. Woxiu, which means “a show of your own” in Chinese, is a PC-based social video platform in China. We enablefor users to connect and communicatestream their performances live to viewers. We launched Renren mobile live streaming in the second quarter of 2016 to serve as the mobile counterpart to Woxiu.

Our used automobile business provides car purchasers in China with each other, share information and user generated content, play online games and enjoyaccess to a wide rangeselection of used vehicles across our network, with a focus on premium brands such as Audi, BMW, Mercedes-Benz, Land Rover and Porsche. In addition, we arrange financing options for customers through Ping An Bank and other featuresfinancial services partners. We also offer value-added services including warranties, insurance and after-sale products and services. Our primaryafter-sale products and services are:

·Renren SNS, which includes our main social networking website and mobile services; and

·Renren Games, our online games business, available atwan.renren.com and on major mobile game distribution platforms, such as Apple’s Appstore;

Beginning in late 2013, we have been reallocating our resources to new business areas. We disposed of Nuomi, our group-buy e-commerceinclude registration, detailing, maintenance and accessories. Our used automotive sales are growing rapidly. After launching this business in two stages in October 2013 and February 2014. We disposedthe middle of 56.com, our on-line video business, in December 2014. We have also shifted from developing games in-house to licensing games from third-party design studios, reducing the size of our gaming team2017, we sold about 2,200 vehicles in the process, although in-house developed games were still responsiblesecond half of 2017, and used automotive sales accounted for a significantthe majority of our Games segment revenues in 2014.2017.

As of March 31, 2018, we had 14 dealerships across China. For the most part these are located in provincial capitals or comparable cities, where we believe the mix of cost structure, consumer demand and opportunity for growth is most favorable. We planprovide capital, a unified brand, technology system and operational coordination. Under this model, all of the cash flow, financial and accounting recordkeeping across our dealerships is centralized. In addition marketing and promotional activities are also centralized, although certain aspects may be executed at the dealership level. Due to continue to develop new services forrestrictions on foreign ownership of certain industries in China, our corevariable interest entity Shanghai Jieying Automobile Sales Co., Ltd., or Shanghai Jieying, is the contracting party under these arrangements.

Our SaaS business began with our launch of Chime in August 2016 and it was further expanded by our acquisition of Geographic Farming, LLC, in August 2017. Chime is an all-in-one real estate solution provider and Geographic Farming is a 360° real estate marketing and media service provider. Unlike our other businesses, our SaaS business is currently focused on the U.S. market rather than the China market.

As our business model was transitioning from our roots in social networking, services, which remainswe made a series of long-term investments in privately held companies that we believed would offer us synergies or access to resources and know-how. The majority of these investments by value was concentrated in the foundationfields of all our services, particularly services that appealinternet finance, social finance, and real estate investment and management, and the number and aggregate size of these investments was significant. As of December 31, 2017, we had US$565.4 million of long-term investments, including US$318.8 million in equity method investments, US$144.8 million in cost method investments, and US$101.8 million in available-for-sale investments. However, due to our target audiencethe risk of college students and young people in China. Webeing deemed to be an investment company, we launched a new servicetransaction on April 30, 2018, to dispose of most of these investments together with our ZenZone advertising agency business. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.”

Our total net revenues have been increasing over the last three years while our losses from continuing operations have been decreasing. Our total net revenues increased from US$41.1 million in the fourth quarter2015 to US$63.4 million in 2016 and US$202.1 million in 2017. We had losses from continuing operations of 2014 to provide credit financing to college studentsUS$223.2 million in China, which we call Renren Fenqi.2015, US$194.1 million in 2016 and US$110.5 million in 2017.

Our Renren SNS

 

Renren, our main real name social networking website plus mobile service, iswas historically the foundation of our service offerings.Renren.com and Renren Mobile App enable users to communicate and stay connected with their friends, classmates, family members and co-workers. We began at university campuses, and we believe our users include a significant portion of current college students and recent college graduates in China. Our real name social networking community has diversified over the years to include white-collar professionals, university-bound high school students and other demographics. Since December 2013, partly due to increased competition for the white collar demographic and their migration to social messaging services, we have begun re-focusingrefocusing on the younger demographic such as university students. We believe real name relationships, through which users share personal content and experiences, provide the basis for a deeper and more authentic sense of community, and hence create stronger and more enduring social graphs on the network. With approximately 88% of our traffic now coming from our mobile services, we have transformed from a PC-based social networking company to a mobile-oriented social networking services provider.

 

We are one of the largest SNS platforms in China. As of December 31, 2012, 20132015, 2016 and 2014,2017, the cumulative total of our activated users was approximately 178228 million, 206240 million and 223257 million, respectively. From January 2014 through December 2014, we added an average of approximately 1.4 million new activated users per month. In December 2012, December 2013 and December 2014, the number ofHowever, our monthly unique log-in users wasdecreased from approximately 5641 million 45in December 2015 to approximately 35 million in December 2016 and 46then further to approximately 32 million respectively. From January 2014 throughin December 2014, our2017. Furthermore, the average amount of time that unique log-in users spent a monthly average of approximately 4 hours on our platform compared to an average of 7.7decreased from approximately 1.8 hours in 2013.2015 to approximately 1.4 hours in 2016 before increasing to approximately 1.6 hours in 2017. The decrease in users’ average time spent on our platform is primarily due to intense competition in the mobile internet environment, where there are numerous mobile applications dedicated to meet the specific needs of different users that have affected their stickiness to our platform.

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Our SNS platform is accessible from internet-enabled devices, including mobile devices and personal computers, so that users can access our platform anytime from anywhere they are connected to the internet. We offer versions of our sites and client applications that have been optimized for a range of mobile device operating systems, including for iOS, Android and Windows. Increasingly, our users are accessing and spending time onrenren.com through mobile devices. For example, theThe mobile percentage of our monthly total user time spent onrenren.com was 69.1%68.6%, 79.2%92.6% and 87.9%87.5% in December 2012,2015, December 20132016 and December 2014,2017, respectively.

 

By providing content and applications that are attractive to Chinese internet users, we seek to strengthen our user base and increase user engagement and retention. With mobile devices becominghaving become the preferred method for Chinese internet users to access social networking services and other internet services, we have focused our research and development resources on mobile services and applications. During 2014,Since 2015, we have continuously improvedcontinued to improve our Renren Mobile App’s communication features. We opened our social graph from a friend-based network to a follow-based social network. In addition, multi-likes and mobile live streaming have been added to the app and are rapidly becoming popular features. The new features such as adding a feature for sending both voice and text messaging between individuals or in groups. We also added various location-based services forare compatible with our usersapp strategy shift to get connected and communicate with others on campus as partan “online celebrity” type of our strategy of re-focusing on the younger user demographics. We have recently launched a mobile application, “YouPai,” for both professional photographers and general users to edit, share and comment on photographs with social networking features.format.

 

From time to time we develop and offer new services that we believe have synergies with our SNS platform and could leverage our SNS user base. For instance, we launched an internet finance initiative in October 2014 through which we provide installment financing plans to eligible college students to facilitate their purchases of various consumers goods such as smartphones, consumer electronics, cosmetics and fashion accessories on our marketplace and various selected e-commerce platforms in China. We call this Renren Fenqi. We believe that we have a competitive advantage with our extensive database of college students in China, which allows us to assess their credit profiles and repayment abilities. As the leading SNS on college campuses in China, we are able to reach out to our target users more effectively.

OneHistorically, one of the primary approaches for us to monetize our user base iswas through online advertising services. We still offer a broad range of advertising formats and solutions, such as social ads, display ads, top promoted news feeds, sponsored online events, campaigns and virtual items on both web and mobile platforms ofrenren.com, which are described. However, online advertising generated an insignificant amount of revenue in more detail below. For social ads, display ads,2017, and top promoted news feed items, we have no expectation that it will constitute a significant part of our business for the capability to targetforeseeable future. Furthermore, we are disposing of our ZenZone advertising agency business as part of the transaction that we announced on April 30, 2018. See “—A. History and reach users meeting certain geographic and demographic criteria, such as educational background, life stage (for example, students or white collar workers), user interests and geographic location. We have developed mobile advertisement solutions which offer similar targeting capabilities, including location based recommendations.

·Mobile advertising—Our mobile advertising products include top banner placements, location-based services, app promotions and promoted news feeds through our mobile applications. Advertisers may pay for different typesDevelopment of advertising formats while targeting their advertisements by user interests, time period, and demographic and geographic criteria. We began selling mobile advertising to our brand advertisers in the fourth quarter of 2013 and it accounted for approximately 15% of our total online advertising revenue for the year ended December 31, 2014.

·Social ads—Our social ads come in a variety of formats, including user icon displays, and they support light flash-based interactions, including polls and coupons. Our social ads allow users to interact with the advertisement alone or together with friends using user-initiated call-to-action buttons such as “participate,” “like this ad,” “comment on this ad,” “share this ad” and “become a fan,” which can result in friend recommendations and other forms of social influence. Our social ads are designed to be non-intrusive and typically do not employ heavy flashing fields or pop-ups that cover large parts of the user’s screen. Advertisers pay for social ads based on the time period that the advertisement is displayed or the number of impressions delivered.

·Display ads—Our display ads are delivered alongside a web page primarily as graphical advertisements. Display ads can be targeted to certain users or can be displayed on a page at a certain time to all users viewing the page. Advertisers can pay for display ads based on the time period that the advertisement is displayed, the number of ad impressions delivered or the number of clicks on their advertisement. An “ad impression” is delivered when an advertisement appears on a page and the page is viewed by a user.

·Top promoted news feeds—Our promoted news feeds display news, events and promotions regarding an advertiser or its brand to users in various formats, including text and text plus graphic, which they can further share among their friends.

·Sponsored online events, campaigns and virtual items—We enable advertisers to sponsor a particular area on our website for online events or campaigns, and to sponsor virtual items.

While the growth of mobile advertising spending may be accelerating in mature markets such as the United States, China’s advertising market historically has taken longer to adopt trends and has yet to fully embrace mobile advertising. Nevertheless, we believe that mobile targeting will become more important as advertisers in China become more comfortable with mobile advertising and users continue to spend more time on our mobile services.Company—The Transaction.”

 

Our online advertising serves a broad base of advertisers, including leading international companies such as Yum and Coca-Cola, leading companies in China such as China Mobile and Snow Beer, and various small- and medium-sized enterprises. In 2012, 2013 and 2014, the number of our brand advertisers was 232, 189 and 139, respectively, and the average annual spending by our brand advertisers was approximately US$182,000, US$193,000 and US$179,000, respectively. Our advertisers operate in a variety of industries, including fast-moving consumer goods, information technology hardware, apparel and accessories, personal care products, automobile manufacturing and financial services. Our online advertising service team has direct contacts with our advertisers, the vast majority of whom purchase our online advertising services through third-party advertising agencies. As of December 31, 2014,Currently, we had 152 sales representatives and supporting personnel for online advertising services.

We also have an advertising division dedicated to servicing small and medium enterprise, or SME, advertisers. We utilize ourrenren.com platform to allow SME advertisers to select certain user information, such as city, gender, age, interest graph and university, for better targeting accuracy. SME advertising verticals typically consist of services relating to tutoring, wedding packages, personal electronics and on-line B2C services. In 2014, SME advertising represented approximately 6% of our total advertising revenue.

In addition to online advertising, we also monetize our user base primarily through VIP memberships and virtual items onrenren.comandwoxiu.com. VIP memberships provide users with additional features and benefits such as larger size limits on photo albums and email inboxes. Virtual items, such as cartoon images, flashes, birthday cards and gift cards containingmemberships. The majority of our virtual currency, can be sent by users to friends. Somerevenue from virtual items are free and others needis related to be purchased.our live streaming services. Woxiu, which means “a show of your own” in Chinese, is a PC-based social video platform for users to stream their performances live to viewers. We launched Renren mobile live streaming in the second quarter of 2016 to serve as the mobile counterpart to Woxiu. With our social networking features, users can chat with the performer and other audience members and purchase virtual items from us such as flowers, jewelry or sports cars to show their support and appreciation for the performers. The performers receive a portion of the purchase price for the virtual items that are gifted to them. Virtual items, such as cartoon images, flashes, birthday cards and gift cards containing our virtual currency, may also be sent by users to friends. Some virtual items are free and others need to be purchased. VIP memberships provide our SNS users with additional features and benefits such as larger size limits on photo albums and email inboxes.

Renren Games

Our Used Automotive Sales

 

We offerprovide car purchasers in China with access to a portfoliowide selection of web-based, cross-platformused vehicles across our network, with a focus on premium brands such as Audi, BMW, Mercedes-Benz, Land Rover and mobile gamesPorsche. We also sell some new cars. We display vehicles at our in-store showrooms as well as on our Kaixin Auto app and through other online vertical channels such as Autohome and 58.com. Most sales occur in-store given the importance of the showroom experience in the premium segment. To provide transparency to our users through Renren Games. Web-based gamescustomers, we provide extensive external and interior photographs of each vehicle on our online inventory. We typically offer favorable trade-in terms in connection with our sales. Our customer support specialists are gamesavailable to answer customer questions that can be played directly fromarise throughout the user’s internet browser without downloading additional software. Cross-platform games are games that allow users to play the same game between PC and mobile devices seamlessly while also using the same account. Cross-platform games are optimized for both PC and mobile games so that user experience on both mediums remains high. Beginning in 2013, with smartphone and tablet penetration continuing to increase in China and globally, we began to allocate more resources to mobile games and new game genres such as card and board games, quiz games and advanced casual games on both iOS and Android systems.process.

 

The gamesIn addition, we arrange financing options for customers through Ping An Bank and other financial services partners. Customers can easily select among various financing options in a convenient sales process. We do not take balance sheet risk in connection with these consumer financing activities. There is typically a period of time between the financing approval and the disbursement of funds, and to address this, we usually provide financing to our dealerships to allow them to complete sales and allow customers to begin to enjoy their purchased vehicles. This interim period is normally between 5 and 25 days depending on the specific financial institutional partner which will lends the funds. We also offer value-added services including warranties, insurance and after-sale products and services. Our after-sale products and services include games thatregistration, detailing, maintenance and accessories.

Our used automotive sales are growing rapidly. After launching this business in the middle of 2017, we have developed internallysold about 2,200 vehicles in the second half of 2017.

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All of the cash flow, financial and games thataccounting recordkeeping across our dealerships is centralized. In addition marketing and promotional activities are also centralized, although certain aspects may be executed at the dealership level. We also support dealers with our dealer SaaS platform, powered by big data, provides market insights and dealer management functionality and assists them in making operational and inventory management decisions. It also empowers their sales via data mining and analysis of existing customer data bases and online lead generation.

Our business is driven by data and technology at all stages of the process, from inventory purchasing, reconditioning, photography and annotation through online merchandising, sales, financing, logistics, and delivery. Through our mobile application and web app, we have licensed from third parties. However, we have shifted from developing games in-houseallow consumers to licensing games from third-party design studios, reducingbrowse vehicle inventory, arrange visits to our showrooms and understand the sizecar buying process. Users are also able to pay deposits online once an automobile is selected. Users who desire to sell their cars to us are able to input information to receive an estimate for the sale of their car. Our dealer SaaS system is designed to cover every aspect of a car dealer’s daily operations, including finance, inventory, sales, procurement, vehicle assessment, and value-added services to improve operating efficiency. It also provides market data insights to assist dealers in their inventory procurement and marketing. Our big data analytics system collects over 25 million data points daily, covering approximately 390 cities. After de-duplication, data normalization and anomaly removal, this yields approximately five million highly relevant data items related to used vehicles for further analysis.

We attract customers through a variety of channels, including referrals, walk-ins, especially for certain of our gamingdealerships located in prime areas, and online performance-based advertising. We believe referrals are key to our customers as they will want to purchase used automobiles from a business they can trust. Each dealership has a team of customer support specialists who provide assistance to our customers located around China. Our specialists are available to assist customers with questions that arise throughout the car buying process. These specialists are available via online chat or telephone and help customers navigate the website, answer specific questions and assist in loan applications. We take a consultative approach with our customers, offering live support and acting as a trusted partner to guide them through each phase of the purchase lifecycle. We are committed to providing our customers with the highest quality transaction experience and believe our customer support specialists are a meaningful reason why customers prefer transacting with us. The effectiveness of our model is reflected in the process, although during this transitional periodhigh ratings we receive from our in-house developed games remain responsiblecustomers and strong customer referrals. We focus on developing our customer support specialists and providing them with the information and resources they need to offer exceptional customer service.

Our platform facilitates value-added services to car purchasers, which is currently comprised sales of third-party insurance policies and third-party warranties. Our scale and our ability to provide an effective channel for a significantinsurance brokers and companies to acquire customers have enabled us to negotiate more favorable standard terms for car purchasers. The products currently offered through our platform are accident insurance and warranties against future repairs. We earn service fees from insurance and warranty policy brokers for facilitating the sale of such insurance products.

We obtain our used vehicle inventory through the large and liquid national used-car market. The majority of our Games segment revenues. Going forward, Renren Games will be primarilyinventory is acquired directly from customers, vehicle finance and leasing companies, online sales platforms or individuals, including those who seek to trade in their vehicles in connection with a game operator rather thanpurchase. We use internally-developed algorithms to advise our dealerships which types of cars to bid on and how much to bid, identifying criteria such as make, model, price range, and likely locations of such cars. Our software sifts through over 25 million data points per day. Using this data, we can evaluate the tens of thousands of potential vehicle purchases we consider each day, giving us a game developer, althoughdistinct advantage over traditional in-person sourcing methods. We utilize a broad range of data sources, including proprietary internal data and a variety of external data sources to support our assessments.

Prior to acquiring a vehicle, we put it through a thorough inspection process covering all major systems, controls, features, brakes, tires and cosmetics. Based on our inspection, we determine the reconditioning necessary to bring the vehicle up to our internal quality standards.We do not offer vehicles for sale which are in poor condition or have a history of accidents, water or fire damage and extensive mileage or other unacceptable attributes. After acquiring a vehicle, we transport the vehicle to one of our reconditioning locations, at which point the vehicle is entered into our inventory management system. Each reconditioning location includes trained technicians, vehicle lifts, dent repair and paint capabilities, and receives on-site support from third party vendors with whom we have integrated systems to ensure ready access to parts and materials. Our centrally trained repair teams perform substantially all routine mechanical and minor body repairs in-house at our dealership locations.

As of March 31, 2018, we had 14 dealerships across China. For the most part these are located in provincial capitals or comparable cities, where we believe the mix of cost structure, consumer demand and opportunity for growth is most favorable. The 14 dealerships are located in Dalian, Chongqing, Nanjing, Jinan, Hangzhou, Shenyang, Zhengzhou, Hohhot, Yinchuan, Cangzhou, Changchun, Shanghai, Suzhou and Wuhan.

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Due to restrictions on foreign ownership of certain industries in China, our variable interest entity Shanghai Jieying Automobile Sales Co., Ltd., or Shanghai Jieying, holds our interests in the dealerships. When we acquire a dealership, the original shareholder of the dealership agrees to set up a new special purpose holding vehicle to which it transfers the eligible assets, employees and business contracts owned and leased by the existing dealership. In turn, Shanghai Jieying agrees to subscribe for 70% of the equity in this new entity. The consideration for the 70% equity interest consists of cash injected into the acquired dealership as well as contingent consideration in the form of shares of Kaixin Auto Group, our subsidiary and the parent of Shanghai Jieying. The payment of the contingent consideration is contingent upon the successful listing of Kaixin Auto Group as well as the performance of the acquired dealership. In addition, if the dealership opens a new store or acquires other car dealerships, then we may invest in particularly promising game design studiosnegotiate an additional performance evaluation method for the new store or acquired business.

In expanding our network of dealerships, we carefully consider potential markets and conduct systematic evaluation of each potential new site, using a scoring system that we developed over the years. In our scoring system, we consider a number of factors, including:

·location, nature and quality of the area served;

·population density in the area served;

·age distribution and average disposable income of consumers in the area served;

·spending patterns, dining habits and frequency of consumers in area served;

·locations of other car dealerships within the area served;

·estimated customer traffic;

·structure of the dealership, including availability of showroom and parking space; and

·rental costs, lease economics and estimated return on investment.

In addition to our dealerships, starting from 2018, we also engage with other in-network dealers through our platform, collaborating with them primarily to meet our inventory needs and by providing them financing. We work with both large dealers, who may have a broader and diverse inventory collection and more need for our financing services, and small dealers, who may have better local knowledge or offer inventory on a relatively small scale.attractive terms. We also support dealers with our dealer SaaS platform, which provides market insights and dealer management functionality.

 

We usemanage our relationships with dealers through a virtual item-based revenue modeldedicated in-house team. Responsibilities of this team include sourcing, review and approval of dealer financing relationships, monitoring of vehicles sourced from dealers, and management of our dealer database. We monitor performance data on a real-time basis through our dealer SaaS system.

To ensure the quality of our dealer network as well as prevent potential fraud risk, we have implemented a rigorous procedure to screen dealers based on the dealer’s licensing status, operation history, scale, location and various other factors.

Our Financing Business

We launched our financing business through internet finance services in the fourth quarter of 2014 with Renren Fenqi, a financial service platform providing credit financing to college students in China for making purchases on e-commerce platforms on an installment payment basis. In the first quarter of 2015, we launched a used automobile financing service which provides credit financing to used automobile dealers in China. In the second quarter of 2015, we launched Renren Licai, a financing platform, as one source of funds for the credit financing that we extend in our internet finance business. In the second quarter of 2016, we stopped making loans through Renren Fenqi, and we are now only collecting the remaining installment payments as they come due. The last of these installment payments will be due in the second quarter of 2018. In the third quarter of 2017, we stopped issuing new financing products on our Renren Licai platform. At the moment, the principal element of our financing business is our used automobile financing service which is now part of our Auto Group segment.

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As of December 31, 2017, we had extended credit in an aggregate of RMB9,957.5 million (US$1,473.7 million) to a total of 879 used automobile dealers in 60 cities mainly concentrated in Shandong, Henan, Jiangsu, Zhejiang and Sichuan provinces. This financing makes it possible for used automobile dealers to acquire and maintain inventory for their businesses. According to the China Automobile Dealers Association, sales of used automobiles in China totaled approximately 12.4 million units in 2017, as compared with 10.4 million units in 2016 and 9.4 million units in 2015.

Our loans to used automobile dealerships are structured on a sale-and-leaseback basis, whereby the dealership sells us the vehicle before leasing it back from us. We do not formally transfer the registration of the vehicle into our name or file mortgage registrations relating to the lease of the vehicle, but our contract with the lessor obligates them not to take any action that could undermine our title to the vehicle, and we retain in our control all documents relating to the vehicle and title and provide markings for the vehicle identifying it as owned by us. Our employees inspect the cars that are sold and leased back under these arrangements and visit the borrowers periodically to ensure that cars recorded as still in inventory have not been sold and that cars that have been sold are replaced by new inventory that becomes part of the security for the loans.

Funds for our games, underfinancing business are provided by our issuance of asset-backed securities collateralized by that credit financing and by peer-to-peer platforms. In January 2016, we originated China’s first asset-backed security product collateralized by finance leasing of used automobiles with an issuance in the amount of RMB 299.8 million (US$46.1 million) and a term of 12 months. This product trades on the Shanghai Stock Exchange. In September 2016, we originated a second, similar asset-backed security product, also collateralized by finance leasing of used automobiles and also listed on the Shanghai Stock Exchange, in the amount of RMB 510.6 million (US$78.5 million) and a term of 21 months. These asset-backed securities are reflected as liabilities on our balance sheet and the corresponding collateral, which players can play games for free but are charged for optional purchasesis constantly renewed over the life of virtual in-game items, suchthe securities, as itemsassets. The financing that improve the strengthis provided by peer-to-peer platforms is primarily short-term, with a term of game character, in-game accessories and pets. In most cases, users that wishone to obtain such items immediately can do so by paying a fee.three months.

 

Our SaaS Business

We are developing a lead generation and customer relationship management (CRM) solution for real estate professionals in the United States under the brand name Chime. Chime is a comprehensive SaaS platform being designed to offer CRM, IDX and team management solutions and help real estate professionals launch marketing campaigns, track leads’ activities, build customer relationships, manage websites and seamlessly communicate with teams across multiple devices. Our Chime team works with top real estate professionals in the San Francisco Bay Area to resolve the issues these professionals encountered from the fragmented apps and multiple disconnected systems in their daily work. Through cooperation with these top real estate professionals, Chime consolidates digital tools used in the real estate industry into one mobile-based easy-to-use platform.

We launched Chime in August 2016. Our Chime team consists of 221 employees as of December 31, 2017, among which 169 employees are responsible for research and development, 23 employees are responsible for sales and 29 employees are responsible for operations and general administration. Our Chime research and development team is based in Beijing and Wuhan and our Chime sales and operation teams are based in Utah. This business is still in an early stage.

In August 2017, we acquired 100% of Geographic Farming, LLC, a 360° real estate marketing and media service provider. Geographic Farming provides fully customizable lead capture landing pages that offer multiple home value estimates. We have enhanced Geographic Farming with Chime’s customer relation management solution.

Strategic Investments

As our business model was transitioning, one of our principal business activities was evaluating and making a series of long-term investments in privately held companies that we believe offer us synergies or access to resources and know-how. The majority of these investments by value was concentrated in the fields of internet finance, social finance, and real estate investment and management, and the number and aggregate size of these investments was significant. As of December 31, 2017, we had US$565.4 million of long-term investments, including US$318.8 million in equity method investments, US$144.8 million in cost method investments, and US$101.8 million in available-for-sale investments. Our single largest long-term investment as of December 31, 2017 was a 14.97% interest in SoFi with a book value of US$208.7 million, which accounted for 36.9% of our total long-term investments as of that date. Notes 10 to our financial statements included in this annual report gives detailed disclosure on our long-term investments.

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We typically invested in early-stage companies where we could offer advice and guidance in shaping the company’s development. While we primarily invested through the acquisition of non-controlling interests, we would normally obtain a board seat as a condition of making an investment of significant size. In order to prevent our ownership interest from being diluted, we invested in multiple rounds of financing in certain companies. Our strategy of acquiring non-controlling interests allowed us to invest in more companies than would have been the case if we were to only acquire controlling interests. Furthermore, our strategy of acquiring non-controlling interests greatly expanded the selection of companies that we could invest in, as founders of early-stage companies are often unwilling to sell a controlling interest. We believe that our connections with companies with related businesses helped us achieve our strategic goals even in the absence of control.

Due to the risk of being deemed to be an investment company, we launched a transaction on April 30, 2018, to dispose of OPI, the entity that holds most of these investments together with our ZenZone advertising agency business. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” As of the date of this annual report, OPI holds shares in 44 portfolio companies and interests in 6 investment funds. These portfolio companies and investment funds have an aggregate book value of US$530.6 million as of December 31, 2017, and represent the overwhelming majority of our long-term investments in terms of both book value and fair market value.

Our long-term investments in early-stage companies did not significantly impact our results of operations before the year 2016. However, impairment of long-term investments significantly increased our net losses in both 2016 and 2017. We had impairment of long-term investments of US$102.3 million in the year ended December 31, 2016. Of this, US$50.8 million was due to impairment of our investment in 268V Limited and US$32.3 million was due to impairment of our investment in Motif Investing Inc. We also had impairment of long-term investments of US$113.1 million in the year ended December 31, 2017. Of this, US$35.0 million was due to impairment of our investment in Credit Shop, Incorporated, US$15.0 million was due to impairment of our investment in Zhu Chao Holdings Company Limited, US$12.1 million was due to impairment of our investment in 268V Limited, US$11.6 million was due to impairment of our investment in Eunke Technology Ltd., US$11.0 million was due to impairment of our investment in KoolRay Vision Inc. and US$10.0 million was due to impairment of our investment in Snowball Finance Inc.

In addition to our long-term investments in early-stage companies, we made a number of long-term investments in investment partnerships and short-term investments in financial instruments. These investments were made for cash management purposes. Notes 9 and 10 to our financial statements included in this annual report give detailed disclosure on these investments. See “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry—If we fail to manage our cash prudently, we may suffer material losses or material fluctuation in the value of our assets or be unable to carry out our business strategies.”

Payment Methods and Systems

 

In October 2007, we launched “Renren Beans,”We have two forms of virtual currency that we make available to our users: “Renren Beans” and “Renren Points.” Renren Beans can be used to purchase any of our IVAS or other paid services and applications for users. Renren Points are for use specifically with our mobile live streaming services. We launched Renren Beans in October 2007 and Renren Points concurrently with our launch of mobile live streaming in March 2016.

Users can acquire ourRenren Beans and Renren Points online by purchasing the virtual currency eitherdirectly on our Renren platform through third-party online or offline:payment systems through bank cards and mobile and SMS payments, among other methods. In cooperation with third-party payment service providers, such as Alipay, Apple Pay, WeChat Pay, 99 Bills, Yeepay and Jcard, we provide a wide selection of payment services to users.

·Online—Users can purchase the virtual currency directly on our Renren platform through third-party online payment systems using bank cards and mobile and SMS payments, among other methods. In cooperation with third-party payment service providers, such as Alipay, 99 Bills, Yeepay and Jcard, we provide a wide selection of payment services to users.

·Offline—Users can purchase online prepaid cards redeemable for our virtual currency from retail points across China, which primarily consist of newsstands, convenience stores and internet cafés.

 

Sales and Marketing

Sales team for financing and SaaS business

We have established a team of sales and marketing personnel dedicated to our financing business. As of December 31, 2017, we had 338 sales and marketing personnel focusing on our growing financing business. Most of these personnel visit used automobile dealerships to persuade dealers to take out or renew loans from us. We also have sales and marketing personnel based in Utah, Arizona and the Philippines who are responsible for growing our incipient Chime business.

Used Automobile Sales

We believe our customer base is similar to the overall market for used automobiles at the typical price points of our vehicles. As of the date of this annual report, the growth of our used auto sales business has primarily been through referrals from one customer to the next. We also believe our strong customer focus ensures customer loyalty which will drive both repeat purchases and referrals. Our sales are primarily made in-store, but we have invested heavily in our online sales channel, including through the Kaixin app and our web interface. We also utilize other online vertical channels. We believe this is a key advantage over our competitors, whether traditional dealers, who do not have a strong offline presence, or online-only competitors, who lack the offline infrastructure and in-store experience we are able to provide.

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Advertising Sales

 

As is customary in China, we sell our online advertising services and solutions primarily through third-party advertising agencies that represent end-advertisers. We cultivate and strengthen our relationships with end-advertisers by sharing our understanding of the evolving social networking industry and related online advertising services and solutions. In addition, we also leverage advertising agencies’ existing client relationships and network resources to increase our sales and expand our advertiser base. We market our services and solutions through direct marketing, by hosting or attending public relations events such as trade marketing events, and through other marketing activities.

As of December 31, 2014, we had 152 sales representatives and supporting personnel for online advertising services. Our sales force for online advertising services is organized by industry and provides a broad range of services and solutions. In addition to building and maintaining customer relationships, our sales force assists advertisers in structuring advertising campaigns by analyzing the advertisers’ target audiences and marketing objectives.

 

Marketing and Brand Promotion

 

We believe that brand recognition is important to our ability to attract users. We have engaged in both online and offline marketing activities to promote our Renren brand.brand, Chime brand and to rebrand our dealerships, many of which have an established local brand, as Kaixin Dealerships. To date, user recognition of our Renren brand has primarily grown virally, and we have built our Renren brand with modest marketing and brand promotion expenditures. During the fourth quarterIn addition, for our used automotive sales business, we work with dealerships on marketing initiatives to further leverage our Kaixin brand value. Our dealerships also engage in certain other promotional activities, including placement of 2013 and early 2014,local radio ads. From 2015 to 2017, we launched a series of online and offline branding campaigns to solidify our Renren brand among the young generation. Although we may have to expand on our promotions from time to time, especially when we launch new services or products, our marketing expenses for these promotions are relatively small when compared to those of our principal competitors.

To encourage such viral growth, we focus on continuously improving the quality of our services, as we believe satisfied users and their friends are more likely to recommend our services to others. We also work with other operators and platforms for cross-marketing and co-branding projects to further leverage our existing brand value.

 

We have a marketing team that initiates various marketing activities. For example, we market our services through media partnerships, co-branding campaigns with other brands, initiatives with hit movies and sponsorship of cultural events such as music festivals. In 2014,From 2015 to 2017, we organized a marketing think tank alliance “Young People Matter” with leading consumer brands, major advertising agencies and a variety of other organizations in China. We hosted a series of events for the alliance members to conduct direct conversations with college students, particularly the thought leaders and active users onrenren.com. We believe that this alliance and its events further strengthened Renren’s reputation as an SNS platform for the young population in China and we expect to continue to actively participate in it.

 

We are currently aggressively rebranding our dealerships, many of whom have an established local brand, as Kaixin Dealerships. Currently, we are co-branding our dealerships to associate their existing brands with the Kaixin brand, which means “Happiness” in Chinese and has had strong impact and positive response in other applications, including a social gaming platform previously operated by Renren. By empowering our dealers with this highly recognizable brand name, they will gain further credibility and trustworthiness.

To date, user recognition of our brand has primarily grown virally and by referrals, and we have built our brand with modest marketing and brand promotion expenditures. To encourage such viral growth, we focus on continuously improving the quality of our services, as we believe satisfied users and their friends are more likely to recommend our services to others. In addition, we work with dealerships on marketing initiatives to further leverage our brand value. Our dealerships also engage in certain other promotional activities, including placement of local radio ads.

We anticipate future marketing experience to mostly be performance-based advertising, with the purpose being to drive traffic that translated to customer purchases. We believe this is an appropriate strategy in the premium used automobile market, where customers are widely distributed and who engage in used automobile transactions relatively infrequently. We expect these advertisements will generally fall into three areas: vertical automotive media, selected online channels and selected offline channels. In addition to our paid channels, we intend to attract new customers through enhancing our media and public relations efforts, including organic marketing to enhance our reputation. Although we may have to expand on our promotions from time to time, especially when we launch new services or products, we expect our marketing expenses for these promotions will be relatively small when compared to those of our principal competitors.

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Seasonality

  

Seasonal fluctuations and industry cyclicality have affected our business in the past. Our Renren SNS business is indirectly affected during the summer and winter vacations because many students do not broadcast when they are likely to continueaway from school. Our automotive sales business is affected by seasonality in used automobile sales, which tends to affect our online advertising services. We generally generate less revenue from online advertising during national holidaysdealers’ need for financing for new inventory. Used automobile sales tend to be lower in China, in particular during the first quarter of each year than in the other three quarters due to the slowdowneffect of business during the Chinese New Year holiday season that lasts approximately two weeks. To a lesser extent, we also typically generate less revenues from online advertising during the fourth quarter of each year. Thisholiday. Our financing business is indirectly affected by seasonality in revenuesused automobile sales, which tends to affect dealers’ need for financing for new inventory. As our financing business and our automotive sales business is duestill growing rapidly, seasonality may be less evident than it otherwise would be, and as our business continues to evolve, the fact that a large concentrationnature of our advertising customers are in the consumer sector, with many of them purchasing more of our advertising services in the spring and summer seasons due to the fact that certain of their major products sell better during those seasons. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of our advertisers. We expect that seasonal fluctuations and cyclicality will continue to cause our quarterly and annual operating results to fluctuate.seasonality may change.

Competition

 

The internet industry in China is rapidly evolving and highly competitive. We face significant competition in almost every aspect of our business. In our social networking business that provides multiple services, including live streaming service and other value-added services, we compete with companies and services such as Tencent’s WeChat, QQ Mobilemobile, and Q-zone, SINA'sSINA’s Weibo, Momo, YY, Huajiao and Momo.Douyu. Competition with these services in the mobile landscape is as intense as with their PC counterparts, if not more so. In our online gamesfinancing business, we primarily compete with the companies such as Tencent, Qihu360of providing financing services to individual consumers and Kunlun.

dealerships in automobile financing services. We also compete for online advertising revenues with other websites that sell online advertising servicesexpect the competition in China. In addition, we indirectly compete for advertising budgets with traditional advertising mediathe internet finance industry in China suchwill continue to intensify as televisionthe industry develops in the near future. In relation to our used automobile sales business, our competitors primarily include the publicly and radio stations, newspapersprivately owned used and magazines,new car dealers, online and major out-of-home media. We may also face potential competition from global social networking service providers that seek to enter the China market.

We compete for advertisers primarily on the basismobile sales platforms, as well as millions of size and purchasing power of our user base, effectiveness of services in reaching targeted consumers, ability to demonstrate marketing results, knowledge of our sales force, and leadership in our social network services category.private individuals.

 

We compete for users and user engagement primarily on the basis of helping users communicate, share and have fun on our platform as a result of quality and innovation in our user-facing products, as well as brand name and recognition and quality of user-generated content. We believe the mobile market competitive landscape will continue to intensify in the near future.

 

We startedcompete for financing business primarily on our internet finance business in 2014risk management and we primarilydata management capabilities, our brand reputation, our sales capability, our stable partner relationships, our technical strength and our process management.

In addition, the PRC automobile marketplace is highly fragmented. We also compete with established banksagainst many online automobile platforms, including Uxin, Guazi, Dasouche, and with lending companies in China such as Qufenqi.comRenrenche for our automotive sales business. A number of used vehicles are also bought and Fenqile.com in online consumer financing services. We expect the competition in the industry finance industry in China will continue to intensify as the industry develops in the near future.sold through privately negotiated transactions.

Regulation

 

This section summarizes the principal current PRC laws and regulations relevant to our business and operations.

 

Regulations on Value-Added Telecommunications Services

 

In 2000, the State Council promulgated the Telecommunications Regulations which draw a distinction between “basic telecommunication services” and “value-added telecommunication services.” The Telecommunications Regulations were subsequently revised in 2014.2014 and again in 2016. In December 2015, the MIIT published the Classification Catalogue of Telecommunications Services, or the 2015 Catalogue, which took effect on March 1, 2016. The first catalogue was published in September 2000 and was subsequently amended in 2001 and 2003, respectively. Under the 2015 Catalogue, “value-added telecommunication services” was further classified into two sub-categories and 10 items. Internet content provision services, or ICP services, is aunder the second subcategory of value-added telecommunications businesses. Under the Telecommunications Regulations, commercial operators of value-added telecommunications services must first obtain an operating license from the MIIT or its provincial level counterparts.

 

In 2000, the State Council issued the Administrative Measures on Internet Information Services, or the Internet Measures, which were subsequently revised in 2011. According to the Internet Measures, commercial ICP service operators must obtain an ICP license from the relevant government authorities before engaging in any commercial ICP operations within the PRC.

 

In 2009, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating License, or the Telecom License Measures. On July 3, 2017, Telecom License Measures was further revised and it became effective on September 1, 2017. The Telecom License Measures set forth the types of licenses required to operate value-added telecommunications services and the qualifications and procedures for obtaining such licenses. For example, an ICP operator providing value-added services in multiple provinces is required to obtain an inter-regionalinterregional license, whereas an ICP operator providing the same services in one province is required to obtain a local license.

 

In 2000, the MIIT promulgated the Administrative Measures on Internet Electronic Messaging Services, which require the operator to obtain a special BBS Permit from the local bureau of the MIIT prior to engaging in BBS services. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms. These measures were terminated by a notice issued by the State Council in September 2014. However, the competent authorities in Beijing still require companies to obtain approval for the operation of BBS services.

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In 2004, the MIIT issued a notice stating that mobile network carriers can only provide mobile network access to those mobile internet service providers that have obtained licenses from the MIIT before conducting operations, and that such carriers must terminate mobile network access for those providers who have not secured the required licenses.

  

To comply with these laws and regulations, our information services operator, Qianxiang Tiancheng, holds a value-added telecommunications business operating license and an ICP license, and our ICP operators Qianxiang Wangjing Qianxiang Changda,and Wole Shijie Tianjin Joy Interactive Technology Development Co., Ltd., or Joy Interactive, and Renren Games allboth hold ICP licenses. Jingwei Zhihui is in the process of applying for an ICP license. In addition, Qianxiang Wangjing possesses BBS Permits issued by the local bureau of the MIIT.

 

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 onin December 11, 2001 and amended onin September 10, 2008 and 2016, the ultimate foreign equity ownership in a value-added telecommunications service 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 the Ministry of Commerce or its authorized local branches, and the relevant approval application process usually takes six to nine months.

In 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 telecommunications 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 the requirements in the 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 value-added telecommunications business operating licenses.

 

To comply with these regulations, we operate our websites through our PRC domestic companies, i.e., Qianxiang Tiancheng, Qianxiang Wangjing Qianxiang Changda,and Wole Shijie, Joy Interactive and Renren Games, each holds relevant licenses and permits.

 

Regulations on Internet Content Services

 

National security considerations are an important factor in the regulation of internet content in China. The National People’s Congress, the PRC’s national legislature, has enacted laws with respect to maintaining the security of internet operations and internet content. According to these laws, as well as the Administrative Measures on Internet Information Services, violators may be subject to penalties, including criminal sanctions, for internet content that:

 

·opposes the fundamental principles stated in the PRC constitution;

 

·compromises 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;

 

·undermines the PRC’s religious policy or propagates superstition;

 

·disseminates rumors, disturbs social order or disrupts social stability;

 

·disseminates obscenity or pornography, encourages gambling, violence, murder or fear or incites the commission of a crime;

 

·insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or

 

·is otherwise prohibited by law or administrative regulations.

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ICP service 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.

 

In February 2015, the China Internet Network Information Center promulgated the Administrative Provisions on Account Names of Internet Users, which became effective as of March 1, 2015. These provisions require all internet information service users to authenticate their real identity information for the registration of accounts and to comply with seven basic requirements, including observing the laws and regulations, upholding the socialist regime, protecting state interests and, among other requirements, ensuring the authenticity of any information they provide. Relevant internet information service providers are responsible for the protection of users’ privacy, the consistency of user information, such as account names, avatars, and the requirements contemplated in the provisions, making reports to the competent authorities regarding any violation of the provisions, and taking appropriate measures to stop any such violations, such as notifying the user to make corrections within a specified time and suspending or closing accounts in the event of continue non-compliance.

 

To comply with these laws and regulations, we have adopted internal procedures to monitor content displayed on our websites, including a team of employees dedicated to screening and monitoring content uploaded on our websites and removing inappropriate or infringing content.

 

Regulations on Internet Publishing

The Administrative Provisions on Online Publishing Services, or the Online Publishing Provisions, was jointly issued by the MIIT and the State General Administration of Press, Publication, Radio, Film and Television in 2016, and came into effect on March 10, 2016. The Online Publishing Provisions define “online publishing services” as providing online publications to the public through information networks. Any online publishing services provided in the territory of the PRC are subject to these provisions. The Online Publishing Provisions requires any internet publishing services provider to obtain an online publishing service license to engage in online publishing services. Under the Online Publishing Provisions, online publications refers to digital works which have publishing features such as digital work that have been edited, produced or processed and which are made available to the public through information networks, including written works, pictures, maps, games, cartoons, audio/video reading materials and other methods. Any online game shall obtain approval from SAPPRFT before it is launched online. Furthermore, Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises cannot engage in providing web publishing services.

Regulations on Information Security

 

The Ministry of Public Security promulgated measures in 1997, further revised in 2011, that prohibit the use of the internet in ways which, among other things, result in a leakage of state secrets or the distribution of socially destabilizing content. 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. 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.

 

In 2005, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet Security Protection, which require all ICP operators to keep records of certain information about their 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. The ICP operators must regularly update information security systems for their websites with local public security authorities, and must also report any public dissemination of prohibited content. If an ICP operator violates these measures, the PRC government may revoke its ICP license and shut down its websites.

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In November 2016, the Standing Committee of the National People’s Congress issued the Cyber Security Law, which came into effect on June 1, 2017. This is the first Chinese law that focuses exclusively on cyber security. The Cyber Security Law provides that network operators must set up internal security management systems that meet the requirements of a classified protection system for cybersecurity, including appointing dedicated cybersecurity personnel, taking technical measures to prevent computer viruses, network attacks and intrusions, taking technical measures to monitor and record network operation status and cybersecurity incidents, and taking data security measures such as data classification, backup and encryption. The Cybersecurity Law also imposes a relatively vague but broad obligation to provide technical support and assistance to the public and state security authorities in connection with criminal investigations or for reasons of national security. The Cybersecurity Law also requires network operators that provide network access or domain name registration services, landline or mobile phone network access, or that provide users with information publication or instant messaging services, to require users to provide a real identity when they sign up. The Cyber Security Law sets high requirements for the operational security of facilities deemed to be part of the PRC’s “critical information infrastructure.” These requirements include data localization, i.e., storing personal information and important business data in China, and national security review requirements for any network products or services that may have an impact on national security. Among other factors, “critical information infrastructure” is defined as critical information infrastructure that will, in the event of destruction, loss of function or data leak, result in serious damage to national security, the national economy and people’s livelihood, or the public interest. Specific reference is made to key sectors such as public communication and information services, energy, transportation, water-resources, finance, public service and e-government. However, no official guidelines as to the scope of “critical information infrastructure” have been formally issued.

 

Our PRC companies which are ICP operators have completed the mandatory security filing procedures with the respective local public security authorities, regularly update their information security and content-filtering systems with newly issued content restrictions, and maintain records of users’ information as required by the relevant laws and regulations. They have also taken measures to delete or remove links to content that to their knowledge contains information violating PRC laws and regulations. Substantially all of the content published on our websites is manually screened by employees who are dedicated to screening and monitoring content published on our website and removing prohibited content. All of the other content, primarily consisting of comments posted by users, is first screened by our filtering systems and content containing prohibited words or images is manually screened by our employees. We believe that with these measures in place, no prohibited content under PRC information security laws and regulations should have been publicly disseminated through our website in the past. However, due to the significant amount of content published on our website by our users on a daily basis, if any prohibited content is publicly disseminated in the future and we become aware of it, we will report it to the relevant governmental authority. We believe these measures are generally in compliance with the relevant laws and regulations.

 

Regulations on Internet Privacy

 

In recent years, PRC government authorities have enacted legislation on internet use to protect personal information from any unauthorized disclosure. The PRC law does not prohibit ICP operators from collecting and analyzing personal information from their users. However, the Administrative Measures on Internet Information Services prohibit an ICP operator from insulting or slandering a third party or infringing the lawful rights and interests of a third party. Pursuant to Administrative MeasuresDecision on Internet Electronic Messaging Services,Strengthening Network Information Protection promulgated by the Standing Committee of the National People’s Congress in 2012, 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. In December 2011, the MIIT promulgated the Several Provisions on Regulating the Market Order of Internet Information Services, which became effective in March 2012. Without obtaining the consent from the users, telecommunication business operators and ICP operators may not collect or use the users’ personal information. The personal information collected or used in the course of provision of services by the telecommunication business operators or ICP operators must be kept in strict confidence, and may not be divulged, tampered with or damaged, and may not be sold or illegally provided to others. The ICP operators are required to take certain measures to prevent any divulge, damage, tamper or loss of users’ personal information.

 

In December 2012, the Standing Committee of the National People’s Congress of the PRC issued the Decision on Strengthening the Protection of Online Information. Under this decision, ICP operators are required to take such technical and other measures necessary to safeguard information against inappropriate disclosure. To further implement this decision and relevant rules, MIIT issued the Regulation of Protection of Telecommunication and Internet User Information in 2013.

In November 2016, the Standing Committee of the National People’s Congress issued the Cyber Security Law, which came into effect on June 1, 2017. The Cyber Security Law imposes certain data protection obligations on network operators, including that network operators may not disclose, tamper with, or damage users’ personal information that they have collected, and that they are obligated to delete unlawfully collected information and to amend incorrect information. Moreover, internet operators may not provide users’ personal information to others without consent. Exempted from these rules is information irreversibly processed to preclude identification of specific individuals. Also, the Cyber Security Law imposes breach notification requirements that will apply to breaches involving personal information.

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To comply with these laws and regulations, we require our users to accept a user term whereby they agree to provide certain personal information to us, and have established information security systems to protect users’ privacy and have filed them with the MIIT or its local branch as required.

 

Regulations on Online Game OperationVirtual Currency

 

Online game operation is covered extensively by a numberThe Notice on the Reinforcement of existing laws and regulations issued by various PRC governmental authorities, including the MIIT, the GAPP and the Ministry of Culture.

In 2011, the Ministry of Culture issued the Provisional Regulations for the Administration of Online Culture. This regulation applies to entities engaging in activities related to “online cultural products,” including musicInternet Cafes and video files, internet games, animation features and audiovisual products, performed plays and artwork converted for dissemination via the internet, and these commercial entities are required to apply to the relevant local branch of the Ministry of Culture for an Online Culture Operating Permit.

In 2009, the State Commission Office for Public Sector Reform issued the Notice on Interpretation of the State Commission Office for Public Sector Reform on Several Provisions Relating to Animation, Online Games, and Comprehensive Law Enforcement in the Culture Market in the ‘Three Provisions’ jointly promulgatedissued by the Ministry of Culture, the SARFTPeople’s Bank of China and other government authorities in 2007, directs the People’s Bank of China to strengthen the administration of virtual currency in online games to avoid any adverse impact on the real economic and financial systems. This notice provides that the total amount of virtual currency issued by online game operators and the GAPP. Accordingamount purchased by individual users should be strictly limited, with a strict and clear division between virtual transactions and real e-commerce transactions. This notice also provides that virtual currency should only be used to this notice, the GAPP is responsible for the examination and approval of online games that will be uploadedpurchase virtual items.

The Notice on the internet, while after the uploading, such online games shall be regulatedStrengthening of Administration on Online Game Virtual Currency, jointly issued by the Ministry of Culture. The notice further clarifies that the GAPP is responsible for the examinationCulture and approval of game publications authorized by offshore copyright owners to be uploaded on the internet, while other imported online games shall be examined and approved by the Ministry of Culture.

The GAPP Notice also restates that foreign investors areCommerce in 2009, broadly defined virtual currency as a type of virtual exchange instrument issued by internet game operation enterprises, purchased directly or indirectly by the game user by exchanging legal currency at a certain exchange rate, saved outside the game programs, stored in servers provided by the internet game operation enterprises in electronic record format and represented by specific numeric units. Virtual currency is used to exchange internet game services provided by the issuing enterprise for a designated extent and time, and is represented by several forms, such as online prepaid game cards, prepaid amounts or internet game points, and does not permitted to invest ininclude game props obtained from playing online game operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through the establishment of other joint venture companies, or contractual or technical arrangements. To comply with these regulations, Qianxiang Wangjing, Renren Games and Joy Interactive each possess an Online Culture Operating Permit, and Qianxiang Changda holds an Internet Publishing License. Based on the advice of TransAsia Lawyers, our PRC legal counsel, the corporate structure of our consolidated affiliated entities and our subsidiary in China comply with all existing PRC laws and regulations.

Online Game Censorship

games. In 2009, the Ministry of Culture issued its Notice Regarding Improving and Strengtheningfurther promulgated the Administration ofFiling Guidelines on Online Game Content. This notice callsVirtual Currency Issuing Enterprises and Online Game Virtual Currency Trading Enterprises, which specifically defines “issuing enterprise” and “trading enterprise” and stipulates that a single enterprise may not operate both types of business.

On December 1, 2016, the MOC issued the Online Game Operation Notice, which became effective on May 1, 2017. The Online Game Operation Notice standardizes rules regarding the issuance of virtual items used for online games. The Online Game Operation Notice provides that the issuance and exchange of virtual items issued by online game operators must be administered in accordance with the regulations applicable to improve and innovate their game models. Emphasis is placed specifically on the following: (i) mitigating the pre-eminence of the “upgrade by monster fighting” model, (ii) imposing more severe restraints on the “player kill” model (i.e., where one player’s character attempts to kill another player’s character), (iii) restricting in-game marriages among game players, and (iv) improving the enforcement of the legal requirements for the registration of minors and games time-limits. This notice also requiresvirtual currency; that online game operators generally may not allow online game virtual currency to set up committeesbe exchanged for real currency or physical items; requires that, when online game operators allow users to carry out gameexchange small-value physical items for virtual items, the content self-censorship. Toand value of such physical items must comply with these requirements, we carry out game content self-censorship.

Anti-Fatigue Systemapplicable laws and the Real Name Registration System

In 2011, the Ministry of Culture, the MIITregulations; and six other central government authorities jointly issued a circular entitled Implementation of Online Game Monitor System of the Guardians of Minors, or the Monitor System Circular. Under the Monitor System Circular,stipulates that online game operators are required to adopt various measures to maintain a system to communicate with the parents or other guardians of minors playing online games and online game operators are required to monitor the online game activities of minors, and must suspend the account of a minor if so requested by the minor’s parents or guardians.

In 2011, the GAPP, the MIIT, the Ministry of Education and five other governmental authorities issued the Notice on Initializing the Verification of Real-name Registration for Anti-Fatigue System on Internet Games to strengthen the implementation of the anti-fatigue system and real-name registration. The notice’s main focus is to prevent minors from using an adult ID to play internet games and, accordingly, it imposes stringent punishments on online game operators that do not implement the required anti-fatigue and real-name registration measures properly and effectively. The most severe punishment under the notice is to require termination of the operation of the online game if the operator is found to be in violation of the notice or of the Anti-Fatigue Notice or Monitor System Circular.

We have developed our own anti-fatigue and real name registration systems, which have been in place since December 2007. Asrenren.com is a real name system, game players are required to use their real identification to create accounts. For game players who do not provide age information, we assume that they are minors. In order to comply with the anti-fatigue rules, after three hours of play, users under 18 years of age only receive half of the experience or other benefits they would otherwise earn. After five hours of play, minors receive no experience points. These restrictions could limit our ability to increase our online games business among minors.

Regulations on Virtual Currency and Virtual Items

The Interim Administration Measures of Online Games require companies that (i) issue online game virtual currency (including prepaid cards and/or pre-payment or prepaid card points), or (ii) offer online game virtual currency transaction services to apply for the Internet Culture Business Permit from provincial branches of the Ministry of Culture. The regulations prohibit companies that issue online game virtual currencyprohibited from providing serviceslucky draws or lotteries that would enableare conducted on the trading of such virtual currency. Any companycondition that fails to submit the requisite application will be subject to sanctions, including but not limited to termination of operation, confiscation of incomes and fines. The regulations also prohibit online game operators from allocating virtual items or virtual currency to players based on random selection through lucky draw, wager or lottery that involvesparticipants contribute cash or virtual currency directly paid bycurrencies in exchange for virtual items and services and must publish the players.results of such lucky draws or lotteries on the website of or other conspicuous location in the game and must maintain all relevant records for at least 90 days. In addition, companies that issueenterprises engaged in online game virtual currency must comply with certain specific requirements, for example,operations shall require online games virtual currency can only be used for productsgame users to register their real names by using valid identity documents and services related toshall limit the issuance company’s ownamount that an online games.game user may top up each time in each game.

 

When applying for an Online Culture Operating Permit or for permission to issue virtual currency, a virtual currency issuer must file detailed information about its currency with the Ministry of Culture, including form, extent of circulation, unit purchase price, and how the virtual currency will be refunded upon termination of services. Qianxiang Wangjing Renren Games and Joy Interactive each possesspossesses an Online Culture Operating Permit with a business scope encompassing the “issuance of virtual currency,currency. therefore, they must also make certain filings with the Ministry of Culture prior to the issuance of virtual currency and conduct their respective businesses in compliance with PRC law.

 

Regulations on Advertisements

 

The PRC government regulates advertising, including online advertising, principally through the State Administration for Industry and Commerce. Under the Rules for Administration of Foreign Invested Advertising Enterprises, which were jointly promulgated by the State Administration for Industry and Commerce and the Ministry of Commerce in 2004, certain foreign investors are permitted to hold direct equity interests in PRC advertising companies. A foreign investor in a Chinese advertising company is required to have previously had direct advertising operations as its main business outside of China for two years if the Chinese advertising company is a joint venture, or three years if the Chinese advertising company is a wholly foreign-owned enterprise. In practice, the foreign investor is deemed compliant with the “main business” requirement if it derives more than 50% of its revenues from advertising business within the past two or three years, as applicable. We conduct our advertising business (including our ZenZone business) through consolidated affiliated entities in China, namely Qianxiang Tiancheng and Qianxiang Wangjing.

 

Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the contents of the advertisements they prepare or distribute are true and in full compliance with applicable laws and regulations. In addition, where a special government review is required for certain categories of advertisements before publishing, the advertisers, advertising operators and advertising distributors are obligated to confirm that such review has been performed and the relevant approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In the case of 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.

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In 2004,April 2015, the Standing Committee of the National People’s Congress issued the PRC Advertising Law or the Advertising Law, which came into effect on September 1, 2015. The Advertising Law applies to all advertising activities conducted via the internet. The Advertising Law requires that users must be able to close online pop-up ads with one click. Moreover, internet service providers are obligated to cease publishing any advertisements that they know or should know are illegal. Violation of these regulations may result in penalties, including fines, confiscation of the advertising incomes, termination of advertising operations and even suspension of the provider’s business license.

In July 2016, the State FoodAdministration for Industry and DrugCommerce issued the Interim Measures for the Administration of Internet Advertising, which became effective on September 1, 2016. These interim measures clarify that “internet advertisements” means commercial advertisements that promote commodities or services directly or indirectly via internet media such as websites, webpages and internet applications in the form of texts, pictures, audio, video or other forms. These interim measures also create a number of new requirements for internet advertisers. For example, these interim measures state that paid search advertisements should be clearly distinguished from ordinary search results. In addition, consistent with the Advertising Law, these interim measures require that advertisements published on internet pages in the form of pop-ups or other similar forms shall be clearly marked with a “close” button to ensure “one click to close.” The measures also prohibit unfair competition in internet advertisement publishing, including (1) providing or using any programs or hardware to intercept or filter any legally operated advertisements of other persons; and (2) using network pathways, network equipment or applications to disrupt the normal data transmission of advertisements, alter or block legally operated advertisements of other persons or load advertisements without authorization. Violation of these regulations may result in fine of no more than RMB 30,000 (US$4,611), with any punishments administrated by the Administrative Authority for Industry and Commerce in the place where the advertisement publisher is located.

In February 2018, the State Administration for Industry and Commerce promulgated the Administration MeasuresNotice on Launching Special Overhaul of Internet Drug Information Services, which requireAdvertising. This notice specifies that illegal internet operators providing drug information services obtain approval fromadvertisements that have an adverse social impact, generate enormous publicity or are detrimental to the competent foodpersonal and drug administration and that drug advertisementsproperty safety of the public will be examined and approved by the competent food and drug administration as well. Qianxiang Wangjing holds an Internet Drug Information Service Permit.regulated more strictly.

 

Regulations on Broadcasting Audio/Video Programs through the Internet

In 2004, the SARFT promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the A/V Broadcasting Rules. These rules apply to the launch, broadcasting, aggregation, transmission or download of audio/video programs via televisions, mobile phones and 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.

 

In 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and 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 A/V 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.

 

In 2009, the 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 comply 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 the distributors of these movies and television shows must obtain an applicable permit before releasing any such movie or television show. In 2012, SARFT and the State Internet Information Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2013,2014, the State Administration for Press, Publication, Radio, Film and Television (formed when the GAPP was combined with the SARFT in March 2013) released a Supplemental Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online audio/video content, such as internet dramas and micro films, must obtain a permit for radio and television program production and operation, and also that online audio/video content service providers should not release any internet dramas or micro films that were produced with any entity lacking such permit. For internet dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting such content will be deemed responsible as the producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified and which content complies with the relevant content management rules. This notice also requires that online audio/video content, include internet drama and micro films, be filed with the relevant authorities before release.

 

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In September 2016, SARFT issued a Circular on Strengthening the Administration on Online Live Broadcast of Audio/Video Programs. The circular requires that providers of live online broadcasts of audio/video programs must obtain an audio/video program transmission license. The circular also prohibits any organization or person on the internet from calling themselves a “television” or “television station” without authorization.

In November 2016, the Cyberspace Administration of China issued Regulations for the Administration of Online Live Streaming Services, or the Online Live Steaming Service Regulations, which took effect on December 1, 2016. The Online Live Steaming Service Regulations require that all live streaming services providers and distributors obtain licenses for their services, including that: (i) live streaming services providers and distributors of online streaming news must obtain a permit for the provision of news information services over the internet and (ii) providers of live performance broadcasts or streaming and providers of live broadcasts of online audio/video programs must also obtain the corresponding permits. The Online Live Streaming Service Regulations also require service providers to censor content before releasing it, and to establish systems that allow them to block illegal live streams immediately. The Online Live Streaming Services Regulations introduce “know your performer” procedures for streaming services providers in respect of all performers on their platforms, including through ID checks and real-name verification, as many artists use pseudonyms or stage names. Streaming services providers are also required to verify through follow-up interviews or other means all data they collect in that regard. Access to streaming services is also supposed to be restricted, which means available only with registration. Further, if chat room functions or other interactive services are offered on such sites, then streaming services providers have the added obligation of reporting any illegal content posted by their users to the relevant authorities. However, there are no guidelines as yet as to what constitutes “illegal content.”

In December 2016, the Ministry of Culture released the Administrative Measures for Online Performance Business Activities. These measures target providers of online live performance broadcasts and streaming that derive a profit from such activities through advertising, sponsorship or by charging for access. These measures came into effect on January 1, 2017, and require streaming services providers to obtain a permit from the provincial cultural affairs bureau and to display their license number in a prominent place on the website, such as on the homepage or landing page.

On March 16, 2018, the State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China issued the Notice on Further Regulating the Order of Transmitting Online Audio-visual Programs. The notice prohibits all online audio/video service providers from engaging in (i) production and transmission of any unauthorized re-editing, re-dubbing or parody of other films, television programs, and online audio-visual programs, (ii) transmitting any trailers or previews of radio and television programs or audio-visual programs that have not obtained the relevant permit or completed required filing procedures. Further, any audio-visual program service provider which has not obtained the License for Online Transmission of Audio-Visual Programs may not engage in sponsorship of or any form of cooperation with any audio-visual program.

Wole Shijie which operateswoxiu.com, a social video platform for users to stream performances live to viewers, is applying forviewers. For such services, Guangzhou Qunge Information Technology Co., Ltd., a wholly-owned subsidiary of Wole Shijie, currently holds an ICP license, a Broadcasting and Television Program Production and Management License, as well as an Online Culture Operation License, which among other things permits woxiu.com to provide plays, programs and performances. Guangzhou Qunge does not hold an Audio/Video Program Transmission License.

Regulations on In addition, we also opened our social graph from a friend-based network to a follow-based social network, and multi-likes and mobile live streaming have been added to the app and are rapidly becoming popular features. To provide such services, Qianxiang Wangjing currently holds an ICP license and an Online Music

In 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of Internet Music. This document,Operation License, which among other things reiterates the requirement for an internet service providerpermits renren.com to obtain an internet culture business permit to carry out any business relating to internet music products. In addition, foreign investors are prohibited from operating internet culture businesses.

In 2009, the Ministry of Culture promulgated the Notice on Strengtheningprovide plays, programs 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.

With respect to the above, we have obtained relevant licenses from third parties and provide online music to our users through our SNS website.performances. Qianxiang Wangjing has been granted an Online Culture Operating Permit, the scope of which covers online games and online music operations. If any music provided through our website is found to be in violation of the filings and/or approvals required, we could be requested to cease providing such music or be subject to penalties from the Ministry of Culture or its local branches.does not hold Audio/Video Program Transmission License.

 

Regulations on Internet Mapping Services

 

Under the Surveying and Mapping Law adopted by the National People’s Congress, entities engaged in surveying and mapping services should obtain a surveying and mapping qualification certificate and comply with the state’s surveying and mapping criteria. According to the amended Administrative Rules of Surveying Qualification Certificate and the amended Standard for Surveying Qualification Certificate issued by the National Administration of Surveying, Mapping and Geoinformation in August 2014 and July 2014, respectively, and the Notice on Further Strengthening the Administration of Internet Map Services Qualifications, issued in 2011, the provision of internet mapping services by any non-surveying and mapping enterprise is subject to the approval of the National Administration of Surveying, Mapping and Geoinformation and requires a surveying and mapping qualification certificate. According to these rules, certain conditions and requirements, such as a minimum number of technical and map security verification personnel, security facilities, and approval from relevant provincial or national governments of the service provider’s security, qualification management and filing management systems, must be complied with by an enterprise applying for a Surveying and Mapping Qualification Certificate. The Internet Mapping Services License covers the following mapping services: (1) geographic location, (2) geographic information uploading and labeling, and (3) map database development. Qianxiang Wangjing holds a Surveying and Mapping Qualification Certificate for internet mapping.

 

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In November 2015, the State Council enacted the Administrative Regulations on PeerMaps, or the Maps Regulations, effective as of January 1, 2016. The Maps Regulations requires entities engaging in internet mapping services, such as geographic positioning, the uploading of geographic information or markings, and the development of a public map database, to Peer Lendingobtain a relevant qualification certificate for surveying and mapping. The Maps Regulations require entities engaging in online map services to use mapping data approved by the relevant governmental authorities, host servers storing map data within the PRC, and establish a management system as well as protection measures for the data security of the online maps. The mapping data must not contain any content prohibited by the Maps Regulations, and no entities or individuals are allowed to upload or mark such prohibited content online. Further, entities engaging in internet mapping services shall keep confidential any information involving state secrets and trade secrets acquired during their work.

UnderRegulations on Illegal Fund-Raising

Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations enterprises engagingto avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations promulgated by the State Council in July 1998 and revised in January 2011, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the General Office of the State Council in July 2007, explicitly prohibit illegal public fund-raising. The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or mainly engagingother securities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in financial operationscash, properties or other forms within a specified period of time, and (iii) using a legitimate form to disguise the unlawful purpose.

To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, which came into force in January 2011. These interpretations provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fundraising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation or advertising such as deposit servicessocial media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, properties in kind and other forms; and (iv) the grantingfund-raising targets at the general public as opposed to specific individuals. An illegal fund-raising activity will be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to these interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of loans withoutdeposits involved exceeding RMB 1,000,000 (US$153,697), (ii) with over 150 fund-raising targets involved, or (iii) with the approvaldirect economic loss caused to fund-raising targets exceeding RMB 500,000 (US$76,849), or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees including but not limited to agent fees, rewards, rebates and commission, constitute an accomplice of the crime of illegal fund-raising. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning the Application of Law in the Illegal Fund-Raising Criminal Cases promulgated on March 25, 2014, the administrative proceeding for determining the nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceeding concerning the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fundraising.

Regulations on Internet Finance Services

In July 2015, ten PRC regulatory agencies, including the People’s Bank of China, the MIIT and the China Banking Regulatory Commission, jointly issued the Guidelines on Promoting the Healthy Development of Internet Finance, or the Guidelines. The Guidelines call for active government support of China's internet finance industry, including the online peer-to-peer lending service industry, and clarify the division of responsibility among regulatory agencies. The Guidelines specify that theChina Banking Regulatory Commissionwill have primary regulatory responsibility for the online peer-to-peer lending service industry in China and state that online peer-to-peer lending service providers shall act as an intermediary platform to provide information exchange, matching, credit assessment and other intermediary services, and must not provide credit enhancement services and/or engage in illegal fund-raising. The Guidelines provide additional requirements for China's internet finance industry, including the use of custody accounts with qualified banks to hold customer funds as well as information disclosure requirements.

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In August 2016, four PRC regulatory agencies, including theChina Banking Regulatory Commission, the MIIT, theMinistry of Public Securityand Cyberspace Administration of China, publishedthe Interim Measures on the Administration of Business Activities of Peer-to-Peer Lending Information Intermediaries, which we refer to as the Interim Measures. The Interim Measures define online lending intermediaries as the financial information intermediaries that are engaged in online peer-to-peer lending information business and provide lenders and borrowers with lending information services, such as information collection and publication, credit rating, information interaction and loan facilitation. Consistent with the Guidelines, the Interim Measures prohibit online lending intermediaries from providing credit enhancement services and collecting funds directly or indirectly, and require, among others, (i) that online lending intermediaries intending to provide online lending information agency services and its subsidiaries and branches must make relevant record-filing with local financial regulatory authorities with which it is registered after obtaining the business license; (ii) that online lending intermediaries operating telecommunication services must apply for relevant telecommunication service license after the completion of the record-filing and registration with the local financial regulatory authority; and (iii) that online lending intermediaries must materially specify the online lending information intermediary in the business scope.

The Interim Measures list the following businesses that an online lending intermediary must not, by itself or on behalf of a third party, participate in: (i) financing for themselves whether or not in disguised form; (ii) accepting or collecting directly or indirectly the funds of lenders; (iii) providing lenders with guarantee or promise on guarantee of principal and interest directly or in disguised form; (iv) publicizing or promoting financing projects at physical locations or entrusting or authorizing a third party to do so; (v) extending loans, except otherwise as provided by laws and regulations; (vi) splitting the term of any financing project; (vii) offering wealth management and other financial products by themselves to raise funds, and selling as an agent bank wealth management, securities company asset management, fund, insurance or trust products and other financial products; (viii) conducting asset securitization business or realizing transfer of creditors' rights in the forms of asset packaging, asset securitization, trust assets, fund shares, etc.; (ix) engaging in any form of mixture, bundling or agency with other institutions in investment, agency in sale, brokerage and other business except as permitted by laws, regulations and relevant regulatory provisions on online peer-to-peer lending; (x) falsifying or exaggerating earnings outlook of financing projects, concealing the defects and risks of financing projects, making false advertising or promotion, etc., by using ambiguous words or other fraudulent means, fabricating or spreading false or incomplete information impairing the business reputation of others or misleading lenders or borrowers; (xi) providing information intermediary services for high-risk financing which uses the borrowed funds for investment in stocks, over-the-counter fund distribution, futures contracts, structured funds and other derivative products; (xii) engaging in businesses such as crowd-funding in equity; and (xiii) other activities prohibited by the laws, regulations and the regulatory provisions on online peer-to-peer lending. In addition, the Interim Measures stipulate that online lending intermediaries shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management in accordance with online lending regulations, via offline physical locations. Furthermore, the Interim Measures provide that online lending intermediaries shall, based on their risk management capabilities, set upper limits on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending intermediaries. In the case of natural persons, this limit shall not be deemed illegalmore than RMB200,000 for one online lending intermediary and not more than RMB1 million in total from all platforms, while the limit for a legal person or organization shall not be more than RMB1 million for one online lending intermediary and not more than RMB5 million in total from all platforms. Moreover, the Interim Measures require that each online lending intermediary (i) separate its own capital from funds received from lenders and borrowers and (ii) select a qualified banking financial institution as its funding custodian institution, which shall perform custody and administrative responsibilities as required.

The Interim Measures also set out certain additional requirements applicable to online lending intermediaries on, among other things, the real-name registration of lenders and borrowers, the risk control, internet and information security, limits on the fund collection period (up to 20 business days), allocation of charges, personal credit management, file management, lenders and borrowers protection, prohibition on making decisions by online lending intermediaries on behalf of the lender without the authorization of the lender, administration of electronic signatures and information disclosure. Any violation of the Interim Measures by an online lending intermediary may subject such online lending intermediary to certain penalties as determined by applicable laws, and regulations, or by relevant government authorities if the applicable laws and regulations are silent on the penalties. The applicable penalties may include but are not limited to, criminal liabilities, warning, rectification, tainted integrity record and fines of up to RMB30,000. If any online lending intermediary established prior to the implementation of these Interim Measures fails to conform to the provisions of these Interim Measures, the local financial regulatory authority shall require such online lending intermediary to make rectification, and the rectification period shall not exceed 12 months.

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On October 28, 2016, theChina Banking Regulatory Commission, the MIIT and the State Administration for Industry and Commerce jointly published the Guidelines on the Administration of Record-filings of Online Lending Information Intermediary Agencies to establish and improve the record-filing mechanisms for online lending intermediaries. According to the guidelines, a newly established online lending intermediary shall make the record-filings with the local financial regulatory authority after obtaining the business license; while with respect to any online lending intermediary which is established and begins to conduct the business prior to the publication of these guidelines, the local financial regulatory authority shall, pursuant to relevant arrangement of specific rectification work for risks in online peer-to-peer lending, accept the application for record-filings submitted by a qualified online lending intermediary, or any online lending intermediary which has completed the rectification confirmed by relevant authorities.

On February 22, 2017, the China Banking Regulatory Commission released the Guidelines to Regulate Funds Custodian for online lending intermediaries. These guidelines define depositories as commercial banks that provide online lending fund custodian services, and stipulate that the depositories shall not engage in offering any guarantee, including: (i) offering guarantees for lending transaction activities conducted by online lending intermediaries, or undertaking any liability for breach of contract related to such activities; (ii) offering guarantees to lenders, guaranteeing principal and dividend payments or bearing the risks associated with fund lending operations for lenders.

On April 18, 2017, the Online Lending Rectification Office issued the Notice on the Performance of Check and Rectification of Cash Loan Business Activities and a supplementary notice. This notice requires the local branches of the Online Lending Rectification Office to conduct a comprehensive review and inspection of the cash loan business of online lending platforms and require such platforms to implement necessary improvements and remediation within a specific period to comply with the relevant requirements under the applicable laws and regulations. The notice focuses on preventing malicious fraudulent activities, loans that are offered at excessive interest rates and violence in the loan collection processes in the cash loan business operation of online lending platforms. The Online Lending Rectification Office also issued a list of cash loan business activities that are to be examined.

On August 23, 2017, the General Office of the China Banking Regulatory Commission released the Guidelines on Information Disclosure of Business Activities of Online Lending Information Intermediaries. Consistent with the Interim Measures, these guidelines emphasize the requirement of information disclosure by an online lending intermediary and further, detail the frequency and scope of such information disclosure. Any violation of the these guidelines by an online lending intermediary may subject the online lending intermediary to certain penalties under Interim Measures. In addition, the guidelines require online lending intermediaries that do not fully comply with the guidelines in conducting their business to rectify the relevant activities within six months after the release of the guidelines.

On December 1, 2017, the Internet Finance Rectification Office and the Online Lending Rectification Office jointly issued the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, outlining general requirements on the “cash loan” business conducted by network microcredit companies, banking financial institutions and punished accordingly. Enterprises that provideonline lending information intermediaries. Circular 141 specifies the features of “cash loans” as not relying on consumption scenarios, with no specified use of loan proceeds, no qualification requirement on customers and unsecured etc. Circular 141 sets forth several general requirements with respect to “cash loan” business, including, without limitation: (i) no organizations or individuals may conduct the lending business without obtaining approvals for the lending business; (ii) the aggregated borrowing costs of borrowers charged by institutions in the forms of interest and various fees should be annualized and subject to the limit on interest rate of private lending set forth in the Private Lending Judicial Interpretations issued by the Supreme People's Court; (iii) all relevant institutions shall follow the “know-your-customer” principle and prudentially assess and determine the borrower's eligibility, credit limit and cooling-off period, etc. Loans to any borrower without income sources are prohibited; and (iv) all relevant institutions shall enhance the internal risk control and prudentially use the “data-driven” risk management model. In additions, Circular 141 emphasizes several requirements on the online lending information intermediaries. For instance, such intermediaries are prohibited from facilitating any loans but doto students or other persons without repayment source or repayment capacity, or loans with no designated use of proceeds. Also, such intermediaries are not accept public deposits must obtain approvalspermitted to deduct interest, handling fee, management fee or deposit from the competent authorities; specifically, enterprises providing consumption-orientedprincipal of loans must obtainprovided to the borrowers in advance. Any violation of Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, disapproval of recordation, revocation of license, order to cease business operation, and criminal liabilities.

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There are also certain rules, laws and regulations relevant or applicable to the online peer-to-peer lending service industry, including the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court.

Due to the relatively short history of peer-to-peer lending in China, the regulatory framework governing the industry is still under development and the PRC government authority may promulgate new laws and regulations regulating peer-to-peer lending services in the future, we cannot assure you that our practice would not be deemed to violate any PRC laws or regulations, especially relating to illegal fund-raising, credit enhancement services and/or information disclosure. See “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry—The laws and regulations governing internet finance service in China are evolving and subject to changes. If our practices are deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected.”

Regulations on Consumer Finance Companies

Pursuant to the Administrative Measures for Pilot Consumer Finance Companies issued by the China Banking Regulatory Commission in November 2013, establishing a consumer finance service company is subject to approval from the China Banking Regulatory Commission, while those providing small-sum loans must obtainand the approvalcompany should also satisfy certain requirements such as having qualified contributors, with registered capital no less than minimum amount specified, and having eligible directors and senior managements and qualified practitioners familiar with consumer finance business, among other requirements. Pursuant to these measures, consumer finance companies are defined as non-banking financial institutions incorporated within the territory of other competent governmental authorities. Under PRC Contract Law, it is legal for individuals to borrow or lend money from other individuals, i.e. engage in peer to peer lending.

In September 2014, an officialChina upon the approval of the China Banking Regulatory Commission, disclosed ten rulesproviding PRC domestic residents with loans for peer-to-peer lending platforms, including a prohibition on capital pooling, a requirement to specify the intermediary nature of the platformconsumption purposes, but excluding real estate loans and a requirement that the platform may not offer guarantees. In January 2015, the commission announced a major structural reform, under which the Puhui Finance Bureau, a newly established bureau of the commission, will be the governing authority for peer to peer lending. It remains to be seen whenmotor loans.

Both domestic and foreign financial institutions and other contributors recognized by the China Banking Regulatory Commission are allowed to invest in consumer finance companies. The major investor of a consumer finance company, by which is meant an investor who contributes 30 percent or more of the consumer finance company’s registered capital, must meet a set of stringent requirements, including that the investor have at least five years’ experience in the consumer finance sector, that its total assets at the end of the most recent fiscal year be no less than RMB 60 billion (US$9.2 billion) or its equivalent foreign currency, and that it be in a sound financial situation and have been profitable for the most recent two fiscal years.

Anti-money Laundering Regulations

The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will be published by the State Council. ThePeople’s Bank of China and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money laundering obligations.

The Guidelines jointly released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers, including online peer-to-peer lending platforms, to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. ThePeople’s Bank of China will formulate implementing rules to further specify the anti-money laundering obligations of internet finance service providers.

The General Office of the State Council promulgated the Opinions on Improving Anti-Money Laundering, Anti-Terrorism Financing and Anti-Tax Evasion Regulatory Systems and Mechanisms on August 29, 2017. According to the opinions, the establishment of anti-money laundering financial regulatory systems for particular non-financial institutions is required to meet international anti-money laundering standards, and certain industries prone to a high risk of money laundering, such as real estate agents, precious metal and jeweler sales, corporate services and other specific non-financial industries, will be strictly regulated.

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Regulations on Financing Leasing

In September 2013, the Ministry of Commerce issued the Administration Measures of Supervision on Financing Lease Enterprises, or the Puhui Finance Bureau will issue any rulesLeasing Measures, to regulate and administer the business operations of financing lease enterprises. According to the Leasing Measures, financing lease enterprises are allowed to carry out financing lease business in such forms as direct lease, sublease, sale-and-lease-back, leveraged lease, entrusted lease and joint lease in accordance with the provisions of relevant laws, regulations and rules. However, the Leasing Measures prohibit financing lease enterprises from engaging in financial business such an accepting deposits, and providing loans or regulations governing peerentrusted loans. Without the approval from relevant authorities, financing lease enterprises shall not engage in inter-bank borrowing and other businesses. In addition, financing lease enterprises are prohibited from carrying out illegal fund-raising activities in the name of financing lease. The Leasing Measures require financing lease enterprises to peer lending.establish and improve their financing and internal risk control system, and a financing lease enterprise’s risk assets shall not exceed ten times of its total net assets. Risk assets generally refer to the adjusted total assets of a financing lease enterprise excluding cash, bank deposits, sovereign bonds and entrusted leasing assets.

 

Regulations on Vehicle Leasing Programs Operating on a Sale-and-Leaseback Basis

On July 11, 2013, the Ministry of Commerce published an Announcement on Strengthening and Improving the Approval and Administration of Foreign-Funded Finance Leasing Companies, which states that no foreign-funded finance leasing company shall engage in activities such as taking deposits, offering loans or being entrusted to grant loans. Further, without approval from relevant authorities, such an enterprise shall not conduct an interbank lending business or an equity investment business. On September 18, 2013, the Ministry of Commerce issued Administrative Measures for the Supervision of Financial Leasing Enterprises which require, in part, that financial leasing enterprises have assets and risk management abilities sufficient for their proposed business activities. These measures also require that foreign investors applying for the establishment of a financial leasing enterprise must comply with relevant provisions on foreign investment. The Guidance of the General Office of the State Council on Accelerating the Development of Financing Leasing Industry, issued by the General Office of the State Council in 2015, requires the establishment of a unified administrative and regulatory system for domestic as well as foreign investment in the leasing industry. According to this guidance, foreign investment in the leasing industry is entitled to enjoy the same treatment as domestic investment in terms of business scope, trading rules, regulatory indicators, information submission and inspection.

The Stipulation on Motor Vehicle Registration issued on May 27, 2008 and amended on September 12, 2012 by the Ministry of Public Security states that the new owner of a vehicle must submit an application for registration of transfer to the local vehicle administration office within 30 days after the delivery of the vehicle. Also, under the Property Law effective as of October 1, 2007, the transfer of movable property is effective upon delivery, but if the transfer of the property right of a vehicle has not been officially registered, it will not be valid against a good faith third-party transferee. In connection with this requirement, the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law in Cases of Finance Lease Contract Disputes came into force on March 1, 2014, providing guidelines on resolving finance lease contract disputes. This interpretation states that if a lessor authorizes a lessee to mortgage a leased item (a vehicle) to the lessor and to legally complete the mortgage registration with the registration authority, this arrangement could be valid as against a title claim made by a good faith third party, even if the transfer of the property right of the vehicle has not been officially registered.

Our loans to used automobile dealerships are structured on a sale-and-leaseback basis. However, we do not update the vehicle registrations to reflect our purchase of leased vehicles nor file mortgage registrations for the leased vehicles. Consequently, we lack unambiguous legal basis to prevent a good-faith third-party buyer from taking legal title to a vehicle if the lessor attempts to sell the vehicle without our knowledge. See “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry—We rely on contractual obligations rather than government filings to ensure our continued title to vehicles managed under our vehicle leasing program.”

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Regulations on Used Automobile Trading

On August 29, 2005, the State Administration of Taxation, theState Administration for Industry and Commerce, the Ministry of Commerce and the Ministry of Public Security jointly promulgated the Measures for the Administration of the Trading of Used Automobiles, or the Used Automobile Trading Measures, which became effective on October 1, 2005 and was further revised on September 14, 2017. Pursuant to the Used Automobile Trading Measures, only an enterprise legal person duly registered with theState Administration for Industry and Commerceor its local branches may engage in used automobile trading, either as an operator of used automobiles markets, as a retailer, or as a brokerage entity.

Under the Used Automobile Trading Measures, a seller of used automobiles must verify certain background information regarding the automobiles for sale, including verification of the identity certificate of the previous owner, the number plate of the automobile, the motor vehicle registration certificate, driver’s license of the previous owner, proof that the automobile has passed the security technical examination, automobile insurance, and payment certificate of relevant taxes and fees. Used automobile retailers shall also provide quality guarantees as well as after-sales services, information about which shall be clearly indicated at its business location from 2018. Furthermore, under certain circumstances, used automobiles are prohibited from being resold, including instances where an automobile has been discarded as unusable, been required to be discarded, or been obtained by illegal means, such as through theft, robbery or fraud.

On March 24, 2006, the Ministry of Commerce promulgated the Specifications for Used Automobile Trade, which provided detailed requirements as to the responsibilities of used automobiles trading entity regarding the trading of used automobiles, including the confirmation of the identity of the seller and the legitimacy of the used automobiles, signing contract for used automobile trading, establishing transaction archives and keeping records for at least three years.

Regulations on Automobile Sales

On April 5, 2017, the Ministry of Commerce promulgated the Measures on the Administrations of Sales of Automobile, or the Measures on Sales of Automobile, which came into effect on July 1, 2017 and the original Implementation Measures for the Administration of Sales of Branded Automobile, or the “Branded Automobile Sales Measures” will be abolished at the same time. According to the Measures on Sales of Automobile, the supplier and distributors of automobiles within the territory of the PRC shall build up an integrated system for automobile sales and after-sales services, guarantee supply of the related auto accessory, provide timely and effective after-sales services, and strictly follow the regulations concerning, among others, 3R (i.e. "replace, repair and refund") and recall of household automobiles to guarantee consumers' legitimate rights and interests. A dealer who sells an automobile without authorization from a supplier or an automobile which is not authorized to be sold by an automobile manufacturer outside the country shall provide a reminder and explanation to the consumer in writing and inform the consumer of the relevant responsibility in writing. When the dealer sells the car to the consumer, it shall verify the valid identity certificate of the registered consumer, sign the sales contract, and issue the sales invoice. 

Regulations on Parallel-import Automobile Sales

On February 22, 2016, the Ministry of Commerce, the Ministry of Industry and Information Technology, Ministry of Environmental Protection, Ministry of Transport, General Administration of Customs, General Administration of Quality Supervision and Inspection and Quarantine and Certification and Accreditation Administration of the People’s Republic of China jointly issued Several Opinions on Promotion of Pilot Program of Parallel-import Automobile. According to these opinions, pilot enterprises can import automobiles and establish a distribution network without authorization from a supplier, and can apply for an automatic import license for automobile products according to their actual business operation requirements. Pilot enterprises shall be subject to the regulations on administration of automatic import licenses, submit the license for verification and complete the customs formalities at the import entrance.

On April 27, 2017, Shanghai Municipal Commission of Commerce and China (Shanghai) Pilot Free Trade Zone Administration jointly issued Notice on Adjustment on the Pilot Enterprises of Parallel-import Automobile in China (Shanghai) Pilot Free Trade Zone, which requires that the pilot enterprises registered in China (Shanghai) Pilot Free Trade Zone shall obtain an automatic import license to sale imported automobile without authorization from the automobile producer, and shall meet the following requirements to operate parallel-import Automobile business: (1) it shall has been operating sales of imported automobile for at least one year and its sales business has reached a certain scale; (2) the pilot enterprise or any of its wholly owned enterprise/ controlling enterprise with automobile sales certificate is registered in China (Shanghai) Pilot Free Trade Zone; (3) it has branches and facilities for maintenance, service and supply of auto parts that match its business scale. Any pilot enterprise that can’t meet this requirement shall depend on a third party to provide such services to participate in the pilot program; (4) it has good reputation and has perfect purchasing channels of oversea automobile and abundant experience in automobile sales industry; (5) the enterprise that has participated in the pilot program and has parallel-import records at Shanghai port shall be prioritized.

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Regulations on Intellectual Property Rights

 

China has adopted legislation governing intellectual property rights, including trademarks, patents and copyrights. China is a signatory to the major 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.

 

PatentPatent.. The National People’s Congress adopted the Patent Law was originally adopted in 1984. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. 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. We have obtained one patent11 patents granted by the State Intellectual Property Office.

CopyrightCopyright.. The National People’s Congress adopted the Copyright Law was originally adopted in 1990. The 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.

 

Pursuant to the relevant PRC regulations, rules and interpretations, ICP operators will be jointly liable with the infringer if they (i) participate in, assist in or abet infringing activities committed by any other person through the internet, (ii) are or should be aware of the infringing activities committed by their website users through the internet, or (iii) fail to remove infringing content or take other action to eliminate infringing consequences after receiving a warning with evidence of such infringing activities from the copyright holder. The court will determine whether an internet service provider should have known of their internet users’ infringing activities based on how obvious the infringing activities are by taking into consideration a number of factors, including (i) the information management capabilities that the provider should have based on the possibility that the services provided by it may trigger infringing acts, (ii) the degree of obviousness of the infringing content, (iii) whether it has taken the initiative to select, edit, modify or recommend the contents involved, (iv) whether it has taken positive and reasonable measures against infringing acts, and (v) whether it has set up convenient programs to receive notices of infringement and made timely and reasonable responses to the notices. Where an internet service provider has directly obtained economic benefits from any contents made available by an internet user, it shall have a higher duty of care with respect to the internet user’s act of infringement of others’ copyrights. Advertisements placed for or other benefits particularly connected with specific contents may be deemed as direct economic benefits from such contents, but general advertising fees or service fees charged by an internet service provider for its internet services will not be included. In addition, where an ICP operator is clearly aware of the infringement of certain content against another’s copyright through the internet, or fails to take measures to remove relevant contents upon receipt of the copyright holder’s notice, and as a result, it damages the public interest, the ICP operator could be ordered to stop the tortious act and be subject to other administrative penalties such as confiscation of illegal income and fines. 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.

 

An internet service provider may be exempted from liabilities for providing links to infringing or illegal content or providing other internet services which are used by its users to infringe others’ copyright, if it does not know and does not have constructive knowledge that such content is infringing upon other parties’ rights or is illegal. However, if the legitimate owner of the content notifies the internet service provider and requests removal of the links to the infringing content, the internet service provider would be deemed to have constructive knowledge upon receipt of such notification, but would be exempted from liabilities if it removes or disconnects the links to the infringing content at the request of the legitimate owner. At the request of the alleged infringer, the internet service provider should immediately restore links to content previously disconnected upon receipt of initial non-infringing evidence.

 

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.

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Software productsproducts.. In 2000,China, holders of computer software copyrights enjoy protections under the MIIT issuedCopyright Law. Various regulations relating to the Administrative Measures on Software Products, which 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 chargeprotection of software industry administration and enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registeredcopyrights in China have promulgated, including the Copyright Law, which was originally promulgated in 1990, the Regulation for five years,the Implementation of the Copyright Law, which originally came into effect in September 2002, and the registration is renewable upon expiration. In 2012,Measures for the Registration of Computer Software Copyright, which were issued by the National Copyright Administration in 2002. Under these regulations, computer software that is independently developed and exists in a physical form is protected, and software copyright owners may license or transfer their software copyrights to others. Registration of software copyrights, exclusive licensing and transfer contracts with the PRC issuedCopyright Protection Center of China or its local branches is encouraged. Such registration is not mandatory under Chinese law, but can enhance the protections available to the registered copyrights holders. The Computer Software Copyright Registration Procedures, whichissued by the National Copyright Administration in 2002, apply to software copyright registration, license contract registration and transfer contract registration. InWe have registered 52 computer software copyrights in compliance with the above rules and in order to take advantage of the above rules, we have registered 123 computer software copyrights.protections under them.

 

TrademarkTrademark.. The PRC Trademark Law was originally adopted in 1982. The Trademark Office under the State Administration for Industry and Commerce handles trademark registrations and grants a term oftenof ten years for registered trademarks.trademarks, plus another ten years if requested upon expiration of the first or any subsequent ten-year term. Trademark license agreements must be filed with the Trademark Office for record. “人人, and “经纬人人分期” are registered trademarks in China. We have also applied with the Trademark Office to register additional trademarks and logos, including 开心汽车,人人游戏”财富,” “人人分期直播 and “目绵直播,“社团人 and“朋友拍”. ..

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Domain NamesNames.. In 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain names. In 2004,On August 24, 2017, the MIIT promulgated the Administrative Measures for Administration ofInternet Domain Names for the Chinese Internet toNames. These measures regulate the registration of domain names, such as the first tier domain name “.cn”.“.cn.” In 2006,November 2014, the CNNIC issued the Measures onRules of First-Tier Domain Name Dispute Resolution, and its implementing rules, pursuant to which the CNNIC can authorize a domain name dispute resolution institution to decide disputes. We have registered domain names includingrenren.com,xiaonei.com,jingwei.comkaixin.com,chewen.com,98un.comchimeroi.com andjiexi.commumiantv.com. In December 2013, we entered into a Registry Agreement with ICANN, which grants us the right to use the generic top level domain name .ren.

Regulations on Anti-unfair Competition

Under the Anti-Unfair Competition Law, effective in 1993 and revised in 2017, a business operator is prohibited from carrying out acts intending to cause confusion, which would mislead others into thinking that its products belong to another party or that there is an association with another party, by:

·using without permission, a mark that is identical with or similar to product names, packaging or decoration of others with a certain degree of influence;

·using without permission, the name of an enterprise, a social organization or an individual with a certain degree of influence;

·using without permission, the main element of a domain name, website name or webpage with a certain degree of influence;

·carrying out confusing acts that are intended to mislead others into thinking that a product belongs to another party or there is an affiliation with another party.

Regulations on Foreign Exchange

 

Under the Foreign Currency Administration Rules, which were promulgated in 2008, if documents certifying the purposes of the conversion of RMB into foreign currency are submitted to the relevant foreign exchange conversion bank, the RMB will be convertible for current account items, including the distribution of dividends, interest and royalties payments, and trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loans, securities investment and repatriation of investment, however, is subject to the approval of SAFE or its local counterpart.

 

Under the Administration Rules for the Settlement, Sale and Payment of Foreign Exchange, which were promulgated in 1996, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at 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 or its local counterpart. Capital investments by PRC entities outside of China, after obtaining the required approvals of the relevant approval authorities, such as the Ministry of Commerce and the National Development and Reform Commission or their local counterparts, are also required to register with SAFE or its local counterpart.

 

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In February 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment, also known as SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 delegates the power to enforce the foreign exchange registration in connection with inbound and outbound direct investments under SAFE rules from local branches of SAFE to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments

In March 2015, SAFE issued the Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises may either continue to follow the current payment-based foreign currency settlement system or choose to follow the “conversion-at-will” system for foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will system for foreign currency settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its Renminbi registered capital converted from foreign currencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises like our PRC subsidiaries are still not allowed to extend intercompany loans to our VIEs. In addition, as SAFE Circular 19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this circular by relevant authorities.

In utilizing the proceedsfunds that we received from our initial public offering in May 2011,hold offshore, as an offshore holding company with PRC subsidiaries, we may (i) make additional capital contributions to our PRC subsidiaries, (ii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, (iii) make loans to our PRC subsidiaries or consolidated affiliated entities, or (iv) acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:

 

·capital contributions to our PRC subsidiaries, whether existing or newly established ones, must be approved by the Ministry of Commerce or its local counterparts;

 

·loans by us to our PRC subsidiaries, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches; and

 

·loans by us to our consolidated affiliated entities, which are domestic PRC entities, must be approved by the National Development and Reform Commission and must also be registered with SAFE or its local branches.

 

In 2008, SAFE issued 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. Pursuant to SAFE Circular 142, RMB resulting from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the applicable government authority and cannot be used for domestic equity investment, unless it is otherwise approved. Documents certifying the purposes of the settlement of foreign currency capital into RMB, including a business contract, must also be submitted for the settlement of the foreign currency. In addition, SAFE strengthened its oversight of the flow and use of RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not be used to repay RMB loans if such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary fines or penalties. In July 2014, SAFE issued SAFE Circular 36, which launched a pilot reform for the use of registered capital converted from foreign currency in 16 pilot areas. According to SAFE Circular 36, a foreign-invested enterprise in the pilot areas is permitted to use RMB converted from its foreign currency registered capital to make equity investments in the PRC, subject to certain registrations and settlement procedures as set forth in the circular. As this circular is relatively new, uncertainties remain as to the interpretation and application of this circular and any other future foreign exchange related rules.

We believe that after the conversion of the net proceeds from our initial public offering in May 2011 into RMB pursuant to SAFE Circular 142, our use of RMB funds have been within the approved business scope of our PRC subsidiaries, and we expect that future uses will be as well. Such business scope includes “technical services” which we believe permits our PRC subsidiary to purchase or lease servers and other equipment and to provide operational support to our consolidated affiliated entities. However, we may not be able to use such RMB funds to make equity investments in the PRC through our PRC subsidiaries. There are no costs associated with applying for registration or approval of loans or capital contributions with or from relevant PRC governmental authorities, other than nominal processing charges. Under PRC laws and regulations, the PRC governmental authorities are required to process such approvals or registrations or deny our application within a prescribed time period, which is usually less than 90 days. The actual time taken, however, may be longer due to administrative delays.

Regulations on Dividend Distribution

 

Wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these wholly foreign-owned enterprises are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital. At the discretion of these wholly foreign-owned enterprises, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

As of December 31, 2014,2017, the registered capital of our wholly foreign-owned subsidiary Qianxiang Shiji was US$180180.0 million with paid-in capital of US$175.0 million. Qianxiang Shiji has not made any profits to date, and thus areis not subject to the statutory reserve fund requirement. Qianxiang Shiji has not and will not be able to pay dividends to our offshore entities until they generate accumulated profits and meet the requirements for statutory reserve funds. As of December 31, 2014,2017, our PRC subsidiary Qianxiang Shiji had an accumulated deficit of approximately US$45.464.6 million in accordance with PRC accounting standards and regulations. The registered capital for Renren Network is US$20.0 million, with paid-in capital of US$10.0 million.

 

Regulations on Offshore Investment by PRC Residents

 

In July 2014, the SAFE promulgated the Notice on Relevant Issues Concerning Foreign Exchange Control of Domestic Residents’ Overseas Investment and Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or SAFE Circular 75, promulgated by the SAFE in 2005.

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SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

We have made due inquiries with the competent local branch of SAFE regarding the applicability of the above foreign exchange registration requirements to our founder and our PRC resident shareholders.

Regulations on Employee Stock Options Plans

 

In 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.company and it was further amended on May 29, 2016. In 2012, SAFE promulgated the Notice on the Administration of Foreign Exchange Matters for Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies, or the Stock Option Notice, which simplifies the requirements and procedures for the registration of stock incentive plan participants, especially in respect of the required application documents and the absence of strict requirements on offshore and onshore custodian banks.

 

Under these rules, for PRC resident individuals who participate in stock incentive plans of overseas publicly listed companies, which includes employee stock ownership plans, stock option plans and other incentive plans permitted by relevant laws and regulations, a PRC domestic qualified agent or the PRC subsidiary of such overseas listed company must, among other things, file on behalf of such resident 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 the stock holding or share option exercises, as PRC residents may not directly use oversea funds to purchase shares or exercise share options. In addition, within three months after any substantial changes to any such stock incentive plan, including example any changes due to a merger or acquisition or changes to the domestic or overseas custodian agent, the domestic agent must update the registration with SAFE.

 

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.

 

In addition, the State Administration of Taxation has issued 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.

 

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Labor Laws and Social Insurance

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with workplace safety training. 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. 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. To comply with these laws and regulations, we have caused all of our full-time employees to enter into labor contracts and provide our employees with the proper welfare and employment benefits.

 

Regulations on Concentration in Merger and Acquisition Transactions

In August 2006, six PRC regulatory agencies jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule.Rules, which were amended in 2009. The M&A Rule established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. These rules require, among other things, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor will take control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council in 2008 are triggered.

C.Organizational Structure

 

The following diagram illustrates our principal subsidiaries and consolidated affiliated entities as of the date of this annual report:

 

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(1)          Formerly named Renren-Jingwei Inc.

 

(2)          Both Qianxiang Tiancheng and Jingwei Zhihui are 99% owned by Ms. Jing Yang, who is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer, and 1% owned by Mr. James Jian Liu, our director and chief operating officer. Renren Games is 70% owned by Mr. Chuan He, our senior vice president for games, and 30% owned by Mr. James Jian Liu. We effectively control Qianxiang Tiancheng and Renren Games and Qianxiang Tiancheng’s subsidiaries through contractual arrangements. See “Item 4.C Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for more information.

(1)Qianxiang Yixin is 99% owned by Ms. Jing Yang, who is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer, and 1% owned by Mr. James Jian Liu, our director and chief operating officer. We effectively control Qianxiang Yixin as well as its subsidiaries through contractual arrangements. See “Item 4.C Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for more information.

(2)Qianxiang Tiancheng is 99% owned by Ms. Jing Yang, who is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer, and 1% owned by Mr. James Jian Liu, our director and chief operating officer. We effectively control Qianxiang Tiancheng as well as its subsidiaries through contractual arrangements. See “Item 4.C Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for more information.

(3)Shanghai Jieying is 99% owned by Mr. Thomas Jintao Ren, our chief finance officer, and 1% owned by Ms. Rita Rui Yi, our Senior Vice President. We effectively control Shanghai Jieying as well as its subsidiaries through contractual arrangements. See “Item 4.C Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for more information.

(4)Qianxiang Changda is also 99% owned by Ms. Jing Yang and 1% owned by Mr. James Jian Liu. We effectively control Qianxiang Changda as well as its subsidiaries through contractual arrangements. See “Item 4.C Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for more information.

 

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Contractual Arrangements with Our Consolidated Affiliated Entities

 

Applicable PRC laws and regulations currently restrict foreign ownership of companies that provide value-added telecommunications services.services in China. In addition to this restriction, there currently exist other regulatory restrictions on foreign investments into a variety of industries in China into which we had invested through the holding of minority ownership of certain domestic companies. To comply with these foreign ownership restrictions, our wholly owned subsidiary Qianxiang Shiji Technology Development (Beijing) Co., Ltd, or Qianxiang Shiji, has entered into a series of contractual arrangements with Beijing Qianxiang Tiancheng Technology Development Co., Ltd., or Qianxiang Tiancheng, and its shareholders,shareholders; our wholly owned subsidiary Shanghai Renren NetworkAutomobile Technology Co., Ltd., or Renren Automobile, has entered into a series of contractual arrangements with Renren GamesShanghai Qianxiang Changda Internet Information Technology Development Co., Ltd., or Shanghai Changda, as well as with Shanghai Jieying Automobile Sales Co., Ltd, or Shanghai Jieying, and its shareholders,their respective shareholders; and our wholly owned subsidiary Jingwei SinanQianxiang Lianhe Technology Development (Beijing) Co., Ltd., or Qianxiang Lianhe, has also entered into a series of contractual arrangements with Jingwei ZhihuiBeijing Qianxiang Yixin Technology Development Co., Ltd., or Qianxiang Yixin, and its shareholders, whichshareholders. These agreements enable us to:

 

·exercise effective control over Qianxiang Tiancheng, Renren Games, Jingwei ZhihuiQianxiang Changda, Shanghai Jieying, Qianxiang Yixin and Qianxiang Tiancheng’stheir respective subsidiaries through powers of attorney and a business operations agreement;agreements;

 

·receive substantially all of the economic benefits of Qianxiang Tiancheng, Renren Games, Jingwei ZhihuiQianxiang Changda, Shanghai Jieying, Qianxiang Yixin and Qianxiang Tiancheng’stheir respective subsidiaries in the form of service and license fees in consideration for the technical services provided, and the intellectual property rights licensed, by Qianxiang Shiji, Shanghai Renren NetworkAutomobile and Jingwei Sinan respectively;Qianxiang Lianhe; and

 

·have an exclusive option to purchase all of the equity interests in Qianxiang Tiancheng, Renren GamesQianxiang Changda, Shanghai Jieying, and Jingwei ZhihuiQianxiang Yixin when and to the extent permitted under PRC laws, regulations and legal procedures.

 

We have been, and are expected to continue to be, dependent on our contractual arrangements with Qianxiang Tiancheng, Renren Games, Jingwei ZhihuiQianxiang Changda, Shanghai Jieying, Qianxiang Yixin and their respective shareholders to operate substantially all of our business in China as long as PRC law does not allow us to directly operate such business in China. We rely on our consolidated affiliated entities, namely Qianxiang Tiancheng, Renren Games, Jingwei ZhihuiQianxiang Changda, Shanghai Jieying, Qianxiang Yixin and Qianxiang Tiancheng’stheir respective subsidiaries, to maintain or renew their respective qualifications, licenses or permits necessary for our business in China. We believe that under our contractual arrangements, we have substantial control over our consolidated affiliated entities and their respective shareholders to renew, revise or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements, or pursuant to certain amendments and changes of the current applicable PRC laws, regulations and rules on terms that would enable us to continue to operate our business in China legally. For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see “Item 4.B—Business Overview—Regulation.” For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see “Item 3.D—Key Information—Risk Factors—Risks Related to Our Corporate Structure and the Regulation of our Business.”

 

The business operation of Qianxiang Shiji is within the approved business scope as set forth in its business license, which includes research and development of computer software, communication software and system integration; sale of self-produced products; provision of after-sale technical consulting and services.

Qianxiang Tiancheng is a limited liability companies established in China. Its approved business scope includes the provision of internet information, internet advertising and advertising agency services, and it holds an internet content provision license, or ICP license. Qianxiang Tiancheng is 99% owned by Ms. Jing Yang, who is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer, and 1% owned by Mr. James Jian Liu, our executive director and chief operating officer. Both Ms. Yang and Mr. Liu are PRC citizens.

 

Qianxiang Wangjing and Qianxiang Changda areis a wholly owned subsidiariessubsidiary of Qianxiang Tiancheng. Qianxiang Wangjing is the operator of ourrenren.com website and holds the licenses and permits necessary to conduct our real name social networking services, online advertising and online game business in China. Qianxiang Changda holds the licenses and permits necessary to conduct our social networking services and online games business.

Theadvertising business operations of Renren Network are within the approved business scope as set forth in its business license, which includes the development and transfer of internet technology and provision of internet technical consultation and services, as well as the design, production, publishing of advertisements and acting as advertisement agent for domestic and overseas clients. Renren Games is a limited liability company established in China. It holds an ICP license. Renren Games is 70% owned by Mr. Chuan He, our senior vice president for games,

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Qianxiang Shiji has also entered into a series of contractual arrangements with Guangzhou Xiuxuan Brokers Co., Ltd., or Guangzhou Xiuxuan, and 30% owned by Mr. James Jian Liu, our director and chief operating officer. Both Mr. He and Mr. Liu are PRC citizens.its shareholders similar to the arrangements mentioned above. Guangzhou Xiuxuan has not carried out any significant business activities to date.

 

The business operation of Jingwei SinanShanghai Renren Automobile is within the approved business scope as set forth in its business license, which includes research and development of automobile technology, computer software, internet communication software and system integration; sale of self-produced products; provision of after-sale technical consulting and services. Jingwei Zhihuitechnology. Qianxiang Changda is a limited liability companies established in China. Its approved business scope includescompany and the provision of basic softwareoperator and application software services, data processing, internet advertisingholding entity for our financing businesses. Shanghai Jieying is a limited liability company and advertising agency services, business consulting services, project investments, financial managementthe operator and financial consulting cervices. We have initiated the process of applyingholding entity for an ICP license for it. Jingwei Zhihui is 99%our used automobile dealership businesses. Our wholly owned by Ms. Jing Yang, who is the wife of Mr. Joseph Chen, our founder, chairman and chief executive officer, and 1% owned by Mr. James Jian Liu, our executive director and chief operating officer. Both Ms. Yang and Mr. Liu are PRC citizens.

In addition, we havesubsidiary Qianxiang Lianhe has entered into a series of contractual arrangements with another entity, Jiexi Haohe (Beijing) Technology Development Co., Ltd.,Qianxiang Yixin, and its shareholders similar to the arrangements mentioned above. Jiexi Haohe has not carried out any significant business activities to date.Qianxiang Yixin acts as the holding entity for most of our minority investments in PRC registered businesses.

 

The following is a summary of the currently effective contracts between our subsidiary Qianxiang Shiji, our consolidated affiliated entity Qianxiang Tiancheng, and the shareholders of Qianxiang Tiancheng; between our subsidiary Renren Network, our consolidated affiliated entity Renren Games, andTiancheng. All the shareholders of Renren Games; and between our subsidiary Jingwei Sinan, our consolidated affiliated entity Jingwei Zhihui, andcontracts in the shareholders of Jingwei Zhihui.other contractual arrangements described above are in their contents substantially the same as those contracts described below. These contracts provide us with the power to direct the activities that most significantly affect the economic performance of our consolidated affiliated entities and enable us to receive substantially all the economic benefits from them.

 

Business Operations AgreementsAgreements.. Pursuant to a business operations agreement between Qianxiang Shiji, Qianxiang Tiancheng and its shareholders, Qianxiang Tiancheng shall appoint the candidates designated by Qianxiang Shiji as the executive director or directors, general manager, chief financial officer and any other senior officers of Qianxiang Tiancheng. Qianxiang Tiancheng agrees to follow the proposal provided by Qianxiang Shiji from time to time relating to employment, daily operation and financial management. Without Qianxiang Shiji’s prior written consent, Qianxiang Tiancheng shall not conduct any transaction that may materially affect its assets, obligations, rights or operations, including but not limited to, (i) incurrence or assumption of any indebtedness, (ii) sale or purchase of any assets or rights, (iii) incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party, or (iv) transfer of any rights or obligations under this agreements to a third party. The term of this agreement is ten years and will be extended automatically for another ten years unless Qianxiang Shiji provides a written notice requesting not to extend the term three months prior to the expiration date, which is December 22, 2020. Qianxiang Shiji may terminate the agreement at any time by providing a 30-day advance written notice to Qianxiang Tiancheng and to each of its shareholders. Neither Qianxiang Tiancheng nor any of its shareholders may terminate this agreement during the term or the extension of the term, if applicable.

 

Renren Network, Renren Games and its shareholders have entered into a business operations agreement. This business operations agreement contains substantially the same terms as the terms of the business operations agreement between Qianxiang Shiji, Qianxiang Tiancheng and its shareholders described above. The expiration date of the business operations agreement between Renren Network, Renren Games and its shareholders is November 29, 2022. The term of the agreement is ten years and will be extended automatically for another ten years unless Renren Network provides a written notice requesting not to extend the term three months prior to the expiration date.

Jingwei Sinan, Jingwei Zhihui and its shareholders have entered into a business operations agreement. This business operations agreement contains substantially the same terms as the terms of the business operations agreement between Qianxiang Shiji, Qianxiang Tiancheng and its shareholders described above. The expiration date of the business operations agreement between Jingwei Sinan, Jingwei Zhihui and its shareholders is May 21, 2024. The term of the agreement is ten years and will be extended automatically for another ten years unless Jingwei Sinan provides a written notice requesting not to extend the term three months prior to the expiration date.

Powers of AttorneyAttorney.. Pursuant to powers of attorney, the shareholders of Qianxiang Tiancheng each irrevocably appointed our executive director and chief operating officer, Mr. James Jian Liu (the person designated by Qianxiang Shiji) as their attorney-in-fact to vote on their behalf on all matters of Qianxiang Tiancheng that requires shareholder approval under PRC laws and regulations as well as Qianxiang Tiancheng’s articles of association. The appointment of Mr. Liu is conditional upon his being the employee and the designated person of Qianxiang Shiji. Each power of attorney will remain in effect from December 23, 2010 to December 22, 2020, unless and until the earlier of the following events: (i) Mr. Liu loses his position in Qianxiang Shiji or Qianxiang Shiji issues a written notice to dismiss or replace Mr. Liu; and (ii) the business operations agreement between Qianxiang Shiji, Qianxiang Tiancheng and its shareholders terminates or expires.

 

Pursuant to a proxy agreement and power of attorney, the shareholders of Renren Games each irrevocably appointed Renren Network as their attorney-in-fact to exercise on their behalf any and all rights that such shareholders have in respect of their equity interests in Renren Games conferred by relevant laws and regulations and the articles of associate of Renren Games. The proxy agreement and power of attorney became effective on November 30, 2012 and will remain effective as long as Renren Games exists. Neither of the shareholders of Renren Games has the right to terminate the proxy agreement or revoke the power of attorney without the prior written consent of Renren Network.

Pursuant to a proxy agreement and power of attorney, the shareholders of Jingwei Zhihui each irrevocably appointed Jingwei Sinan as their attorney-in-fact to exercise on their behalf any and all rights that such shareholders have in respect of their equity interests in Jingwei Zhihui conferred by relevant laws and regulations and the articles of associate of Jingwei Zhihui. The proxy agreement and each of the power of attorney became effective on May 22, 2014. Each power of attorney will remain in effect from May 22, 2014 to May 21, 2024, unless and until the assignment of the loan under the loan agreement described below from Jingwei Sinan to each shareholder of Jingwei Zhihui. Neither of the shareholders of Jingwei Zhihui has the right to terminate the proxy agreement or revoke the power of attorney without the prior written consent of Jingwei Sinan.

Spousal Consent LettersLetters.. Pursuant to spousal consent letters, the spouse of each of the shareholders of Qianxiang Tiancheng acknowledged that certain equity interests of Qianxiang Tiancheng held by and registered in the name of his/her spouse will be disposed of pursuant to the equity option agreements. These spouses understand that such equity interests are held by their respective spouse on behalf of Qianxiang Shiji, and they will not take any action to interfere with the disposition of such equity interests, including, without limitation, claiming that such equity interests constitute communal property of marriage.

 

Pursuant to spousal consent letters, the spouse of each of the shareholders of Renren Games has acknowledged that certain equity interests of Renren Games held by and registered in the name of his/her spouse will be disposed of pursuant to the loan agreement, equity option agreement and equity interest pledge agreement of which they are respectively a party, and they will not take any action to interfere with such arrangement, including claiming that such equity interests constitute property or communal property between his/her spouse and himself/herself.

Pursuant to spousal consent letters, the spouse of each of the shareholders of Jingwei Zhihui has acknowledged that certain equity interests of Jingwei Zhihui held by and registered in the name of his/her spouse will be disposed of pursuant to the loan agreement, equity option agreement and equity interest pledge agreement of which they are respectively a party, and they will not take any action to interfere with such arrangement, including claiming that such equity interests constitute property or communal property between his/her spouse and himself/herself.

Equity Option AgreementsAgreements.. Pursuant to equity option agreements between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng, Qianxiang Tiancheng’s shareholders granted Qianxiang Shiji or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of their equity interests in Qianxiang Tiancheng in consideration of the loans extended to Qianxiang Tiancheng’s shareholders under the loan agreements mentioned below. In addition, Qianxiang Shiji has the option to acquire the equity interests of Qianxiang Tiancheng at the lowest price then permitted by PRC law in consideration of the cancellation of all or part of the loans extended to the shareholders of Qianxiang Tiancheng under the loan agreements. Qianxiang Shiji or its designated representative(s) have sole discretion as to when to exercise such options, either in part or in full. Qianxiang Shiji or its designated representative(s) is entitled to exercise the options for unlimited times until all of the equity interests of Qianxiang Tiancheng have been acquired, and can be freely transferred, in whole or in part, to any third party. Without Qianxiang Shiji’s consent, Qianxiang Tiancheng’s shareholders shall not transfer, donate, pledge, or otherwise dispose their equity shareholdings in Qianxiang Tiancheng in any way. The equity option agreement will remain in full force and effect until the earlier of: (i) the date on which all of the equity interests in Qianxiang Tiancheng have been acquired by Qianxiang Shiji or its designated representative(s); or (ii) the receipt of the 30-day advance written termination notice issued by Qianxiang Shiji to the shareholders of Qianxiang Tiancheng. The key factors for our decision to exercise the option are whether the current regulatory restrictions on foreign investment in the internet business and advertising business will be relaxed in the future, which is rather unpredictable at the moment. If such restrictions are relaxed, we will, through Qianxiang Shiji, exercise the option and purchase all or part of the equity interests in Qianxiang Tiancheng.

Renren Network and each of the shareholders of Renren Games have entered into an equity option agreement. The terms of this agreement are substantially the same as the terms of the equity option agreement between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng.

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Jingwei Sinan and each of the shareholders of Jingwei Zhihui have entered into an equity option agreement. The terms of this agreement are substantially the same as the terms of the equity option agreement between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng.

  

Exclusive Technical Service AgreementsAgreements.. Pursuant to an exclusive technical service agreement between Qianxiang Shiji and Qianxiang Tiancheng, Qianxiang Shiji has the exclusive right to provide certain technical services, including maintenance of servers, development, updating and upgrading of web user application software, e-commerce technical services, to Qianxiang Tiancheng. Without Qianxiang Shiji’s prior written consent, Qianxiang Tiancheng shall not engage any third party to provide any of the technical services under this agreement. In addition, Qianxiang Shiji exclusively owns all intellectual property rights resulting from the performance of this agreement. Qianxiang Tiancheng agrees to pay a service fee to Qianxiang Shiji at a specific fee rate proposed by Qianxiang Shiji. Qianxiang Shiji shall have the right to adjust at any time the fee rate based on the quantity, difficulty and urgency of the services it provides to Qianxiang Tiancheng and other factors. The term of this agreement is ten years and will be extended automatically for another ten years unless terminated by Qianxiang Shiji’s written notice three months prior to the expiration of the term, which is December 22, 2020. Qianxiang Shiji can terminate the agreement at any time by providing a 30-day prior written notice. Qianxiang Tiancheng is not permitted to terminate this agreement prior to the expiration of the term, unless Qianxiang Shiji fails to comply with any of its obligations under this agreement and such breach makes Qianxiang Shiji unable to continue to perform this agreement.

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Pursuant to an exclusive technology support and technology services agreement between Renren Network and Renren Games, Renren Network has the exclusive right to provide to Renren Games certain development, maintenance and support services for the servers and computer software and hardware for Renren Games’ online game business. Renren Games agrees to pay a service fee to Renren Network at a specific fee rate proposed by Renren Network. Renren Network shall have the right to adjust at any time the fee rate based on certain factors, including the quantity, scope and nature of the services it provides to Renren Games. The other terms of this agreement are substantially the same as the terms of the exclusive technical service agreement between Qianxiang Shiji and Qianxiang Tiancheng. The term of this agreement is ten years commencing from November 30, 2012, and Renren Network has the right in its sole discretion to extend the term of this agreement for additional ten-year terms by notifying Renren Games at least three months prior to the end of each such ten-year term.

Jingwei Sinan and Jingwei Zhihui have entered into an exclusive technology support and technology services agreement. This exclusive technology support and technology services agreement contains substantially the same terms as the terms of the technology support and technology services agreement between Renren Network and Renren Games. The term of this agreement is ten years commencing from May 22, 2014, and Jingwei Sinan has the right in its sole discretion to extend the term of this agreement for additional ten-year terms by notifying Jingwei Zhihui at least three months prior to the end of each such ten-year term.

 

Intellectual Property Right License AgreementsAgreements.. Pursuant to an intellectual property right license agreement between Qianxiang Shiji and Qianxiang Tiancheng, Qianxiang Shiji grants a non-exclusive and non-transferable license, without sublicense rights, to Qianxiang Tiancheng to use certain of the domain names, registered trademarks and non-patent technology (software) owned by Qianxiang Shiji. Qianxiang Tiancheng may only use the intellectual property rights in its own business operations. The amount, payment method and classification of the license fees under this agreement shall be determined based on the precondition that they facilitate Qianxiang Shiji’s securing of all preferential treatments under the PRC tax policies and shall be agreed by both Qianxiang Shiji and Qianxiang Tiancheng considering, among others, the following factors: (i) the number of users purchasing Qianxiang Tiancheng’s products or receiving Qianxiang Tiancheng’s services; and (ii) the types and quantity of the intellectual property rights, which are specified under this agreement, actually used by Qianxiang Tiancheng for selling products or providing services to its users. The termOn December 1, 2015, Qianxiang Shiji and Qianxiang Tiancheng entered into a supplementary agreement to extend the terms of this agreement is fivefor ten years, andpursuant to which the current term expires on December 22, 2015. The term of this agreement can be extended for another five years with both parties’ consents.1, 2025. Qianxiang Shiji may terminate this agreement at any time by providing a 30-day prior written notice. Any party may terminate this agreement immediately with written notice to the other party if the other party materially breaches the relevant agreement and fails to cure its breach within 30 days from the date it receives the written notice specifying its breach from the non-breaching party. The parties will review this agreement every three months and determine if any amendment is needed.

Renren Network and Renren Games have entered into an intellectual property right license agreement. This intellectual property right license agreement contains substantially the same terms as the intellectual property right license agreement between Qianxiang Shiji and Qianxiang Tiancheng. Under the intellectual property right license agreement between Renren Network and Renren Games, Renren Network has granted a non-exclusive and non-transferable license, without sublicense rights, to Renren Games to use certain intellectual property rights owned by Renren Network. The current term of the intellectual property right license agreement between Renren Network and Renren Games expires on November 29, 2017, and the term will be automatically extended for additional one year terms unless either party provides the other party with notice of its desire to terminate this agreement.

Jingwei Sinan and Jingwei Zhihui have entered into an intellectual property right license agreement. This intellectual property right license agreement contains substantially the same terms as the intellectual property right license agreement between Qianxiang Shiji and Qianxiang Tiancheng. The current term of the intellectual property right license agreement between Jingwei Sinan and Jingwei Zhihui expires on May 21, 2024, and the term will be automatically extended for additional ten year terms unless either party provides the other party with notice of its desire to terminate this agreement.

 

Equity Interest Pledge AgreementsAgreements.. Pursuant to equity interest pledge agreements between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng, the shareholders of Qianxiang Tiancheng pledge all of their equity interests in Qianxiang Tiancheng to Qianxiang Shiji, to guarantee Qianxiang Tiancheng and its shareholders’ performance of their obligations under, where applicable, (i) the loan agreements, (ii) the exclusive technical service agreement, (iii) the intellectual property right license agreement and (iv) the equity option agreements. If Qianxiang Tiancheng and/or any of its shareholders breach their contractual obligations under the aforesaid agreements, Qianxiang Shiji, as the pledgee, will be entitled to certain rights and entitlements, including the priority in receiving payments by the evaluation or proceeds from the auction or sale of whole or part of the pledged equity interests of Qianxiang Tiancheng in accordance with legal procedures. Without Qianxiang Shiji’s prior written consent, shareholders of Qianxiang Tiancheng shall not transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Qianxiang Shiji’s interests. During the term of this agreement, Qianxiang Shiji is entitled to collect all of the dividends or other distributions, if any, derived from the pledged equity interests. The equity interest pledge has become effective and will expire on the earlier of: (i) the date on which Qianxiang Tiancheng and its shareholders have fully performed their obligations under the loan agreements, the exclusive technical service agreement, the intellectual property right license agreement and the equity option agreements; (ii) the enforcement of the pledge by Qianxiang Shiji pursuant to the terms and conditions under this agreement to fully satisfy its rights under such agreements; or (iii) the completion of the transfer of all equity interests of Qianxiang Tiancheng by the shareholders of Qianxiang Tiancheng to another individual or legal entity designated by Qianxiang Shiji pursuant to the equity option agreement and no equity interest of Qianxiang Tiancheng is held by such shareholders.

Renren Network has entered into an equity interest pledge agreement with each of the shareholders of Renren Games. The terms of these two agreements are substantially the same as the terms of the equity interest pledge agreements between Qianxiang Shiji andhave been registered with the shareholders of Qianxiang Tiancheng.relevant authorities.

 

Jingwei Sinan has entered into an equity interest pledge agreement with each of the shareholders of Jingwei Zhihui. The terms of these two agreements are substantially the same as the terms of the equity interest pledge agreements between Qianxiang Shiji and the shareholders of Qianxiang Tiancheng.

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All of the equity interest pledge agreements between our subsidiaries and each of the shareholders of our consolidated affiliated entities have been registered.

  

Loan AgreementsAgreements.. Under loan agreements between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng, Qianxiang Shiji made interest-free loans in an aggregate amount of RMB10.0RMB 10.0 million (US$1.5 million) to the shareholders of Qianxiang Tiancheng exclusively for the purpose of the initial capitalization and the subsequent financial needs of Qianxiang Tiancheng. The loans can only be repaid with the proceeds derived from the sale of all of the equity interests in Qianxiang Tiancheng to Qianxiang Shiji or its designated representatives pursuant to the equity option agreements. The term of the loans is ten years from the actual drawing down of such loans by the shareholders of Qianxiang Tiancheng, and will be automatically extended for another ten years unless a written notice to the contrary is given by Qianxiang Shiji to the shareholders of Qianxiang Tiancheng three months prior to the expiration of the loan agreements.

Renren Network and each of the shareholders of Renren Games have entered into loan agreements. Under the loan agreements, Renren Network made interest-free loans in an aggregate amount of RMB10.0 million to the shareholders of Renren Games. The other terms of each of these loan agreements are substantially the same as the terms of the loan agreements between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng.

Jingwei Sinan and each of the shareholders of Jingwei Zhihui have entered into loan agreements. Under the loan agreements, Jingwei Sinan made interest-free loans in an aggregate amount of RMB1.0 million to the shareholders of Jingwei Zhihui. The other terms of each of these loan agreements are substantially the same as the terms of the loan agreements between Qianxiang Shiji and each of the shareholders of Qianxiang Tiancheng.

 

D.Property, Plants and Equipment

 

Our principal executive offices are located at 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Chaoyang District, Beijing, 100016, People’s Republic of China, where we lease approximately 13,7886,739 square meters of office space as of March 31, 2015.2018. We also lease an additional 12,28438,008 square meters of office space in 2734 cities throughoutacross China, primarily for our sales and marketing team servicing our used automobile dealership customers but also including storefront space forused automotive sales and after-sales stores, office space for the majority of our research and development team in Beijing, Shanghai,our Woxiu business in Guangzhou, the majority of our internet content monitoring team in Wuhan and Wuhan.our the majority of our credit control team in Shanghai. We lease our premises from unrelated third parties under non-cancelable operating lease agreements. A quarter of our leases are due to expire during 2018, while the lease of our principal executive offices is due to expire in November 2020.

Some of the lessors of our leased premises in China do not have valid title to such premises or proper authorization from the title owner to sublease such premises. For further details, see “Item 3.D—Risk Factors—Risks Related to Our Business and Industry—The leasehold interests of some of our consolidated affiliated entities might not be fully protected by the terms of the relevant lease agreements due to defects in or the landlord’s failure to provide certain title documents with respect to some of our leased properties.” Our leases typically have terms

We also lease 3,300 square meters of one or two years, although there are a few leases which have terms of three to four years, includingoffice space in the lease ofUnited States and the Philippines for our principal executive offices. The majority of our leases are due to expire during 2015, and we plan to renew our leases before they expire.SaaS business team.

 

Our servers are primarily hosted at internet data centers owned by major domestic internet data center providers. The hosting services agreements typically have terms of one year. We believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.

 

Item 4A.Unresolved Staff Comments

Item 4A. Unresolved Staff Comments

 

None.As of the date 180 days before the end of the fiscal year to which this annual report relates, there were no unresolved comments from the staff of the SEC regarding our periodic reports under the Exchange Act. However, we did receive a letter from the Division of Investment Management dated December 18, 2015, which asked us to provide a detailed written response analyzing whether we are an investment company under the Investment Company Act, and further, if we determined that we were an investment company, to explain why we are not required to register as an investment company or else what action we plan to take either to fall outside of that definition or to register as an investment company. We responded to this letter with an analysis that explained why we believe that we are not an investment company under the Investment Company Act. After further discussion with the staff of the Division of Investment Management, we undertook to dispose of enough of our assets that might be deemed to be investment securities under the Investment Company Act so as to ensure that any such remaining assets would not constitute more than 40% of our total remaining assets by value, as the relevant percentage would be calculated for purposes of the Investment Company Act. On April 30, 2018, we launched a transaction which is scheduled to close in June 2018 and which we believe will dispose of sufficient assets to meet those criteria. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.”

 

Item 5.Operating and Financial Review and Prospects

Item 5. Operating and Financial Review and Prospects

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “ Item 3.D. Key Information—Risk Factors” and elsewhere in this annual report on Form 20-F.

 

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A.Operating Results

 

Overview

 

In 2012, we had two operatingRenren operates a social networking service (SNS) business, a used automobile business and reportable segments, namely Renren and Nuomi. The Renren segment includeda SaaS business. Currently, our online advertising, online games and other IVAS businesses, such as our Woxiu business. Our Nuomi group-buy business was quite significant at that time and thus formed a separate segment.primary services are:

 

During 2013, the following corporate changes occurred in our businesses and organizations:

·Renren SNS, which includes our main social networking website and mobile services and our social video platformwoxiu.com;

·Used Automotive Sales, which includes the corporate restructuringsales of used automobiles and related products and the provision of related services. Associated with the sales of used automobiles, we provide related services by arrange financing options for customers through our online gamesfinancial services partners;

·Financing, which includes used automobile financing, our business which was originally under IVAS, now had its own management team and operating entitieswhere we provide credit financing to meet its business needs;used automobile dealers; and

 

·in October 2013, Baidu Holdings Limited,Software as a subsidiary of Baidu, Inc.Solution (SAAS), acquired approximately 59% of the equity interest of Nuomi Holdings Inc., or Nuomi, which operated our group-buy business.includes all-in-one real estate solution provider, Chime, and a 360° real estate marketing and media service provider, Geographic Farming.

 

As a result of the dilutionThe majority of our equity interest in Nuomi, Nuomi’s financial results have been deconsolidated as of October 26, 2013revenues are generated by our used automobile business, which includes both used automotive sales revenues and classified under discontinued operations. Based onfinancing revenues. Because our analysis of the above corporate changes,SaaS business does not generate significant revenue yet, we concluded that in 2013 and 2014 we have two reportable segments, namelyinclude our SaaS revenues together with our Renren and Games. In addition, in 2014 we disposed of Qianjun Technology, the operator of 56.com within the Renren segment, and therefore we have classified the financial results from 56.com under discontinued operations as well. We retrospectively adjusted our segment information for all periods presented to reflect these changesSNS revenues in our segment reporting. These adjustments are also reflected in the following discussion of our segment operating results for comparison to prior year results.financial statements.

 

We currently generate revenues fromstarted to operate our used automotive sales business in 2017 and stopped providing loans through Renren Fenqi in 2016. As a result, we reevaluated our segments and concluded that we had two remaining reportable segments as of and for the year ended December 31, 2017, namely Renren and Auto Group. The segment information for the years ended December 31, 2015 and Games segment.2016 were retrospectively revised to reflect such changes.

Our business model has been evolving continuously in response to changes in internet culture and competitive pressures in China. At the time of our initial public offering in May 2011, we were primarily a social networking service platform, and we had a number of ancillary businesses that were intended to monetize that platform. We gradually disposed of most of those ancillary businesses in the years that followed our initial public offering. We disposed of Nuomi, our group-buy e-commerce business, in two stages in October 2013 and February 2014. We disposed of56.com, our on-line video business, in December 2014. We disposed of our online games business in March 2016. Our Renren segment had netSNS revenues from both online advertising andtoday consist primarily of internet value-added services, or IVAS. IVAS, relating to online performances.

Our onlineused automobile business and SaaS business are more recent in origin. Our used automobile business has two components which evolved separately: financing and used automotive sales. We launched our financing business in the fourth quarter of 2014 as an internet finance business offering installment purchase plans to college students, and it has since evolved into our current business of providing credit financing to used automobile dealers in China. We launched our used automotive sales business in June 2017, in part to take advantage of synergies with our rapidly growing financing business. Our SaaS business began with our launch of Chime in August 2016 and it was further expanded by our acquisition of Geographic Farming, LLC, in August 2017. Unlike our other businesses, our SaaS business is currently focused on the U.S. market rather than the China market.

As our business model was transitioning, we made a series of long-term investments in privately held companies that we believed would offer us synergies or access to resources and know-how. The majority of these investments by value was concentrated in the fields of internet finance, social finance, and real estate investment and management, and the number and aggregate size of these investments was significant. As of December 31, 2017, we had US$565.4 million of long-term investments, including US$318.8 million in equity method investments, US$144.8 million in cost method investments, and US$101.8 million in available-for-sale investments. However, due to the risk of being deemed to be an investment company, we launched a transaction on April 30, 2018, to dispose of most of these investments together with our ZenZone advertising revenues are derived from a wide rangeagency business. See “Item 4. Information on the Company—A. History and Development of advertising formats and solutions. Our IVAS revenues include revenues from VIP memberships, virtual items and other paid applications onrenren.com andwoxiu.com. Our Games segment derives its net revenues from online games, with a substantial majority being generated from users’ purchases of in-game virtual items offered through Renren Games.the Company—The Transaction.”

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Our total net revenues decreasedhave been increasing over the last three years while our losses from continuing operations have been decreasing. Our total net revenues increased from US$154.841.1 million in 20122015 to US$147.963.4 million in 20132016 and decreased further to US$83.0202.1 million in 2014.2017. We had a losslosses from continuing operations of US$31.9 million and US$29.0223.2 million in 2012 and 2013, respectively, and an income from continuing operations of2015, US$33.4194.1 million in 2014.2016 and US$110.5 million in 2017.

 

The major factors affecting our results of operations and financial condition are discussed below.

 

Net Revenues

 

We derive all of our revenues from our Renren and GamesAuto Group segments. Our Renren segment includes online advertising and IVAS service lines. As is customary in the advertising industry in China, we offer rebates to third-party advertising agencies and recognize online advertising revenues net of these rebates. We recognized allconsists of our revenues netIVAS and others business line and our SaaS business line. Our Auto Group segment mostly consists of our used automobile sales business taxes through 2011. Starting from 2012, weand our financing business. We recognize our revenues net of business taxes or value added tax, as applicable.

 

The following table sets forth the principal components of our net revenues, both as absolute amounts and as percentages of our total net revenues from our continuing operations, for the periods presented.

 

  Years ended December 31, 
  2012  2013  2014 
  (in thousands of US$, except for percentages) 
  US$  %  US$  %  US$  % 
Net revenues:                        
Renren segment:                        
Online advertising $49,129   31.7% $41,575   28.1% $26,894   32.4%
IVAS  16,243   10.5   20,899   14.1   18,959   22.9 
Renren segment total  65,372   42.2   62,474   42.2   45,853   55.3 
Games segment  89,455   57.8   85,473   57.8   37,101   44.7 
Total net revenues $154,827   100.0% $147,947   100.0% $82,954   100.0%
  Years ended December 31, 
  2015  2016  2017 
  (in thousands of US$, except for percentages) 
  US$  %  US$  %  US$  % 
Net revenues:                        
Used automobile sales $     $     $121,084   59.9% 
IVAS and others  32,507   79.1%   34,047   53.7%   51,749   25.6% 
Financing income  8,604   20.9%   29,317   46.3%   29,269   14.5% 
Total net revenues $41,111   100.0%  $63,364   100.0%  $202,102   100.0% 

 

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Our Renren segmentUsed automobile sales

 

Our Renren segment has net revenues from both online advertising and IVAS.

Online advertising. We offer a wide rangeused automobile sales consist primarily of online advertising formats and solutions, including social ads, display ads, promoted news feed items, fan and brand pages, self-service advertising solutions targeted at small- and medium-sized enterprises, and other formats such as sponsored online events and branded virtual items. We have also started offering mobile advertising solutionsrevenues generated from the sale of used cars to customers made through our Renren mobile app towards the end of 2013, which include banners, newsfeeds and sponsored stories. In 2012, 2013 and 2014, approximately 86.3%, 87.9% and 94.7%, respectively, of our online advertising revenues were derived from pay-for-time arrangements, whereby advertisers place their orders based on the period of time an advertisement is displayed in a specific format on a specific web page or through our mobile advertising formats. In addition to pay-for-time arrangements, advertisers can pay for our PC advertising solutions based on the number of ad impressions delivered or the number of clicks on their advertisement. An “ad impression” is delivered when an advertisement appears on a page and the page is viewed by a user.

Historically, advertisers looked at the size and demographics of our user base and the traffic on our SNS platform to gauge how effectively our SNS platform could be used to reach their target customers. The number of our activated users increased from approximately 178 million as of December 31, 2012 to approximately 206 million as of December 31, 2013dealerships, and to approximately 223 million asa much lesser extent to fees we collect for sales of December 31, 2014. However, we suffered a significant drop in monthly unique log-in users in 2013extended warranties and in average amount of time that unique log-in users spent on our platform in 2014. Our monthly unique log-in users decreased from approximately 56 million in December 2012 to approximately 45 million in December 2013 and then increased to approximately 46 million as of December 2014. The average amount of time that unique log-in users spent on our platform increased from approximately 7.6 hours in 2012 to approximately 7.7 hours in 2013 and then decreased to approximately 4.0 hours in 2014. These decreases in usage are primarily due to intense competition in the mobile internet environment, where there are numerous mobile applications dedicated to meet the specific needs of different users.

Meanwhile, the migration of our user traffic from PC to mobile made it more difficultreferrals for us to monetize our user traffic. The mobile percentage of our monthly total user time spent onrenren.com grew from 69.1% in December 2012 to 79.2% in December 2013 and further to 87.9% in December 2014. To date, advertisers have spent considerably less money advertising on mobile devices as compared to advertising on personal computers, due to the limited screen size of mobile devices and the under-developed measurement and tracking services for mobile advertising, and we did not begin monetizing through advertising until towards the end of the 2013. As a consequence, the number of our brand advertisers has decreased in recent years, even as annual spending by our brand advertisers has remained relatively stable. The number of our brand advertisers was 232, 189 and 139 in 2012, 2013 and 2014, respectively, while annual spending by our brand advertisers was approximately US$182,000, US$193,000 and US$179,000 in 2012, 2013 and 2014, respectively.

Due to the rapidly evolving nature of both the online advertising industry and social networking websites as an advertising platform, we are generally not able to use conventional price and volume analysis in evaluating the financial performance of our online advertising services. Because we offer a variety of advertisement formats on different locations of our webpages and both the advertisement formats and webpages have changed significantly in the past few years, we do not have meaningful advertisement volume information that can be used for period to period comparison purposes. Similarly, the price for the same duration of an advertisement may change due to the location of the webpage, the location of the advertisement on the webpage and rotation frequency. In addition, because social networking mobile services and websites as an advertising platform is an emerging business model and our pricing model for our advertising services has undergone significant changes in the past several years, period to period comparisons of prices of our advertising services would not be meaningful.insurance products.

 

The most significant factors that directly or indirectly affect our online advertising revenues include the following:from used automobile sales include:

 

·Demand. The demand for used automobiles in China, and particularly for premium ones, drives the numbergrowth in the size of the market that our users who visitused automobile sales business addresses. According to the mobileChina Automobile Dealers Association, sales of used automobiles in China totaled approximately 9.4 million units in 2015, 10.4 million units in 2016 and PC versions of our social networking internet platform, and the amount of time as well as the page views spent on the mobile and PC versions of our platform;12.4 million units in 2017.

 

·acceptance by advertisersRelationship with dealerships. We rely on our dealerships to conduct significant aspects of online advertising in generalour used automobile sales business. As of March 31, 2018, we had 14 dealerships across China. Our dealerships and real name social networking services in particular as an effective marketing channel;their employees directly interact with consumers, other dealerships and other platform participants, and their performance directly impacts our results of operations and financial condition.

 

·Customer engagement and branding. We engage car buyers primarily through our network of dealerships, our web and mobile apps and advertising on third party platforms. Our ability to expand the sizecustomer base for our used automobile sales business depends on the number and performance of total online advertising budgetsour dealerships as well as our ability to strengthen our recently launched brand through word of advertisers for both mobilemouth and PC solutions;advertising.

 

·Service offerings and pricing. We provide a variety of services to meet the needs of our customers. Each of our service offerings may have different revenue sources, cost structures and customer bases and may face different market conditions and pricing pressures. Therefore, the ability to retain existing advertisersadjust our service offerings and attract new advertisers;
·the levelpricing to adapt to changing market conditions may impact our results of competition among companies providing social networking, social messaging and social media services;operations.

 

·Technology. The continued enhancement of our abilitytechnology platforms and integration of technology into our used automobile sales business is important to continue providing innovative advertising solutions that enable advertisers to reach their target audiences;our future success.

 

·reports by 3rd party internet traffic tracking service providers in China, such as iResearch;Strategic expansion and acquisitions. We intend to continue to expand our network of dealerships to cover substantially all of China. We may also selectively pursue acquisitions, investments, joint ventures and partnerships that we believe are strategic and complementary to our used automobile sales business.

 

·73the state of the PRC and global economy; and

 

·government regulations or policies affecting the internet and SNS and online advertising businesses.

IVAS and others

We are disposing part of our ZenZone business as part of the Transaction. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” Our ZenZone business accounted for US$5.0 million in total revenue in 2016 and US$5.1 million in total revenue in 2017, including both IVAS and advertising revenues.

 

Advertising. We offer a wide range of online advertising formats and solutions. Online advertising was important to our company historically but generated an insignificant amount of revenue in 2017, and we have no expectation that it will constitute a significant part of our business for the foreseeable future.

IVAS. Our Renren segment’s IVAS revenues include virtual items, VIP memberships virtual items and other paid applications onrenren.comandwoxiu.com. Revenues generated from applications developed by third parties are subject to revenue-sharing agreements with the third-party developers.

As our Renren segment’s IVAS business is comprised of several business models, and each business model has its own revenue sources, quantitative price analysis for our Renren segment’s IVAS business as a whole is not practical or meaningful. Consequently, we are generally not able to use conventional average sale price analysis in evaluating the financial performance of our Renren segment’s IVAS businesses.

 

The most significant factors that directly or indirectly affect our Renren segment’s IVAS revenues include the following:

 

·our ability to maintain and improve revenue-sharing arrangements with third-party application developers;

·our ability to continue to offer new VIP features on our Renren SNS platform; and

 

·our ability to continue to offer new engaging VIP features on our Renren SNS platformmobile live-streaming and Woxiu that are attractive to users.

 

We launched Renren mobile live streaming in the second quarter of 2016. Our Games segmentmobile live streaming business accounted for US$21.0 million in total revenue in 2017 and accounted for 59.4% of our IVAS revenue for that year.

 

Financing income

We extended credit in an aggregate of RMB 4,832.6 million and RMB 4,390.0 million (US$649.7 million) to used automobile dealers in 2016 and 2017, respectively. Our Games segment’s revenues are derived from online games, including mobile, PCused automobile financing business accounted for US$17.9 million in total revenue in 2016 and cross-platform games. The substantial majority61.2% of our online games revenues are generated from users’ purchases of in-game virtual items, such as accessoriesfinancing revenue for that year. In 2017, it accounted for US$25.4 million in total revenue and pets, onwan.renren.com and other direct-to-consumer store fronts such as Apple’s Appstore. We collect most86.8 % of our financing revenue for that year. The rate at which we charge upfront fees and interest to used automobile dealerships is about 10.1% to 18.0%.

We previously made loans through Renren Fenqi, an online games revenuesplatform which provided credit financing to college students in China on an installment payment basis for the purchase of consumer goods. In the second quarter of 2016, we stopped making loans through third-party online payment systems. We also sell online prepaid cards to distributors at a discount tothis platform and we are now only collecting the face valueremaining installment payments as they come due. The last of these installment payments will be due in the cards. second quarter of 2018. Our revenue from Renren Fenqi includes interest and repayment processing fees.

For a detailed discussion of how revenues from games segmentfinancing are recognized in our financial statements, see “—Critical Accounting Policies—Revenue Recognition.”

 

TheSince our used automobile financing business accounted for the majority of our financing income for 2017, the most significant factors that directly or indirectly affect our Games segment’sfinancing revenues include the following:are similar to those that affect our revenues from used automobile sales.

·our ability to continue to offer new revenue-generating online games that are attractive to users;

·costs relating to licensing or acquiring and marketing new online games, including cross-platform games and mobile games;

·our ability to maintain and improve revenue-sharing arrangements with third-party online game developers;

·competition in China’s online games markets; and

·government regulations or policies affecting online games businesses.

 

Cost of Revenues

 

The following table sets forth the principal components of our cost of revenues, both as absolute amounts and as percentages of our total net revenues from our continuing operations, for the periods presented.

  Years ended December 31, 
  2012  2013  2014 
  (in thousands of US$, except for percentages) 
  US$  %  US$  %  US$  % 
Cost of revenues:                        
Renren segment:                        
Bandwidth and co-location costs $10,907   7.0% $12,192   8.2% $10,133   12.2%
Salaries and benefits  1,752   1.1   1,482   1.0   1,563   1.9 
Direct advertisement costs  1,654   1.1   676   0.5   1,419   1.7 
Commission costs  4,013   2.6   8,238   5.6   11,184   13.5 
Other expenses  6,365   4.2   8,448   5.7   8,738   10.5 
Sub-total  24,691   16.0   31,036   21.0   33,037   39.8 
                         
Games segment:                        
Bandwidth and co-location costs $5,660   3.7  $3,843   2.6  $3,031   3.7 
Salaries and benefits  10,280   6.6   10,521   7.1   5,744   6.9 
Games related costs  5,064   3.3   6,477   4.4   3,291   4.0 
Other expenses  4,099   2.6   2,403   1.6   2,869   3.4 
Sub-total  25,103   16.2   23,244   15.7   14,935   18.0 
                         
Total cost of revenues $49,794   32.2% $54,280   36.7% $47,972   57.8%

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  Years ended December 31, 
  2015  2016  2017 
  (in thousands of US$, except for percentages) 
  US$  %  US$  %  US$  % 
Cost of revenues:                        
Used automobile sales $     $     $116,385   57.6% 
IVAS and others  30,083   73.2%   26,059   41.1%   39,038   19.3% 
Financing income  6,637   16.1%   25,708   40.6%   28,975   14.3% 
Total cost of revenues $36,720   89.3%  $51,767   81.7%  $184,398   91.2% 

 

Our Renren segmentUsed automobile sales

For used automobile sales, our cost of revenues consists primarily of the cost of acquiring vehicles for sale, as well as costs for inspection and reconditioning.

IVAS and others

 

Cost of revenues for our Renren segmentIVAS and others consists primarily of bandwidth and co-location costs, salaries and benefits, direct advertisement costs and commission costs. We expect that our cost of revenues will increase in amount as we further grow our user base and expand our revenue-generating services.

Bandwidth and co-location costs. Bandwidth and co-location 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 and co-location costs are a significant component of our cost of revenues.

Salaries and benefits. Salaries and benefits primarily consist of salaries and welfare benefits for employees whose services are directly related to the generation of revenues.

Direct advertisement costs. Direct advertisement costs include design, development and certain other costs incurred by third parties with whom we have contracted to provide certain services relating to our online advertising services. For example, if an advertiser places an advertisement on ourrenren.com website and we contract with a third party to provide technical assistance and design support for placing such advertisement, the fees paid to this third party are classified as direct advertisement costs.

Commission costs. Commission costs primarily consist of commissions that were paid to mobile live streaming performers and Woxiu performers. Such commissions were calculated as a percentage of the revenues we generate from the sales of virtual items that fans of the performers have purchased.

 

Other expenses.Other expenses primarily include salaries and benefits for employees whose services are directly related to the generation of revenues, fees we pay to telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their internet data centers, depreciation and content costs. Depreciation expenses primarily consist offor the depreciation of servers and other equipment. We include depreciation expenses for servers and other equipment that are directly related to our business operations and technical support in our cost of revenues. Content costs consist ofrevenues, and fees we pay to license content from copyright owners or content distributors.

Our Games segmentZenZone business accounted for US$1.7 million of our cost of revenues in 2016 and US$3.8 million of our cost of revenues in 2017.

Financing income

Cost of revenues for financing income consists primarily of financing costs and provision for financing receivable.

Financing costs.Financing costs primarily consist of interest expenses, including the expenses paid to investors on Renren Licai and other peer-to-peer platforms, issuing related expenses and interest expenses of asset-backed securities. Funds for our financing business are provided by our issuance of asset-backed securities collateralized by that credit financing and by peer-to-peer platforms. Our cost of funding is related to prevailing interest rates in China and other factors that affect the availability of credit, though the relationship is indirect because we rely on unconventional sources of funding. Interest rates paid to investors on peer-to-peer platforms tend to be somewhat higher than prevailing interest rates because peer-to-peer platforms are relatively novel and have not achieved wide acceptance. Our ability to source funding at affordable rates will have a significant impact on our ability to control costs.

 

Games related costsProvision for financing receivable.. Games-related costs primarily consistThe provision for financing receivable is accrued when we believe that the future collection of fixed and variable fees for licensing certain online games from third-party developers. Fixed licensing fees are amortized on a straight line basis overprincipal is unlikely. We consider the shortercredit worthiness of the license period and the useful economic lifecustomers, aging of the licensed game. Variable licensing feesoutstanding receivable and other specific circumstances related to the receivable when determining the allowance for receivable losses. In the aggregate, these costs are calculated asrelated to our ability to maintain and improve our credit risk control system. We are not a percentagefinancial institution and we do not have a long history of designing and operating credit risk control systems. Provision for financing receivable accounts for a significant proportion of the cost of revenues we generate from the licensed games and are recognized when the relevant revenues are recognized. In addition, games-related costs include the depreciation and amortization of computer servers and software which are attributableour financing business, comparable to our online games business.

financing costs in 2016 and 2017, so the accuracy and efficiency of our credit risk control systems will have a significant impact on our ability to control costs.

Bandwidth

Other expenses. Other expenses of our financing business include salaries and benefits for employees, bandwidth and co-location costs. Bandwidth and co-location costs of our Games segment primarily consist of the fees we pay to telecommunications carriers for hosting of servers.

Salariesservers, and benefits. Salariesrental expense and benefits of our Games segment primarily consist of expenses for employees whose services are directly related to the operation of our online game services.

Other expenses. Other expenses of Games segment mainly include depreciation and amortization for servers and equipment, thatin each case as they are directly related to the online games services.our financing business.

 

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Operating Expenses

 

Our operating expenses consist of selling and marketing expenses, research and development expenses, and general and administrative expenses, restructuring cost, impairment of intangible assets and impairment of goodwill.expenses. The following table sets forth our operating expenses for continuing operations, both as absolute amounts and as percentages of our total net revenues, for the periods indicated.

 

 Years ended December 31,  Years ended December 31, 
 2012  2013  2014  2015  2016  2017 
 (in thousands of US$, except for percentages)  (in thousands of US$, except for percentages) 
 US$  %  US$  %  US$  %  US$  %  US$  %  US$  % 
Operating Expenses:                        
Operating expenses:                        
Selling and marketing $47,926   31.0% $62,198   42.0% $38,340   46.2% $30,502   74.2%  $21,276   33.6%  $28,954   14.3% 
Research and development  71,558   46.2   77,956   52.7   50,675   61.1   32,392   78.8%   20,750   32.7%   23,678   11.7% 
General and administrative  33,577   21.7   49,275   33.4   51,429   61.9   46,803   113.8%   42,584   67.2%   52,949   26.2% 
Impairment of intangible assets        208   0.1   714   0.9 
Impairment of goodwill              46,864   56.5 
Restructuring cost        3,475   2.3   6,354   7.7 
Total operating expenses $153,061   98.9% $193,112   130.5% $194,376   234.3% $109,697   266.8%  $84,610   133.5%  $105,581   52.2% 

 

Our selling and marketing expenses, research and development expenses and general and administrative expenses include share-based compensation charges. See “—Critical Accounting Policies—Share-Based Compensation” for more information.

 

Selling and marketing expenses

 

Selling and marketing expenses consist primarily of salaries, benefits and commissions for our sales and marketing personnel and advertising and promotion expenses. Compared with 2014, ourOur selling and marketing expenses may increase in the near term if we plan to increase our promotion expenses for our Renren brand online gamesand Kaixin brand, our live streaming service and our internet finance services.used automobile business.

 

Research and development expenses

 

Research and development expenses consist primarily of salaries and benefits for research and development personnel. Our research and development expenses decreased substantially in 2014 due mainly to the headcount reduction for our game development teams when we shifted our focus to operating and distributing online games from third parties. Our research and development expenses may increase in the near term on an absolute basis as we intend to hire additional research and development personnel to develop new features for our various services and further improve our technology infrastructure.

General and administrative expenses

 

General and administrative expenses consist primarily of salaries and benefits for our general and administrative personnel and fees and expenses for third-party professional services. Our general and administrative expenses increased substantially in 2017 primarily due to the increase in share-based expenses, as well as professional expenses for the transaction we announced on April 30, 2018. Our general and administrative expenses may increase in the future on an absolute basis as our used automobile business grows.

Impairment of goodwill

As the declining performance of our Renren reporting unit indicated an impaired goodwill, we performed an interim impairment test in September 2014 and recorded an impairment of goodwill of the Renren reporting unit, which included 56.com, of US$46.9 million.

 

Taxation

 

Cayman Islands

 

We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

 

PRC

 

AllPrior to the adoption of the value-added tax, all entities and individuals that engage in the provision of services, the transfer of intangible assets or the sale of real properties within the PRC arewere required to pay PRC business tax. Currently, we areWe were subject to a 5.6% to 8.6% business tax on gross revenue generated from IVAS, online advertising and social commerce services, plus related surcharges.

On January 1, 2012, the Ministry of Finance and the State Administration of Taxation introduced a pilot plan for the imposition of a value-added tax to replace the business tax. This pilot plan was first launched in Shanghai and subsequently was expanded to ten other provinces and municipalities, between August and December of 2012.surcharges, up through April 2016. As of December 31, 2014, certain2017, all of our subsidiaries and consolidated affiliated entities based in Beijing, Guangzhou and Shanghaithe PRC have been required by the local tax authorityauthorities to pay value-added tax at a rate of 6.72%2.18% to 6.78%18.7% on certain service revenues which were previously subject to business tax.

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The Enterprise Income Tax Law applies a uniform enterprise income tax rate of 25% to all domestic enterprises and foreign-invested enterprises and defines new tax incentives for qualifying entities. Dividends, interests, rent or royalties paid by a PRC entity to foreign non-resident enterprise investors, and proceeds from the disposition of assets by such foreign enterprise investor,investors, will generally be subject to a 10% withholding tax.

 

On March 31, 2009, Qianxiang Wangjing, one of our consolidated affiliated entities, was qualified as a “software enterprise” by the Beijing Municipal Commission of Science and Technology. According to such qualification, Qianxiang Wangjing was eligible for certain preferential tax treatments, including a two-year exemption and three-year 50% reduction on its annual enterprise income tax starting from the first year when it generated profits, which was 2009. Qianxiang Wangjing did not qualify for renewal of such qualification and accordingly the preferential tax treatments ceased in 2013. This preferential tax treatment benefited us by reducing our income tax charge by US$1.4 million and nil in 2011 and 2012 respectively. From tax year 2013 onward, Qianxiang Wangjing is subject to income tax at the standard rate of 25%. Qianxiang Changda had been qualified as a “software enterprise” by the Shanghai Municipal Commission of Science and Technology and, accordingly, was exempt from enterprise income tax rate in 2011 and 2012. In 2013 Qianxiang Changda did not qualify for renewal of this qualification and accordingly will not continue to be entitled to the tax reduction of 50% for 2013, 2014 and 2015. This preferential tax treatment benefited us by reducing our income tax charge by US$2.8 million in 2011 and US$9.8 million in 2012. Renren Games has been qualified as a “software enterprise” by the Shanghai Municipal Commission of Science and Technology and, accordingly, was exempt from enterprise income tax rate in 2013, will be exempt in 2014 and will enjoy a tax reduction of 50% from 2015 to 2017. This preferential tax treatment benefited us by reducing our income tax charge by US$5.8 million in 2013 and US$2.1 million in 2014. Furthermore, certain enterprises may still benefit from a preferential tax rate of 15% under the Enterprise Income Tax Law if they qualify as a “High and New Technology Enterprise” subject to certain general factors described in the Enterprise Income Tax Law and the related regulations. Tianjin Joy Interactive Technology Development Co., Ltd. is entitled to a preferential tax rate of 15% due to its qualification as a “High and New Technology Enterprise” from October 21, 2014 to October 20, 2017.

Under the Enterprise Income Tax Law, an enterprise established outside of the PRC with “de facto management bodies” located within the PRC is considered a PRC resident enterprise and therefore will be subject to a 25% PRC enterprise income tax on its global income. The implementation rules define “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” In addition, SAT Circular 82 treats a Chinese-controlled enterprise established outside of China as a PRC resident enterprise with “de facto management bodies” located in the PRC for tax purposes where all of the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily production or business operations are located in the PRC; (ii) its financial and human resource decisions are subject to determination or approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s board members with voting rights or senior management habitually reside in the PRC. In addition, the State Administration of Taxation issued a bulletin effective September 1, 2011 to provide more guidance on the implementation of the above circular. The bulletin made clarification in the areas of resident status determination, post-determination administration and competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. Despite the uncertainties resulting from limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises under the Enterprise Income Tax Law. If we were considered a PRC resident enterprise for tax purposes, we would be subject to the PRC enterprise income tax at the rate of 25% on our global income for the period after January 1, 2008. Given that Circular 82 was issued regarding overseas enterprises controlled by PRC enterprises (not those controlled by PRC individuals), it is not strictly applicable to us. As of December 31, 2014,2017, we had not accrued reserves for PRC tax on such basis.

 

Discontinued Operations

 

In October 2013, Baidu Holdings Limited, a subsidiaryNovember 2015, our board of Baidu, Inc., acquired approximately 59%directors approved the disposition of the equity interestour online games business as part of Nuomi Holdings Inc., or Nuomi, a wholly-owned subsidiaryour change in strategic direction to focus more on our internet finance business. We disposed of ours and a leading provider of group-buying servicesour entire online games business in China. In December 2014, Tianjin Jinhu Culture Development Co., Ltd, a subsidiary of Sohu.com Inc., acquired 100% of the equity interest of Qianjun Technology, a wholly-owned subsidiary of ours and operator of the 56.com website.March 2016. As a result, our financial statements now reflect the deconsolidation of Nuomi’s, Qingting’sQianjun Technology’s and Qianjun Technology’sour online games business’s operating results. Retrospective adjustments to the historical statement of operations have also been made to provide a consistent basis of comparison for the financial results. Specifically, Nuomi’s, Qingting’sQianjun Technology’s and Qianjun Technology’sour online games business’s operational results have been excluded from our financial results from continuing operations and have been separately itemized underreclassified to discontinued operations.

 

Critical Accounting Policies

 

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and net revenues and expenses. We regularly evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect. This is especially true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.

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Revenue Recognition

 

Historically, we have generated revenues primarily through online games, online advertising, our online social video platform and social commerce. Our social commerce services and online advertising services generated on our online social video platform have been discontinued after our deconsolidation of Nuomi. Nuomi and Qianjun Technology. Our online game services have been discontinued since we reclassified our online games business as held for sale in 2015 and we disposed of our online games business in 2016. During the years ended December 31, 2015, 2016 and 2017, our revenues are mainly generated from used automobile sales, advertising and IVAS as well as internet finance services.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

 

Online gamesUsed automobile sales

 

Revenue from used automobile sales is recognized when a sales contract has been executed, the vehicle has been delivered, and payment has been received or financing has been arranged. We generatedo not provide customers with any sales return policy. We purchase used automobiles from unrelated individuals or dealerships and sell them directly to our customers through our local dealerships which we acquired during the year ended December 31, 2017.

IVAS and others

IVAS and others revenue mostly include revenues from online advertising and revenue from the provision of online games, particularly cross-platform and web-based online games. Our games can be accessed and played by end users free of charge, and the end users may choose to purchase in-game virtual merchandise or premium features to enhance their game-playing experience using virtual currency. The end users can purchase virtual currency by making direct online payments to us through third-party online payment platforms or purchasing online prepaid cards. Net proceeds received from these service providers after deduction of service fees are recorded initially as deferred revenues. We sell online prepaid cards through distributors across China with sales discounts from the face value offered by us. As we do not have control over and generally do not know the ultimate selling price of the online prepaid cards sold by the distributors, net proceeds received from distributors after deduction of sales discounts are recorded as deferred revenues. End users consume the virtual currency for in-game merchandise or premium features sold.live streaming services.

 

We categorizes in-game merchandise or premium features as either consumptive or permanent. For the consumptive in-game merchandise or premium features, revenues are recognized when the in-game merchandise or premium features are first used by the end users. For the permanent in-game merchandise or premium features, revenues are recognized ratably over the estimated average playing period of paying players for each applicable game, which represents our best estimate of the estimated average life of permanent in-game merchandise or premium features.

In estimating the average playing period of paying players for each applicable game, we consider the charging data, which are affected by various factors such as acceptance and popularity of the game, the game updates and other in-game items, promotional events launched, future operating strategies and market conditions. Given the short operating history of our online games, the estimated average playing period of paying players for each applicable game may not accurately reflect the actual lives of the permanent in-game merchandise or premium features in that game. We review, at least annually, the average playing period of paying players for all applicable games to determine whether the estimated lives for permanent in-game merchandise or premium features remain reasonable. Based on our latest review, such estimated lives remain reasonable and have not changed significantly over time. We may revise our estimates as it continues to collect operating data, and refine the estimation process and results accordingly. All paying players’ data in an applicable game collected since the launch date of such game are used to perform the relevant assessment for that applicable game.

If there is insufficient player data to determine the average playing period of players for an applicable game, such as in the case of a newly launched game, we estimate the average playing period of paying players based on other similar games we or third parties operate, taking into account the game profile, the target audience and the appeal to paying players of different demographics, until sufficient data is collected, which is normally up to 12 months after launch.

We are not able to track on an individual basis the virtual currency purchased by our users at various prices. Accordingly, we calculate the amount of revenues recognized for each game point consumed using a moving weighted average method, by dividing the sum of the payments received in the current month and the deferred revenue balance as of the beginning of the month by the sum of number of the units of the virtual currency purchased by the end users in the current month and the units unconsumed by the end users as of the beginning of the month.

An example calculation of the application of the moving weighted average method is as follows:

We sell a pre-paid card with a face value of 100 units of virtual currency through a distributor at a price of US$80 and sell another 100 units virtual currency through direct on-line payment at a price of US$100. There is no unused virtual currency or deferred revenues outstanding as of the beginning of the period. During the period, the game players completely used 150 units of virtual currency, and the computation of the revenues recognized by the application of the moving weighted average method is as follows:

Units of virtual currencyAmount in US$
Outstanding units/deferred revenues as of beginning of the periodAB
Sales during the period200CUS$180(US$80+US$100)D
Moving weighted average unit price for the periodUS$0.9E=(B+D)/(A+C)
Units used/revenues recognized in the period150FUS$135G=E×F
Outstanding units/ deferred revenues as of ending of the period50

H=A+C−F

US$45

I=B+D−G

The deferred revenues in relation with the inactivated online prepaid cards are recognized as revenues when the term of the online prepaid card expires, which is normally two years from the date of purchase. The amount associated with the unused virtual currency, which are without contractual expiration term, are carried as deferred revenues indefinitely as we are not able to reasonably estimate the amount of virtual currency which will be ultimately given up by the users due to our short operating history.

We have also entered into revenue sharing agreements with certain third-party game developers, under which we promote and provide links to the online games developed by these third-party developers on our platforms while the third-party game developers operate the games, which includes providing game software, hardware, technical support and customer services. All of the web games developed by third-party game developers can be accessed and played by game players on our platforms without downloading separate software. We view the game developers to be our customers and consider our responsibility under such agreements to be that of distribution and payment collection for such games. We primarily collect payments from game players in connection with the sale of in-game currencies and remits certain agreed-upon percentages of the proceeds to the game developers with the residual portion of such proceeds deferred for revenue recognition until the estimated consumption date, (i.e., the estimated date by which in-game currencies are consumed within the games for purchase of in-game merchandise or premium features), which is typically within a short period of time after purchase of the in-game currency. Purchases of in-game currency are not refundable unless there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the monthly revenue generated by a game is insignificant.

Online advertising

. Pursuant to advertising contracts, we provide advertisement placement services on our SNS platform and in our online games. We primarily enter into pay-for-time contracts, pursuant to which we bill our customers based on the period of time to display the advertisements in the specific formats on specific web pages. In recent years we have entered into pay-for-volume arrangements, pursuant to which we bill our customers based on the number of impressionstraffic volume basis, e.g. pay-per-click or click-throughs that we deliver.pay-per-impression.

For pay-for-time contracts revenues are recognized ratably over the period the advertising is provided. Pay-for-volumeFor pay-for-volume contracts revenues are recognized based on traffic volume tracked and the pre-agreed unit price. Contractual billings in excess of recognized revenue and payments received in advance of revenue recognition are recorded as deferred revenues.

We enter into advertising placement contracts with advertisers, or more frequently, with the advertisers’ advertising agents, and we offer volume rebates to certain advertisers’ advertising agents. We treat these advertising agents as our customers and our advertising revenues are recognized after deducting the estimated rebates. An estimate of the total rebate is based on the estimates of the sales volume to be reached based on our historical experience. If amounts of future rebates cannot be reasonably estimated, a liability will be recognized for the maximum potential amount of the rebates.

Live streaming revenue. We generate live streaming revenue from both Woxiu and Renren Open Platform Programmobile live streaming.

 

Our social networking internet“Woxiu,” which means “a show of your own” in Chinese, is a virtual stage that we initially offered on our56.com platform and then on the Woxiu platform after the completion of the disposition of56.com, where grassroots musicians and performers can live-stream their performances and share them with viewers. Fans of the performing user can chat live with the performer and other audience members and purchase consumable virtual items to show support for the performer. In the second quarter of 2016, we also allowslaunched live streaming service on Renren mobile terminal.

For both Woxiu and Renren mobile live streaming, the amount of virtual currencies consumed is maintained by our users to access for-purchase applications developed by third parties. Pursuant to revenue-sharing agreements entered between usoperating system and will be deducted from users’ accounts automatically when the virtual currencies are deemed as consumed. Revenue is recognized monthly based on the virtual currencies consumed. We pay the performers a certain percentage of the virtual currencies consumed. We recognize total revenue on a gross basis, and the third-party application developers,commission paid to performers is recorded as cost of revenues. We calculate the amount of revenues recognized for each unit of virtual currency consumed using a moving weighted average method by dividing the total cumulative unrecognized deferred revenues by total unconsumed virtual currency.

Financing

We generate revenue from our financing business primarily through providing credit financing to used automobile dealers. Additionally, we are generally entitledalso provided credit financing to a 52% sharecollege students on Renren Fenqi as well as apartment rental financing during the years ended December 31, 2015 and 2016. Both of those services were terminated, in May and January 2016 respectively. We record financing income and service fees related to those services over the life of the revenues generated from our users accessing such for-purchase applications developed by third parties.underlying financing using the effective interest method on unpaid principal amounts. The revenuesservice fees collected upfront, as well as the direct origination costs for the financing, are deferred and recognized as financing income as an adjustment to the yield on a netstraight line basis whenover the third-party applications are sold through our platform and our users make online payment to us, which generally occurs concurrently.life of the portfolio financing.

Social commerce

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Used car financing

 

Between June 2010We provide short-term financing services to used automobile dealers to fund the car dealers’ cash needs for used automobile purchasing. The financing period is no more than six months and October 2013, we were engaged in social commerce services through nuomi.com. Third-party merchants agree to provide Nuomi users discounted prices when pre-agreed amount of Nuomi users sign up foris secured by a deal consisting of services events or products provided by the merchants. We recognize revenue for the differencepledge of the amounts we collect from Nuomi users anddealers' used automobile with total value exceeding the amount we pay to the third-party merchants. The revenues are recognized when allprincipal of the following criteria are met: (i) the number of participating users reaches the minimum requirement of the merchants; (ii) the participating users have made their payments to us; (iii) we have released the electronic coupons for the agreed discounted prices to the participating users; and (iv) the electronic coupons have been consumed by the participating users. The payments received for unused coupons are initially recognizedfinancing. We charge an upfront service fee as other accounts payables and are recognizedwell as revenues when the above criteria have been met. Due to Nuomi’s customer service policies that enabled participating users to a full cash refund within seven days of purchasing a coupon or if the quality of the products or services provided by the third-party merchants did not meet the descriptions of the products or services provided by the third-party merchants on our Nuomi website, or that allowed participating users to deposit the payments made to us as credits for future transactions without a time limit, we recognized the revenue upon the consumption of the released coupon. We believed that we were an agent and recognized revenuesfinancing income on a netmonthly basis. We did not recognizeThe remaining financing income in the revenues for unused coupons upon their expiration,respective periods related to credit financing provided to college students as wewell as apartment rental financing, both of which were not able to estimate how many users would ultimately neither useterminated during the coupon noryear ended December 31, 2016 as discussed in the credits received upon expiry of the initial unused coupon for a future purchase, and we carried all such amounts as a liability until the released coupon was ultimately used.preceding paragraph.

 

Goodwill and Intangible Assets

 

Goodwill represents the costexcess of the purchase price over the fair value of identifiable net assets acquired in business combinations.

Goodwill is not amortized, but tested for impairment upon first adoption and annually, or more frequently if event and circumstances indicate that they might be impaired. We have an acquired business in excessoption to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of identifiable tangibleeach reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, and intangible net assets purchased. We generally seekassumptions that are consistent with the assistanceplans and estimates being used to manage our business, estimation of an independent valuation firm in determiningthe long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of the identifiable intangible net assets of the acquired business.

There are several methods that can be useda reporting unit change from year to determine the fair value of assets acquiredyear based on operating results and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows associated with a particular intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significantmarket conditions. Changes in these estimates and assumptions inherent incould materially affect the income method or other methods includedetermination of fair value and goodwill impairment for the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the asset’s economic life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives.reporting unit.

 

Goodwill is tested forIn performing the two-step quantitative impairment at least once annually. Impairment is tested using a two-step process. Thetest, our first step comparesis to compare the fair valuevalues of each reporting unit to its carrying amount, including goodwill. If the fair value of eacha reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit's goodwill to the carrying value of a reporting unit’sthat 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.

In view ofestimating the declining performance of our Renren reporting unit and the reallocating of resources to new business areas, we performed an interim impairment test of goodwill on September 30, 2014 and wrote down its carrying amount to its fair value of $13.7 millioneach reporting unit we estimate the future cash flows of each reporting unit, we have taken into consideration the overall and recognized anindustry economic conditions and trends, market risk of the Company and historical information. We did not record impairment losscharges of $46.9 milliongoodwill for the year ended December 31, 2014.2017. We test goodwill for impairment at the reporting unit level, which is the same as reportable segment. Goodwill is only associated with our “Renren” reporting unit. The following table sets forth the estimated fair value, carrying value anddid not have goodwill as of September 30, 2014.December 31, 2016 and 2015.

 

Renren
(in millions of US$ except for
percentages)
Estimated fair value of total equity(109.6)
Carrying value(65.8)
Amount of goodwill allocated to the reporting unit13.7

The fair value at this interim test was determined based on the discounted cash flow or DCF method of the income approach applying assumptions including terminal growth rate of 3%, discount rate of 19% and annual risk free rate of 4%.

Upon the disposal of Qianjun Technology, which is included in our Renren reporting unit, we disposed of a certain amount of goodwill that was determined based on the relative fair value of the disposed business and the remained portion in our Renren reporting unit. All the remaining carrying amount of goodwill of $13.7 million was allocated to the disposed business and then disposed of on December 1, 2014.

Please see “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry” for a discussion of risks and uncertainties that may adversely affect our growth. These risks and uncertainties, if materialized, could also have a negative effect on the estimated fair value.

 

Intangible assets with indefinite useful lives are not subject to amortization and are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such impairment test consists of the fair values of assets with their carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. During the years ended December 31, 2012, 2013 and 2014, we recorded impairment losses of nil, nil and US$0.1 million, respectively, from continuing operations, and impairment losses of nil, nil and US$13.5 million, respectively, from discontinued operations, mainly related to domain names with indefinite life, since we performed an interim impairment test on intangible assets. The fair value of the intangible assets of 56.com were estimated based on the latest operating results and market conditions and such impairments were based on the fair value in impairment test. Upon the disposal of Qianjun Technology, we allocated intangible assets related to 56.com into our discontinued operations and accordingly, we have US$2,000 of intangible assets as of December 31, 2014.

Intangible assets with determinable useful lives are amortized on a straight-line basis.

We evaluate intangible assets with determinable useful life for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. During the year ended December 31, 2012, 2013 and 2014, we recognized impairment for intangible assets of nil, US$0.2 million and US$1.8 million for games licenses.

Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.

Share-based Compensation

 

Our share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument we issued and recognized asinstrument. We recognize the compensation expensecosts net of estimated forfeitures using the straight-line method, over the applicable vesting period based on the straight-line method, with a corresponding impact reflected in additional paid-in capital. Share awards issued to non-employees, such as advisors, are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.

period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. Share options granted to employees with market conditions attached are measured at fair value on the grant date and are recognized as the compensation costs over the estimated requisite service period, regardless of whether the market condition has been met.

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Share awards issued to non-employees are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.

 

A change in any of the terms or conditions of share options shall be accounted for as a modification of the plan. Therefore, we calculatescalculate incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, we would recognize incremental compensation cost in the period of the modification occurred and for unvested options, we would recognize, over the remaining applicable vesting period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

Volatility. The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options.

Risk-free interest rate. Risk-free interest rate was estimated based on the yield to maturity of China Sovereign Bonds with a maturity period close to the expected term of the options.

Expected term. For the options granted to employees, we estimated the expected term based on the vesting and contractual terms and employee demographics, and we estimated the expected term as the average between the vesting term of the options and the original contractual term. For the options granted to non-employees, we estimated the expected term as the original contractual term.

Dividend yield. We estimated the dividend yield based on our expected dividend policy over the expected term of the options.

Exercise price. The exercise price of the options was determined by our board of directors.

Fair value of underlying ordinary shares. The closing market price of our ADSs (adjusted for the ratio of ordinary shares per ADS) on the grant date was used.

 

Income Taxes

 

In preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include in our consolidated balance sheet. We must then assess the likelihood that we will recover our deferred tax assets from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance, we must include an expense within the tax provision in our statement of operations. We adopted ASU 2015-17 Income Taxes (Topic 740) on January 1, 2017 and presented deferred tax assets and liabilities as non-current in our consolidated balance sheet as of December 31, 2017. Prior periods were not retrospectively adjusted and the adoption of this new standard did not have a material impact on our consolidated financial statements.

 

Management must exercise significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

 

U.S. GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit during that period. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than the expected ultimate assessment. We recorded no unrecognized tax benefits of nil, nil and nil during the yearyears ended December 31, 2012, 20132015, 2016 and 2014 respectively.2017.

 

Uncertainties exist with respect to the application of the PRC Enterprise Income Tax Law and its implementing rules to our operations, specifically with respect to our tax residency status. The Enterprise Income Tax Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” are located within the PRC. The Enterprise Income Tax Law’s implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”

 

Despite the uncertainties resulting from limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC constitute residents under the Enterprise Income Tax Law. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operations. See “Item 3.D—Risk Factors—Risk Related to Doing Business in China—Discontinuation of any of the preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.

 

Based on our analysis of the facts related to our corporate restructuring in 2005 and 2006, we do not believe that we should be treated as a United States corporation for United States federal income tax purposes. However, as there is no direct authority on how the relevant rules of the Code might apply to us, our company’s conclusion is not free from doubt. Therefore, our conclusion may be challenged by the United States tax authorities and a finding that we owe additional United States taxes could substantially reduce the value of your investment in our company. If the United States taxing authorities successfully treated our company as a United States domestic corporation, our company would be subject to United States federal income tax on its worldwide taxable income as if it were a United States corporation. For more information, please refer to “Item 3.D—Risk Factors—Risks Related to Our Corporate Structure and the Regulation of Our Business—If we are required to pay U.S. taxes, the value of your investment in our company could be substantially reduced.”

 

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Consolidation of Variable Interest Entityvariable interest entity

 

PRC laws and regulations currently prohibit direct foreign ownership of business entities providing value-added telecommunications services in the PRC where certain licenses are required for the provision of such services. To comply with the PRC laws and regulations, we conduct substantially all of our business through our variable interest entities and their subsidiaries. We have, through threeone of our wholly owned subsidiaries in the PRC, entered into contractual arrangements with Qianxiang Tiancheng and Renren Games, such that these entitiesQianxiang and its subsidiaries are considered as our variable interest entities for which we are considered their primary beneficiary. We believe we have substantive kick-out rights per the terms of the equity option agreements, which gives us the power to control the shareholder of these entities. More specifically, we believe that the terms of the exclusive equity option agreements are currently exercisable and legally enforceable under PRC laws and regulations. Therefore, we believe this gives us the power to direct the activities that most significantly impact the economic performance of these entities and their subsidiaries. We believe that our ability to exercise effective control, together with the service agreements and the equity interest pledge agreements, give us the rights to receive substantially all of the economic benefits from these entities and their subsidiaries in consideration for the services provided by our wholly owned subsidiaries in China. Accordingly, as the primary beneficiary of these entities and in accordance with U.S. GAAP, we consolidate their financial results and assets and liabilities in our consolidated financial statements.

 

Based on the advice of TransAsia Lawyers, our PRC legal counsel, our corporate structure in China complies with all existing PRC laws and regulations. However, our PRC legal counsel has also advised us that as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. 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.

 

Short-term investmentsIn January 2016 and September 2016, we originated the issuance of two Shanghai Renren Finance Leasing Asset-Backed Special Plans, approximating RMB 299.8 million (US$46.1 million) and RMB 510.6 million (US$78.5 million), respectively. The plans are collateralized by certain financing receivables arising from our used automobile financing business.

 

The short-term investments comprise marketableplans consist of three tranches: AAA-rated senior securities (covering 68.0% and 70.5% of the total securities issued, respectively) and AA-rated senior securities (covering 10.5% and 11.0% of the total securities issued, respectively) which are classified as available-for-sale, held-to-maturitywere purchased by external investors, and derivative financial instruments that are regarded as assets. The available-for-sale investments are reported at fair values withsubordinate securities (covering 21.5% and 18.5% of the unrealized gains or losses recorded as accumulated other comprehensive incometotal securities issued, respectively) held by us. We also provided a guarantee to secure the full repayment of the principal and interest of the external investors in equity. Short-term investments with contractual maturity dates less than one year are classified as held-to-maturity measured at amortized costs whenthe plans.

We hold significant variable interests in the plans through holding the subordinate securities and the guarantee provided, from which we have the positive intent and abilityright to holdreceive benefits from the securitiesplans that could potentially be significant to maturity. The derivative financial instruments that are treated as assets are measured at fair value. The changes in fair value of those derivative instruments are recognized as gain or loss if such derivative instruments are not qualified for hedge accounting.the plans.

 

We reviewalso have power to direct the available-for-sale investments for other-than-temporary impairment based on the specific identification method. We consider available quantitative and qualitative evidence in evaluating the potential impairmentactivities of the short-term investments. Ifplans that most significantly impact the cost of an investment exceeds the investment’s fair value, we consider, among other factors, general market conditions, expected futureeconomic performance of the investees,plans by making revolving purchases of underlying financing receivables and providing payment collection services from the duration andunderlying financing receivables.

Accordingly, we are considered the extent to which the fair valueprimary beneficiary of the investment is less thanplans and have consolidated the cost,plans’ assets, liabilities, results of operations and our intent and ability to holdcash flows in the investment. We separate the amountaccompanying consolidated financial statements.

The assets of the other-than-temporary impairment intoplans are not available to our creditors. In addition, the amount that is credit related (credit loss component) andinvestors of the amount due to all other factors. The credit loss component is recognized in earnings, which represents the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to other factors is recognized in the consolidated statements of comprehensive income (loss) if we neither intends to sell and will not more likely than not be required to sell the security before recovery. The difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. We recognized nil, US$2.1 million and nil impairment losses on short-term investments for the years ended December 31, 2012, 2013 and 2014, respectively.plans have no recourse against our assets.

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Long-term investments

  

·Equity method investments. Investment in common stock or in-substance common stock of an entity where we can exercise significant influence, but not control, is accounted for using the equity method. Significant influence is generally considered to exist when we have an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements are also considered in determining whether the equity method of accounting is appropriate. An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity’s common stock. We consider subordination, risks and rewards of ownership and obligation to transfer value when determining whether an investment in an entity is substantially similar to an investment in that entity’s common stock. Under the equity method, the investment is initially recorded at cost and adjusted for our share of undistributed earnings or losses of the investee. Investment losses are recognized until the investment is fully written down as we do not guarantee the investee’s obligations nor it is committed to provide additional funding. When our carrying value in an equity method affiliated company is reduced to zero, no further losses are recorded in our consolidated financial statements unless we guaranteed obligations of the affiliated company or have committed additional funding. When the affiliated company subsequently reports income, we will not record its share of such income until it exceeds the amount of its share of losses not previously recognized. We regularly evaluate the impairment of the equity 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 charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. We recognized nil, US$23.04.3 million, US$7.5 million and nilUS$20.0 million in impairment losses on equity method investments for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

·Warrants and purchased call options. Warrants and purchased call options represent financial instruments purchased by us to acquire additional equity interest if the counterparties fulfilled certain conditions during certain period of time. The warrants and purchased call options are recorded at fair value at the acquisition date and carried at cost less impairment.

 

·Cost method investments. For investments in an investee over which we do not have significant influence and which are not considered debt securities or equity securities that have readily determinable fair values, we carry the investment at cost and recognize income as any dividends declared from distribution of investee’s earnings. We review the cost method investments for impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. The primary factors we consider in our impairment analysis include the duration and severity of the decline in fair value, the financial condition, operation performance and the prospects of the investees as well as other company specific information such as recent financing rounds. 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. We determine the fair value of our cost method investment generally by adopting a market approach concluding on the overall investee’s equity value which takes into consideration a number of factors that include expected market multiples from publicly traded companies in the industry and allocating this value to the various classes of preferred and common shares by using an option pricing method which takes into consideration a number of factors that include lack of marketability discount, interest rate, expected volatility, probability weight for each scenario including liquidation, redemption and initial public offering as applicable. We recognized nil, US$44.0 million and US$53.1 million in impairment losses on cost method investments for the years ended December 31, 2015, 2016 and 2017, respectively.

 

·Held-to-maturity investmentAvailable-for-sale investments. Held-to-maturity investment includesOur investments in convertible redeemable preferred shares and convertible debt are classified as available-for-sale investments which are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. We monitor the investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends and other company-specific information. An impairment loss on the available-for-sale securities is recognized in the consolidated statements of operations and comprehensive income when the decline in value is determined to be other-than-temporary. Fair value of our long-term available for sales investments is generally based on a market approach taking into consideration a number of factors that we purchasedinclude expected market multiples from Sofi Lending Corp.,publicly traded companies in the industry, and allocating this value to the various classes of preferred and common shares by using an option-pricing method which will mature on July 3, 2032 and havetakes into consideration a fixed annualnumber of factors that include lack of marketability discount, interest rate, of 4%.expected volatility, probability weight for each scenario including liquidation, redemption and initial public offering as applicable. We haverecognized nil, US$50.8 million and US$40.0 million in impairment losses on available-for-sale investments for the positive intentyears ended December 31, 2015, 2016 and ability to hold the securities to maturity. Our held-to-maturity investment is classified as long-term investments on the consolidated balance sheets based on their contractual maturity dates and are stated at their amortized costs.2017, respectively.

 

Accounts and notes receivables and allowance for doubtful accountsFinancing receivable

 

AccountsFinancing receivable represents those receivables derived from the financing business. Financing receivable is recorded at amortized cost, reduced by a valuation allowance estimated as of the balance sheet dates. The amortized cost of a financing receivable is equal to the unpaid principal balance, plus net deferred origination costs. Net deferred origination costs are comprised of certain direct origination costs, net of origination fees received. Origination fees include fees charged to the individuals or companies that increase the financing’s effective yield. Direct origination costs in excess of origination fees received are included in the ordinary course of business. Notes receivablesfinancing receivable and amortized over the financing term using the effective interest method. Financing origination costs are bank accepted draftslimited to direct costs attributable to originating the financing, including commissions and personnel costs directly related to trade receivablesthe time spent by those individuals performing activities related to the origination.

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Due to limitations imposed by PRC laws and regulations, we previously had appointed a senior management member to act as an intermediary to facilitate certain financing services for our internet finance business. Under this business model, we arranged for each individual or company to sign the financing agreement with the intermediary. We provided funds to the intermediary to finance the individuals or companies in accordance with the financing agreement. Immediately upon signing a financing agreement with an individual or a company, the intermediary then transferred all of advertising revenue with a maturity less than six months. the creditor’s rights arising from the financing agreement to us. The intermediary never put his own funds at risk and bore no risk in the arrangement and thus was considered an agent. In May 2016, we terminated all of the financing business conducted under this business model and we performed all subsequent financing ourselves.

Allowance for financing receivable

An allowance for doubtful accountsfinancing receivable is providedestablished through periodic charges to the provision for financing receivable losses when we believe that the future collection of principal is unlikely. Subsequent recoveries, if any, are recorded as credits against the allowance. We evaluate the creditworthiness of our portfolio based on a pooled basis due to the composition of homogeneous financing with similar size and general credit risk characteristics for similar financing businesses. We consider the creditworthiness of the individuals and the companies receiving financing, aging analyses of accountsthe outstanding financing receivable balances, historical bad debt rates, repayment patterns and customer credit worthiness. Noother specific circumstances related to the financing when determining the allowance for financing receivable. The allowance is subjective as it requires material estimates including such factors as known and inherent risks in the financing portfolio, adverse situation that may affect the ability of the individuals and the companies receiving financing to repay and current economic conditions. Recovery of the carrying value of financing receivable is dependent to a great extent on conditions that are beyond our control.

Nonaccrual financing receivable

Financing income is calculated based on the contractual rate of the financing and recorded as financing income over the life of the financing using the effective interest method. Financing receivables are placed on non-accrual status upon reaching 90 days past due for notes receivablesthose arising from financing for installment sales and apartment rental financing, or when reasonable doubt exists as such balanceto the full, timely collection of the financing receivable. When a financing receivable is placed on non-accrual status, we stop accruing financing income. The financing receivable is returned to accrual status if the related individual or company has performed in accordance with the contractual terms for a reasonable period of time and, in our judgment, will continue to make period principal and financing income payments as scheduled. We write off our nonaccrual financing receivable by considering factors including, but not limited to the overdue days, the collection condition replied by third party collectors and the repayment willingness of the debtor.

Transfer of financial instruments

Sales and transfers of financial instruments are securedaccounted under authoritative guidance for the transfers and servicing of financial assets and extinguishment of liabilities.

Through the peer-to-peer platforms and the plans, we identified individual investors and transfers creditors’ rights originated from the aforementioned financing services to the individual investors. We further offered different investment periods to investors with various annual interest rates while those credit rights are held by the acceptanceinvestors. The terms of the bank.sales require us to repurchase those creditors’ rights from investors prior to or upon the maturity of the investment period. As a result, the sales of those creditors’ rights are not accounted for as a sale and remain on our consolidated balance sheet and are recorded as payable to investors in our consolidated balance sheet.

 

Inventory

Inventory consists of purchased used automobiles. The vehicle reconditioning costs and other incremental costs are capitalized as a component of inventory. Inventory is stated at the lower of cost or net realizable value. Inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent, market resources. Each reporting period we recognize any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of sales in the accompanying consolidated statements of operations.

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Business Combinations

Business combinations are recorded using the acquisition method of accounting. We elected to early adopt ASU 2017-01 “Business Combination (Topic 805): Clarifying the Definition of a Business” on January 1, 2017 and applied the new definition of a business prospectively for acquisitions made during the year ended December 31, 2017. The purchase price of the acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.

Where the consideration in an acquisition includes contingent consideration and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings. As of December 31, 2017, contingent consideration liability related to the used car dealers acquired during the year ended December 31, 2017 amounted to US$66.8 million and have been recorded as contingent consideration liability and long-term contingent consideration liability on our consolidated balance sheet. We estimated the fair value of our contingent consideration by using valuation models that incorporate certain assumptions which include IPO probability and discount rate.

Accounting Pronouncements Newly Adopted

 

In March 2013, the FASB issued an authoritative pronouncement relatedNewly adopted accounting pronouncements that are relevant to parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investmentus are included in a foreign entity. When a reporting entity (parent) ceasesnote 2 to have a controllingour audited consolidated financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity instatements, which the subsidiary or group of assets had resided.

For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

Additionally, the amendmentsare included in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events.

The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption. We consider the adoption of this guidance does not have a significant effect on our consolidated financial statements.

In July 2013, the FASB issued a pronouncement which provides guidance on financial statement presentation of an unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this pronouncement is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this pronouncement state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, except as follows.

To the extent a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

This pronouncement applies to all entities that have unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists at the reporting date. The amendments in this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. We consider the adoption of this guidance does not have a significant effect on our consolidated financial statements.annual report.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In April, 2014, the FASB issued Accounting Standard Update 2014-08,Not yet adopted accounting pronouncements that are relevant to us are included in note 2 to our audited consolidated financial statements, which amends the definition of a discontinued operationare included in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new guidance eliminates the second and third criteria of discontinued operation in ASC 205-20-45-1 and instead requires discontinued-operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale.this annual report.

 

The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position.

Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2) depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to the discontinued operation.

The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We do not expect the adoption of this guidance will have a significant effect on our consolidated financial statements.

In May 2014, the FASB issued, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exiting revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements.

In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We do not expect the adoption of this guidance will have a significant effect on our consolidated financial statements.

In August 2014, the FASB issued a new pronouncement which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Further, an entity must provide certain disclosures if there is "substantial doubt about the entity's ability to continue as a going concern." The new standard is effective for fiscal years ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

Results of Operations

 

The following table sets forth a summary of our consolidated results of operations for the years indicated. Our business has evolved rapidly in recent years. We believe that period-to-period comparisons of our results of operations should not be relied upon as indicative of future performance.

 

  Year ended December 31, 
  2012  2013  2014 
  (in thousands of US$) 
Net revenues:            
Renren segment:            
Online advertising $49,129  $41,575  $26,894 
Other IVAS  16,243   20,899   18,959 
Renren segment  65,372   62,474   45,853 
Games segment  89,455   85,473   37,101 
Total net revenues  154,827   147,947   82,954 
Cost of revenues  49,794   54,280   47,972 
Gross profit  105,033   93,667   34,982 
Operating expenses:            
Selling and marketing  47,926   62,198   38,340 
Research and development  71,558   77,956   50,675 
General and administrative  33,577   49,275   51,429 
Impairment of intangible assets     208   714 
Impairment of goodwill        46,864 
Restructuring cost     3,475   6,354 
Total operating expenses  153,061   193,112   194,376 
Loss from operations  48,028   99,445   159,394 
Other income  2,446   1,039   636 
  Year ended December 31, 
  2012  2013  2014 
  (in thousands of US$) 
Exchange gain (loss) on offshore bank accounts  (1,769)�� 1,476   (2,277)
Interest income  20,029   12,778   12,677 
Realized gain on short-term investments  4,317   56,022   139,265 
Impairment of short-term investments     (2,098)   
Impairment of equity method investments     (23,025)   
             
Loss before provision of income tax and earnings (loss) in equity method investments and noncontrolling interest, net of income taxes  (23,005)  (53,253)  (9,093)
Income tax benefit (expenses)  (1,384)  3,980   (6,517)
Loss before earnings (loss) in equity method investment, net of income taxes  (24,389)  (49,273)  (15,610)
Earnings (loss) in equity method investment, net of income taxes  (7,471)  20,317   49,015 
Income (loss) from continuing operations  (31,860)  (28,956)  33,405 
Discontinued operations:            
Loss from the operations of the discontinued operations, net of income taxes  (43,193)  (40,068)  (30,809)
Gain on deconsolidation of the subsidiaries, net of income taxes     132,665   489 
Gain on disposal of equity method investment, net of income taxes        56,993 
Income (loss) on discontinued operations, net of income taxes  (43,193)  92,597   26,673 
Net income (loss)  (75,053)  63,641   60,078 
Net loss attributable to the noncontrolling interest  27   92   382 
Net income (loss) from continuing operations attributable to Renren Inc.  (31,833)  (28,864)  33,787 
Net income (loss) from discontinued operations attributable to Renren Inc.  (43,193)  92,597   26,673 
Net income (loss) attributable to Renren Inc. $(75,026) $63,733  $60,460 
  Years ended December 31, 
  2015  2016  2017 
          
Net revenues:            
Used automobile sales       $121,084 
IVAS and others $32,507  $34,047   51,749 
Financing income  8,604   29,317   29,269 
             
Total net revenues  41,111   63,364   202,102 
Cost of revenues:            
Used automobile sales        116,385 
IVAS and others  30,083   26,059   39,038 
Financing income  6,637   25,708   28,975 
             
Total cost of revenues  36,720   51,767   184,398 
             
Gross profit  4,391   11,597   17,704 
             
Operating expenses:            
Selling and marketing  30,502   21,276   28,954 
Research and development  32,392   20,750   23,678 
General and administrative  46,803   42,584   52,949 
             
Total operating expenses  109,697   84,610   105,581 
             
Loss from operations  (105,306)  (73,013)  (87,877)
Other (expenses) income  (7,058)  12,888   (1,369)
Interest income  2,190   919   2,029 
Interest expenses  (2,041)  (12,439)  (10,185)
Realized (loss) gain on short-term investments  (98,112)  552   (100)
Realized gain on disposal of long-term investments        37,311 
Impairment of long-term investments  (4,258)  (102,307)  (113,073)
             
Loss before provision of income tax and (loss) earnings in equity method investments and noncontrolling interest, net of tax  (214,585)  (173,400)  (173,264)
Income tax expenses  (3,124)  (2,470)  (4,479)
             
Loss before (loss) earnings in equity method investments and noncontrolling interest, net of tax  (217,709)  (175,870)  (177,743)
(Loss) earnings in equity method investments, net of tax  (5,468)  (18,183)  67,240 
             
Loss from continuing operations $(223,177) $(194,053) $(110,503)

 

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Year Ended December 31, 20142017 Compared to Year Ended December 31, 20132016

 

Net revenues. Our net revenues decreasedincreased by 43.9%219% from US$147.963.4 million in 20132016 to US$83.0202.1 million in 2014.2017. This decreaseincrease was primarily due to revenues from used automobile sales, which was a 56.6% decreasebusiness that we launched in the net revenues of our Games segmentJune 2017, and to a 26.6% decreaselesser extent to a 52.0% increase in the net revenues of our Renren segment.IVAS and others revenues.

 

·Renren segmentUsed automobile sales.. Our Renren segment’s We commenced used automobile sales in June 2017, and they already accounted for 59.9% of our total net revenues decreasedin 2017.

·IVAS and others. Our IVAS and others net revenues increased by 26.6%52.0% from US$62.534.0 million in 20132016 to US$45.951.7 million in 2014.2017. The decreaseincrease in our Renren segment’sIVAS and others net revenues was primarily due to the decrease in its online advertising revenue and to a lesser extent, the decrease in its IVAS revenue. Online advertisingfrom our Renren mobile live streaming service.

·Financing income. Our financing income revenues decreased by 35.3% fromremained substantially unchanged at US$41.629.3 million in 20132016 and 2017. The amount of loan origination to used automobile dealerships was US$26.925.4 million during 2017, as compared with US$17.9 million during 2016.

Cost of revenues. Our cost of revenues increased by 256% from US$51.8 million in 2016 to US$184.4 million in 2017. This increase was primarily due to the cost of used automobile sales.

·Used automobile sales. Used automobile sales accounted for 63.1% of our total cost of revenues in 2017, in line with the percentage of total revenues which they accounted for. Cost of revenues for used automobile sales is primarily the cost to acquire the vehicles.

·IVAS and others. Our IVAS and others cost of revenues increased by 49.8% from US$26.1 million in 2014.2016 to US$39.0 million in 2017. The continuing migrationincrease in our IVAS and others cost of revenues was primarily due to an increase of commission cost we paid to our trafficmobile live streaming performers and Woxiu performers.

·Financing income. Our cost of revenues for financing income increased by 12.7% from PCUS$25.7 million in 2016 to mobile has caused the vast majorityUS$29.0 million in 2017. The increase was primarily due to an increase in provision for financing receivables.

Operating expenses. Our operating expenses increased by 24.8% from US$84.6 million in 2016 to US$105.6 million in 2017, due to increases in sales and marketing expenses and general and administrative expenses.

·Selling and marketing expenses. Our selling and marketing expenses increased by 36.1% from US$21.3 million in 2016 to US$29.0 million in 2017. This increase was primarily due to an increase of US$2.9 million in salaries and other benefits as we increased our Renren users’ time onheadcount, an increase of US$3.1 million in promotion expenses for our SNSlive streaming service and in increase of US$1.1 million for promotion expenses for Chime.

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·Research and development expenses. Our research and development expenses increased by 14.1% from US$20.7 million in 2016 to be spent on mobile,US$23.7 million in 2017. This increase was primarily due to an increase of US$1.7 million in salaries and other benefits for research and development personnel, which we did not begin monetizing through advertising until towards the end of 2013. Further, Chinese advertisers have, to date, spent considerably less money advertising on mobile devices as compared to advertising on personal computerswas primarily due to the limited screen sizeincrease in our research and development headcount in 2017.

·General and administrative expenses. Our general and administrative expenses increased by 24.3% from US$42.6 million in 2016 to US$52.9 million in 2017. The increase was primarily due to an increase of US$4.9 million in share-based compensation expenses, as well as an increase in the professional expenses for the transaction that we announced on April 30, 2018.

Interest income. Our interest income was US$2.0 million in 2017, as compared to interest income of US$0.9 million in 2016. Our interest income was primarily interest from term deposits at commercial banks.

Interest expenses. Our interest expense was US$10.2 million in 2017, as compared to interest expense of US$12.4 million in 2016. The interest expense was primarily interest on loans that we borrowed to fund the purchase of additional shares in SoFi in 2016, and the decline was due to our early repayment for one of these loans, a long-term loan of US$42.8 million that we borrowed from an asset management company.

Realized gain on disposal of long-term investments. Our realized gain on disposal of long-term investments was US$37.3 in 2017, compared to a realized gain on disposal of long-term investments of nil in 2016. The gain was primarily due to the disposal of common shares of Mapbar Technology Limited.

Impairment of long-term investments. Our impairment of long-term investments was US$113.1 million in 2017, compared to impairment of long-term investments of US$102.3 million in 2016. The increase was primarily due to an impairment of US$35.0 million in our investment in Credit Shop, Incorporated, an impairment of US$15.0 million in our investment in Zhu Chao Holdings Company Limited, an impairment of US$12.1 million in our investment in 268V Limited, an impairment of US$11.6 million in our investment in Eunke Technology Ltd., an impairment of US$11.0 million in our investment in KoolRay Vision Inc., an impairment of US$10.0 million in our investment in Snowball Finance Inc.

(Loss) earnings in equity method investments. Our earnings in equity method investments was US$67.2 million in 2017, compared to loss in equity method investments of US$18.2 million in 2016. The increase was primarily due to the US$58.3 million gain on disposal of certain shares of Social Finance Inc. in 2017.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net revenues. Our net revenues increased by 54.1% from US$41.1 million in 2015 to US$63.4 million in 2016. This increase was primarily due to revenues from financing income.

·IVAS and others. Our IVAS and others net revenues increased by 4.7% from US$32.5 million in 2015 to US$34.0 million in 2016. An increase in IVAS revenues as we launched our mobile devices and the under-developed measurement and tracking services for mobile advertising. This shift of user traffic, coupled with intensifying competition, has had an adverse impact on ourlive streaming business was offset by a sharp decrease in online advertising revenues. The number of our monthly unique log-in users increased slightlydecreased from 4541 million in December 20132015 to 4635 million in December 2014 but2016 and the average amount of time that unique log-in users spent on our platform decreased from approximately 7.71.8 hours in 20132015 to approximately 4.01.4 hours in 2014.2016. The number of our brand advertisers decreased from 18972 in 20132015 to 13912 in 2014,2016, and the average annual spending by our brand advertisers decreased from approximately US$193,000118,000 in 20132015 to approximately US$179,00060,000 in 2014. Our Renren segment’s IVAS revenues decreased by 9.3% from US$20.9 million in 2013 to US$19.0 million in 2014, primarily due to the decrease in VIP memberships and third-party application developer revenues onrenren.com.2016.

 

·Games segment.Financing income. Our Games segmentfinancing income revenues decreasedincreased by 56.6%241% from US$85.58.6 million in 20132015 to US$37.129.3 million in 2014,2016. The increase in our financing income revenues was primarily due to a lack of new hit titlesthe substantial increase in the credit we extended in our used automobile financing service, which increased from third-party developers under our new business modelRMB 734.9 million in 2015 to compensate for the declineRMB 4,832.6 million (US$727.8 million) in revenue from our previously launched older games as they matured. Including both in-house developed and third-party games, our active paying users on a quarterly average basis decreased from approximately 162,000 in 2013 to 76,000 in 2014. While we started to shift our focus to operating games instead of developing them as part of the restructuring of our game business that began in late 2013, in-house developed games were still responsible for a significant majority of our Games segment revenues in 2014. The number of in-house developed games we offered decreased from 17 as of December 31, 2013 to 11 as of December 31, 2014.2016.

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Cost of revenues. Our cost of revenues decreasedincreased by 11.6%41.0% from US$54.336.7 million in 20132015 to US$48.051.8 million in 2014.2016. This decreaseincrease was primarily due to financing costs and the provision for financing receivable for our Auto segment, as well as a 35.7% decrease in the cost of revenues of our Games segment, offset by a 6.4%7.1% increase in the cost of revenues of our Renren segment.

 

·Renren segmentIVAS and others.. Our Renren segment’s cost of revenues increased by 6.4% from US$31.0 million in 2013 to US$33.0 million in 2014. The increase was primarily due to an increase of US$2.9 million in commission costs for Woxiu, partly offset by a decrease of US$2.1 million in bandwidthIVAS and co-location costs.

·Games segment. Our Games segment’sothers cost of revenues decreased by 35.7%13.4% from US$23.230.1 million in 20132015 to US$14.926.1 million in 2014, primarily due to the decrease of US$4.8 million in salaries and other benefits for game operations personnel as we reduced the size of our gaming team, and decrease in games related cost by US$3.2 million.

Operating expenses. Our operating expenses increased by 0.7% from US$193.1 million in 2013 to US$194.4 million in 2014, primarily due to the one-time impairment charges of intangible assets and goodwill, largely offset by decreased selling and marketing expenses and research and development expenses.

·Selling and marketing expenses. Our selling and marketing expenses decreased by 38.4% from US$62.2 million in 2013 to US$38.3 million in 2014. This2016. The decrease was primarily due to a decrease of US$15.54.1 million in advertising and promotional expenses for our gamesbandwidth costs and a decrease of US$3.32.0 million in promotion expensesdepreciation costs for our Renren brand.

·Research and development expenses.IT servers. Our research and development expenses decreased by 35.0% from US$78.0 million in 2013 to US$50.7 million in 2014. This decrease was primarily due to a 37.8% decrease in salaries and other benefits for research and development personnel, from US$61.6 million in 2013 to US$38.3 million in 2014, as well as to a decrease in the associated office facilities expenses from US$8.0 million in 2013 to US$5.7 million in 2014. During 2014 we continued to reduce the size of our online games development teambandwidth costs fell as the focus for our online games business has shifted to game distribution and operations.

·General and administrative expenses. Our general and administrative expenses increased by 4.4% from US$49.3 million in 2013 to US$51.4 million in 2014. This increase was primarily due to increased share-based compensation charges.

·Impairment of intangible assets and goodwill were US$0.7 million and US$46.9 million respectively. The fair value of the goodwill of the Renren reporting unit, which included 56.com, was reviewed and estimated in September 2014 based on the operating results and market conditions at the time of the review, and we determined that such impairments were required.

·Restructuring costs in 2014 were US$6.4 million, compared to US$3.5 million in 2013. These were costs incurred in connection with the gaming business restructuring.

Exchange (loss) gain on offshore bank accounts. We had an exchange loss of US$2.3 million on offshore RMB deposits in 2014, compared with an exchange gain of US$1.5 million on offshore bank deposits in 2013.

Interest income. Interest income was US$12.7 million in 2014, as compared to interest income of US$12.8 million in 2013. The interest income for both years was primarily interest on term deposits at commercial banks.

Realized gain on short-term investments. Realized gain on short-term investments was US$139.3 million in 2014, compared to US$56.0 million in 2013. These realized gain on short-term investments were mainly due to proceeds from sales of marketable securities.

Earnings in equity method investments. Earnings in equity method investments were US$49.0 million in 2014, compared to US$20.3 million in 2013. These earnings were mainly derived from earnings in Japan Macro Opportunities Offshore Partners, LP.

Gain on deconsolidation of the subsidiaries. We recognized a gain on deconsolidation of subsidiary of US$0.5 million from the deconsolidation of 56.com in 2014. In 2013 the gain on deconsolidation of the subsidiaries was US$132.7 million, due primarily to the one-time gain from the deconsolidation of Nuomi.

Gain on disposal of equity method investment,net of income taxes.Gain on disposal of equity method investment, net of income tax, was US$57.0 million, which represented the one-time gain from the disposal of our remaining equity interest in Nuomi.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net revenues. Our net revenues decreased by 4.4% from US$154.8 million in 2012 to US$147.9 million in 2013. This decrease was primarily due to a 4.5% decrease in the net revenues of our Games segment, and a 4.4% decrease in the net revenues of our Renren segment.

·Renren segment. Our Renren segment’s net revenues decreased by 4.4% from US$65.4 million in 2012 to US$62.5 million in 2013. The decrease in our Renren segment’s net revenues was primarily due to the decrease in its online advertising revenues, largely offset by its increase in IVAS revenues. Online advertising revenues decreased by 15.4% from US$49.1 million in 2012 to US$41.6 million in 2013. The decrease was an overall result of the continuing shift of our traffic from PC to mobile, coupled with increasing competition. The majority of our Renren users’ time on our SNS service was spent on mobile, which we did not begin to monetize until late in 2013. User habits were also rapidly shifting from traditional social network services to more popular social messaging services. Theaverage number of our brand advertisers decreased from 232 in 2012 to 189 in 2013, due mainly to decreased traffic on personal computers, even though the average annual spending by our brand advertisers increased from approximately US$182,000 in 2012 to approximately US$193,000 in 2013. Our monthly unique log-in users decreased from 56 million in December 2012 to 45 million in December 2013 althoughand the average amount of time that unique log-in users spent on our platform increased slightly from approximately 7.6 hours in 2012 to approximately 7.7 hours in 2013. Our Renren segment’s IVAS revenues increased by 28.7% from US$16.2 million in 2012 to US$20.9 million in 2013, primarily due to Woxiu services, which increased from US$7.2 million in 2012 to US$13.0 million in 2013, and to a lesser extent, our open platform for third-party application developer revenues onrenren.com.both declined.

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·Games segment.Financing income. Our Games segment revenues decreased by 4.5% from US$89.5 million in 2012 to US$85.5 million in 2013, due to a lack of new hit titles to compensate for the decline in revenue from our previously launched older games as they matured. The number of in-house developed games we offered increased from 15 as of December 31, 2012 to 17 as of December 31, 2013. Including both in-house developed and third-party games, we had approximately 162,000 active paying users on a quarterly average basis in 2013, compared to 219,000 active paying users on a quarterly average basis in 2012. The decrease in paying users was due to our older games maturing and hence attracting fewer paying users.

Cost of revenues. Our cost of revenues increased by 9.0% from US$49.8 million in 2012 to US$54.3 million in 2013. This increase was primarily due to a 25.7% increase in the cost of revenues of our Renren segment, offset by a 7.4% decrease in the cost of revenues of our Games segment.

·Renren segment. Our Renren segment’sfinancing income cost of revenues increased by 25.7% from US$24.76.6 million in 20122015 to US$31.025.7 million in 2013.2016 as we provided more services in 2016. The main components of financing income cost of revenues included financing costs and provision for financing receivable. Our financing costs increased in line with the substantial increase in the credit we extended in our used automobile financing service. Our provision for financing receivable in 2016 was primarily due to an increase of US$4.2 million in commission costs for Woxiu.Renren Fenqi.

·Games segment. Our Games segment’s cost of revenues decreased by 7.4% from US$25.1 million in 2012 to US$23.2 million in 2013, primarily due to the decrease in bandwidth and co-location costs by US$1.8 million as we had fewer active players in 2013.

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Operating expenses. Our operating expenses increaseddecreased by 26.1%22.9% from US$153.1109.7 million in 20122015 to US$193.184.6 million in 2013,2016, primarily due to increasesdecreased expenses in our sellingsalaries and marketing expenses, general and administrative expenses, and research and development expenses.other benefits.

 

·Selling and marketing expensesexpenses.. Our selling and marketing expenses increaseddecreased by 29.8%30.2% from US$47.930.5 million in 20122015 to US$62.221.3 million in 2013.2016. This increasedecrease was primarily due to an increasea decrease of US$6.97.3 million in advertisingsalaries and promotional expenses forother benefits as we reduced our games and an increase of US$3.4 million in promotional expenses for our Renren brand.headcount.

 

·Research and development expensesexpenses.. Our research and development expenses increaseddecreased by 8.9%35.9% from US$71.632.4 million in 20122015 to US$78.020.7 million in 2013.2016. This increasedecrease was primarily due to a 9.1% increase38.2% decrease in salaries and other benefits for research and development personnel, from US$56.524.0 million in 20122015 to US$61.614.8 million in 2013. The increase in salaries and other benefits for these personnel2016, which was mainlyprimarily due to the reduction in our mobile related initiatives.research and development headcount in 2016, as well as to a decrease in the associated rental and office facilities expenses from US$5.0 million in 2015 to US$2.5 million in 2016.

 

·General and administrative expensesexpenses.. Our general and administrative expenses increaseddecreased by 46.7%9.0% from US$33.646.8 million in 20122015 to US$49.342.6 million in 2013. This increase2016. The decrease was primarily due to increaseda decrease of US$4.1 million in share-based compensation charges, expanded gaming operations and increased rent expenses. In particular, salaries and other benefits for our general and administrative personnel increased from US$18.3 million in 2012 to US$32.1 million in 2013, resulting primarily from increased share-based compensation charges as well as increased personnel expenses due to the expansion of our business.

 

Exchange (loss) gain on offshore bank accounts. We had an exchange gain of US$1.5 million on offshore RMB deposits in 2013, compared with an exchange loss of US$1.8 million on offshore bank deposits in 2012.

Interest income. InterestOur interest income was US$12.80.9 million in 2013,2016, as compared to interest income of US$20.02.2 million in 2012.2015. Our interest income was primarily interest from term deposits at commercial banks.

Interest expenses. Our interest expense was US$12.4 million in 2016. The interest income for both yearsexpense was primarily interest on term deposits at commercial banks. The decreaseloans that we borrowed to fund the purchase of additional shares in interest income was due to the cash balances decreased from 2012 to 2013 as well as a general decreaseSoFi in interest yield for our offshore bank deposits.2015.

 

Realized (loss) gain on short-term investments. We had aOur realized gain on short-term investments ofwas US$56.00.6 million in 2013, as2016, compared to US$4.3 million in 2012. Thea realized gainloss on short-term investments of US$98.1 million in 20132015, as we adopted a more conservative approach to our treasury management operations. The gain in 2016 was mainlyprimarily due to proceeds from sales of marketablea gain on trading securities.

 

Impairment of short-termlong-term investments. We recognizedOur impairment of long-term investments was US$102.3 million in 2016, compared to impairment of long-term investments of US$4.3 million in 2015. The increase was primarily due an impairment of short-term investmentsUS$50.8 million in our investment in 268V Limited and an impairment of US$2.132.3 million in 2013, which represented the difference between the cost of certain corporate bonds we had purchased and their fair value as of December 31, 2013, by which time we no longer had the intention to hold them until their forecasted recovery.our investment in Motif Investing Inc.

 

Impairment ofLoss in equity method investments. In 2013, we had impairment charges of US$19.0 million and US$4.0 million for ourOur loss in equity method investments was US$18.2 million in Mapbar Technology Ltd. and Gaoxue Network Technology (Shanghai) Co. Ltd., respectively. These impairment charges were2016, compared to loss in equity method investments of US$5.5 million in 2015. The increase was primarily due to theirthe pick-up loss in SoFi and Sindeo Inc. and the decrease in fair value becauseearnings from investment in JMOOP after our disposition of intensified competition and worsening financial performance.that investment in 2015.

 

Gain on deconsolidation of the subsidiaries. Gain on deconsolidation of the subsidiaries was US$132.7 million in 2013, due primarily to the one-time gain from the deconsolidation of Nuomi.

Discussion of Segment Operations

 

We had two reportable segments as of December 31, 2014,2017, our Renren segment and our Gamesauto group segment. Our Renren segment offers social networking services and other internet value added services. Our Gamesauto group segment offers online gaming services.sells used automobiles and related products, arranges financing options for customers through our financial services partners and provides credit financing to used automobile dealerships.

The following table lists our net revenues and operating costs and expenses by reportable segment for the periods indicated.

 

  Year ended December 31, 2012 
  Renren  Games  Total 
Net revenues $65,372  $89,455  $154,827 
Cost of revenues  (24,691)  (25,103)  (49,794)
Operating expenses  (114,247)  (38,814)  (153,061)
Operating (loss) income  (73,566)  25,538   (48,028)
Net (loss) income from continuing operations  (57,575)  25,715   (31,860)
Net loss from discontinued operations  (43,193)     (43,193)
Net (loss) income  (100,768)  25,715   (75,053)
Total assets $1,104,989  $72,953  $1,177,942 
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  Year ended December 31, 2013 
  Renren  Games  Total 
Net revenues $62,474  $85,473  $147,947 
Cost of revenues  (31,036)  (23,244)  (54,280)
Operating expenses  (124,163)  (68,949)  (193,112)
Operating loss  (92,725)  (6,720)  (99,445)
Net loss from continuing operations  (22,312)  (6,644)  (28,956)
Net income from discontinued operations  92,597      92,597 
Net income (loss)  70,285��  (6,644)  63,641 
Total assets $1,344,327  $41,359  $1,385,686 

  

 Year ended December 31, 2014  Year ended December 31, 2015 
 Renren  Games  Total  Renren  Auto  Total 
Net revenues $45,853  $37,101  $82,954  $36,880  $4,231  $41,111 
Cost of revenues  (33,037)  (14,935)  (47,972)  (35,203)  (1,517)  (36,720)
Operating expenses  (163,512)  (30,864)  (194,376)  (107,211)  (2,486)  (109,697)
Operating (loss) income  (150,696)  (8,698)  (159,394)  (105,534)  228   (105,306)
Net income (loss) from continuing operations  39,965   (6,560)  33,405 
Net loss from continuing operations  (221,851)  (1,326)  (223,177)
Net income from discontinued operations  26,673      26,673   1,520      1,520 
Net income (loss)  66,638   (6,560)  60,078 
Total assets $1,113,446  $35,707  $1,149,153 
Net loss  (220,331)  (1,326)  (221,657)

 

  Year ended December 31, 2016 
  Renren  Auto  Total 
Net revenues $42,513  $20,851  $63,364 
Cost of revenues  (37,696)  (14,071)  (51,767)
Operating expenses  (68,918)  (15,692)  (84,610)
Operating loss  (64,101)  (8,912)  (73,013)
Net loss from continuing operations  (183,638)  (10,415)  (194,053)
Net income from discontinued operations  8,701      8,701 
Net loss  (174,937)  (10,415)  (185,352)

We have retrospectively adjusted our segment information for all periods presented to reflect the change in segment reporting and the discontinued operations of Qianjun Technology. These adjustments are reflected in the discussion of segment results for comparison to prior year results.

  Year ended December 31, 2017 
  Renren  Auto  Total 
Net revenues $52,251  $149,851  $202,102 
Cost of revenues  (40,108)  (144,290)  (184,398)
Operating expenses  (80,403)  (25,178)  (105,581)
Operating loss  (68,260)  (19,617)  (87,877)
Net loss from continuing operations  (85,237)  (25,266)  (110,503)
Net income from discontinued operations         
Net loss  (85,237)  (25,266)  (110,503)

 

B.Liquidity and Capital Resources

 

Cash Flows and Working Capital

 

Prior to our initial public offering and concurrent private placement in May 2011, we financed our operations primarily through issuance and sale of preferred shares and warrants to investors in private placements and, to a much lesser extent, from cash generated from our operating activities. As of December 31, 2014,2017, we had US$677128.6 million in cash and cash equivalents and term deposits. We believeOn April 30, 2018, we declared a cash dividend payable to all holders of our ordinary shares and ADSs. As part of the remaining unusedtransaction of which this cash dividend forms a part, we receivedwill receive a payment of US$25 million in cash from our initial public offering and concurrentOPI prior to the time when we must pay the cash dividend. The size of the cash dividend will be determined by the number of shares of OPI that are purchased in the private placement that also comprises part of the same transaction, so we do not know at this time what it will be, either in May 2011the aggregate or on a per share basis. However, the cash dividend may be as much as US$131 million, in which case our remaining cash balance would be considerably less than it was as of December 31, 2017. See “Item 3.D—Key Information—Risk Factors—Risks Related to Our Business and Industry—The Transaction will leave us with less cash and fewer investment assets that can be readily converted into cash, which may restrict our growth in the future.”

Even with the payment of the cash dividend, we believe that our cash on hand, together with cash from disposal of long-term investments and cash provided by financing activities, will provide us with sufficient capital to meet our anticipated cash needs for the next 12 months. If we have additional liquidity needs, in the future, we may obtain additional financing including equity offering and debt financing in capital markets, to meet such needs. However, we cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may suffer.

Prior

As of December 31, 2017, our balance sheet included US$565.4 million in long-term investments in some 57 portfolio companies and investment funds. After the Transaction, we will only retain a minority interest in 6 portfolio companies which either have especially strong synergy with our company in their business or which are insignificant in value and would be costly and difficult to our disposal of a majoritytransfer due to the way the investment was structured. As part of the equity interests in NuomiTransaction, Oak Pacific Investment will issue a note to us with a principal amount of US$90,000,000, an interest rate of 8% per year, and Qingting in October 2013,a term of the earlier of five years and the disposal of the 56.com business in December 2014, each of these entities experienced operating lossesdate upon which OPI and net losses. To fund their daily operations, we provided intercompany interest-free loans to them. After elimination of intercompany interest-free loans, the net cash outflows pertaining to Nuomi and Qingting were approximately $13.0 million and $32.0 million for the years ended December 31, 2012 and 2013, respectively, and the net cash outflows pertaining to 56.com were approximately US$12.4 million, US$6.0 million and US$16.6 million for the years ended December 31, 2012, 2013 and 2014, respectively. After the deconsolidation, Nuomi, Qingting and 56.com wereits subsidiaries no longer a drain on our consolidated cash flow.hold any shares of Social Finance Inc.

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Although we consolidate the results of Qianxiang Wangjing and Qianxiang Changda, and Renren Games, our access to cash balances or future earnings of these entities is only through our contractual arrangements with these entities and their respective shareholders and subsidiaries. See “Item 4.C—Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

  Years ended December 31 
  2012  2013  2014 
  (in thousands of US$) 
Net cash provided by (used in) operating activities $(11,087) $(73,035) $56,439 
Net cash provided by (used in) investing activities  (12,742)  20,065   109,215 
Net cash used in financing activities  (53,892)  (1,033)  (134,832)
Net increase (decrease) in cash and cash equivalents  (77,721)  (54,003)  30,822 
Cash and cash equivalents at the beginning of the year  284,643   207,438   154,308 
Effect of exchange rate changes  516   873   (2,105)
Cash and cash equivalents at the end of the year $207,438  $154,308  $183,025 
  Years ended December 31 
  2015  2016  2017 
  (in thousands of US$) 
Net cash used in operating activities $(50,042) $(11,005) $(114,964)
Net cash (used in) provided by investing activities  (248,984)  (193,283)  224,236 
Net cash provided by (used in) financing activities  180,430   226,075   (67,113)
Net (decrease) increase in cash and cash equivalents  (118,596)  21,787   42,159 
Cash and cash equivalents at the beginning of the year  183,025   60,837   79,370 
Effect of exchange rate changes  (3,592)  (3,254)  7,066 
Cash and cash equivalents at the end of the year  60,837   79,370   128,595 

 

Operating Activities

 

Net cash used in operating activities consisted primarily of our net income or loss as adjusted by our gain on short-term and long-term investments, depreciation of servers and other equipment, share-based compensation and non-cash adjustments, such as exchange loss on offshore bank accounts as well as earnings (loss) in equity method investments, and further adjusted by changes in assets and liabilities, such as accounts receivable, accrued expenses and other liabilities and prepaid expenses and other current assets. The major factors affecting our operating cash flows isare the timing of cash receipts from sales of our services and of the cash settlement for our accounts payable and accrued expenses and the prepayment to merchants for our social commerce services, which have been discontinued in October 2013.

Net cash provided by operating activities amounted to US$56.4 million in 2014, compared to a net income of US$60.1 million. The principal items accounting for the difference between our net income and net cash provided by operating activities in 2014 were capital distribution received from Japan Macro Opportunities Offshore Partners, LP. of US$63.9 million, impairment of goodwill of US$46.9 million, share-based compensation expenses of US$21.6 million, depreciation and amortization of US$18.5 million and impairment of intangible assets of US$15.5 million, partially offset by gain on short-term investments of US$139.3 million, gain on disposal of equity method investment of US$57.0 million and net earnings in equity method investments of US$49.0 million, further adjusted by the decrease in amount due from related party of US$61.4 million primarily due to the repayment of receivables due from Nuomi.expenses.

 

Net cash used in operating activities amounted to US$73.0115.0 million in 2013, compared to a net income of US$63.6 million. The principal items accounting for the difference between our net income and our net cash used in operating activities in 2013 were related to our investing activities, including our gain on deconsolidation of subsidiaries of $132.7 million, gain on short-term investments of US$56.0 million and net earnings in equity method investments of US$20.3 million, partially offset by impairment of equity method investments of US$23.0 million, depreciation and amortization of US$19.2 million and share-based compensation expenses of US$16.1 million.

Net cash used in operating activities amounted to US$11.1 million in 2012,2017, compared to a net loss of US$75.1110.5 million. Our accounts payable increased by US$15.9 million, primarily due to increased payables to third-party merchants in social commerce services, and our accrued expenses and other payables increased by US$11.6 million, primarily due to increased salaries and welfare payable resulting from increased headcount. The principal non-cash itemschange in operating assets and liabilities accounting for the difference between our net loss and our net cash used in operating activities in 20122017 was an increase in inventory of US$76.6 million for the acquisition of used automobiles in connection with the new business we launched in June 2017. The principal adjustments to reconcile our net loss to our net cash used by operating expenses were depreciationimpairment on long-term investments of US$113.1 million relating to assets which we have transferred to OPI in connection with the transaction we announced on April 30, 2018, share-based compensation expenses of US$28.0 million and amortizationprovision for financing receivable losses of US$16.112.7 million, partially offset by gain on disposal of equity method investment of US$59.7 million for Social Finance Inc. and Loadstar Capital K.K., and realized gain on disposal of long-term investments of US$37.3 million for Mapbar Technology Limited.

Net cash used in operating activities amounted to US$11.0 million in 2016, compared to a net loss of US$185.4 million. The principal changes in operating assets and liabilities accounting for the difference between our net loss and our net cash used in operating activities in 2016 were a decrease in prepaid expenses and other current assets of US$7.9 million and the repayment of an intercompany loan that we had made to Online Gaming of US$7.5 million. The principal adjustments to reconcile our net loss to our net cash used by operating expenses were impairment on long-term investments of US$102.3 million, share-based compensation expenses of US$23.5 million, net loss in equity method investments of US$18.2 million and provision for financing receivable losses of US$12.4 million, partially offset by gain on deconsolidation of subsidiaries of US$12.9 million.

Net cash used in operating activities amounted to US$50.0 million in 2015, compared to a net loss of US$221.7 million. The principal changes in operating assets and liabilities accounting for the difference between our net loss and our net cash used in operating activities in 2015 were a profit distribution received from Japan Macro Opportunities Offshore Partners, LP of US$9.2 million and a decrease in accounts and notes receivable of US$7.6 million. An increase in prepaid expenses and other current assets of US$22.8 million was offset by miscellaneous increases in non-current assets. The principal adjustments to reconcile our net loss to our net cash used by operating expenses were a loss on short-term investments and fair value change of derivatives of US$98.1 million and share-based compensation expenses of US$10.928.2 million.

 

Investing Activities

Net cash provided by or used in investing activities largely reflects our investment in term deposits, our purchases and sales of short-term investments and our capital expenditures.

 

Net cash provided by investing activities amounted to US$109.2224.2 million in 2014,2017, due mainly to proceeds from salesprincipal repayments of short-term investmentsfinancing receivable of US$496.4926.0 million capital distribution received from equity method investeesand release of restricted cash of US$74.7416.9 million, proceeds from disposalsale of equity method investment of $46.5US$94.6 million and proceeds from sale of cost method investment of US$32.7 million, partially offset by cash paid for purchase of short-term investmentspayments to provide financing receivable of US$247.9748.7 million and cash paid for purchaseplacement of long-term investmentsrestricted cash of US$244.7456.0 million. The financing receivable is generated from loans to used automobile dealerships in our financing business. Restricted cash primarily consists of cash deposits used to secure debt borrowings and is expected to be released in accordance with the debt agreement.

 

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Net cash provided by investing activities amounted to US$20.1 million in 2013, due mainly to a net withdrawal in term deposits of $58.2 million, proceeds from sales of short-term investments of US$119.0 million, partially offset by US$88.7 million in purchase of short-term investments. Moreover, in 2013 we have also invested an additional US$20.0 million in our equity method investment, Japan Macro Fund, and paid US$29.1 million for purchase of equipment and property.

·Our principal purchases of long-term investments in 2017 included US$4.4 million for Shenzhen Xing Tu Zhi Kong Technology Co., Ltd., US$3.0 million for Shanghai SinceMe Networking & Technology Corp. Ltd. and US$2.0 million for Plum Inc. In addition, we made other purchases of long-term investments of US$4.2 million for equity interests in 2017.

·Our principal disposition of long-term investments in 2017 included US$91.9 million from Social Finance Inc. and US$32.7 million from Mapbar Technology Limited.

 

Net cash used in investing activities amounted to US$12.7193.3 million in 2012, primarily attributable toUS$140.72016, due mainly to cash paid to customers in our financing business of US$799.2 million and cash paid for purchases of long-term investments of US$50.8 million, partially offset by repayment from customers in our internet finance business of US$626.8 million, capital distributions received from equity method investees of US$29.6 million, proceeds from sale of trading securities of US$22.6 million and proceeds from sale of equity method investment of US$18.5 million.

·Our principal purchases of long-term investments in 2016 included US$20.0 million for Series A Preferred Shares of Credit Shop Inc. and US$12.9 million for Shenzhen Golden Axe Co., Ltd. In addition, we made other purchases of long-term investments of US$17.9 million for equity interests in 2016.

·Our principal disposition of long-term investments in 2016 was US$29.5 million from Hayman Credes Master Fund.

Net cash used in investing activities amounted to US$249.0 million in purchase2015, due mainly to cash paid for purchases of long-term investments of US$538.1 million, cash paid to customers in our financing business of US$289.0 million and purchases of short-term investments US$65.2 million in purchase of long-term investments, and US$39.6199.2 million, in purchases of equipment and property, partially offset by a net withdrawal of US$150.9 million in term deposits andof US$81.1493.5 million, in proceeds from the salesales of short-term investments. The purchaseinvestments of long-term investments related primarily to anUS$129.1 million, repayment from customers in our financing business of US$126.5 million and capital distributions received from equity investmentmethod investees of US$49.0 million in Social Finance Inc. and the purchase of US$10.0 million in 20-year notes from SoFi Lending Corp., a subsidiary of Social Finance Inc.60.3 million.

·Our principal purchases of long-term investments in 2015 included US$172.3 million for Series E and Series F Preferred Shares of SoFi, US$65.8 million for Series C Preferred Shares of LendingHome Corporation, US$40.0 million for Series E Preferred Shares of Motif Investing Inc., US$25.0 million for Series B Preferred Shares of Eunke Technology Ltd. and US$15.0 million for Series A Preferred Shares of Credit Shop Inc. In addition, we made other purchases of long-term investments of US$220.0 million for equity interests in 35 companies in 2015.

·Our principal disposition of long-term investments in 2015 was US$60.3 million from Japan Macro Opportunities Offshore Partners, LP.

·Our principal purchases of short-term investments in 2015 included US$101.4 million for derivative financial instruments, US$68.0 million for trading securities and US$29.8 million for available-for-sale securities. Our purchases of derivative financial instruments were related primarily to the purchase for US$62.1 million of an H-Share Index Call Option and the purchase for US$39.1 million of an FXI UP Call Option, both of which expired out of the money. Our purchases of trading securities included US$20.8 million for equity securities, US$23.5 million for corporate bonds and US$23.4 million in funds. Our purchases of short-term available-for-sale securities were all equity securities and we disposed of all of them during the same year.

·Our principal dispositions of short-term investments in 2015 included US$63.8 million from trading securities and US$62.7 million from available-for-sale securities. Our disposition of trading securities included most of the trading securities that we had purchased during the course of the year, with dispositions of US$19.7 million of equity securities, US$22.7 million in corporate bonds and US$21.4 million in funds. We disposed of all of our short-term available-for-sale securities during 2015, including ones that we had purchased in earlier years, to provide cash for other purposes. These short-term available-for-sale securities were all equity securities.

 

Financing Activities

 

Net cash used in financing activities was US$134.867.1 million in 2014, primarily attributable2017, due mainly to US$76.41,688.7 million of principal repayment to investors in our financing business and US$68.0 million used to repay short-term and long-term loans, partially offset by proceeds from investors in our financing business of US$1,580.5 million and proceeds from debt borrowings of US$92.5 million. Proceeds from investors and principal repayment to investors relate to our use of asset-backed securities and peer-to-peer platforms to fund the financing receivables that we generate in our financing business.

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Net cash provided by financing activities was US$226.1 million in 2016, due mainly to proceeds from investors in our financing business of US$844.7 million and proceeds from debt borrowings of US$39.1 million, partially offset by US$637.9 million of principal repayment to investors in our financing business and US$31.9 million used to repay short-term and long-term loans (net of restricted cash).

Net cash provided by financing activities was US$180.4 million in 2015, due mainly to proceeds from investors in our financing business of US$174.5 million and proceeds from debt borrowings (net of restricted cash) of US$138.0 million, partially offset by US$125.0 million of principal repayment to investors in our financing business and US$10.3 million used to repurchase our ordinary shares and repaid a promissory note issued to Nuomi of US$60.9 million, partially offset by US$2.5 million in proceeds from the exercise of share options.

Net cash used in financing activities was US$1.0 million in 2013, primarily attributable to US$55.6 million used to repurchase our ordinary shares and US$10.9 million deposits paid for share repurchase, offset substantially by US$60.9 million in proceeds from a promissory note issued to Nuomi, which is interest free, without fixed repayment schedule and due in October 2023.

Net cash used in financing activities amounted to US$53.9 million in 2012, primarily attributable to US$53.6 million used to repurchase our ordinary shares, offset in part by US$1.9 million in proceeds from the exercise of share options.shares.

 

Holding Company Structure

 

Overview

 

We are a holding company with no material operations of our own. We conduct our operations in China principally through threeseveral sets of contractual arrangements namely a setbetween three of contractual arrangements between our wholly owned PRC subsidiary,subsidiaries, namely Qianxiang Shiji, itsRenren Automobile and Qianxiang Lianhe, and their respective consolidated affiliated entity,entities, namely Qianxiang Tiancheng, Shanghai Changda, Shanghai Jieying and its shareholders,Qianxiang Yixin, and a set of contractual arrangements between our wholly owned PRC subsidiary, Renren Network, its consolidated affiliated entity, Renren Games, and itstheir respective shareholders. See “Item 4.C—Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities” for a summary of these contractual arrangements. For each of the three years ended December 31, 2014,2017, revenues from our consolidated affiliated entities constituted substantially all of our total consolidated net revenues.

Conducting our operations through contractual arrangements with our consolidated affiliated entities in China entails a risk that we may lose effective control over our consolidated affiliated entities, which may result in our being unable to consolidate their financial results with our results and may impair our access to their cash flow from operations and thereby reduce our liquidity. See “Item 3.D—Risk Factors—Risks Related to Our Corporate Structure and the Regulation of our Business” for more information, including the risk factors titled “If the PRC government finds that the agreements that establish the structure for operating our services in China do not comply with PRC governmental restrictions on foreign investment in internet businesses, 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” and “We rely on contractual arrangements with consolidated affiliated entities for our China operations, which may not be as effective in providing operational control as direct ownership. Any failure by our affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business and financial condition.

 

Dividend Distributions

 

As a holding company, our ability to pay dividends and other cash distributions to our shareholders depends primarily upon dividends and other distributions paid to us by our PRC subsidiaries. The amount of dividends paid by each of our PRC subsidiaries to us depends solely on the service and license fees paid to each of our PRC subsidiaries by the consolidated affiliated entity with which it has contractual arrangements.

 

Under PRC law, all of our PRC subsidiaries and consolidated affiliated entities in China are required to set aside at least 10% of their respective after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of their respective registered capital. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Our PRC subsidiaries are permitted to pay dividends to us only out of their respective retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.

 

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After Qianxiang Wangjing and Qianxiang Changda make appropriations for their respective statutory reserves and retain any profits, each of their remaining net profits are distributable to their sole shareholder, Qianxiang Tiancheng, in the form of an RMB dividend. Pursuant to the contractual arrangements between Qianxiang Tiancheng and Qianxiang Shiji, Qianxiang Tiancheng’s earnings and cash (including dividends received from its subsidiaries) are used to pay service and license fees in RMB to Qianxiang Shiji, in the manner and amount set forth in these agreements. There are similar contractual arrangements between Renren Network and Renren Games. After paying the withholding taxes applicable to Qianxiang Shiji’s and Renren Network’s respective revenues and earnings, making appropriations for their respectiveits statutory reserve requirements and retaining any profits from accumulated profits, the remaining net profits of Qianxiang Shiji and Renren Network would be available for distribution to us through the respective offshore holding companies through which we respectively own Qianxiang Shiji, and Renren Network, although we have not, and do not have, any present plan to make such distributions. As of December 31, 2014,2017, the net assets of Qianxiang Shiji Renren Network and our consolidated affiliated entities which were restricted due to statutory reserve requirements and other applicable laws and regulations, and thus not available for distribution, was in aggregate US$6.7 million, and the net assets of Qianxiang Shiji, Renren Network and our consolidated affiliated entities which were unrestricted and thus available for distribution was in aggregate US$1.1 billion.436.0 million. We do not believe that these restrictions on the distribution of our net assets will have a significant impact on our ability to timely meet our financial obligations in the future. See “Item 3.D—Risk Factors—Risks Related to Our Corporate Structure and the Regulation of our Business—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business” and “Item 3.D—Risk Factors—Risks Related to Doing Business in China—Our global income and the dividends that we may receive from our PRC subsidiary, dividends distributed to our non-PRC shareholders and ADS holders, and gain recognized by such shareholders or ADS holders, may be subject to PRC taxes under the Enterprise Income Tax Law, which would have a material adverse effect on our results of operations” for more information.

 

Furthermore, cash transfers from our PRC subsidiaries to our subsidiaries outside of China are subject to PRC government control of currency conversion. Restrictions on the availability of foreign currency may affect the ability of our PRC subsidiaries and our consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. See “Item 3.D—Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”

Capital Expenditures

 

We made capital expenditures of US$40.71.2 million, US$30.40.4 million and US$9.60.5 million in 2012, 20132015, 2016 and 2014,2017, respectively. In the past, our capital expenditures were primarily used to purchase servers and other equipment for our business, and purchase of real estate. In 2012, we purchased an office building in Shanghai for RMB201.1 million (US$32.1 million). RMB100.5 million of the purchase price was paid in 2012 and the other RMB100.6 million (US$16.3 million) was paid in 2013. In 2014,2015, our capital expenditures included purchases of computer servers and equipment of US$8.00.8 million and purchases of license rights of online games of US$1.60.4 million. In 2016, our capital expenditures included purchases of computer servers and equipment of US$0.4 million. In 2017, our capital expenditures included purchases of computer servers and equipment of US$0.1 million. We expect to incur capital expenditures of up to approximately US$15.0 2.0 million in 2015,2018, which will be primarily used to purchase some equipment for our after-sale services business, additional servers and computers improve our office leaseholds, and expand our network infrastructure to support the growth of our business.

 

C.Research and Development, Patents, and Licenses, etc.

 

Research and Development

 

Our research and development efforts focus on developing and improving the scalability, features and functions of each of our websites, services and applications, especially mobile applications. We have a large team of 381 engineers and developers which accountedas of December 31, 2017, accounting for 41%29% of our employees as of December 31, 2014.that date. Most of our engineers and developers are based at our headquarters in Beijing.

 

As of December 31, 2014, substantially all of ourOur research and development personnel focusedsupport all areas of our business, mainly focusing on the improvement and enhancement of our Renren SNS services for both mobile devices and personal computers including communication-related features, user-generated contentand our live streaming services advertisingfor mobile devices and targeting solutions, as well as ensuring we are fully compatible with the latest mobile operating systems such as iOS, Android and Windows. Further, weWindows, but also working on our Chime initiative, supporting our financing business and supporting our Woxiu business. We continue to develop new products and services to meet with ourthe needs of our user base for example our internet finance initiative and other stand-alone mobile applications.customers.

 

Our research and development expenses primarily include salaries and benefits for our research and development personnel and depreciation of related PC and servers. We incurred US$71.632.4 million, US$78.020.7 million and US$50.723.7 million of research and development expenses in 2012, 20132015, 2016 and 2014,2017, respectively.

 

Intellectual Property

 

Our intellectual property includes trademarks and trademark applications related to our brands and services, copyrights in software, and games, trade secrets, patent applications and other intellectual property rights and licenses. We seek to protect our intellectual property assets and brand through a combination of monitoring and enforcement of trademark, patent, copyright and trade secret protection laws in the PRC and other jurisdictions, as well as through confidentiality agreements and procedures.

 

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人人”, “人人分期, and “经纬开心汽车” are registered trademarks in China. We have also applied with the Trademark Office to register additional trademarks and logos, including “ ”, “人人游戏”, “人人分期”, “社团人” and “朋友拍”. We have applied for patents relating to our technologies, among which we have been granted a patent for systems and methods for accelerating content downloads.11 patents. We have registered the top level domain name.renand domain names includingrenren.com,xiaonei.com,jingwei.comkaixin.com,chimeroi.comandchewen.commumianty.com.. In addition, we maintain 12370 copyright registrations, of which 52 are computer software copyright registrations, including those in connection with our games. We own the copyrights to the games we have developed.registrations. Our employees sign confidentiality and non-compete agreements when hired.

 

D.Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 20142017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.Off-Balance Sheet Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. From time to time we enter into derivative contracts, including derivatives that are solely for our own treasury investment purposes and not related to our business operating activities. As of the date of this annual report, we have a total of seven swaption contracts on Japanese yen interest rates outstanding with expiration dates ranging from the second quarter of 2015 to the second quarter of 2016, for which we paid a total of US$14.5 million in premiums. Upon the maturity date of a swaption contract, if the prevailing rate for Japanese yen interest rate swaps is higher than the strike rate of the contract, then we will have the right to enter into an underlying swap and immediately receive an amount with reference to the discounted cash flows of the underlying swap as settlement of the contract; otherwise, the contract will expire unexercised and we will lose the premium paid for the contract. We have also entered into a swap contract on Japanese yen interest rates, for which we pay fixed rate of 0.2025% and receive floating rate of 6 months Japanese Yen Libor for a notional of 72 billion Japanese Yen from March 27, 2015 to March 26, 2016. This swap contract on Japanese yen interest rates is not reasonably likely to have a material effect on investors in our ordinary shares or ADSs. Besides the swaption and swap contracts, we also have a total of seven call option contracts on a Hong Kong listed stock. These call option contracts are of expiration dates in May and October 2015. Upon the maturity of date of a call option contract, if the prevailing price of the stock is higher than the strike price of the contract, we will receive an amount with reference to the difference between the prevailing market price and strike price of the underlying stock as settlement of the contract; otherwise, the contract will expire unexercised and we will lose the premium paid for the contract. We mark our derivatives positions to market each quarter and gains and losses are reflected in our results of operations. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

F.Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations including interest payment, if applicable, as of December 31, 2014:2017:

 

  Payment Due by Period 
  Total  Less than
1 year
  1-3 years  3-5 years  More than
5 years
 
  (in thousands of US$) 
Operating lease obligations(1) $21,479  $14,526  $6,953  $  $ 
Unconditional investment obligations(2)  4,156   4,156          
TOTAL $25,635  $18,682  $6,953  $  $ 

  Payment Due by Period 
  Total  Less than 1 year  1-3 years  4-5 years  More than 5 years 
  (in thousands of US$) 
Operating lease obligations(1) $14,875  $6,366  $7,702   417       390 
Unconditional investment obligations(2) $1,736  $1,736   -   -   - 
Loan obligations(3) $185,574  $135,626  $49,948   -   - 
TOTAL $202,185  $143,728  $57,650   417   390 

 

 

(1)We lease facilities and offices under non-cancelable operating lease agreements. In addition, we pay telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their internet data centers under non-cancelable agreements, which are treated as operating leases.

 

(2)We are obligated to pay up to US$1,736 thousand for the acquisition of investments under various arrangements as of December 31, 2017.

(3)

In 2014,2016, we entered into antwo short-term loan agreements. In 2017, we entered into one long-term borrowing for a total of US$33.0 million and several short-term borrowing for a total of US$63.0 million. Balances include future principal and interest payments related to those agreements. Actual interest payments may differ. 

In December 2016, the Company entered into a short-term loan agreement promisingwith East West Bank for $30,000. In June 2017, the Company amended and extended the maturity date to purchase equity interest issued byApril 2018. In October 2017, the Company repaid $10,000 of the loan balance. In January 2018, the Company further refinanced its short-term loan agreement with East West Bank and replaced it with a certain investee in 2015.long-term debt. The long-term debt is repayable on April 3, 2020. Accordingly, the Company has excluded $20,000 from the short-term debt and has reclassified it to long-term debt as of December 31, 2017.

 

G.Safe Harbor

 

See “Forward-Looking Statements” on page 1 of this annual report.

Item 6.Directors, Senior Management and Employees

Item 6. Directors, Senior Management and Employees

 

A.Directors and Senior Management

 

The following table sets forth information regarding our directors and executive officers as of the date of this annual report.

 

Directors and Executive Officers

 

Age

 

Position/Title

Joseph Chen 4548 Chairman, Chief Executive Officer
James Jian Liu 4245 Director, Chief Operating Officer
Katsumasa Niki47Director
Hui Huang 4245 Independent Director
David K. Chao 48Independent Director
Matthew Nimetz7551 Independent Director
Chuanfu Wang 52Independent Director
Stephen Tappin51Independent Director
Tianruo Pu49 Independent Director
Ashley Kwok Wai LawThomas Jintao Ren 4239 Acting Chief Financial Officer
Lillian LiuRita Rui Yi 5048 Senior Vice President for HR
Miao Cao36Chief Marketing Officer
He Li 3234 Vice President for Renren SNS

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Joseph Chenis the founder of our company. Mr. Chen has served as the chairman of our board of directors and chief executive officer of our company since our inception. Mr. Chen is a pioneer of China’s internet industry. Before founding our company, Mr. Chen was the co-founder, chairman and chief executive officer of ChinaRen.com, a first-generation SNS in China and one of China’s most visited websites in 1999. He served as senior vice president for Sohu.com after ChinaRen.com was acquired by Sohu.com in 2000. Mr. Chen holds a bachelor’s degree in physics from the University of Delaware, a master’s degree in engineering from the Massachusetts Institute of Technology, and a M.B.A.an MBA degree from Stanford University.

James Jian Liuhas served as our director since January 2008 and chief operating officer since February 2006. Mr. Liu is also acting as our interim Vice President for Games. Before joining our company, he was the co-founder and chief executive officer of UUMe.com, one of the earliest social networking service websites in China. He served as product management director at Fortinet in its early years and held a senior product manager role at Siebel Systems. Mr. Liu started his career as a management consultant with the Boston Consulting Group in China. Mr. Liu holds a bachelor’s degree in computer science from Shanghai Jiao Tong University and a M.B.A.an MBA degree from Stanford University, where he was an Arjay Miller Scholar.

Katsumasa Niki has served as a director of our company since January 2011. Mr. Niki serves as corporate officer, corporate strategy and development department of SoftBank Corp. where he is in charge of investment activities, and as director of several subsidiaries of SoftBank Corp. Mr. Niki is a director of SB Pan Pacific Corporation, a wholly owned subsidiary of SoftBank Corp. and one of our major shareholders. Mr. Niki holds a bachelor’s degree in economics from Kobe University and an M.B.A. degree in finance from Chuo Graduate School of Accounting. Mr. Niki was nominated to be our director by SB Pan Pacific Corporation, and as long as SB Pan Pacific Corporation and its affiliates continue to collectively hold over 50% of the number of our shares held by them as of May 9, 2011, they have the right to appoint one director to serve on our board of directors.

Hui Huanghas served as our director since January 2015. Ms. Huang served as the chief financial officer of our company from March 2010 to December 2014. From 2007 to February 2010, Ms. Huang was the chief financial officer and director of Cathay Industrial Biotech Ltd. From 2003 to 2007, she was an executive director and Shanghai chief representative of Johnson Electric Capital Limited. From 2000 to 2003, she was an associate of Goldman Sachs (Asia) L.L.C. in its principal investment area and executive office. From 1994 to 1998, she was an associate with the Boston Consulting Group. Ms. Huang received a bachelor’s degree in industrial foreign trade from Shanghai Jiaotong University in 1994, and received a M.B.A.an MBA degree from the Wharton School of the University of Pennsylvania in 2000.

David K. Chaohas served as a director of our company since March 2006. Mr. Chao is a co-founder and general partner of DCM Ventures, an early stage technology venture capital firm that manages over US$2.5 billion of fund assets. Prior to joining DCM Ventures, Mr. Chao was a co-founder of Japan Communications, Inc., a public company that provides mobile data and voice communications services in Japan. He also worked as a management consultant at McKinsey & Company in San Francisco. Prior to that, Mr. Chao worked in marketing and product management at Apple Computer and was an account executive for Recruit Co., Ltd. Mr. Chao currently serves on the boards of directors of 51job, Inc. and numerous DCM Ventures'Ventures’ portfolio companies. He is a management board director of the Stanford Graduate School of Business Board of Trustees, and also serves on the advisory board of Legend Capital and is a trustee at the Thacher School. Mr. Chao received a bachelor’s degree in economics and East Asian studies with high honors from Brown University and a M.B.A.an MBA degree from Stanford University.

Matthew NimetzChuanfu Wanghas served as a director of our company since December 2008. Mr. Nimetz currently serves as an advisory director of General Atlantic LLC, a leading global growth equity firm. He also serves as a director of TriPlus Services, Inc. and a number of not-for-profit entities. He formerly served as the chief operating officer of General Atlantic Service Company, LLC from January 2000 to December 2011 and as a managing director of General Atlantic LLC and its affiliates and predecessors from January 2000 through December 2011. Prior to joining General Atlantic in 2000, Mr. Nimetz was a partner (and former chair) of the law firm of Paul, Weiss, Rifkind, Wharton & Garrison in New York City, where he concentrated on corporate and international law from December 1980 through January 2000. He previously practiced law as a partner at Simpson Thacher & Bartlett between 1969 and 1977. Mr. Nimetz served as Under Secretary of State for Security Assistance, Science and Technology from February through December 1980 and as Counselor of the Department of State from 1977 to 1980. His previous federal government positions include service as a Staff Assistant to President Lyndon Johnson from July 1967 to January 1969; a law clerk to Justice John M. Harlan of the Supreme Court of the United States from 1965 to 1967; and other positions with the U.S. and New York governments and with the United Nations. Mr. Nimetz received degrees from Williams College and Harvard Law School where he was president of the Harvard Law Review. He also received a master’s degree from Balliol College, Oxford University, where he was a Rhodes Scholar.

Chuanfu Wang has served as a director of our company since JuneMay 2012. Mr. Wang is the Chairman of the Board and President of BYD Company Limited. He has been BYD’s Executive Director since June 2002, in charge of BYD’s general operations and overall strategies. Mr. Wang founded Shenzhen BYD Battery Company Limited (now BYD Company Limited) in February 1995. Before that he served as the Deputy Director of the Beijing General Research Institute for Nonferrous Metals from 1990 to 1995. Mr. Wang has received many awards, prizes and recognitions, such as Hong Kong’s Bauhinia Cup Outstanding Entrepreneur Award in 2000 and BusinessWeek’s “Stars of Asia” in 2003, among others. In addition, Mr. Wang was elected as a representative in the Shenzhen People’s Congress in March 2000, a member of the Fourth Shenzhen Municipal People’s Congress Standing Committee in May 2005, and a member of the Fifth Shenzhen Municipal People’s Congress Standing Committee in 2010. Mr. Wang graduated from the Central South University of Technology (now Central South University) in 1987, majoring in Physical Chemistry of Metallurgy. He received his Master’s degree in Physical Chemistry of Metallurgy at Beijing General Research Institute for Nonferrous Metals in 1990.

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Ashley Kwok Wai LawStephen Tappinis a CEO coach and the host of CEO Guru on BBC World News. He is also the co-founder, chairman and CEO of Xinfu, a global CEO consultancy business. Prior to that, he was a managing partner at Heidrick and Struggles, a worldwide executive search firm. Mr. Tappin also founded Edengene, an innovation services consultancy. His early corporate career included experience as a senior manager at ICI, the global chemical company, and as a management consultant at KPMG. Mr. Tappin was originally qualified as an accountant and has a joint MBA from Cranfield University and the University of Washington.

Tianruo Puis currently the CFO of Zhaopin Limited (NYSE: ZPIN) and an independent director and the chairman of the audit committee of Wowo Limited (NASDAQ: JMU) and 3SBio Inc. (HKEX:1530). Mr. Pu has more than twenty years of work experience in finance and accounting in both the United States and China. Before joining Zhaopin, Mr. Pu served as CFO of UTStarcom Holdings Corp., and prior to that, as the CFO of China Nuokang Bio-Pharmaceutical Inc. Mr. Pu received his MBA degree from Northwestern University’s Kellogg School of Management in 2000 and his Master of Science degree in accounting from the University of Illinois in 1996.

Thomas Jintao Renhas served as the acting chief financial officer of our company since JanuarySeptember 2015. Mr. Law joinedPrior to rejoining our company, in November 2012Mr. Ren was the chief financial officer at Chukong Technologies. Mr. Ren was previously at Renren between 2005 and 2013, where he served as our senior director of finance and financial controller, and subsequently was promoted to the vice president of finance in August 2014.director. Prior to that, he served in various controller and finance functions at CDC Corporation, Monty Group and Gameone Online Entertainment Group. Before that, Mr. LawRen had worked at KPMG.KPMG for five years. Mr. Ren holds a bachelor’s degree in economics from Renmin University of China. He is a member of American Institute of Certified Public Accountants, Hong Kong Institute of Certified Public Accountantscertified public accountant in China and Institute of Chartered Accountants in England and Wales. Mr. Law holds a bachelor degree in Accountancy from Hong Kong Polytechnic Universitythe United States, and a M.B.A. degree from Hong Kong University of Science & Technology.chartered professional accountant in Canada.

 

Lillian LiuRita Rui Yihas served as a senior vice president for our company in charge of human resources for our company since September 2012.October 2016. Prior to joining our company, Ms. LiuYi served as the human resource senior director of Nokia from 2004 to 2012 and theRealNetworks in charge of human resource director of HP/Compaq Computer from 1999business partner management work, covering both the greater China region and South Asia region. Prior to 2004. Shethat, Ms. Yi also worked as agained human resource manager at Nortel Networksmanagement experience from 1994 to 1999.ING Capital Life Insurance Company, General Electronic and Northern Telecom. Ms. LiuYi received a bachelor’s degree in Englishtourism economy from the Beijing ForeignInternational Studies University in 1989 and received a M.B.A.an MBA degree from CityMcMaster University U.S. in 1999.

Canada in 2001.

Miao Cao has served as chief marketing officer of sales of our company since October 2014. He joined our company in 2004 and was promoted to the vice president for sales in September 2013. Prior to joining our company, Mr. Cao worked at Shun Tak Holding Limited, a company listed on the Hong Kong Stock Exchange, and Clevo Co., a company listed on the Taiwan Stock Exchange. Mr. Cao received a bachelor’s degree in Economics from the Shanghai University of International Business and Economics in 1999.

He Lihas served as vice president of our company since 2014 and is now in charge of Renren SNS. Mr. Li joined our company in 2011 and has since held various positions in research and development. Mr. Li received a bachelor’s degree in Computer Science and a master’s degree in Software Science Theory from Peking University.

B.Compensation

 

For the year ended December 31, 2014,2017, we paid an aggregate of approximately US$2.21.6 million in cash to our executive officers and non-executive directors. Our PRC subsidiaries are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. In 2014, our PRC subsidiaries2017, we accrued in aggregate US$7568 thousand worth of such benefits for our executive officers.

 

For the year ended December 31, 2014,2017, we granted a total of 1,587,000259,872 restricted Class A ordinary shares to our executive officers and non-executive directors, and we recorded US$0.30.03 million in share-based compensation expense for these grants. In addition, for the year ended December 31, 2014, we granted share options to our executive officers and non-executive directors representing the right to acquire a total of 69,593,691 Class A ordinary shares, and recorded US$13.4 million in share-based compensation expenses for these grants. For more information, see “Item 6.B. Directors, Senior Management and Employees—Compensation—Equity Incentive Plans”.Plans.”

 

Equity Incentive Plans

 

Since February 27, 2006, we have adopted fourfive equity incentive plans for Renren Inc. and one equity incentive plan for Link224 Inc., a subsidiary within the Game segment, to motivate, retain and attract the best personnel and promote the success of our business. The fourfive plans adopted by Renren Inc. were the 2006 Equity Incentive Plan, the 2008 Equity Incentive Plan, the 2009 Equity Incentive Plan, the 2011 Share Incentive Plan (as amended) and the 20112016 Share Incentive Plan. We refer to these collectively as the Plans. As of February 28, 2015,2018, options to purchase 3,971,130 ordinary shares were outstanding under the 2006 Equity Incentive Plan options to purchase 1,254,500 ordinary shares were outstandingor under the 2008 Equity Incentive Plan, 3,570 restricted share units and options to purchase 5,263,2152,322,930 ordinary shares were outstanding under the 2009 Equity Incentive Plan, and 5,563,7801,659,045 restricted share units and options to purchase 103,126,29697,812,636 ordinary shares were outstanding under the 2011 Share Incentive Plan (as amended), and 8,164,350 restricted share units and options to purchase 39,752,430 ordinary shares were outstanding under the 2016 Share Incentive Plan.

95

On August 24, 2017, the Company’s Compensation Committee approved to reduce the exercise price for all outstanding options previously granted by the Company with an exercise price higher than $0.478 per ordinary share to $0.478 per share.

 

The following table summarizes the outstanding share options granted to certain of our directors, executive officers and other individuals under the Plans as of February 28, 2015.2018.

 

Name 

Number of Ordinary Shares
Underlying Outstanding
Options(1)

  

Exercise Price
(US$/Share)(1)

  Grant Date Expiration Date 
Joseph Chen  16,800,000   0.873  April 5, 2012 April 4, 2022 
   3,150,000   0.873  March 22, 2013 March 21, 2023 
   25,946,844   0.873  May 19, 2014 May 18, 2024 
   25,946,847   0.873  May 19, 2014 May 18, 2024 
James Jian Liu  *   0.873  April 5, 2012 April 4, 2022 
   *   0.873  March 22, 2013 March 21, 2023 
   *   0.873  May 19, 2014 May 18, 2024 
   *   0.873  May 19, 2014 May 18, 2024 
Hui Huang  *   0.873  April 5, 2012 April 4, 2022 
   *   0.873  March 22, 2013 March 21, 2023 
David K. Chao  *   0.873  April 5, 2012 April 4, 2022 
   *   0.873  March 22, 2013 March 21, 2023 
Matthew Nimetz  *   0.873  January 4, 2011 January 3, 2021 
   *   0.873  April 5, 2012 April 4, 2022 
   *   0.873  March 22, 2013 March 21, 2023 
Chuanfu Wang  *   0.873  June 14, 2012 June 13, 2022 
   *   0.873  March 22, 2013 March 21, 2023 
Ashley Kwok Wai Law  *   0.873  December 28, 2012 December 27, 2022 
   *   0.873  December 2, 2013 December 1, 2023 
NameNumber of Ordinary Shares
Underlying Outstanding
Options(1)
Exercise Price
(US$/Share)(1)
Grant DateExpiration Date
Lillian Liu*0.873December 28, 2012December 27, 2022
*0.873March 22, 2013March 21, 2023
Miao Cao*0.18March 2, 2006March 1, 2016
*0.18October 9, 2007October 8, 2017
*0.18January 31, 2008January 31, 2018
*0.18October 15, 2009October 14, 2019
*0.873January 4, 2011January 3, 2021
*0.873August 30, 2013August 29, 2023
He Li*0.873April 18, 2011April 17, 2021
*0.873December 28, 2011December 27, 2021
*0.873December 28, 2012December 27, 2022
*0.873May 17, 2013May 16, 2023
*0.873December 2, 2013December 1, 2023
Other individuals as a group13,482,450(2)(2)(3)
Name Number of Ordinary
Shares Underlying
Outstanding Options(1)
  Exercise Price
(US$/Share)(1)
  Grant Date Expiration Date
Joseph Chen  16,800,000   0.478  April 5, 2012 April 4, 2022
   3,150,000   0.478  March 22, 2013 March 21, 2023
   25,946,844   0.478  May 19, 2014 May 18, 2024
   25,946,847   0.478  May 19, 2014 May 18, 2024
   39,752,430   0.478  January 15, 2016 January 14,2025
James Jian Liu  *   0.478  April 5, 2012 April 4, 2022
   *   0.478  March 22, 2013 March 21, 2023
   *   0.478  May 19, 2014 May 18, 2024
   *   0.478  May 19, 2014 May 18, 2024
Hui Huang  *   0.478  April 5, 2012 April 4, 2022
   *   0.478  March 22, 2013 March 21, 2023
David K. Chao  *   0.478  April 5, 2012 April 4, 2022
   *   0.478  March 22, 2013 March 21, 2023
Chuanfu Wang  *   0.478  June 14, 2012 June 13, 2022
   *   0.478  March 22, 2013 March 21, 2023
He Li  *   0.478  April 18, 2011 April 17, 2021
   *   0.478  December 28, 2011 December 27, 2021
   *   0.478  December 28, 2012 December 27, 2022
   *   0.478  May 17, 2013 May 16, 2023
   *   0.478  December 2, 2013 December 1, 2023
Other individuals as a group  2,006,875   (2) (2) (3)

 

 

*The aggregate beneficial ownership of our company held by the named grantee is less than 1% of our total outstanding shares.

 

(1)The number of share options granted and exercise prices in this table, including footnote 2, gives effect to the ten-for-one share split that became effective on March 25, 2011.

 

On December 28, 2012, we modified the exercise price of the outstanding share options previously granted that had exercise prices of US$4.00 per ADS or higher, reducing them uniformly to US$3.30 per ADS ($(US$1.10 per ordinary share), which was the closing price of our ADS on the modification date. (These per ADS numbers have not been adjusted to give retroactive effect to the change in the number of ordinary shares represented by each ADS from three to fifteen that became effective on February 6, 2017.) Options exercisable for a total of 27,480,309 ordinary shares were modified. The total incremental cost as a result of the modification was US$4.3 million, of which US$0.9 million, US$1.1 million, US$1.1 million and US$1.10.9 million was recognized as share-based compensation expense in 2012, 2013, 2014 and 20142015 respectively, and the remaining balance will be amortized over the expected requisite service period.

 

On December 29, 2014, we modified the exercise price of the outstanding share options previously granted that had exercise price higher than $0.873US$0.873 per ordinary share, reducing them uniformly to $0.873US$0.873 per share, which was the average closing price during the period from December 8, 2014 through December 19, 2014, when the repricing was being discussed. Options exercisable for a total of 107,197,908 ordinary shares were modified. The total incremental cost as a result of the modification was US$6.4 million, of which US$3.75.2 million was recognized as share-based compensation expense in 2014 and 2015 and the remaining balance will be amortized over the expected requisite service period.

On December 23, 2015, we waived the award condition with respect to the options granted on May 19, 2014, Options exercisable for a total of 34,796,844 ordinary shares were modified. The total incremental cost as a result of the modification was US$10.9 million, of which US$4.4 million was recognized as share-based compensation expense in 2015 and the remaining balance will be amortized over the expected requisite service period.

On August 24, 2017, we modified the exercise price of the outstanding share options previously granted that had exercise price higher than US$0.478 per ordinary share, reducing them uniformly to US$0.478 per share. The total incremental cost as a result of the modification was US$10.4 million, of which US$7.4 million was recognized as share-based compensation expense in 2017 and the remaining will be amortized over the expected requisite service period.

96

  

(2)We granted share options to other individuals on the following dates and at the following exercise prices: (i) on March 2, 2006, 1,079,400 options with an exercise price of US$0.001 per share; (ii) on March 2, 2006, 10,204,000 options and on October 9, 2007, 800,000 options, each with an exercise price of US$0.08 per share; (iii) on March 2, 2006, 4,568,670 options and on October 21, 2010, 179,450 options, each with an exercise price of US$0.10 per share; (iv) on March 2, 2006, 18,346,96018,046,960 options, on October 9, 2007, 22,292,0002007,22,142,00 options, on January 31, 2008, 14,889,50014,809,500 options, on October 15, 2009, 18,944,00018,644,000 options, on March 10, 2010, 300,000 options, on June 1, 2010, 490,000 options and on October 21, 2010, 11,180 options, each with an exercise price of US$0.18 per share; (v) on March 2, 2006, 1,243,880 options with an exercise price of US$0.20 per share; (vi) on October 9, 2007, 100,000 options with an exercise price of US$0.26 per share; (vii) on October 9, 2007, 300,000 options with an exercise price of US$0.28 per share; (viii) on October 9, 2007, 100,000 options with an exercise price of US$0.30 per share; (ix) on October 9, 2007, 925,000 options with an exercise price of US$0.35 per share; (x) on October 9, 2007, 220,000 options with an exercise price of US$0.38 per share; (xi) on January 4, 2011, 11,628,50012,068,500 options, on April 18, 2011, 3,296,500 options, on September 23, 2011, 519,000 options, on December 28, 2011, 1,621,107 options, on April 5, 2012, 1,686,0001,881,500 options, on April 30, 2012, 300,000 options, on December 28, 2012, 3,047,4003,167,400 options, on March 22, 2013, 4,362,0002013,4,587,000 options, on May 17, 2013, 2,862,000 options, on August 30, 2013, 450,000 options, on December 2, 2013, 2,683,5002,707,500 options, each with an exercise price of US$0.8730.478 per share. As of February 28, 2015, 113,967,5972018, 118,567,172 options had been forfeited, cancelled or exercised.

(3)Each option will expire after ten years from the grant date or such shorter period as the board of directors may determine at the time of its grant.

 

The following table summarizes the outstanding restricted share units granted to our executive officers and certain other individuals as of February 28, 20152018 under the Plans adopted by Renren Inc.:

 

Name Number of Ordinary
Shares
Underlying Restricted
Restricted Share Units Outstanding
  Grant Date
Joseph Chen9,029,637January 15, 2016
Hui Huang*May 19, 2014
Hui Huang*January 1, 2015
David K. Chao  *  May 19, 2014
David K. Chao  *  May 19, 2014April 15, 2015
Matthew NimetzChuanfu Wang  *  May 19, 2014
Chuanfu Wang  *  May 19, 2014April 15, 2015
Ashley Kwok Wai LawThomas Ren  *  May 19, 2014September 30, 2015
Ashley Kwok Wai LawThomas Ren  *  July 17, 2014February 1, 2016
Ashley Kwok Wai LawStephen Tappin  *  October 17, 2014December 5, 2016
Ashley Kwok Wai LawTianruo Pu*December 5, 2016
Rita Yi  *  January 5, 2015
Lillian Liu*May 19, 2014
Miao Cao*May 19, 2014
Miao Cao*October 17, 20143, 2017
He Li  *  May 19, 2014
He Li  *  October 17, 2014
Certain individuals as a groupHe Li  -*  September 23, 2011April 15, 2015
He Li*February 1, 2016
Certain individuals as a group  3,570December 28, 2011
Certain individuals as a group-March 22, 2013
Certain individuals as a group3,073,07961,485  May 19, 2014
Certain individuals as a group  18,014July 17, 2014
Certain individuals as a group653,21235,520  October 17, 2014
Certain individuals as a group  23,500484,320May 15, 2015
Certain individuals as a group3,060June 15, 2015
Certain individuals as a group11,895September 30, 2015
Certain individuals as a group20,040November 1, 2015
Certain individuals as a group814,995February 1, 2016
Certain individuals as a group257,520June 15, 2016
Certain individuals as a group268,110March 22, 2017
Certain individuals as a group432,303September 1, 2017
Certain individuals as a group114,933December 8, 2017
Certain individuals as a group31,470  January 20, 201516, 2018

 

 

*The aggregate beneficial ownership of our company held by the named grantee is less than 1% of our total outstanding shares.

 

On April 1, 2013, our board of directors authorized Link224 Inc. to adopt the 2013 ShareJanuary 31, 2018, we adopted a Kaixin Auto Group 2018 Equity Incentive Plan for issuance and reservation of up to 13,005,529Kaixin Auto Group, whereby 40,000,000 ordinary shares of Link224 Inc. specificallyKaixin Auto Group had been made available for granting or awarding to the employees of our Games segment. On the same date Link224 Inc. granted 11,630,000 options to individuals including Mr. Joseph Chen and Mr. James Jian Liu, with an exercise price US$0.01 per ordinary share of Link224 Inc. No grantee’s aggregate beneficial ownershipconsultants of the company, exceeded 1%either as incentive share options or as restricted shares. As of March 31, 2018, 35,461,500 shares have been granted or awarded to any of the total outstanding sharesemployees and consultants of Link224 Inc. As of February 28, 2015, options to purchase 3,683,272 ordinary shares of Link224 Inc. were outstandingthe Company under the 2013 Share Incentive Plan.this plan.

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Principal Terms of 2006, 2008 and 2009 Equity Incentive Plans adopted by Renren Inc.

 

The principal terms of the 2006 Equity Incentive Plan, the 2008 Equity Incentive Plan and the 2009 Equity Incentive Plan are substantially the same. The following paragraphs summarize the principal terms of these three plans and, unless otherwise specified below, the following summary applies to each of these plans.

 

Types of Awards and Exercise Prices.Prices. Three types of awards may be granted under the plans.

·Incentive share options. Incentive share options are share options which satisfy the requirements of Section 422 of the Internal Revenue Code of 1986. The exercise price of an incentive share option must be at least equal to the fair market value of the shares on the date of grant. If an employee, officer or director owns or is deemed to own more than 10% of the combined voting power of all classes of shares and an incentive share option is granted to such person, the exercise price for such incentive share option shall be at least 110% of the fair market value of the shares on the date of grant.

·Nonqualified share options. Nonqualified share options are share options which do not satisfy the requirements of Section 422 of the Internal Revenue Code of 1986. The exercise price of a nonqualified share option may be less than, equal to or greater than the fair market value of the shares on the date of grant.

 

·Restricted share options. Restricted share options are options to purchases ordinary shares which are subject to certain restrictions or limitations set forth in the plans or in the related award agreement, and may be subject to risk of forfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by us during a restricted period. The exercise price of restricted share options may be determined by the plan administrator in the award agreement.

 

Plan Administration. The plan administrator is our board of directors or a committee of two or more members of our board. The plan administrator designates the eligible recipients and determines the award type, award period, grant date, performance requirements and such other provisions and terms not inconsistent with the plans in each award agreement.

Award Agreement. Incentive share options, nonqualified share options or restricted share options granted under the plans are evidenced by an award agreement that sets forth the terms, provisions, limitations and performance requirements for each grant.

Eligibility. At the discretion of the board of directors, we may grant awards to employees, officers, directors, outside directors or consultants of our company.

Transfer Restriction. Subject to certain exceptions, awards for incentive share options, nonqualified share options and restricted share options may not be transferred, assigned, pledged, hypothecated or otherwise conveyed or encumbered by the award holders.

Term of Awards.Unless otherwise provided in the award agreement by the plan administrator, each option shall expire after ten years from the grant date. If an employee, officer or director owns or is deemed to own more than 10% of the combined voting power of all classes of shares and an incentive share option is granted to such person, such incentive share option shall expire after five years from the grant date.

Vesting Schedule.The plan administrator may determine the vesting schedule and may provide additional vesting conditions in the award agreement to each recipient.

Amendment and Termination. Our board of directors may at any time by resolutions amendThe 2006 Equity Incentive Plan and the plans, subject to certain exceptions.2008 Equity Incentive Plan were terminated on September 15, 2013. Unless earlier terminated by the board or directors, the 2006 Equity Incentive Plan will terminate on September 15, 2013, the 2008 Equity Incentive Plan will terminate on September 15, 2013, and the 2009 Equity Incentive Plan will terminate on December 31, 2019. In each case, grants made before the termination date will continue to be effective in accordance with their terms and conditions. Our board of directors may at any time by resolutions amend the 2009 Equity Incentive Plan, subject to certain exceptions.

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Principal Terms of the 2011 and 2016 Share Incentive Plan adopted by Renren Inc.

 

The principal terms of the 2011 Share Incentive Plan (as amended) and the 2016 Share Incentive Plan are substantially the same. The following paragraphs describesummarize the principal terms of our 2011 Share Incentive Plan:these two plans and, unless otherwise specified below, the following summary applies to each of these plans.

 

Types of Awards and Exercise Prices. The plan permitsplans permit the grant of options to purchase our Class A ordinary shares, restricted shares and restricted share units as deemed appropriate by the plan administrator.

·Options. Options provide for the right to purchase a specified number of our Class A ordinary shares at a specified price and usually will become exercisable in the discretion of the plan administrator in one or more installments after the grant date. Options include incentive share options, which are share options which satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, and non-qualified share options, which do not satisfy these requirements. The exercise price of an option shall be determined by the plan administrator and set forth in the award agreement.

·Restricted Shares. A restricted share award is the grant of our Class A ordinary shares which are subject to certain restrictions or limitations set forth in the plan or in the related award agreement. Unless otherwise determined by our plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by us during a restricted period. The exercise price of restricted share options may be determined by the plan administrator in the award agreement.

 

·Restricted Share Units. Restricted share units represent the right to receive our Class A ordinary shares at a specified date in the future. On the maturity date specified by the plan administrator, we will transfer to the participant one unrestricted, fully transferable share for each restricted share unit.

 

Plan Administration. The planplans will be administered by the board of directors or the compensation committee of the board, or a committee of one or more directors to whom the board or the compensation committee shall delegate the authority to grant or amend awards to participants other than senior executives. TheAs to the 2011 Share Incentive Plan (as amended), the plan administrator shall consist of at least two individuals, each of whom qualifies as an independent director. With respect to the awards granted to independent directors, the plan administrator shall be the board of directors. The plan administrator will determine the terms and conditions of each award grant.

Awards and Award Agreement. Awards granted under the planplans are evidenced by award agreements that set forth the terms, conditions and limitations for each award, which may include the term of an award, the provisions applicable in the event the participant’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an award.

Eligibility. We may grant awards to our employees, directors and consultants, as determined by our plan administrator.

Term of the Awards. The term of each award grant shall be determined by our plan administrator, provided that the term shall not exceed ten years from the date of the grant.

Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies, the vesting schedule.

Transfer Restrictions. Except as otherwise provided by our plan administrator, an award may not be transferred or otherwise disposed of by a participant other than by will or the laws of descent and distribution. Our plan administrator by express provision in the award or an amendment may permit an award (other than an incentive share option) to be transferred to or exercised by certain persons related to the participant.

Amendment and Termination of the Plan. With the approval of our board, our plan administrator may at any time amend, modify or terminate the plan, subject to certain exceptions.

Principal Terms of the 2013 Share Incentive Plan Adopted by Link224 Inc.

The following paragraphs describe the principal terms of our 2013 Share Incentive Plan:

Types of Awards and Exercise Prices. The plan permits the grant of options to purchase the ordinary shares and restricted shares and restricted share units of Link224 Inc. as deemed appropriate by the plan administrator.

·Options. Options provide for the right to purchase a specified number of the ordinary shares of Link224 Inc. at a specified price during specified time periods, and usually will become exercisable in the discretion of the plan administrator in one or more installments after the grant date. Options include incentive share options, which are share options which satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, and non-qualified share options, which do not satisfy these requirements. The exercise price of an option shall be determined by the plan administrator and set forth in the award agreement.

·Restricted Shares. A restricted share award is the grant of the ordinary shares of Link224 Inc. which are subject to certain restrictions or limitations set forth in the plan or in the related award agreement. Unless otherwise determined by the plan administrator, a restricted share is nontransferable and may be forfeited or repurchased by Link224 Inc. upon termination of employment or services during the applicable restricted period. The exercise price of restricted share options may be determined by the plan administrator in the award agreement.

·Restricted Share Units. Restricted share units represent the right to receive the ordinary shares of Link224 Inc. at a specified date in the future. On the maturity date specified by the plan administrator, Link224 Inc. will transfer to the participant one unrestricted, fully transferable share for each restricted share unit.

Plan Administration. The plan will be administered Unless earlier terminated by the board of directors, of Link224 Inc., or a committee with one or more members of the board to whom2011 Share Incentive Plan (as amended) will expired on April 14, 2021 and the board of Link224 Inc. shall delegate with the authority to grant or amend awards to participants other than senior executives. A majority of the committee shall constitute a quorum. With respect to the awards granted to independent directors, the plan administrator shall be the board of directors. The plan administrator2016 Share Incentive Plan will determine the terms and conditions of each award grant.expire on January 15, 2026.

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Awards and Award Agreement. Awards granted under the plan are evidenced by award agreements that set forth the terms, conditions and limitations for each award, which may include the term of an award, the provisions applicable in the event the participant’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an award.

Eligibility. The awards may grant to employees, directors and consultants of Link224 Inc. and its subsidiaries, as determined by the plan administrator.

Term of the Awards. The term of each award grant shall be determined by the plan administrator.

Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies, the vesting schedule.

Transfer Restrictions. Except as otherwise provided by the plan administrator, an award may not be transferred or otherwise disposed of by a participant other than by will or the laws of descent and distribution. The plan administrator by express provision in the award or an amendment may permit an award (other than an incentive share option) to be transferred to or exercised by certain persons or entities related to the participant.

Amendment and Termination of the Plan. With the approval of our board, the plan administrator may at any time amend, modify or terminate the plan, subject to certain exceptions.

C.Board Practices

 

Composition of Board of Directors

 

Our board of directors currently consists of seven directors. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect towho is in any way, whether directly or indirectly, interested in a contract or transaction or proposed contract or arrangement in which he is materially interested providedtransaction with our company must declare the nature of his interest at a meeting of the interestdirectors. Subject to the NYSE rules and disqualification by the chairman of the relevant board meeting, a director may vote in respect of any contract or transaction or proposed contract or transaction notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at the relevant board meeting at which such contract or transaction or proposed contract or transaction is disclosed prior to voting.considered. A director may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. None of our non-executive directors and independent director appointees has a service contract with us that provides for benefits upon termination of employment. As long as SB Pan Pacific Corporation and its affiliates continue to collectively hold over 50% of the number of our shares held by them as of May 9, 2011, they have the right to appoint one director to serve on our board of directors. Our director, Katsumasa Niki, wasboard of directors currently does not contain a member appointed by SB Pan Pacific Corporation.

 

Code of Business Conduct and Ethics

 

Our code of business conduct and ethics provides that our directors and officers are expected to avoid any action, position or interest that conflicts with the interests of our company or gives the appearance of a conflict. Directors and officers have an obligation under our code of business conduct and ethics to advance our company’s interests when the opportunity to do so arises.

Duties of Directors

 

Cayman Islands law does not prescribe by statute the specific duties of directors of Cayman Islands companies and therefore the duties of directors are dictated by common law. Our directors have certain duties of care, diligence and skill as well as a fiduciary duty to act honestly and in good faith in the best interests of our company. Our directors are not required to exhibit inmust exercise the performance of their duties a greater degree of skill than may reasonably be expected from persons of their knowledge and experience.skills they actually possess. Our directors must exercise reasonable care and diligence that a reasonably prudent person would exercise in comparable circumstances but will not be liable for errors of judgment and therefore they may rely upon opinions and advice of outsiders but must still exercise their business judgment based upon such advice. It was previously considered that a director needs not to exhibit in the performance of his or her duties a greater degree of skills than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skills and care and these authorities are likely to be followed in the Cayman Islands. The fiduciary relationship of our directors is with our company and our directors therefore do not usually owe a fiduciary duty to an individual shareholder, and instead, they owe a fiduciary duty to our shareholders as a whole. In addition, our directors have a duty to act in good faith, which means they must act bona fide in the interests of our company. Our directors must also use their powers for a proper purpose. If our directors take actions which are within their powers but for purposes other than those for which such powers were conferred, they may be personally liable. Our directors are also required not to put themselves into a position where there is a conflict, actual or potential, between their personal interests and their duties to our company or between their duty to our company and a duty owed to another person. Finally, our directors cannot validly contract, either with one another or with third parties, as to how they shall vote at future meetings of directors. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

 

Terms of Directors and Executive Officers

 

Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a set term of office and hold office until the next general meeting called for the election of directors and until their successor is duly elected or such time as they die, resign or are removed from office by special resolution or the unanimous written resolution of all shareholders. A director will cease to be removed from officea director automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.mind; (iii) resigns his office by notice in writing to our company; or (iv) is removed from office pursuant to any other provision of our memorandum and articles of association.

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Committees of the Board of Directors

 

We have established three regular committees and one special committee under the board of directors:directors. The three regular committees are the audit committee, the compensation committee, and the corporate governance and nominating committee. We have adopted a charter for each of thesethe regular committees. Each committee’s members and functions are as follows.

 

Audit Committee. Our audit committee consists of Messrs. David Chao, Stephen Tappin and Matthew Nimetz.Tianruo Pu. Mr. Chao is the chairman of our audit committee and our board of directors has determined that Mr. Chao is an audit committee financial expert. Mr. Chao, Mr. Tappin and Mr. NimetzPu satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE and Rule 10A-3 under the Exchange Act. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

·selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by the independent registered public accounting firm;

 

·reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s response;

 

·reviewing and approving any proposed related party transaction, as defined in Item 404 of Regulation S-K under the Securities Act, involving over US$120,000 in a single transaction or a series of related transactions;

 

·discussing the annual audited financial statements with management and the independent registered public accounting firm;

 

·reviewing major issues as to the adequacy of our internal control and any special audit steps adopted in light of material control deficiencies; and
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·meeting separately and periodically with management and the independent registered public accounting firm.

In 2017, our audit committee held meetings or passed resolutions by unanimous written consent four times.

Compensation Committee. Our compensation committee consists of Messrs. Matthew NimetzStephen Tappin and David Chao. Mr. NimetzTappin is the chairman of our compensation committee. Mr. NimetzTappin and Mr. Chao satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer is prohibited from attending any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

·reviewing and approving the total compensation package for our chief executive officer;

 

·reviewing and recommending to the board the compensation of our directors; and

 

·reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

In 2017, our compensation committee held meetings or passed resolutions by unanimous written consent once.

 

Corporate Governance and Nominating Committee. Our corporate governance and nominating committee consists of Messrs. David Chao and Chuanfu Wang, and is chaired by Mr. Chao. Mr. Chao and Mr. Chuanfu Wang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE. The corporate governance and nominating committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

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·identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;

 

·reviewing annually with the board the composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us;

 

·identifying and recommending to the board the directors to serve as members of the board’s committees;

 

·advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and

 

·monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

In 2017, our corporate governance and nominating committee held meetings or passed resolutions by unanimous written consent one time.

Special Committee. The special committee consists of Mr. Tianruo Pu, Mr. Stephen Tappin and Ms. Hui Huang. Mr. Pu is the chairman of the special committee. The special committee was formed on December 20, 2016, to review the terms of the proposed spin-off that was originally announced on September 30, 2016. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” All three members of the special committee are disinterested. The board of directors has delegated the power and authority of the board to the special committee in relation to the proposed spin-off and the related proposal that we received on December 22, 2016, including the power to retain legal counsel, financial advisors, outside consultants or other advisors, to investigate the proposed spin-off and the related proposal that we received on December 22, 2016, to evaluate the terms of the proposed spin-off and the related proposal and any other proposal that might be received in connection with the proposed spin-off, to explore, consider, review and solicit any alternative transactions that it deems appropriate, to negotiate the terms of the proposed spin-off and any alternative transaction, and to decide whether we should engage in the spin-off or in any alternative transaction and on what terms.

In 2017, our special committee held meetings or passed resolutions by unanimous written consent 27 times.

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, willful misconduct to our detriment or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause by a one-month prior written notice. An executive officer may terminate his or her employment with us by a one-month prior written notice for certain reasons, in which case the executive officer is entitled to the same severance benefits as in the situation of termination by us without cause.

 

Our executive officers have also agreed not to engage in any activities that compete with us, or to directly or indirect solicit the services of our employees, for a period of one year after termination of employment. Each executive officer has agreed to hold in strict confidence any confidential information or trade secrets of our company. Each executive officer also agrees to comply with all material applicable laws and regulations related to his or her responsibilities at our company as well as all material corporate and business policies and procedures of our company.

D.Employees

 

We had 3,211, 2,4421,078, 988 and 1,6021,368 full-time employees as of December 31, 2012, 20132015, 2016 and 2014,2017, respectively. The following table sets forth the number of our employees by function as of December 31, 2014:2017:

 

Functional Area Number of
Employees
  % of Total  Number of Employees  % of Total 
Management and administration  203   13%  251   18 
Sales and marketing  655   41%  659   47 
Operations  88   5%  77   6 
Research & development  656   41%  381   29 
Total  1,602   100%  1,368   100 

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As of December 31, 2014,2017, we had 1,046876 employees located in Beijing and 556492 employees located in other cities in China.

 

Our ZenZone business, which we are planning to dispose of, employed 45 of our 1,368 employees as of December 31, 2017. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.”

E.Share Ownership

 

The following table sets forth information with respect to the beneficial ownership of our ordinary shares (including Class A ordinary shares represented by our ADSs), as of February 28, 2015,2018, by:

 

·each of our directors and executive officers; and

 

·each person known to us to own beneficially more than 5% of our ordinary shares.

 

The calculations in the table below are based on 1,021,240,8061,034,254,008 ordinary shares outstanding as of February 28, 2015,2018, including 715,852,356728,865,558 Class A ordinary shares and 305,388,450 Class B ordinary shares. Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our ordinary shares. In computing the number of ordinary shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

 

  Ordinary Shares Beneficially Owned 
  Number  

%(1)

  

% of Voting
Power(2)

 
Directors and Executive Officers:            
Joseph Chen(3)  284,499,595   27.5   48.0 
James Jian Liu(4)  35,961,985   3.5   1.0 
Katsumasa Niki(5)  *   *   * 
Hui Huang(6))  *   *   * 
David K. Chao(7)  90,270,371   8.8   2.4 
Matthew Nimetz(8)  *   *   * 
Chuanfu Wang(9)  *   *   * 
Ashley Kwok Wai Law(10)  *   *   * 
Lillian Liu(10)  *   *   * 
Miao Cao(10)  *   *   * 
He Li(10)  *   *   * 
All directors and executive officers as a group(11)  417,777,736   40.0   51.4 
             
Principal Shareholders:            
SB Pan Pacific Corporation and affiliate(12)  405,388,451   39.7   43.0 
Joseph Chen(3)  284,499,595   27.5   48.0 
DCM and affiliates(13)  87,929,871   8.6   2.3 

  Ordinary Shares Beneficially Owned 
  Number  %(1)  % of Voting
Power(2)
 
Directors and Executive Officers:            
Joseph Chen(3)  359,314,396   32.1   48.9 
James Jian Liu(4)  55,145,415   5.2   1.4 
Hui Huang(5)  *   *   * 
David K. Chao(6)  90,737,075   8.8   2.4 
Chuanfu Wang(7)  *   *   * 
Stephen Tappin(8)  *   *   * 
Tianruo Pu(9)  *   *   * 
Thomas Jintao Ren(10)  *   *   * 
Rita Yi(10)  *   *   * 
He Li(10)  *   *   * 
All directors and executive officers as a group(11)  513,871,712   44.7   52.5 
             
Principal Shareholders:            
SB Pan Pacific Corporation and affiliate(12)  405,388,451   39.2   42.9 
Joseph Chen(3)  359,314,396   32.1   48.9 
DCM and affiliates(13)  87,929,865   8.5   2.3 

 

*    Less than 1% of our total outstanding ordinary shares.

*Less than 1% of our total outstanding ordinary shares.

 

(1)For each person and group included in this column, percentage ownership is calculated by dividing the number of ordinary shares beneficially owned by such person or group by the sum of the number of ordinary shares outstanding and the number of ordinary shares such person or group has the right to acquire upon exercise of the share options or warrants within 60 days of February 28, 2015.2018.

 

(2)For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power with respect to all of our Class A and Class B ordinary shares as a single class. Each holder of our Class B ordinary shares is entitled to ten votes per share and each holder of Class A ordinary shares is entitled to one vote per share held by our shareholders on all matters submitted to them for a vote. Subject to certain exceptions, our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders. Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a one-for-one basis.

 

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(3)Represents (i) 170,258,970 Class B ordinary shares held by Mr. Joseph Chen, (ii) 100,000,000103,386,106 Class A ordinary shares held by Mr. Joseph Chen, among which 99,999,990 Class A ordinary shares are represented by 6,666,666 American depositary shares, and (iii) 14,240,62585,669,320 Class A ordinary shares issuable upon exercise of options held by Mr. Chen that that are exercisable within 60 days after February 28, 2015.2018. See the two paragraphs following this table for more information on Class A and Class B ordinary shares. The business address of Mr. Chen is 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Chaoyang District, Beijing, 100016, People’s Republic of China.

 

(4)Represents (i) 31,365,11031,365,105 Class A ordinary shares held by Mr. James Jian Liu and (ii) 4,596,87523,780,310 Class A ordinary shares issuable upon exercise of options held by Mr. Liu that are exercisable within 60 days after February 28, 2015. ,2018. The business address of Mr. Liu is 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Chao Yang District, Beijing, 100016, People’s Republic of China.

 

(5)The business address of Mr. Niki is c/o SoftBank Corp., 1-9-1 Higashi-shimbashi, Minato-ku, Tokyo, 105-7303, Japan.

(6)The business address of Ms. Huang is 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Beijing, 100016, People’s Republic of China.

 

(7)(6)Represents (i) 1,958,0002,203,610 Class A ordinary shares held by Mr. David Chao, (ii) 382,500510,000 Class A ordinary shares issuable upon exercise of options held by Mr. Chao that are exercisable within 60 days after February 28, 20152018 and (iii) 87,929,87187,929,865 Class A ordinary shares held by DCM and affiliates. DCM Investment Management III, LLC is the general partner of DCM. Mr. David Chao and Mr. Peter W. Moran are the managing members of DCM Investment Management III, LLC. See note 13, below, for more information on the shares held by DCM and affiliates. The business address of Mr. Chao is 2420 Sand Hill Road, Suite 200, Menlo Park, CA 94025.

 

(8)The business address of Mr. Nimetz is c/o General Atlantic LLC, 55 East 52 Street, New York, New York 10055.

(9)(7)The business address of Mr. Wang is No. 3009, BYD Road, Pingshan, Shenzhen, 518118, People'sPeople’s Republic of China.

(8)The business address of Mr. Tappin is Business Clubs Ltd, 2nd Floor, 1-2 Alfred Place, London, WC1E 7EB.

(9)The business address of Mr. Pu is 5/F, North Wing, 18 Jiuxianqiao Middle Road, Beijing, 100016, People’s Republic of China.

 

(10)The business address of this individualMr. Ren is 1/5/F, North Wing, 18 Jiuxianqiao Middle Road, Beijing, 100016, People’s Republic of China.

 

(11)Certain directors and executive officers have been granted options pursuant to our 2006, 2008 and 2009 Equity Incentive Plans and our 2011 and 2016 Share Incentive Plan. See “Item 6.B—Directors, Senior Management and Employees—Compensation—Equity Incentive Plans.”

 

(12)The number of ordinary shares beneficially owned is as of December 31, 2011, as reported in a Schedule 13G filed by SB Pan Pacific Corporation and SoftBank Corp. on February 14, 2012, and consists of 270,258,971 Class A ordinary shares and 135,129,480 Class B ordinary shares held by SB Pan Pacific Corporation. See the two paragraphs following this table for more information on Class A and Class B ordinary shares. SB Pan Pacific Corporation is a corporation established under the laws of the Federated States of Micronesia, and is a wholly owned subsidiary of SoftBank Corp. SoftBank Corp. is a corporation established under the laws of Japan, and is a public company listed on the Tokyo Stock Exchange. On January 31, 2011, SoftBank Corp. transferred 2,582,200 series C preferred shares and 402,870,510 series D preferred shares to SB Pan Pacific Corporation, and, immediately prior to the completion of our initial public offering in May 2011, 135,129,480 of these series D preferred shares were converted into Class B ordinary shares on a one-to-one basis and the rest of the preferred shares held by SB Pan Pacific Corporation were converted into Class A ordinary shares on a one-to-one basis. The business address for SB Pan Pacific Corporation is P.O. Box 902, Kolonia, Pohnpei, FSM 96941, and the business address for SoftBank Corp. is 1-9-1 Higashi-Shimbashi, Minato-ku, Tokyo 105-7303, Japan.

(13)The number of ordinary shares beneficially owned is as of December 31, 20112015 as reported in a Schedule 13G13G/A filed by DCM Ventures (as defined below) and affiliates on February 13, 2012,4, 2016, and consists of (i) 81,768,285 Class A ordinary shares which are directly owned by DCM III, L.P. (“DCM III”), (ii) 2,166,5012,166,595 Class A ordinary shares which are directly owned by DCM III-A, L.P. (“DCM III-A”) and (iii) 3,995,085 Class A ordinary shares which are directly owned by DCM Affiliates Fund III, L.P. (“Aff III”). We refer to DCM III, DCM III-A and Aff IIIthese three entities collectively as “DCM.” DCM Investment Management III, LLC (“GP III”) is the general partner of DCM III, DCM III-A and Aff IIIeach of these three entities and may be deemed to have sole power to vote and dispose theseof the Class A ordinary shares respectively held by DCM III, DCM III-A and Aff III, andthem. In addition, Mr. David Chao and Mr. Peter W. Moran, the managing members of GPDCM Investment Management III, LLC, may be deemed to have shared power to vote and dispose theseof those Class A ordinary shares. As set forth in note 6 above, Mr. Chao also owns 1,958,000 Class A ordinary shares. The business address of DCM Ventures is 2420 Sand Hill Road, Suite 200 Menlo Park, CA 94025.

 

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering in May 2011. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares. See “Item 10.B—Additional Information—Memorandum and Articles of Association—Ordinary Shares” for a more detailed description of our Class A ordinary shares and Class B ordinary shares.

 

To our knowledge, as of February 28, 2015,2018, a total of 385,751,202461,238,667 Class A ordinary shares were held by one31 record holderholders in the United States, which wasincluding Citibank, N.A., the depositary of our ADS program, and 170,258,970 Class B ordinary shares were held by one record holder in the United States. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.

 

We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.company other than the non-binding going-private proposal that we received on June 10, 2015. See “Item 4. Information on the Company—A. History and Development of the Company—The Transaction.” To our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any other natural or legal persons, severally or jointly.

 

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For the options granted to our directors, officers and employees, please refer to “Item 6.B—Directors, Senior Management and Employees—Compensation—Equity Incentive Plans.”

 

Item 7.Major Shareholders and Related Party Transactions

Item 7. Major Shareholders and Related Party Transactions

 

A.Major Shareholders

 

Please refer to “Item 6.E. Share Ownership.”

 

B.Related Party Transactions

 

Contractual Arrangements with Our Consolidated Affiliated Entities

 

Please refer to “Item 4.C—Information on the Company—Organizational Structure—Contractual Arrangements with Our Consolidated Affiliated Entities.”

 

Related Party Transactions with Oak Pacific Holdings and Its Affiliates

 

The three largest shareholders of Oak Pacific Holdings are Mr. Joseph Chen, our founder, chairman and chief executive officer; James Jian Liu, our director and chief operating officer; and David Chao, our director. Collectively they hold approximately 98.5% of Oak Pacific Holdings. Summarized below are certain transactions our company has had with affiliates of Oak Pacific Holdings in 2012, 20132015, 2016 and 2014.2017.

Gummy Inc.

 

During 2012, we performed certain payment collection services to Gummy Inc., a subsidiary of Oak Pacific Holdings. These services amounted to approximately US$1,000 for the year ended December 31, 2012. Gummy Inc. owed our company approximately US$20,00019,000, nil and US$21,000nil for payment collection services as of December 31, 20122015, 2016 and as of December 31, 2013, respectively. During 2014, we licensed certain self-developed games to Gummy Inc. These services amounted to US$77,000 for the year ended December 31, 2014. As of December 31, 2014, Gummy Inc. owed our company approximately US$46,000 for these services,2017, respectively, which amount was unsecured, non-interest bearing and payable on demand.

 

Beijing Qian Xiang Hu LianQianxiang Hulian Technology Development Co., Ltd.

 

We performed certain back office services for Beijing Qian Xiang Hu LianQianxiang Hulian Technology Development Co., Ltd., or Hu Lian, which is a subsidiary of Oak Pacific Holdings. These services included provisions of human resources and accounting services and amounted to US$0.30.04 million, US$0.1 millionnil and US$0.1nil million in 2012, 20132015, 2016 and 2014,2017, respectively. As of December 31, 2014, Hu Lian owed our company US$0.3 million for these services, which amount was unsecured, non-interest bearing and payable on demand.

 

Related Party Transactions with Our Major Shareholder

 

SBPSBeautiful Bay Co., Ltd.

 

SBPS,In 2015, we provided a loan of US$4.8 million to Beautiful Bay Co. Ltd., an affiliateentity of SB Pan Pacific Corporation, provided third-party collection services forwhich the wife of our subsidiary in Japan in 2012, 2013chairman and 2014. These services amounted to approximately US$1.1 million, US$1.2 million and US$0.5 million in 2012, 2013 and 2014, respectively. Aschief executive officer, Joseph Chen, is a majority shareholder. The loan has been repaid as of December 31, 2014, SBPS owed2015.

Beautiful Legend Co., Ltd.

In 2015, we acquired a 7.5% equity interest in Beautiful Legend Co., Ltd., an entity of which the wife of our subsidiary in Japan US$20,000chairman and chief executive officer, Joseph Chen, is a majority shareholder. We accounted for these services, whichthe investment as a cost method investment and the carrying amount was unsecured, non-interest bearing and payable on demand.US$4.6 million as of December 31, 2015.

In January 2017, we acquired 1,150,000 shares for a total consideration of US$2.9 million, representing a 5% equity interest, in Shanghai Xingmi Network Technology Joint Stock Limited Company from Beautiful Legend Co., Ltd.

In January 2017, we acquired a 5% equity interest in Beijing Caiqiu Century Technology Co., Ltd. from Beautiful Legend Co., Ltd., for a total consideration of US$1.5 million.

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Related Party Transactions with Our Equity MethodLong Term Investments

 

Mapbar Technology Limited

 

In October 2011, we acquired a 35% equity interest in Mapbar Technology Limited, or Mapbar, and accounted for the investment using equity method as we are able to exercise significant influence over Mapbar. Mapbar performed approximately US$304,000, US$299,000110,000, nil and US$203,000nil of location-based services for our company in 2012, 20132015, 2016 and 20142017 respectively. AsIn March 2017, we sold all the equity interests in Mapbar for a total consideration of US$37.3 million, of which US$32.7 million was received as of December 31, 2014, our company owed Mapbar US$37,000 for these services, which amount2017 and the remainder was unsecured, non-interest bearing and payable on demand.received during January 2018.

 

Qingting

 

In October 2013, the Groupwe sold 60% of the equity interest in Qingting to an individual and deconsolidated Qingting as itwe no longer holdsheld a controlling interest. Qingting provided internet services of approximately US$0.1 million and US$0.2 million for our companyto us in 2013 and 2014. As of December 31, 2014, our companywe owed Qingting nil for these services. During 2014, we provided a loan of US$0.2 million to Qingting. As of December 31, 2014, Qingting owed our company approximately US$220,000, which amountThe loan was unsecured, non-interest bearing and payable on demand.fully repaid in 2015.

 

Ying He Hu Dong Technology Development Co., Ltd.

In November 2014, we invested for a 30% equity interest in Ying He Hu Dong Technology Development Co., Ltd, or Ying He Hu Dong, and accounted for the investment using equity method as we are able to exercise significant influence over Ying He Hu Dong. During 2014, Ying He Hu Dong provided game operating services of approximately US$0.4 million to us. As of December 31, 2014, we owed Ying He Hu Dong approximately US$266,000 for these services, which amount was unsecured, non-interest bearing and payable on demand.

Japan Macro Opportunities Offshore Partners, LP

 

In November 2011, February 2013 and January 2014, we invested US$20.0 million, US$20.0 million and US$40.0 million, respectively in Japan Macro Opportunities Offshore Partners, LP, or JMOOP, which is a Cayman Islands exempted limited partnership. The investment was accounted for using equity method accounting. We received capital distributions of US$19.284.0 million and US$84.069.1 million in the years ended December 31, 20132014 and 2014,2015, respectively, Asand we disposed of December 31, 2014, JMOOP owed us approximately US$419,000, which amount was unsecured, non-interest bearing and payablethe investment on demand.August 24, 2015.

 

Social Finance Inc.

 

In July 2012, we purchased US$10.0 million Series 2012-A Senior Secured Refi Loan Notes issued by SoFi Lending Corp., a subsidiary of Social Finance Inc. Oak Pacific Holdings is a shareholder of Social Finance Inc. and our chairman and chief executive officer, Joseph Chen, is a director of Social Finance Inc. The note has a maturity date of July 3, 2032 and a fixed annual interest rate of 4% with no redemption feature. We received monthly payments, including return of principal of US$414,000, US$1,353,000984,000 and US$1,370,0005,879,000 in 2012, 20132015 and 2014,2016, respectively, and earned interest of US$137,000, US$248,000181,000 and US$211,000,166,000 from SoFi Lending Corp. for the years ended December 31, 2012, 20132015 and 2014,2016, respectively. As ofIn December 31, 2014,2016, SoFi Lending Corp. elected to repay the carrying amount ofSoFi loan notes in advance, and we therefore received all the note was US$6,863,000.remaining principal and earned interest in cash.

 

In September 2012, we invested US$49.0 million in newly issued series B preferred shares of Social Finance Inc., concurrently with a group of other investors.

 

In January 2014, we invested US$20.8 million in newly issued series D preferred shares of Social Finance Inc., concurrently with a group of other investors.

 

In January 2015, we invested US$22.3 million in newly issued series E preferred shares of Social Finance Inc., concurrently with a group of other investors.

 

In October 2015, we invested US$150 million in newly issued series F preferred shares of Social Finance Inc., concurrently with a group of other investors.

In April 2017, we sold 5,719,986 preferred shares of SoFi for total net proceeds of US$91.9 million.

Golden Axe Inc.

In December 2015, we acquired a 2% equity interest in Golden Axe Inc. and accounted for the investment using equity method as we are able to exercise significant influence over Golden Axe Inc. In 2015, we provided a loan of US$11.2 million to Golden Axe Inc. and recorded US$0.2 million interest. As of December 31, 2015, Golden Axe Inc. owed us US$16.0 million for the loan. Of this amount, US$10.8 million was repaid to us in 2016 and the remainder was converted into equity.

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268V Limited

In January 2015, we acquired a 20.00% equity interest in 268V Limited and accounted for it as an available-for-sale investment. In 2015, 2016 and 2017, we purchased about US$42,000, US$238,000 and US$333,000 of used automobile services from 268V Limited, respectively. As of December 31, 2017, our company owed 268V Limited US$40,000 for these services, which amount was unsecured, non-interest bearing and payable on demand. In 2016, we provided a loan of US$3 million to 268V Limited. This loan is still outstanding.

Eall Technology Limited

In October 2014, we acquired a 20.4% equity interest in Eall Technology Limited and accounted for it as an available-for-sale investment. In May 2016, we provided a loan of RMB 70 million (US$11 million) to Tianjin Yi Chuang Xin He Information Technology Co., Ltd., a subsidiary of Eall Technology Limited. In May 2016, Eall Technology Limited provided a loan of US$10.7 million to us. Both of these loans are still outstanding.

Eunke Technology Ltd.

In March 2015, we acquired a 19.29% equity interest in Eunke Technology Ltd. and accounted for it as a cost method investment. In August 2016, we provided a loan of US$871,000 to Loji Logistics Ltd., a subsidiary of Eunke Technology Ltd, and recorded US$12,000 in interest. In 2017, we provided a loan of US$8,452,000 to Loji Logistics Ltd.,. and recorded US$139,000 in interest. As of December 31, 2017, Loji Logistics Ltd. owed us nil for the loan and the deposit paid by Loji Logistics Ltd. was US$154,000.

KoolRay Vision Inc.

In January and July 2017, we provided a loan of RMB 10 million (US$1.5 million) and RMB 2 million (US$0.3 million) to Kuwei Optics Technology (Shanghai) Co., Ltd., a subsidiary of KoolRay Vision Inc., in which we own a 39.06% equity interest.

The transactions described above were approved by the independent, disinterested members of our board and the audit committee of the board.board in all cases where the counterparty was a related party at the time of the transaction or had been prior to the time of the transaction.

 

Employment Agreement

 

Please refer to “Item 6.C—Directors, Senior Management and Employees Board Practices—Employment Agreements.”

 

C.Interests of Experts and Counsel

 

Not applicable.

 

Item 8.Financial Information

Item 8. Financial Information

 

A.Consolidated Statements and Other Financial Information

 

See “Item 18. Financial Statements.”

 

Legal Proceedings

 

From time to time, we have become and may in the future become a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. Internet media companies are frequently involved in litigation based on allegations of infringement or other violations of intellectual property rights and other allegations based on the content available on their website or services they provide. See “Item 3.D—Risk Factors—Risks Related to Our Business and Our Industry—We have been and may continue to be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our website or distributed to our users, which may materially and adversely affect our business, financial condition and prospects.” Although such proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flow. Regardless of the outcome, however, any litigation can have an adverse impact on us because of defense costs, diversion of management’s attention and other factors.

107

Dividend Policy

 

We have not paid in the past any cash dividends on our ordinary shares, and we do not have any present plan to pay any cash dividends on our ordinary shares in the past. On April 30, 2018, we announced a cash dividend payable to all holders of ordinary shares (including ordinary shares represented by ADSs). However, the payment of this special dividend would represent an exception to our dividend policy rather than a change to it. We do not expect to pay regular dividends in the foreseeable future. WeAside from this special dividend, we currently intend to retain most, if not all, of our available funds and any future earnings to operatefund the development and expandgrowth of our business.

 

As we are a holding company, we rely, in part, on dividends paid to us by our PRC subsidiary for our cash requirements, including funds to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. In China, the payment of dividends is subject to limitations. PRC laws and regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until such reserve funds reach 50% of their registered capital. At the discretion of our PRC subsidiary, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves may not be distributed as cash dividends. Further, if our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. See “Item 3.D—Risk Factors—Risks Related to Our Corporate Structure and the Regulation of Our Business—We may rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.”

 

OurSubject to our memorandum and articles of association and certain restrictions under Cayman Islands law, our board of directors has complete discretion on whether to distribute dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, they will be paid in accordance with Cayman Islands law, which provides, in summary, that dividends may be paid out of profits and/or our share premium account provided that in the case of our share premium account, no such distribution or dividend paid to our shareholders will cause us to be unable to pay our debts as they fall due in the ordinary course of our business. In addition, the Companies Law (2013(2018 Revision) of the Cayman Islands prevents us from offering our shares or securities to individuals within the Cayman Islands, which may limit our ability to distribute a dividend comprised of our shares or other securities. We will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares” in our registration statement on Form F-1 (File No. 333-173548), as amended, initially filed with the SEC on April 15, 2011. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

B.Significant Changes

 

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Item 9.The Offer and Listing

Item 9. The Offer and Listing

 

A.Offering and Listing Details

 

See “—C. Markets”

 

B.Plan of Distribution

 

Not applicable.

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C.Markets

 

Our ADSs, each representing threefifteen Class A ordinary shares, have been listed on the NYSE since May 4, 2011 and trade under the symbol “RENN.” The following table provides the high and low trading prices for our ADSs on the NYSE for the periods indicated.indicated, as adjusted to give retroactive effect to the change in the number of ordinary shares represented by each ADS from three to fifteen that became effective on February 6, 2017. The last reported closing price for our ADSs on April 13, 2015May 11, 2018 was US$2.708.78 per ADS.

 

  Market Price
(US$)
 
  High  Low 
Annual High and Low        
2012  7.87   3.00 
2013  4.63   2.52 
2014  4.79   2.45 
Quarterly Highs and Lows        
First Quarter of 2013  4.02   2.85 
Second Quarter of 2013  3.46   2.52 
Third Quarter of 2013  4.63   2.89 
Fourth Quarter of 2013  4.23   2.76 
First Quarter of 2014  4.79   3.00 
Second Quarter of 2014  3.60   3.12 
Third Quarter of 2014  3.65   3.10 
Fourth Quarter of 2014  3.53   2.45 
First Quarter of 2015  2.80   2.35 
Monthly Highs and Lows        
October 2014  3.53   3.06 
November 2014  3.49   2.65 
December 2014  2.85   2.45 
January 2015  2.80   2.52 
February 2015  2.76   2.48 
March 2015  2.61   2.35 
April 2015 (through April 13, 2015)  2.82   2.39 
  Market Price (US$) 
  High  Low 
Annual High and Low        
2013  23.15   12.60 
2014  23.95   12.25 
2015  22.25   11.75 
2016  18.40   7.55 
2017  11.98   6.01 
Quarterly Highs and Lows        
Second Quarter of 2016  17.80   8.75 
Third Quarter of 2016  10.70   7.55 
Fourth Quarter of 2016  12.50   7.75 
First Quarter of 2017  8.75   7.59 
Second Quarter of 2017  7.89   6.01 
Third Quarter of 2017  9.21   6.01 
Fourth Quarter of 2017  11.98   8.71 
First Quarter of 2018  18.70   8.02 
Monthly Highs and Lows        
November 2017  11.98   9.01 
December 2017  11.14   9.37 
January 2018  18.70   9.85 
February 2018  10.30   8.02 
March 2018  9.74   8.22 
April 2018  10.44   8.13 
May 2018 (through May 11)  8.95   8.33 

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

Not applicable.

Item 10. Additional Information

A.Share Capital

 

Not applicable.

 

Item 10.Additional Information

A.Share Capital

Not applicable.

B.Memorandum and Articles of Association

 

We are a Cayman Islands exempted company and our affairs are governed by our amended and restated memorandum and articles of association, as amended and restated from time to time, and the Companies Law (2013(2018 Revision) of the Cayman Islands, which is referred to below as the Companies Law.Law, and the common law of the Cayman Islands.

109

  

The following are summaries of the material provisions of our amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares.

 

Registered Office and Objects

 

Our registered office in the Cayman Islands is located at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. As set forth in article 3 of our memorandum of association, the objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, (2013 Revision), as amended from time to time, or any other law of the Cayman Islands.

 

Board of Directors

 

See “Item 6.C. Directors, Senior Management and Employees—Board Practices—Composition of Board of Directors” and “Item 6.C. Directors, Senior Management and Employees—Board Practices—Terms of Directors and Executive Officers.”

 

Ordinary Shares

 

General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Certificates representing theOur ordinary shares are issued in registered form.form, and are issued when registered in our register of members. 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 subject to the Companies Law. The Companies Law provides, in summary, that dividends may be paid out of profits and/or our share premium account provided that in the case of our share premium account, no such distribution or dividend paid to our shareholders will, immediately after this payment, cause us to be unable to pay our debts as they fall due in the ordinary course of our business. In addition, the Companies Law prevents us from offering our shares or securities to individuals within the Cayman Islands which may limit our ability to distribute a dividend comprised of our shares or other securities.

Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. All Class B ordinary shares beneficially owned by a holder and such holder’s affiliates will automatically convert into the same number of Class A ordinary shares if the holder and its affiliates collectively own less than 50% of the total shares held by them immediately upon the completion of our initial public offering in May 2011. In addition, upon any transfer of Class B ordinary shares by a holder to any person or entity which is not over 50% owned by, or is not a direct family member of, the original holder, such Class B ordinary shares shall be automatically and immediately converted into an equal number of Class A ordinary shares. Furthermore, if a holder of the Class B ordinary shares transfers Class B ordinary shares to any entities in which the original holder owns over 50% but less than 100%, the number of Class B ordinary shares equal to the product of (X) the total number of Class B ordinary shares so transferred; and (Y) the difference between 100% and the percentage of ownership held by the original holder in the transferee shall be automatically and immediately converted into an equal number of Class A ordinary share.

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Voting Rights. In respect of matters requiring shareholders’ votes, each Class A ordinary share is entitled to one vote and each Class B ordinary share is entitled to ten votes. In addition, the following matters are subject to the approval by the holders representing a majority of the aggregate voting power of our company, the holders of a majority of total outstanding Class A ordinary shares and, for as long as SB Pan Pacific Corporation and its affiliates collectively own no less than 50% of the total shares held by them immediately upon the completion of our initial public offering, the approval of SB Pan Pacific Corporation: (i) a change of control event, and (ii) election of director(s) to the board at an annual general meeting. In addition, for as long as SB Pan Pacific Corporation and its affiliates collectively own no less than 50% of the total shares held by them immediately upon the completion of our initial public offering, we need to obtain SB Pan Pacific Corporation’s approval for the following matters: (i) issuance of ordinary shares, or of securities convertible into or exercisable for ordinary shares, in the aggregate in excess of 10% of the number of all ordinary shares outstanding immediately prior to the issuance of such shares or securities on an as-converted basis in any 12-month period, (ii) acquisition of major assets or business for consideration exceeding 10% of our company market capitalization; (iii) disposals of our material assets with a value exceeding 5% of our company’s market capitalization; or (iv) any amendment to our amended and restated memorandum and articles of association that specifically adversely affects the rights of SB Pan Pacific Corporation. In addition, for as long as SB Pan Pacific Corporation and its affiliates collectively own no less than 50% of the total shares held by them immediately upon the completion of our initial public offering, SB Pan Pacific Corporation and its affiliates will have the right to collectively appoint one director and the exclusive right to remove such director.

 

110

A quorum required for a meeting of shareholders consists of at least one shareholder present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative holding not less than an aggregate of one-third of all voting power of the shares in issue.issue entitled to vote at the general meeting. Shareholders’ meetings aremay be held annually and may be convened by any one of our directors on its own initiative or upon a request to the directors by shareholders holding in aggregate at least one-thirdone-fifth of ourthe voting power of our share capital. Advance notice of at least seven days is required for the convening of our annual general meeting and other shareholders’ meetings.

 

An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the 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 the ordinary shares. A special resolution is required for important matters such as an amendment to our amended and restated memorandum andor articles of association. Holders of the ordinary shares may effect certain changes by ordinary resolution, including alteringincreasing the amount of our authorized share capital, consolidating and dividing all or any of our share capital into shares of larger amountpar value than our existing share capital, and canceling any shares.

 

Transfer of Shares. Subject to the restrictions of our amended and restated memorandum and articles of association, which allows our directors to decline to register a transfer of any share which is not fully paid or on which we have a lien and to decline to recognize an instrument of transfer should it fail to comply with the form prescribed by our board or our transfer agent, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board, and we will take all steps necessary to ensure that the transferee is entered on the register of members in order for the transfer to be effective. We understand that no further approval by any authority in the Cayman Islands will be required in order for the transfer of shares to be effective.

Liquidation. On a liquidation or winding up, distribution or payment shall be made to the holders of ordinary shares. Considerations received by each Class B ordinary share and Class A ordinary share should be the same in any liquidation event. Assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionally.

Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.

Redemption of Shares. The provisions of the Companies Law, in summary, provides that provided our amended and restated articles of association permit it, we may issue shares which are to be redeemed or are liable to be redeemed at the option of our directors or a shareholder. In addition, the Companies Law allows us to purchase our own share, including any redeemable shares. Shares to be purchased or redeemed must be fully paid and there must remain at least one shareholder of the company holding shares. Share re-purchases or redemptions may be funded out of profits, capital or share premium, but to the extent funds other than profits are used, it is statutorily required that we be able to pay our debts as they fall due in our ordinary course of business following such a purchase or redemption. Subject to these provisions, our amended and restated articles of association allow us to issue shares on terms that are subject to either re-purchase by us or redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution.

Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of our amended and restated articles of association, be varied either with the written consent of the holders of a 75% 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. The rights conferred upon the holders of the shares of any class shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking in priority to or pari passu with such previously existing shares.

Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records, with the exception that, pursuant to statutory requirements, any of our creditors or shareholder may inspect our register of mortgages and charges, which includes details of any mortgage and change over our assets. We will provide our shareholders with annual audited financial statements.

 

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Anti-Takeover Provisions. Some provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that:

·authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders; and

 

·establish advance notice requirements for nominating board of directors nominees or for proposing matters that can be acted on by shareholders at annual shareholder meetings.

 

However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association for a proper purpose and for what they honestly believe in good faith to be in the best interests of our company.

 

Rights of Non-resident or Foreign Shareholders. There are no limitations imposed by our amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our amended and restated memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

C.Material Contracts

 

For the two years immediately preceding the date of this annual report, we have not entered into any material contracts, other than in the ordinary course of business or those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.

 

D.Exchange Controls

 

The Cayman Islands currently has no exchange control restrictions. See also “Item 4.B—Information on the Company—Business Overview—Regulation—Regulations on Foreign Exchange.”

 

E.Taxation

 

The following discussion of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in our Class A ordinary shares or ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in the Class A ordinary shares or ADSs, such as the tax consequences under U.S. state, local and other tax laws. To the extent that the discussion relates to matters of Cayman Islands tax law, it is the opinion of Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, and to the extent it relates to PRC tax law, it is the opinion of TransAsia Lawyers, our PRC counsel.

Cayman Islands Taxation

 

We are an exempted company incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company.

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People’s Republic of China Taxation

 

We are a holding company incorporated in the Cayman Islands, and 100% of our equity interests in our PRC subsidiaries are held indirectly through our offshore holding companies. Our business operations are principally conducted through our PRC subsidiaries and consolidated affiliated entities. The Enterprise Income Tax Law provides that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent that is not a PRC resident enterprise and has no establishment in the PRC, will normally be subject to PRC withholding tax at a rate of 10%. Under the Enterprise Income Tax Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered to be PRC tax resident enterprises for tax purposes. If we are considered a PRC tax resident enterprise under the above definition, then our global income will be subject to PRC enterprise income tax at the rate of 25%.

 

The implementation rules of the Enterprise Income Tax Law provide that (i) if the enterprise that distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the Enterprise Income Tax Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders or ADS holders as well as gains recognized by such shareholders or ADS holders from the transfer of our shares or ADSs may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10%.

 

See “Item 3.D—Risk Factors—Risks Related to Doing Business in China—Discontinuation of any of the preferential tax treatments or imposition of any additional taxes could adversely affect our financial condition and results of operations.

United States Federal Income Tax Considerations

 

The following is a discussion of the principal United States federal income tax considerations relating to the acquisition, ownership and disposition of our ADSs or ordinary shares by a U.S. Holder (as defined below) that acquires our ADSs or ordinary shares and holds our ADSs or ordinary shares as “capital assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing United States federal tax law, including the Code, its legislative history, existing, temporary and proposed regulations thereunder, published rulings and court decisions, all of which are subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules (for example, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships (or other entities treated as partnerships for United States federal income tax purposes) and their partners and tax-exempt organizations (including private foundations), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively) 10% or more of our voting stock (by vote or value), holders who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation, investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for United States federal income tax purposes, or investors that have a functional currency other than the United States dollar), all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not discuss any United States federal estate, gift or alternative minimum tax consequences or any non-United States, state or local tax considerations. Each U.S. Holder is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ADSs or ordinary shares.

General

 

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a United States person under the Code.

 

If a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner of a partnership holding our ADSs or ordinary shares, the U.S. Holder is urged to consult its tax advisor regarding an investment in our ADSs or ordinary shares.

 

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Our company is a corporation organizedan exempted company incorporated under the laws of the Cayman Islands. As such, our company believes that it is not a United States corporation for United States federal income tax purposes. Under certain provisions of the Code and regulations, however, if pursuant to a plan (or a series of related transactions), a non-United States corporation such as our company acquires substantially all of the assets of a United States corporation, and after the acquisition 80% or more of the stock (by vote or value) of the non-United States corporation (excluding stock issued in a public offering related to the acquisition) is owned by former shareholders of the United States corporation by reason of their ownership of the United States corporation, the non-United States corporation will be considered a United States corporation for United States federal income tax purposes. Based on our analysis of the facts related to our corporate restructuring in 2005 and 2006, we do not believe that we should be treated as a United States corporation for United States federal income tax purposes. However, as there is no direct authority on how the relevant rules of the Code might apply to us, our company’s conclusion is not free from doubt. Therefore, our conclusion may be challenged by the United States tax authorities and a finding that we owe additional United States taxes could substantially reduce the value of your investment in our company. You are urged to consult your tax advisor concerning the income tax consequences of purchasing, holding or disposing of ADSs or ordinary shares if we were to be treated as a United States domestic corporation for United States federal income tax purposes. The remainder of this discussion assumes that our company is treated as a non-United States corporation for United States federal income tax purposes.

 

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with the terms thereof.

 

For United States federal income tax purposes, a U.S. Holder of ADSs will be treated as the beneficial owner of the underlying shares represented by the ADSs.

 

Passive Foreign Investment Company Considerations

 

A non-United States corporation, such as our company, will be a “passivepassive foreign investment company, or “PFIC,”PFIC, for United States federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as a passive asset and the company’s unbooked intangibles are taken into account. Passive income is any income that would be foreign personal holding company income under the Code, including dividends, interest, royalties, rents, annuities, net gains from the sale or exchange of property producing such income, net gains from commodity transactions, net foreign currency gains and income from notional principal contracts. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.

Although the law in this regard is unclear, we treat Qianxiang Tiancheng and Renren Gamesour VIEs as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. If it were determined, however, that we were not the owner of the above mentioned entities for United States federal income tax purposes, then we would likely be treated as a PFIC even if we would not otherwise have been treated as a PFIC for that particular year.

 

We believe we were classified as a PFIC for each of the past seven taxable years endedending December 31, 2012, 2013 and 2014. Our31st. Although our PFIC status for the current taxable year will not be determinable until after the close of the year, we expect, but cannot guarantee, to be treated as a PFIC for the current taxable year. Because we currently hold,year due to our ownership of and expect to continue to hold, a substantial amount of cash and otherincome from significant assets treated as passive assets and, because, as a public company,under the PFIC rules. Our PFIC classification for any particular year will depend on the value of our assets for this purpose is determined in part by reference toordinary shares and ADSs, the market pricesnature of our ADSsassets and outstanding ordinary shares, thereincome over time, and the nature of our business. There can be no assurance that we will not be a PFIC for the current or any future taxable year. Under circumstances where revenues from activities that produceyear, even if we hold fewer passive income significantly increase relative to our revenues from activities that produce non-passive income or where we determine not to deploy significant amountsinvestment assets as a result of cash for active purposes, our risk of being a PFIC for the particular year may substantially increase.Transaction.

 

If we are a PFIC, our ADSs or ordinary shares generally will continue to be treated as shares in a PFIC for all succeeding years during which a U.S. Holder holds our ADSs or ordinary shares, unless we cease to be a PFIC and the U.S. Holder makes a “deemed sale” election with respect to the ADSs or ordinary shares. If you make a deemed sale election, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value as of the last day of the last year during which we were a PFIC (the “termination date”). Any gain from such deemed sale would be subject to the consequences described below under “—Passive Foreign Investment Company Rules.” You are urged to consult your tax adviser regarding our possible status as a PFIC as well as the benefit of making a deemed sale election.

 

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Dividends

 

If we are not a PFIC, any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or ordinary shares out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in the case of ADSs. Because we do not intend to determineprovide our earnings and profits on the basis of United States federal income tax principles, you should assume that any distribution paid will generally be treated as a “dividend” for United States federal income tax purposes. A non-corporate U.S. Holder that is the recipient of dividend income generally will be subject to tax on dividend income from a “qualified foreign corporation” at the lower applicable capital gains rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an established securities market in the United States. Our ADSs are listed on the NYSE, which is an established securities market in the United States, and our ADSs are readily tradable. Thus, we believe that dividends we pay on our ADSs willwould meet the conditions required for the reduced tax rates.rates if we are not a PFIC. Since we do not expect that our ordinary shares will be listed on an established securities market, we do not believe that dividends we pay on our ordinary shares that are not represented by ADSs will meet the conditions required for these reduced tax rates. Dividends received on our ADSs or ordinary shares will not be eligible for the dividend received deduction allowed to corporations.

 

In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our ADSs or ordinary shares. In such case, we may, however, be eligible for the benefits of the United States-PRC income tax treaty. If we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by our ADSs, would be eligible for the reduced rates of taxation applicable to qualified dividend income, as discussed above.

Dividends generally will be treated as income from foreign sources for United States foreign tax credit purposes and generally will constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such U.S. Holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

 

If we are a PFIC, the rules described above would generally only apply to distributions that were not “excess distributions” received by a U.S. Holder who does not make a mark-to market election (described below).

 

Sale or Other Disposition of ADSs or Ordinary Shares

 

If we are not a PFIC, a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Holder’s adjusted tax basis in such ADSs or ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. Capital gains of non-corporate U.S. Holders derived from capital assets held for more than one year are currently eligible for reduced rates of taxation. In the event that gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, such gain may be treated as PRC source gain under the United States-PRC income tax treaty. The deductibility of a capital loss is subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit under their particular circumstances.

 

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Passive Foreign Investment Company Rules

 

If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special United States federal income tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125% of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other disposition, including a pledge, of ADSs or ordinary shares. Under the PFIC rules:

 

·the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;

 

·the amounts allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC, or a pre-PFIC year, will be taxable as ordinary income; and

 

·the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for such year and would be increased by an additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable year.

 

Because we have not paid any dividends in the prior three taxable years, a U.S. Holder’s receipt of the cash dividend pursuant to the Transaction is expected to be treated as an excess distribution under these rules provided the cash is not received with respect to ADSs or ordinary shares acquired during the year such cash dividend is paid.

If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of each such non-United States subsidiary that is a PFIC (each such subsidiary, a lower-tier PFIC) and would be subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions. This may occur as a result of the private placement by OPI, which we expect to be treated as a PFIC, pursuant to the Transaction. Under these rules, a U.S. Holder whose (direct or indirect) interest in OPI decreases as a result of the Transaction may be required to recognize an amount of gain subject to the excess distribution rules described above equal to such U.S. Holder’s pro rata portion of the gain that would be recognized by Renren Inc. if Renren Inc. sold all of its OPI Shares to a third-party for full fair market value immediately before OPI closes the private placement. The amount of gain that would be recognized by Renren Inc. for U.S. federal income tax purposes as a result of such deemed sale has not yet been determined. U.S. Holders should consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.subsidiaries, including OPI.

As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC is permitted to make a mark-to-market election with respect to our ADSs, but not our ordinary shares, provided that our ADSs remain listed on the NYSE and are regularly traded. We anticipate that our ADSs should qualify as being regularly traded, but no assurances may be given in this regard. If a U.S. Holder makes a valid mark-to-market election, the U.S. Holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the U.S. Holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder recognizes upon the sale or other disposition of our ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. In the case of a U.S. Holder who has held ADSs or ordinary shares during any taxable year in respect of which we were a PFIC and continues to hold such ADSs or ordinary shares (or any portion thereof) and has not previously made a mark-to-market election, but who is considering making a mark-to-market election, special tax rules may apply relating to purging the PFIC taint of such ADSs or ordinary shares through the use of a “deemed sale” election, as discussed above under “—Passive Foreign Investment Company Considerations.”

 

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Because, as a technical matter, a mark-to-market election cannot be made for any lower-tier PFICs that we may own, including OPI, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.purposes, even if a mark-to-market election is made with respect to our ADSs.

 

We do not intend

In certain circumstances, a shareholder in a PFIC may avoid the adverse tax consequences of the excess distribution regime described above if such shareholder can, and does, make a timely “qualified electing fund” election to provide information necessary forinclude in income its pro rata share of the PFIC’s ordinary income and net capital gain on a current basis. In general, a U.S. Holders toHolder may make a qualified electing fund elections which,election only if available,we provide U.S. Holders with a “PFIC Annual Information Statement” that would resultallow the U.S. Holder to compute its pro rata share of our ordinary earnings and net capital gain determined under U.S. federal income tax principles. We currently do not separately compute income and loss in accordance with U.S. federal income tax treatment different from the general tax treatment for PFICs described above.principles and, accordingly, U.S. Holders may not be able to make a qualified electing fund election.

 

If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the U.S. Holder will be required to file an annual IRS Form 8621 and must report any “excess distributions” with respect to our ADSs or ordinary shares during the year and other forms as may be required by the United States Treasury Department. Each U.S. Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of purchasing, holding and disposing ADSs or ordinary shares, including the possibility of making a mark-to-market election, and the potential unavailability of the election to treat us as a qualified electing fund.fund and the potential for the Transaction to result in the recognition of an “excess distribution” under the PFIC rules.

 

Medicare Tax

 

Recently enacted legislation generally imposes aAn additional 3.8% tax is imposed on a portion or all of the net investment income of certain individuals with a modified adjusted gross income of over $200,000US$200,000 (or $250,000US$250,000 in the case of joint filers or $125,000US$125,000 in the case of married individuals filing separately) and on the undistributed net investment income of certain estates and trusts. For these purposes, “net investment income” generally includes interest, dividends (including dividends paid with respect to our ADSs or ordinary shares), annuities, royalties, rents, net gain attributable to the disposition of property not held in a trade or business (including net gain from the sale, exchange or other taxable disposition of an ADS or ordinary share) and certain other income, reduced by any deductions properly allocable to such income or net gain. U.S. holders are urged to consult their tax advisors regarding the applicability of this tax to their income and gains in respect of their investment in the ADSs or ordinary shares.

 

Information Reporting and Backup Withholding

 

Dividend payments with respect to the ADSs or ordinary shares and proceeds from the sale, exchange or redemption of our ADSs or ordinary shares may be subject to information reporting to the IRS and possible United States backup withholding. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes other required certifications, or who is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the United States information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s United States federal income tax liability, and a U.S. Holder generally may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.

Individual U.S. Holders and certain U.S. entities may be required to submit to the IRS certain information with respect to their beneficial ownership of the ADSs or ordinary shares, if such ADSs or ordinary shares are not held on their behalf by a financial institution. Penalties are also imposed if an individual U.S. Holder isHolders who fail to timely furnish the required information may be subject to submit sucha penalty. U.S. Holders should consult their tax advisors regarding the application of the United States information to the IRSreporting and fails to do so.backup withholding rules.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

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H.Documents on Display

 

We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-173548), as amended, including the prospectus contained therein, to register our Class A ordinary shares. We have also filed with the SEC a related registration statement on Form F-6 (Registration No. 333-173515), as amended, to register the ADSs.

 

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year, which is December 31. Reports and other information, when so filed, may be accessed on the SEC website at www.sec.gov. Copies of reports and other information may also be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

 

We will furnish Citibank, N.A, the depositary of our ADSs, all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us. We will file our annual report on Form 20-F, including our audited financial statements, with the SEC. Our annual report on Form 20-F can be accessed on the SEC’s website as well the investor relations section of our website. Investors may request a hard copy of our annual report, free of charge, by contacting us.

 

I.Subsidiary Information

 

Not applicable.

 

Item 11.Quantitative and Qualitative Disclosures About Market Risk

Item 11. Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Exchange Risk

 

Substantially all of our revenues and expenses are denominated in RMB. We had aan exchange loss on offshore bank accounts of US$1.8 million on foreign currency deposit in 2012, a gain of US$1.50.2 million in 20132015, approximately nil in 2016 and a loss of US$2.3 millionapproximately nil in 2014,2017, which were primarily related to the exchange rate fluctuation of our RMB depositdeposits during the year.

 

To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. Although our exposure to foreign exchange risks is generally limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and the RMB because the value of our business is effectively denominated in RMB, while our ADSs are traded in U.S. dollars.

The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. AfterSince June 2010, the RMB began to appreciatehas fluctuated against the U.S. dollar, again, although there have been some periods when it has lost value against the U.S. dollar, as it did for example during 2014.at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

 

To the extent that we need to convert U.S. dollars including U.S. dollars we received from our initial public offering, into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. As of December 31, 2014,2017, we had RMB-denominated cash and term deposits totaling US$148.8RMB 150.6 million (US$23.1 million) and U.S. dollar-denominated cash and term deposits totaling US$528.3105.4 million.

 

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Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits, and derivative contracts on Japanese yen interest rates that we have invested in solely for our own treasury investment purposes and not related to our business operating activities.

deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

As of the date of this annual report, we have a total of seven swaption contracts on Japanese yen interest rates outstanding with expiration dates ranging from the second quarter of 2015 to the second quarter of 2016, for which we paid a total of US$14.5 million in premiums. Upon the maturity date of a swaption contract, if the prevailing rate for Japanese yen interest rate swaps is higher than the strike rate of the contract, then we will have the right to enter into an underlying swap and immediately receive an amount with reference to the discounted cash flows of the underlying swap as settlement of the contract; otherwise, the contract will expire unexercised and we will lose the premium paid for the contract. Other than interest rate swaption contracts, in March 2014 we also invested in one swap contract on Japanese yen interest rates, for which we pay fixed rate of 0.2025% and receive floating rate of 6 months Japanese Yen Libor for a notional of 72 billion Japanese Yen from March 27, 2015 to March 26, 2016.

The table below set out the quantitative analysis of the swaptions and swap contracts outstanding as of the date of this annual report, that are subjected to interest risk and for treasury investment purposes:

  Expected Maturity 
  2015  2016  Premium Paid  Fair Value 
  (Contract notional, in JPY million)  (in US$ million) 
Interest rate swaption on Japanese yen interest rate                
Pay 2.75%, Receive variable rate of 20 years swap rate     30,000   3.2   0.9 
Pay 3.0%, Receive variable rate of 20 years swap rate  100,000   40,000   5.6   0.9 
Pay 3.5%, Receive variable rate of 20 years swap rate     30,000   1.7   0.3 
Pay 4.0%, Receive variable rate of 30 years swap rate     58,000   4.0   0.8 
                 
Interest rate swap on Japanese yen interest rate                
Pay 0.2025%, Receive floating rate of 6 months JPY Libor  55,233   16,767      (0.4)

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 year-over-year percent changes in the consumer price index for December 2012, 20132015, 2016 and 2014 were2017 increases of 2.5%1.6%, 2.5%2.1% and 1.5%1.8%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

 

Item 12. Description of Securities Other than Equity Price RiskSecurities

Our exposure to equity price risk primarily relates to the changes in market value of our short-term investments and derivative contracts in options of listed stocks. We have invested in these investments solely for our own treasury purposes and not related to our business operating activities.

As of the date of this annual report, we have a total of seven call option contracts on a Hong Kong listed stock of expiration dates in May and October 2015, for which we paid a total of US$23.4 million in premiums. The fair market value of these contracts as of the date of this annual report is approximately US$25.7 million.

Item 12.Description of Securities Other than Equity Securities

 

A.Debt Securities

 

Not applicable.

 

B.Warrants and Rights

 

Not applicable.

 

C.Other Securities

 

Not applicable.

 

D.American Depositary Shares

 

Fees and Charges Our ADS Holders May Have to Pay

 

Citibank, N.A., is the depositary of our ADS program. Set forth below is a summary of fees holders of our ADSs may be required to pay for various services the depositary may provide:

 

Service

 

Fee

Issuance of ADSs Up to US$0.05 per ADS issued
Cancellation of ADSs Up to US$0.05 per ADS canceled
Distribution of cash dividends or other cash distributions Up to US$0.05 per ADS held
Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights Up to US$0.05 per ADS held exercise of rights
Distribution of securities other than ADSs or rights to purchase additional ADSs Up to US$0.05 per ADS held
Depositary services Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary
Transfer of ADRs US$1.50 per certificate presented for transfer

 

As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:

·fees for the transfer and registration of Class A ordinary shares charged by the registrar and transfer agent for the Class A ordinary shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A ordinary shares);

 

·expenses incurred for converting foreign currency into U.S. dollars;

 

·expenses for cable, telex and fax transmissions and for delivery of securities;

119

  

·taxes and duties upon the transfer of securities (i.e., when Class A ordinary shares are deposited or withdrawn from deposit); and

 

·fees and expenses incurred in connection with the delivery or servicing of Class A ordinary shares on deposit.

 

Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.

 

The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (such as stock dividends and rights distributions), the depositary charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.

 

The fees and charges ADS holders may be required to pay may vary over time and may be changed by us and by the depositary. ADS holders will receive prior notice of such changes.

 

Fees and Other Payments Made by the Depositary to Us

 

The depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADS program, including investor relations expenses and exchange application and listing fees. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. In 2012, 20132015, 2016 and 2014,2017, we received approximately US$2.51.1 million, US$1.11.7 million and nil, respectively, net of applicable withholding taxes in the United States, from the depository as reimbursement for our expenses incurred in connection with the establishment and maintenance of the ADS program.

 

PART II

 

Item 13.Defaults, Dividend Arrearages and Delinquencies

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

None.

 

Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

Material Modifications to the Rights of Security Holders

 

See “Item 10. Additional Information—Ordinary Shares” for a description of the rights of securities holders, which remain unchanged.

Use of Proceeds

 

The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-173548 ) (the “F-1 Registration Statement”) in relation to (i) our initial public offering of 42,898,711 ADSs representing 128,696,133 Class A ordinary shares, and the underwriters’ full exercise of their option to purchase from us an additional 7,965,000 ADSs representing 23,895,000 Class A ordinary shares, at an initial offering price of US$14.00 per ADS, and (ii) an aggregate of 23,571,426 Class A ordinary shares which we sold in a private placement (the “concurrent private placement”) at a price of US$4.67 per Class A ordinary share to a group of unrelated third-party investors consisting of entities affiliated with Alibaba Group, China Media Capital and CITIC Securities concurrently with, and subject to, the completion of our initial public offering. Our initial public offering and the concurrent private placement closed in May 2011. Morgan Stanley & Co. International plc, Deutsche Bank Securities Inc. and Credit Suisse Securities (USA) LLC were the representatives of the underwriters for our initial public offering.Not applicable.

 

120

We received net proceeds of approximately US$777 million from our initial public offering

Item 15. Controls and the concurrent private placement. For the period from May 4, 2011, the date the F-1 Registration Statement was declared effective by the SEC, to December 31, 2014, we used net proceeds from our initial public offering and the concurrent private placement primarily as follows:Procedures

·US$3.2 million, US$11.1 million and US$92.2 million used in operating activities during 2011, 2012 and 2013 respectively.

·US$79.8 million in the acquisition of 56.com;

·US$69.8 million for an equity investment in Social Finance, Inc.;

·US$26.6 million for a long-term investment in Mapbar Technology Limited;

·US$80.0 million for a long-term investment in Japan Macro Opportunities Offshore Partners, LP;

·US$240.9 million for share repurchases;

·US$32.1 million for a property purchased in Shanghai;

·US$35.0 million for an equity investment in shares and warrants issued by Snowball Finance Inc.;

·US$17.2 million and US$10.0 million for equity investment in Rise Companies Corp and Fundrise, L.P. respectively;

·US$18.1 million for an equity investment in Eall Technology Limited; and

·US$12.4 million for an equity investment in Koolray Vision Inc.

Item 15.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and acting chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based upon this evaluation, our management, with the participation of our chief executive officer and acting chief financial officer, has concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were not effective, due to the material weakness in ensuringour internal control over financial reporting as described below.

Disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in by the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and acting chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated financial statements.

Due to its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation, and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Under guidelines established by the SEC, companies are permitted to exclude acquisitions from their evaluation of internal control over financial reporting during the first year after the acquisition. As described elsewhere in this annual report, we are in the process of integrating 14 newly acquired used car dealerships into our operations, including our overall internal control over financial reporting. Refer to Note 5 to our consolidated financial statements included in this annual report for more information on these acquisitions. As a result, management excluded the following entities, which were acquired at various times during the second half of the year ended December 31, 2017, from the scope of the evaluation of our internal control over financial reporting and from this management report on the effectiveness of such internal controls:

·Cangzhou Jieying Bole Automobile Sales Co., Ltd

·Chongqing Jieying Shangyue Automobile Sales Co., Ltd.

·Dalian Yiche Jieying Automobile Sales Co., Ltd.

·Hangzhou Jieying Yifeng Automobile Sales Co., Ltd.

·Henan Jieying Hengxin Automobile Sales Co., Ltd.

·Jiangsu Jieying Ruineng Automobile Sales Co., Ltd.

·Jieying Baolufeng Automobile Sales (Shenyang) Co., Ltd.

·Jilin Jieying Taocheguan Automobile Sales Co., Ltd.

·Neimenggu Jieying Kaihang Automobile Sales Co., Ltd.

·Ningxia Jieying Xianzhi Automobile Sales Co., Ltd.

·Shandong Jieying Huaqi Automobile Service Co., Ltd.

·Shanghai Jieying Diyi Automobile Sales Co., Ltd.

·Suzhou Jieying Chemaishi Automobile Sales Co., Ltd.

·Wuhan Jieying Chimei Automobile Sales Co., Ltd.

Although these acquired used car dealerships play a key role in our used automobile sales business, we have organized this business so that the assets are held and the revenue is recognized primarily in one of our existing subsidiaries, and not in the acquired dealerships. Therefore, these dealerships represented only 0.1% and 2.5% of our total assets and net loss, respectively, at the end of and for the year ended December 31, 2017.

As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of our company’s internal control over financial reporting as of December 31, 20142017, using criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. BasedOur management identified one material weakness in our internal control over financial reporting, as follows:

·Inadequate controls designed over the accounting of significant, unusual and complex transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP. Specifically, management concluded that it lacked sufficient accounting and financial reporting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address the complex accounting issues involved in the application of purchase accounting principles in connection with the acquisition of used car dealerships as described in Note 5 of our consolidated financial statements included in this annual report, and the deconsolidation principles associated with the Transaction that that is expected to close in 2018.

As a result of this material weakness and based on thisthe evaluation ourdescribed above, management has concluded that our company’s internal control over financial reporting was not effective as of December 31, 2014.

2017. Notwithstanding this material weakness, however, management has concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP. Our independent registered public accounting firm, Deloitte Touche Tohmatsu Certified Public Accountants LLP, has issued an attestation report on our internal control over financial reporting.

 

Report of Independent Registered Public Accounting Firm

121

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To The Board Of Directors And Shareholders Of Renren Inc.TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENREN INC.

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Renren Inc. (the “Company”), its subsidiaries, its variable interest entity (“VIEs”)entities and the subsidiaries of its VIEs’ subsidiariesvariable interest entities (collectively, the “Group”“Company”) as of December 31, 2014,2017, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the Committee of Sponsoring Organizationsstandards of the Treadway Commission. Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated May 14, 2018, expressed an unqualified opinion on those financial statements.

As described in the Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Cangzhou Jieying Bole Automobile Sales Co., Ltd., Chongqing Jieying Shangyue Automobile Sales Co., Ltd., Dalian Yiche Jieying Automobile Sales Co., Ltd., Hangzhou Jieying Yifeng Automobile Sales Co., Ltd., Henan Jieying Hengxin Automobile Sales Co., Ltd., Jiangsu Jieying Ruineng Automobile Sales Co., Ltd., Jieying Baolufeng Automobile Sales (Shenyang) Co., Ltd., Jilin Jieying Taocheguan Automobile Sales Co., Ltd., Neimenggu Jieying Kaihang Automobile Sales Co., Ltd., Ningxia Jieying Xianzhi Automobile Sales Co., Ltd., Shandong Jieying Huaqi Automobile Service Co., Ltd., Shanghai Jieying Diyi Automobile Sales Co., Ltd., Suzhou Jieying Chemaishi Automobile Sales Co., Ltd. and Wuhan Jieying Chimei Automobile Sales Co., Ltd., which were acquired during 2017 and whose financial statements constitute 0.1% of total assets and 2.5% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2017. Accordingly, our audit did not include the internal control over financial reporting at those entities.

Basis for Opinion

The Group'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on the Group'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s 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 the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.

 

Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Group maintained,Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in all material respects, effective internal control over financial reporting, as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizationssuch that there is a reasonable possibility that a material misstatement of the Treadway Commission.

We have also audited,Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: Inadequate controls designed over the accounting of significant, unusual and complex transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP. This material weakness was considered in determining the standardsnature, timing, and extent of the Public Company Accounting Oversight Board (United States),audit tests applied in our audit of the consolidated financial statements and financial statements schedule as of and for the year ended December 31, 20142017, of the GroupCompany, and this report does not affect our report dated April 16, 2015 expressed an unqualified opinion on those consolidatedsuch financial statements and financial statement schedule.statements.

 

/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP

Beijing, the People’s Republic of China
April 16, 2015

May 14, 2018

 

We have served as the Company’s auditor since 2008.

122

Management’s Remediation Plans and Actions

To remediate the material weakness described above in “Management’s Report on Internal Control over Financial Reporting,” we are implementing the plan and measures described below, and we will continue to evaluate and may in the future implement additional measures.

We will carry out the following remediation measures:

·We have hired a new senior finance director with extensive U.S. GAAP and reporting experience. This individual is a U.S. certified public accountant who previously worked at our company and has since worked at another U.S. public company. He is expected to rejoin our company in June 2018.

·We plan to recruit additional staff with relevant accounting experience, skills and knowledge in accounting and disclosure for complex transactions under the requirements of U.S. GAAP.

·We will design and implement robust financial reporting and management controls over future acquisitions of additional dealerships.

We believe that we are taking the steps necessary for remediation of the material weakness identified above, and we will continue to monitor the effectiveness of these steps and to make any changes that our management deems appropriate.

Changes in Internal Control over Financial Reporting

 

During

In 2017, the processspecial committee of preparingthe board of directors that was tasked with evaluating the fairness of the Transaction employed an external financial advisor and external U.S. counsel to review the Transaction and to ensure that the measurement of the investments involved was performed properly. These remedial measures were undertaken to address the material weakness related to inadequate controls designed over the measurement of investments reported in our consolidated financial statements included in this annual report a significant deficiency was identifiedon Form 20-F for the year ended December 31, 2016. Accordingly, as of December 31, 2017, we concluded that the material weakness related to the monitoringmeasurement of investment assets and the formal documentation of the board’s preapproval for certain long-term investments in 2014. Accordingly, we established monitoring control in fiscal year 2015 to ensure that we properly conduct and document the formal board resolutions on preapproval for investments. We believe these actions could remedy the deficiency.Transaction had been remediated.

  

Except forOther than the significant deficiency identifiedremedial measures described above, there were no other significant changes in our internal control over financial reporting during the yearsyear ended December 31, 2013 and 20142017 that have materially affected or are reasonablyreasonable likely to materially affect our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Management, including our chief executive officer and our acting chief financial officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and procedures and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process, therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

121

Item 16. Reserved

 

Item 16.Reserved

Item 16A. Audit Committee Financial Expert

Item 16A.Audit Committee Financial Expert

 

Our board of directors has determined that each of Mr. David Chao and Mr. Tianruo Pu, each of whom is an independent director (under the standards set forth in Section 303A of the Corporate Governance Rules of the NYSE and Rule 10A-3 under the Exchange Act), qualifies as an “audit committee financial expert.”

 

Item 16B.Code of Ethics

Item 16B. Code of Ethics

 

Our board has adopted a code of business conduct and ethics that provides that our directors and officers are expected to avoid any action, position or interest that conflicts with the interests of our company or gives the appearance of a conflict. Directors and officers have an obligation under our code of business conduct and ethics to advance our company’s interests when the opportunity to do so arises. We have posted a copy of our code of business conduct and ethics on our website athttp://www.renren-inc.com.

 

Item 16C.Principal Accountant Fees and Services

Item 16C. Principal Accountant Fees and Services

 

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated.

 

  For the Year Ended December 31, 
  2013  2014 
  (In thousands of US$) 
Audit fees(1)  1,255.5   1,230.0 
  For the Year Ended December 31, 
  2016  2017 
  (in thousands of US$) 
Audit fees(1)  1,346.2   1,558.3 
Other fees(2)  107.0   - 

 

 

(1)“Audit fees” means the aggregate fees billed or payable for professional services rendered by our independent auditors in connection with the audit of our consolidated financial statements or the review of our interim consolidated financial statements required for statutory or regulatory filings.

 

(2)“Other fees” represent the aggregate fees billed and expected to be billed in each of the fiscal years listed for professional services rendered by our independent registered public accounting firm other than the services reported in (1).

All audit and non-audit services provided by our independent auditors must be pre-approved by our audit committee.

 

Item 16D.123Exemptions from the Listing Standards for Audit Committees

Item 16D. Exemptions from the Listing Standards for Audit Committees

 

Not applicable.

 

Item 16E.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On June 28, 2013, we announced that our board of directors had authorized a new share repurchase program for 12 months from June 28, 2013 to June 27, 2014. During this 12-month period, our company was authorized, but not obligated, to repurchase up to US$100 million of our ADSs. By the completion of this share repurchase program on June 27, 2014, our company had purchased a total of 22,208,923 ADSs at an aggregate consideration of US$69.3 million.

The following table sets forth information about our repurchases made in the year 2014 under the share repurchase program described in the paragraph above.

Period Total Number of
ADSs Purchased
  Average Price Paid
per ADS (US$)
  Total Number of
ADSs Purchased as
Part of Publicly
Announced Plans or
Programs
  Maximum Dollar
Value of ADSs that
May Yet be Purchased
Under the Plans or
Programs (US$)
 
Month #1
(January 1, 2014 — January 31, 2014)
  3,709,317  $3.29   3,709,317   63,096,465 
Month #2
(February 1, 2014 — February 28, 2014)
  2,731,894  $3.34   2,731,894   53,959,767 
Month #3
(March 1, 2014 — March 31, 2014)
  1,148,893  $2.89   1,148,893   50,638,187 
Month #4
(April 1, 2014 — April 30, 2014)
  3,308,796  $3.44   3,308,796   39,261,984 
Month #5
(May 1, 2014 — May 31, 2014)
  2,663,771  $3.23   2,663,771   30,659,529 
Month #6
(June 1, 2014 — June 28, 2014)
           30,659,529 
Total  13,562,671  $3.29   13,562,671     

On May 21, 2014, we announced that our board of directors authorized a new share repurchase program for 12 months from June 28, 2014 to June 27, 2015. During this 12-month period, our company is authorized, but not obligated, to repurchase up to US$100 million of our ADSs.

 

The following table sets forth information about our repurchases made in the year 2014 under the share repurchase program described in the paragraph above.

Period Total Number of
ADSs Purchased
  Average Price Paid
per ADS (US$)
  Total Number of
ADSs Purchased as
Part of Publicly
Announced Plan or
Program
  Maximum Dollar
Value of ADSs that
May Yet be Purchased
Under the Plan or
Program (US$)
 
Month #1
(June 28, 2014 — July 27, 2014)
  265,970  $3.31   265,970   99,120,355 
Month #2
(July 28, 2014 — August 27, 2014)
  149,465  $3.14   149,465   98,650,467 
Month #3
(August 28, 2014 — September 27, 2014)
  3,638,803  $3.41   3,638,803   86,226,942 
Month #4
(September 28, 2014 — October 27, 2014)
  5,412,366  $3.32   5,412,366   68,251,410 
Month #5
(October 28, 2014 — November 27, 2014)
  696,872  $3.43   696,872   65,861,538 
Month #6
(November 28, 2014 — December 31, 2014)
  3,183,232  $2.68   3,183,232   57,317,182 
Total  13,346,708  $3.20   13,346,708     

In addition, duringDuring the course of the administration of our equity incentive plans, we have, from time to time, canceled or repurchased restricted shares or other securities held by employees or other participants of our equity incentive plans.

 

Item 16F.Change in Registrant’s Certifying Accountant

As we announced on April 30, 2018, we will pay a cash dividend. We expect the market price of our ADSs to fall significantly on the ex-dividend date to reflect the value that will have been removed from our company and transferred to our shareholders. To the extent that our ADSs trade below US$1.00 per ADS for an extended period of time, or at or below US$0.16 per ADS for any period of time, our ADSs may be suspended from trading on the NYSE and ultimately delisted. To assist in stabilizing the ADS trading price and address this risk, we have adopted an ADS repurchase program to be effected on the open market at prevailing market prices from time to time as market conditions warrant in accordance with the applicable requirements of Rule 10b5-1 and Rule 10b-18 under the Exchange Act. As of the date of this annual report, we have not made any purchases pursuant to this ADS repurchase plan.

Item 16F. Change in Registrant’s Certifying Accountant

 

Not applicable.

 

Item 16G.Corporate Governance

Item 16G. Corporate Governance

 

Section 303A.12(a) of the NYSE Listed Company Manual requires each listed company’s chief executive officer to certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. We are a Cayman Islands exempted company, and our chief executive officer is not required under applicable Cayman Islands law to make such a certification. Pursuant to the exception granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have followed our home country practice in this regard and have not in the past submitted the certification set forth in Section 303A.12(a) of the NYSE Listed Company Manual.

Section 303A.01 of the NYSE Listed Company Manual requires a listed company to have a majority of independent directors. Section 303A.07(a) of the NYSE Listed Company Manual requires the audit committee to have a minimum of three members. Section 303A.08 of the NYSE Listed Company Manual requires a listed company to give shareholders an opportunity to vote on all equity compensation plans and material revisions thereto. We are a Cayman Islands exempted company, and our audit committee is not requiredthere are no requirements under applicable Cayman Islands law that correspond to have a minimumthese sections of three members.the NYSE Listed Company Manual. Pursuant to the exception granted to foreign private issuers under Section 303A.00 of the NYSE Listed Company Manual, we have followed our home country practice inand are exempted from the requirements of Sections 303A.01, 303A.07(a) and 303A.08 of the NYSE Listed Company Manual. Nevertheless, as of the date of this regard andannual report our audit committee may have fewer thanhas three members.

 

Other than the requirements discussed above, there are no significant differences between our corporate governance practices and those followed by domestic listed companies as required under the NYSE Listed Company Manual.

 

Item 16H.Mine Safety Disclosure

Item 16H. Mine Safety Disclosure

 

Not applicable.

 

PART III

 

Item 17.Financial Statements

Item 17. Financial Statements

 

We have elected to provide financial statements pursuant to Item 18.

 

Item 18.Financial Statements

Item 18. Financial Statements

 

The consolidated financial statements of Renren Inc. and its subsidiaries and consolidated affiliated entities are included at the end of this annual report.

 

124

In accordance with Regulation S-X Rule 3-09, the following documents of Japan Macro Opportunities Offshore Partners, L.P are included at the end of this annual report:

Item 19. Exhibits

 

·financial statements as of and for the year ended December 31, 2012;

·financial statements as of and for the year ended December 31, 2013, and independent auditors’ report; and

·financial statements as of and for the year ended December 31, 2014, and independent auditors’ report.

Item 19.Exhibits

Exhibit Number

Description of Document

1.1 
1.1Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
2.1 Specimen American depositary receipt of the Registrant (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
2.2 Specimen Class A ordinary share certificate of the Registrant (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
2.3 Deposit Agreement, dated as of May 4, 2011, by and among the Registrant, Citibank, N.A., as depositary, and the holders of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-8 (file no. 333-177366), filed with the SEC on October 18, 2011).
   
2.4 Amended and Restated Investors’ Rights Agreement between the Registrant and other parties therein, dated as of April 4, 2008, as amended (incorporated by reference to Exhibit 4.6 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
Exhibit Number Description of Document
2.5 Form of Registration Rights Agreement between the Registrant and other parties therein (incorporated by reference to Exhibit 10.21 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.1 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.2 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.3 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.4 2011 Share Incentive Plan (as amended by Amendment No.1 to the 2011 Share Incentive Plan) (incorporated by reference to Exhibit 10.410.1 to our Registration Statement on Form F-1S-8 (file no. 333-173548)333-209734), as amended, initially filed with the SEC on April 15, 2011)February 26, 2016).
   
4.5 Form of Indemnification Agreement between the Registrant and its directors and officers (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.6 Form of Employment Agreement between the Registrant and the officers of the Registrant (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.7 Business Operations Agreement, dated as of December 23, 2010, between Qianxiang Shiji, Qianxiang Tiancheng and the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.8 Amended and Restated Equity Option Agreements, dated as of December 23, 2010, between Qianxiang Shiji and the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).

 125 

4.9 Amended and Restated Equity Interest Pledge Agreements, dated as of December 23, 2010, between Qianxiang Shiji and the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.10 Power of Attorney, dated as of December 23, 2010, by the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.11 Spousal Consents, dated as of December 23, 2010, by the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.11 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.12 Amended and Restated Loan Agreements, dated as of December 23, 2010, between Qianxiang Shiji and the shareholders of Qianxiang Tiancheng (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.13 Amended and Restated Exclusive Technical Service Agreement, dated as of December 23, 2010, between Qianxiang Shiji and Qianxiang Tiancheng (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
Exhibit Number Description of Document
4.14 Amended and Restated Intellectual Property Right License Agreement, dated as of December 23, 2010, between Qianxiang Shiji and Qianxiang Tiancheng (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).
   
4.15 Loan Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and Chuan He (incorporated by reference to Exhibit 4.28 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.16Loan Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and James Jian Liu (incorporated by reference to Exhibit 4.29 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.17Business Operations Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd., Shanghai Renren Games Technology Development Co., Ltd., Chuan He and James Jian Liu (incorporated by reference to Exhibit 4.30 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.18Proxy Agreement and Power of Attorney, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd., Shanghai Renren Games Technology Development Co., Ltd., Chuan He and James Jian Liu (incorporated by reference to Exhibit 4.31 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.19Spousal Consent issued by Jianghao Leng, as the lawful spouse of Chuan He, and Yan Chen, as the lawful spouse of James Jian Liu, both dated November 30, 2012 (incorporated by reference to Exhibit 4.32 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.20Exclusive Technology Support and Technology Service Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and Shanghai Renren Games Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.33 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.21Intellectual Property Right License Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and Shanghai Renren Games Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.34 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.22Equity Interest Pledge Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and Chuan He (incorporated by reference to Exhibit 4.35 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.23Equity Interest Pledge Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and James Jian Liu (incorporated by reference to Exhibit 4.36 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.24Equity Option Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and Chuan He (incorporated by reference to Exhibit 4.37 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
Exhibit NumberDescription of Document
4.25Equity Option Agreement, dated November 30, 2012, between Renren Games Network Technology Development (Shanghai) Co., Ltd. and James Jian Liu (incorporated by reference to Exhibit 4.38 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.26Link224 Inc. 2013 Share Incentive Plan (incorporated by reference to Exhibit 4.39 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 23, 2013).
4.27Share Purchase Agreement by and among the Registrant, Nuomi Holdings Inc. and Baidu Holdings Limited, dated as of August 23, 2013 (incorporated by reference to Exhibit 4.27 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 29, 2014).
4.28Share Purchase Agreement by and among the Registrant, Nuomi Holdings Inc. and Baidu Holdings Limited, dated as of January 22, 2014 (incorporated by reference to Exhibit 4.28 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 29, 2014).
4.29Power of Attorney, dated December 4, 2013, by Huang Hui (incorporated by reference to Exhibit 4.32 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 29, 2014).
   
4.304.16 Power of Attorney, dated December 4, 2013, by Liu Jian (incorporated by reference to Exhibit 4.33 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 29, 2014).
   
4.314.17 Spousal Consent issued by Jonathan Gentile Anderson, as the lawful spouse of Huang Hui, and Chen Yan, as the lawful spouse of Liu Jian, both dated December 4, 2013 (incorporated by reference to Exhibit 4.34 to our annual report on Form 20-F (file no. 001-35147)00135147), filed with the SEC on April 29, 2014).
   
4.32*4.18 Loan Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jing Yang (incorporated by reference to Exhibit 4.32 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.33*4.19 Loan Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jian Liu (incorporated by reference to Exhibit 4.33 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.34*4.20 Business Operations Agreement, dated May 22, 2014, by and among Beijing Jingwei Sinan Information Technology Co., Ltd., Beijing Jingwei Zhihui Information Technology Co., Ltd., Jing Yang and Jian Liu (incorporated by reference to Exhibit 4.34 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.35*4.21 Power of Attorney, dated May 22, 2014, by Jing Yang (incorporated by reference to Exhibit 4.35 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.36*4.22 Power of Attorney, dated May 22, 2014, by Jian Liu (incorporated by reference to Exhibit 4.36 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)

 126 

4.37*4.23 English translation of Spousal Consents, by Joseph Chen, as the lawful spouse of Jing Yang, and Yan Chen, as the lawful spouse of James Jian Liu, both dated May 22, 2014 (incorporated by reference to Exhibit 4.37 to our annual report on Form 20-F (file no. 00135147), filed with the SEC on April 16, 2015)
   
4.38*4.24 Exclusive Technology Support and Technology Service Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Beijing Jingwei Zhihui Information Technology Co., Ltd. (incorporated by reference to Exhibit 4.38 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.39*4.25 Intellectual Property Right License Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Beijing Jingwei Zhihui Information Technology Co., Ltd. (incorporated by reference to Exhibit 4.39 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.40*4.26 English translation of Equity Interest Pledge Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jing Yang (incorporated by reference to Exhibit 4.40 to our annual report on Form 20-F (file no. 00135147), filed with the SEC on April 16, 2015)
   
4.41*4.27 English translation of Equity Interest Pledge Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jian Liu (incorporated by reference to Exhibit 4.41 to our annual report on Form 20-F (file no. 00135147), filed with the SEC on April 16, 2015)
Exhibit Number Description of Document
4.42*4.28 Equity Option Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jing Yang (incorporated by reference to Exhibit 4.42 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.43*4.29 Equity Option Agreement, dated May 22, 2014, between Beijing Jingwei Sinan Information Technology Co., Ltd. and Jian Liu (incorporated by reference to Exhibit 4.43 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.44*4.30 English translation of Framework Purchase Agreement, dated October 28, 2014, by and among the Registrant, Beijing Wole Information Technology Co., Ltd., Jian Liu, Hui Huang, GuanzhouGuangzhou Qianjun Internet Technology Co., Ltd. and Tianjin Jinhu Media Co., Ltd. (incorporated by reference to Exhibit 4.44 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.45*4.31 English translation of Amendment to Framework Purchase Agreement, dated December 1, 2014, by and among the Registrant, Beijing Wole Information Technology Co., Ltd., Jian Liu, Hui Huang, GuanzhouGuangzhou Qianjun Internet Technology Co., Ltd. and Tianjin Jinhu Media Co., Ltd. (incorporated by reference to Exhibit 4.45 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.46*4.32 English translation of Business Cooperation Agreement, dated December 1, 2014, by and among Beijing Wole Information Technology Co., Ltd., GuanzhouGuangzhou Qianjun Internet Technology Co., Ltd., Beijing Qianxiang Wangjing Technology Development Co., Ltd. and Tianjin Jinhu Media Co., Ltd. (incorporated by reference to Exhibit 4.46 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
4.47*4.33 English translation of Service Agreement, dated December 1, 2014, by and among Beijing Wole Information Technology Co., Ltd., GuanzhouGuangzhou Qianjun Internet Technology Co., Ltd., Beijing Qianxiang Wangjing Technology Development Co., Ltd. and Tianjin Jinhu Media Co., Ltd. (incorporated by reference to Exhibit 4.47 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on April 16, 2015)
   
8.1*4.34 SubsidiariesConvertible Note and Series F Preferred Stock Purchase Agreement, dated July 28, 2015, by and among Social Finance, Inc., SoftBank Group International Limited, the Registrant and other parties therein (incorporated by reference to Exhibit 4.37 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on May 16, 2016)

127

4.35English translation of Framework Agreement on Transfer of Renren Games Business by Renren Inc., dated January 5, 2016, by and among the Registrant, Link 224 Inc., Renren Game Hong Kong Limited and other parties therein (incorporated by reference to Exhibit 4.38 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on May 16, 2016)
   
11.14.36 English translation of Asset Sale and Purchase Agreement for Shanghai Renren Finance Leasing Asset-Backed Special Plan, dated January 26, 2016, by and between Shanghai Renren Finance Leasing Co., Ltd. and Xinyuan Asset Management Co., Ltd. (incorporated by reference to Exhibit 4.38 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on May 15, 2017)
4.372016 Share Incentive Plan (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-8 (file no. 333-209734), filed with the SEC on February 26, 2016)
4.38English translation of Asset Sale and Purchase Agreement for Shanghai Renren Finance Leasing Asset-Backed Special Plan II, dated August 10, 2016, by and between Shanghai Renren Finance Leasing Co., Ltd. and Beijing Founder Fubon Asset Management Co., Ltd. (incorporated by reference to Exhibit 4.40 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on May 15, 2017)
4.39Transaction Confirmation, dated April 4, 2017, in connection with the sale of shares of Social Finance Inc. by the Registrant (incorporated by reference to Exhibit 4.41 to our annual report on Form 20-F (file no. 001-35147), filed with the SEC on May 15, 2017)
4.40*Loan Agreement between Shanghai Renren Automobile Technology Company Limited and James Jian Liu (English Translation), dated August 18, 2017
4.41*Loan Agreement between Shanghai Renren Automobile Technology Company Limited and Yang Jing (English Translation), dated August 18, 2017
4.42*Loan Agreement between Shanghai Renren Automobile Technology Company Limited and Yi Rui, dated August 18, 2017 (English Translation)
4.43*Loan Agreement between Shanghai Renren Automobile Technology Company Limited and Thomas Jintao Ren, dated August 18, 2017 (English Translation)
4.44*Exclusive Technology Support and Technology Services Agreement between Shanghai Renren Automobile Technology Company Limited and Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd. dated August 18, 2017 (English Translation)
4.45*Exclusive Technology Support and Technology Services Agreement between Shanghai Renren Automobile Technology Company Limited and Shanghai Jieying Automobile Sales Co., Ltd. dated August 18, 2017 (English Translation)
4.46*Equity Pledge Agreement concerning Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd, between Shanghai Renren Automobile Technology Company Limited and James Jian Liu, dated August 18, 2017 (English Translation)
4.47*Equity Pledge Agreement concerning Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd, between Shanghai Renren Automobile Technology Company Limited and Yang Jing, dated August 18, 2017 (English Translation)
4.48*Equity Pledge Agreement concerning Shanghai Jieying Automobile Sales Co., Ltd., between Shanghai Renren Automobile Technology Company Limited and Yi Rui, dated August 18, 2017 (English Translation)
4.49*Equity Pledge Agreement concerning Shanghai Jieying Automobile Sales Co., Ltd., between Shanghai Renren Automobile Technology Company Limited and Thomas Jintao Ren, dated August 18, 2017 (English Translation)
4.50*Intellectual Property Right License Agreement between Shanghai Renren Automobile Technology Company Limited and Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd. and  dated August 18, 2017 (English Translation)

128

4.51*Intellectual Property Right License Agreement between Shanghai Renren Automobile Technology Company Limited. and Shanghai Jieying Automobile Sales Co., Ltd., dated August 18, 2017
4.52*Equity Option Agreement concerning Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd between Shanghai Renren Automobile Technology Company Limited and James Jian Liu, dated August 18, 2017 (English Translation)
4.53*Equity Option Agreement concerning Shanghai Qianxiang Changda Internet Information Technology Development  Co., Ltd between Shanghai Renren Automobile Technology Company Limited and Yang Jing, dated August 18, 2017 (English Translation)
4.54*Equity Option Agreement concerning Shanghai Jieying Automobile Sales Co., Ltd. between Shanghai Renren Automobile Technology Company Limited and Yi Rui, dated August 18, 2017 (English Translation)
4.55*Equity Option Agreement concerning Shanghai Jieying Automobile Sales Co., Ltd. between Shanghai Renren Automobile Technology Company Limited and Thomas Jintao Ren, dated August 18, 2017 (English Translation)
4.56*Form of Equity Purchase Agreement (English Translation)
4.57*Form of Used Vehicle Purchase Contract (English Translation)
4.58*Form of Used Vehicle Agency Services Agreement (English Translation)
4.59*Form of Used Vehicle Sales Contract (English Translation)
4.60*2018 Equity and Incentive Plan
4.61*Power of Attorney between Ren Jintao and Shanghai Renren Automobile Technology Company Limited, dated August 18, 2017
4.62*Power of Attorney between Yi Rui and Shanghai Renren Automobile Technology Company Limited, dated August 18, 2017
4.63*Power of Attorney between Yang Jing and Shanghai Renren Automobile Technology Company Limited, dated August 18, 2017
4.64*Power of Attorney between Liu Jian and Shanghai Renren Automobile Technology Company Limited, dated August 18, 2017
4.65*Business Operations Agreement by and among Shanghai Renren Automobile Technology Company Limited., Shanghai Jieying Automobile Sales Co., Ltd., Ren Jintao and Yi Rui, dated August 18, 2017
4.66*Business Operations Agreement by and among Shanghai Renren Automobile Technology Company Limited., Shanghai Qianxiang Changda Internet Information Technology Development Co. Ltd, Yang Jing and Liu Jian, dated August 18, 2017
4.67*Consent of Xi Wang, lawful spouse of Ren Jintao, dated August 18, 2017
4.68*Consent of Zhang Jian, lawful spouse of Yi Rui, dated August 18, 2017
4.69*Consent of Joseph Chen, lawful spouse of Yang Jing, dated August 18, 2017
4.70*Consent of Chen Yan, lawful spouse of Liu Jian, dated August 18, 2017
8.1*Subsidiaries of the Registrant
11.1Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 to our Registration Statement on Form F-1 (file no. 333-173548), as amended, initially filed with the SEC on April 15, 2011).

 129 

12.1* Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
12.2* Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
13.1** Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
13.2** Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
15.1* Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
   
15.2* Consent of TransAsia Lawyers
   
15.3* Consent of Maples and Calder
15.4*Consent of Deloitte & Touche (Hong Kong) LLP
   
101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Schema Document
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
Exhibit NumberDescription of Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.herewith

 

**Furnished herewith.

130

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 Renren Inc.
  
 By:/s/ Joseph Chen

 Name:Joseph Chen
 Title:Chairman of the Board of Directors and Chief
Executive officerOfficer

 

Dated: April16, 2015

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014May 14, 2018

 

131

  

RENREN INC.

 

Report and Consolidated Financial Statements

For the years ended December 31, 2012, 20132015, 2016 and 20142017

 

 
132 

 

RENREN INC.

RENREN INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 and 20142017

 

PAGE(S)
CONTENTS PAGE(S)
  
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMF-2
  
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 20132016 AND 20142017F-3
  
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017
F-5
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME LOSS
FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017
F-7F-8
  
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017
F-8F-9
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 2012, 20132015, 2016 AND 20142017
F-9F-10
  
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017
F-11F-13
  
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IF-78F-101

 

F- 1

 

RENREN INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RENREN INC.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Renren Inc., and its subsidiaries, its variable interest entities and the subsidiaries of its variable interest entities (collectively, the "Group""Company") as of December 31, 20132017 and 2014, and2016, the related consolidated statements of operations, comprehensive income (loss),loss, changes in equity, (deficit) and cash flows for each of the three years in the period ended December 31, 2014,2017, and the related notes and the financial statement schedule included in Schedule I. These consolidated financial statements and financial statement schedule areI (collectively referred to as the responsibility of the Group's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)"financial statements"). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidatedthe financial statements present fairly, in all material respects, the financial position of the GroupCompany as of December 31, 20132017 and 2014,2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014,2017, 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 to such consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group'sCompany's internal control over financial reporting as of December 31, 2014,2017, based on the criteria established in Internal Control-IntegratedControl — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 16, 2015May 14, 2018, expressed an unqualifiedadverse opinion on the Group'sCompany's internal control over financial reporting.

reporting because of a material weakness.

 

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/Deloitte Touche Tohmatsu Certified Public Accountants LLP

Beijing, the People's Republic of China

May 14, 2018

April 16, 2015

We have served as the Company’s auditor since 2008.

RENREN INC.F- 2

RENREN INC.

 

CONSOLIDATED BALANCE SHEETS

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

  As of December 31, 
  2013  2014 
ASSETS        
         
Current assets:        
Cash and cash equivalents $154,308  $183,025 
Term deposits  492,699   494,065 
Short-term investments  301,995   29,384 
Accounts and notes receivable (net of allowances of $1,143 and $2,946 as of December 31, 2013 and 2014, respectively)  15,958   18,044 
Prepaid expenses and other current assets  34,080   37,638 
Amounts due from related parties  62,411   1,047 
Deferred tax assets-current  628   - 
Equity method investment- current  60,508   - 
Total current assets  1,122,587   763,203 
Property and equipment, net  58,560   43,690 
Intangible assets, net  27,397   2 
Goodwill  61,407   - 
Long-term investments  107,842   320,414 
Deferred tax assets-noncurrent  1,109   - 
Other non-current assets  6,784   21,844 
TOTAL ASSETS $1,385,686  $1,149,153 
         
LIABILITIES AND EQUITY        
         
Current liabilities:        
Accounts payable (including accounts payable of the consolidated VIEs without recourse to Renren Inc. of $9,002 and $5,176 as of December 31, 2013 and 2014, respectively) $10,170  $5,501 
Accrued expenses and other payables (including accrued expenses and other payables of the consolidated VIEs without recourse to Renren Inc. of $29,463 and $16,324  as of December 31, 2013 and 2014, respectively)  33,314   24,094 
Amounts due to related parties (including amount due to a related party of the consolidated VIEs without recourse to Renren Inc. of $178 and $303 as of December 31, 2013 and 2014, respectively)  61,062   303 
Deferred revenue and advance from customers (including deferred revenue and advance from customers of the consolidated VIEs without recourse to Renren Inc. of $8,003 and $6,212 as of December 31, 2013 and 2014, respectively)  8,639   6,917 
Income tax payable (including income tax payable of the consolidated VIEs without recourse to Renren Inc. of $2,066 and $3,165 as of December 31, 2013 and 2014, respectively)  2,077   9,229 
Total current liabilities  115,262   46,044 
Long-term liabilities:        
Other non-current liabilities (including other non-current liabilities of the        
Consolidated VIE's without recourse to Renren Inc. of $156 and $nil as of        
December 31, 2013 and 2014, respectively)  156   730 
TOTAL LIABILITIES $115,418  $46,774 
  As of December 31, 
  2016  2017 
ASSETS        
         
Current assets:        
Cash and cash equivalents $79,370  $128,595 
Restricted cash  30,390   47,253 
Short-term investments  410   - 
Accounts receivable (net of allowances of $2,839 and $2,856 as of December 31, 2016 and 2017, respectively)  4,702   6,260 
Financing receivable (net of allowances of $15,067 and $7,023 as of December 31, 2016 and 2017, respectively; including $73,549 and $78,485 from the Plans(i) as of December 31, 2016 and 2017, respectively)  301,773   125,478 
Prepaid expenses and other current assets  20,749   50,183 
Inventory  -   95,012 
Amounts due from related parties  13,419   15,224 
         
Total current assets  450,813   468,005 
         
Long-term financing receivable (net of allowances of $47 and $nil as of December 31, 2016 and 2017, respectively)  330   8 
Property and equipment, net  28,666   29,532 
Intangible assets, net  -   2,260 
Goodwill  -   101,937 
Long-term investments  695,348   565,366 
Other non-current assets  1,687   27,056 
         
TOTAL ASSETS $1,176,844  $1,194,164 
         
LIABILITIES AND EQUITY        
         
Current liabilities:        
Accounts payable (including accounts payable of the consolidated VIEs without recourse to Renren Inc. of $5,423 and $19,476 as of December 31, 2016 and 2017, respectively) $5,561  $20,046 
Short-term debt (including short-term debt of the consolidated VIEs without recourse to Renren Inc. of $7,202 and $12,296 as of December 31, 2016 and 2017, respectively)  37,202   61,479 
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to Renren Inc. of $11,277 and $17,498 as of December 31, 2016 and 2017, respectively; including accrued expenses and other current liabilities of the Plans without recourse to Renren Inc. of $4 and $4 as of December 31, 2016 and 2017, respectively)  19,781   45,898 
Payable to investors (including payable to investors of the consolidated VIEs without recourse to Renren Inc. of $182,810 and $7,153 as of December 31, 2016 and 2017, respectively; including payable to investors of the Plans without recourse to Renren Inc. of $141 and $64,087 as of December 31, 2016 and 2017, respectively)  182,951   142,689 
Amounts due to related parties (including amount due to related parties of the consolidated VIEs without recourse to Renren Inc. of $222 and $7,013 as of December 31, 2016 and 2017, respectively)  10,914   17,746 
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to Renren Inc. of $5,804 and $10,164 as of December 31, 2016 and 2017, respectively)  5,954   11,489 

RENREN INC.F- 3

RENREN INC.

 

CONSOLIDATED BALANCE SHEETS - continued

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

 As of December 31,  As of December 31, 
 2013 2014  2016  2017 
Commitments and contingency (Note 22)        
     
Income tax payable (including income tax payable of the consolidated VIEs without recourse to Renren Inc. of $7,163 and $10,380 as of December 31, 2016 and 2017, respectively)  7,860   12,652 
Contingent consideration (Note 5) (including contingent consideration of the consolidated VIEs without recourse to Renren Inc. of $nil and $5,944 as of December 31, 2016 and 2017, respectively)  -   5,944 
        
Long-term debt – current (including long-term debt – current of the consolidated VIEs without recourse to Renren Inc. of $nil and $nil as of December 31, 2016 and 2017, respectively)  -   52,604 
        
Total current liabilities  270,223   370,547 
        
Long-term liabilities:        
Long-term debt (including long-term debt of the consolidated VIEs without recourse to Renren Inc. of $nil and $nil as of December 31, 2016 and 2017, respectively)  95,390   47,665 
Long-term payable to investors (including long-term payable to investors of the Plans without recourse to Renren Inc. of $59,916 and $nil as of December 31, 2016 and 2017, respectively)  59,916   - 
Long-term contingent consideration (Note 5) (including long-term contingent consideration of the consolidated VIEs without recourse to Renren Inc. of $nil and $60,850 as of December 31, 2016 and 2017, respectively)  -   60,850 
Other non-current liabilities (including other non-current liabilities of the consolidated VIEs without recourse to Renren Inc. of $nil and $nil as of December 31, 2016 and 2017, respectively)  12,849   6,356 
        
Total non-current liabilities  168,155   114,871 
        
TOTAL LIABILITIES $438,378  $485,418 
        
Commitments (Note 23)        
                
Equity:                
Class A ordinary shares, $0.001 par value, 3,000,000,000 shares authorized,789,976,372 and 720,040,971 shares issued and outstanding as of December 31, 2013 and 2014, respectively $790  $720 
Class B ordinary shares, $0.001 par value, 500,000,000 shares authorized, 305,388,450 and 305,388,450 shares issued and outstanding as of December 31, 2013 and 2014, respectively  305   305 
Class A ordinary shares, $0.001 par value, 3,000,000,000 shares authorized, 719,651,418 and 726,549,453 shares issued and outstanding as of December 31, 2016 and 2017, respectively $720  $727 
Class B ordinary shares, $0.001 par value, 500,000,000 shares authorized, 305,388,450 and 305,388,450 shares issued and outstanding as of December 31, 2016 and 2017, respectively  305   305 
Additional paid-in capital  1,285,283   1,224,393   1,266,592   1,303,117 
Accumulated deficit  (197,726)  (137,266)  (542,746)  (653,173)
Statutory reserves  6,712   6,712   6,712   6,712 
Accumulated other comprehensive income  174,781   7,774   6,883   17,116 
        
Total Renren Inc. shareholders' equity  1,270,145   1,102,638   738,466   674,804 
        
Noncontrolling interest  123   (259)  -   33,942 
Equity  1,270,268   1,102,379 
        
Total equity  738,466   708,746 
        
TOTAL LIABILITIES AND EQUITY $1,385,686  $1,149,153  $1,176,844  $1,194,164 

(i) The Company consolidated Shanghai Renren Finance Leasing Asset-Backed Special Plans (the "Plans"), see Note 1.

 

The accompanying notes are an integral part of these consolidated financial statements.

RENREN INC.F- 4

RENREN INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

  Years ended December 31, 
  2012  2013  2014 
          
Net revenues $154,827  $147,947  $82,954 
Cost of revenues  49,794   54,280   47,972 
Gross profit  105,033   93,667   34,982 
Operating expenses:            
Selling and marketing  47,926   62,198   38,340 
Research and development  71,558   77,956   50,675 
General and administrative  33,577   49,275   51,429 
Impairment of intangible assets  -   208   714 
Impairment of goodwill  -   -   46,864 
Restructuring cost  -   3,475   6,354 
Total operating expenses  153,061   193,112   194,376 
Loss from operations  48,028   99,445   159,394 
Other income  2,446   1,039   636 
Exchange (loss) gain on offshore bank accounts  (1,769)  1,476   (2,277)
Interest income  20,029   12,778   12,677 
Realized gain on short-term investments  4,317   56,022   139,265��
Impairment of short-term investments  -   (2,098)  - 
Impairment of equity method investments  -   (23,025)  - 
Loss before provision of income tax and earnings (loss) in equity method investments and noncontrolling interest, net of tax  (23,005)  (53,253)  (9,093)
Income tax (expenses) benefit  (1,384)  3,980   (6,517)
(Loss) before earnings (loss) in equity method investments and noncontrolling interest, net of tax  (24,389)  (49,273)  (15,610)
Earnings (loss) in equity method investments, net of tax  (7,471)  20,317   49,015 
Income (loss) from continuing operations  (31,860)  (28,956)  33,405 
Discontinued operations:            
Loss from the operations of the discontinued operations, net of tax benefits of $464, $3,473 and $321 for the years ended December 31, 2012, 2013 and 2014, respectively  (43,193)  (40,068)  (30,809)
Gain on deconsolidation of the subsidiaries, net of tax of $nil for the years ended December 31, 2012, 2013 and 2014, respectively  -   132,665   489 

Gain on disposal of equity method investment, net of tax expense of $nil, $nil and $6,027 for the years ended December 31, 2012, 2013 and 2014, respectively

  -   -   56,993 
Gain (loss) from discontinued operations,  net of tax expense (benefits) of $(464), $(3,473) and $5,706 for the years ended December 31, 2012, 2013 and 2014, respectively  (43,193)  92,597   26,673 
Net income (loss)  (75,053)  63,641   60,078 
Net loss attributable to the noncontrolling interest  27   92   382 
Net income (loss) from continuing operations attributable to Renren Inc.  (31,833)  (28,864)  33,787 
Net income (loss) from discontinued operations attributable to Renren Inc.  (43,193)  92,597   26,673 
Net income (loss) attributable to Renren Inc. $(75,026) $63,733  $60,460 
  Years ended December 31, 
  2015  2016  2017 
          
Net revenues:            
Used car sales  -   -  $121,084 
IVAS and others $32,507  $34,047   51,749 
Financing income  8,604   29,317   29,269 
             
Total net revenues  41,111   63,364   202,102 
Cost of revenues:            
Used car sales  -   -   116,385 
IVAS and others  30,083   26,059   39,038 
Financing income  6,637   25,708   28,975 
             
Total cost of revenues  36,720   51,767   184,398 
             
Gross profit  4,391   11,597   17,704 
             
Operating expenses:            
Selling and marketing  30,502   21,276   28,954 
Research and development  32,392   20,750   23,678 
General and administrative  46,803   42,584   52,949 
             
Total operating expenses  109,697   84,610   105,581 
             
Loss from operations  (105,306)  (73,013)  (87,877)
Other (expenses) income  (7,058)  12,888   (1,369)
Interest income  2,190   919   2,029 
Interest expenses  (2,041)  (12,439)  (10,185)
Realized (loss) gain on short-term investments  (98,112)  552   (100)
Realized gain on disposal of long-term investments  -   -   37,311 
Impairment of long-term investments  (4,258)  (102,307)  (113,073)
             
Loss before provision of income tax and (loss) earnings in equity method investments and noncontrolling interest, net of tax  (214,585)  (173,400)  (173,264)
Income tax expenses  (3,124)  (2,470)  (4,479)
             
Loss before (loss) earnings in equity method investments and noncontrolling interest, net of tax  (217,709)  (175,870)  (177,743)
(Loss) earnings in equity method investments, net of tax  (5,468)  (18,183)  67,240 
             
Loss from continuing operations $(223,177) $(194,053) $(110,503)

 

F-5F- 5

 

RENREN INC.

RENREN INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS - continued

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

  Years ended December 31, 
  2012  2013  2014 
          
Net income (loss) per share:            
Net income (loss) per share from continuing operations attributable to Renren Inc. shareholders:            
Basic $(0.03) $(0.03) $0.03 
Diluted $(0.03) $(0.03) $0.03 
             
Net income (loss) per share from discontinued operations attributable to Renren Inc. shareholders            
Basic $(0.04) $0.08  $0.03 
Diluted $(0.04) $0.08  $0.03 
             
Net income (loss) per share attributable to Renren Inc. shareholders:            
Basic $(0.07) $0.06  $0.06 
Diluted $(0.07) $0.06  $0.06 
             
Weighted average number of shares used in calculating net income (loss) per share from continuing operations attributable to Renren Inc. shareholders:            
Basic  1,151,659,545   1,118,091,879   1,059,446,436 
Diluted  1,151,659,545   1,118,091,879   1,067,631,709 
             
Weighted average number of shares used in calculating net income (loss) per share from discontinued operations attributable to Renren Inc. shareholders:            
Basic  1,151,659,545   1,118,091,879   1,059,446,436 
Diluted  1,151,659,545   1,130,739,922   1,067,631,709 
  Years ended December 31, 
  2015  2016  2017 
          
Discontinued operations:            
Income from the operations of the discontinued operations, net of tax expenses of $944, $102 and $nil for the years ended December 31, 2015, 2016 and 2017, respectively $1,520  $391  $- 
Gain on deconsolidation of subsidiaries, net of tax of $nil, $454 and $nil for the years ended December 31, 2015, 2016 and 2017, respectively  -   8,310   - 
             
Income from discontinued operations, net of tax expenses of $944, $556 and $nil for the years ended December 31, 2015, 2016 and 2017, respectively  1,520   8,701   - 
             
Net loss  (221,657)  (185,352)  (110,503)
Net loss attributable to the noncontrolling interest  1,529   -   76 
             
Net loss from continuing operations attributable to Renren Inc.  (221,648)  (194,053)  (110,427)
Net income from discontinued operations attributable to Renren Inc.  1,520   8,701   - 
             
Net loss attributable to Renren Inc. $(220,128) $(185,352) $(110,427)

F- 6

 

The accompanying notes are an integral part of these consolidated financial statements.RENREN INC.

RENREN INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMEOPERATIONS - continued

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

  Years ended December 31, 
  2012  2013  2014 
          
Net income (loss) $(75,053) $63,641  $60,078 
             
Other comprehensive (loss) income, net of tax:            
Foreign currency translation  1,289   4,805   (5,039)
Net unrealized gain (loss) on available-for-sale investments, net of tax of $nil for the years ended December 31, 2012, 2013 and 2014, respectively  32,374   183,932   13,223 
Transfer to statements of operations of realized gain on available-for-sale securities, net of tax of $nil for the years ended December 31, 2012, 2013 and 2014, respectively  (1,283)  (55,768)  (175,191)
Transfer to statements of operations as a result of other-than-temporary impairment of short-term investments, net of tax of $nil  -   2,098   - 
             
Other comprehensive (loss) income  32,380   135,067   (167,007)
             
Comprehensive (loss) income  (42,673)  198,708   (106,929)
Less: Comprehensive loss attributable to noncontrolling interest  27   92   382 
             
Comprehensive (loss) income attributable to Renren Inc. $(42,700) $198,800  $(106,547)
  Years ended December 31, 
  2015  2016  2017 
          
Net loss per share:            
Net loss per share from continuing operations attributable to Renren Inc. shareholders:            
Basic $(0.22) $(0.19) $(0.11)
Diluted $(0.22) $(0.19) $(0.11)
             
Net income per share from discontinued operations attributable to Renren Inc. shareholders            
Basic $0.00  $0.01  $- 
Diluted $0.00  $0.01  $- 
             
Net loss per share attributable to Renren Inc. shareholders:            
Basic $(0.22) $(0.18) $(0.11)
Diluted $(0.22) $(0.18) $(0.11)
             
Weighted average number of shares used in calculating net loss per share from continuing operations attributable to Renren Inc. shareholders:            
Basic  1,019,378,556   1,022,664,396   1,028,537,406 
Diluted  1,019,378,556   1,022,664,396   1,028,537,406 
             
Weighted average number of shares used in calculating net income per share from discontinued operations attributable to Renren Inc. shareholders:            
Basic  1,019,378,556   1,022,664,396   1,028,537,406 
Diluted  1,027,236,202   1,027,176,963   1,028,537,406 

 

See theThe accompanying notes toare an integral part of these consolidated financial statements.

RENREN INC.F- 7

RENREN INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands of US dollars, except share data and per share data, or otherwise noted)

  Years ended December 31, 
  2015  2016  2017 
          
Net loss $(221,657) $(185,352) $(110,503)
             
Other comprehensive income (loss), net of tax:            
Foreign currency translation  (7,777)  (10,994)  9,585 
Net unrealized gain (loss) on available-for-sale investments, net of tax of $nil for the years ended December 31, 2015, 2016 and 2017, respectively  40,695   (18,518)  3,891 
Transfer to statements of operations of realized gain on available-for-sale investments, net of tax of $nil for the years ended December 31, 2015, 2016 and 2017, respectively  (3,568)  (729)  (3,243)
             
Other comprehensive income (loss)  29,350   (30,241)  10,233 
             
Comprehensive loss  (192,307)  (215,593)  (100,270)
Less: Comprehensive loss attributable to noncontrolling interest  1,529   -   76 
             
Comprehensive loss attributable to Renren Inc. $(190,778) $(215,593) $(100,194)

The accompanying notes are an integral part of these consolidated financial statements.

F- 8

RENREN INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

                                Accumulated  Total       
  Class A  Class B        Additional           other  Renren  Non-    
  ordinary shares  ordinary shares  Treasury shares  paid-in  Subscription  Accumulated  Statutory  comprehensive  Inc.'s  controlling  Total 
  Shares  Amount  Shares  Amount  Shares  Amount  capital  receivable  deficit  reserves  income  equity  interest  equity 
                                           
Balance at January 1, 2012  770,912,350  $771   398,763,450  $399   (18,267,684) $(25,597) $1,407,059   -  $(183,228) $3,507  $7,334  $1,210,245  $300  $1,210,545 
Stock-based compensation  -   -   -   -   -   -   10,897   -   -   -       10,897   -   10,897 
Other comprehensive income  -   -   -   -   -   -   -   -   -   -   32,380   32,380   -   32,380 
Net loss  -   -   -   -   -   -   -   -   (75,026)  -   -   (75,026)  (27)  (75,053)
Provision of statutory reserves  -   -   -   -   -   -   -   -   (3,205)  3,205   -       -   - 
Exercise of share option and restricted shares vesting  13,189,706   13   3,916,667   4   -   -   3,571   -   -   -   -   3,588   -   3,588 
Repurchase of ordinary shares  (54,253,314)  (54)  -   -   (54,253,314)  (76,131)  1,100   -   -   -   -   (75,085)  -   (75,085)
Advances to shareholders  -   -   -   -   -   -   (1,605)  -   -   -   -   (1,605)  -   (1,605)
Cancellation of treasury shares  -   -   -   -   72,520,998   101,728   (101,728)  -   -   -   -   -   -   - 
Acquisition 35% noncontrolling interest in Qingting  -   -   -   -   -   -   (250)  -   -   -   -   (250)  (287)  (537)
Share subscription receivables of JiehunChina  -   -   -   -   -   -   -   (229)  -   -   -   (229)  229   - 
                                                         
Balance at December 31, 2012  729,848,742  $730   402,680,117  $403   -   -  $1,319,044  $(229) $(261,459) $6,712  $39,714  $1,104,915  $215  $1,105,130 
Stock-based compensation  -   -   -   -   -   -   16,138   -   -   -   -   16,138   -   16,138 
Other comprehensive income  -   -   -   -   -   -   -   -   -   -   135,067   135,067   -   135,067 
Net income  -   -   -   -   -   -   -   -   63,733   -   -   63,733   (92)  63,641 
Exercise of share option and restricted shares vesting  16,763,199   17   2,708,333   2   -   -   4,013   -   -   -   -   4,032   -   4,032 
Repurchase of ordinary shares  (56,635,569)  (57)  -   -   -   -   (55,517)  -   -   -   -   (55,574)  -   (55,574)
Transfer Class B shares to Class A shares  100,000,000   100   (100,000,000)  (100)  -   -   -   -   -   -   -   -   -   - 
Bad debt provision of share subscription receivables  -   -   -   -   -   -   -   229   -   -   -   229   -   229 
Receipt of repayment from shareholder  -   -   -   -    -   -   1,605   -   -   -   -   1,605   -   1,605 
                                                         
Balance at December 31, 2013  789,976,372  $790   305,388,450  $305   -   -  $1,285,283   -  $(197,726) $6,712  $174,781  $1,270,145  $123  $1,270,268 
Stock-based compensation  -   -   -   -   -   -   23,604   -   -   -       23,604   -   23,604 
Other comprehensive income  -   -   -   -   -   -   -   -   -   -   (167,007)  (167,007)  -   (167,007)
Net income  -   -   -   -   -   -   -   -   60,460   -   -   60,460   (382)  60,078 
Exercise of share option and restricted shares vesting  10,792,736   11   -   -   -   -   2,748   -   -   -   -   2,759   -   2,759 
Repurchase of ordinary shares  (80,728,137)  (81)  -   -   -   -   (87,242)  -   -   -   -   (87,323)  -   (87,323)
Balance at December 31, 2014  720,040,971  $720   305,388,450  $305   -   -  $1,224,393   -  $(137,266) $6,712  $7,774  $1,102,638  $(259) $1,102,379 

                       Accumulated  Total       
  Class A  Class B  Additional        other  Renren  Non-    
  ordinary shares  ordinary shares  paid-in  Accumulated  Statutory  comprehensive  Inc.'s  controlling  Total 
  Shares  Amount  Shares  Amount  capital  deficit  reserves  income  equity  interest  equity 
                                  
Balance at January 1, 2015  720,040,971  $720   305,388,450  $305  $1,224,393  $(137,266) $6,712  $7,774  $1,102,638  $(259) $1,102,379 
Stock-based compensation  -   -   -   -   28,241   -   -   -   28,241   -   28,241 
Other comprehensive income  -   -   -   -   -   -   -   29,350   29,350   -   29,350 
Net loss  -   -   -   -   -   (220,128)  -   -   (220,128)  (1,529)  (221,657)
Exercise of share option and restricted shares vesting  5,236,230   5   -   -   1,362   -   -   -   1,367   -   1,367 
Repurchase of ordinary shares  (10,912,110)  (11)  -   -   (10,281)  -   -   -   (10,292)  -   (10,292)
Purchase of noncontrolling  interest in Jiehun China  -   -   -   -   119   -   -   -   119   (119)  - 
Decrease in equity interest in Beijing Wanmen Education Technology Co., Ltd. ("Wanmen")  -   -   -   -   (751)  -   -   -   (751)  751   - 
                                             
Balance at December 31, 2015  714,365,091  $714   305,388,450  $305  $1,243,083  $(357,394) $6,712  $37,124  $930,544  $(1,156) $929,388 
Stock-based compensation  -   -   -   -   23,544   -   -       23,544   -   23,544 
Other comprehensive loss  -   -   -   -   -   -   -   (30,241)  (30,241)  -   (30,241)
Net loss  -   -   -   -   -   (185,352)  -   -   (185,352)  -   (185,352)
Exercise of share option and restricted shares vesting  5,286,327   6   -   -   1,144   -   -   -   1,150   -   1,150 
Deconsolidation of Wanmen  -   -   -   -   (1,179)  -   -   -   (1,179)  1,156   (23)
                                             
Balance at December 31, 2016  719,651,418  $720   305,388,450  $305  $1,266,592  $(542,746) $6,712  $6,883  $738,466   -  $738,466 
Stock-based compensation  -   -   -   -   28,016   -   -   -   28,016   -   28,016 
Other comprehensive loss  -   -   -   -   -   -   -   9,477   9,477   756   10,233 
Noncontrolling interest arising from an acquisition  -   -   -   -   -   -   -   756   756   24,499   25,255 
Capital contribution from non-controlling shareholder  -   -   -   -   7,954   -   -   -   7,954   8,763   16,717 
Net loss  -   -   -   -   -   (110,427)  -   -   (110,427)  (76)  (110,503)
Exercise of share option and restricted shares vesting  6,898,035   7   -   -   555   -   -   -   562   -   562 
                                             
Balance at December 31, 2017  726,549,453  $727   305,388,450  $305  $1,303,117  $(653,173) $6,712  $17,116  $674,804   33,942  $708,746 

 

The accompanying notes are integral part of these consolidated financial statements.

 

F-8F- 9

RENREN INC.

RENREN INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of US dollars, or otherwise noted)

 

  Years ended December 31, 
  2012  2013  2014 
Cash flows from operating activities:            
Net income (loss) $(75,053) $63,641  $60,078 
Adjustments to reconcile net income (loss) to net cash used in operating activities:            
Share-based compensation expense  10,897   16,138   21,649 
Gain on deconsolidation of subsidiaries  -   (132,665)  (489)
Gain on disposal of equity method investment  -   -   (56,993)
Depreciation and amortization  16,138   19,188   18,488 
Exchange loss (gain) on offshore accounts  1,769   (1,476)  2,277 
Impairment on intangible assets  -   208   15,461 
Impairment on equity method investments  -   23,025   - 
Impairment on short-term investments  -   2,098   - 
Impairment on goodwill  -   -   46,864 
Impairment on long lived assets  -   90   - 
Provision for doubtful accounts-accounts receivable  1,357   813   2,090 
Provision for other current assets  3,543   146   - 
Provision for advance to supplier  1,020   252   305 
Provision for subscription receivable  -   229   - 
Loss (gain) on disposal of equipments  128   (86)  1,797 
Gain on short-term investments and fair value change of derivatives  (4,317)  (56,022)  

(139,265

)
(Earnings) loss in equity method investments  7,471   (20,317)  (49,015)
Changes in operating assets and liabilities:            
Accounts and notes receivable  (4,639)  1,631   (6,480)
Prepaid expenses and other current assets  4,199   (19,625)  (9,740)
Other non-current assets  (5,054)  (488)  3,164 

Intercompany loan to Qianjun Technology (see Note 4.3)

  -   -   

21,831

 
Accounts payable  15,933   2,213   762 
Amounts due from/to related parties  341   13,063   61,404 
Accrued expenses and other payables  11,603   3,861   (6,509)
Deferred revenue and advance from customers  3,104   (848)  (1,195)
Other non-current liabilities  -   156   (152)
Income tax payable  (494)  1,054   1,614 
Deferred income taxes  967   (8,472)  

4,576

 
Capital distribution received from Japan Macro  -   19,158   63,917 

Net cash provided by (used in) operating activities

  (11,087)  (73,035)  

56,439

 
Cash flows from investing activities:            
(Increase) decrease in term deposits  150,911   58,235   (3,414)
Proceeds from sale of available for sale securities  81,136   118,958   415,528 
Proceeds from sale of derivative financial instruments  1,297   959   80,861 
Proceeds from principal return on
Series 2012-A Senior Secured Refi Loan Notes
  414   1,353   

1,370

 

Proceeds from sale of subsidiary, net cash disposed

  -   -   

3,001

 
Proceeds from sale of equity method investment  -   -   46,484 
Capital distribution received from equity method investees  -   -   74,721 
Dividend received from available for sale securities  -   -   1,050 
Purchase of available for sale securities  (140,677)  (88,681)  (129,407)
Purchase of derivative financial instruments  -   (1,999)  (118,470)
Purchase of equity method investments, call option and warrant  (55,155)  (20,000)  (212,763)
Purchase of cost method investment  -   (116)  (31,969)
Purchases of Series 2012-A Senior Secured Refi Loan Notes  (10,000)  -   - 
Proceeds from disposal of equipment  -   338   386 
Purchases of equipment and property  (39,639)  (29,077)  (8,028)
Purchases of intangible assets  (1,029)  (1,349)  (1,574)
Cash disposed of from deconsolidation of subsidiaries  -   (18,637)  -
  Years ended December 31, 
  2015  2016  2017 
Cash flows from operating activities:            
Net loss $(221,657) $(185,352) $(110,503)
Adjustments to reconcile net loss to net cash used in operating activities:            
Share-based compensation expense  28,241   23,544   28,016 
Gain on deconsolidation of subsidiaries  -   (12,895)  (1,825)
Loss (earnings) in equity method investments  4,943   18,183   (67,240)
Realized gain on disposal of long-term investments  -   -   (37,311)
Depreciation and amortization  8,935   2,678   2,029 
Exchange loss on offshore accounts  174   4   - 
Impairment on long-term investments  4,258   102,307   113,073 
Loss on expiration of warrant  -   901   - 
Interest income from long-term available-for-sale investment  -   (298)  (108)
Provision for doubtful accounts-accounts receivable  788   (205)  46 
Provision for doubtful accounts- others  836   369   (39)
Provision for financing receivable losses  3,665   12,436   12,745 
Write off of financing receivable  -   (119)  - 
(Gain) loss on disposal of equipment  (988)  (95)  13 
Loss (gain) on short-term investments and fair value change of derivatives  98,112   (552)  100 
Realized gain on long-term available-for-sale investment  -   (729)  - 
Fair value change of put option and liability-classified warrant  6,270   (105)  (195)
Fair value change of contingent consideration  -   -   2,545 
             
Changes in operating assets and liabilities:            
Accounts and notes receivable  7,613   (881)  2,116 
Financing receivable  (217)  10   (321)
Prepaid expenses and other current assets  (22,788)  7,934   (20,842)
Inventory  -   -   (76,605)
Other non-current assets  19,313   490   434 
Intercompany loan to Online Gaming (see Note 4)  -   7,500   - 
Accounts payable  1,266   797   12,599 
Amounts due from/to related parties  1,260   1,167   7,514 
Accrued expenses and other current liabilities  1,090   2,037   8,576 
Interest payable to investors  870   (531)  (4,048)
Deferred revenue  397   2,780   4,109 
Other non-current liabilities  966   5,332   5,862 
Income tax payable  (2,624)  2,288   4,296 
Profit distribution received from Japan Macro  9,235   -   - 
Net cash used in operating activities  (50,042)  (11,005)  (114,964)
             
Cash flows from investing activities:            
Placement of restricted cash  (22,532)  (25,000)  (455,956)
Release of restricted cash  -   15,370   416,907 
Decrease in term deposits  493,471   -   - 
Proceeds from principal repayments of financing receivable  126,535   626,775   925,951 
Payments to provide financing receivable  (289,041)  (799,174)  (748,725)
Proceeds from sale of trading securities  63,822   22,632   7,973 
Proceeds from sale of available-for-sale securities  62,704   -   - 
Proceeds from sale of derivative financial instruments  2,580   -   - 
Proceeds from principal return on Series 2012-A Senior Secured Sofi Loan Notes ("SoFi Loan Note")  984   5,879   - 

 

F- 10

 

RENREN INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(In thousands of US dollars, or otherwise noted)

 

  Years ended December 31, 
  2012  2013  2014 
Cash consideration received from disposition of Qingting  -   81   - 
Loan to third parties  -   -   (8,561)
Net cash provided by (used in) investing activities  (12,742)  20,065   

109,215

 
Cash flows from financing activities:            
Repurchase of ordinary shares  (53,630)  (55,575)  (76,462)
Deposits for share repurchase  -   (10,860)  - 
Proceeds from exercise of share options  1,898   2,913   2,514 
Advances to nominee shareholders of Jiexi Haohe  (1,605)  -   - 
Contribution from nominee shareholders of Jiexi Haohe  -   1,605   - 
Proceeds from the issuance of promissory note issued to Nuomi Inc.  -   60,884   - 
Repayment of promissory note issued to Nuomi Inc.  -   -   (60,884)
Consideration paid for acquiring 35% noncontrolling interest in Qingting  (555)  -   - 
Net cash used in financing activities  (53,892)  (1,033)  (134,832)
Net increase (decrease) in cash and cash equivalents  (77,721)  (54,003)  30,822 
Cash and cash equivalents at beginning of year  284,643   207,438   154,308 
Effect of exchange rate changes  516   873   

(2,105

)
Cash and cash equivalents at end of year $207,438  $154,308  $183,025 
Supplemental schedule of cash flows information:            
Income taxes paid $481  $11  $11 
Schedule of non-cash activities:            
Non-cash capital contribution by noncontrolling shareholder of JiehunChina $229   -   - 
Payable for acquisition of property, plant and equipments  included in accrued expenses and other liabilities $847  $319   - 
Acquisition of property, plant and equipments and other intangible assets through utilization of deposits $5,391  $15,246  $1,514 
Repurchase of ordinary shares through utilization of deposits $21,455   -  $10,860 
  Years ended December 31, 
  2015  2016  2017 
          
Proceeds from sale of equity method investments  94   18,460   94,604 
Proceeds from sales of cost method investment  -   -   32,726 
Proceeds from capital withdrawal from equity method investees  60,279   29,634   148 
Dividend received from trading and available-for-sales securities  176   -   - 
Purchase of trading securities  (67,986)  (19,702)  (7,653)
Purchase of available-for-sale securities  (29,833)  -   - 
Purchase of derivative financial instruments  (101,409)  (264)  - 
Purchase of equity method investments, call option and warrant  (225,885)  (16,331)  (4,940)
Purchase of cost method investments  (179,262)  (28,344)  (5,673)
Purchase of long-term available-for-sale investments  (132,957)  (6,150)  (3,000)
Proceeds from disposal of equipment  1,084   142   63 
Purchases of equipment and property  (806)  (357)  (135)
Purchases of intangible assets  (386)  -   - 
Settlement of put option  -   (7,000)  - 
Cash disposed of from deconsolidation of subsidiaries  -   (6,176)  (1,179)
Acquisition of subsidiaries, net of cash acquired  -   -   (23,305)
Loan to a noncontrolling shareholder  (1,930)  -   - 
Loan to related parties  (4,775)  (14,625)  (11,113)
Proceeds from repayment of related party loans  4,775   11,701   8,871 
Loans to third parties  (21,898)  (4,518)  (2,220)
Proceeds from repayment of third party loans  13,212   3,765   892 
             
Net cash (used in) provided by investing activities  (248,984)  (193,283)  224,236 
             
Cash flows from financing activities:            
Repurchase of ordinary shares  (10,292)  -   - 
Proceeds from exercise of share options  1,231   1,430   262 
Proceeds from investors  174,543   844,712   1,580,544 
Payment to investors  (125,001)  (637,931)  (1,688,655)
Repayment of short-term borrowings  -   (108,292)  (24,060)
Repayment of long-term borrowings  -   (23,608)  (43,965)
Proceeds from short-term borrowings  107,134   39,072   65,859 
Proceeds from long-term borrowings  130,885   -   26,639 
Proceeds from loan provided by a related party  -   10,692   - 
Placement of restricted cash  (100,000)  -   - 
Release of restricted cash  -   100,000   - 
Capital injection by noncontrolling shareholders  1,930   -   16,263 
             
Net cash provided by (used in) financing activities  180,430   226,075   (67,113)
             
Net (decrease) increase in cash and cash equivalents  (118,596)  21,787   42,159 
Cash and cash equivalents at beginning of year  183,025   60,837   79,370 
Effect of exchange rate changes  (3,592)  (3,254)  7,066 
             
Cash and cash equivalents at end of year $60,837  $79,370  $128,595 
             
Supplemental schedule of cash flows information:            
Interest paid  2,793  $12,249  $10,729 
Income taxes paid $6,744  $123  $180 

F- 11

RENREN INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(In thousands of US dollars, or otherwise noted)

  Years ended December 31, 
  2015  2016  2017 
          
Schedule of non-cash activities:            
Payable for acquisition of property, plant and equipments included in accrued expenses and other liabilities $43  $3  $6 
Purchase of long-term available-for-sale investment through exchange of equity interest in a subsidiary  -   1,742   - 
Acquisition of business settled by forgiveness of financing receivable  -   -   21,201 
Acquisition of entity through settlement of long-term investments  -   -   5,787 
Acquisition of entity through settlement of loan to a related party  -   -   200 
Acquisition of equity method investment through settlement of loan from a related party $-   4,905   - 

 

The accompanying notes are an integral part of these consolidated financial statements.

F- 12

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Renren Inc. (the "Company"),was incorporated in the Cayman Islands, andIslands. Through its social networking internet platform, the Company, its consolidated subsidiaries, variable interest entities ("VIEs") and VIEs' subsidiaries (collectively referred to as the "Group""Company") arewere primarily engaged in the operation of its social networking internet platform ("SNS"), provision of through which it provides online advertising services and internet value-added services ("IVAS") as well as the operation of financial services platform to provide internet finance services. During the second half year of 2017, the Company, through the acquisition of a number of used car dealerships in China, also started the business of used car trading which represented a significant portion of its operations for the year ended December 31, 2017. Refer to Note 5 for further details.

During 2015, the Company reached a resolution to dispose of its online gaming business ("Online Gaming"), includingwhich was subsequently sold in March 2016. The disposal of Online Gaming represented a strategic shift and had a major effect on the Company’s result of operations. Accordingly, revenues and expenses and cash flows related to the Online Gaming entities have been reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented. The consolidated balance sheet as of December 31, 2015, consolidated statements of operations and consolidated statements of cash flows for the year ended December 31, 2015 have been adjusted to reflect this change.

Beginning with the fourth quarter of 2014, the Company launched Renren Fenqi platform (“Renren Fenqi”), a financial service platform which provides financing to college students in China for making purchases on e-commerce platforms. From the first quarter of 2015, the Company started to provide credit financing to used automobile dealers and apartment rental financing to individuals and apartment agents. Additionally, during 2015, the Company also launched Renren Licai (“Renren Licai”), a platform through which the Company identifies individual investors and transfers the creditors’ rights arising from aforementioned financing to individual investors. Additionally, in August 2017, the Company stopped accepting new funds from Renren Licai. In the first and second quarter of 2016, the Company stopped providing apartment rental financing to individuals and apartment agents, and financing to college students, respectively. As of December 31, 2017, the principal element of the Company's financing business is its financing to used automobile dealers.

On September 30, 2016, the Company announced a plan to spin off a newly formed subsidiary, Oak Pacific Investment (the "OPI") that would hold the online talent show VIP membershipsbusiness ("Woxiu") and most of its investments in minority stakes in privately held companies. On December 22, 2016, the Company formed a special committee to review the terms of the proposed transaction. Subsequently, the Company revised the plan to substitute Beijing Zhenzhong Interactive Information Technology Co., Ltd ("Zhenzhong", a subsidiary of one of the Company's VIEs) for Woxiu. On April 30, 2018, the Company announced that OPI will offer newly issued ordinary shares of OPI in a private placement to those shareholders of Renren as of the Record Date who satisfy all three of the following criteria: (1) the shareholder is an “accredited investor,” as such term is defined under the U.S. Securities Act of 1933, as amended, (2) the shareholder is a “qualified purchaser,” as such term is defined under the U.S. Investment Company Act of 1940, as amended, and (3) the shareholder is not a resident of a jurisdiction where the offering would be illegal. Additionally, the Company also announced a cash dividend payable by Renren to all shareholders other IVAS, etc.than those shareholders who waive the cash dividend in connection with the private placement described above. The amount of the cash dividend will depend on the results of the private placement but Renren expects the cash dividend to be between US$0.4831 and online gaming operations, through its platform,US$0.6096 per ordinary share of Renren. The cash dividend and the private placement are part of an integrated series of transactions designed to address concerns that Renren may be deemed to be an investment company within the meaning of the Investment Company Act. Upon the closing of the private placement, Renren will no longer hold any shares of OPI and OPI will be entirely owned by the purchasers in the People's Republicprivate placement. Following the transaction, the Company will no longer hold any shares of China (the "PRC").OPI and OPI will be deconsolidated from the Company's consolidated financial statements. Additionally, the Company concluded that the disposal of OPI represents a non-prorata distribution of shares of OPI to selected shareholders combined with a cash dividend to the remaining shareholders. The Company expects to account for the disposal of OPI at fair value and will record the distribution of OPI to selected shareholders and the payment of cash to the others at fair value in its consolidated financial statements at the time the transaction takes place.

F- 13

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

As of December 31, 2014,2017, Renren Inc.'s subsidiaries, VIEs and VIEs' subsidiaries are as follows:

 

  Later of date  Percentage of   
  of incorporation Place of legal ownership  
Name of Subsidiaries or acquisition incorporation by Renren Inc. Principal activities
Subsidiaries:  
Subsidiaries:        
CIAC/ChinaInterActiveCorp ("CIAC") August 5, 2005 Cayman Islands 100%100% Investment holding
Renren-JingweiKaixin Auto Group (formerly named as Renren Wealth Inc.) March 7, 2011 Cayman Islands 100%100% InactiveInvestment holding
Link224 Inc. May 31, 2011 Cayman Islands 100%100% Investment holding
Renren Lianhe Holdings September 2, 2011 Cayman Islands 100%100% Investment holding
Wole Inc. October 27, 2011 Cayman Islands 100%100% Investment holding
JiehunChina Inc. ("JiehunChina") June 14, 2011 Cayman Islands 85.43%100%Investment holding
Renren Gongying Inc.October 2, 2015Cayman Islands100%Investment holding
Renren Study Inc.April 5, 2012Cayman Islands100%Investment holding
Renren Finance, Inc.December 15, 2014Cayman Islands100%Internet business
Renren CRSP Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren CHYP Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren PLML Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren KURY Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren ONER Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren BLCR Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren ZHCH Holdings Inc.October 14, 2016Cayman Islands100%Investment holding
Renren LSTAR Holdings Inc.October 17, 2016Cayman Islands100%Investment holding
Renren CHRYPH Holdings Inc.October 31, 2016Cayman Islands100%Investment holding
Renren SF Holdings Inc.January 9, 2017Cayman Islands100%Investment holding
Oak Pacific InvestmentSeptember 14, 2017Cayman Islands100%Investment holding
Jet Sound Hong Kong Company LimitedMay 7, 2011Hong Kong100%Investment holding
Renren Game Hong Kong Limited ("Game HK")March 8, 2012Hong Kong100% Investment holding
Renren Giant Way Limited ("Renren Giant Way") May 17, 2012 Hong Kong 100%100% Investment holding
Renren Finance, Inc.Lianhe (Hong Kong) Co. Limited. December 15, 2014May 16, 2016 Cayman IslandsHong Kong 100%100Inactive
Funall Technology Inc.January 5, 2011Cayman Islands100%Investment holding
Xin Ditu HoldingsSeptember 7, 2011Cayman Islands100%% Investment holding
Renren Study Inc.April 5, 2012Cayman Islands100%Investment holding
Jingwei Inc. LimitedWinday Company Limited. July 16, 2012Cayman Islands100%Inactive
Happy Link Corporation LimitedMay 7, 201126, 2016 Hong Kong 85.43%100% Investment holding
Renren Game HongKong Limited ("Game HK")Giantly Limited. March 8, 2012August 16, 2016 Hong Kong 100%100% Investment holding
Jupiter Way Limited ("Jupiter Way").Renren Gentle Height Company Limited. July 16, 2012December 7, 2016 Hong Kong 100%100% InactiveInvestment holding
Renren Game Japan Inc.August 22, 2011Japan100%Online Games
Renren Game Korea Co., LtdSeptember 30, 2011Korea100%Online Games
Funall Technology Development (Taiwan) Co., Ltd.September 6. 2010Taiwan100%Online Games
Renren Game USA Inc.March 8, 2012USA100%Online Games
AppsurdityChime Technologies, Inc. September 7, 2012 USA 100%100%Internet business
Renren U.S. Holdco, Inc.July, 2017USA100%Investment holding
Sindeo Inc.July 3, 2017USA100%Internet business
Geographic Farming LLCAuguest 24, 2017USA100%Internet business
Trucker Path Inc.December 28, 2017USA100% Internet business
Qianxiang Shiji Technology Development (Beijing) Co., Ltd. ("Qianxiang Shiji") March 21, 2005 PRC 100%100% Investment holding
Beijing WoleWoxiu Information Technology Co. Ltd. ("Beijing Wole"Woxiu") October 27, 2011 PRC 100%100% Investment holding
Renren Game Network Technology Development (Shanghai) Co., Ltd. ("Renren Network")November 30, 2012PRC100%Investment holding

Beijing JiexiJiexun Shiji Technology Development Co., Ltd.

("Jiexi ("Jiexun Shiji")

 April 26, 2012 PRC 85.43%100% Investment holding
Renren Huijin (Tianjin) Technology Co., Ltd. ("Huijin") October 10, 2012 PRC 100%100% Investment holding
Joy Interactive (Beijing) Technology Development Co., Ltd. April 24, 2013 PRC 100%100% Online GamesInvestment holding
Beijing Jingwei Sinan InformationShanghai Renren Financial Leasing Co., LtdMay 25, 2015PRC100%Internet business
Qianxiang Lianhe Technology Development (Beijing) Co., LtdNovember 12, 2016PRC100%Internet business
Shanghai Renren Automobile Technology Co., Ltd May 22, 2014August 18, 2017 PRC 100%100%Investment holding

F- 14

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

Renren Zhenhan Technology Development (Beijing) Co., LtdNovember 13, 2017PRC100% Investment holding
         
Variable Interest Entities:        
Beijing Qianxiang Tiancheng Technology Development Co., Ltd. ("Qianxiang Tiancheng") October 28, 2002 PRC N/AIVAS business
Shanghai Renren Games Technology
Development Co., Ltd. ("Renren Games").November 15, 2012PRC N/A Online Games

Jiexi Haohe (Beijing) Technology

Development Co.,Ltd. ("Jiexi Haohe")

February 5, 2013PRCN/A IVAS business
Beijing Jingwei Zhihui Information Technology Co., LtdMarch 19, 2014PRCN/AInternet Business
Guangzhou Xiuxuan Brokers Co., Ltd.(“Guangzhou Xiuxuan”) September 22, 2014 PRC N/A IVAS business
Beijing Qianxiang Yixin Technology Development Co., LtdSeptember 1, 2016PRCN/AInvestment holding
Shanghai Qianxiang Changda Internet Information Technology Development Co., Ltd. ("Shanghai Changda")October 25, 2010PRCN/AInternet business
 Shanghai Jieying Automobile Sales  Co., Ltd. ("Shanghai Jieying")Feburay 27, 2017PRCN/AAutomobile business
         
Subsidiaries of Variable Interest Entities:        
Beijing Qianxiang Wangjing Technology Development Co., Ltd. ("Qianxiang Wangjing") November 11, 2008 PRC N/A Internet business
Shanghai Qianxiang Changda Internet Information Technology Development Co., Ltd. ("Shanghai Changda")October 25, 2010PRCN/A Internet business
Beijing Wole Shijie Information Technology Co., Ltd. ("Wole Shijie") October 27, 2011 PRC N/A Technology development and service
Suzhou Sijifeng Internet InformationBeijing Kirin Wings Technology Development Co., Ltd.March 22, 2012PRCN/AOnline Games
Beijing Qilin Wings Technology Development Co., Ltd.. January 16, 2013 PRC N/A Internet business
Tianjin Joy Interactive Technology Development Co., Ltd..March 29, 2013PRCN/AOnline Games
Beijing Wanmen Education Technology Co., LtdMay 19, 2014PRCN/AInternet Business
Beijing Zhenzhong InteractiveHudong Information Technology Co., LtdLtd. December 23, 2014 PRC N/A Internet Businessbusiness
Shanghai Wangjing Commercial Factoring Co., Ltd.July 28, 2015PRCN/AFactoring business
Beijing Jingwei Zhihui Information Technology Co., Ltd. (“Jingwei Zhihui”)March 19, 2014PRCN/AInternet business
Shanghai Wangjing Investment Management Co., Ltd.April 20, 2015PRCN/AInternet business
Shanghai Mumian Interactive Internet Information Service Co., Ltd.June 16, 2016PRCN/AIVAS business
Fenqi Winday Company Limited,February 29, 2016Hong KongN/AInternet business
Guangzhou Qunge Information Technology Co., Ltd.August 26, 2016PRCN/AIVAS business
Tianjin Zhenzhong Interactive Information Technology Co., Ltd.April 8, 2016PRCN/AInvestment holding
Beijing Qianxiang Wanxin Technology Development Co., Ltd.November 18, 2016PRCN/AInvestment holding
Shanghai Heiguo Internet Information Technology Co., Ltd.Feburary 27,2017PRCN/AInvestment holding
Renren (Tianjin) Insurance Broker Co,. Ltd.August 24, 2017PRCN/AInvestment holding
Renren Zhencai Technology Development (Beijing) Co., Ltd.December 15, 2017PRCN/AInvestment holding
Jieying Baolufeng Automobile Sales (Shenyang) Co., Ltd.June 14, 2017PRCN/AAutomobile business
Chongqing Jieying Shangyue Automobile Sales  Co., Ltd.July 3, 2017PRCN/AAutomobile business
Jiangsu Jieying Ruineng Automobile Sales  Co., Ltd.May 16, 2017PRCN/AAutomobile business
Dalian Yiche Jieying Automobile Sales  Co., Ltd.June 27, 2017PRCN/AAutomobile business
Henan Jieying Hengxin Automobile Sales  Co., Ltd.June 29, 2017PRCN/AAutomobile business

F- 15

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

Shandong Jieying Huaqi Automobile Service  Co., Ltd.July 20, 2017PRCN/AAutomobile business
Neimenggu Jieying Kaihang Automobile Sales  Co., Ltd.July 14, 2017PRCN/AAutomobile business
Hangzhou Jieying Yifeng Automobile Sales  Co., Ltd.August 1, 2017PRCN/AAutomobile business
Jilin Jieying Taocheguan Automobile Sales  Co., Ltd.October 31, 2017PRCN/AAutomobile business
Suzhou Jieying Chemaishi Automobile Sales Co., Ltd.October 27, 2017PRCN/AAutomobile business
Cangzhou Jieying Bole Automobile Sales  Co., Ltd.August 10, 2017PRCN/AAutomobile business
Shanghai Jieying Diyi Automobile Sales  Co., Ltd.October 19, 2017PRCN/AAutomobile business
Ningxia Jieying Xianzhi Automobile Sales  Co., Ltd.July 26, 2017PRCN/AAutomobile business
Wuhan Jieying Chimei Automobile Sales  Co., Ltd.November 20, 2017PRCN/AAutomobile business

F- 16

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements

 

PRC regulations currently limit direct foreign ownership of business entities providing value-added telecommunications services, online advertising services online game and internet services in the PRC where certain licenses are required for the provision of such services. To comply with these PRC regulations, the Company currently conducts substantially all of its businesses through two VIEs and their respective subsidiaries includingthe VIE Qianxiang Tiancheng and Renren Games.as well as its respective subsidiaries. Prior to March 2016, the Company also conducted its business through a VIE Jingwei Zhihui, which became a wholly owned subsidiary of Qianxiang Tiancheng in March 2016. Qianxiang Tiancheng is mainly engaged in the provision of online advertising, IVAS and IVAS. Renren Gamesinternet finance services. Jingwei Zhihui is primarilymainly engaged in the provision of online gaming.internet finance services. From June 2017, the Company also operates the used car trading business through a newly found VIE, Shanghai Jieying.

 

Qianxiang Shiji ("WFOE"), a wholly owned subsidiary of CIAC, and Shanghai Renren Automotive Technology Co., Ltd, or Shanghai Automotive ("WFOE"), Renren Network, a wholly owned subsidiary of Game HK ("WFOE")Jet Sound Hong Kong Company Limited., entered into a series of contractual arrangements with the VIEs that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs' financial results of operations, assets and liabilities in the Company's consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company's rights under the terms of the exclusive option agreement and power of attorney are substantive given the substantive participating rights held by SoftbankSB Pan Pacific Corporation as it relates to operating matters, which provide it with a substantive kick out right.

 

More specifically, the Company believes the terms of the contractual agreements are valid, binding and enforceable under PRC laws and regulations currently in effect. In particular the Company also believes that the minimum amount of consideration permitted by the applicable PRC law to exercise the exclusive option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the exclusive option agreement. A simple majority vote of the Company's board of directors is required to pass a resolution to exercise the Company's rights under the exclusive option agreement, for which the consent from Mr. Joe Chen's consentChen, who holds the most voting interests in the Company and is also the Company's chairman and CEO, is not required. The Company's rights under the exclusive option agreement give the Company the power to control the shareholders of the VIEs and thus the power to direct the activities that most significantly impact the VIEs' economic performance. In addition, the Company's rights under the powers of attorney also reinforce the Company's abilities to direct the activities that most significantly impact the VIEs' economic performance. The Company also believes that this ability to exercise control ensures that the VIEs will continue to execute and renew service agreements and pay service fees to the Company. By charging service fees in whatever amountsat the sole discretion of the Company, deems fit, and by ensuring that service agreements are executed and renewed indefinitely, the Company has the rights to receive substantially all of the economic benefits from the VIEs.

F- 17

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

The VIEs and their subsidiaries hold the requisite licenses and permits necessary to conduct the Company's business.business under the current business arrangements.

 

The contractual agreements below provide the Company with the power to direct the activities that most significantly affect the economic performance of the VIEs and enable the Company to receive substantially all of economic benefits and absorb the losses of the VIEs.

 

(1)Power of Attorney: WFOEs hold irrevocable power of attorney executed by the legal owners of the VIEs to exercise their voting rights on, including but not limited to dividend declaration, all matters at meetings of the legal owners of the VIEs and through such power of attorney has the right to control the operations of the VIEs. The power of attorney for Qianxiang Tiancheng will remain in force for ten years until December 22, 2020, and will be automatically renewed upon the extension of the terms of the relevant business operations agreements until the earlier of the following events: (i) nominee loses his/her position in WFOEsQianxiang Shiji or WFOEsQianxiang Shiji issue a written notice to dismiss or replace nominee; and (ii) the business operations agreements among WFOEs, VIEsQianxiang Shiji, Qianxiang Tiancheng and VIEs'Qianxiang Tiancheng's shareholders terminate or expire. The power of attorney for Renren GamesShanghai Jieying became effective on November 30, 2012August 18, 2017 and will remain effective as long as Renren GamesShanghai Jieying exist. Neither of theThe shareholders of Renren Games hasShanghai Jieying do not have the right to terminate or revoke the power of attorney without the prior written consent of Renren Network.Shanghai Automotive.

 

(2)Business Operations Agreement: The business operations agreements specifically and explicitly grant WFOEs the principal operating decision making rights, such as appointment of the directors and executive management, of the VIEs.

 

The terms of the business operations agreements are ten years and will be extended automatically for another ten years unless the WFOEs provide a 30-day advance written notice to the VIEs and to each of the VIEs' shareholders requesting not to extend the term three months prior to the expiration dates of December 22, 2020 and November 29, 2022,August 17, 2027, respectively. Neither the VIEs nor any of the VIEs' shareholders may terminate the agreements during the terms or the extensions of the terms.

F-13F- 18

 

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

(3)Exclusive Equity Option Agreement: Under the exclusive equity option agreement, the WFOEs have the exclusive right to purchase the equity interests of the VIEs from the registered legal equity owners as far as PRC regulations permit a transfer of legal ownership to foreign ownership. The WFOEs can exercise the purchase right at any portion and any time in the 10-year agreement period.

 

Without the WFOEs'WFOE's consent, the VIEs' shareholders shall not transfer, donate, pledge, or otherwise dispose their equity shareholdings in the VIEs in any way. The equity option agreement will remain in full force and effect until the earlier of: (i) the date on which all of the equity interests in the VIEs have been acquired by the respective WFOE or its designated representative(s); or (ii) the receipt of the 30-day advance written termination notice issued by the respective WFOE to the shareholders of the VIEs. The term of these agreements will be automatically renewed upon the extension of the term of the relevant exclusive equity option agreement.

 

(4)Spousal Consent Agreement:The spouse of each of the shareholders of Qianxiang Tiancheng acknowledged that certain equity interests of Qianxiang Tiancheng held by and registered in the name of his/her spouse will be disposed of pursuant to the equity option agreements. These spouses understand that such equity interests are held by their respective spouse on behalf of Qianxiang Shiji, and they will not take any action to interfere with the disposition of such equity interests, including, without limitation, claiming that such equity interests constitute communal property of marriage.

 

The spouse of each of the shareholders of Renren Games hasShanghai Jieying acknowledged that certain equity interests of Renren Games,Shanghai Jieying, held by and registered in the name of his/her spouse willwould be disposed of pursuant to the loan agreement, equity option agreement and equity interest pledge agreement of which they arewere respectively a party, and they will not take any action to interfere with such arrangement, including claiming that such equity interests constitute property or communal property between his/her spouse and himself/herself.

F- 19

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

(5)Exclusive Technical and Consulting Services Agreement: The WFOEs and registered shareholders irrevocably agree that the WFOEs shall be the exclusive technology service provider to the VIEs in return for a service fee which is determined at the sole discretion of the WFOEs.

 

The term of each of agreement is ten years and will be extended automatically for another ten years unless terminated by the WFOEs. The WFOEs can terminate the agreement at any time by providing a 30-day prior written notice. The VIEs are not permitted to terminate the agreements prior to the expiration of the terms by December 22, 2020 and November 29, 2022,August 17, 2027, respectively, unless the WFOEs fail to comply with any of itstheir obligations under this agreement and such breach makes the WFOEs unable to continue to perform this agreement.the agreements.

 

(6)Intellectual Property License Agreement:The WFOEs and registered shareholders agree that the WFOEs shall have the exclusive right to license its intellectual property rights to the VIEs in return for a license fee. The license fee is determined at the discretion of the Company. The term of these agreements will be automatically renewed upon the extension of the term of the relevant intellectual property license agreement.

 

The term of the agreement will be extended for another five years with both parties' consents. The WFOEs may terminate the agreement at any time by providing a 30-day prior written notice. Any party may terminate the agreement immediately with written notice to the other party if the other party materially breaches the relevant agreement and fails to cure its breach within 30 days from the date it receives the written notice specifying its breach from the non-breaching party. The parties will review the agreement every three months and determine if any amendment is needed.

 

(7)Loan Agreements: Under loan agreements between WFOEthe WFOEs and each of the shareholders of the respective VIEs, WFOEthe WFOEs made interest-free loans to the shareholders of exclusively for the purpose of the initial capitalization and the subsequent financial needs of the VIEs. The loans can only be repaid with the proceeds derived from the sale of all of the equity interests in VIEthe VIEs to WFOEthe WFOEs or itstheir designated representatives pursuant to the equity option agreements. The term of each of these loans is ten years from the actual drawing down of such loans by the shareholders of VIE,the VIEs, and will be automatically extended for another ten years unless a written notice to the contrary is given by WFOEthe WFOEs to the shareholders of VIEthe VIEs three months prior to the expiration of the loan agreements.

F- 20

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

(8)Equity Interest Pledge Agreement: Shareholders of the VIEs have pledged all of their equity interests in the VIEs with their respective WFOEs and the WFOEs are entitled to certain rights to sell the pledged equity interests through auction or other means if the VIEs or the shareholders default in their obligations under other above-stated agreements.

 

These agreements are substantially the same, and that the equity interest pledge has become effective and will expire on the earlier of: (i) the date on which the VIEVIEs and itstheir shareholders have fully performed their obligations under the loan agreements, the exclusive technical service agreement, the intellectual property right license agreement and the equity option agreements; (ii) the enforcement of the pledge by WFOEthe WFOEs pursuant to the terms and conditions under this agreement to fully satisfy its rights under such agreements; or (iii) the completion of the transfer of all equity interests of VIEthe VIEs by the shareholders of VIEthe VIEs to another individual or legal entity designated by WFOEthe WFOEs pursuant to the equity option agreement and no equity interestinterests of VIE isthe VIEs are held by such shareholders.

 

Risks in relation to the VIE structure

 

The Company and the Company's legal counsel believe that Qianxiang Shiji's and Renren Network'sShanghai Automotive's contractual arrangements with the VIEs are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company's ability to enforce these contractual arrangements and if the shareholders of the VIEVIEs were to reduce their interest in the Company, their interests may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

 

·Revoke the business and operating licenses of the WFOEs, the VIEs and their subsidiaries;
·Discontinue or restrict the operations of any related-party transactions among the WFOEs, the VIEs and their subsidiaries;
·Impose fines or other requirements on the WFOEs, the VIEs and their subsidiaries;
·Require the Company or the WFOEs, the VIEs and their subsidiaries to revise the relevant ownership structure or restructure operations; and/or
·Restrict or prohibit the Company's use of the proceeds of the additional public offering to finance the Company's business and operations in China.

F- 21

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements- continued

 

The Company's ability to conduct its business including online advertising, online game,gaming (discontinued after the Company's resolution to dispose of Online Gaming in 2015), online talent show, other internet value added services, used car trading business and social commerceinternet finance services (discontinued after the Company's deconsolidation of Nuomi in October 2013) may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result, the Company may not be able to consolidate the VIEs and the VIEs' subsidiaries in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and the VIEs' subsidiaries and shareholders, and it may lose the ability to receive economic benefits from the VIEs and the VIEs' subsidiaries.

 

Certain shareholders of the VIEs are also shareholders of the Company. The interests of the shareholders of the VIEs may diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so. The Company cannot assure that when conflicts of interest arise, shareholders of the VIEs will act in the best interests of the Company or that conflicts of interests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest the shareholders of the VIEs may encounter in their capacity as beneficial owners and directors of the VIEs. The Company believes the shareholders of the VIEs will not act contrary to any of the contractual arrangements and the exclusive option agreements provide the Company with a mechanism to remove the current shareholders of the VIEs as beneficial shareholders of the VIEs should they act to the detriment of the Company. The Company relies on the current shareholders of VIEs whom also are directors and executive officers of the Company, to fulfill their fiduciary duties and abide by laws of Cayman Islands and act in the best interest of the Company or that conflicts will be resolved in ourthe Company’s favor. If the Company cannot resolve any conflicts of interest or disputes between the Company and the shareholders of the VIEs, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.

 

The Company's ability to control the VIEs also depends on the power of attorney that Qianxiang Shiji and Renren Networkthe WFOEs have to vote on all matters requiring shareholder approval in the VIEs. As noted above, the Company believes this power of attorney is legally enforceable but may not be as effective as direct equity ownership.

F- 22

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements- continued

 

The following financial statement balances and amounts of the Company’s VIEs were included in the accompanying consolidated financial statements after elimination of intercompany balances and transactions between the offshore companies, WFOEs, VIEs and VIEs’ subsidiaries. As of December 31, 20132016 and 2014,2017, the balance of the amountamounts payable by the VIEs and their subsidiaries to the WFOEs related to the service fees were $nil and $2,264, respectively and was eliminated upon consolidation.$ nil.

 

 As of December 31,  As of December 31, 
 2013 2014  2016 2017 
          
Cash and cash equivalents $25,710  $28,865  $55,908  $8,188 
Term deposits  -   16,117 
Accounts and notes receivable, net  17,526   18,025 
Restricted cash  288   51 
Short-term investments  410   - 
Accounts receivable, net  4,702   1,584 
Financing receivable, net  228,224   145 
Inventory  -   95,012 
Prepaid expenses and other current assets  13,958   16,614   17,988   37,422 
Amounts due from related parties  68,661   520   10,219   11,624 
Deferred tax assets-current  628   - 
        
Total current assets  126,483   80,141   317,739   154,026 
        
Long-term financing receivable, net  330   - 
Property and equipment, net  17,535   6,840   1,058   507 
Intangible assets, net  1,337   2 
Long-term investments  36,470   43,979 
Goodwill  757   -   -   89,274 
Long-term investments  2,648   3,218 
Deferred tax assets-non-current  7,598   - 
Other non-current assets  5,977   2,327   876   835 
        
Total non-current assets  35,852   12,387   38,734   134,595 
        
Total assets $162,335  $92,528  $356,473  $288,621 
        
Accounts payable $9,002  $5,176  $5,423  $19,476 
Accrued expenses and other payables  29,463   16,324 
Short-term debt  7,202   12,296 
Accrued expenses and other current liabilities  11,277   17,498 
Payable to investors  182,810   7,153 
Amounts due to related parties  178   303   222   7,013 
Deferred revenue and advance from customers  8,003   6,212 
Deferred revenue  5,804   10,164 
Contingent consideration  -   5,944 
Income tax payable  2,066   3,165   7,163   10,380 
        
Total current liabilities  48,712   31,180   219,901   89,924 
Other long-term liabilities  156   - 
        
Long-term contingent consideration  -   60,850 
        
Total non-current liabilities  -   60,850 
        
Total liabilities $48,868  $31,180  $219,901  $150,774 

F- 23

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements- continued

 

  Years ended December 31, 
  2012  2013  2014 
          
Net revenue $152,730  $142,891  $78,419 
Loss from continuing operations $(25,819) $(50,770) $(61,683)
Loss from discontinued operations $(42,153) $(40,383) $(30,809)

  Years ended December 31, 
  2012  2013  2014 
          
Net cash provided by operating activities $21,101  $11,820  $24,502 
Net cash used in investing activities $(21,411) $(7,457) $(20,696)
Net cash provided by financing activities $1,050  $8,133   - 
  Years ended December 31, 
  2015  2016  2017 
          
Net revenues $39,017  $61,948  $181,253 
Loss from continuing operations $(68,991) $(31,997) $(42,245)
Income from discontinued operations $4,302  $829  $- 
    ��        
  Years ended December 31, 
  2015  2016  2017 
          
Net cash provided by (used in) operating activities $34,652  $68,374  $(146,911)
Net cash (used in) provided by investing activities $(102,061) $(187,621) $22,943 
Net cash provided by financing activities $55,928  $148,080  $37,208 

 

The VIEs contributed an aggregate of 98.6%94.9%, 96.6%97.8% and 94.5%89.7% of the consolidated net revenues for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. The VIEs hold domain names, trade mark and various licenses, including value-added telecommunications business operating license, ICP license, BBS Permits and Audio/Video Program Transmission License, etc., upon which the Company's business depends. A substantial majority of the Company's employees that provide the Company's services are hired by the VIEs, and the VIEs lease a substantial majority of the properties where the Company's services are delivered. As of the fiscal years ended December 31, 20132016 and 2014,2017, the VIEs accounted for an aggregate of 11.7%30.3% and 8.1%24.2%, respectively, of the consolidated total assets, and 42.3%50.2% and 66.7%31.1%, respectively, of the consolidated total liabilities. The assets not associated with the VIEs primarily consist of cash and cash equivalents and term deposits in offshore accounts, short-term investments and long-term investments.

 

There are no consolidated VIEs' assets that are collateral for the VIEs' obligations and can only be used to settle the VIEs' obligations. There are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests, which require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholders of the VIEs or entrustment loans to the VIEs.

 

Relevant PRC laws and regulations restrict the VIEs from transferring a portion of its net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 2426 for disclosure of restricted net assets.

F- 24

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

Consolidated Plans

In January 2016 and September 2016, the Company originated the issuance of two Shanghai Renren Finance Leasing Asset-Backed Special Plans, approximating $46.1 million (RMB299.8 million) and $78.5 million (RMB510.6 million), respectively. The Plans are collateralized by certain financing receivables arising from the Company's used car financing business. The plan will expire by the end of May 2018.

The Plans consist of three tranches: AAA-rated senior securities (covering 68.0% and 70.5% of the total securities issued, respectively) and AA-rated senior securities (covering 10.5% and 11.0% of the total securities issued, respectively) which were purchased by external investors, and subordinate securities (covering 21.5% and 18.5% of the total securities issued, respectively) held by the Company. The Company also provided a guarantee to secure the full repayment of the principal and interest of the external investors in the Plans.

The Company holds significant variable interests in the Plans through holding the subordinate securities and the guarantee provided, from which the Company has the right to receive benefits from the Plans that could potentially be significant to the Plans.

The Company also has power to direct the activities of the Plans that most significantly impact the economic performance of the Plans by making revolving purchases of underlying financing receivables and providing payment collection services from the underlying financing receivables.

Accordingly, the Company is considered the primary beneficiary of the Plans and has consolidated the Plans' assets, liabilities, results of operations, and cash flows in the accompanying consolidated financial statements.

The assets of the Plans are not available to creditors of the Company. In addition, the investors of the Plans have no recourse against the assets of the Company.

F- 25

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

Consolidated Plans-continued

The following financial statement amounts and balances of the Plans were included in the accompanying consolidated financial statements after elimination of intercompany transactions and balances:

  As of December 31, 
  2016  2017 
       
Financing receivable, net $73,549  $78,485 
         
Total assets $73,549  $78,485 
         
Accrued expenses and other current liabilities $4  $4 
Payable to investors  141   64,087 
Long-term payable to investors  59,916   - 
         
Total liabilities $60,061  $64,091 

  Years ended December 31, 
  2015  2016  2017 
          
Net revenues  -   -   - 
Net loss  -  $375  $91 

  Years ended December 31, 
  2015  2016  2017 
          
Net cash provided by operating activities  -   -   - 
Net cash provided by investing activities  -   -   - 
Net cash provided by financing activities  -   -   - 

F- 26

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").

 

Certain accounts and balances in the 2013 and 2014 consolidated financial statements and the related notes have been retrospectively adjusted to reflect the effect of discontinued operations as described in Note 5.

Principles of consolidation

 

The consolidated financial statements of the Company include the financial statements of Renren Inc., its subsidiaries, its VIEs and VIEs' subsidiaries. All inter-companyinter-companies transactions and balances are eliminated upon consolidation.

Business combinations

Business combinations are recorded using the acquisition method of accounting. The Company elected to early adopt ASU 2017-01 “Business Combination (Topic 805): Clarifying the Definition of a Business” on January 1, 2017 and applied the new definition of a business prospectively for acquisitions made during the year ended December 31, 2017. Upon the early adoption of ASU 2017-01, a new screen is introduced to evaluate whether a transaction should be accounted for as an acquisition and/or disposal of a business versus assets. In order for a purchase to be considered an acquisition of a business, and receive business combination accounting treatment, the set of transferred assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. The adoption of this standard requires future purchases to be evaluated under the new framework.

The purchase price of business acquisition is allocated to the tangible assets, liabilities, identifiable intangible assets acquired and non-controlling interest, if any, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are expensed as incurred.

Where the consideration in an acquisition includes contingent consideration and the payment of which depends on the achievement of certain specified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings.

 

Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company's consolidated financial statements include, but are not limited to, revenue recognition, allowance for financing receivable, allowance for doubtful accounts, receivables, share-based compensation, deferred tax valuation allowance, income taxes, impairment of goodwill and indefinite-lived intangible assets, fair value of derivative financial instruments and long-term available-for-sale investments, impairment of long-term and short-term investments.investments, the price purchase allocation and the fair value of contingent consideration for business acquisition.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and term deposits which are highly liquid with a maturity of three months or less.

Term deposits

Term deposits are classified as held-to-maturity investments and carried at amortized cost. The term deposits mature within one year and are subject to penalty for early redemption before their maturity.hand.

 

F-20F- 27

 

RENREN INC.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Restricted cash

Restricted cash primarily consists of cash deposits used to secure debt borrowings of the Company which is expected to be released in accordance with the debt agreement.

The restriction will lapse when the related debt agreement is paid off. The current portion of restricted cash represents cash deposited into bank accounts which is expected to be released within the next twelve months. The non-current portion of restricted cash represents cash deposited into bank accounts which is not expected to be released within the next twelve months. Non-current restricted cash is recorded in other non-current assets and amounted to $323 and $26,075 as of December 31, 2016 and 2017, respectively.

  

Fair value

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

 

·Level 1-inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

·Level 2-inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·Level 3-inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

RENREN INC.F- 28

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Investments

 

(1)           Short-term investments

(1)Short-term investments

 

The Company's short-term investments comprise of marketable securities which areis classified as trading, available-for-sale and held-to-maturityinvestments, and derivative financial instruments that are regarded as assets. The trading investments are reported at fair values with the changes in fair values of those investments recognized as gain or loss. The available-for-sale investments are reported at fair values with the unrealized gains or losses recorded as accumulated other comprehensive income in equity. Short-term investments with contractual maturity dates less than one year are classified as held-to-maturity measured at amortized costs when the Company has the positive intent and ability to hold the securities to maturity. The Company's derivative financial instruments are measured at fair value. The changes in fair valuevalues of those derivative instruments are recognized as gain or loss if such derivative instruments are not qualified for hedge accounting.in the consolidated statements of operations.

 

The Company reviews its available-for-sale short-term investments for other-than-temporary impairment ("OTTI") based on the specific identification method. The Company considers available quantitative and qualitative evidence in evaluating the potential impairment of its short-term investments. If the cost of an investment exceeds the investment's fair value, the Company considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Company's intent and ability to hold the investment. The Company separates the amount of the OTTI into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings, which represents the difference between a security's amortized cost basis and the discounted present value of expected future cash flows. The amount due to other factors is recognized in the consolidated statements of comprehensive income (loss)loss if the entity neither intends to sell and will not more likely than not be required to sell the security before recovery. The difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income.

 

(2)           Long-term investments

(2)Long-term investments

 

Equity method investments

 

InvestmentEquity investment in common stock or in-substance common stock of an entity where the Company can exercise significant influence, but not control, is accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements are also considered in determining whether the equity method of accounting is appropriate. An investment in in-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to that entity’s common stock. The Company considers subordination, risks and rewards of ownership and obligation to transfer value when determining whether an investment in an entity is substantially similar to an investment in that entity’s common stock.

F- 29

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Investments - continued

(2)Long-term investments - continued

Equity method investments - continued

Under the equity method, the investment is initially recorded at cost and adjusted for the Company's share of undistributed earnings or losses of the investee. Investment losses are recognized until the investment is fully written down as the Company does not guarantee the investee's obligations nor it is committed to provide additional funding.

F-22

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Investments - continued

(2)           Long-term investments - continued

Equity method investments- continued

 

When the Company's carrying value in an equity method affiliated company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the affiliated company or has committed additional funding. When the affiliated company subsequently reports income, the Company will not record its share of such income until it exceeds the amount of its share of losses not previously recognized.

 

The Company’s management regularly evaluates the impairment of the equity 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 charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

 

Warrants and purchased call options

The warrants and purchased call options represent the financial instruments purchased by the Company to acquire additional equity interest if the counterparties fulfilled certain conditions during certain period of time. The warrants and purchased call options are recorded at fair value at the acquisition date and carried at cost less impairment.

Cost method investments

 

For equity investments in an investee that are not considered debt securities or equity securities that have readily determinable fair values and over which the Company does not haveneither has significant influence nor control, the Company carries the investment at cost and recognizes income as any dividends declared from distribution of investee's earnings. The Company reviews the cost method investments for impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. 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.

  

Held-to-Maturity investment

Held-to-maturity investment includes debt securities that the Company purchased from SoFi Lending Corp., which will mature on July 3, 2032 and has a fixed annual interest rate of 4%. The Company has the positive intent and ability to hold the securities to maturity. The Company's held-to-maturity investment is classified as long-term investments on the consolidated balance sheets based on their contractual maturity dates and are stated at their amortized costs.

F-23F- 30

  

RENREN INC.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Investments - continued

(2)Long-term investments - continued

Available-for-sale investment

The Company’s investments in convertible redeemable preferred shares and convertible debt are classified as available-for-sale investments which are reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income. The Company monitors the investments for OTTI by considering factors including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the Company’s intent and ability to hold the investment as well as other company-specific information. An impairment loss on the available-for-sale securities is recognized in the consolidated statements of operations and comprehensive income when the decline in value is determined to be other-than-temporary.

Accounts and notes receivablesreceivable and allowance for doubtful accounts

 

Accounts receivable represents those receivables derived in the ordinary course of business. Notes receivables are bank accepted drafts related to trade receivablesbusiness from continuing operations which mainly consists of advertising revenue with a maturity less than six months.IVAS. An allowance for doubtful accounts is provided based on aging analyses of accounts receivable balances, historical bad debt rates, repayment patterns and customer credit worthiness. No

F- 31

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Financing receivable

Financing receivable represents receivables derived from the internet finance business. Financing receivable is recorded at amortized cost, reduced by a valuation allowance estimated as of the balance sheet date. The amortized cost of a financing receivable is equal to the unpaid principal balance, plus net deferred origination costs. Net deferred origination costs are comprised of certain direct origination costs, net of origination fees received. Origination fees include fees charged to the individuals or companies that increase the financing’s effective yield. Direct origination costs in excess of origination fees received are included in the financing receivable and amortized over the financing term using the effective interest method. Financing origination costs are limited to direct costs attributable to originating the financing, including commissions and personnel costs directly related to the time spent by those individuals performing activities related to the origination.

Due to limitations imposed by PRC laws and regulations, the Company appointed a senior management member (the “Intermediary”) to act as an intermediary to facilitate certain financing services for its internet finance business (the “Intermediary Business Model”). Under the Intermediary Business Model, each individual or company is arranged to sign the financing agreement with the Intermediary. The Company provides funds to the Intermediary to finance the individuals or companies in accordance with the financing agreement. Immediately upon signing a financing agreement with an individual or a company, the Intermediary then transfers all of the creditor’s rights arising from the financing agreement to the Company. Additionally, once investors are identified by the Company on Renren Licai, the Company transfers the underlying creditor’s rights to the investors through the Intermediary. The Company, through the Intermediary, agrees to repurchase the creditor's rights from the investors prior to or upon the maturity of the investment period therefore acting as a principal in the transaction.

F- 32

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Financing receivable - continued

Under the Intermediary Business Model, the Intermediary is acting as an agent for the Company. As noted above, the funds provided to the individuals and companies are obtained from the Company who further agrees to take all the risk arising from the potential breaches of agreement by the individuals or the companies receiving financing. Additionally, the Intermediary’s role is restricted to sign agreements with individuals and companies receiving financing, and investors and the Intermediary has no obligation to make any repayment to the investors once the creditors’ rights are transferred. As such, the Intermediary never puts his own funds at risk and bears no risk in the arrangement and is considered an agent.

In May 2016, the Company terminated all of its financing business conducted under the Intermediary Business Model. All subsequent financing has been performed by the Company.

Allowance for financing receivable

An allowance for financing receivable is established through periodic charges to the provision for financing receivable losses when the Company believes that the future collection of principal is unlikely. Subsequent recoveries, if any, are recorded as credits against the allowance. The Company evaluates the creditworthiness of its portfolio based on a pooled basis due to the composition of homogeneous financing with similar size and general credit risk characteristics for similar financing businesses. The Company considers the credit worthiness of the individuals and the companies receiving financing, aging of the outstanding financing receivable and other specific circumstances related to the financing when determining the allowance for financing receivable. The allowance is subjective as it requires material estimates including such factors as known and inherent risks in the financing portfolio, adverse situation that may affect the ability of the individuals and the companies receiving financing to repay and current economic conditions. Recovery of the carrying value of financing receivable is dependent to a great extent on conditions that are beyond the Company’s control.

Nonaccrual financing receivable

Financing income is calculated based on the contractual rate of the financing and recorded as financing income over the life of the financing using the effective interest method. Financing receivables are placed on non-accrual status upon reaching 90 days past due for notes receivablesthese arising from financing for installment sales and apartment rental financing, or when reasonable doubt exists as such balanceto the full, timely collection of the financing receivable. When a financing receivable is securedplaced on non-accrual status, the Company stops accruing financing income. Financing receivable is returned to accrual status if the related individual or company has performed in accordance with the contractual terms for a reasonable period of time and, in the Company’s judgment, will continue to make period principal and financing income payments as scheduled. The Company writes off its nonaccrual financing receivable by considering factors including (i) death of the borrower; or (ii) its inability to reach the borrower.

F- 33

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Transfer of financial instruments

Sales and transfers of financial instruments are accounted under authoritative guidance for the transfers and servicing of financial assets and extinguishment of liabilities.

Through the peer-to-peer platforms and the Plans, the Company identifies individual investors and transfers creditors’ rights originated from the aforementioned financing services to the individual investors. The Company further offers different investment periods to investors with various annual interest rates while those credit rights are held by the acceptanceinvestors. The term of the bank.sales require the Company to repurchase those creditors’ rights from investors prior to or upon the maturity of the investment period. As a result, the sales of those creditors’ rights are not accounted for as a sale and remain on the consolidated balance sheet and are recorded as payable to investors in the Company’s consolidated balance sheet.

Inventory

Inventory consists of purchased used cars. The vehicle reconditioning costs and other incremental costs are capitalized as a component of inventory. Inventory is stated at the lower of cost or net realizable value. Inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent, market resources. Each reporting period the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of sales in the accompanying consolidated statements of operations.

 

Property and equipment, net

 

Property and equipment, net is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

 

Building46 years
Furniture and vehicles5 years
Computer equipment and application software2-3 years
Furniture and vehicles2-35 years
Leasehold improvementsOver the lesser of the lease term
or useful life of the assets

 

F- 34

Intangible assets, net

  

Intangible assets, other than goodwill, resulting from the acquisitions of entities accounted for using the acquisition method of accounting are estimated by management based on the fair value of assets acquired. Identifiable intangible assets with definite lives are carried at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed using the straight-line method or accelerated method over the following estimated average useful lives, which are as follows:RENREN INC.

Domain names, trademarks and online licensesIndefinite lives
Operating platform and technology3-8 years
Non-compete agreements4 years
Game license0.5-5 years
Login user0.5-1 year
Technology, user generated content and
  relationship with broadcasters6 years
Customer relationship4 years
Registered user list3 years
Video content copyright and
  web game cooperation agreement2 years
RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Intangible assets with indefinite lives

 

Intangible assets with indefinite lives mainly include trademark and licenses. If an intangible asset is determined to have an indefinite life, it shouldis not be amortized until its useful life is determined to be no longer indefinite. An intangible asset that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such impairment test consists of comparing the fair values of assets and their carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. For the years ended December 31, 2012, 20132015, 2016 and 2014,2017, the Company recordeddid not record impairment loss for indefinite-lived intangible assets from discontinued operations of $nil, $nil and $13,536, and from continuing operations of $nil, $nil and $122 respectively.assets.

 

Impairment of long-lived assets and intangible assets with definite lives

 

Long-lived assets, such as property and equipment and definite-lived intangible assets are stated at cost less accumulated depreciation or amortization. Depreciation and amortization is computed byusing the straight-line method.

 

The Company evaluates the recoverability of long-lived assets, including identifiable intangible assets, with determinable useful lives whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. The Company measures the carrying amount of long-lived asset against the estimated undiscounted future cash flows associated with it. Impairment exists when the sum of the expected undiscounted future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated based on various valuation techniques, including the discounted value of estimated future undiscounted cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. For the years ended December 31, 2012, 20132015, 2016 and 2014,2017, the Company recordeddid not record impairment loss for long-lived assets and intangible assets with definite life from discontinued operations of $nil, $nil and $nil, and from continuing operations of $nil, $208 and $1,803, respectively.lives.

RENREN INC.F- 35

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations.

 

Goodwill is not amortized, but tested for impairment upon first adoption and annually, or more frequently if event and circumstances indicate that they might be impaired. The Company has an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.

 

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, and assumptions that are consistent with the plans and estimates being used to manage the Company's business, estimation of the long-term rate of growth for the Company's business, estimation of the useful life over which cash flows will occur, and determination of the Company's weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

 

The Company performs aIn performing the two-step goodwillquantitative impairment test. Thetest, the first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit's goodwill to the carrying value of 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. In estimating the fair value of each reporting unit the Company estimates the future cash flows of each reporting unit, the Company has taken into consideration the overall and industry economic conditions and trends, market risk of the Company and historical information. The Company recorded $nil, $nil and $46,864did not record impairment charges of goodwill for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

 

F-26F- 36

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition

 

The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Company's revenues include revenue from its used car sales, revenue from advertising and IVAS as well as revenue related to its finance services.

 

Used car sales

Revenue from used car sales is recognized when a sales contract has been executed, the vehicle has been delivered, and payment has been received or financing has been arranged. The Company purchases used cars from unrelated individuals or dealerships and sells them directly to customers through its local dealer shops.

IVAS and others

IVAS and others revenue mainly include revenues from online advertising and revenue from live streaming services.

Online advertising revenues

 

The Company provides advertisement placement services in its SNS platforms and online games. The Company primarily enters into pay-for-time contracts, under which the Company bills its customers based on the period of time to display the advertisements in the specific formats on specific web pages. The Company also enters into pay-for-volume arrangements, under which it bills its customers on the traffic volume basis, e.g. pay-per-click or pay-per-impression.

 

For pay-for-time contracts, revenue is recognized ratably over the period the advertising is displayed.

For pay-for-volume contracts, revenue is recognized based on traffic volume tracked and the pre-agreed unit price.

 

Contractual billings in excess of recognized revenue and payments received in advance of revenue recognition are recorded as deferred revenues.

 

The Company principally enters into advertising placement contracts with advertisers' advertising agents and the Company offers volume rebates to certain advertisers' advertising agents. The Company recognizes estimated rebates as the reduction of revenues based on a systematic and rational allocation of the cost of honoring rebates earned and claimed to each of the underlying revenue transactions that results in progress by the customer toward earning the rebate or refund. Estimation of the total rebate is based on the estimates of the sales volume to be reached based on the historic experience of the Company. If amounts of future rebates cannot be reasonably estimated, a liability will be recognized for the maximum potential amount of the rebates.

Online game revenues

The Company generates revenues from Revenue related to online advertising services amounted to $9,721, $1,653 and $348 during the provision of online game, primarily web-based online game services. The online games can be accessedyears ended December 31, 2015, 2016 and played by end users free of charge but the end users may choose to purchase in-game merchandise or premium features to enhance their game playing experience using virtual currencies. The end users can purchase virtual currencies by making direct online payments or purchasing prepaid cards ("PP-Cards"). The Company uses on-line payment services operated by independent service providers and pays a fee for such services. Net proceeds received from these service providers after deduction of service fees are recorded as deferred revenues. The Company sells PP-Cards through distributors at a discount to the face value of the PP-Card. As the Company does not have control over and generally does not know the ultimate selling price of the PP-Cards sold by the distributors, net proceeds received from distributors after deduction of sales discounts are recorded as deferred revenues.2017.

 

F-27F- 37

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition- continued

 

Online game revenues - continued

End users consume virtual currencies by purchasing in-game merchandise or premium features online. The Company calculates the monetary value of each unit of virtual currency consumed using a moving weighted average method by dividing the total cumulative unrecognized deferred revenues by total unconsumed virtual currencies monthly in advance.Live streaming revenue

 

The Company categorizes in-game merchandise or premium features as either consumptive or permanent. For the consumptive in-game merchandise or premium features, revenues are recognized when the in-game merchandise or premium features are first used by the end users. For the permanent in-game merchandise or premium features, revenues are recognized ratably over the estimated average playing period of paying players for each applicable game, which represents the Company's best estimate of the estimated average life of permanent in-game merchandise or premium features.

In estimating the average playing period of paying players for each applicable game, the Company considers the charging data, which are affected by various factors such as acceptancegenerates live streaming revenue from both "Woxiu" and popularity of the game, the game updates and other in-game items, promotional events launched, future operating strategies and market conditions. Given the short operating history of the Company's online games, the estimated average playing period of paying players for each applicable game may not accurately reflect the actual lives of the permanent in-game merchandise or premium features in that game. The Company reviews, at least annually, the average playing period of paying players for all applicable games to determine whether the estimated lives for permanent in-game merchandise or premium features remain reasonable. Based on the Company's latest review, such estimated lives remain reasonable and have not changed significantly over time. The Company may revise its estimates as it continues to collect operating data, and refine its estimation process and results accordingly. All paying players' data in an applicable game collected since the launch date of such game are used to perform the relevant assessment for that applicable game.

If there is insufficient player data to determine the average playing period of paying players for an applicable game, such as in the case of a newly launched game, the Company estimates the average playing period of paying players based on other similar games the Company or third parties operate, taking into account of the game profile, the target audience and the appeal to paying players of different demographics, until sufficient data is collected, which is normally up to 12 months after launch.

The amount associated with unused virtual currencies, which are without contractual expiration term, is carried as deferred revenues indefinitely as the Company was not able to reasonably estimate the amount of virtual currency which will be ultimately given up by the users due to the short operating history of the Company.

F-28

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Revenue recognition- continued

Online game revenues - continued

The Company also entered into revenue sharing agreements with various third-party game developers, under which the Company provides links of online games developed by those third-party game developers on the Company's platforms while the third-party game developers operate the games, including providing game software, hardware, technical support and customer services. All of the web games developed by third-party game developers can be accessed and played by game players on the Company's platforms without downloading separate software. The Company views the game developers to be its customers and considers its responsibility under such agreements to be that of distribution and payment collection for such games. The Company primarily collects payments from game players in connection with the sale of in-game currencies and remits the agreed-upon percentages of the proceeds to the game developers with the residual portion of such proceeds being deferred for revenue recognition until the estimated consumption date (the estimated date by which in-game currencies are consumed within the games for purchase of in-game merchandise or premium features), which is typically within a short period of time after the purchase of the in-game currencies. Purchase of in-game currencies is not refundable unless there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the monthly revenue generated by a game becomes insignificant.

Online talent show revenue ("Woxiu")Renren mobile live streaming.

 

"Woxiu,"Woxiu", which translates into "a show of your own" in Chinese, is a virtual stage the Company initially offers atoffered on the 56.com platform and then at Renrenon the “Woxiu” platform after the completion of the disposition of 56.com (see Note 4.3)56.com. On "Woxiu", where grassroots musicians and performers can live-stream their performances and share with viewers. Fans of the performing user can chat along with the performer and other live audience and purchase consumable virtual items to show support to the performers.

All "Woxiu" live video shows are available free of charge and fans can purchase virtual items or features on the platform with virtual currencies to show support their favoriteto the performers. The numberIn the second quarter of 2016, the Company also launched its live streaming service on its Renren mobile terminal.

For both "Woxiu" and Renren mobile live streaming, the amount of virtual currencies consumed is kept track ofmaintained by our operationthe Company’s operating system and will be automatically deducted from users' accounts automatically when the virtual currencies are deemed as consumed.used. Revenue is recognized monthly based on the virtual currencies consumed. We payThe Company pays the performers a certain percentage of the amount of virtual currencies consumed. We recognize theThe Company recognizes total revenue on a gross basis, and the commission paid to the performers is recorded as cost of revenues. Similar to online game, theThe Company calculates the amount of revenues recognized for each unit of virtual currency consumed using a moving weighted average method by dividing the total cumulative unrecognized deferred revenues by total unconsumed virtual currency. Revenue related to live streaming services amounted to $15,404, $17,898 and $32,341 during the years ended December 31, 2015, 2016 and 2017.

Internet finance services

During the year ended December 31, 2017, the Company generates revenue from its internet finance services business primarily through financing provided to used car dealers. Additionally, the Company also provided credit financing to college students on Renren Fenqi as well as apartment rental financing during the years ended December 31, 2015 and 2016. Both of those services were terminated in May 2016 and January 2016, respectively. The Company records financing income and service fees related to those services over the life of the underlying financing using the effective interest method on unpaid principal amounts. The service fees collected upfront, as well as the direct origination costs for the financing, are deferred and recognized as financing income as an adjustment to the yield on a straight line basis over the life of the portfolio financing.

Used car financing

The Company provides short-term financing services to used car dealers to fund the car dealers’ cash needs for used car purchasing. The financing period is no more than six months and is secured by a pledge of the dealers' used car with total value exceeding the principal of the financing. The Company charges an upfront service fee as well as financing income on a monthly basis. Revenue related to used car financing services amounted to $2,754, $17,854 and $25,399 during the years ended December 31, 2015, 2016 and 2017. The remaining financing income in the respective periods related to crediting financing provided to college students as well as apartment rental financing, both of which were terminated during the year ended December 31, 2016 as discussed in the preceeding paragraph.

 

F-29F- 38

 

RENREN INC.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition- continued

 

Social commerce servicesOnline game revenues

Between June 2010 and October 2013, the Company was engaged in social commerce services through nuomi.com. Third-party merchants agree to provide Nuomi users discounted prices when pre-agreed amount of Nuomi users sign up for a deal consisting of particular products, services or events provided by the merchants. The Company recognizes revenue for the difference of the amounts it collects from Nuomi users and the amount the Company pays to the third-party merchants. The revenues are recognized when all following criteria are met: (i) the number of participating users reaches the minimum requirement of the merchants; (ii) the participating users have made their payments to the Company; (iii) the Company have released the electronic coupons for the agreed discounted prices to the participating users; and (iv) the electronic coupons have been consumed by the participating users. The payments received for unused coupons are initially recognized as other accounts payables and part of such balance is recognized as revenues when the above criteria have been met.

The third party merchants are responsible and liable for the quality of the products or services provided. The Company holds the right to claim reimbursements from the third party merchants or deduct from the amounts payable to them.

 

The Company no longer provides social commerce services since October 2013, whengenerates revenues from the provision of online game, primarily web-based online game services. The online game revenues were generally recognized ratably over the estimated average playing period of paying players for each applicable game. During 2015, the Company deconsolidated Nuomi duereached a resolution to dispose of the lossOnline Gaming; the disposal was completed in controlling financial interestMarch 2016. As such, online gaming revenues is included in Nuomi (see Note 4.1).

Business taxes

The Company's PRC subsidiariesdiscontinued operations during the years ended December 31, 2015 and VIEs are subject to business taxes at the rate of 3.36% for wireless value added services ("WVAS") revenue, 5.6% for games revenue and 8.6% for advertising revenue before a pilot value-added tax ("VAT") reform program was officially launched on January 1, 2012 ("Pilot Program") by the Chinese State Council. Businesses in the Pilot Program would pay VAT instead of business tax.2016. The Company reportsdid not generate any revenue net of business taxes. Business taxes deducted in arriving net revenuerelated to its online gaming during 2012, 2013 and 2014 were $5,685, $2,663 and $1,267, respectively.the year ended December 31, 2017. See Note 4 for further details.

F-30F- 39

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Cost of revenues

Cost of revenues consists of costs directly related to used car sales, online advertising and IVAS business as well as costs incurred related to the internet financing operations which mostly include interest expenses paid to investors on Renren Licai and interest paid for asset-backed securities. Cost of revenue also includes provision for loan loss which amounted to $3,665, $12,436 and $12,745 during the years ended December 31, 2015, 2016 and 2017, respectively.

Business taxes

The Company reports revenue net of business taxes. Business taxes deducted in arriving at net revenue during 2015, 2016 and 2017 were $25, $77 and $nil, respectively.

 

Value added taxes

 

On January 1, 2012, the Chinese State Council officially launched a pilot value-added tax ("VAT") reform program ("Pilot Program"), applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business tax. The Pilot Program initially applied only to transportation industry and "modern service industries" ("Pilot Industries") in Shanghai and subsequently was expanded to ten other provinces and municipalities between August and December 2012. Since September 1, 2012, certain revenue generated from providing services which were previously subject to business tax became subject to VAT and related surcharges by various Chinese local tax authorities at rates ranging from 6.72% to 6.78%. VAT is also reported as a deduction to revenue when incurred and amounted to $8,980, $8,874$1,217, $4,080 and $4,441$9,777 for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in the line item of accrued expense and other payablescurrent liabilities on the face of consolidated balance sheet.

F- 40

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Income taxes

 

Current income taxes are provided for in accordance with the laws of the relevant tax authorities.

 

Deferred income taxes are recognized when temporary differences exist between the tax basesbasis of assets and liabilities and their reported amounts in the financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The components ofCompany adopted ASU 2015-17 Income Taxes (Topic 740) on January 1, 2017 and presented the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.in its consolidated balance sheet as of December 31, 2017. Prior periods were not retrospectively adjusted.

 

The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes. The Company did not recognize any income tax due to uncertain tax position or incur any interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

F-31

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Financial instruments

 

Financial instruments include cash and cash equivalents, term deposits,restricted cash, accounts and notesreceivable, financing receivable, amounts due from/to related parties, short-term investments, derivative financial instruments,long-term financing receivable, long-term investments, accounts payable, short-term debt, payable to investors, long-term debt and written put option.

The fair value of cash and cash equivalents, term deposits, amounts due from/liability-classified warrant. Refer to related parties and accounts payables approximate their carrying amounts reported in the consolidated balance sheets due to the short-term maturity of these instruments.

The short-term investments, derivative financial instruments and written put option are carried at fair value.

The long-term investments are carried at carrying value and held-to-maturity investments are carried at amortized cost. It is not practical to estimate the fair value of such investments because of the lack of quoted market price and the inability to estimate fair value without incurring excessive costs.Note 18 for further details.

  

Research and development expenses

 

Research and development expenses are primarily incurred for development of new services, features and products for the Company's SNS, online gamesinternet finance business, used car business, as well as to further improve the Company's technology infrastructure to support these businesses. The Company has expensed all research and development costs when incurred.

 

F- 41

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Foreign currency translation

 

The functional and reporting currency of the Company is the United States dollar ("US dollar"). The financial records of the Company's subsidiaries and VIEs located in the PRC Japan, Taiwan,and Hongkong and Korea are maintained in their local currencies, Renminbi ("RMB"), Japanese Yen ("JPY"), New Taiwan Dollar ("TWD"), and Hong Kong Dollar ("HKD") and Korea Won ("KRW"), respectively, which are also the functional currencies of these entities.

 

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations.

 

The Company's entities with functional currency of RMB TWD,and HKD, KRW and JPY, translate their operating results and financial positions into US dollar, the Company's reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated using the average rates for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component in the statements of comprehensive (loss) income.

Comprehensive loss

Comprehensive loss includes net loss, unrealized gain (loss) on short-term investments, long-term available-for-sale investments and foreign currency translation adjustments and is reported in the consolidated statements of comprehensive loss.

F- 42

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Comprehensive (loss) income

Comprehensive (loss) income includes net income or loss, unrealized gain (loss) on short-term investment and foreign currency translation adjustments and is reported in the consolidated statements of comprehensive (loss) income.

 

Share-based compensation

 

Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. The Company recognizes the compensation costs net of estimated forfeitures using the straight-line method, over the applicable 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 stock compensation expense to be recognized in future periods. Share options granted to employees with market conditions attached are measured at fair value on the grant date and are recognized as the compensation costs over the estimated requisite service period, regardless of whether the market condition has been met.

 

Share awards issued to non-employees are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.

 

A change in any of the terms or conditions of share options shall beis accounted for as a modification of the plan. Therefore, thestock options. The Company calculates the incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, the Company would recognizerecognizes incremental compensation cost in the period of the modification occurred and foroccurred. For unvested options, the Company would recognize,recognizes, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

EarningsLoss per share

 

Basic earnings (loss)loss per ordinary share is computed by dividing net income (loss)loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

 

Diluted earnings per ordinary share reflect the potential dilution that could occur if securities were exercised or converted into ordinary shares. The Company had stock options, which could potentially dilute basic earnings per share in the future. For market-based stock awards, the options are included in the computation of diluted earnings per share if the market condition has been met at the end of reporting period. To calculate the number of shares for diluted income per share, the effect of share options is computed using the treasury stock method. Potential ordinary shares in the diluted net loss per share computation are excluded in periods of losses from continuing operations as their effect would be anti-diluted.

RENREN INC.F- 43

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Accounting pronouncements newly adopted

  

In March 2013,November 2015, the FASB issued an authoritative pronouncement relatedASU 2015-17 Income Taxes (Topic 740) which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups ofpresent deferred tax liabilities and assets within a foreign entity or of an investmentas current and noncurrent in a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent isclassified balance sheet. Instead, organizations will be required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group ofclassify all deferred tax assets had resided.

For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does notand liabilities as noncurrent. The amendments apply to an equity method investmentall organizations that is notpresent a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.

Additionally,classified balance sheet. For public companies, the amendments in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events.

The amendments in this pronouncement are effective prospectively for fiscal years (and interim reportingfinancial statements issued for annual periods within those years) beginning after December 15, 2013. The amendments should2016, and interim periods within those annual periods. This ASU may be applied prospectively to derecognition events occurring after the effective date. Priorall deferred tax liabilities and assets or retrospectively to all periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption.presented. The Company considers theadopted this guidance on January 1, 2017 on a prospective basis. The adoption of this guidance doesstandard did not have a significant effectmaterial impact on its consolidated financial statements.statement.

 

In July 2013, the FASB issued a pronouncement which provides guidance on financial statement presentation of an unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this pronouncement is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this pronouncement state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, except as follows.

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RENREN INC.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Accounting pronouncements newly adopted - continued

To the extent a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

This pronouncement applies to all entities that have unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists at the reporting date. The amendments in this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company considers the adoption of this guidance does not have a significant effect on its consolidated financial statements.

Recent accounting pronouncements not yet adopted

In April 2014, the FASB issued Accounting Standard Update ("ASU") 2014-08, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new guidance eliminates the second and third criteria of discontinued operation in ASC 205-20-45-1 and instead requires discontinued-operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale.

The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position.

Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2) depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to the discontinued operation.

The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a significant effect on its consolidated financial statements.

F-35

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accountingAccounting pronouncements not yetnewly adopted continued - continued

 

In May 2014,March 2016, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers2016-09, Compensation - Stock Compensation (Topic 606)”718). The new guidance substantially converges final standards on revenue recognition between the FASBsimplifies certain aspects related to income taxes, statement of cash flows, and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exiting revenue recognitionforfeitures when accounting for share-based payment transactions. This new guidance including industry-specific guidance, in current U.S. generally accepted accounting principles.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects towill be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The amendments in this ASU are effective for annualthe Company for the first reporting periodsperiod beginning after December 15, 2016, including interim periods within that reporting period. Early application is notwith earlier adoption permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company is in the process of evaluating the impact of adoptionadopted of this guidance on January 1, 2017. The adoption of this standard did not have a material impact on its consolidated financial statements.statement. 

 

In June 2014,March 2016, the FASB issued a new pronouncement ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which requiresaffects all entities that a performance targethave an investment that affects vesting and that could be achieved afterbecomes qualified for the requisite service period be treatedequity method of accounting as a performance condition. A reporting entity should apply existing guidanceresult of an increase in Topic 718, Compensation-Stock Compensation, as it relates to awards with performance conditionsthe level of ownership interest or degree of influence. The amendments eliminate the requirement that affect vesting to accountwhen an investment qualifies for such awards. The performance target should not be reflected in estimating the grant-date fair valueuse of the award. Compensationequity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments should be recognizedapplied prospectively upon their effective date to increases in the periodlevel of ownership interest or degree of influence that result in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the endadoption of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.equity method. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

The amendments in this ASU are effective for annual periodsall entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted. The Company adopted this guidance on January 1, 2017. The adoption of this standard did not have a material impact on its consolidated financial statement. 

In January, 2017, the FASB issued a new pronouncement, ASU 2017-01, which clarifies the definition of a business in ASC 805. The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU narrows the definition of a business and provide a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. Specifically, the ASU:

• Provides a “screen” for determining when a set is not a business.

• Specifies that if the screen’s threshold is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create outputs.

• Narrows the definition of the term “output” to be consistent with the description of outputs in ASC 606.

For public business entities, the ASU is effective for annual periods beginning after December 15, 2015. Earlier2017, including interim periods therein. Early adoption is permitted. The ASU must be applied prospectively on or after the effective date. The Company does not expectearly adopted this guidance on January 1, 2017 and applied it prospectively to all new acquisitions completed during the year ended December 31, 2017. The adoption of this guidance willstandard did not have a significant effectmaterial impact on itsthe Company’s consolidated financial statements.statements

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which modifies the accounting for inventory. Under this ASU, the measurement principle for inventory will change from lower of cost or market value to lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this ASU on January 1, 2017 and measured inventory at the lowest of cost and net realizable value.

 

F-36F- 45

  

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing” ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09.

The Company plans on adopting ASU 2014-09 using the modified retrospective method on January 1, 2018. Prior periods will not be retrospectively adjusted. The Company has substantially finalized its preliminary assessment of the new standard and concluded that revenue generated from internet finance services is explicitly excluded from the scope of the new standard as it represents revenue within the scope of ASC 310, Receivables, which is explicitly excluded from the scope of ASC 606. Accordingly, the Company has concluded that the fees related to its internet finance services will not be effected by the adoption of ASC 606. Additionally, the Company has preliminarily concluded that the impact of ASC 606 to its IVAS and used car sales business will not be material to its consolidated financial statements. However, the Company believes that certain financial statements disclosure requirements are mandated by the new standard including disclosure of contract assets and contract liabilities as well as disaggregated view of revenue.

In January, 2016, the FASB issued a new pronouncement ASU 2016-01, “Financial Instruments–Overall”, which is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

The new guidance makes targeted improvements to existing US GAAP by:

·Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

·Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

·Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

·Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;

·Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and

·

Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. The Company is in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

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RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent accounting pronouncements not yet adopted - continued

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance, but expects that most existing operating lease commitments will be recognized as operating lease obligations and right-of-use assets as a result of this adoption.

In August, 2014,June 2016, the FASB issued a new pronouncement ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which providesis intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

F- 47

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent accounting pronouncements not yet adopted - continued

In August 2016, the FASB issued a new pronouncement ASU 2016-15, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on determining when and how reportingeight cash flow issues:

·Debt prepayment or debt extinguishment costs.

·Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing.

·Contingent consideration payments made after a business combination.

·Proceeds from the settlement of insurance claims.

·Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies.

·Distributions received from equity method investees.

·Beneficial interests in securitization transactions.

·Separately identifiable cash flows and application of the predominance principle.

For public business entities, must disclose going-concern uncertaintiesthe guidance in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements. Further, an entity must provide certain disclosures if there is "substantial doubt about the entity's ability to continue as a going concern." The new standardASU is effective for fiscal years endingbeginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for all entities. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company does not expect the adoption of this pronouncement will have a significant effect on its consolidated financial position or results of operations.

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RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent accounting pronouncements not yet adopted - continued

In November 2016, the FASB issued a new pronouncement, ASU 2016-18, which amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. Key requirements of the ASU are as follows:

·An entity should include in its cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms “restricted cash” and “restricted cash equivalents” but states that an entity should continue to provide appropriate disclosures about its accounting policies pertaining to restricted cash in accordance with other GAAP. The ASU also states that any change in accounting policy will need to be assessed under ASC 250.

·A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents.

·Changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows.

·An entity with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods thereafter,within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented. The Company plans to adopt this ASU in the first quarter of fiscal 2018. The adoption of this guidance will impact the presentation and classification of restricted cash in the Company’s consolidated statements of cash flow.

F- 49

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent accounting pronouncements not yet adopted - continued

In January 2017, the FASB issued ASU 2017-04: Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with earlyits carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. A public business entity should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption permitted.is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this guidance will have a significant effect on the Company'sCompany’s consolidated financial statements.

 

F- 50

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

3.SIGNIFICANT RISKS AND UNCERTAINTIES

 

Foreign currency risk

 

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Cash and cash equivalents of the Company included aggregate amounts of $122,838$29,027 and $148,830$23,144 at December 31, 20132016 and 2014,2017, respectively, which were denominated in RMB.

 

Concentration of credit risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, term deposits, short termshort-term investment, accounts receivable, financing receivable and amounts due from related parties. The Company places their cash, cash equivalents, term deposits and short termshort-term investment, with financial institutions with high-credit ratings and quality. The Company conducts credit evaluations of customers in online advertising and generally do not requireinternet finance business, and requires collateral or other security from their customers.the customers for certain of the financing receivable as described in Note 7.

 

There waswere no customer whocustomers that accounted for 10% or more of total net revenue for the years ended December 31, 2012, 20132015, 2016 and 2014.2017.

 

Clients accountingOne customer accounted for 13% of the balance of accounts receivable as of December 31, 2016. No customers accounted for 10% or more of the balance of accounts receivables arereceivable or financing receivable as follows:of December 31, 2017.

 

  As of December 31, 
  2013  2014 
  Amount  %  Amount  % 
                 
Client B  1,855   11.6   435   2.4 
F- 51

 

RENREN INC.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

4.DECONSOLIDATION OF SUBSIDIARIESDISCONTINUED OPERATIONS

4.1 DeconsolidationDisposition of Nuomi Holdings Inc and its subsidiariesOnline Gaming

 

Nuomi Holdings Inc and its subsidiaries (collectivelyOn November 19, 2015, the "Nuomi") primarily provided deep-discount localized social commerce services and products through Nuomi.comCompany reached a resolution to Nuomi users. Entertainment, dining, health and beauty services made up the majoritydispose of its social commerce deals.Online Gaming which was subsequently sold in March 2016 for a gross consideration of $17,500, of which $7,500 was related to the repayment of intercompany loans provided by the Company to its Online Gaming business. The disposal of the Online Gaming represented a strategic shift and has a major effect on the Company’s result of operations. Accordingly, assets, liabilities, revenues and expenses and cash flows related to the Online Gaming entities have been reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented. Additionally, long-lived assets classified as held for sale as of December 31, 2015 were measured at the lower of their carrying amount or fair value less cost to sell.

 

On August 23, 2013, the Company, Baidu Holdings Limited ("Baidu") and Nuomi Holdings Inc. ("Nuomi Inc"), entered into a share purchase agreement whereby Baidu would purchase the newly issued shares of Nuomi Inc. On a fully-diluted basis, upon the completion of the transaction on October 26, 2013, the Company's ownership of Nuomi Inc. was reduced to 31.61%. As a result, from October 26, 2013,From March 31, 2016, the Company no longer retained power of control over NuomiOnline Gaming and accordingly deconsolidated Nuomi'sthe Online Gaming’s financial statementsstatement from the Company's consolidated financial statements.

On October 26, 2013, the Company used equity method to account for the investment in Nuomi Inc at value of $63,626, which represented fair value of 31.61% equity interest in Nuomi Inc. and was determined by the Company with the assistance of an independent valuation firm. On the same date, the Company calculated a gain on loss of control of $132,821, which was recorded as "gain on deconsolidation of the subsidiaries" in the statements of operations. The gain on such deconsolidation is calculated as follows:

  As of 
  October 26, 2013 
    
Fair value of 31.61% shares in Nuomi Inc. $63,626 
Less: Cash and cash equivalents  18,310 
Prepaid expenses and other current assets  26,417 
Property and equipment, net  1,318 
Other non-current assets  190 
Accounts payable  (28,467)
Accrued expenses and other payables  (10,957)
Amounts due to Renren Inc.  (74,825)
Deferred revenue  (1,181)
Gain on deconsolidation of Nuomi Inc $132,821 

In February 2014, the Company sold the remaining 31.61% equity interest in Nuomi Inc. to Baidu in the amount of $68,066 with a gain of $56,993 (see Note 8). Therefore, the Company treated the operations of Nuomi as discontinued and presented the investment in Nuomi Inc. separately under the caption "Equity method investment-current" in current assets on the consolidated balance sheets as of December 31, 2013.

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RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

4.DECONSOLIDATION OF SUBSIDIARIES - continued

4.2 Deconsolidation of Beijing Qingting Technology Development Co. Ltd ("Qingting")

Beijing Qingting Technology Development Co. Ltd., or Qingting was jointly established by the Company and eLong Inc, or eLong in April 2011 to operate travel interest-related fengche.com website in China. The Company held 65% equity interest of Qingting until February 2012, when the Company purchased the remaining 35% equity interest of Qingting from eLong with total cash consideration of $555. As a result, Qingting became a 100% owned subsidiary of the Company as of December 31, 2012.

On October 31, 2013, the Company sold 60% equity interest of Qingting to an independent individual for a cash consideration of $81. Upon the completion of the transaction on October 31, 2013, the Company's ownership of Qingting was reduced to 40%. As a result, from November 1, 2013, the Company no longer retained power of control over Qingting and accordingly deconsolidated Qingting's financial statements from the Company'sCompany’s consolidated financial statements.

 

On OctoberMarch 31, 2013, the Company used equity method to account for the investment in Qingting at value of $160, which represents fair value of 40% equity interest in Qingting. On the same date,2016, the Company calculated a loss on loss of control of $156, which is recorded as a deduction of "gain on deconsolidation of the subsidiaries" in the statements of operations. The loss ongain regarding such deconsolidation is calculateddisposition as follows:

 

  As of 
  October 31, 2013 
    
Cash consideration received $81 
Fair value of 40% investment in Qingting  160 
Less: Cash and cash equivalents  328 
Prepaid expenses and other current assets  5 
Property and equipment, net  64 
Loss on deconsolidation of Qingting $(156)
  As of 
  March 31, 2016 
    
The proceeds $17,500 
Less: The repayment of intercompany loans provided by the Company  7,500 
     
Net consideration  10,000 
     
Less:  Cash and cash equivalents  15,982 
Prepaid expenses and other current assets  2,737 
Property and equipment, net  194 
Intangible assets, net  263 
Other non-current assets  1,508 
Accounts payable  (1,209)
Accrued expenses and other current liabilities  (7,062)
Amount due to the Company  (7,500)
Deferred revenue  (3,677)
     
Net assets of Online Gaming  1,236 
     
Less: Tax expenses  454 
     
Gain on deconsolidation of Online Gaming $8,310 

 

The operations of Qingting were treated as discontinued since October 2013.

F- 52

 

  

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

4.DECONSOLIDATION OF SUBSIDIARIES -DISCONTINUED OPERATIONS- continued

 

4.3 DeconsolidationDisposition of Guangzhou Qianjun Internet Technology Co., Ltd. ("Qianjun Technology")Online Gaming - continued

 

On October 28, 2014,The condensed cash flow of Online Gaming were as follows for the Company, the nominee shareholder of Qianjun Technologyyears ended December 31, 2015 and a subsidiary of Sohu.com (“Sohu”), entered into a share purchase agreement, whereby Sohu would acquire 100% ownership of Qianjun Technology in the amount of $25,000, of which $21,831 was related to the repayment of intercompany loan provided by the Company to Qianjun Technology.2016:

 

Upon the completion of the change of registration at Administration for Industry & Commerce, on December 1, 2014, the Company no longer retained power of control over Qianjun Technology and accordingly deconsolidated Qianjun Technology’s financial statement from the Company’s consolidated financial statements.

  Years ended December 31, 
  2015  2016 
       
Net cash (used in) provided by operating activities $(10,164) $11,171 
Net cash (used in) provided by investing activities $(1,304) $25 

 

On December 1, 2014, the Company calculated a gain regarding such disposition as follows:

     As of 
  Note  December 1, 2014 
       
The proceed     $25,000 
Less: The repayment of intercompany loan provided by        
   the Company      21,831 
Net consideration      3,169 
Less: Cash and cash equivalents      168 
Other current assets      3,654 
 Property and equipment, net  (see Note 10)   2,347 
 Intangible assets, net      11,509 
 Goodwill  (see Note 13)  13,652 
 Other non-current assets      78 
 Income tax payable      (426)
 Current liabilities      (8,426)
 Amount due to Sohu related to the repayment of        
 intercompany loan      (21,831)
Net assets of Qianjun Technology      725 
Less: Transaction related cost  (i)   1,955 
Gain on deconsolidation of Qianjun Technology     $489 

(i)

The transaction related cost represents the incremental cost resulting from the acceleration of the vesting of the nonvested restricted shares, which were granted to the employee of Qianjun Technology, to be fully vested on the disposition day (see Note 18).

As of December 31, 2014, out of total consideration of $25,000, $20,000 was received from Sohu and the remaining was accounted for as "other current assets" (see Note 7).

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

5.DISCONTINUED OPERATIONS

As described in Note 4, the operations of Nuomi, Qingting and Qianjun Technology were treated as discontinued operations. The operating results from discontinued operations included in the Company's consolidated statement of operations were as follows for the years ended December 31, 2012, 20132015 and 2014.2016.

 

  Year ended December 31, 
  2012  2013  2014 
        Qianjun        Qianjun     Qianjun 
   Nuomi Inc.   Qingting   Technology   Nuomi Inc.   Qingting   Technology   Nuomi Inc.   Technology 
                                 
Net revenue from discontinued operations $16,451  $-  $4,808  $19,319  $-  $8,744  $-  $6,822 
Loss from the operations of the discontinued operations, before income tax  27,295   216   16,146   28,378   959   14,204   -   31,130 
Income tax expense  -   -   (464)  -   -   (3,473)  -   (321)
Loss from the operations of the discontinued operations, net of tax  27,295   216   15,682   28,378   959   10,731   -   30,809 
Gain (loss) on deconsolidation of the subsidiaries  -   -   -   132,821   (156)  -   -   489 
                                 
Gain on disposal of equity method investment, net of tax  -   -   -   -   -   -   56,993   - 
                                 
Gain (loss) from the discontinued operations, net of tax $(27,295) $(216) $(15,682) $104,443  $(1,115) $(10,731) $56,993  $(30,320)

  Years ended December 31, 
  2015  2016 
  Renren Games  Renren Games 
         
Major classes of line items constituting pretax profit of discontinued operations        
Net revenues $17,071  $1,699 
Cost of revenues  (9,426)  (871)
Selling, research and development, and general and administrative expenses  (6,362)  (485)
Other income that are not major  1,181   150 
Income from the operations of the discontinued operations, before income tax  2,464   493 
Income tax expenses  (944)  (102)
Income from the operations of the discontinued operations, net of tax  1,520   391 
         
Gain on deconsolidation of the subsidiaries, net of tax  -   8,310 
         
Gain from the discontinued operations, net of tax $1,520  $8,701 

 

All notes to the accompanying consolidated financial statements have been retrospectively adjusted to reflect the effect of the discontinued operations, where applicable.

 

6.ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

  As of December 31, 
  2013  2014 
       
Accounts receivable $17,101  $20,990 
Allowance of doubtful accounts  (1,143)  (2,946)
Accounts receivable, net $15,958  $18,044 

Accounts receivable mainly represent amounts earned under advertising contracts at the respective balance sheet dates. These amounts become billable according to the contract term.

F-41F- 53

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

5.BUSINESS ACQUISITION

Acquisition of used car dealers

In the second half of 2017, in order to start and expand its business of used car trading, the Company completed the acquisitions of 14 unrelated used car dealerships. The acquired dealerships operate used car sales business in various cities across China.

Each acquisition, while negotiated independently, was structured in a similar manner. Specifically, Shanghai Jieying, a PRC subsidiary of the Company, initially purchased all car inventories from each dealership. The total consideration was $45,920, which was settled with a combination of cash paid by the Company amounting to $14,884 and a forgiveness of the financing receivable balances amounting to $21,201 related to financing previously provided to the dealership by the Company. The remaining balance was paid in cash in 2018. Subsequent to the car purchase, Shanghai Jieying and the shareholder of the existing car dealership (the "Seller") enter into an equity purchase agreement which requires the Seller to transfer majority interest of the dealership as follows:

(1)The Seller agrees to set up a new entity to which it transfers the remaining eligible assets of the dealerships, employees, business contracts owned and leased by the existing dealership. In turn, Shanghai Jieying agrees to subscribe for 70% of the entity interest in this entity.
(2)As consideration for the above transaction, Shanghai Jieying agrees to inject cash to the acquired dealership as well as to pay the Seller contingent consideration in the form of shares of Kaixin Auto Group ("Kaixin"), a Cayman subsidiary of the Company and the parent of Shanghai Jieying.

The cars purchase and acquisition of the dealership were accounted for as a single transaction.

The payment of the contingent consideration is contingent upon the successful listing of Kaixin as well as the performance of the acquired dealerships. The amount of consideration is measured based on the operating performance of the acquired dealerships both prior to and subsequent to the future initial public offering ("IPO") of Kaixin, and the number of shares expected to be issued will be calculated based on the IPO issuance price. Such contingent consideration includes two components that will require the Company to issue the shares at different times. The first issuance will be made upon the successful IPO of Kaixin and is calculated based on a percentage of the cumulative operating results of the acquired dealerships between the acquisition date and the date of the IPO. The second issuance will be made in five equal annual installments after the successful IPO of Kaixin and will be calculated based on a percentage of the trailing 12 months operating results of the acquired dealerships leading up to the successful IPO. The contingent issuance of shares is not dependent on whether the previous dealership owner remains employed with the Company.

The total purchase price of these 14 acquisitions consisted of a cash injection to the dealerships amounting to $17,580, of which $7,240 was paid as of December 31, 2017, and contingent consideration with a fair value of amounting to $66,794 which is recorded in contingent consideration on the consolidated balance sheet. Each acquisition was recorded using the acquisition method of accounting. Accordingly, the acquired assets and liabilities were recorded at their fair value at the date of acquisition. The purchase price allocation described below was based on a valuation analysis that utilized and considered generally accepted valuation methodologies such as the income, market and cost approach. The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation methodologies requiring considerable judgment from management. 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, forecasted life cycle and forecasted cash flows over that period.

Subsequent to the date of each acquisition, the Company re-measured the estimated fair values of the contingent consideration at each reporting date. For the year ended December 31, 2017, the Company recorded $2,601 in changes in fair value of contingent consideration in the Company's consolidated statements of operations as a result of the Company's re-measurement of the estimated fair value of the contingent consideration at the reporting date.

F- 54

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

6.5.ACCOUNTS RECEIVABLEBUSINESS ACQUISITION - continued

 

MovementAcquisition of allowanceShandong, Chongqing and Wuhan

On July 20, 2017, July 3, 2017, October 27, 2017, the Company entered into an equity purchase agreement (as described above) with Shandong, Chongqing and Wuhan for doubtful accountsa total purchase price of $18,585, $10,112 and $7,284 respectively. Prior to the agreement, the Company purchased all the car inventories from the above dealerships amounting to $3,721, $2,791 and $8,786, respectively. The Company further paid an aggregate of $2,951 for the car inventory during the year ended December 31, 2017 and forgave an aggregate of $6,995 of financing receivable previously provided to those dealerships. The remaining balance was paid in cash in 2018. The allocation of the purchase prices for those three significant acquisitions as of the date of the acquisition are summarized as below:

  Shandong  Chongqing  Wuhan 
Cash  -  $2,727   - 
Goodwill $26,550   11,719  $10,405 
NCI  7,965   4,334   3,121 
             
The purchase price comprised of:            
-cash consideration  -   818   - 
-contingent consideration  18,585   9,294   7,284 
Total $18,585  $10,112  $7,284 

Other acquisitions of used car dealerships in 2017

During the second half of 2017, the Company further entered into separate equity purchase agreements (as described above) with an additional 11 individually insignificant car dealerships. Prior to the agreement, the Company purchased all the car inventories from each dealership amounting to $30,622. The Company paid an aggregate of $11,933 during the year ended December 31, 2017 and forgave an aggregate of $14,206 of financing receivable previously provided to those dealerships. The remaining balance was paid in 2018. The allocation of the purchase price for those insignificant acquisition is presented on a combined basis as follows:

 

  As of December 31, 
  2012  2013  2014 
          
Balance at beginning of year $224  $556  $1,143 
Charge to expenses  325   812   2,090 
Transferring out as a result of deconsolidation of subsidiaries  -   (2)  (247)

Write-off of accounts receivable

  -   (249)  - 
Exchange difference  7   26   (40)
Balance at end of year $556  $1,143  $2,946 
  Other used car dealer acquisitions 
Cash $1,270 
Goodwill  38,317 
NCI  11,876 
     
The purchase price comprised of:    
-cash consideration  381 
-contingent consideration  27,330 
Total $27,711 

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergies resulting from these acquisitions.

 

7.PREPAID EXPENSES AND OTHER CURRENT ASSETS

     As of December 31, 
  Note  2013  2014 
          
Deposits of share repurchase  (i)  $10,860  $- 
Advances to suppliers  (ii)   4,054   1,985 
Receivables related to online gaming  (iii)   5,931   3,625 
Interest income receivable  (iv)   2,869   5,526 
Prepaid expenses      4,404   4,286 
Other current assets      4,022   6,836 
Rental deposits      1,940   1,850 
Amount due from Sohu in relation to the  disposition of Qianjun Technology  (4.3)  -   5,000 
Loan to third parties  (v)   -   8,530 
Total     $34,080  $37,638 

(i)The board of directors of the Company approved a series of share repurchase programs in September 2011, December 2012, June 2013 and June 2014, respectively, whereby the Company is authorized, but not obligated to repurchase its outstanding American Depositary Shares ("ADSs") through the broker from the open market within one year time period for each authorized program. The Company deposited $10,860 and $nil at the broker for the share repurchase as of December 31, 2013 and 2014, respectively.

F-42F- 55

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

7.5.PREPAID EXPENSES AND OTHER CURRENT ASSETSBUSINESS ACQUISITION - continued

 

(ii)Advances to suppliers were mainly comprised of prepayment to suppliers for purchasing fixed assets, contents and copyrights. Advances to suppliers were non-interest bearing and short-term in nature.

InThe following information summarizes the years ended December 31 2013 and 2014,results of operations attributable to the allowanceacquisitions included in the Company’s consolidated statement of $252 and $305 were provided foroperations since the advances to game developers based on specific identification after considering repayment patterns and supplier credit worthiness.acquisition date:

 

(iii)Receivables related to online gaming represents balances paid online by end users but held at a third party electronic payment service provider, which were in transition to the Company's bank accounts as of December 31, 2013 and 2014. The balances were received by the Company a few days after December 31, 2013 and 2014, respectively.

(iv)Interest income receivable of $2,869 and $5,526 as of December 31, 2013 and 2014 mainly related to the earned and accrued interest of the term deposits with financial institutions during the year.

(v)In December 2014, the Company entered into a loan agreement with Shenzhen Golden Axe Co., Ltd. pursuant to which, a short-term loan in the principal amount of $3,320 was provided by the Company. The loan bears interest of 5% per annum and was expected to be repaid within 12 months.

In October 2014, the Company entered into a loan agreement with Fameast Limited, pursuant to which, a short-term interest-free loan of $5,210 was provided by the Company. This loan was expected to be repaid no later than May 1st, 2015. 

8.SHORT-TERM INVESTMENTS AND EQUITY METHOD INVESTMENT-CURRENT
  Year ended December 31, 2017 
  Shandong  Chongqing  Wuhan  Others 
             
Net revenues $334  $793   -  $1,387 
                 
Net loss $(76) $(59)  -  $(123)

 

Available-for-sale securitiesPro forma information of acquisitions

 

AsSupplementary pro-forma revenues and net earnings for the combined entity, as though the acquisition date for this business combination had been as of January 1, 2016 have not been included as it is impracticable since historical records of the used car dealerships are not available.

Acquisition of TruckerPath Inc.

In December 31, 2013 and19, 2014, the Company held following available-for-sale securities investments:

    As of December 31, 2013  As of December 31, 2014 
        Gross  Other-than        Gross    
        unrealized  -temporary  Carrying     unrealized  Carrying 
  Note  Cost  gains  impairment  amount  Cost losses  amount 
                         
Available-for-sale securities:                                
Equity securities  (i)  $77,506  $160,288   -  $237,794  $29,303  $(1,493) $27,810 
Corporate bonds  (ii)   64,818   187   (2,098)  62,907   -   -   - 
Total     $142,324  $160,475  $(2,098) $300,701  $29,303  $(1,493) $27,810 

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(invested and paid $11,500 to obtain 29% equity interests in TruckerPath Inc. to expand the business of value-added-service platform. The investment was initially recognized as an equity-method investment as the Company concluded that it had significant influence over the operations of TruckerPath Inc. In thousandsDecember 2017, the Company acquired an additional 71% equity interests in TruckerPath Inc. for a total consideration of US dollars, except share data and per share data, or otherwise noted)

8.SHORT-TERM INVESTMENTS AND EQUITY METHOD INVESTMENT-CURRENT - continued

Available-for-sale securities -continued$7,616. The acquisition resulted in the Company obtaining control of TruckerPath Inc. with an ownership of 100% equity interests.

 

The following table provides additional information onpurchase price consists of the realized gains and losses in relation to the sales of available-for-sale securities for the years ended December 31, 2012, 2013, and 2014. For the purpose of determining gross realized gains or losses, the initial cost of securities sold was based on specific identification.following: 

 

     Year ended December 31, 2012  Year ended December 31, 2013  Year ended December 31, 2014 
  Note  Proceeds  Initial
costs
  Gains
(losses)
  Proceeds  Initial
costs
  Gains  Proceeds  Initial
costs
  Gains 
                               
Equity securities  (i)  $6,097  $6,229  $(132) $81,456  $25,950  $55,506  $352,733  $177,633  $175,100 
Corporate bonds  (ii)   73,742   71,887   1,855   37,502   37,240   262   62,795   62,713   82 
Total     $79,839  $78,116  $1,723  $118,958  $63,190  $55,768  $415,528  $240,346  $175,182 

(i)Equity securities
  US$ 
Consideration $7,616 
Fair value of the 29% equity interests:    
Carrying amount  5,587 
Gain on re-measurement of fair value of noncontrolling equity investment  (2,903)
Total $10,300 

 

In 2013, theThe Company purchased several stocks at a costrecognized an investment gain of $48,899 and sold some stocks with cost of $25,950 and recognized $55,506$2,903 in realized gain infrom investment as a result of remeasuring the statement of operations.

In 2014, the Company purchased additional stocks at a cost of $129,407 and sold some stocks with cost of $177,633 and recognized $175,100 realized gain in the statement of operations. In addition, the company received stock dividend of $1,050 which was recognized as the realized gain of short-term investment.

(ii)Corporate bonds

In 2013, the Company purchased several corporate bonds at cost of $39,782 and classified such corporate bonds as available-for-sale securities. A portion of corporate bonds was impaired because of the change of29% equity interests immediately to fair value before the business combination. The acquisition was recorded using the acquisition method of accounting. Accordingly, the acquired assets and $2,098 was recognized as an impairment loss in accordance with the difference between the investment's cost and itsliabilities were recorded at their fair value at December 31, 2013. In 2014,the date of acquisition. The acquisition-date fair value of the equity interests held by the Company sold allimmediately prior to the Corporate bondsacquisition date was measured at fair value using a discounted cash flow method and taking into account certain factors including the management projection of discounted future cash flow and an appropriate discount rate. The purchase price allocation described below was determined by the Company with the assistance of an independent valuation appraiser. The acquired net assets were recorded at their estimated fair values on the acquisition date. The goodwill is mainly attributable to intangible assets that cannot be recognized $82separately as realized gain.identifiable assets under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition. The acquired goodwill is not deductible for tax purposes.

 

F-44F- 56

  

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

5.BUSINESS ACQUISITION - continued

The purchase price was allocated as of December 28, 2017, the date of acquisition as follows:

     Amortization 
  US$  period 
Net working capital $139     
Other current assets  5,016     
Intangible assets        
Customer relationship  610   3 
Technology platform  325     
Trade name  540   3 
Goodwill  7,952     
Other current liabilities  (4,282)    
         
Total $10,300     

Pro forma information of acquisitions

The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2016 and December 31, 2017 of the Company as if the acquisition had occurred on January 1, 2016. There were no material nonrecurring pro-forma adjustments incurred. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results:

  For the years ended 
  December 31,
2016
  December 31,
2017
 
       
Pro forma net revenues $63,404  $203,391 
Pro forma net loss $(193,704) $(116,397)

Other acquisitions in 2017

In 2017, the Company acquired 100% equity interests in Sindeo Inc. ("Sindeo") and Geographic Farming LLC ("Geofarm"). The total consideration for these two acquisitions amounted to $4,326, which was paid in cash during 2017. The acquisition was recorded using the acquisition method of accounting, accordingly, the acquired assets and liabilities were recorded at their fair value at the date of acquisition. The Company recorded $3,251 and $1,460 of goodwill from the acquisition of Sindeo and Geofarm, respectively. Such acquisitions were not material to the Company's consolidated financial statements during the year ended December 31, 2017.

F- 57

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

6.ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

  As of December 31, 
  2016  2017 
       
Accounts receivable $7,541  $9,116 
Allowance of doubtful accounts  (2,839)  (2,856)
         
Accounts receivable, net $4,702  $6,260 

Accounts receivable mainly represent amounts earned under advertising contracts and IVAS business at the respective balance sheet dates. These amounts become billable according to the contract term.

Movement of allowance for doubtful accounts is as follows:

  As of December 31, 
  2015  2016  2017 
          
Balance at beginning of year $2,946  $3,252  $2,839 
Charge to expenses  788   (205)  46 
Exchange difference  (482)  (208)  (29)
             
Balance at end of year $3,252  $2,839  $2,856 

F- 58

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

7.FINANCING RECEIVABLE

Financing receivable consists of the following:

  As of December 31, 
  2016  2017 
Current financing receivable        
Used car financing $277,684  $129,018 
Financing for installment sales  11,205   2,177 
Other financing  27,775   1,306 
Net deferred origination costs  176   - 
Less allowance for financing receivable  (15,067)  (7,023)
Current financing receivable, net $301,773  $125,478 
         
Long-term financing receivable        
Used car financing $53  $8 
Financing for installment sales  324   - 
Less allowance for long-term financing receivable  (47)  - 
Long-term financing receivable, net $330  $8 

Financing receivable mainly represent both the principal and financing income receivable associated with the respective financing services expected to be collected from the individuals or companies receiving financing under the internet finance business at the respective balance sheet dates.

Used car financing is secured with pledged assets, which are used cars with value not less than the financing receivable. Other financing includes financing receivable related to rental financing provided to individuals referred by rental agents as well as micro cash financing to college students.

F- 59

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

7.FINANCING RECEIVABLE - continued

The following table presents nonaccrual financing receivable as of December 31, 2016 and 2017, respectively.

  As of December 31, 
  2016  2017 
       
Used car financing $3,352  $7,373 
Financing for installment sales  6,817   2,051 
Other financing  4,945   1,286 
  $15,114  $10,710 

The following table presents the aging of financing receivable as of December 31, 2017.

  0-90  over 90  total 
  days  days  financing 
  aging  aging  receivable 
          
Used car financing $121,653  $7,373  $129,026 
Financing for installment sales  229   1,948   2,177 
Other financing  138   1,168   1,306 
  $122,020  $10,489  $132,509 

As of December 31, 2017, a total of $10,021 and $10,489 of financing receivables are past due and are respectively reflected in the 0-90 days aging and over 90 days aging table above.

The following table presents the aging of financing receivable as of December 31, 2016.

  0-90  over 90  total 
  days  days  financing 
  aging  aging  receivable 
          
Used car financing $275,007  $2,730  $277,737 
Financing for installment sales  4,712   6,817   11,529 
Other financing  23,734   4,041   27,775 
  $303,453  $13,588  $317,041 

F- 60

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

7.FINANCING RECEIVABLE - continued

Movement of allowance for financing receivable is as follows:

  As of December 31,
  2015 2016 2017
       
Balance at beginning of year $-  $(3,583) $(15,114)
Charge to cost of revenues  (3,665)  (12,436)  (12,745)
Write off of financing receivable  -   119   22,178 
Exchange difference  82   786   (1,342)
             
Balance at end of year $(3,583) $(15,114) $(7,023)

For the years ended December 31, 2015, 2016 and 2017, the Company considered loan principal and financing income receivables meeting any of the following conditions as uncollectible and has further written them off: (i) death of the borrower; or (ii) unable to reach the borrower. The Company outsourced almost all of its collection effort to third-party collection agencies.

8.PREPAID EXPENSES AND OTHER CURRENT ASSETS

    As of December 31,
  Note 2016 2017
       
Advances to third parties  (i) $721  $14,457 
Prepaid expenses    2,341   3,925 
Deposits    4,259   4,308 
Loan to third parties    1,261   2,720 
Funds receivable (ii)  4,495   3,880 
Receivable from brokers (iii)  5,853   - 
Disposal of Mapbar Technology Limited (”Mapbar”)    -   4,585 
Disposal of online wealth management business    -   3,482 
Other receivable (iv)  -   4,209 
Other current assets    1,819   8,617 
           
Total   $20,749  $50,183 

(i)Advances to third parties represents cash advanced to third party dealerships. Specifically, the Company acts as an agent and assists other dealerships in the sale of their cars by allowing them to move their cars to the Company's own lot and as an exchange, pays those third party dealerships an advance amounting to the value of the car. The Company subsequently agrees to market those cars and if successfully sold, receives a commission from those third party dealerships. The Company does not take title to the cars and merely acts as an agent. The advance is subsequently settled either (1) when the car is sold by the Company or (2) if the car is not sold, the cash is remitted back to the Company by the third party dealership. The balance was substantially collected after year-end and the commission earned from the above arrangements is immaterial for the year ended December 31, 2017.

(ii)Funds receivable mainly represents balances paid by individuals for repayments of financing on Renren Fenqi as well as amounts paid by investors for investments made on Renren Licai that are held at a third party electronic payment service provider as of December 31, 2016 and 2017. The balances were collected subsequent to year-end.

F- 61

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

8.PREPAID EXPENSES AND OTHER CURRENT ASSETS - continued

(iii)Receivable from brokers represents cash provided to brokers who hold the cash on behalf of the Company. The cash has not been used to purchase any securities and accordingly is recorded as a receivable. During the year ended December 31, 2017, the Company sold all its short-term securities and received the entire receivable back from the brokers.

(iv)Other receivable represents cash advanced to customers of third party dealerships for purchase of cars for which loans were approved by a bank but for which the customers has not yet received the cash. The amount was subsequently collected by the Company after year-end.

9.SHORT-TERM INVESTMENTS AND EQUITY METHOD INVESTMENT-CURRENT

Short-term investments comprise of marketable securities which are classified as trading and available-for-sale, and derivative financial instruments that are regarded as assets.

Trading securities

During the years ended December 31, 2016 and 2017, the Company purchased and sold serveral trading securities and recorded $577 of gain and $100 of loss in the consolidated statements of operations. As of December 31, 2017, the Company did not hold any trading securities.

Available-for-sale securities

During the year ended December 31, 2015, the Company sold all short-term available-for-sale securities with initial costs of $ 59,136 for total proceeds of $62,704 and recorded $3,568 of realized gain in the consolidated statements of operations. For the purpose of determing gross realized gains or losses, the initial cost of securities sold was based on specific identification. During the years ended December 31, 2016 and 2017, the Company did not make any investments in short-term availabale-for-sale securities.

F- 62

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

9.SHORT-TERM INVESTMENTS - continued

 

Derivative financial instruments

 

The companyCompany used derivative financial instruments in the forms of interest rate swap contracts, interest rate swaption contracts and a series of equity contracts and included these derivative instruments in its trading portfolio.

 

Such derivative instruments were not designated or qualified as hedging instruments, and accordingly were accounted for by fair value at each period end through the statement of operations.

 

The following table provides additional information of the fair value of each financial instruments at year end and of the realized gains or losses during the reporting periods.

  Assets (Liability) Derivatives  Realized Gains/(Losses) 
  as of December 31,  for the years ended December 31, 
  2013  2014  2012  2013  2014 
                
Derivatives not designated as                    
hedging instruments:                    
                     
Interest rate swaption-2013 batch  1,294   -   -   (705)  (1,302)
Interest rate swaption-2014 batch  -   1,937   -   -   (38,383)
Interest rate swap  -   (363)  -   -   (363)
Short call  -   -   1,297   959   10,919 
Long call  -   -   -   -   (6,141)
Short put  -   -   -   -   (1,697)
Total  1,294   1,574   1,297   254   (36,967)

Equity method investment-current

As described in Note 4.1, the current portion of equity method investment represented 31.61% equity interest in Nuomi. In February 2014, the Company sold such equity method investment to Baidu in the amount of $68,066, of which $49,606 was received in fiscal year 2014 and the remaining will be settled on February 28, 2016 and was accounted for as "other non-current assets" as of December 31, 2014 (see Note 12).2016 and 2017, the Company did not hold any derivative financial instruments. The transactionCompany recorded a realized loss of $100,644, mostly related cost of $3,122to H-Share Index and related tax of $6,027 were recognized as a deduction of the gain on disposal of equity method investment forFXI UP call options, during the year ended December 31, 2014.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data2015. The realized gain or losses were insignificant for the years ended 2016 and per share data, or otherwise noted)2017.

9.LONG-TERM INVESTMENTS

     As of December 31, 
  Note  2013  2014 
          
Equity method investments:            
  Social Finance Inc. ("SoFi")  (i)  $44,673  $67,490 
  Japan Macro Opportunities Offshore            
Partners, LP ("JMOOP")  (ii)   48,119   59,860 
  Snowball Finance Inc. ("Snowball")  (iii)   -   33,613 
  Hayman Credes Offshore Fund, LP            
("Hayman")  (iv)   -   30,000 
  Eall Technology Limited ("Eall")  (v)   -   17,879 
  Rise Companies Corp. ("Rise")  (vi)   -   16,025 
  Effective Space Solution ("ESS")  (vii)   -   4,730 
  Others  (viii)   4,223   48,553 
Total equity method investments      97,015   278,150 
             
Warrant:            
  Warrant of Snowball  (iii)   -   901 
             
Cost method investments:            
  Hylink Advertising Co., Ltd. ("Hylink")  (ix)   2,478   2,417 
  StoreDot Ltd. ("StoreDot")  (x)   -   10,001 
  GoGo Tech Holdings Limited ("GoGo")  (xi)   -   8,100 
  Sirin Sarl ("Sirin")  (xii)   -   5,000 
  Others  (xiii)   116   8,982 
Total cost method investments      2,594   34,500 
             
Held-to-maturity investments:            
  Series 2012-A Senior Secured            
Refi Loan Notes.  (xiv)   8,233   6,863 
Total long-term investments     $107,842  $320,414 

 

F-46F- 63

  

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

10.LONG-TERM INVESTMENTS

    As of December 31,
  Note 2016 2017
       
Equity method investments:          
Social Finance Inc. ("SoFi") (i) $231,952  $208,694 
Eall (Tianjin) Network Technology Co., Ltd. ("Eall Network") (xiii)  18,137   18,458 
Golden Axe (ii)  16,243   14,268 
Others (iii)  91,394   77,391 
           
Total equity method investments    357,726   318,811 
           
Cost method investments:          
Hylink Advertising Co., Ltd. ("Hylink") (iv)  2,161   - 
StoreDot Ltd. ("StoreDot") (v)  10,001   10,001 
GoGo Tech Holdings Limited ("GoGo") (vi)  11,127   11,127 
Motif Investing Inc. ("Motif") (vii)  7,700   5,475 
LendingHome Corporation ("LendingHome") (viii)  65,843   65,843 
Credit Shop Inc. ("Credit Shop") (ix)  35,000   - 
Eunke Technology Ltd. ("Eunke") (x)  25,000   13,438 
Others (xi)  37,605   38,913 
           
Total cost method investments    194,437   144,797 
           
Available-for-sale investments:          
Snowball Finance Inc. ("Snowball") (xii)  36,337   26,070 
Eall Technology Limited ("Eall") (xiii)  2,892   2,892 
268V Limited (xiv)  24,170   12,207 
Omni Prime Inc. ("Omni") (xv)  27,053   27,637 
Zhu Chao Holding Company Limited ("Zhu Chao") (xvi)  18,722   - 
Hylink Advertising Co., Ltd. (iv)  -   9,794 
Others (xvii)  34,011   23,158 
           
Total available-for-sale investments    143,185   101,758 
           
Total long-term investments   $695,348  $565,366 

F- 64

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

9.10.LONG-TERM INVESTMENTS - continued

 

Equity method investments

 

(i)In September 2012, and March 2014, January 2015, and October 2015, the Company entered into agreements to purchase 5,573,719 Series B Preferred Shares, and 6,014,3046,020,695 Series D Preferred Shares, 2,361,116 Series E Preferred Shares and 9,507,933 Series F Preferred Shares issued by SoFi at a price of $8.791258$8.79 per Series B Share, and $3.453$3.45 per Series D Share, with$9.46 per Series E Share and $15.78 per Series F Share for a total consideration of $69,789.$242,120. In November 2012, SoFi split 1 Series B Preferred Share into 4 Series B Preferred Shares and the Company held 22,294,876 Series B Preferred Shares after that. In April 2017, the Company disposed 5,719,986 preferred shares of SoFi for total net proceeds of $91,926, recording a realized gain amounting to $58,335 in (Loss) earnings in equity method investments, net of tax on the consolidation statement of operations  for the year ended December 31, 2017. The Company held 26.68%21.06% and 24.62%14.97% equity interest of SoFi as of December 31, 20132016 and 2014,2017, respectively and recognized its share of lossgain in SoFi of $3,103$3,902, loss of $3,968 and gain of $2,028$10,333 for the years ended December 31, 20132015, 2016 and 2014,2017, respectively. The Company accounted for this investment as equity method as of December 31, 2016 and continued to do so during the year ended December 31, 2017 as it believes it is able to exert significant influence through its board seat combined with the board seats held by the Company's two major shareholders on SoFi's board of directors.

 

(ii)

In November 2011, February 2013 and January 2014,2015, the Company invested $20,000, $20,000entered into an agreement to purchase 2,000,000 Ordinary Shares and $40,000, respectively26,081,176 Series B Preferred Shares issued by Golden Axe Inc. for a total consideration of $18,943 (the "Consideration"). The Company paid $1,143 in JMOOP,December 2015 and $7,167 of the Consideration was settled by both paying cash and forgiving previous loans provided to Golden Axe Inc. in January 2016, at which ispoint, $10,633 of the Consideration remained outstanding. In 2016, concurrent with a Cayman Islands exempted Limited partnership, and served asrestructuring of Golden Axe, the Company entered into a limited partner. JMOOP is essentiallysubsequent agreement to acquire 20.46% equity interest of a hedge fund that focuses on generating return for its partners through investments in the Japanese foreign currency exchange and credit markets. Pursuant to Subscription Agreement of JMOOP, once the general partner and a prospective investor agreed on the terms and investment objectives, the investor will subscriberelated entity, Shenzhen Golden Axe Co, Ltd. (collectively with Golden Axe Inc., "Golden Axe"), for the agreed amount and become a limited partner of JMOOP. The general partner will create a new tranche within the fund for the new limited partner’s monies, and commence the investing activities for this tranche. There are multiple tranches within JMOOP and there is no restriction on the maximum sizeremainder of the fund.Consideration of $10,633. The general partner is not required to obtain existing partners' consents for or notify the existing partnersCompany held 20.46% equity interest of the addition of new investors into the fund. Therefore, the Company is practically unable to track its percentage ownership regularly in the partnership’s capital. JMOOP reports the fair market value of the investment securities owned by the Company’s investment tranche on a monthly basis, and the Company recognizes the appreciation or depreciation on its investment in JMOOP based on such valuation report.

AsGolden Axe as of December 31, 2014, the Company held two individual partner accounts, “Tranche Y”2017 and “Tranche W”, and accounted for them using equity method. The Company recognized its share of loss of $3,560, gain of $29,290$nil, $2,275 and gain of $55,978$2,496 for the years ended December 31, 2012, 20132015, 2016 and 2014, respectively and recognized capital distributions of $19,158 and $84,057 in the years ended December 31, 2013 and 2014,2017, respectively. As of December 31, 2014, capital distribution receivable of $419 was recorded as amount due from related party (see Note 19).

 

(iii)Others represents other equity method investments with individual carrying amounts less than $15,000 as of December 31, 2016 and 2017, respectively.

F- 65

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Equity method investments - continued

The summarized financial information for all of the Company’s equity method investments were as follows:

  As of December 31,
  2016 2017
     
Total current assets $7,176,015  $10,070,446 
Total assets $7,250,680  $10,151,227 
Total current liabilities $5,200,536  $7,825,929 
Total liabilities $5,340,139  $7,997,108 
Noncontrolling interests $443,885  $- 

  For the years ended December 31,
  2015 2016 2017
       
Net revenues $199,069  $406,686  $673,420 
Gross profits $167,512  $351,782  $579,076 
(Loss) income from continuing operations $(58,658) $(25,455) $30,669 
Net (loss) income $(58,658) $(25,455) $30,669 

Cost method investments

(iv)

In April 2011, the Company acquired 2% equity interest of Hylink at total cash consideration of $2,381. Hylink is mainly engaged in advertising agency service. The Company was not able to exercise significant influence over the operating and financial decisions of Hylink, and thus the Company used the cost method to account for its investment.

In August 2017, Hylink successfully listed on the Shanghai Stock Exchange in China. The Company reclassified the investment as available-for-sale securities. Unrealized holding gains of $7,489 were reported in other comprehensive income for the year ended December 31, 2017.

F- 66

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Cost method investments – continued

(v)In August 2014, the Company entered into an agreement to purchase Series B Preferred Shares issued by StoreDot for a  total cash consideration of $10,001 and held 6.06% equity interest of StoreDot. The Company was not able to exercise significant influence over the operating and financial decisions of StoreDot, and thus the Company used the cost method to account for its investment.

(vi)In November 2014, the Company entered into an agreement to acquire 10% equity interest of GoGo for a total consideration of $8,100. In May 2015, June 2015 and May 2016, the Company acquired additional equity interest of GoGo for a total consideration of $5,000, $3,000 and $500, respectively. The Company held 13.89% and 10.48% equity interest of GoGo as of December 31, 2015 and 2016, respectively. The Company was not able to exercise significant influence over the operating and financial decisions of GoGo, and thus the Company used the cost method to account for its investment. As of December 31, 2016, as a result of a decrease in fair value of GoGo from its new financing in 2016, the Company performed an impairment analysis and recognized an OTTI loss of $5,473 during the year ended December 31, 2016.

(vii)In January 2015, the Company entered into an agreement to purchase 5,579,734 Series E Preferred Shares issued by Motif for a total consideration of $40,000 and held 10% equity interest of Motif as of December 31, 2015. The Company was not able to exercise significant influence over the operating and financial decisions of Motif, and thus the Company used the cost method to account for its investment. As a result of a failure to achieve Motif’s business plan and deterioration of its results, the Company performed an impairment analysis and recognized an OTTI loss of $32,300 and $2,225 during the years ended December 31, 2016 and 2017, respectively.

(viii)In March 2015, the Company entered into an agreement to purchase 6,153,999 Series C Preferred Shares issued by LendingHome for a total consideration of $65,843 and held 14.72% equity interest of LendingHome as of December 31, 2015. The Company was not able to exercise significant influence over the operating and financial decisions of LendingHome, and thus the Company used the cost method to account for its investment.

(ix)In January 2015, the Company acquired 204,471 Series A Preferred Shares issued by Credit Shop at a price of $73.36 for a total consideration of $15,000. Additionally, the parties also reached an agreement, whereby the Company would provide a revolving line of credit up to $15,000 to Credit Shop. That agreement also included an option whereby the Company or Credit Shop have the option to convert the full $15,000 revolving line into Series A Preferred Shares of Credit Shop. Prior to or in conjunction with the exercise of the option, the Company is required to have fully funded the $15,000 revolving loan. Additionally, upon the exercise of the option, the Company is also required to purchase additional Series A Preferred Shares from Credit Shop in the amount of $5,000.

Such option is not legally detachable or transferable and therefore was not separately accounted. In December 2015, Credit Shop exercised the option; the Company therefore purchased $20,000 of Series A Preferred Shares in February 2016. As of December 31, 2016, the Company held 40.99% equity interest of Credit Shop. The Company accounted for the investment under the cost method given that such shares have substantive liquidation preference over ordinary shares and are not considered in-substance common stock.

During the year ended December 31, 2017, as a result of a failure to achieve CreditShop’s business plan and deterioration of the its financial results, the Company performed an impairment analysis. As a result, the Company recognized an OTTI loss amounting to $35,000 during the year ended December 31, 2017.

F- 67

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Cost method investments – continued

(x)In March 2015, the Company entered into an agreement to purchase 4,770,131 Series B Preferred Shares issued by Eunke for a total consideration of $25,000, and held 21.9% equity interest of Eunke as of December 31, 2015. The Company accounted for the investment under the cost method given that such shares have substantive liquidation preference over ordinary shares and are not considered in-substance common stock. In determining the fair value of the investment in Eunke, as a result of a failure to achieve Eunke’s business plan and deterioration of its financial results, the Company applied the market approach using unobservable inputs, such as a lack of marketability discount and probability weighting for each scenario including liquidation, and initial public offering, and recognized an OTTI loss amounting to $11,562 during the year ended December 31, 2017.

(xi)

Others represents other cost method investments with individual carrying amount less than $10,000 as of December 31, 2016 and 2017, respectively.

In the third quarter of 2017, the Company disposed Mapbar, a cost method investment acquired in 2011, to an unrelated investor for a total consideration of US$37,311, of which US$32,726 was received as of December 31, 2017 and the rest amount were received in January 2018. The investment was fully impaired during the year ended December 31, 2013, and therefore, a total of $37,311 gain on disposal of investment was recognized in 2017.

Available-for-sale investments

Long-term available-for-sale investments represent convertible redeemable preferred shares, convertible debt and equity securities. As of December 31, 2016 and 2017, the Company held following long-term available-for-sale investments:

  As of December 31, 2017 As of December 31, 2016
    Gross Other-than     Gross Other-than  
    unrealized -temporary Fair   unrealized -temporary Fair
  Cost gains impairment value Cost gains impairment value
                 
Convertible redeemable preferred shares $165,524  $9,745  $(89,805) $85,464  $172,928  $16,387  $(50,830) $138,485 
Convertible debt  7,500   -   (1,000)  6,500   4,700   -   -   4,700 
Equity securities  2,305   7,489   -   9,794   -   -   -   - 
                                 
Total $175,329  $17,234  $(90,805) $101,758  $177,628  $16,387  $(50,830) $143,185 

F- 68

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Available-for-sale investments - continued

(xii)In November 2014, the Company acquired 35,040,427 Series C Preferred Shares issued by Snowball at a price of $0.9988 per share. Meanwhile,As part of the acquisition, the Company received a detachable preferred share warrant, exercisable within 2 years of the share acquisition, to (1) purchase additional up to 8,872,590 Series C Preferred SharesShare at a price of $1.6906 per share; (2) if Snowball issued subsequent equity securities, purchase such subsequent equity securities at a price ofamounting to the lower of $1.6906 and the per share price paid by investors purchasing such subsequent equity securities. The total consideration for the purchase of Series C Preferred Shares and warrant was $34,998, of which $901 was allocated to the value of warrant based on its fair value at the acquisition date. The Company did not exercise the warrant and it expired in September 2016. As a result, the Company recorded a loss of $901 in 2016.

 

The total consideration forCompany has determined that the purchase of Series C Preferred Shares and warrant was $34,998,are redeemable at the option of which $901 was allocatedthe investors according to the redemption terms further included below:

(1)Each holder of the preferred shares then outstanding may require Snowball to redeem all but not less than all of the then outstanding preferred shares held by such requesting holder, at any time after the earliest of (i) five years from the issuance of the preferred shares if there is no firm commitment underwritten registered public offering of the shares or other securities of Snowball, (ii) any material adverse change in the regulatory environment, or (iii) any material breach by Snowball and/or the founders of Snowball of the preferred share purchase agreements, the shareholders’ agreement, the Amended Memorandum and Articles of Snowball, or other relevant agreements and documents.
(2)The redemption price per preferred share shall be the sum of the original issue price (as adjusted) and all declared but unpaid dividends, plus an assumed 8 percent compounded per annum return for each year the preferred shares were outstanding.

As such, the Company determined that the shares are debt securities in nature and accounted for those as available-for-sale securities. The Company performed an impairment analysis and recognized an OTTI loss of $9,989 during the year ended December 31, 2017. In determining the fair value of warrant based on its fair value at the acquisition date.investment in Snowball Finance Inc., the Company applied the market approach using unobservable inputs, such as a lack of marketability discount and probability weighting for each scenario including liquidation, and initial public offering. Unrealized holding gains of $803 and loss of $278 were reported in other comprehensive income for the years ended December 31, 2016 and 2017, respectively.

F- 69

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

(iv)10.In December 2014, the Company invested $30,000 in Hayman which is a Cayman Islands exempted Limited partnership and served as a Limited Partner. The general partner of Hayman is Hayman Offshore Management Inc, which is also the general partner of JMOOP.LONG-TERM INVESTMENTS - continued

Available-for-sale investments - continued

 

(v)(xiii)In September 2014, the Company entered into an agreement to purchase 5,321,428 Series B-1 Preferred Shares and 649,351 Series B-2 Preferred Shares issued by Eall at a price of $3.08 per Series B-1 Shareshare and $2.62 per Series B-2 Share withshare for a total consideration of $18,090. In July 2015, the Company purchased an additional 652,598 Series B-1 Preferred Shares at a price of $3.08 per Series B-1 share for a total consideration of $2,010. The Company held 18.77% equity interesthas determined that all of Eall and one board seat outthe purchased shares are redeemable at the option of four as of December 31, 2014 and recognized its share of loss of $211 for the year ended December 31, 2014.investors according to the redemption terms further included below:

 

(vi)(1)

In April 2014,Each holder of the Company entered into anthen outstanding preferred shares may require that Eall redeem all or part of the preferred shares then outstanding, on or after the earlier of (i) January 1, 2019, or (ii) the occurrence of any material breach or violation of any of the Memorandum and Articles of Eall, the preferred share purchase agreements, the shareholders agreement, to purchase 7,856,395 Series A Preferred Shares issuedand other relevant agreements and documents and/or the applicable laws by Rise at a priceEall or any direct or indirect holder of $2.1872 per share with a total considerationthe ordinary shares of $17,183. The Company held 35.6% equity interest of Rise as of December 31, 2014.

Eall.

 

(vii)(2)

In December 2014,The redemption price per preferred share shall be the Company entered into an agreement with ESSamount equal to purchase 3,333,333 Ordinary Shares at100 percent of the original issue price, of $1.20 perplus all accrued or declared but unpaid dividends on such preferred shares (subject to adjustments for share with total cash consideration of $4,000. Since the Company held 25% equity interest of ESS as of December 31, 2014 and was able to exert significant influence over ESS, the investment was accounted for using equity method.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

9.LONG-TERM INVESTMENTS - continuedsplit, share dividend, reclassification or other similar events).

 

Equity method investments- continuedAs such, the Company determined that they are debt securities in nature and accounted for those as available-for-sale securities.

 

Meanwhile,In July 2016, Eall conducted a restructuring such that the Company was grantedultimately held a call option20.4% investment in both Eall and Eall Network, a shell company controlled by the founding shareholders of Eall. The Company still accounted the investment in Eall as available-for-sale investment as there were no changes to invest additional $7,000 within next 18 months to acquire additional ordinary sharesthe nature and redemption rights of the investment and recorded its investment at fair value as of December 31, 2016 and 2017.

Additionally, the Company accounted for its investment in Eall Network as an in-substance common stock investment over which the Company could exercise significant influence. As a per share price determinedresult, the Company recorded its investment in Eall Network as an equity method investment at $17,937 based on the basis of ESS’s valuation of $30,000. Since the fair value of this call option was immaterialthe investment at the purchase date, it was recorded aggregately withtime of the costrestructuring. The Company recognized its share of equity method investment.loss of $200 and gain of $321 related to its investment in Eall Network for the years ended December 31, 2016 and 2017, respectively.

 

Besides, the Company wrote an option, which allows ESS torequest additional investment of $7,000 from the Company if the aggregate amount of pre-sale letters received by ESS from its potential clients exceeded $10,000 during next 3 years. Such written put option was separately recorded based on its fair value of $730 at the purchase date under the caption of "Other non-current liabilities" on the consolidated balance sheets as of December 31, 2014.

F- 70

 

(viii)Others represents other equity method investments with individual carrying amount less than $15,000 as of December 31, 2013 and 2014, respectively.

  

The summarized financial information of the equity method investments were as follows:

  As of December 31, 
  2013  2014 
       
Total current assets $76,508  $318,629 
Total assets $471,322  $898,713 
Total current liabilities $21,291  $47,999 
Total liabilities $225,822  $412,806 

  For the years ended December 31, 
  2012  2013  2014 
          
Net revenues $7,881  $145,745  $118,814 
Gross profits $5,371  $138,168  $105,193 
Net (income) loss $64,139  $(83,431) $(30,696)

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

9.LONG-TERM INVESTMENTS - continued

Cost method investments

(ix)

In April 2011, the Company acquired 2% equity interest of Hylink at total cash consideration of $2,381. Hylink is mainly engaged in advertising agency service. The Company had no seat in Board and was not able to exercise significant influence over the operating and financial decisions of Hylink, and thus the Company used the cost method to account for its investment.

(x)

In August 2014, the Company entered into an agreement to purchase Series B Preferred Shares issued by StoreDot at total cash consideration of $10,001 and held 6.06% equity interest of StoreDot. The Company had no seat in Board and was not able to exercise significant influence over the operating and financial decisions of StoreDot, and thus the Company used the cost method to account for its investment.

(xi)

In November 2014, the Company entered into an agreement to acquire 10% equity interest of GoGo with a total consideration of $8,100. The Company had no seat in Board and was not able to exercise significant influence over the operating and financial decisions of GoGo, and thus the Company used the cost method to account for its investment.

(xii)In November 2014, the Company entered into an agreement to provide $5,000 loan to Sirin. The loan bears interest at an annual rate of LIBOR plus 2%. The sum of the principal and the interest would be automatically converted into Sirin's equity securities upon the occurrence of performance conditions or within 36 months.

(xiii)Others represents other cost method investments with individual carrying amount less than $3,000 as of December 31, 2013 and 2014, respectively.

Held-to-Maturity investments

(xiv)

In July 2012, the Company entered into a Note Purchase Agreement with SoFi Lending Corp., a subsidiary of SoFi, to purchase $10,000 Series 2012-A Senior Secured Refi Loan Notes issued by SoFi Lending Corp. The loan has a maturity date of July 3, 2032 and a fixed annual interest rate of 4% with no redemption feature. The Company has the positive intent and ability to hold the investments to maturity. The Company received monthly payments, including return of the principal of $1,353, $1,370 and earned interest of $248, $211 from SoFi Lending Corp. for the years ended December 31, 2013 and 2014.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.PROPERTY AND EQUIPMENT, NET

  As of December 31, 
  2013  2014 
       
Building $34,395  $33,558 
Computer equipment and application software  61,857   49,206 
Furniture and vehicles  1,267   664 
Leasehold improvements  5,425   5,585 
  $102,944  $89,013 
Less: Accumulated depreciation $(44,294) $(45,233)
Less: Accumulated impairment loss  (90)  (90)
  $58,560  $43,690 

Depreciation expenses from continuing operations were $11,389, $14,539 and $14,975 and from discontinued operations were $2,494, $3,031and $2,370, for the years ended December 31, 2012, 2013 and 2014, respectively.

Impairment loss from continuing operations were $nil, $90 and $nil for the years ended December 31, 2012, 2013 and 2014, respectively. No impairment loss was incurred from discontinued operations for the respective years.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

11.ACQUIRED INTANGIBLE ASSETS, NET

The gross carrying amount, accumulated amortization and net carrying amount of the intangible assets were as follows:

  As of December 31, 
  2013  2014 
Intangible assets:        
Domain name, trademarks and online licenses $25,001  $122 
Operating platforms and technology  1,264   363 
Game license, webgame cooperation agreement and content copyright  5,278 �� 5,668 
User generated content  1,395   - 
Customer and broadcasters relationship  793   - 
Login users and registered user list  635   169 
Non-compete agreement  195   - 
  $34,561  $6,322 
Less: Accumulated amortization        
Operating platforms and technology $(936) $(363)
Game license, webgame cooperation agreement and content copyright  (3,773)  (3,669)
User generated content  (931)  - 
Customer and broadcasters relationship  (582)  - 
Login users and registered user list  (575)  (169)
Non-compete agreement  (159)  - 
  $(6,956) $(4,201)
Less: Accumulated impairment        
Domain name, trademarks and online licenses $-  $(121)
Game license, webgame cooperation agreement and content copyright  (208)  (1,998)
  $(208) $(2,119)
Intangible asset, net $27,397  $2 

Impairment loss from continuing operations were $nil, $208 and $1,925, and from discontinued operations were $nil, $nil and $13,536, respectively for the years ended December 31, 2012, 2013 and 2014. Out of the impairment loss from continuing operations of $1,925 for the year ended December 31, 2014, $1,211 was included in restructuring cost due to an online game’s internal restructuring and $714 was disclosed as impairment of intangible assets.

Amortization expenses from continuing operations were $332, $558 and $666 and from discontinued operations were $1,873, $1,060 and $477 for the years ended December 31, 2012, 2013 and 2014, respectively.

As stated in Note 13, on September 30, 2014, the Company performed an interim impairment test on Goodwill. To get the implied fair value of goodwill, the Company allocated the fair value of Renren reporting unit to each of the assets and liabilities in this reporting unit, including indefinite-lived intangible assets. As a result, the indefinite-lived intangible assets was reduced from $24,536 to $11,000, which was determined using discounted cash flow ("DCF") method of the income approach applying assumptions including financial forecast developed by the Company for the planning purpose, terminal growth rate of 3%, discount rate of 19% and annual risk free rate of 4%.

In subsequent, due to the disposition of Qianjun Technology on December 1, 2014 (see Note 4.3), the intangible assets including both indefinite-lived and definite-lived intangible assets, which are associated with Qianjun Technology and its online video business were disposed of with a total gross amount of $28,778, accumulated amortization of $3,733 and accumulated impairment loss of $13,536, representing a net intangible assets of $11,509.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

12.OTHER NON-CURRENT ASSETS

    As of December 31, 
  Note  2013  2014 
          
Receivable related to the disposition of equity method investment in Nuomi  (8) $-  $18,460 
Employee housing loan  (i)   3,797   1,734 
Rental deposit      1,896   1,259 
Restricted cash, non-current      322   314 
Long-term deferred expense      49   - 
Suppliers deposit      720   77 
Total     $6,784  $21,844 

(i)The balance represents the interest-bearing long-term loans to employees provided by the Company during the period from late 2011 to early 2013. Such program was suspended in 2013.

13.GOODWILL

The Company tested goodwill for impairment at the reporting unit level, which is the same as reportable segment. Goodwill is only associated with "Renren" reporting unit. The changes in carrying amounts of goodwill for the years ended December 31, 2013 and 2014 were as follows:

    As of December 31, 
  Note  2013  2014 
          
Gross amount:            
Beginning balance     $60,298  $62,032 
Disposal  (4.3)  -   (61,141)
Exchange difference      1,734   (891)
Ending balance      62,032   - 
Accumulated impairment loss:            
Beginning balance      (625)  (625)
Charge for the year      -   (46,864)
Disposal  (4.3)  -   47,489 
Ending balance      (625)  - 
Goodwill, net     $61,407  $- 
RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

13.GOODWILL - continued

In view of the declining performance of Renren reporting unit and the reallocating of resources to new business areas, the Company performed an interim impairment test on September 30, 2014 and wrote down its carrying amount to its fair value of $13,700 and recognized an impairment loss of $46,864 for the year ended December 31, 2014. The fair value at this interim test was determined based on the discounted cashflow ("DCF") method of the income approach applying assumptions including terminal growth rate of 3%, discount rate of 19% and annual risk free rate of 4%.

As stated in Note 4.3, on December 1, 2014, the Company completed the disposition of Qianjun Technology, which is also included in Renren reporting unit. The amount of goodwill allocated to the business disposed of was determined based on the relative fair value of disposed business and the remained portion in Renren reporting unit, which is close to the remaining carrying amount of goodwill of $13,652.

14.ACCRUED EXPENSES AND OTHER PAYABLES

    As of December 31, 
  Note 2013  2014 
           
Employee payroll and welfare payables   $9,168  $6,175 
Other tax payable    7,510   7,256 
Accrued professional, marketing and leasing fees    8,897   3,889 
Other payables    6,397   6,291 
Liability for advance payment of unvested options    166   - 
Accrued advertising sales rebate    505   91 
Accrued restructuring liabilities (i)  671   392 
Total   $33,314  $24,094 

(i)

The accrued restructuring liabilities represent the accrued severance package and the payables to the counterparties of business contracts in associate with online game service. During 2013 and 2014, the Company restructured the games segment by disposition of the games development activities and focuses on games distribution and operations. Whereas, a number of employment contracts and certain business contracts were terminated. As such, the Company accrued restructuring expenses of$3,475 and $2,619 and paid $2,804 and $2,898 in 2013 and 2014, respectively.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

15.10.LONG-TERM INVESTMENTS - continued

Available-for-sale investments - continued

(xiv)In January 2015, the Company entered into an agreement to purchase 64,281,655 Series D Preferred Shares issued by 268V Limited for a total consideration of $75,000. The Company has determined that the Series D Preferred Shares are redeemable at the option of the investors according to the redemption terms further included below:

(1)At the option of a holder of the preferred shares, 268V Limited shall redeem all, or any, of the outstanding preferred shares held by the requesting holder, at any time after the earliest of (i) the date that there is a material breach by 268V Limited or by any direct or indirect owners of the ordinary shares of 268V Limited, of the preferred share purchase agreements, the shareholder agreement, the restated Articles, and other relevant agreements and documents, (ii) any material adverse change in the regulatory environment that will cause the agreements that provide 268V Limited the control over its variable interest entity to be invalid or unenforceable, or (iii) the failure by 268V Limited to complete a firm underwritten public offering of the shares or other equity securities within five years from the issuance date of the preferred shares.
(2)The redemption price shall be equal to the greater of (i) an amount equal to the sum of the original issue price (as adjusted), plus an assumed 12 percent compounded per annum return for each year the preferred shares were outstanding, and all declared but unpaid dividends thereon up to the date of redemption or (ii) the fair market value of each preferred share.

As such, the Company determined that they are debt securities in nature and accounted for those as available-for-sale securities. As a result of a decrease in fair value of 268V Limited from its new financing in 2016 and 2017, the Company performed an impairment analysis and recognized an OTTI loss of $50,830 and $12,085 during the years ended December 31, 2016 and 2017, respectively. In determining the fair value of the investment in 268V Limited, the Company applied the market approach using unobservable inputs, such as a lack of marketability discount and probability weighting for each scenario including liquidation, and initial public offering. Unrealized holding gains of $nil and $122 were reported in other comprehensive income for the years ended December 31, 2016 and 2017, respectively.

F- 71

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Available-for-sale investments – continued

(xv)In July 2015 and March 2016, the Company purchased 14,727,541 Series B Preferred Shares and 510,248 shares of Series B++ Preferred Shares issued by Omni at the price of $1.358 per Series B Preferred Share and $1.96 per Series B++ Preferred Share for a total consideration of $21,000, respectively. The Company has determined that the Series B Preferred Shares and Series B++ Preferred Shares are redeemable at the option of the investor according to the redemption terms further included below:

(1)If so requested by any holder of the preferred shares, Omni shall redeem all or part of such outstanding preferred shares, at any time after the earliest of (i) July 30, 2021, if Omni has not consummated an underwritten public offering of its ordinary shares, (ii) any change of laws or policy with respect to the validity of the agreements that provide Omni with control over its variable interest entity, (iii) any competent governmental authority having determined that it is illegal for Omni to carry on its business as conducted and as proposed to be conducted in accordance with applicable laws, regulations, policies or discretion of competent governmental authorities, and Omni has been unable to carry on such business for at least 3 consecutive months due to such determination or (iv) any material breach by Omni and/or its founders of the preferred share purchase agreements, shareholder agreement or relevant agreements and documents.
(2)The price at which each preferred share shall be redeemed shall be equal to the greater of (i) 150 percent of the original issue price of such preferred shares and (ii) the fair market value of such preferred shares.

As such, the Company determined that they are debt securities in nature and accounted for those as available-for-sale securities. Unrealized holding loss of $2,813 and gain of $584 were reported in other comprehensive income for the years ended December 31, 2016 and 2017, respectively.

F- 72

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

10.LONG-TERM INVESTMENTS - continued

Available-for-sale investments – continued

(xvi)In January 2015, the Company entered into an agreement to purchase 1,553,566 Series A Preferred Shares issued by Zhu Chao for a total consideration of $15,000. The Company has determined that the Series A Preferred Shares are redeemable at the option of the investor according to the redemption terms further included below:

(1)Each holder of the then outstanding preferred shares is entitled to request Zhu Chao to redeem all or part of its outstanding preferred shares on or after the earliest of (i) August 10, 2020, if there has been no firm commitment underwritten public offering of the ordinary shares of Zhu Chao, (ii) the last date of the three-month period commencing from the delivery of notice of the occurrence of any PRC regulatory development by the majority preferred shareholders to Zhu Chao, if, during such three-month period, the ordinary shareholders of Zhu Chao have failed to devise a feasible alternative legal structure reasonably satisfactory to the majority preferred shareholders that will give effect to the rights and preferences of the preferred shareholders under the Memorandum and Articles of Zhu Chao, the preferred share purchase agreement, the shareholder agreement and other relevant agreements and documents (“Zhu Chao Transaction Agreements”), as closely as possible, or (iii) the occurrence of any material breach by Zhu Chao or any holder of the ordinary shares of Zhu Chao of any of the Zhu Chao Transaction Agreements.
(2)The redemption price per preferred share shall be the amount equal to 200 percent the original issue price of the preferred share, plus all accrued or declared but unpaid dividends on such preferred share.

As such, the Company determined that they are debt securities in nature and accounted for those as available-for-sale securities. In determining the fair value of the investment in Zhuchao Holdings Company Limited., as a result of a failure to achieve Zhu Chao’s business plan and deterioration of its operating results, the Company performed an impairment analysis and recognized an OTTI loss amounting to $15,000 during the year ended December 31, 2017. Unrealized holding gains of $nil, $3,722 and loss of $3,722 were reported in other comprehensive income for the years ended December 31, 2015, 2016 and 2017, respectively.

(xvii)Others represents other long-term available-for-sale investments with individual carrying amount less than $10,000 as of December 31, 2016 and 2017, respectively.

The fair value of long-term available-for-sale investments as measured is further discussed in Note 18.

F- 73

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

11.PROPERTY AND EQUIPMENT, NET

  As of December 31,
  2016 2017
     
Building $29,989  $32,002 
Computer equipment and application software  18,724   17,821 
Furniture and vehicles  137   312 
Leasehold improvements  775   809 
         
  $49,625  $50,944 
Less: Accumulated depreciation $(20,869) $(21,322)
Less: Accumulated impairment loss  (90)  (90)
         
  $28,666  $29,532 

Depreciation expense from continuing operations was $7,338, $2,626 and $1,974 and from discontinued operations was $1,500, $52 and $nil, for the years ended December 31, 2015, 2016 and 2017, respectively.

No impairment loss was recorded for the years ended December 31, 2015, 2016 and 2017, respectively.

F- 74

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

12.Goodwill

  Amount 
    
Balance at January 1, 2017  - 
Increase in goodwill related to acquisitions $99,654 
Exchange difference  2,283 
Balance at December 31, 2017 $101,937 

The Company’s goodwill reflects the excess of the consideration paid or transferred including the fair value of contingent consideration over the fair values of the identifiable net assets acquired. The majority of the goodwill balance as of December 31, 2017 relates to the various used car dealerships acquired during the year ended December 31, 2017 as well as to other acquisitions which were individually deemed insignificant. Refer to Note 5 for further details.

To assess potential impairment of goodwill, the Company performs an assessment of the carrying value of the reporting unit at least on an annual basis or when events occur or circumstnaces change that would more likely than not reduce the estimated fair value of the reporting unit below its carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company would perform the second step in its assessment process and record an impairment loss to earnings to the extent the carrying amount of the reporting unit's goodwill exceeds its implied fair value. The Company estimates the fair value of its reporting units through internal analysis and external valuations, which utilize the income and market approaches through the application of discounted cash flow methods. These valuations are based on a number of estimabes and assumptions, including the projected future operating results of the reporting unit, discount rates, long-term growth rates and market comparables. The Company has performed its annual test for impairment of goodwill in accordance with the accounting standard as of December 31, 2017, and determined that it was not more likely than not that goodwill was impaired, and therefore did not recognized any impairment loss during the year ended December 31, 2017.

F- 75

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

13.SHORT -TERM DEBT AND LONG-TERM DEBT

Short-term debt

    As of December 31, 
  Note 2016  2017 
         
East West Bank (i) $30,000  $- 
Bank of Shanghai (ii)  7,202   12,296 
Hengfeng Bank (iii)  -   49,183 
           
Total   $37,202  $61,479 

(i)In December 2016, the Company entered into a short-term loan agreement with East West Bank for $30,000. The loan bears an annual interest rate equal to the one month LIBOR rate plus 1.2% and has a loan period of six month. In June 2017, the Company amended and extended the maturity date to April 2018. In October 2017, the Company repaid $10,000 of the loan balance. In January 2018, the Company further refinanced its short term loan agreement with East West Bank and replaced it with a long-term debt. The long-term debt has an annual interest rate equal to LIBOR rate plus 1.2% and is repayable on April 3, 2020. Accordingly, the Company has excluded $20,000 from the short term debt and has reclassified it to long-term debt as of December 31, 2017.
(ii)In November 2016, the Company entered into a short-term loan agreement with Bank of Shanghai for $7,202. The loan bears an annual interest rate of 141.5% of the one year loan interest rate quoted by the People’s Bank of China and has a loan period of six months. The Chief Operating Officer (“COO”) of the Company provided joint and several liability guarantee for the loan. The Company repaid the loan in May 2017.
In May and August 2017, the Company entered into five short-term loan agreements with Bank of Shanghai for $12,296. The loans bear an annual interest rates ranging from 137.9% to 149.4% of the one year loan interest rate quoted by the People’s Bank of China and have loan periods ranging from eight to eleven months. The Company repaid the loans in April 2018.
In February 2017, the Company entered into a six-month loan agreement with Bank of Shanghai for $4,358. The loan bears an annual interest rates of 143.5% of the one year loan interest rate quoted by the People’s Bank of China and has a  loan period of five months. The Company repaid the loan in August 2017.
(iii)In March 2017, the Company entered into a loan agreement with Hengfeng Bank for $33,045. The loan bears an annual interest rate of 109.2% of the one year loan interest rate quoted by the People’s Bank of China. The Company repaid $2,305  of the principal during the year ended December 31, 2017. $3,074 of the principal is due during the year ended December 31, 2018 and the remaining balance, classified as long-term debt, is due during the years ended December 31, 2019 and 2020.
In May 2017, the Company entered into three short-term loan agreements with Hengfeng Bank for $46,109. The loans bear an annual interest rate of 98.9% of the one year loan interest rate quoted by the People’s Bank of China and has a loan period of one year.

Long-term debt – current

    As of December 31, 
  Note 2016  2017 
         
A trust company (v)  -  $52,604 
           
Total    -  $52,604 

F- 76

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

13.SHORT -TERM DEBT AND LONG-TERM DEBT – continued

Long-term debt –non current

    As of December 31, 
  Note 2016  2017 
         
An asset management company (iv) $42,786  $- 
A trust company (v)  52,604   - 
Hengfeng Bank and East West Bank (iii) (i)  -   47,665 
           
Total   $95,390  $47,665 

(iv)In November 2015, the Company entered into a long-term loan agreement with an asset management company to borrow $69,468 in order to finance the investment in SoFi. The loan bears an annual interest rate ranging from 12% to 16% upon certain scenarios, including a qualified public offering of SoFi during the period of the loan, and requests the pledge of certain assets of the Company including building, the long-term investment in Hayman, and certain shares of SoFi owned by the Company including 4,970,573 Series B Preferred Stock, 6,020,695 Series D Preferred Stock and 2,361,116 Series E Preferred Stock. The loan is expected to be repaid within four years. The Chief Executive Officer (“CEO”) of the Company provided joint and several liability guarantee for the loan. The loan can be repaid in advance at the option of the Company upon distribution from the long-term investment in one of its equity method investee, or upon approval from the asset management company. In January 2016, the Company received the notice for such distribution from the equity method investee and repaid $23,608 of the loan balance. In early 2017, the Company made a request to the asset management company for an early repayment. Such request was approved and the Company repaid the remainder of the loan in February 2017.

(v)In October 2015, the Company entered into a long-term loan agreement with a trust company to borrow $59,260 in order to finance the investment in SoFi. The loan bears an annual interest rate 6% and requests the pledge of 7,512,535 Series F Preferred Stock of SoFi owned by the Company. As of December 31, 2017, as a result of SoFi missing certain revenue target, the loan became due within one year. Accordingly, the Company reclassed the loan to long-term debt - current.

Additionally, the Company issued the trust company a warrant to purchase 1,502,507 Series F Preferred Stock of SoFi from the Company at a preliminary exercise price of $15.7763 per share upon occurrence of certain events within five years, including a qualified public offering of SoFi. Such warrant was considered as liability-classified warrants and separately recorded based on its fair value under the caption of "Other non-current liabilities" on the consolidated balance sheet.

The Company recognized a discount of $6,656 based on the initial fair value of the warrant as a reduction of the loan. The discount is recognized over the term of the loan using the effective interest method, based on an imputed interest rate of 9.95%.

F- 77

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

14.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

    As of December 31, 
    2016  2017 
         
Employee payroll and welfare payables   $2,800  $3,437 
Other tax payable    7,013   12,676 
Accrued professional, marketing and leasing fees    3,965   6,032 
Interest payable (i)  1,761   13,472 
Other payables    4,242   10,281 
           
Total   $19,781  $45,898 

(i)The balance mainly include the interest payable of Long-term debt - current (see Note 13 (v)).

15.PAYABLE TO INVESTORS

In the ordinary course of business, through the peer-to-peer platforms and the Company's consolidated Shanghai Renren Finance Leasing Asset-Backed Special Plans (the "Plans"), the Company identifies investors and transfers creditors' rights to those investors. The Company further offers different investment periods to investors with various annual interest rates while those credit rights are held by the investors. The terms of the sales require the Company to repurchase those creditors’ rights from investors prior to or upon the maturity of the investment period. As a result, the sales of those creditors’ rights are not accounted for as a sale and remain on the consolidated balance sheet and are recorded as payable to investors in the Company’s consolidated balance sheet.

The short-term payable to investors bears a fixed annual rate ranging from 8.6% to 11.04% with different investment periods to investors ranging from 15 days to 12 months, for both the years ended December 31, 2016 and 2017. Short-term payable to investors also includes payable to investors from the Plans.

The long-term payable to investors as of December 31, 2016 was arising from the Plans, which will expire by the end of May 2018, and bears a fixed annual rate ranging from 5.5% to 7.0% with an investment periods to investors of 21 months. The remaining balance from the Plan as December 31, 2017 became short-term payable to investors.

16.INCOME TAXES

 

The Company, CIAC, Renren-JingweiRenren Gongying Inc, Link224 Inc., Renren Lianhe Holdings, Wole Inc., JiehunChina Inc., Funall TechnologyRenren Auto Group, Renren CRSP Holdings Inc., Xin DituRenren CHYP Holdings Inc., Renren PLML Holdings Inc., Renren KURY Holdings Inc., Renren ONER Holdings Inc., Renren LSTAR Holdings Inc., Renren BLCR Holdings Inc., Renren ZHCH Holdings Inc., Renren CHRYPH Holdings Inc., Renren Study Inc., JingweiRenren SF Holdings Inc. Limited,, Oak Pacific Investment and Renren Finance Inc. are all incorporated in the Cayman Islands. They are tax-exempted underUnder the taxcurrent laws of the Cayman Islands.Islands, the companies are not subject to income or capital gains taxes.

 

Qianxiang Wangjing,Chime Technologies, Inc., Renren U.S. Holdco, Inc., Sindeo Inc., Geographic Farming LLC and Trucker Path Inc. are incorporated in the PRC on November 11, 2008, qualified as a "software enterprise" in 2009,US and therefore was entitledsubject to a two-year exemption starting from the commencement of the profitable year 2009, followed by a 50% reduction instate income tax and federal income tax at different tax rates, depending upon taxable income levels. They did not have taxable income and no income tax expense was provided for the succeeding three years in accordance with the EIT Law if Qianxiang Wangjing qualified for renewalyear ended December 31, 2015, 2016 and filed an annual qualification status update to the tax authority. In 2013, Qianxiang Wangjing did not file such report and accordingly was not entitled to such tax reduction from 2013.2017.

F- 78

RENREN INC.

 

Shanghai Changda, incorporated in the PRC on October 25, 2010, qualified as a "software enterprise" in 2010,NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and therefore was entitled to a two-year exemption starting from the commencement of the profitable year 2011, followed by a 50% reduction in tax rates for the succeeding three years in accordance with the EIT Law if Shanghai Changda qualified for renewal and filed an annual qualification status update to the tax authority. In 2013, Shanghai Changda did not file such report and accordingly was not continually entitled to such tax reduction from 2013.per share data, or otherwise noted)

 

Renren Games, incorporated in the PRC on November 15, 2012, qualified as a "software enterprise" in 2013, and therefore was entitled to a two-year exemption starting from the commencement of the profitable year 2013, followed by a 50% reduction in tax rates for the succeeding three years in accordance with the EIT Law.

16.INCOME TAXES - continued

 

Other subsidiaries and VIEs of the Company domiciled in the PRC were subject to 25% statutory income tax rate in the years presented.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

15.INCOME TAXES - continued

 

The EIT Law includes a provision specifying that legal entities organized outside PRC will be considered residents for Chinese income tax purposes if their place of effective management or control is within PRC. If legal entities organized outside PRC 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 from legal entities organized outside PRC earned to be subject to PRC's 25% EIT. The Implementation Rules to EIT Law provide that non-resident legal entities will be considered as PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. reside within PRC.

 

Beijing Qilin Wings Technology Development Co., Ltd., incorporated in the PRC on January 16, 2013, qualified as a “High and New Tech Enterprise” in 2017, and therefore was entitled to a preferential tax rate of 15% for the following three years.

Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Company does not believe that the legal entities organized outside the PRC should be characterized as PRC residents for EIT Law purposes.

 

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 PRC 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 PRC that provides for a different withholding arrangement. The Cayman Islands, where the Company is incorporated, does not have a tax treaty with PRC.

 

The Company's subsidiaries and VIEs located in the PRC had aggregate accumulated deficits as of December 31, 2014.2017. Accordingly, no deferred tax liability had been accrued for the Chinese dividend withholding taxes as of December 31, 2014.2017.

 

The current and deferred component of income tax expenses (benefits) which were substantially attributable to the Company's PRC subsidiaries and VIEs and VIEs' subsidiaries, are as follows:

 

  Years ended December 31, 
  2012  2013  2014 
             
Current income tax expense $7  $1,019  $1,620 

Deferred income tax expense (benefit)

  1,377   (4,999)  4,897 

Total income tax expense (benefits)

 $1,384  $(3,980) $6,517 
  Years ended December 31, 
  2015  2016  2017 
          
Current income tax expenses $3,124  $2,470  $4,479 
Deferred income tax expenses  -   -   - 
Total income tax expenses $3,124  $2,470  $4,479 

RENREN INC.F- 79

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

16.15.INCOME TAXES - continued

 

The principal components of the deferred tax assets and liabilities wereare as follows:

 

  As of December 31, 
  2013  2014 
       
Current deferred tax assets        
Provision for doubtful accounts $484  $1,583 
Accrued payroll and welfare  1,763   1,474 
Accrued liabilities-current  1,894   1,551 

Impairment of intangible assets

  52   272 
Less valuation allowance  (3,565)  (4,880)
Current deferred tax assets, net $628  $- 
Non-current deferred tax assets        
Accrued liabilities-non-current $56  $5 
Excessive advertising fee-non-current  791   1,304 
Excessive employee education fee-non-current  -   74 
Net operating loss carry forwards  42,606   54,577 
Less valuation allowance  (35,855)  (55,960)
Non-current deferred tax assets, net $7,598  $- 
Non-current deferred tax liabilities        
Intangible assets $(6,489) $- 
Non-current deferred tax liabilities $(6,489) $- 
  As of December 31, 
  2016  2017 
       
Deferred tax assets        
Provision for doubtful accounts $5,339  $3,422 
Accrued payroll and welfare  700   809 
Accrued liabilities  2,409   2,414 
Long term investment impairment  -   2,328 
Excessive advertising fee  1,572   1,990 
Excessive employee education fee  150   161 
Net operating loss carry forwards  54,567   55,745 
Less valuation allowance  (64,737)  (66,869)
         
Deferred tax assets, net $-  $- 
         
Deferred tax liabilities $-  $- 

RENREN INC.F- 80

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

16.15.INCOME TAXES - continued

 

The Company operates through multiple subsidiaries and VIEs and VIEs' subsidiaries. The valuation allowance is considered on each individual entity basis. The subsidiaries and VIEs and VIEs' subsidiaries registered in the PRC have total deferred tax assets related to net operating loss carry forwards of $42,606$54,567 and $54,577$55,745 as of December 31, 20132016 and 2014,2017, respectively. The Company assessed the available evidence to estimate if sufficient future taxable income would be generated to use the existing deferred tax assets. As of December 31, 2014,2016 and 2017, valuation allowances were established because the Company believes that it is more likely than not that its deferred tax assets will not be realized as it does not expect to generate sufficient taxable income in the near future.

 

Reconciliation between the income taxes expense (benefits)tax expenses computed by applying the PRC tax rate to loss before the provision of income taxes and the actual provision for income taxes is as follows:

 

  Years ended December 31, 
  2012  2013  2014 
          
Income (loss) before provision of income tax $(23,005) $(53,253) $(9,093)
PRC statutory income tax rate  25%  25%  25%
Income tax at statutory tax rate  (5,751)  (13,313)  (2,273)
Taxable deemed interest income from inter-company interest-free loans  1,864   4,427   6,276 
Non-deductible loss and other expenses not deductible for tax purposes  8,526   2,887   582 
Effect of income tax exemption of the Company in the Cayman Islands  (5,060)  (3,911)  (18,293)
Effect of tax holidays  (9,846)  (4,718)  (1,707)
Changes in valuation allowance  11,651   10,648   21,932 

Income tax expenses (benefits)

 $1,384  $(3,980) $6,517 

If the tax holidays were not available, income taxes provision and net income (loss) per share would have been as follows:

  Years ended December 31, 
  2012  2013  2014 
          
Provision for income taxes $11,230  $738  $8,224 
             
Net income (loss) per ordinary share from continuing operations attributable to Renren Inc. shareholders            
- basic $(0.04) $(0.03) $0.03 
- diluted $(0.04) $(0.03) $0.03 

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

15.INCOME TAXES - continued
  Years ended December 31, 
  2015  2016  2017 
          
Loss before provision of income tax $(214,585) $(173,400) $(173,264)
PRC statutory income tax rate  25%  25%  25%
Income tax at statutory tax rate  (53,646)  (43,350)  (43,316)
Taxable deemed interest income from inter-company interest-free loans  5,632   6,925   7,288 
Non-deductible loss and other expenses not deductible for tax purposes  41,114   42,571   37,096 
Effect of income tax rate differences in jurisdictions other than the PRC  (27)  (54)  709 
Effect of tax holidays  -   -   570 
Changes in valuation allowance  10,051   (3,622)  2,132 
Income tax expenses $3,124  $2,470  $4,479 

 

The Company did not identify significant unrecognized tax benefits for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively. The Company did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the adoption of pronouncement issued by FASB regarding accounting for uncertainty in income taxes did not have a significant impact on the unrecognized tax benefits within 12 months from December 31, 2014.expenses.

 

Since January 1, 2008, the relevant tax authorities have not conducted a tax examination on PRC entities. In accordance with relevant PRC tax administration laws, tax years from 20102013 to 20142017 of the Company's PRC subsidiaries and VIEs and VIEs' subsidiaries remain subject to tax audits as of December 31, 2014,2017, at the tax authority's discretion.

 

F- 81

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

17.16.ORDINARY SHARES

 

Under a series of share repurchase programs approved by the Company's board of directors on September 29, 2011, December 26, 2012, June 28, 2013 and June 28, 2014, during the years ended December 31, 2012, 20132015, 2016 and 2014,2017, the Company repurchased 54,253,314, 56,635,56910,912,110, nil and 80,728,137nil ordinary shares for total considerations of $53,630, $55,575$10,292, $ nil and $87,323,$nil, respectively.

As of December 31, 2014, the Company is authorized to continue its repurchase up to $57,317 worth of its issued and outstanding ADSs in open-market transactions on NYSE by June 27, 2015.

 

18.17.FAIR VALUE MEASUREMENTS

 

Assets and liabilities disclosed at fair value

The Company measures its cash and cash equivalents, restricted cash, amounts due from/to related parties, financing receivable, cost method investments and short-term and long-term debt and payable to investors at amortized cost. The carrying values of cash and cash equivalents and restricted cash approximated fair value and represented a level 1 measurement. The carrying value of financing receivable and payable to investors approximate their fair value due to their short-term nature and are considered level 3 measurement. Such fair value was estimated by discounting scheduled cash flows through the estimated maturity with estimated discount rates based on current offering rates of comparable financings with similar terms. The carrying value of the debt obligations approximate fair value considering the borrowing rates are at the same level of the current market yield for the comparable debts and represent a level 2 measurement. The carrying value of amounts due from/to related parties approximate fair value due to the relatively short maturity.

Fair value of the cost method investments approximated $187,649 as of December 31, 2017, as compared with $144,797 of carrying value. Cost method investments do not have a quoted market price. The Company determined the fair value of the cost method investments generally by recent financing transactions which closed in the recent year as reference for fair value of the company’s stock value. As the inputs are unobservable inputs for the asset or liability, this represents a level 2 measurement. 

F- 82

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.FAIR VALUE MEASUREMENTS - continued

Assets and liabilities measured at fair value on a recurring basis

The Company measured its financial assets and liabilities including short-term investments, long-term available-for-sale investment and written put optionliability-classified warrant at fair value on a recurring basis as of December 31, 20132016 and 2014.2017.

 

The short-termShort-term investments includedinclude the investments in equity securitiesfund and corporate bondsfuture that were traded publicly in the open market and were valued based on the quoted market price.price and were classified as Level 1.

 

The Company's derivative financial instruments were classified as Level 2, as they were not actively traded and were valued using pricing models that used observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

17.FAIR VALUE MEASUREMENTS - continued

Assets and liabilities measured at fair value on a recurring basis -continued

The following table summarizes the Company's financial assets and liabilities measured and recorded at fair value on recurring basis as of December 31, 20132016 and 2014,2017, respectively:

 

  As of December 31, 2013  As of December 31, 2014 
  Fair Value Measurement at the Reporting Date using  Fair Value Measurement at the Reporting Date using 
  Quoted price in  Significant      Quoted price in  Significant         
  active markets  other  Significant    active markets  other  Significant     
  for identical  observable  unobservable    for identical  observable  unobservable     
  assets  inputs  in puts    assets  inputs  in puts     
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
                         
Available-for-sale investments:                                
Equity securities $237,794  $-  $-  $237,794  $27,810  $-  $-  $27,810 
Corporate bonds  62,907   -   -   62,907   -   -   -   - 
Derivative financial instruments:                                
Interest rate swaptions  -   1,294   -   1,294   -   1,937   -   1,937 
Interest rate swap  -   -   -   -   -   (363)  -   (363)
Written put option  -   -   -   -   -   -   (730  (730)
Total $300,701  $1,294  $-  $301,995  $27,810  $1,574  $(730 $

28,654

 
  As of December 31, 2016  As of December 31, 2017 
  Fair Value Measurement at the Reporting Date using  Fair Value Measurement at the Reporting Date using 
  Quoted
price in
          Quoted
price in
         
  active
markets
  Significant
other
  Significant     active
markets
  Significant
other
  Significant    
  for identical  observable  unobservable     for identical  observable  unobservable    
  assets  inputs  inputs     assets  inputs  inputs    
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
                         
Short-term investments                                
Trading securities:                                
Funds  411   -   -   411   -   -   -   - 
Future  (1)  -   -   (1)  -   -   -   - 
Long-term investments                                
Available-for-sale investments:                                
Convertible redeemable preferred shares  -   -   138,485   138,485   -   -   85,464   85,464 
Convertible debt  -   -   4,700   4,700   -   -   6,500   6,500 
Equity securities  -   -   -   -   -   9,794   -   9,794 
Accrued expense and other current liabilities                                
Liability-classified warrant  -   -   (6,551)  (6,551)  -   -   (6,356)  (6,356)
Total $410   -  $136,634  $137,044   -   9,794  $85,608  $95,402 

F- 83

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.FAIR VALUE MEASUREMENTS - continued

Assets and liabilities measured at fair value on a recurring basis - continued

 

The following table provides additional information about the reconciliation of the fair value measurements of written put optionassets and liabilities using significant unobservable inputs (level 3) from December 31, 2013 to December 31, 2014..

 

  Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
 
Balance at December 31, 2013 $- 
Initial recognition  (730)
Change in fair value  - 
Balance at December 31, 2014 $(730)
  Convertible          
  redeemable     Written  Liability- 
  preferred  Convertible  put  classified 
  shares  Debt  option  warrant 
             
Balance as of December 31, 2015 $219,278  $6,500  $(7,000) $(6,656)
Initial recognition  6,492   3,200   -   - 
Derecognition  (17,937)  (5,000)  7,000   - 
 (Losses) earnings for the period                
 Earnings  -   -   -   105 
 Impairment losses  (50,830)  -   -     
Other comprehensive loss  (18,518)  -   -   - 
                 
Balance as of December 31, 2016 $138,485  $4,700  $-  $(6,551)
                 
Initial recognition  -   3,000   -   - 
Derecognition  (10,647)  (200)  -   - 
 (Losses) earnings for the period                
 Earnings  -   -   -   195 
 Impairment losses  (38,975)  (1,000)  -   - 
Other comprehensive loss  (3,399)  -   -   - 
                 
Balance as of December 31, 2017 $85,464  $6,500  $-  $(6,356)

 

Available-for-sale equityTrading securities recorded in short-term investments were valued using the market approach based on the quoted prices in active markets at the reporting date.

 

Derivative financial instruments were valued based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

 

Long-term available-for-sale investments do not have a quoted market rate. The written put option was valued usingCompany determined the Binomial pricing model. The calculation was basedfair value of the long-term available-for-sale investments generally by adopting a market approach concluding on the exercise priceoverall investee’s equity value which takes into consideration a number of $2.25 per share, annual risk freefactors that include expected market multiples from publicly traded companies in the industry, and allocating this value to the various classes of preferred and common shares by using an option-pricing method which takes into consideration a number of factors that include lack of marketability discount, interest rate, expected volatility, probability weight for each scenario including liquidation, redemption and initial public offering as applicable. The determination of 1.61%, dividend yield of 0%the fair value requires the Company to make certain assumptions and volatility of 32%.estimates regarding industry economic factors.

 

F- 84

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

18.17.FAIR VALUE MEASUREMENTS - continued

Assets and liabilities measured at fair value on a recurring basis - continued

The liability-classified warrant was valued using Black-Scholes model with the following assumptions.

  Years ended December 31, 
  2016  2017 
Exercise price $15.78  $15.78 
Annual risk-free interest rate  1.7%  2.0%
Volatility  28%  31%
Dividend yield  -   - 

The assumptions are inherently uncertain and subjective. Changes in any unobservable inputs may have a significant impact on the fair values.

 

Assets measured at fair value on a nonrecurring basis

 

The Company measured its property and equipment, goodwill and other intangible assets, long-term cost and equity method investments at fair value on a nonrecurring basis whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable.

 

The following table sets forth assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy asAs of December 31, 20132016, the Company performed impairment tests on its equity method investments, cost method investments and 2014:long-term available-for-sales investments, using the market approach or asset-based approach and recorded OTTI losses of $7,519, $43,958 and $50,830 for its equity method investments, cost method investments and available-for-sales investments during the year ended December 31, 2016. The impairment of the equity method investments, cost method investments and available-for-sales investment is considered level 3 because the Company used unobservable inputs, such as a lack of marketability discount and probability weighting for each scenario including liquidation, redemption and an initial public offering as applicable.

     Fair value measurements at reporting date using  Fair value measurements at reporting date using 
     

As of
December
31, 2013
  Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  

Significant 
Other
Observable
Inputs
(Level 2)
  

Significant
Unobservable
Inputs
(Level 3)
  

Total 
Losses
  

As of
December
31, 2014
  Quoted
Prices
in Active
Markets
for 
Identical 
Assets
(Level 1)
  

Significant 
Other
Observable
Inputs
(Level 2)
  

Significant
Unobservable
Inputs
(Level 3)
  

 

 Total
Losses
 
                                  
Intangible assets-game licenses and domain name  (i)  $-  $-  $-  $-  $208  $-  $-  $-  $-  $1,925 

Equity method investment-Mapbar

  (ii)   2,414   -   -   2,414   19,012   -   -   -   -   - 

Equity method investment-Gaoxue

  (iii)   1,754   -   -   1,754   4,013   -   -   -   -   - 

(i)

As of December 31, 2013 and 2014, the Company used income approach to measure the fair value of domain name in game sector and certain online game's licenses that were terminated due to an internal restructuring. Since such items no longer provided positive cash flows, they were fully impaired in the amount of $208 and $1,925 for the years ended December 31, 2014.

(ii)

As of December 31, 2013, the Company valuated the fair value of the investment in Mapbar using the cost approach. The significant unobservable inputs that were used in the valuation included the estimated recovery rate for the investee's assets. The range of estimated recovery rate was from 36% to 100%. As of December 31, 2014, the carrying amount of the investment in Mapbar was reduced to zero because of share of loss.

(iii)As of December 31, 2013, the Company valuated the fair value of the investment in Gaoxue using the income approach. The significant unobservable inputs that were used in the valuation included:

Range
Estimated net revenues13,022~52,944
Estimated terminal growth rate3%
Discount rate25%
Timing of cash flows7 years

 

As of December 31, 2014,2017, the investment in Gaoxue was not re-measured by fair value.Company performed impairment tests on its equity method investments, cost method investments and long-term available-for-sales investments, using the market approach or asset-based approach and recorded OTTI losses of $20,040, $53,058 and $39,975 for its equity method investments, cost method investments and long-term available-for-sales investments during the year ended December 31, 2017 (see Note 10). The impairment of the equity method investments, cost method investments and long-term available-for-sales investments is considered level 3 because the Company used unobservable inputs, such as a lack of marketability discount and probability weighting for each scenario including liquidation, redemption and an initial public offering as applicable.

 

F- 85

In addition, the Company measured the goodwill (see Note 13) and acquired indefinite-lived intangible assets (see Note 11) on a nonrecurring basis on September 30, 2014 using models with significant unobservable inputs (Level 3 inputs).

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

19.18.SHARE-BASED COMPENSATION

 

Stock options

 

The Company adopted 2003 Stock Incentive Plan (the "2003 Plan"), 2004 Stock Incentive Option Plan (the "2004 Plan"), 2005 Stock Incentive Plan (the "2005 Plan"), 2006 Equity Incentive Plan (the "2006 Plan"), 2008 Equity Incentive Plan (the "2008 Plan"), 2009 Equity Incentive Plan (the "2009 Plan"), 2011 Share Incentive Plan (the "2011 Plan"), 2016 Share Incentive Plan (the "2016 Plan") and the Equity Incentive Plan specifically for Games segmentOnline Gaming (the "Link224 Inc. Plan") for the granting of stock options and incentive stock options to employees and executives to reward them for service to the Company and to provide incentives for future service.

In 2006, the Company adopted 2006 Plan to replace the 2003 Plan, 2004 Plan and 2005 Plan. On January 31, 2008,February 26, 2016, the Company's Board of Directors approved 60,312,000Company amended 2011 Plan and 45,000,000 ordinary shares for option grantshave been added to the award pool under the 20082011 Plan. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2006 Plan, 2008 Plan, 2009 Plan, 2011 Pan, 2016 Plan and Link224 Inc. Plan is 97,430,220, 30,529,630, 40,000,000, 110,014,158, 53,596,236 and 13,055,529, respectively. The term of the options were granted in two batches with the majority options to be vested over four years. For Batch I options, 25% will be vested on the first anniversary and the remaining will vest 1/36 monthly from the second year to the fourth year, whereas Batch II options will be vested evenly on monthly basis over the four years period. The stock options expire in 10may not exceed ten years from the date of grant. All the authorized 60,312,000 options were granted to employeesgrant, except for the situation of amendment, modification and management in 2008.

On October 15, 2009, the Company's Board of Directors approved 39, 064,000 shares for option grantstermination. The awards under the 2009 Plan. The options will vest over three years where 25% of the options will vest on the grant date, 75% will vest evenly each subsequent calendar month through the three years. The stock options expire in 10 yearsabove plans are subject to vesting schedules ranging from the date of grant. All the authorized 39, 064,000 options were granted to employees and management in 2009.

On various dates from March to October 2010, the Company granted 3,980, 630 stock options to certain employees and advisor at exercise price of $1.80 per share. The options will vest either (1) 100% immediately upon grant (2) over twoto six years where 50% of the options will vest at the end of the first year, 1/24 will vest at each of the monthly anniversary for the grant date from the second year or (3) over four years where 25% of the options will vest at the end of the first year, 1/36 of the remaining 75% will vest at each of the monthly anniversary for the grant date from the second year through the fourth year.

The exercise with promissory notes was considered as a modification to the share-based compensation arrangement but without an incremental compensation cost.

In January 2011, the Company granted 12,608,500 share options to certain employees and advisors at the exercise price of $1.2 per share, where 25% of the options were vested on December 31, 2011 and 1/36 of the remaining 75%will be vested at each of the monthly anniversary of the grant date since December 31, 2011 through the end of the fourth year

In September 2011, the Company granted 519,000 share options to certain employees with the exercise price of $1.76 per share, where 25% of the options were vested on various defined vesting commencement date per the share option agreements and 1/36 of the remaining 75% will be vested at each calendar month subsequent to first anniversary of the vesting commencement date through the end of the fourth year.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.SHARE-BASED COMPENSATION - continued

Stock options - continued

In December 2011, the Company granted 1,639,107 share options to certain employees with exercise price of $1.1 per share. For 60,000 share options of the total share options, 25% of the options were vested on November 9, 2012 and 1/36 of the remaining 75% will be vested at the ninth day of each calendar month after November 9, 2012 through the end of the fourth year. For 1,579,107 share options of the total share options, 25% of the options were vested on December 31, 2012 and 1/36 of the remaining 75% will be vested at the end of each calendar month after December 31, 2012 through the end of the fourth year.

On April 5, 2012, the Company issued 24,636,000 share options under the Company's 2011 share incentive plan to its executives, non-executives directors and employees with the exercise price of $1.82 per share. For 24,300,000 share options of the total share options, 25% of the options will be vested on April 4, 2013 and 1/36 of the remaining 75% will be vested at the fourth day of each calendar month after April 4, 2013 through the end of the fourth year. For 240,000 share options of the total share options, 25% of the options will be vested on February 28, 2013 and 1/36 of the remaining 75% will be vested at the end of each calendar month after February 28, 2013 through the end of the fourth year. For 90,000 share options of the total share options, 25% of the options will be vested on January 8, 2013 and 1/36 of the remaining 75% will be vested at the eighth day of each calendar month after January 8, 2013 through the end of the fourth year. For 6,000 share options of the total share options, 25% of the options will be vested on March 18, 2013 and 1/36 of the remaining 75% will be vested at the eighteenth day of each calendar month after March 18, 2013 through the end of the fourth year. The Company has determined the fair value of the options was $26,638 on the grant date, which will be recognized as a share-based compensation cost in the consolidated statements of operations in the next four years on a straight line basis.

On April 30, 2012, the Company granted 300,000 share options to a new director appointed by the Board of Directors, the Company's independent director, with exercise price of $2.03 per share, where 25% of the options will be vested on May 1, 2013 and 1/36 of the remaining 75% will be vested at the end of each calendar month after May 1, 2013 through the end of the fourth year.

In June, 2012, the Company granted 300,000 share options to another new director appointed by the Board of Directors, the Company's independent director, with exercise price of $1.486 per share, where 25% of the options will be vested on June 14, 2013 and 1/36 of the remaining 75% will be vested at the end of each calendar month after June 14, 2013 through the end of the fourth year.

In December, 2012, the Company granted 3,503,400 share options to certain employees with exercise price of $1.1 per share, where 25% of the options will be vested on December 31, 2013 and 1/36 of the remaining 75% will be vested at the end of each calendar month after December 31, 2013 through the end of the fourth year.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.SHARE-BASED COMPENSATION - continued

Stock options - continueddate.

 

On December 28, 2012, the Company modified the exercise price of the outstanding share options granted from $4.00 per ADS to $3.30 per ADS, which is the closing price of the Company's ADS on the modification date. The eligible outstanding options for this modification as of December 31, 2012 totaled at 27,480,309. The total incremental cost as a result of the modification was $4,281, of which $949, $1,063 and $1,063 werewas fully recognized as share-based compensation expense for the years ended December 31, 2012, 2013 and 2014, respectively, and the remaining will be recognized over the expected requisite service period.

On March 22, 2013, the Company granted 9,867,000 share options to certain employees with exercise price of $0.983 per share, where 25% of the options will be vested on March 21, 2014 and 1/36 of the remaining 75% will be vested at the 21st day of each calendar month after March 21, 2014 through the end of the fourth year.

On April 1, 2013, Link 224 Inc, a subsidiary of the Company, granted 11,630,000 share options to certain employees with exercise price of $0.01 per share, where 25% of the options will be vested on December 31, 2013 and 1/36 of the remaining 75% will be vested at the last day of each calendar month subsequent to January 1, 2014 through the end of the fourth year.

On May 17, 2013, the Company granted 3,060,000 share options to certain employees with exercise price of $0.95 per share, where 25% of the options will be vested on May 16, 2014 and 1/36 of the remaining 75% will be vested at the 16th day of each calendar month after May 16, 2014 through the end of the fourth year.

On August 30, 2013, the Company granted 600,000 share options to certain employees with exercise price of $1.087 per share, where 25% of the options will be vested on August 30, 2014 and 1/36 of the remaining 75% will be vested at the 16th day of each calendar month after August 30, 2014 through the end of the fourth year.

On October 25, 2013, the Company cancelled 187,600 options that were granted in several batches to the selected employees in Nuomi with weighted average exercise price of $1.15. This cancellation resulted in an immediate recognition of share-based compensation expenses of $425 in the year ended December 31, 2013.

On December 2, 2013, the Company granted 2,755,500 share options to certain employees with exercise price of $0.94 per share, where 25% of the options will be vested on December 2, 2014 and 1/36 of the remaining 75% will be vested at the 1st day of each calendar month after December 2, 2014 through the end of the fourth year.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.SHARE-BASED COMPENSATION - continued

Stock options - continued2016.

 

On May 19, 2014, the Company granted 69,593,691 share options to certain employees with exercise price of $1.097 per share. Amongst, 34,796,847 shares were under agreement where 25% of the options will be vested on May 19, 2015 and 1/36 of the remaining 75% will be vested at the 18th day of each calendar month after May 19, 2015 through the end of the fourth year; 34,796,844 were under conditional option agreement where (1) 100% of the options shall be forfeited on May 19, 2017 unless the average closing price of one ADS of the Company during any 30-day period beginning on or after May 19, 2014 and ending on or before May 19, 2017 is US$6.00$6.00 or higher, and (2) 25% of the options will be vested on May 19, 2015 and 1/36 of the remaining 75% will be vested at the 18th day of each calendar month after May 19, 2015 through the end of the fourth year, however, that any conditional management options shall not be vested until the end of said 30-day period. On December 23, 2015, the Company’s Compensation Committee approved to waive the award condition for certain outstanding share options. The total incremental cost as a result of the modification was $10,926.

  

On December 29, 2014,August 24, 2017, the Company’s Compensation Committee approved to reduce the exercise price for all outstanding options previously granted by the Company with an exercise price higher than $0.873$0.478 per ordinary share to $0.873$0.478 per share. This actionSuch reduction was accounted forby the Company as a share option modification and required the remeasurement of these share options. This remeasurement resulted in aoptions at the time of the modification. The total incremental share-based compensationcost as a result of $6,350,the modification was $10,382. The incremental cost related to vested options amounted to $7,427 and was recorded in the consolidated statements of which $3,678 was recognized in 2014 foroperations during the vested shareyear ended December 31, 2017. The incremental cost related to unvested options amounted to $2,955 and the remaining will be recognized ratablyrecorded over the remaining vesting period of the awards.service period.

F- 86

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

19.SHARE-BASED COMPENSATION - continued

Stock options - continued

Excluding the options containing market and service vesting conditions, the Company calculated the estimated fair value of the options on the respective grant dates using Black-Scholes option pricing model orthe binomial option pricing model with the assistance from independent valuation firms, with the following assumptions used in 2012, 20132016. The Company did not grant any options in 2015 and 2014.2017. The weighted-average grant-date fair value of the share options granted during 2016 was $0.54.

  Year ended December 31, 
  2016 
  Using binomial
model
 
Risk-free interest rate  2.0%
Volatility  50%
Expected term (in years)  10 
Exercise price $1.227 
Dividend yield  - 

F- 87

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

  Years ended December 31,
  2012 2013 2014
  Using Black-
Scholes model
 Using binomial
model
 Using binomial
model
Risk-free interest rate 1.28~1.93% 2.0~2.9% 2.6%
Volatility 53%~64% 55%~57% 54%
Expected term (in years) 5.96~6.08 10 10
Exercise price $1.10~$2.03 $0.01~$1.087 $1.097
Dividend yield - - -

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

19.SHARE-BASED COMPENSATION - continued

Stock options - continued

 

(1)Volatility

 

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.SHARE-BASED COMPENSATION - continued

Stock options - continued

(2)Risk-free interest rate

 

Risk-free interest rate was estimated based on the yield to maturity of treasury bonds of the United States with a maturity period close to the expected life of the optionsoptions.

 

(3)Expected term

 

For the options granted to employees, the Company estimated the expected term based on the vesting and contractual terms and employee demographics.

For the options granted to non-employees, the Company estimated the expected term as the original contractual term.

 

(4)Dividend yield

 

The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options.

(5)Exercise price

 

The exercise price of the options was determined by the Company's board of directors.

 

(6)Fair value of underlying ordinary shares

 

The closing market price of the Company's ordinary shares on the grant date was used.

For the options containing market and service vesting conditions, the Company estimated the fair value and derived service period of these options using a Monte Carlo simulation pricing model. The calculation was based on the exercise price of $1.097 per ordinary share, the stock price of $2.60, annual risk free rate of 2.197%, volatility of 52% and a term of 10 years.

  

The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying awards and the closing stock price of $1.15, $1.02,$1.23, $0.53, and $0.84$0.69 of the Company's ordinary share on December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

The total intrinsic value of options exercised for the years ended December 31, 2015, 2016 and 2017 were $2,044, $1,118, and $293, respectively. The total fair value of options vested during the years ended December 31, 2012, 20132015, 2016 and 20142017 were $14,848, $15,964,$23,008, $12,721, and $7,451,$16,036, respectively.

 

F- 88

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

19.18.SHARE-BASED COMPENSATION - continued

 

Stock options - continued

 

The following table summarizes information with respect to share options outstanding as of December 31, 2014:2017:

 

  Options outstanding  Options exercisable 
     Weighted  Weighted  Weighted     Weighted  Weighted  Weighted 
     average  average  average     average  average  average 
  Number  remaining  exercise  intrinsic  Number of  remaining  exercise  intrinsic 
Range of exercise prices outstanding  contractual life  price  value  exercisable  contractual life  price  value 
                         
$0.08~$0.18  8,606,881   5.46  $0.10  $6,303   8,315,816   5.37  $0.11  $6,062 
$0.2~$0.3  1,043,880   1.79  $0.23  $635   1,043,871   1.79  $0.23  $635 
$0.35~$0.38  1,068,502   2.78  $0.36  $513   1,068,492   2.78  $0.36  $513 
$0.873~$1.2  107,128,743   8.70  $0.87  $-   23,722,206   7.26  $0.87  $- 
   117,848,006          $7,451   34,150,385          $7,210 
  Options outstanding  Options exercisable 
     Weighted  Weighted  Weighted     Weighted  Weighted  Weighted 
     average  average  average     average  average  average 
Range of Number  remaining  exercise  intrinsic  Number of  remaining  exercise  intrinsic 
exercise prices outstanding  contractual life  price  value  exercisable  contractual life  price  value 
                         
$0.08~$0.18  442,515   1.62  $0.18  $227   442,455   1.62  $0.18  $227 
$0.3~$0.48  141,039,101   6.40  $0.48   30,276   105,631,485   5.96  $0.48   22,676 
   141,481,616          $30,503   106,073,940          $22,903 

 

    Weighted  Weighted 
    average  average 
    exercise  grant date 
  Number of shares  price  fair value 
          
Balance, January 1, 2013  70,502,943  $0.71     
Granted  27,912,500  $0.57   1.11 
Exercised  (18,583,733) $0.22   0.14 
Forfeited  (8,852,585) $0.85   0.92 
Balance, December 31, 2013  70,979,125  $0.77   0.86 
Granted  69,593,691  $0.87   0.55 
Exercised  (7,477,739) $0.32   0.24 
Forfeited  (15,247,071) $0.52   1.13 
Balance, December 31, 2014  117,848,006  $0.81   0.68 
Exercisable, December 31, 2014  34,150,385  $0.65     
Expected to vest, December 31, 2014  83,697,621  $0.87     
     Weighted  Weighted 
     average  average 
  Number of  exercise  grant date 
  shares  price  fair value 
          
Balance, December 31, 2016  145,446,560  $0.96  $0.63 
             
Exercised  (1,715,895) $0.33  $0.30 
Forfeited  (2,249,049) $0.36  $0.16 
             
Balance, December 31, 2017  141,481,616  $0.48  $0.64 
             
Exercisable, December 31, 2017  106,073,940  $0.48     
             
Expected to vest, December 31, 2017  35,407,676  $0.48     

 

For employee stock options, the Company recorded share-based compensation from continuing operations of $8,966, $13,788,$22,989, $19,420, and $19,059$23,904 and from discontinued operations of $282, $649$1,736, $ nil and $nil for the years ended December 31, 2012, 2013,2015, 2016, and 2014,2017, respectively, based on the fair value on the grant dates over the requisite service period of award using the straight-line method.

 

For non-employee options, the Company recorded share-basedshare based compensation from continuing operations of $694, $721, and $614 and from discontinued operations of $nilwas immaterial for the years ended December 31, 2012, 2013,2015, December 31, 2016 and 2014, respectively, based on the fair value on the grant dates over the requisite service period of award using the straight-line method.December 31, 2017, respectively.

 

As of December 31, 2014,2017, there was $52,077$22,147 unrecognized share-based compensation expense relating to share options. This amount is expected to be recognized over a weighted-average vesting period of 3.101.70 years.

F- 89

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

19.18.SHARE-BASED COMPENSATION - continued

 

Nonvested restricted shares

In September 2011, the Company granted 60,000 restricted Class A ordinary shares to an employee under 2009 Equity Incentive Plan. 25% of the total restricted shares will vest on August 31, 2012 and thereafter the remaining 75% will vest at the ending of each calendar month subsequent to September 1, 2012.

In December 2011, the Company granted 3,750,000 restricted Class A ordinary shares to employees under 2009 Equity Incentive Plan. 25% of the restricted shares will vest on the first anniversary of the vesting commencement date as of October 26, 2012 and thereafter the remaining 75% will vest at the 26th day of each calendar month subsequent to October 26, 2012.

In March 2013, the Company granted 168,000 restricted Class A ordinary shares to employees under 2011 Equity Incentive Plan. 25% of the restricted shares will vest on the first anniversary of the vesting commencement date as of March 22, 2014, and the remaining 75% will vest at the 21st day of each calendar month subsequent to March 22, 2014.

On May 19, 2014, the Company granted 8,035,500 restricted Class A ordinary shares to employees under 2011 Equity Incentive Plan. Amongst, 874,500 shares were under agreement where 25% of the nonvested restricted shares will vest on the first anniversary of the vesting commencement date as of May 18th, 2015, and the remaining 75% will vest at the 18 day of each calendar month subsequent to May 18th, 2015; 7,161,000 shares were under agreement where one-forty eighth (1/48) of the nonvested restricted shares will vest at the 18th day of each calendar month subsequent to May 19th, 2014.

On July 17, 2014, the Company granted 78,000 restricted Class A ordinary shares to employees under 2011 Equity Incentive Plan. Amongst, 60,000 shares were under agreement where one-forty eighth (1/48) of the nonvested restricted shares will vest at the 16th day of each calendar month subsequent to July 17th, 2014; 18,000 shares were under agreement where 25% of the nonvested restricted shares will vest on the first anniversary of the vesting commencement date as of July 16th, 2015, and the remaining 75% will vest at the 16th day of each calendar month subsequent to July 16th, 2015.

On October 17, 2014, the Company granted 1,144,035 restricted Class A ordinary shares to employees under 2011 Equity Incentive Plan. Amongst, 652,500 shares were under agreement where one-forty eighth (1/48) of the nonvested restricted shares will vest at the 16th day of each calendar month subsequent to October 17th, 2014; 237,000 shares were under agreement where 25% of the nonvested restricted shares will vest on the first anniversary of the vesting commencement date as of October 16th, 2015, and the remaining 75% will vest at the 16th day of each calendar month subsequent to October 16th, 2015; 254,535 shares were vested immediately after granted.

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(In thousands of US dollars, except share data and per share data, or otherwise noted)

18.SHARE-BASED COMPENSATION - continued

Nonvested restricted shares - continued

Immediately before the disposition of Qianjun Technology in November 2014 (see Note 4.3), the Company accelerated the vesting of the nonvested restricted shares that were previously granted to Qianjun Technology's employees to fully vest. As a result, the Company recorded incremental share-based compensation expenses of $1,955, which was considered as disposition-related cost and recorded as a deduction of the gain on deconsolidation of the subsidiaries. 

 

A summary of the nonvested restricted shares activity is as follows:

 

 Weighted Weighted  Weighted Weighted
average fair
 
 number of average fair value  number of value 
 nonvested per ordinary  nonvested per ordinary 
 restricted share at the  restricted share at the 
 shares grant dates  shares  grant dates 
Outstanding as of December 31, 2016  15,935,208   1.00 
             
Outstanding as of December 31, 2012  2,566,776   1.11 
Granted  168,000   0.98   1,475,608   0.53 
Vested  (887,799)  1.11   (5,182,140)  1.01 
Forfeited  (82,827)  1.10   (1,425,993)  0.90 
Outstanding as of December 31, 2013  1,764,150   1.10 
Granted  9,257,535   1.10 
Vested  (3,314,997)  1.09 
Forfeited  (1,993,695)  1.10 
Outstanding as of December 31, 2014  5,712,993   1.10 
        
Outstanding as of December 31, 2017  10,802,683   0.95 

 

The Company recorded compensation expenses based on the fair value of nonvested restricted shares on the grant dates over the requisite service period of award using the straight line vesting attribution method. The fair value of the nonvested restricted shares on the grant date was the closing market price of the ordinary shares as of the date. For nonvested restricted share granted in 2014, the fair values at the dates of grant were $1.097, $1.103, and $1.060 per share. The Company recorded the compensation expenses related with nonvested restricted shares from continuing operations of $27, $25$1,509, $4,124 and $1,196 and from$4,112. The Company did not have any compensation expenses related to nonvested shares in discontinued operations of $928, $955 and $2,735 for the years ended December 31, 2012, 2013 and 2014, respectively.operations.

F- 90

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

19.18.SHARE-BASED COMPENSATION - continued

 

Nonvested restricted shares - continued

 

There was totalTotal unrecognized compensation expense of $6,989amounting to $10,323 related to nonvested restricted shares granted as of December 31, 2014.2017. The expense is expected to be recognized over a weighted-average period of 3.442.12 years.

 

In December 2015, the Company provided a loan of $1,930 to one of its employees who was also a 25% noncontrolling shareholder of Wanmen, a subsidiary in which the Company initially owned a 75% equity interest. The employee used the loan to further contribute to Wanmen’s capital. In January 2016, the Company waived the loan to the noncontrolling interest shareholder. The Company determined that the waiver of the loan and the capital contribution of Wanmen were a single transaction and accounted for the waiver of the loan as share-based compensation expense during the year ended December 31, 2015. In February 2016, Wanmen further received a capital injection from another external investor; as a result, the Company lost control over Wanmen and deconsolidated Wanmen during the year ended December 31, 2016.

The amount of share-based compensation expense for options and nonvested restricted shares attributable to cost of revenues, selling and marketing, research and development, general and administrative expenses and loss from the operations of the discontinued operations are as follows:

 

 Years ended December 31,  Years ended December 31, 
 2012 2013 2014  2015  2016  2017 
              
Gross amount:                        
Cost of revenues $-  $184  $83 
Selling and marketing  356   155   201  $243  $770  $598 
Research and development  1,511   889   1,072   781   1,363   1,092 
General and administrative  7,820   13,306   19,513   25,481   21,411   26,326 
  9,687   14,534   20,869   26,505   23,544   28,016 
Expense from the discontinued operations  1,210   1,604   2,735 
Expense recorded in discontinued operations  1,736   -   - 
            
Total share-based compensation expense $10,897  $16,138  $23,604  $28,241  $23,544  $28,016 

 

There was no income tax benefit recognized in the statements of operations for share-based compensation for the years ended December 31, 2012, 20132015, 2016 and 2014.2017.

F- 91

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

20.19.RELATED PARTY BALANCES AND TRANSACTIONS

 

Details of major related party balances and transactions as of December 31, 20132016 and 20142017 are as follows:

 

(1)Amounts due from related parties

 

As of December 31, 20132016 and 2014,2017, amounts due from related parties were $62,411$13,419 and $1,047,$15,224, respectively, and details are as follows:

 

   As of December 31, 
  Note  2013  2014 
          
Gummy Inc., subsidiary of Oak Pacific Holdings ("OPH")  (i)  $21  $46 
Beijing Qian Xiang Hu Lian Technology Development Co., Ltd., ("Hu Lian") subsidiary of OPH  (i)   245   342 
Softbank Payment Service Corporation ("SBPS"),
an affiliate of SB Pan Pacific Corporation
  (ii)   108   20 
Nuomi Holdings Inc., equity investee of Renren, Inc     175   - 
Beijing Nuomi Wang Technology Development Co., Ltd.,
subsidiary of Nuomi Holdings Inc. ("Beijing Nuomi")
  (iii)   61,663   - 
Qingting, equity investee of Renren, Inc.     192   220 
Beautiful Legend Co., Ltd,
entity substantially controlled by the majority shareholder of OPH
     7   - 

JMOOP, equity investee of the Company

  9(ii)   -   419 
Total     $62,411  $1,047 
    As of December 31, 
  Note 2016  2017 
         
Tianjin Yi Chuang Xin He Information Technology Co., Ltd., (“Yi Chuang Xin He”), a subsidiary of Eall, available-for-sale investee of the Company (i)  10,082   10,759 
Others    3,337   4,465 
           
Total   $13,419  $15,224 

 

(i)OPHThe balance represents the loan to Yi Chuang Xin He. Yi Chuang Xin He is a subsidiary of Eall, which is an entity controlled by the CEOavailable-for-sale investee of the Company. The two subsidiariesIn May 2016, the Company entered into agreements with Eall and Yi Chuang Xin He for a series of OPH, Gummy Inc. and Hu Lian have acted as collection agentsloan transactions, pursuant to which the Company made a loan amounting to RMB70 million to Yi Chuang Xin He. At the same time, Eall made a loan in US dollar to the Company amounting to RMB70 million ($10,692). Both of the loans are free of interest. The loan due from Yi Chuang Xin He is repayable on demand. The loan due to Eall is repayable 5 work days after Yi Chuang Xin He repays the loan to the Company. The Company during 2013 and 2014.

(ii)SBPS, an affiliate of SB Pan Pacific Corporation, provides third party collection service for Renren Game Japan Inc. during 2013 and 2014.

(iii)As described in Note 4.1,recorded the Company deconsolidated Nuomi from the Company's consolidated financial statements on October 26, 2013. At the deconsolidation date, theloans as amount due from Beijing Nuomi was $74,825, which was partially settled in November and December 2013.amount due to related parties as the Company does not have the right to offset and does not intend on setting off the loans. As of December 31, 2013,2017, both of the balance of amount due from Beijing Nuomi was $61,663, which was fully settled subsequently in February 2014.loans remained outstanding.

F- 92

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

20.19.RELATED PARTY BALANCES AND TRANSACTIONS - continued

 

(2)Amounts due to related parties:parties

 

  As of December 31, 
  Note  2013  2014 
          
Qingting, equity investee of the Company     $113  $- 
Mapbar, equity investee of the Company      65   37 
Nuomi Holdings Inc., equity investee of the Company  (i)   60,884   - 

Ying He Hu Dong, equity investee of the Company

      -   266 
Total     $61,062  $303 
    As of December 31, 
    2016  2017 
         
Eall (i) $10,692  $10,692 
Others    222   7,054 
           
Total   $10,914  $17,746 

(i) The balance represents the loan provided by Eall (see Note 20 (i)).

 

(i)As described in Note 4.1, the Company deconsolidated Nuomi Hodings Inc. on October 26, 2013. Pursuant to purchase agreement reached among the Company, Nuomi Holdings Inc. and Baidu Holdings Limited dated on August 23, 2013, immediately after the deconsolidation date, the Company issued promissory note to Nuomi Holdings Inc. in the principal amount of $60,884 that equaled the balance of the Company's receivables from Beijing Nuomi as of July 31, 2013. Such promissory note would be repaid upon the settlement of the Company's receivables in respect to Beijing Nuomi. After the balance sheet date, the promissory note of $60,884 was paid up in February 2014 along with the settlement of the other receivable.

(3)Transactions with related parties for amount due from related parties

 

  Years ended December 31, 
  2015  2016  2017 
          
Loan to Beautiful Bay Co., Ltd, substantially controlled by the majority shareholder of OPH which is controlled by the CEO of the Company $4,775  $-  $- 
Loan to Yi Chuang Xin He  -   10,542   - 
Loan to Beijing Yunke Logistics Co., Ltd, a subsidiary of Eunke, cost method investee of the Company  -   -   8,591 
Others  182   4,083   3,069 
             
Total $4,957  $14,625  $11,660 

  Years ended December 31, 
  2012  2013  2014 
          
Cash collected through SBPS, an affiliate of SB Pan Pacific Corporation $1,116  $1,153  $515 
Back office service provided to Hu Lian, subsidiary of OPH  270   128   104 
Self-developed games licensed to Gummy Inc., subsidiary of OPH  1   -   77 
Professional fees paid for Nuomi by Renren Inc.  -   175   - 
Dividend declared but not paid by JMOOP, equity investee of the Company  -   -   419 
Loan to Qingting, equity investee of the Company  -   -   228 
             
Total $1,387  $1,456  $1,343 
F- 93

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

20.19.RELATED PARTY BALANCES AND TRANSACTIONS - continued

 

(4)Transactions with related parties for amount due to related parties

 

  Years ended December 31, 
  2012  2013  2014 
          
Location-based service provided by Mapbar Technology Limited $304  $299  $203 
Internet service provided by Qingting, equity investee of Renren Inc.  -   111   197 

Game operating service provided by Ying He Hu Dong,
equity investee of Renren Inc.

  -   -   428 
Game operating service provided by Beautiful Legend Co., Ltd,
entity substantially controlled by the majority shareholder of OPH
  -   -   44 
Total $304  $410  $872 

  Years ended December 31, 
  2015  2016  2017 
          
Loan from Eall $-  $10,692  $- 
Others  152   413   333 
             
Total $152  $11,105  $333 

 

(5)In July 2012, the Company purchased $10,000 Series 2012-A Senior Secured RefiSofi Loan Notes issued by SoFi Lending Corp., a subsidiary of SoFi. OPH is a shareholder of SoFi and the Company's chairman and chief executive officer, JosephCEO, Joe Chen, is a director of SoFi. In September 2012, March 2014, January and January 2014,February 2015, and October 2015, the Company invested $49,000, $20,789, $22,331 and $150,000 in newly issued Series B preferred shares, and $20,789 in newly issued Series D preferred shares, Series E preferred shares and Series F preferred shares of SoFi, respectively, concurrently with a group of other investors. These transactions were approved by the independent, disinterested members of the Company's board and the audit committee of the board.
In April 2017, the Company disposed 5,719,986 preferred shares of SoFi for total net proceeds of $91,926, recording a realized gain amounting to $58,335 (see Note 10 (i)).

(6)In November 2015, the CEO of the Company provided joint and several liability guarantee for a long-term debt with a principal of $69,468 (see Note 13 (iv)).

(7)In 2006, the Company entered into an agreement to make a loan of $167 to Liu Guolan, who is the mother-in-law of the Company’s CEO, for her investment into Beijing Hulian Shidai Telecom Technology Co., Ltd. (“Hulian Shidai”). The period of the loan is 10 years.

In 2016, the Company received $7,188 from Liu Guolan for the repayment of the loan, which is all the proceeds directly or indirectly received by Liu Guolan through holding the investment in Hulian Shidai. $7,021 of the repayment was recorded as other income in the year ended December 31, 2016 as the Company has no further obligations to the relevant payment received.

(8)In November 2016, the COO of the Company provided joint and several liability guarantee for a short-term debt with a principal of $7,202 (see Note 13 (ii)).

F- 94

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

21.20.SEGMENT INFORMATION

 

The Company's Chief Operating Decision Maker (the "CODM") continued to be identified asis the Chief Executive Officer,CEO, who is responsible for decisions about allocating resources and assessing performance of the Company. An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Company’s CODM.

 

TheAs described in Note 1, the Company reevaluatedstarted to operate the used car trading business in the second half of 2017 and stopped providing apartment rental financing to individuals and apartment agents, and financing to college students in 2016. As a result, the Company reevaluted its segments in the fourth quarter of 2017 and concluded that it hashad two remaining reportable segments in 2014,as of and for the year ended December 31, 2017, namely Renren and Games. As described in Note 4, Nuomi, QingtingAuto Group. The Auto Group segment mostly includes the sales of used cars as well as used car financing provided to used car dealerships while the Renren segment mostly includes the Company’s main social networking website and Qianjun Technology excluding Woxiu business were treatedmobile services as discontinued.well as our social video platform. The segment information for year 2012the years ended December 31, 2015 and 20132016 were retrospectively revised to reflect such changes as follows:

 

  Year ended December 31, 2012  Year ended December 31, 2013  Year ended December 31, 2014 
  Renren  Games  Total  Renren  Games  Total  Renren  Games  Total 
                            
Net revenues 65,372  89,455  154,827  62,474  85,473  147,947  45,853  37,101  82,954 
Cost of revenues  (24,691)  (25,103)  (49,794)  (31,036)  (23,244)  (54,280)  (33,037)  (14,935)  (47,972)
Operating expenses  (114,247)  (38,814)  (153,061)  (124,163)  (68,949)  (193,112)  (163,512)  (30,864)  (194,376)
Operating (loss) income  (73,566)  25,538   (48,028)  (92,725)  (6,720)  (99,445)  (150,696)  (8,698)  (159,394)
Net income (loss) from continuing operations  (57,575)  25,715   (31,860)  (22,312)  (6,644)  (28,956)  39,965   (6,560)  33,405 
Net income (loss) from discontinued operations  (43,193  -   (43,193  92,597   -   92,597   26,673   -   26,673 
Net income (loss) (100,768) 25,715  (75,053) 70,285  (6,644) 63,641  66,638  (6,560) 60,078 
Total assets 1,104,989  72,953  1,177,942  1,344,327  41,359  1,385,686  1,113,446  35,707  1,149,153 

  Year ended December 31, 2015  Year ended December 31, 2016  Year ended December 31, 2017 
  Renren  Auto
Group
  Total  Renren  Auto
Group
  Total  Renren  Auto
Group
  Total 
                            
Net revenues $36,880   4,231   41,111   42,513   20,851   63,364   52,251   149,851   202,102 
Cost of revenues  35,203   1,517   36,720   37,696   14,071   51,767   40,108   144,290   184,398 
Operating expenses  107,211   2,486   109,697   68,918   15,692   84,610   80,403   25,178   105,581 
Operating (loss) gain  (105,534)  228   (105,306)  (64,101)  (8,912)  (73,013)  (68,260)  (19,617)  (87,877)
Net loss from continuing operations  (221,851)  (1,326)  (223,177)  (183,638)  (10,415)  (194,053)  (85,237)  (25,266)  (110,503)
Net income from discontinued operations  1,520   -   1,520   8,701   -   8,701   -   -   - 
                                     
Net loss $(220,331)  (1,326)  (221,657)  (174,937)  (10,415)  (185,352)  (85,237)  (25,266)  (110,503)

The Company does not allocate assets to its current operating segments as management does not believe that allocating these assets is useful in evaluating these segments’ performance. Accordingly, the Company has not made disclosure of total assets by reportable segment.

 

The majority of the Company's revenue for the years ended December 31, 2012, 20132015, 2016 and 20142017 was generated from the PRC. Game has recognized revenue of $2,004, $2,368 and $4,480 from overseas game entities for the years ended December 31, 2012, 2013 and 2014, respectively.

 

As of December 31, 20132015, 2016 and 2014,2017, respectively, substantially all of long-lived assets of the Company were located in the PRC.

F- 95

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

22.21.EARNINGSLOSSES PER SHARE

 

The following table sets forth the computation of basic and diluted net income (loss)loss per ordinary share for the years ended:

 

  Years ended December 31, 
  2012  2013  2014 
Net income (loss):            
Income (loss) from continuing operations $(31,860) $(28,956) $33,405 
Income (loss) on discontinued operations, net of tax  (43,193)  92,597   26,673 
Net income (loss)  (75,053)  63,641   60,078 
Add: net loss attributable to noncontrolling interest  27   92   382 
Net income (loss) attributable to Renren Inc. shareholders $(75,026) $63,733  $60,460 
Weighted average number of ordinary shares outstanding used in computing net income (loss) per ordinary share-basic  1,151,659,545   1,118,091,879   1,059,446,436 
Incremental weighted average ordinary shares from assumed exercise of stock options using the treasury stock method  -   12,648,043   8,185,273 
Weighted average number of ordinary shares outstanding used in computing net income (loss) per ordinary share-diluted  1,151,659,545   1,130,739,922   1,067,631,709 
Net income (loss) per ordinary share attributable to Renren Inc. shareholders - basic:            
Income (loss) per ordinary share from continuing operations $(0.03) $(0.03) $0.03 
Income (loss) per ordinary share from discontinued operations $(0.04) $0.08  $0.03 
Net income (loss) per ordinary share attributable to Renren Inc. shareholders - basic: $(0.07) $0.06  $0.06 
Net income (loss) per ordinary share attributable to Renren Inc. shareholders - diluted:            
Income (loss) per ordinary share from continuing operations $(0.03) $(0.03) $0.03 
Income (loss) per ordinary share from discontinued operations $(0.04) $0.08  $0.03 
Net income (loss) per ordinary share attributable to Renren Inc. shareholders - diluted: $(0.07) $0.06  $0.06 
  Years ended December 31, 
  2015  2016  2017 
Net loss:            
Loss from continuing operations $(223,177) $(194,053) $(110,503)
Income from discontinued operations, net of tax  1,520   8,701   - 
             
Net loss  (221,657)  (185,352)  (110, 503) 
Add: net loss attributable to noncontrolling interest  1,529   -   76 
             
Net loss attributable to Renren Inc. $(220,128) $(185,352) $(110,427)
             
Weighted average number of ordinary shares outstanding used in computing net loss per ordinary share-basic  1,019,378,556   1,022,664,396   1,028,537,406 
Incremental weighted average ordinary shares from assumed exercise of stock options using the treasury stock method  7,857,646   4,512,567   - 
             
Weighted average number of ordinary shares outstanding used in computing net income per ordinary share-diluted  1,027,236,202   1,027,176,963   1,028,537,406 
             
Net loss per ordinary share attributable to Renren Inc. shareholders - basic:            
Loss per ordinary share from continuing operations $(0.22) $(0.19) $(0.11)
Income per ordinary share from discontinued operations $0.00  $0.01  $- 
             
Net loss per ordinary share attributable to Renren Inc. shareholders - basic: $(0.22) $(0.18) $(0.11)
             
Net loss per ordinary share attributable to Renren Inc. shareholders - diluted:            
Loss per ordinary share from continuing operations $(0.22) $(0.19) $(0.11)
Income per ordinary share from discontinued operations $0.00  $0.01  $- 
             
Net loss per ordinary share attributable to Renren Inc. shareholders - diluted: $(0.22) $(0.18) $(0.11)

 

For the years ended December 31, 20132016 and 2014, 47,873,2542017, 142,517,623 and 75,475,022142,615,572 stock options and nil3,354,015 and 4,778,8779,668,727 nonvested shares were excluded from the calculation of diluted weighted average number of common shares, respectively, as their effect was anti-dilutive.

 

F- 96

In addition, for the year ended December 31, 2014, 34,796,844 market-conditioned stock options were excluded from the calculation of diluted weighted average number of common shares, as the market condition has not been met at the end of reporting period.

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

23.22.COMMITMENTS AND CONTINGENCY

 

(1)Operating lease as lessee

 

The Company leases its facilities and offices under non-cancelable operating lease agreements. In addition, the Company pays telecommunications carriers and other service providers for telecommunications services and for hosting its servers at their internet data centers under non-cancelable agreements, which are treated as operating leases. These leases expire through 20172027 and are renewable upon negotiation. Rental and bandwidth expenses under operating leases for 2012, 20132015, 2016 and 20142017 from continuing operations were $26,133, $27,258,$12,113, $5,964, and $22,244$5,926 respectively and from discontinued operations were $9,576, $9,982$2,553, $183 and $8,603,$nil, respectively.

 

Future minimum lease payments under such non-cancellable leases as of December 31, 20142017 are as follows:

 

2015 $14,526 
2016  6,809 
2017  144 
2018 and thereafter  - 
     
Total $21,479 
2018 $6,366 
2019  3,792 
2020  3,031 
2021 and thereafter  1,686 
     
Total $14,875 

 

(2)Future minimum principal payments related to the Company’s long-term debts as of December 31, 2017 are as follows (see Note 13):

2018 $59,260 
2019  3,074 
2020  44,591 
     
Total $106,925 

(3)Unconditionalinvestment commitment

 

Based onThe Company was obligated to pay up to $2,887 and $1,736 for the share purchase agreement with Loadstar dated March 14, 2014, the Company will acquire Series C Preferred Stock issued by Loadstar with the total considerationacquisition of approximately $4.2 million within fiscal year 2015. The above mentioned consideration was not paid byinvestments under various arrangements as of December 31, 2014.

2016 and 2017, respectively.

 

24.23.EMPLOYEE BENEFIT PLAN

 

Full time employees of the Company in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Company accrues for these benefits based on certain percentages of the employees' salaries. The total provisions for such employee benefits from continuing operations were $17,928, $21,913$10,032, $6,469 and $15,152$7,528 and from discontinued operations were $3,825, $5,620$621, $85 and $877nil for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

F- 97

 

RENREN INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

25.OTHER COMPREHENSIVE INCOME

Movement of accumulated other comprehensive income is as follow:

  Foreign  Unrealized    
  currency  gain (loss) on    
  translation  available-for-sale    
  adjustments  investments  Total 
          
Balance as of December 31, 2014 $9,267  $(1,493) $7,774 
             
Exchange difference  (7,777)  37,127   29,350 
             
Balance as of December 31, 2015 $1,490  $35,634  $37,124 
             
Exchange difference  (10,994)  (19,247)  (30,241)
             
Balance as of December 31, 2016 $(9,504) $16,387  $6,883 
             
Exchange difference  9,585   648   10,233 
             
Balance as of December 31, 2017 $81  $17,035  $17,116 

 

26.24.STATUTORY RESERVE AND RESTRICTED NET ASSETS

 

In accordance with the Regulations on Enterprises with Foreign Investment of China and their articles of association, the Company’s subsidiaries and VIE entities located in the PRC, being foreign invested enterprises established in the PRC, are required to provide for certain statutory reserves. These statutory reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund or discretionary reserve fund, and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires a minimum annual appropriation of 10% of after-tax profit (as determined under accounting principles generally accepted in China at each year-end); the other fund appropriations are at the subsidiaries' or the affiliated PRC entities' discretion. These statutory reserve funds can only be used for specific purposes of enterprise expansion, staff bonus and welfare, and are not distributable as cash dividends except in the event of liquidation of the Company's subsidiaries, the Company's affiliated PRC entities and their respective subsidiaries. The Company's subsidiaries and VIE entities are required to allocate at least 10% of their after-tax profits to the general reserve until such reserve has reached 50% of their respective registered capital. As of December 31, 2014,2017, none of the Company's PRC subsidiaries and VIE entities had a general reserve that reached the 50% of their registered capital threshold, therefore they will continue to allocate at least 10% of their after-tax profits to the general reserve fund.

 

F- 98

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

26.STATUTORY RESERVE AND RESTRICTED NET ASSETS - continued

Appropriations to the enterprise expansion reserve and the staff welfare and bonus reserve are to be made at the discretion of the board of directors of each of the Company's subsidiaries.

The appropriation to these reserves by the Company's PRC subsidiaries was $3,205,$nil, $nil and $nil for the years ended December 31, 2012, 20132015, 2016 and 2014,2017, respectively.

 

As a result of these PRC laws and regulations and the requirement that distributions by PRC entities can only be paid out of distributable profits computed in accordance with PRC GAAP, the PRC entities are restricted from transferring a portion of their net assets to the Company. Amounts restricted include paid-in capital and the statutory reserves of the Company's PRC subsidiaries and VIE entities. The aggregate amounts of capital and statutory reserves restricted which represented the amount of net assets of the relevant subsidiaries and VIE entities in the Company not available for distribution was 304,502$370,971 and $435,999 as of December 31, 2014.2016 and 2017, respectively.

 

25.SUBSEQUENT EVENTF- 99

 

Long-term investment

Subsequent to the balance sheet date, the Company paid a total of $274.7 million in relation with the following long term investments:

(i)In January 2015, the Company acquired 204,471 Series A Preferred Shares, representing 25% of total shares of Credit Shop Inc. (“Credit Shop”), for a total consideration of $15,000. The parties also reached an agreement on a convertible revolving loan arrangement, whereby the Company will provide a revolving line of credit up to $15,000 to Credit Shop and may convert the loan to Series A Preferred Shares. Upon the conversion, the Company will purchase additional Series A Preferred Shares from Credit Shop in the amount of $5,000.

(ii)In January 2015, the Company entered into an agreement with Motif Investing Inc. to purchase 5,579,734 Series E Preferred Shares, representing 10% of its total shares, for a total consideration of $40,000. The Company also received a detachable preferred share warrant to purchase up to an additional 6,199,704 Series E Preferred Shares at a price of $17.92 per share.

(iii)In January 2015, the Company entered into an agreement with 268V Limited to purchase 64,281,655 Series D Preferred Shares, representing 20% of its total shares, for a total consideration of $75,000. Meanwhile, the Company received a preferred share warrant to purchase up to an additional 6,428,181 Series D-1 Preferred Shares at a price of $3.11 per share within 24 months.

 

RENREN INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 20132015, 2016 AND 20142017

(In thousands of US dollars, except share data and per share data, or otherwise noted)

 

27.25.SUBSEQUENT EVENT - continued

Long-term investment -continued

(iv)On January 30, 2015 and February 17, 2015, the Company entered into agreements to purchase a total of 2,361,116 Series E Preferred Shares issued by SoFi at a price of $9.4578 per share for a total consideration of $22,331, which has been paid in full. Prior to these additional purchase of shares, the Company had already made investments in SoFi, classified as an equity method investment with a carrying value of $67,490 as of December 31, 2014 (see Note 9i), representing the Company’s original cost of investment adjusted by the Company’s share of undistributed earnings or losses of SoFi up to December 31, 2014. Upon the completion of these investments, the Company held 24.8% of total shares of SoFi.

(v)In March 2015, the Company entered into an agreement with LendingHome Corporation to acquire 6,153,999 Series C Preferred Shares representing 14.72% of its total shares, in a total consideration of $65,843.

(vi)In March 2015, the Company entered into agreement with Eunke Technology Ltd. to purchase 4,770,131 Series B Preferred Shares, representing 20.9% of its total shares, in a total consideration of $25,000.

(vii)Other than the items stated as above, the Company also invested in an aggregate of $31.5 million in long-term investments and a convertible loan with individual amounts each less than $10,000.

Tender offerStock incentive plan

 

On April 2, 2015,January 31, 2018, the Company announced that it was commencingapproved a modified Dutch auction tender offerstock incentive plans specifically for Auto Group segment (the "Kaixin Auto Group 2018 Plan"), pursuant to purchase up to $50 million in valuewhich the maximum number of its ADSs at a price not greater than $2.75 nor less than $2.40 per ADS. Under the termsshares of the tender offer, the Company will invite holdersavailable for issurance pursuant to all awards thereunder shall be 40,000,000 ordinary shares of ADSs to tender their ADSs at prices specified by such holders within such range of prices in the manner described in the offer materials. Subject to the conditions set forth in the offer materials, the Company will select the lowest single per ADS purchase price that will allow it to purchase $50 million in value of ADSs at completionKaixin Auto Group, a subsidiary of the tender offer. The tender offer will expire at 12:00 midnight, New York City time, at the end of April 29, 2015, unless the Company extends the offer. The tender offer constitutes a part of the $100 million share repurchase program that the Company announced on June 28, 2014.Company.

Property disposal plan

 

Short-term investment

Subsequent to the balance sheet date,On April 20, 2018, the Company madeentered into a contract with Shanghai Liandong Economic Development Company, Shanghai Zhenda Industrial Co., Ltd. and Shanghai Baoshan Xiershi Industrial Co., Ltd., selling the following short-term investments:Company’s property located in Shanghai. The selling deposit amounted to $3,073 and the total selling price amounted to $61,210. The deposit was received in April 2018.

 

  Period subsequent to the balance sheet date, 
  Gross Purchase  Sales of investments 
  Cost  Proceeds  Costs  Losses 
Available-for-sale            
Equity securities  30,994   161   164   3 
                 
Derivative financial instruments                
Call options  23,388   -   -   - 

F-77F- 100

 

RENREN INC.

 

Additional Information - Financial Statement Schedule I

Condensed Financial Information of Parent Company

BALANCE SHEETS

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  As of December 31, 
  2016  2017 
ASSETS        
         
Current assets:        
Cash and cash equivalents $15,694  $97,697 
Prepaid expenses and other current assets  -   5,179 
Amounts due from subsidiaries  1,127,402   1,144,420 
         
Total current assets  1,143,096   1,247,296 
         
Long-term investments  232,952   209,605 
Investment in subsidiaries  (529,991)  (687,629)
         
TOTAL ASSETS $846,057  $769,272 
         
LIABILITIES AND EQUITY        
         
Current liabilities:        
Short-term debt  30,000   - 
Long-term debt - current  -   52,604 
Accrued expenses and other current liabilities  1,446   15,508 
Amounts due to related party  10,692   - 
         
Total current liabilities  42,138   68,112 
         
Long-term liabilities  52,604   20,000 
Other non-current liabilities  12,849   6,356 
         
TOTAL LIABILITIES $107,591  $94,468 
         
Equity:        
Class A ordinary shares, $0.001 par value, 3,000,000,000 shares authorized, 719,651,418 and 726,549,453 shares issued and outstanding as of December 31, 2016 and 2017, respectively  720   727 
Class B ordinary shares, $0.001 par value, 500,000,000 shares authorized, 305,388,450 and 305,388,450 shares issued and outstanding as of December 31, 2016 and 2017, respectively  305   305 
Additional paid-in capital  1,266,592   1,303,117 
Accumulated deficit  (536,034)  (646,461)
Accumulated other comprehensive income  6,883   17,116 
Equity  738,466   674,804 
TOTAL LIABILITIES AND EQUITY $846,057  $769,272 

 

   As of December 31,  
   2013   2014 
ASSETS        
         
Current assets:        
  Cash and cash equivalents $82,586  $95,485 
  Term deposits  392,699   139,890 
  Short-term investments  300,701   28,139 
  Prepaid expenses and other current assets  15,199   3,048 
Amounts due from subsidiaries  418,079   933,496 
Amounts due from related parties  -   419 
  Equity method investment- current  60,508   - 
Total current assets  1,269,772   1,200,477 
Long-term investments  101,025   83,403 
Investment in subsidiaries  (37,945)  (192,061)
Other non-current assets  -   18,460 
         
TOTAL ASSETS  1,332,852   1,110,279 
         
LIABILITIES AND EQUITY        
         
Current liabilities:        
  Accrued expenses and other payables $1,823  $1,614 
  Promissory notes to related parties  60,884   - 
  Income tax payable  -   6,027 
         
Total current liabilities  62,707   7,641 
         
TOTAL LIABILITIES $62,707  $7,641 
         
Equity:        
Class A ordinary shares, $0.001 par value, 3,000,000,000 shares        
  authorized,789,976,372 and 720,040,971 shares issued and outstanding        
  as of December 31, 2013 and 2014, respectively $790  $720 
Class B ordinary shares, $0.001 par value, 500,000,000 shares        
  authorized, 305,388,450 and 305,388,450 shares issued and outstanding        
  as of December 31, 2013 and 2014, respectively  305   305 
Additional paid-in capital  1,285,283   1,224,393 
Accumulated deficit  (191,014)  (130,554)
Accumulated other comprehensive income  174,781   7,774 
         
Equity  1,270,145   1,102,638 
         
TOTAL LIABILITIES AND EQUITY $1,332,852  $1,110,279 
F- 101

 

RENREN INC.

 

Additional Information - Financial Statement Schedule I

Condensed Financial Information of Parent Company

STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  Years ended December 31, 
  2015  2016  2017 
Selling and marketing $243  $770  $598 
Research and development  780   1,363   1,092 
General and administrative  28,811   25,477   33,519 
             
Total operating expenses  29,834   27,610   35,209 
             
Other (loss) income  (528)  307   1,385 
Interest income  270   127   223 
Interest expenses  (985)  (5,728)  (6,391)
Realized gain on short-term investments  4,102   -   - 
(Loss) earnings in equity method investments  (3,516)  (3,968)  9,743 
(Loss) gain on disposal of equity method investments  (534)  -   58,335 
(Loss) gain on disposal of cost method investments  -   -   37,311 
Equity in loss of subsidiaries and variable interest entities  (189,103)  (148,480)  (175,824)
             
Net loss $(220,128) $(185,352) $(110,427)
             
Other comprehensive (loss) income, net of tax:            
Foreign currency translation  (7,777)  (10,994)  9,585 
Net unrealized gain (loss) on available-for-sale investments, net of tax of $nil for the years ended December 31, 2015, 2016 and 2017, respectively  40,695   (18,518)  3,891 
Transfer to statements of operations of realized gain on available-for-sale securities, net of tax of $nil for the years ended December 31, 2015, 2016 and 2017, respectively  (3,568)  (729)  (3,243)
             
Other comprehensive income (loss) $29,350  $(30,241) $10,233 
Comprehensive loss $(190,778) $(215,593) $(100,194)

 

  Years ended December 31, 
  2012  2013  2014 
          
Selling and marketing $562  $398  $625 
Research and development  1,855   697   1,342 
General and administrative  13,376   14,820   24,964 
             
Total operating expenses  15,793   15,915   26,931 
             
Other income  389   574   332 
Exchange (loss) gain on offshore bank accounts  -   1,386   (2,314)
Interest income  19,925   12,508   7,059 
Realized gain on short-term investments  4,317   

56,727

   167,225 

Impairment of short-term investments

  -   (2,098)  - 
Earnings (loss) in equity method investments  (4,784)  23,070   4,835 
Gain on disposal of equity method investments  -   -   60,116 
Gain on deconsolidation of the subsidiaries  -   132,821   - 
Equity in loss of subsidiaries and variable interest entities  (79,080)  (145,340)  (149,862)
             
Net income (loss)  (75,026)  63,733   60,460 
             
Other comprehensive (loss) income, net of tax:            
  Foreign currency translation  1,289   4,805   (5,039)
  Net unrealized gain on available-for-sale investments,            
    net of tax of $nil for the years ended            
    December 31, 2012, 2013 and 2014, respectively  32,374   183,932   13,223 
  Transfer to statements of operations of realized gain            
    on available-for-sale securities, net of tax of $nil            
    for the years ended December 31, 2012, 2013 and 2014, respectively  (1,283)  (55,768)  (175,191)
  Transfer to statements of operations as a result of            
    other-than-temporary impairment of short-term investments,            
    net of tax of $nil  -   2,098   - 
             
Other comprehensive (loss) income  32,380   135,067   (167,007)

F-79F- 102

 

RENREN INC.

Additional Information - Financial Statement Schedule I

Condensed Financial Information of Parent Company

STATEMENT OF CHANGES IN EQUITY

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

                                        Accumulated    Total 
                            Additional            other    Renren 
   Class A   Class B           paid-in    Subscription    Accumulated    comprehensive    Inc.'s 
   ordinary shares   ordinary shares   Treasury shares   capital   receivable   deficit    income    equity 
   Shares   Amount   Shares   Amount   Shares   Amount                     
                                             
Balance at January 1, 2012  770,912,350  $771   398,763,450  $399   (18,267,684) $(25,597) $1,407,059   -  $(179,721) $7,334  $1,210,245 
Stock-based compensation  -   -   -   -   -   -   10,897   -   -   -   10,897  
Other comprehensive income  -   -   -   -   -   -   -   -   -   32,380   32,380 
Net loss  -   -   -   -   -   -   -   -   (75,026)  -   (75,026)
Exercise of share option and restricted shares vesting  13,189,706   13   3,916,667   4   -   -   3,571   -   -   -   3,588 
Repurchase of ordinary shares  (54,253,314)  (54)  -   -   (54,253,314)  (76,131)  1,100   -   -   -   (75,085)
Advances to shareholders  -   -   -   -   -   -   (1,605)  -   -   -   (1,605)
Cancellation of treasury shares  -   -   -   -   72,520,998   101,728   (101,728)  -   -   -   - 
Acquisition 35% noncontrolling interest in Qingting  -   -   -   -   -   -   (250)  -   -   -   (250)
Share subscription receivables of JiehunChina  -   -   -   -   -   -   -   (229)  -   -   (229)
                                             
Balance at December 31, 2012  729,848,742  $730   402,680,117  $403   -   -  $1,319,044  $(229) $(254,747) $39,714  $1,104,915 
Stock-based compensation   -          -         16,138             16,138  
Other comprehensive income   -    -    -    -   -               135,067    135,067  
Net income   -    -    -    -   -            63,733       63,733  
Exercise of share option and restricted shares vesting  16,763,199   17   2,708,333   2   -   -   4,013       -    -   4,032  
Repurchase of ordinary shares  (56,635,569)  (57)   -   -   -   -   (55,517            (55,574
Transfer Class B shares to Class A shares  100,000,000   100   (100,000,000)  (100)  -   -   -   -    -    -    
Bad debt provision of share subscription receivables  -   -   -   -   -   -   -   229   -   -   229 
Receipt of repayment from shareholder  -   -   -   -         1,605     -    -      1,605  
                                             
Balance at December 31, 2013  789,976,372  $790   305,388,450  $305   -   -  $1,285,283   -  $(191,014) $174,781  $1,270,145 
Stock-based compensation         -    -    -    -   23,604     -    -      23,604  
Other comprehensive income   -   -   -    -    -    -       -    -   (167,007 )  (167,007)
Net income   -    -    -    -    -    -       -   60,460     -   60,460  
Exercise of share option and restricted shares vesting  10,792,736   11    -    -    -    -   2,748     -    -    -   2,759  
Repurchase of ordinary shares  (80,728,137)  (81)  -  -   -    -   (87,242   -    -    -   (87,323
                                             
Balance at December 31, 2014  720,040,971  $720   305,388,450  $305   -   -  $1,224,393   -  $(130,554) $7,774  $1,102,638 

RENREN INC.

 

Additional Information - Financial Statement Schedule I

Condensed Financial Information of Parent Company

STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  Years ended December 31, 
  2015  2016  2017 
Cash flows from operating activities:            
Net loss $(220,128) $(185,352) $(110,427)
Equity in income of subsidiaries and variable interest entities  189,103   148,480   175,824 
Share-based compensation expense  24,575   23,544   28,016 
Gain on disposal of cost method investment  -   -   (37,311)
Exchange loss (gain) on offshore accounts  376   3   (1)
Gain on short-term investments and fair value change of derivatives  (4,102)  -   - 
Loss (earnings) in equity method investment  4,050   3,968   (68,078)
Fair value change of liability-classified warrant  -   (105)  (195)
             
 Changes in operating assets and liabilities:            
Prepaid expenses and other current assets  2,796   107   (294)
Accrued expenses and other current liabilities  (5,040)  (1,689)  1,902 
Other non-current liabilities  966   5,332   5,862 
Increase in amounts due from subsidiaries  (128,551)  (65,055)  (27,710)
             
Net cash used in operating activities  (135,955)  (70,767)  (32,412)
             
Cash flows from investing activities:            
Restricted cash  (15,370)  15,370   - 
Decrease in term deposits  139,514   -   - 
Proceeds from sale of available-for-sale securities  33,416   -   - 
Proceeds from principal return on SoFi Loan Note  984   5,879   - 
Proceeds from sale of equity method investment  -   18,460   91,926 
Proceeds from sale of cost method investment  -   -   32,726 
Capital distribution received from equity method investees  9,854   -   - 
Dividend received from available-for-sale securities  137   -   - 
Purchase of equity method investment  (172,331)  (1,000)  (500)
Purchase of cost method investment  (300)  -   - 
             
Net cash (used in) provided by investing activities  (4,096)  38,709   124,152 
             
Cash flows from financing activities:            
Repurchase of ordinary shares  (10,292)  -   - 
Proceeds from exercise of share options  1,231   1,430   262 
Proceeds from borrowings  159,260   30,000   - 
Restricted cash for debt borrowings  (100,000)  100,000   - 
Repayment of borrowings  -   (100,000)  (10,000)
Proceeds from loan from a related party  -   10,692   - 
             
Net cash provided by (used in) financing activities  50,199   42,122   (9,738)
             
Net (decrease) increase in cash and cash equivalents  (89,852)  10,064   82,002 
Cash and cash equivalents at beginning of year  95,485   5,633   15,694 
Effect of exchange rate changes  -   (3)  1 
Cash and cash equivalents at end of year $5,633  $15,694  $97,697 

F- 103

 

  Years ended December 31, 
  2012  2013  2014 
Cash flows from operating activities:         
  Net income (loss) $(75,026) $63,733  $60,460 
  Equity in income of subsidiaries and variable interest entities  79,080   145,340   149,862 
  Share-based compensation expense  10,897   11,754   22,827 
  Gain on deconsolidation of subsidiaries  -   (132,821)  - 
  Gain on disposal of equity method investment  -   -   (60,116)
  Depreciation and amortization  266   267   - 
  Exchange loss (gain) on offshore accounts  -   (1,386)  2,314 
  Impairment on short-term investments  -   2,098   - 
  Gain on short-term investments and fair value change of derivatives  (4,317)  (56,727)  (167,225)
  Earnings (loss) in equity method investments  4,784   (23,070)  (4,835)
  Changes in operating assets and liabilities:         
  Prepaid expenses and other current assets  3,320   (9)  1,770 
  Accrued expenses and other payables  (496)  538   (444)
  Increase in amounts due to a subsidiary  (95,108)  (250,013)  (512,295)
  Capital distribution received from Japan Macro  -   19,158   25,321 
             
Net cash used in operating activities  (76,600)  (221,138)  (482,361)
             
Cash flows from investing activities:            
  Decrease in term deposits  152,680   158,687   250,495 
  Proceeds from sale of available for sale securities  81,136   118,958   415,528 
  Proceeds from sale of derivative financial instruments  1,297   959   80,861 
  Proceeds from principal return on            
  Series 2012-A Senior Secured Refi Loan Notes  414   1,353   1,370 
  Proceeds from sales of equity method investment  -   -   46,484 
  Capital distribution received from equity method investees  -   -   74,721 
  Dividend received from available for sale securities  -   -   1,050 
  Purchase of available for sale securities  (140,677)  (88,676)  (129,407)
  Purchase of derivative financial instruments  -   -   (90,112)
  Purchase of equity method investments  (49,000)  (20,000)  (20,789)
  Purchases of Series 2012-A Senior Secured Refi Loan Notes  (10,000)  -   - 
  Cash disposed of from deconsolidation of subsidiaries  -   (18,309)  - 
  Investment in subsidiaries  (1,343)  -   - 
             
Net cash provided by investing activities  34,507   152,972   630,201 
             
Cash flows from financing activities:            
  Repurchase of ordinary shares  (53,630)  (55,575)  (76,462)
  Deposits for share repurchase  -   (10,860)  - 
  Proceeds from exercise of share options  1,898   2,913   2,514 
  Proceeds from the issuance of promissory note issued to Nuomi Inc.  -   60,884   - 
  Repayment of promissory note issued to Nuomi Inc.  -   -   (60,884)
             
Net cash used in financing activities  (51,732)  (2,638)  (134,832)
             
Net increase (decrease) in cash and cash equivalents  (93,825)  (70,804)  13,008 
Cash and cash equivalents at beginning of year  247,215   153,390   82,586 
Effect of exchange rate changes  -   -   (109)
Cash and cash equivalents at end of year $153,390  $82,586  $95,485 

RENREN INC.

 

Additional Information - Financial Statement Schedule I

Condensed Financial Information of Parent Company

NOTES TO FINANCIAL STATEMENTS

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.BASIS FOR PREPARATION

 

The condensed financial information of the Parent Company has been prepared using the same accounting policies as set out in the Group’sCompany’s consolidated financial statements except that the Parent Company used the equity method to account for investments in its subsidiaries and VIEs.VIE.

 

The condensed financial information is provided since the restricted net assets of the Group’sCompany’s subsidiaries, VIEsVIE and VIEs’VIE’s subsidiaries were $435,999, over 25% of the consolidated net assets of the GroupCompany as of December 31, 2014.2017.

 

2.INVESTMENTS IN SUBSIDIARIES, VIESVIE AND VIES’VIE’S SUBSIDIARIES

 

The Parent Company and its subsidiaries, VIEs and VIEs' subsidiaries were included in the consolidated financial statements where inter-company balances and transactions were eliminated upon consolidation. For purpose of the Parent Company’s stand-alone financial statements, its investments in subsidiaries, VIEs and VIEs' subsidiaries were reported using the equity method of accounting. The Parent Company’s share of loss from its subsidiaries, VIEs and VIEs' subsidiaries were reported as share of loss of subsidiaries, VIEs and VIEs' subsidiaries in the accompanying Parent Company financial statements. Ordinarily under the equity method, an investor in an equity method investee would cease to recognize its share of the losses of an investee once the carrying value of the investment has been reduced to nil$nil absent an undertaking by the investor to provide continuing support and fund losses. For the purpose of this Schedule I, the Parent Company has continued to reflect its share, based on its proportionate interest, of the losses of subsidiaries, VIEs and VIEs' subsidiaries regardless of the carrying value of the investment even though the Parent Company is not obligated to provide continuing support or fund losses.

 

Japan Macro Opportunities

Offshore Partners, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2012

FJ-1
F- 104

 

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2012
(Expressed in U.S. dollars)

ASSETS    
     
INVESTMENT IN JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P. (the “Master Fund”) — at fair value $77,319,518 
     
CASH  42,686 
     
OTHER ASSETS  1,326 
     
TOTAL $77,363,530 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
CAPITAL WITHDRAWALS PAYABLE $42,686 
     
ACCRUED EXPENSES  27,281 
     
PARTNERS’ CAPITAL  77,293,563 
     
TOTAL $77,363,530 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-2

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED LOSS ON INVESTMENTS ALLOCATED FROM MASTER FUND:    
Realized loss on derivative instruments and securities $(25,119,745)
Net change in unrealized depreciation on derivative instruments and securities  (16,093,777)
     
Realized and unrealized loss on derivative instruments and securities allocated from Master Fund  (41,213,522)
     
NET INVESTMENT LOSS ALLOCATED FROM MASTER FUND:    
Interest income  12 
Management fees  (1,121,686)
Professional, administrator and other expenses  (281,127)
     
Net investment loss allocated from Master Fund  (1,402,801)
     
PARTNERSHIP EXPENSES — Other expenses  34,499 
     
NET INVESTMENT LOSS  (1,437,300)
     
DECREASE IN PERFORMANCE DISTRIBUTION AT MASTER FUND  485,357 
     
NET DECREASE IN PARTNERS’ CAPITAL RESULTING FROM OPERATIONS $(42,165,465)

See notes to financial statements and attached financial statements of the Master Fund.

FJ-3

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

  General  Limited    
  Partner  Partners  Total 
          
PARTNERS’ CAPITAL — January 1, 2012 $-  $98,404,685  $98,404,685 
             
Capital contributions  -   24,340,000   24,340,000 
             
Capital withdrawals  -   (3,285,657)  (3,285,657)
             
Net decrease in partners’ capital resulting from operations  -   (42,165,465)  (42,165,465)
             
PARTNERS’ CAPITAL — December 31, 2012 $-  $77,293,563  $77,293,563 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-4

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

CASH FLOWS FROM OPERATING ACTIVITIES:    
Net decrease in partners’ capital resulting from operations $(42,165,465)
Adjustments to reconcile net decrease in partners’ capital resulting from operations to net cash used in operating activities:    
Net investment loss allocated from Master Fund  1,402,801 
Net change in unrealized depreciation on derivative instruments and securities allocated from Master Fund  16,093,777 
Realized loss on derivative instruments and securities allocated from Master Fund  25,119,745 
Decrease in performance distribution at Master Fund  (485,357)
Contributions to Master Fund  (24,340,000)
Withdrawals from Master Fund  3,303,628 
Decrease in receivable from Master Fund  1,993,703 
Decrease in other assets  1,750 
Increase in accrued expenses  15,281 
     
Net cash used in operating activities  (19,060,137)
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Capital contributions, including decrease in capital contributions received in advance of $10,000,000  14,340,000 
Capital withdrawals, including decrease in capital withdrawals payable of $1,965,633  (5,251,290)
     
Net cash provided by financing activities  9,088,710 
     
NET CHANGE IN CASH AND CASH EQUIVALENTS  (9,971,427)
     
CASH AND CASH EQUIVALENTS — Beginning of year  10,014,113 
     
CASH AND CASH EQUIVALENTS — End of year $42,686 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-5

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.
(A Cayman Islands Exempted Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Offshore Partners, L.P. (the “Partnership”) is a Cayman Islands exempted limited partnership organized on March 22, 2010, which began operations on July 9, 2010. The limited partnership agreement (the “Partnership Agreement”) was most recently amended and restated on August 1, 2011. The Partnership is registered under the Mutual Funds Law of the Cayman Islands. The Partnership has elected to be taxed as a corporation from a U.S. federal income tax perspective. The investment objective of the Partnership is to achieve capital appreciation through investments in public and private securities and other financial instruments. This investment strategy is executed solely through an investment in Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) (a Cayman Islands Exempted Limited Partnership). Japan Macro Opportunities Partners, L.P. a Delaware limited partnership (the “Onshore Fund”), also invests in the Master Fund. As of December 31, 2012, the Partnership owns approximately 57% of the Master Fund.

Hayman Offshore Management, Inc. is the general partner (the “General Partner”) of the Partnership, and a general partner of the Master Fund. Hayman Capital Management L.P. is the managing general partner of the Master Fund (the “Managing General Partner”). Hayman Advisors SLP, L.P., an affiliate of the General Partner, was designated by the General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2012, the General Partner had no partner capital balance in the Partnership.

Equinoxe Alternative Investment Services (Bermuda) Ltd. (“Equinoxe”) performs various administrative services for the Partnership.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying financial statements are presented using accounting principles generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

Investment in Master Fund — The Partnership’s investment in the Master Fund is valued at fair value as determined by the General Partner based on the partners’ capital balance reflected in the financial statements of the Master Fund. The performance of the Partnership is directly affected by the performance of the Master Fund. The financial statements of the Master Fund, which are an integral part of these financial statements, are attached.

Income and Expense Recognition — The Partnership’s pro-rata share of income and expense and realized and unrealized gain and loss from its direct investment in the Master Fund are included in their appropriate revenue and expense categories in the Partnership’s Statement of Operations. In addition, the Partnership accrues its own direct expenses.

FJ-6

Cash and Cash Equivalents — The Partnership defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less. Additional information on cash receipts and payments is presented in the Statement of Cash Flows.

Income Taxes — The Partnership is registered as an exempted limited partnership pursuant to the Exempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Partnership has also received an undertaking from the Cayman Islands’ government that, for a period of 50 years from May 11, 2010, the Partnership will be exempt from taxation in the Cayman Islands. The only taxes payable by the Partnership on its income are withholding taxes applicable to certain income.

The Partnership determines whether a tax position of the Partnership is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Partnership reviews and evaluates tax positions in the jurisdictions in which the Partnership operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review management concluded that, the Partnership’s tax returns will remain open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan, Cayman Islands and foreign jurisdictions where the Partnership and Master Fund makes significant investments, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). The Partnership’s tax returns will remain open for examination by tax authorities for a period of three years from when they are filed. Accordingly, the Partnership’s 2010 and 2011 tax returns remain open for examination. The Partnership is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

Capital Contributions, Withdrawals and Allocation of Partnership Profits and Losses — Capital contributions received at each closing are maintained in special memorandum accounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). A new Tranche is established at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche. The Partnership is a single legal entity, and the Tranches are not separate legal entities. As of December 31, 2012, the Partnership participated in 16 Tranches in the Master Fund — A, D to L, O to S, and U. The table below summarizes the contributions and withdrawals by Tranche during the year ended December 31, 2012:

Tranche Contributions  Withdrawals 
       
A $-  $1,095,654 
G  -   2,190,003 
K  2,500,000   - 
R  10,000,000   - 
S  11,340,000   - 
U  500,000   - 
         
  $24,340,000  $3,285,657 

Capital withdrawals are permitted at the end of each quarter after a limited partner has held a tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. A withdrawal fee of $55,864 charged to a limited partner that withdrew from the Partnership during the year ended December 31, 2012, is reported as a reduction in the withdrawals of Tranche A and was allocated pro-rata among the remaining Limited Partners in Tranche A. The General Partner does not charge a withdrawal fee when the partners in a Tranche are all affiliated.

FJ-7

Using the net asset value from the close, subsequent to the withdrawal request, the General Partner will determine the net asset value of the tranche and segregate the pro-rata portion of each asset in the tranche for the benefit of the withdrawing limited partner. The General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

The profits and losses of each Tranche of the Partnership are allocated to each partner based upon the amount of such partner’s capital balance of each Tranche as of the beginning of each month.

Indemnities — The General Partner on behalf of the Partnership enters into certain contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had any prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

3.FAIR VALUE MEASUREMENTS

The Partnership uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Partnership has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The General Partner believes the most relevant fair value disclosure relates to the Master Fund’s investment portfolio and can be found in Note 3 of the Master Fund’s financial statements, which are attached to these statements.

FJ-8

4.RELATED-PARTY TRANSACTIONS, INCLUDING MANAGEMENT AND PERFORMANCE DISTRIBUTION

Management fees and the performance distributions occur at the Master Fund level. During the year ended December 31, 2012, the Partnership was allocated management fees of $1,121,686. As of December 31, 2012, there is no accrued performance distribution payable to the Special Limited Partner with respect to the Partnership (based on a hypothetical liquidation of the Master Fund). A decrease in the performance distribution of $485,357 to the Special Limited Partner was recorded at the Master Fund, for the year ended December 31, 2012. The Special Limited Partner of the Master Fund has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed aggregate capital contributions to all Tranches made by such partner.

As of December 31, 2012, two limited partners advised by a single investment manager, unaffiliated with the General Partner, owned approximately 32.9% of the Partnership. Their interests represent approximately 18.7% of the partners’ capital of the Master Fund.

The Partnership has investor concentrations as discussed above and could be materially affected by their actions. Due to the nature of the master fund/feeder fund structure, the Partnership could be materially affected by contributions or withdrawals of the Master Fund’s interests made by investors in the Onshore Fund.

5.FINANCIAL HIGHLIGHTS

The following are the Partnership’s financial highlights, by Tranche, for the year ended December 31, 2012. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2,3 
    Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
                      
Tranche A  (49.16)%  -%  (49.16)%  (1.73)%  - %   (1.73)%  (1.73)%
Tranche D  (34.72)  -   (34.72)  (1.82)  -   (1.82)  (1.82)
Tranche E  (55.50)  -   (55.50)  (1.90)  -   (1.90)  (1.90)
Tranche F  (45.84)  -   (45.84)  (1.85)  -   (1.85)  (1.85)
Tranche G  (51.11)  -   (51.11)  (1.76)  -   (1.76)  (1.76)
Tranche H  (46.07)  -   (46.07)  (1.80)  -   (1.80)  (1.80)
Tranche I  (40.21)  -   (40.21)  (1.77)  -   (1.77)  (1.77)
Tranche J  (38.62)  -   (38.62)  (1.77)  -   (1.77)  (1.77)
Tranche K  (27.56)  -   (27.56)  (1.74)  -   (1.74)  (1.74)
Tranche L  (62.70)  -   (62.70)  (1.96)  -   (1.96)  (1.96)
Tranche O  (25.26)  1.67   (23.59)  (1.78)  3.11   1.34   (1.78)
Tranche P  (17.98)  1.47   (16.51)  (1.76)  2.33   0.57   (1.76)
Tranche Q  (25.19)  -   (25.19)  (1.76)  -   (1.76)  (1.76)
Tranche R  (30.17)  -   (30.17)  (1.76)  -   (1.76)  (1.76)
Tranche S  (27.40)  -   (27.40)  (1.78)  -   (1.78)  (1.78)
Tranche U  22.81   -   22.81   (1.70)  -   (1.70)  (1.70)

FJ-9

1Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return has not been annualized for those Tranches created during the year.

2Average partners’ capital has been computed based on monthly valuations. Ratios have been annualized for those Tranches created during the year. Performance distribution ratios have not been annualized.

3Includes the proportionate share of the Partnership’s income and expenses allocated from the Master

Fund.

6.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 27, 2013, the date these financial statements were available to be issued. Subsequent to December 31, 2012, the Partnership issued Tranches W and X following the receipt of capital contributions of approximately $30.3 million. The Partnership also received additional contributions from existing tranches of $4.5 million. The Partnership experienced significant, positive performance from January 1, 2013 through March 27, 2013 due primarily to the devaluation of the Japanese Yen relative to the United States Dollar during the same period.

* * * * * *

FJ-10

Japan Macro Opportunities

Master Fund, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2012

FJ-11

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2012
(Expressed in U.S. dollars)

ASSETS    
     
DERIVATIVE INSTRUMENTS — At fair value (cost $158,321,667) $93,135,952 
     
SECURITIES — At fair value (cost $42,494,974)  42,511,790 
     
CASH AND CASH EQUIVALENTS  785,984 
     
OTHER ASSETS  80,605 
     
TOTAL $136,514,331 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
ACCRUED EXPENSES $78,911 
     
PARTNERS’ CAPITAL  136,435,420 
     
TOTAL $136,514,331 

See notes to financial statements.

FJ-12

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
CONDENSED SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 2012
(Expressed in U.S. dollars)

  Fair Value 
DERIVATIVE INSTRUMENTS (68.3% of partners’ capital):    
     
Interest rate swaptions — Japanese LIBOR (10.0% of partners’ capital):    
1 year swaptions with maturities (January 2013–December 2013) $4,700,560 
2 year swaptions maturing July 2013  23,931 
3 year swaptions with maturities (July 2013–July 2015)  8,986,408 
     
Total interest rate swaptions — Japanese LIBOR (cost $56,007,453)  13,710,899 
     
Foreign currency options — Japanese Yen (58.3% of partners’ capital):    
1 year options with maturities (January 2013–December 2013)  30,940,538 
2 year swaptions maturing July 2013  917,658 
3 year options with maturities (July 2013–July 2015)  47,566,857 
     
Total foreign currency options — Japanese Yen (cost $102,314,214)  79,425,053 
     
DERIVATIVE INSTRUMENTS — (cost $158,321,667) $93,135,952 
     
SECURITIES - US GOVERNMENT OBLIGATIONS (31.2% of partners’ capital) —    
$42,519,000 US Treasury bills 6-month original maturity due March 21-April 25, 2013 (cost $42,494,974) $42,511,790 

See notes to financial statements.

FJ-13

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED LOSSES ON DERIVATIVE INSTRUMENTS AND SECURITIES:    
Net realized losses on derivative instruments and securities $(53,056,157)
Net change in unrealized depreciation on derivative instruments and securities  (14,695,408)
     
Net realized and unrealized losses on derivative instruments and securities  (67,751,565)
     
INVESTMENT INCOME — Interest  18 
     
EXPENSES:    
Management fees  1,840,460 
Professional, administrator and other  466,624 
     
Total expenses  2,307,084 
     
NET INVESTMENT LOSS  (2,307,066)
     
NET DECREASE IN PARTNERS’ CAPITAL RESULTING FROM OPERATIONS $(70,058,631)

See notes to financial statements.

FJ-14

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

        Japan Macro    
  Special  Japan Macro  Opportunities    
  Limited  Opportunities  Offshore    
  Partner  Partners, L.P.  Partners, L.P.  Total 
             
PARTNERS’ CAPITAL — January 1, 2012 $793,774  $71,846,690  $98,414,112  $171,054,576 
                 
Capital contributions  -   22,110,000   24,340,000   46,450,000 
                 
Capital withdrawals  -   (7,706,897)  (3,303,628)  (11,010,525)
                 
Net decrease in partners’ capital resulting from operations  -   (27,442,308)  (42,616,323)  (70,058,631)
                 
Net accrued performance distribution (see Note 6)  (366,050)  (119,307)  485,357   - 
                 
PARTNERS’ CAPITAL — December 31, 2012 $427,724  $58,688,178  $77,319,518  $136,435,420 

See notes to financial statements.

FJ-15

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

CASH FLOWS FROM OPERATING ACTIVITIES:    
Net decrease in partners’ capital resulting from operations $(70,058,631)
Adjustments to reconcile net decrease in partners capital resulting from operations to net cash used in operating activities:    
Payments for derivative instruments  (61,595,967)
Proceeds from sales of derivative instruments  2,152,481 
Payments for securities  (199,991,699)
Proceeds from sales of securities  157,607,768 
Net realized losses on derivative instruments and securities  53,056,157 
Net change in unrealized depreciation on derivative instruments and securities  14,695,408 
Decrease in other assets  107,473 
Decrease in accrued expenses  (20,371)
     
Net cash used in operating activities  (104,047,381)
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Capital contributions  46,450,000 
Capital withdrawals, net of decrease in capital withdrawals payable of $1,993,703  (13,004,228)
     
Net cash provided by financing activities  33,445,772 
     
NET CHANGE IN CASH AND CASH EQUIVALENTS  (70,601,609)
     
CASH AND CASH EQUIVALENTS — Beginning of year  71,387,593 
     
CASH AND CASH EQUIVALENTS — End of year $785,984 

See notes to financial statements.

FJ-16

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.
(A Cayman Islands Exempted Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2012
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) is a Cayman Islands exempted limited partnership organized under the laws of the Cayman Islands. In March 2012, the Master Fund registered with the Cayman Islands Monetary Authority (“CIMA”) pursuant to an amendment to the Mutual Funds Law of the Cayman Islands which requires “master funds” as defined therein to register with and be regulated by CIMA. The investment objective of the Master Fund is to generate superior risk-adjusted rates of return through investments in the Japanese foreign currency exchange and credit markets. To achieve its investment objective, the Master Fund invests in fully paid for fixed-income and foreign exchange securities and derivative products in the Japanese capital markets within a broad global macroeconomic strategy focusing on the risks to Japanese interest rate and currency volatility contained within the market for sovereign credit.

The Master Fund receives capital contributions from Japan Macro Opportunities Partners, L.P. (the “Onshore Fund”) and Japan Macro Opportunities Offshore Partners, L.P. (the “Offshore Fund”). Hayman Capital Management, L.P. is the managing general partner for the Master Fund (the “Managing General Partner”) and is the general partner of the Onshore Fund. Hayman Offshore Management, Inc., a Cayman Islands exempted company, serves as the general partner of the Master Fund and Offshore Fund (the “General Partner”). Hayman Advisors SLP, L.P., an affiliate of the Managing General Partner, was designated by the Managing General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2012, the General Partner and the Managing General Partner had no partner capital balance in the Master Fund. The Master Fund, pursuant to an amended and restated agreement of the Limited Partnership (the “Agreement”), was formed on March 22, 2010 and began operations on July 9, 2010.

The Master Fund operates under a “master/feeder structure” whereby the Onshore Fund and the Offshore Fund invest substantially all of their investable assets in the Master Fund. As of December 31, 2012, the Onshore Fund and the Offshore Fund owned approximately 43% and 57% of the Master Fund, respectively.

Equinoxe Alternative Investment Services (Bermuda) Ltd. (“Equinoxe”) performs various administrative services for the Master Fund.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying financial statements are presented using accounting principles generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

FJ-17

Cash and Cash Equivalents — The Master Fund defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less. As of December 31, 2012, $785,984 is invested in treasury backed money market funds offered by JP Morgan. Additional information on cash receipts and payments is presented in the statement of cash flows.

Derivative Instruments — Derivative instruments are valued at fair value in accordance with the Managing General Partner’s valuation policy. Valuations are obtained from third-party pricing services which rely on observable market inputs and market information received from dealers, or brokers, when available and considered reliable.

Foreign Currency Translations — Assets and liabilities denominated in foreign currencies are translated into Unites States dollar amounts at the period-end exchange rates. Purchases and sales of investments, and income and expenses that are denominated in foreign currencies are translated into U.S. dollar amounts on the transaction date. Adjustments arising from foreign currency transactions are reflected in the Statement of Operations.

The Master Fund does not isolate the portion of the operating results that are due to the changes in foreign exchange rates. Such fluctuations are included in unrealized depreciation on derivative instruments in the Statement of Operations. Investments in Japanese Yen denominated securities have additional risks not present in securities denominated in U.S. dollars.

Income and Expense Recognition — Interest is recorded on the accrual basis. Operating expenses are recorded on the accrual basis as incurred. Realized gains and losses on derivative instruments and securities are recorded on an identified cost basis.

Income Taxes — The limited partners of the Master Fund are individually liable for taxes on their share of Master Fund taxable income.

The Master Fund determines whether a tax position of the Master Fund is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Master Fund reviews and evaluates tax positions in the jurisdictions in which the Master Fund operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review, management concluded that the Master Fund’s tax returns will be open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan and the Cayman Islands, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). Accordingly, the Master Fund’s 2010 and 2011 tax returns remain open for examination. The Master Fund is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

The Master Fund has been registered as an exempted limited partnership pursuant to the Exempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Master Fund has also received an undertaking from the Cayman Islands’ Government that, for a period of 50 years from May 11, 2010, the Master Fund will be exempt from taxation in the Cayman Islands. The only taxes payable by the Master Fund on its income are withholding taxes applicable to certain income.

Indemnities — The Managing General Partner on behalf of the Master Fund enters into certain contracts that contain a variety of indemnifications. The Master Fund’s maximum exposure under these arrangements is unknown. However, the Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

FJ-18

Capital Contributions, Withdrawals, and Income/Expenses Allocations — Capital contributions received at each closing are maintained in special memorandum accounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). The Managing General Partner establishes a new Tranche at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche.

The Master Fund is a single legal entity, and the Tranches are not separate legal entities. Since commencement of operations, the Managing General Partner has established 22 Tranches. As of December 31, 2012, 20 Tranches are in existence. The table below summarizes investor contributions and withdrawals for each for the year ended December 31, 2012. Withdrawals of $55,656 were made to pay for feeder fund level expenses.

Tranche Contributions  Withdrawals 
       
A $-  $944,580 
B  -   5,704,602 
D  -   2,429 
E  -   597 
F  -   2,078 
G  -   2,213,716 
H  -   6,170 
I  -   3,456 
J  -   1,756 
K  2,500,000   1,637 
L  -   1,527 
M  1,850,000   1,854,239 
N  260,000   262,534 
O  -   1,366 
P  -   2,113 
Q  -   922 
R  10,000,000   821 
S  11,340,000   863 
T  5,000,000   1,058 
U  5,500,000   1,405 
V  10,000,000   2,656 
         
  $46,450,000  $11,010,525 

Capital withdrawals are permitted at the end of each quarter after a limited partner has held a Tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. A withdrawal fee of $211,376 was recorded by the Master Fund during the year ended December 31, 2012, and is reported as a reduction in the withdrawals of Tranche A and was allocated pro-rata among the remaining Limited Partners in Tranche A. The General Partner does not charge a withdrawal fee for withdrawals from single Investor Tranches.

FJ-19

Using the net asset value from the close, subsequent to the withdrawal request, the General Partner will determine the net asset value of the Tranche and segregate the pro-rata portion of each asset in the Tranche for the benefit of the withdrawing limited partner. The General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

3.FAIR VALUE MEASUREMENTS

The Master Fund uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Master Fund has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Managing General Partner. The Managing General Partner considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Managing General Partner’s perceived risk of that instrument.

Investments in U.S. Government obligations are valued by a third-party pricing service using market observable data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data and are therefore classified as Level 2.

Most derivative instruments that are not exchange-traded are considered Level 2. These over-the-counter (OTC) derivatives, including interest rate swaptions and foreign currency options, are valued by a third-party pricing service using observable inputs, such as quotations received from brokers. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in the instrument, as well as, the availability and reliability of, observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of such inputs.

FJ-20

A valuation committee established by the Managing General Partner meets on a monthly basis to review and approve the valuation of the Master Fund’s investments, to ensure that the valuations are in accordance with the pricing policy adopted by the Managing General Partner and the methods described above.

As of December 31, 2012, the financial instruments carried on the Statement of Assets and Liabilities by caption and by level within the valuation hierarchy are presented in the table that follows. The financial instruments are further classified by geography within the Condensed Schedule of Investments.

  Assets at Fair Value as of December 31, 2012 
  Level 1  Level 2  Level 3  Total 
Cash equivalents $785,984  $-  $-  $785,984 
U.S. Government obligations  -   42,511,790   -   42,511,790 
Interest rate swaptions  -   13,710,899   -   13,710,899 
Foreign currency options  -   79,425,053   -   79,425,053 
Total $785,984  $135,647,742  $-  $136,433,726 

4.FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Derivative Contracts — In the normal course of business, the Master Fund enters into derivative financial instruments (“derivatives”). The derivatives in which the Master Fund invests are primarily interest rate swaptions and foreign currency options. Derivatives serve as a component of the Master Fund’s investment strategy and are utilized primarily to structure the portfolio or individual investments to economically match the investment objective of the Master Fund.

As of December 31, 2012, the derivative instruments carried on the Statement of Assets and Liabilities are presented in the table below. Fair value is presented in thousands.

Derivatives Not Accounted for Number of  Fair 
as Hedging Instruments Contracts  Value 
       
Interest rate swaption contracts  105  $13,711 
Foreign currency option contracts  314   79,425 
         
Total derivative instruments     $93,136 

The impact of these derivative instruments on the Statement of Operations is presented in the table below. All numbers are presented in thousands.

  Net Change in    
  Unrealized  Net Realized 
  Depreciation  Losses 
  on Derivative  on Derivative 
Derivatives Not Accounted for Instruments  Instruments 
as Hedging Instruments and Securities  and Securities 
       
Interest rate swaption contracts $(44,757) $(18,241)
Foreign currency option contracts  30,045   (34,926)
         
Total $(14,712) $(53,167)

FJ-21

For the year ended December 31, 2012, the volume of derivative transactions of the Master Fund was as follows:

  Contracts 
Derivatives not Accounted for Entered  Sold/ 
as Hedging Instruments Into  Expired 
       
Interest rate swaption contracts  61   51 
Foreign currency option contracts  127   100 
         
Total  188   151 

Swaptions — The Master Fund enters into swaptions in the normal course of pursing its investment objectives. Swaptions are used to create exposure for the Master Fund based on its directional view of interest rates. Swaptions are options that grant the holder the right to enter into an underlying swap. The underlying swaps of the Master Fund’s swaptions are interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Master Fund may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional principal amount. Swaptions are marked to market by a third-party pricing service and the change, if any, is recorded as a net change in unrealized appreciation or depreciation on derivative instruments in the Statement of Operations. When the swaption contract is terminated early, the Master Fund records a realized gain or loss. The risks of swaptions include changes in market conditions that affect the value of the contract or the cash flows and the possible inability of the counterparty to fulfill its obligations under the agreement. The Master Fund’s maximum risk of loss from counterparty credit risk is the market value of the positions held by the counterparty. This risk is mitigated by having a master netting arrangement between the Master Fund and the counterparty and by the posting of collateral by the counterparty to the Master Fund to cover a portion of the Master Fund’s exposure to the counterparty.

Options — The Master Fund holds foreign currency denominated interest rate swaptions and the value of these swaptions may decrease if the foreign currency depreciates in value. The Master Fund purchases options for the purpose mitigating foreign exchange risk and to enhance returns on its portfolio. Options are contracts that grant the holder, in return for payment of the purchase price (the “premium”) of the option, the right to either purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date, from or to the writer of the option.

The Master Fund’s focus is to execute an investment strategy that is primarily concentrated in Japanese LIBOR interest rate swaptions and Japanese Yen foreign currency options, and as a result will potentially be materially impacted by changes in the movement of Japanese LIBOR interest rates and the Japanese Yen.

5.DUE FROM (TO) BROKERS

The Master Fund does not clear its own derivative transactions. It has established accounts with other financial institutions for this purpose. This can, and often does, result in concentration of credit risk with one or more of these firms. Such risk, however, is mitigated by the obligation of U.S. financial institutions to comply with rules and regulations governing broker/dealers and futures commission merchants. These rules and regulations generally require maintenance of net capital, as defined, and segregation of customers’ funds and securities from holdings of the firm.

FJ-22

6.RELATED-PARTY TRANSACTIONS

The Master Fund pays the Managing General Partner, a management fee, as compensation for managing the business and affairs of the Master Fund, equal to 1.25% per annum of the capital account of each limited partner. Management fees are calculated and paid quarterly in advance as of the first day of each calendar quarter in accordance with the Agreement.

The Managing General Partner and the General Partner may reduce or waive the management fee for any individual investor.

The Agreement provides for a performance distribution to the Special Limited Partner at the time of distributions. Distributions attributable to a Tranche initially shall be allocated to the limited partners in that Tranche Pro Rata. Thereafter, distributions are to be allocated as follows:

i)First, to the limited partner until the limited partner has received an aggregate amount of distributions to the extent of their aggregate capital contributions to all Tranches;

ii)Second, 80% to the limited partners and 20% to the Special Limited Partner until aggregate distributions to the limited partner are equal to 10 times aggregate capital contributed by the limited partner to all Tranches;

iii)Thereafter, 65% to the limited partner and 35% to the Special Limited Partner.

The accrued performance distribution is calculated at the end of each period (based on a hypothetical liquidation of the Master Fund on such dates). As of December 31, 2012, the total accrued performance distribution to the Special Limited Partner pursuant to the Agreement would have been $427,724. For the year ended December 31, 2012, the net reduction in the performance distribution accrual to the Special Limited Partner was $366,050. The performance distribution accrual is calculated for each limited partner taking into consideration such partner’s aggregate contributions to all Tranches. The Special Limited Partner has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed aggregate capital contributions to all Tranches made by such partner.

The General Partner shall be paid an annual fee of $1,000 on January 1 of each year, which shall be charged proportionally among all Tranches based on the relative net asset value of each Tranche.

During the year ended December 31, 2012, the Managing General Partner paid $90,287 to the Master Fund to reimburse the Master Fund for a trading loss incurred by the Master Fund. This amount is included in net realized losses on derivative instruments and securities on the Statement of Operations.

FJ-23

7.FINANCIAL HIGHLIGHTS

The following are the Master Fund’s financial highlights, by Tranche, for the year ended December 31, 2012. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2: 
           Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
                      
Tranche A  (44.17)%  -%  (44.17)%  (1.73)%  -%  (1.73)%  (1.73)%
Tranche B  (60.82)  -   (60.82)  (1.02)  -   (1.02)  (1.02)
Tranche D  (34.68)  -   (34.68)  (1.77)  -   (1.77)  (1.77)
Tranche E  (54.47)  -   (54.47)  (1.86)  -   (1.86)  (1.86)
Tranche F  (45.81)  -   (45.81)  (1.81)  -   (1.81)  (1.81)
Tranche G  (51.11)  -   (51.11)  (1.76)  -   (1.76)  (1.76)
Tranche H  (46.04)  -   (46.04)  (1.75)  -   (1.75)  (1.75)
Tranche I  (40.17)  -   (40.17)  (1.72)  -   (1.72)  (1.72)
Tranche J  (38.59)  -   (38.59)  (1.73)  -   (1.73)  (1.73)
Tranche K  (27.53)  -   (27.53)  (1.70)  -   (1.70)  (1.70)
Tranche L  (62.68)  -   (62.68)  (1.92)  -   (1.92)  (1.92)
Tranche M  (20.07)  -   (20.07)  (1.70)  -   (1.70)  (1.70)
Tranche N  (32.88)  1.20   (31.68)  (1.75)  2.69   0.94   (1.75)
Tranche O  (25.23)  2.07   (23.16)  (1.73)  3.84   2.11   (1.73)
Tranche P  (17.94)  1.47   (16.47)  (1.71)  2.33   0.62   (1.71)
Tranche Q  (25.16)  -   (25.16)  (1.72)  -   (1.72)  (1.72)
Tranche R  (30.13)  -   (30.13)  (1.72)  -   (1.72)  (1.72)
Tranche S  (27.36)  -   (27.36)  (1.72)  -   (1.72)  (1.72)
Tranche T  (37.53)  -   (37.53)  (1.75)  -   (1.75)  (1.75)
Tranche U  22.84   -   22.84   (1.64)  -   (1.64)  (1.64)
Tranche V  21.48   (4.28)  17.20   (1.70)  (4.40)  (6.10)  (1.70)

1 Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return for tranches issued or withdrawn during the year have not been annualized.

2 Average partners’ capital has been computed based on monthly valuations. Ratios for Tranches issued during the year have been annualized. Ratios for Tranche B are not annualized, because a complete withdrawal occurred during the year. Performance distribution ratios have not been annualized.

8.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 27, 2013, the date these financial statements were available to be issued. Subsequent to December 31, 2012, the Master Fund has issued Tranches W and X, following the receipt of capital contributions of approximately $53.3 million. The Master Fund also received additional contributions from existing tranches of $30 million. The Master Fund experienced significant, positive performance from January 1, 2013 through March 27, 2013 due primarily to the devaluation of the Japanese Yen relative to the United States Dollar during the same period.

* * * * * *

FJ-24

Japan Macro

Opportunities Offshore

Partners, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2013, and

Independent Auditors’ Report

FJ-25

 

Deloitte & Touche
One Capital Place
P.O. Box 1787
Grand Cayman KY1-1109
CAYMAN ISLANDS
Tel: +1 345 949 7500
Fax:+1 345 949 8238
cayman@deloitte.com
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the General Partner of

Japan Macro Opportunities Offshore Partners, L.P.:

We have audited the accompanying financial statements of Japan Macro Opportunities Offshore Partners, L.P. (a Cayman Islands Exempted Limited Partnership) (the“Partnership”), which comprise the statement of assets and liabilities, as of December 31, 2013, and the related statements of operations, changes in partners’ capital and cash flows for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Partnership’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Partnership as of December 31, 2013, and the results of its operations, changes in its partners’ capital, and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche

March 26, 2014

Member firm of
Deloitte Touche Tohmatsu Limited

FJ-26

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2013
(Expressed in U.S. dollars)

ASSETS    
     
INVESTMENT IN JAPAN MACRO OPPORTUNITIESMASTER FUND, L.P. (the “Master Fund”) — At fair value $154,358,735 
     
CASH  107,856 
     
WITHDRAWALS RECEIVABLE FROM MASTER FUND  9,265,450 
     
TOTAL $163,732,041 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
CAPITAL DISTRIBUTIONS PAYABLE $9,296,470 
     
CAPITAL WITHDRAWALS PAYABLE  76,105 
     
ACCRUED EXPENSES  25,307 
     
PARTNERS’ CAPITAL  154,334,159 
     
TOTAL $163,732,041 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-27

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATEDFROM MASTER FUND:    
Realized gain on derivative instruments and securities $25,850,621 
Net change in unrealized appreciation/depreciation on derivativeinstruments and securities  101,789,651 
     
Realized and unrealized gain on derivative instruments and securitiesallocated from Master Fund  127,640,272 
     
NET INVESTMENT LOSS ALLOCATED FROM MASTER FUND:    
Interest expense  (64,668)
Management fees  (1,800,215)
Professional, administrator and other expenses  (321,220)
     
Net investment loss allocated from Master Fund  (2,186,103)
     
PARTNERSHIP EXPENSES — Other expenses  (49,136)
     
NET INVESTMENT LOSS  (2,235,239)
     
INCREASE IN PERFORMANCE DISTRIBUTION AT MASTER FUND  (13,914,913)
     
NET INCREASE IN PARTNERS’ CAPITAL RESULTING FROMOPERATIONS $111,490,120 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-28

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

  General  Limited    
  Partner  Partners  Total 
          
PARTNERS’ CAPITAL — January 1, 2013 $-  $77,293,563  $77,293,563 
             
Capital contributions  -   34,790,500   34,790,500 
             
Capital distributions  -   (60,207,624)  (60,207,624)
             
Capital withdrawals  -   (9,032,400)  (9,032,400)
             
Net increase in partners’ capital resultingfrom operations  -   111,490,120   111,490,120 
             
PARTNERS’ CAPITAL — December 31, 2013 $-  $154,334,159  $154,334,159 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-29

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

CASH FLOWS FROM OPERATING ACTIVITIES:    
Net increase in partners’ capital resulting from operations $111,490,120 
Adjustments to reconcile net increase in partners’ capital resulting fromoperations to net cash provided by operating activities:    
Net investment loss allocated from Master Fund  2,186,103 
Net change in unrealized appreciation/depreciation on derivative instrumentsand securities allocated from Master Fund  (101,789,651)
Realized gain on derivative instruments and securities allocated from Master Fund  (25,850,621)
Increase in performance distribution at Master Fund  13,914,913 
Contributions to Master Fund  (34,790,500)
Distributions from Master Fund  60,207,624 
Withdrawals from Master Fund  9,082,915 
Increase in withdrawals receivable from Master Fund  (9,265,450)
Decrease in other assets  1,326 
Decrease in accrued expenses  (1,974)
     
Net cash provided by operating activities  25,184,805 
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Capital contributions  34,790,500 
Capital distributions, net the increase in capital distributions payable of $9,296,470  (50,911,154)
Capital withdrawals, net the increase in capital withdrawals payable of $33,419  (8,998,981)
     
Net cash used in financing activities  (25,119,635)
     
NET CHANGE IN CASH AND CASH EQUIVALENTS  65,170 
     
CASH AND CASH EQUIVALENTS — Beginning of year  42,686 
     
CASH AND CASH EQUIVALENTS — End of year $107,856 
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —Cash paid for interest $64,671 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-30

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Offshore Partners, L.P. (the “Partnership”) is a Cayman Islands exempted limited partnership organized on March 22, 2010, which began operations on July 9, 2010. The limited partnership agreement (the “Partnership Agreement”) was most recently amended and restated on August 1, 2011. The Partnership is registered under the Mutual Funds Law of the Cayman Islands. The Partnership has elected to be taxed as a corporation from a U.S. federal income tax perspective. The investment objective of the Partnership is to achieve capital appreciation through investments in public and private securities and other financial instruments. This investment strategy is executed solely through an investment in Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) (a Cayman Islands Exempted Limited Partnership). Japan Macro Opportunities Partners, L.P. a Delaware limited partnership (the “Onshore Fund”), also invests in the Master Fund. As of December 31, 2013, the Partnership owns approximately 45% of the Master Fund, after the impact of the accrued performance distribution at December 31, 2013. See Note 4 Related-Party Transactions for additional details.

Hayman Offshore Management, Inc. is the general partner (the “General Partner”) of the Partnership, and a general partner of the Master Fund. Hayman Capital Management L.P. is the managing general partner of the Master Fund (the “Managing General Partner”). Hayman Advisors SLP, L.P., an affiliate of the General Partner, was designated by the General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2013, the General Partner had no partner capital balance in the Partnership.

Equinoxe Alternative Investment Services (Bermuda) Ltd. (“Equinoxe”) performs various administrative services for the Partnership.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting— The accompanying financial statements are presented using accountingprinciples generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

Investment in Master Fund— The Partnership’s investment in the Master Fund is valued at fair valueas determined by the General Partner based on the partners’ capital balance reflected in the financial statements of the Master Fund. The performance of the Partnership is directly affected by the performance of the Master Fund. The financial statements of the Master Fund, which are an integral part of these financial statements, are attached.

FJ-31

Income and Expense Recognition— The Partnership’s pro-rata share of income and expense andrealized and unrealized gain and loss from its direct investment in the Master Fund are included in their appropriate revenue and expense categories in the Partnership’s Statement of Operations. In addition, the Partnership accrues its own direct expenses.

Cash and Cash Equivalents— The Partnership defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less. Additional information on cash receipts and payments is presented in the Statement of Cash Flows.

Income Taxes— The Partnership is registered as an exempted limited partnership pursuant to theExempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Partnership has also received an undertaking from the Cayman Islands’ government that, for a period of 50 years from May 11, 2010, the Partnership will be exempt from taxation in the Cayman Islands. The only taxes payable by the Partnership on its income are withholding taxes applicable to certain income.

The Partnership determines whether a tax position of the Partnership is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Partnership reviews and evaluates tax positions in the jurisdictions in which the Partnership operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review management concluded that, the Partnership’s tax returns will remain open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan, Cayman Islands and foreign jurisdictions where the Partnership and Master Fund make significant investments, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). The Partnership’s tax returns will remain open for examination by tax authorities for a period of three years from when they are filed. Accordingly, the Partnership’s 2010, 2011, and 2012 tax returns remain open for examination. The Partnership is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

FJ-32

Capital Contributions, Distributions, Withdrawals and Allocation of Partnership Profits and Losses— Capital contributions received at each closing are maintained in special memorandumaccounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). A new Tranche is established at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche. The Partnership is a single legal entity, and the Tranches are not separate legal entities. As of December 31, 2013, the Partnership participated in 15 Tranches in the Master Fund — E, G-L, O-S, U, W, and X. The table below summarizes the contributions, distributions, and withdrawals by Tranche during the year ended December 31, 2013:

Tranche Contributions  Distributions  Withdrawals 
          
A $-  $5,779,894  $(7,316)
D  -   1,589,441   - 
E  4,454,500   7,691,378   - 
F  -   1,573,303   - 
G  -   -   1,083,291 
H  -   393,180   99,537 
I  -   3,172,155   1,387,836 
J  -   9,335,583   - 
L  -   3,543,000   - 
O  -   2,719,133   486,885 
P  -   19,158,238   - 
Q  -   4,722,651   5,588,522 
U  -   529,668   - 
W  20,000,000   -   - 
X  10,336,000   -   393,645 
             
  $34,790,500  $60,207,624  $9,032,400 

Capital withdrawals are permitted at the end of each quarter after a limited partner has held a tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. Withdrawal fees of $75,000 were charged to limited partners that withdrew from the Partnership during the year ended December 31, 2013. Withdrawal fees are reported as a reduction in withdrawals of Tranches A, H, O, and X and were allocated pro-rata among the remaining Limited Partners in the respective tranches across the Partnership and the Onshore Fund. The General Partner does not charge a withdrawal fee when the partners in a Tranche are all affiliated.

Using the net asset value from the close, subsequent to the withdrawal request, the General Partner will determine the net asset value of the tranche and segregate the pro-rata portion of each asset in the tranche for the benefit of the withdrawing limited partner. The General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

The profits and losses of each Tranche of the Partnership are allocated to each partner based upon the amount of such partner’s capital balance of each Tranche as of the beginning of each month.

FJ-33

Indemnities— The General Partner on behalf of the Partnership enters into certain contracts thatcontain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had any prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

3.FAIR VALUE MEASUREMENTS

The Partnership uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1— Valuations based on unadjusted quoted prices in active markets for identical assets orliabilities that the Partnership has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2— Valuations based on quoted prices in markets that are not active or for which all significantinputs are observable, either directly or indirectly.

Level 3— Valuations based on inputs that are unobservable and significant to the overall fair valuemeasurement.

The General Partner believes the most relevant fair value disclosure relates to the Master Fund’s investment portfolio and can be found in Note 3 of the Master Fund’s financial statements, which are attached to these statements.

4.RELATED-PARTY TRANSACTIONS, INCLUDING MANAGEMENT AND PERFORMANCE DISTRIBUTION

Management fees and the performance distributions occur at the Master Fund level. During the year ended December 31, 2013, the Partnership was allocated management fees of $1,800,215. For the year ended December 31, 2013, the performance distribution paid to the special limited partner was $137,093. As of December 31, 2013, the accrued performance distribution payable to the Special Limited Partner with respect to the Partnership (based on a hypothetical liquidation of the Master Fund) is $13,777,820. The Special Limited Partner of the Master Fund has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed aggregate capital contributions to all Tranches made by such partner.

FJ-34

5.FINANCIAL HIGHLIGHTS

The following are the Partnership’s financial highlights, by Tranche, for the year ended December 31, 2013. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2,3: 
           Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
                      
Tranche E  169.51%  (2.63)%  166.88%  (1.40)%  (1.32)%  (2.72)%  (1.40)%
Tranche F  161.74   -   161.74   (1.33)  -   (1.33)  (1.33)
Tranche G  86.52   -   86.52   (1.47)  -   (1.47)  (1.47)
Tranche H  105.77   -   105.77   (1.40)  -   (1.40)  (1.40)
Tranche I  130.89   2.52   133.41   (1.32)  -   (1.32)  (1.32)
Tranche J  188.44   (14.89)  173.55   (1.43)  (13.99)  (15.42)  (1.43)
Tranche K  120.53   (8.97)  111.56   (1.35)  (6.36)  (7.71)  (1.35)
Tranche L  225.49   -   225.49   (1.37)  -   (1.37)  (1.37)
Tranche O  152.76   (25.74)  127.02   (1.51)  (15.13)  (16.64)  (1.51)
Tranche P  179.44   (29.22)  150.22   (1.56)  (17.72)  (19.28)  (1.56)
Tranche Q  191.35   (23.32)  168.03   (1.51)  (11.76)  (13.27)  (1.51)
Tranche R  136.55   (18.67)  117.88   (1.51)  (12.27)  (13.78)  (1.51)
Tranche S  96.93   (11.84)  85.09   (1.47)  (8.46)  (9.93)  (1.47)
Tranche U  189.63   (36.72)  152.91   (1.49)  (19.34)  (20.83)  (1.49)
Tranche W  40.09   (8.02)  32.07   (1.53)  (7.96)  (9.49)  (1.53)
Tranche X  54.95   (13.24)  41.71   (1.51)  (10.39)  (11.90)  (1.51)

1Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return has not been annualized for those Tranches created during the year.

2Average partners’ capital has been computed based on monthly valuations. Ratios have been annualized for those Tranches created during the year. Performance distribution ratios have not been annualized.

3Includes the proportionate share of the Partnership’s income and expenses allocated from the Master Fund.

6.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 26, 2014, the date these financial statements were available to be issued. Subsequent to December 31, 2013, the Partnership issued Tranche Y following the receipt of capital contributions of approximately $40 million and paid out distributions of approximately $38 million and withdrawals of $1.3 million, of which $9.3 million and $.1 million were accrued, respectively, at year-end.

* * * * * *

FJ-35

Japan Macro Opportunities

Master Fund, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2013, and

Independent Auditors’ Report

FJ-36

 

Deloitte & Touche
One Capital Place
P.O. Box 1787
Grand Cayman KY1-1109
CAYMAN ISLANDS
Tel: +1 345 949 7500
Fax:+1 345 949 8238
cayman@deloitte.com
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the General Partner of

Japan Macro Opportunities Master Fund, L.P.:

We have audited the accompanying financial statements of Japan Macro Opportunities Master Fund, L.P. (a Cayman Islands Exempted Limited Partnership) (the “Master Fund”), which comprise the statement of assets and liabilities, including the condensed schedule of investments, as of December 31, 2013, and the related statements of operations, changes in partners’ capital, and cash flows for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Master Fund’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Master Fund as of December 31, 2013, and the results of its operations, changes in its partners’ capital and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche

March 26, 2014

Member firm of
Deloitte Touche Tohmatsu Limited

FJ-37

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2013
(Expressed in U.S. dollars)

ASSETS    
     
DERIVATIVE INSTRUMENTS — At fair value (cost $192,014,691) $298,660,977 
     
SECURITIES — At fair value (cost $125,758,605)  125,769,866 
     
CASH AND CASH EQUIVALENTS  131,346,327 
     
DUE FROM BROKERS  30,691,445 
     
OTHER ASSETS  28,808 
     
TOTAL $586,497,423 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
COLLATERAL PAYABLE $177,910,815 
     
ACCRUED EXPENSES  77,252 
     
CAPITAL DISTRIBUTIONS PAYABLE  47,296,714 
     
CAPITAL WITHDRAWALS PAYABLE  18,162,516 
     
PARTNERS’ CAPITAL  343,050,126 
     
TOTAL $586,497,423 

See notes to financial statements.

FJ-38

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

CONDENSED SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 2013
(Expressed in U.S. dollars)

  Fair Value 
    
DERIVATIVE INSTRUMENTS (87.1% of partners’ capital):    
Interest rate swaptions — Japanese LIBOR (2.8% of partners’ capital):    
Swaptions with original maturities less than 1 year (January 2014–May 2014) $269,736 
Swaptions with original maturities of 3 years (January 2014–May 2016)  9,337,578 
     
Total interest rate swaptions — Japanese LIBOR (cost $46,620,884)  9,607,314 
     
Foreign currency options — Japanese Yen (84.3% of partners’ capital):    
Options with original maturities of 1–2 years (February 2014–June 2015)  120,086,109 
Options with original maturities of 2–3 years (March 2014–June 2016)  168,967,554 
     
Total foreign currency options — Japanese Yen (cost $145,393,807)  289,053,663 
     
DERIVATIVE INSTRUMENTS — (cost $192,014,691) $298,660,977 
     
SECURITIES — US GOVERNMENT OBLIGATIONS (36.7% of partners’ capital)    
US Treasury bills 6–12 month original maturities:    
$42,797,000 US Treasury bills 6–month original maturity (Feb. 2014–March 2014) $42,792,154 
$53,506,000 US Treasury bills 12–month original maturity (Jan. 2014–May 2014)  53,505,898 
     
Total US Treasury bills 6–12 month original maturities  96,298,052 
     
US Treasury notes 5–7 year original maturities (August 2017–Nov. 2020)  4,668,487 
     
US Treasury inflation-indexed bonds 5–30 year original maturities(April 2017–April 2028)  24,803,327 
     
SECURITIES — US GOVERNMENT OBLIGATIONS — (cost $125,758,605) $125,769,866 

See notes to financial statements.

FJ-39

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED GAINS ON DERIVATIVE    
INSTRUMENTS AND SECURITIES:    
Net realized gains on derivative instruments and securities $92,192,671 
Net change in unrealized appreciation/depreciation on derivativeinstruments and securities  171,826,438 
     
Net realized and unrealized gains on derivative instruments and securities  264,019,109 
     
EXPENSES:    
Management fees  3,963,867 
Interest expense  121,014 
Professional, administrator and other  706,478 
     
Total expenses  4,791,359 
     
NET INVESTMENT LOSS  (4,791,359)
     
NET INCREASE IN PARTNERS’ CAPITAL RESULTING FROM OPERATIONS $259,227,750 

See notes to financial statements.

FJ-40

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

        Japan Macro    
  Special  Japan Macro  Opportunities    
  Limited  Opportunities  Offshore    
  Partner  Partners, L.P.  Partners, L.P.  Total 
             
PARTNERS’ CAPITAL — January 1, 2013 $427,724  $58,688,178  $77,319,518  $136,435,420 
                 
Capital contributions  -   98,629,500   34,790,500   133,420,000 
                 
Capital withdrawals  (3,175,444)  (20,150,864)  (9,082,915)  (32,409,223)
                 
Capital distributions  (415,462)  (93,000,735)  (60,207,624)  (153,623,821)
                 
Net increase in partners’ capital resulting from operations  -   133,773,581   125,454,169   259,227,750 
                 
Performance distribution (see Note 7)  33,519,860   (19,604,947)  (13,914,913)  - 
                 
PARTNERS’ CAPITAL — December 31, 2013 $30,356,678  $158,334,713  $154,358,735  $343,050,126 

See notes to financial statements.

FJ-41

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

CASH FLOWS FROM OPERATING ACTIVITIES:    
Net increase in partners’ capital resulting from operations $259,227,750 
Adjustments to reconcile net increase in partners capital resulting fromoperations to net cash provided by operating activities:    
Payments for derivative instruments  (125,585,553)
Proceeds from sales of derivative instruments  184,038,604 
Payments for securities  (466,202,808)
Proceeds from sales of securities  382,985,764 
Net realized gains on derivative instruments and securities  (92,192,671)
Net change in unrealized appreciation/depreciation on derivativeinstruments and securities  (171,826,438)
Increase in due from broker  (30,691,445)
Increase in collateral payable  177,910,815 
Decrease in other assets  51,797 
Decrease in accrued expenses  (1,658)
     
Net cash provided by operating activities  117,714,157 
     
CASH FLOWS FROM FINANCING ACTIVITIES:    
Capital contributions  133,420,000 
Capital withdrawals, net of capital withdrawals payable of $18,162,516  (14,246,707)
Capital distributions, net of capital distributions payable of $47,296,714  (106,327,107)
     
Net cash provided by financing activities  12,846,186 
     
NET CHANGE IN CASH AND CASH EQUIVALENTS  130,560,343 
     
CASH AND CASH EQUIVALENTS — Beginning of year  785,984 
     
CASH AND CASH EQUIVALENTS — End of year $131,346,327 
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —Cash paid for interest $111,570 

See notes to financial statements.

FJ-42

JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2013
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) is a Cayman Islands exempted limited partnership organized under the laws of the Cayman Islands. In March 2012, the Master Fund registered with the Cayman Islands Monetary Authority (“CIMA”) pursuant to an amendment to the Mutual Funds Law of the Cayman Islands which requires “master funds” as defined therein to register with and be regulated by CIMA. The investment objective of the Master Fund is to generate superior risk-adjusted rates of return through investments in the Japanese foreign currency exchange and credit markets. To achieve its investment objective, the Master Fund invests in fully paid for fixed-income and foreign exchange securities and derivative products in the Japanese capital markets within a broad global macroeconomic strategy focusing on the risks to Japanese interest rate and currency volatility contained within the market for sovereign credit.

The Master Fund receives capital contributions from Japan Macro Opportunities Partners, L.P. (the “Onshore Fund”) and Japan Macro Opportunities Offshore Partners, L.P. (the “Offshore Fund”). Hayman Capital Management, L.P. is the managing general partner for the Master Fund (the “Managing General Partner”) and is the general partner of the Onshore Fund. Hayman Offshore Management, Inc., a Cayman Islands exempted company, serves as the general partner of the Master Fund and Offshore Fund (the “General Partner”). Hayman Advisors SLP, L.P., an affiliate of the Managing General Partner, was designated by the Managing General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2013, the General Partner and the Managing General Partner had no partner capital balance in the Master Fund. The Master Fund, pursuant to an amended and restated agreement of the Limited Partnership (the “Agreement”), was formed on March 22, 2010, and began operations on July 9, 2010.

The Master Fund operates under a “master/feeder structure” whereby the Onshore Fund and the Offshore Fund invest substantially all of their investable assets in the Master Fund. As of December 31, 2013, the Onshore Fund and the Offshore Fund owned approximately 46% and 45% of the Master Fund, respectively, after the impact of the accrued performance distribution at December 31, 2013. See Note 7 Related-Party Transactions for additional details.

Equinoxe Alternative Investment Services (Bermuda) Ltd. (“Equinoxe”) performs various administrative services for the Master Fund.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting— The accompanying financial statements are presented using accountingprinciples generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

FJ-43

Cash and Cash Equivalents— The Master Fund defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less. As of December 31, 2013, $131,341,640 is invested in treasury backed money market funds offered by JP Morgan. Additional information on cash receipts and payments is presented in the statement of cash flows.

Derivative Instruments— Derivative instruments are valued at fair value in accordance with theManaging General Partner’s valuation policy. Valuations are obtained from third-party pricing services which rely on observable market inputs and market information received from dealers, or brokers, when available and considered reliable.

Foreign Currency Translations— Assets and liabilities denominated in foreign currencies aretranslated into United States dollar amounts at the period-end exchange rates. Purchases and sales of investments, and income and expenses that are denominated in foreign currencies are translated into U.S. dollar amounts on the transaction date. Adjustments arising from foreign currency transactions are reflected in the Statement of Operations.

The Master Fund does not isolate the portion of the operating results that are due to the changes in foreign exchange rates. Such fluctuations are included in unrealized appreciation on derivative instruments in the Statement of Operations. Investments in Japanese Yen denominated securities have additional risks not present in securities denominated in U.S. dollars.

Income and Expense Recognition— Interest is recorded on the accrual basis. Operating expenses arerecorded on the accrual basis as incurred. Realized gains and losses on derivative instruments and securities are recorded on an identified cost basis.

Income Taxes— The limited partners of the Master Fund are individually liable for taxes on their shareof Master Fund taxable income.

The Master Fund determines whether a tax position of the Master Fund is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Master Fund reviews and evaluates tax positions in the jurisdictions in which the Master Fund operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review, management concluded that the Master Fund’s tax returns will be open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan and the Cayman Islands, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). Accordingly, the Master Fund’s 2010, 2011, and 2012 tax returns remain open for examination. The Master Fund is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

The Master Fund has been registered as an exempted limited partnership pursuant to the Exempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Master Fund has also received an undertaking from the Cayman Islands’ Government that, for a period of 50 years from May 11, 2010, the Master Fund will be exempt from taxation in the Cayman Islands. The only taxes payable by the Master Fund on its income are withholding taxes applicable to certain income.

Indemnities— The Managing General Partner on behalf of the Master Fund enters into certaincontracts that contain a variety of indemnifications. The Master Fund’s maximum exposure under these arrangements is unknown. However, the Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

FJ-44

Capital Contributions, Distributions, Withdrawals, and Income/Expenses Allocations— Capitalcontributions received at each closing are maintained in special memorandum accounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). The Managing General Partner establishes a new Tranche at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche.

The Master Fund is a single legal entity, and the Tranches are not separate legal entities. Since commencement of operations, the Managing General Partner has established 24 Tranches. As of December 31, 2013, 18 Tranches are in existence. The table below summarizes investor contributions, distributions, and withdrawals for each tranche for the year ended December 31, 2013. Withdrawals of $108,356 were made to pay for feeder fund level expenses.

Tranche Contributions  Distributions  Withdrawals 
          
Tranche A $-  $19,959,651  $309,864 
Tranche D  -   7,180,500   5,433 
Tranche E  5,000,000   8,633,115   2,991 
Tranche F  -   7,865,140   4,023 
Tranche G  -   -   1,086,425 
Tranche H  -   1,169,795   247,700 
Tranche I  -   5,924,951   1,391,749 
Tranche J  -   9,335,583   3,047 
Tranche K  -   -   4,362 
Tranche L  -   3,543,000   2,631 
Tranche M  -   10,916,885   14,475,855 
Tranche N  100,000   5,643,149   8,383,800 
Tranche O  -   5,237,565   481,599 
Tranche P  -   19,158,238   10,242 
Tranche Q  -   4,800,445   5,592,466 
Tranche R  -   -   4,537 
Tranche S  -   -   4,990 
Tranche T  75,000,000   30,691,445   6,384 
Tranche U  -   5,824,749   3,791 
Tranche V  -   7,739,610   6,911 
Tranche W  20,000,000   -   2,052 
Tranche X  33,320,000   -   378,371 
             
  $133,420,000  $153,623,821  $32,409,223 

The Master Fund may make distributions to limited partners from time to time as determined by the managing General Partner. See Note 7 for details regarding performance distributions. Capital withdrawals are permitted at the end of each quarter after a limited partner has held a Tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. Withdrawal fees of $112,500 were recorded by the Master Fund during the year ended December 31, 2013, and are reported as a reduction in the withdrawals of the tranche and were allocated pro-rata among the remaining Limited Partners in the tranche. The General Partner does not charge a withdrawal fee for withdrawals from single Investor Tranches.

FJ-45

Using the net asset value from the close, subsequent to the withdrawal request, the General Partner will determine the net asset value of the Tranche and segregate the pro-rata portion of each asset in the Tranche for the benefit of the withdrawing limited partner. The General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

3.FAIR VALUE MEASUREMENTS

The Master Fund uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1— Valuations based on unadjusted quoted prices in active markets for identical assets orliabilities that the Master Fund has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2— Valuations based on quoted prices in markets that are not active or for which all significantinputs are observable, either directly or indirectly.

Level 3— Valuations based on inputs that are unobservable and significant to the overall fair valuemeasurement.

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Managing General Partner. The Managing General Partner considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Managing General Partner’s perceived risk of that instrument.

Investments in U.S. Government obligations are valued by a third-party pricing service using market observable data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data and are therefore classified as Level 2.

Most derivative instruments that are not exchange-traded are considered Level 2. These over-the-counter (OTC) derivatives, including interest rate swaptions and foreign currency options, are valued by a third-party pricing service using observable inputs, such as quotations received from brokers. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in the instrument, as well as, the availability and reliability of, observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of such inputs.

FJ-46

No level 3 holdings were held at any time during the year ended December 31, 2013.

A valuation committee established by the Managing General Partner meets on a monthly basis to review and approve the valuation of the Master Fund’s investments, to ensure that the valuations are in accordance with the pricing policy adopted by the Managing General Partner and the methods described above.

As of December 31, 2013, the financial instruments carried on the Statement of Assets and Liabilities by caption and by level within the valuation hierarchy are presented in the table that follows. The financial instruments are further classified by geography within the Condensed Schedule of Investments.

  Assets at Fair Value as of December 31, 2013 
  Level 1  Level 2  Level 3  Total 
             
Cash equivalents $131,341,640  $-  $-  $131,341,640 
U.S. Government obligations  -   125,769,866   -   125,769,866 
Interest rate swaptions  -   9,607,314   -   9,607,314 
Foreign currency options  -   289,053,663   -   289,053,663 
                 
Total $131,341,640  $424,430,843  $-  $555,772,483 

4.BALANCE SHEET OFFSETTING

The Master Fund adopted the provisions of Accounting Standards Update (“ASU”) 2013-01, “Balance Sheet Offsetting”, which is an amendment to ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities”, and requires the disclosure of information regarding rights of setoff and related arrangements associated with financial instruments and derivatives. The Master Fund presents derivative exposure on a gross basis on the Statement of Assets and Liabilities. Below is a table that shows the gross amounts of derivative positions recorded on the Statement of Assets and Liabilities.

Offsetting of Financial Assets and Derivative Assets

        Net Amounts       
     Gross Amounts  of Assets  Cash    
     Offset in the  Presented in the  Collateral    
  Gross Amounts of  Statement of  Statement of  (Received) /    
  Recognized Assets  Assets and Liabilities  Assets and Liabilities  Posted  Net Amount 
Derivatives Instruments $298,660,977  $-  $298,660,977  $(177,910,815) $120,750,162 

Over the Counter derivative transactions are subject to the terms and conditions of the International Swaps and Derivatives Association (“ISDA”) agreements entered into by the Master Fund and its trading counterparties. The ISDA agreements allow for the right of setoff in cases of early termination. Two of the ISDA agreement place restrictions on collateral received by the Master Fund. One of the agreements requires the Master Fund to hold the collateral in the state of New York. The amount of collateral from this counterparty held by the Master Fund at December 31, 2013 was approximately $14,080,000. Another ISDA agreement requires the Master Fund to hold collateral at The Bank of New York Mellon. The amount of collateral from this counterparty held by the Master Fund at December 31, 2013 was $31,900,815.

FJ-47

5.FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Derivative Contracts— In the normal course of business, the Master Fund enters into derivativefinancial instruments (“derivatives”). The derivatives in which the Master Fund invests are primarily interest rate swaptions and foreign currency options. Derivatives serve as a component of the Master Fund’s investment strategy and are utilized primarily to structure the portfolio or individual investments to economically match the investment objective of the Master Fund.

As of December 31, 2013, the derivative instruments carried on the Statement of Assets and Liabilities are presented in the table below.

Derivatives Not Accounted for Number of  Fair 
as Hedging Instruments Contracts  Value 
       
Interest rate swaption contracts  93  $9,607,314 
Foreign currency option contracts  332   289,053,663 
         
Total derivative instruments     $298,660,977 

The impact of these derivative instruments on the Statement of Operations is presented in the table below.

  Net Change in    
  Unrealized  Net Realized 
  Appreciation/Depreciation  Gains (Losses) 
Derivatives Not Accounted for on Derivative  on Derivative 
as Hedging Instruments Instruments  Instruments 
       
Interest rate swaption contracts $5,282,983  $(28,928,457)
Foreign currency option contracts  166,549,008   121,059,724 
         
Total $171,831,991  $92,131,267 

For the year ended December 31, 2013, the volume of derivative transactions of the Master Fund was as follows:

  Contracts 
Derivatives Not Accounted for Entered  Sold/ 
as Hedging Instruments Into  Expired 
       
Interest rate swaption contracts  44   56 
Foreign currency option contracts  203   185 
         
Total  247   241 

FJ-48

Swaptions— The Master Fund enters into swaptions in the normal course of pursing its investmentobjectives. Swaptions are used to create exposure for the Master Fund based on its directional view of interest rates. Swaptions are options that grant the holder the right to enter into an underlying swap. The underlying swaps of the Master Fund’s swaptions are interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Master Fund may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional principal amount. Swaptions are marked to market by a third -party pricing service and the change, if any, is recorded as a net change in unrealized appreciation or depreciation on derivative instruments in the Statement of Operations. When the swaption contract is terminated early, the Master Fund records a realized gain or loss. The risks of swaptions include changes in market conditions that affect the value of the contract or the cash flows and the possible inability of the counterparty to fulfill its obligations under the agreement. The Master Fund’s maximum risk of loss from counterparty credit risk is the market value of the positions held by the counterparty. This risk is mitigated by having a master netting arrangement between the Master Fund and the counterparty and by the posting of collateral by the counterparty to the Master Fund to cover a portion of the Master Fund’s exposure to the counterparty.

Options— The Master Fund holds foreign currency denominated interest rate swaptions and the valueof these swaptions may decrease if the foreign currency depreciates in value. The Master Fund purchases options for the purpose mitigating foreign exchange risk and to enhance returns on its portfolio. Options are contracts that grant the holder, in return for payment of the purchase price (the “premium”) of the option, the right to either purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date, from or to the writer of the option.

The Master Fund’s focus is to execute an investment strategy that is primarily concentrated in Japanese LIBOR interest rate swaptions and Japanese Yen foreign currency options, and as a result will potentially be materially impacted by changes in the movement of Japanese LIBOR interest rates and the Japanese Yen.

6.DUE FROM (TO) BROKERS

The Master Fund does not clear its own derivative transactions. It has established accounts with other financial institutions for this purpose. This can, and often does, result in concentration of credit risk with one or more of these firms. Such risk, however, is mitigated by the obligation of U.S. financial institutions to comply with rules and regulations governing broker/dealers and futures commission merchants. These rules and regulations generally require maintenance of net capital, as defined, and segregation of customers’ funds and securities from holdings of the firm.

7.RELATED-PARTY TRANSACTIONS

The Master Fund pays the Managing General Partner, a management fee, as compensation for managing the business and affairs of the Master Fund, equal to 1.25% per annum of the capital account of each limited partner. Management fees are calculated and paid quarterly in advance as of the first day of each calendar quarter in accordance with the Agreement.

The Managing General Partner and the General Partner may reduce or waive the management fee for any individual investor.

The Agreement provides for a performance distribution to the Special Limited Partner at the time of withdrawals or distributions. Withdrawals or distributions attributable to a Tranche initially shall be allocated to the limited partners in that Tranche Pro Rata. Thereafter, withdrawals or distributions are to be allocated as follows:

i)First, to the limited partner until the limited partner has received an aggregate amount of withdrawals or distributions to the extent of their aggregate capital contributions to all Tranches;

FJ-49

ii)Second, 80% to the limited partners and 20% to the Special Limited Partner until aggregate withdrawals or distributions to the limited partner are equal to 10 times aggregate capital contributed by the limited partner to all Tranches;

iii)Thereafter, 65% to the limited partner and 35% to the Special Limited Partner.

The performance distribution is calculated at the end of each period (based on a hypothetical liquidation of the Master Fund on such dates). For the year ended December 31, 2013, total performance distributions paid to the Special Limited Partner were $3,590,906. As of December 31, 2013, the accrued performance distribution to the Special Limited Partner pursuant to the Agreement is $30,356,678. The accrued performance distribution is calculated for each limited partner taking into consideration such partner’s aggregate contributions to all Tranches. The Special Limited Partner has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed aggregate capital contributions to all Tranches made by such partner.

The General Partner shall be paid an annual fee of $1,000 on January 1 of each year, which shall be charged proportionally among all Tranches based on the relative net asset value of each Tranche.

During the year ended December 31, 2013, the Managing General Partner paid $14,815 to the Master Fund to reimburse the Master Fund for a trading loss incurred by the Master Fund. The amount is included in net realized gains on derivative instruments and securities on the Statement of Operations.

8.FINANCIAL HIGHLIGHTS

The following are the Master Fund’s financial highlights, by Tranche, for the year ended December 31, 2013. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2: 
           Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
                      
Tranche E  169.54%  (2.69)%  166.85%  (1.33)%  (1.32)%  (2.65)%  (1.37)%
Tranche F  161.74   -   161.74   (1.34)  -   (1.34)  (1.35)
Tranche G  86.51   -   86.51   (1.39)  -   (1.39)  (1.44)
Tranche H  106.40   -   106.40   (1.38)  -   (1.38)  (1.43)
Tranche I  130.89   2.34   133.23   (1.26)  -   (1.26)  (1.30)
Tranche J  188.44   (14.88)  173.56   (1.34)  (13.98)  (15.32)  (1.39)
Tranche K  120.55   (9.03)  111.52   (1.27)  (6.39)  (7.66)  (1.31)
Tranche L  225.48   -   225.48   (1.29)  -   (1.29)  (1.34)
Tranche N  99.48   (17.42)  82.06   (1.43)  (10.93)  (12.36)  (1.48)
Tranche O  156.09   (27.16)  128.93   (1.45)  (15.06)  (16.51)  (1.49)
Tranche P  179.45   (29.26)  150.19   (1.47)  (17.72)  (19.19)  (1.53)
Tranche Q  191.34   (23.28)  168.06   (1.45)  (12.03)  (13.48)  (1.48)
Tranche R  136.57   (18.67)  117.90   (1.43)  (12.27)  (13.70)  (1.47)
Tranche S  96.95   (11.84)  85.11   (1.44)  (8.75)  (10.19)  (1.48)
Tranche T  123.87   (24.54)  99.33   (1.49)  (11.45)  (12.94)  (1.51)
Tranche U  189.66   (36.56)  153.10   (1.44)  (20.39)  (21.83)  (1.47)
Tranche V  158.05   (23.00)  135.05   (1.55)  (19.41)  (20.96)  (1.61)
Tranche W  40.11   (7.93)  32.18   (0.64)  (3.50)  (4.14)  (0.66)
Tranche X  56.03   (11.22)  44.81   (0.66)  (4.30)  (4.96)  (0.67)

1 Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return for tranches issued or withdrawn during the year have not been annualized.

FJ-50

2 Average partners’ capital has been computed based on monthly valuations. Ratios for Tranches issued during the year have been annualized. Performance distribution ratios have not been annualized.

9.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 26, 2014, the date these financial statements were available to be issued. Subsequent to December 31, 2013, the Master Fund issued Tranche Y, following the receipt of capital contributions of approximately $40 million and paid out distributions of approximately $90.6 million and withdrawals of $19.5 million, of which $47.3 million and $18.2 million were accrued, respectively, at year-end.

* * * * * *

FJ-51

Japan Macro

Opportunities Offshore

Partners, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2014, and

Independent Auditors’ Report

FJ-52

 

Deloitte & Touche
One Capital Place
P.O. Box 1787
Grand Cayman KY1-1109
CAYMAN ISLANDS
Tel: +1 345  949 7500
Fax:+1 345  949 8238
cayman@deloitte.com
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Managing General Partner of

Japan Macro Opportunities Offshore Partners, L.P.:

We have audited the accompanying financial statements of Japan Macro Opportunities Offshore Partners, L.P. (a Cayman Islands Exempted Limited Partnership) (the “Partnership”), which comprise the statement of assets and liabilities, as of December 31, 2014, and the related statements of operations and changes in partners’ capital for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Partnership’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Japan Macro Opportunities Offshore Partners, L.P. as of December 31, 2014, and the results of its operations and changes in its partners’ capital, for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche

March 27, 2015

Member firm of
Deloitte Touche Tohmatsu Limited

FJ-53

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2014
(Expressed in U.S. dollars)

ASSETS    
     
INVESTMENT IN JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P. (the “Master Fund”) — At fair value $69,518,336 
     
CASH  1,406,590 
     
DISTRIBUTIONS RECEIVABLE FROM MASTER FUND  7,095,108 
     
TOTAL $78,020,034 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
CAPITAL DISTRIBUTIONS PAYABLE $8,468,512 
     
CAPITAL WITHDRAWALS PAYABLE  24,687 
     
ACCRUED EXPENSES  38,300 
     
TOTAL LIABILITIES  8,531,499 
     
PARTNERS’ CAPITAL  69,488,535 
     
TOTAL $78,020,034 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-54

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED GAIN ON INVESTMENTS ALLOCATED FROM MASTER FUND:    
Realized gain on derivative instruments and securities $90,413,688 
Net change in unrealized appreciation/depreciation on derivative instruments and securities  (19,327,687)
     
Realized and unrealized gain on derivative instruments and securities allocated from Master Fund  71,086,001 
     
NET INVESTMENT LOSS ALLOCATED FROM MASTER FUND:    
Interest expense  (31,644)
Management fees  (1,355,510)
Professional, administrator and other expenses  (256,552)
     
Net investment loss allocated from Master Fund  (1,643,706)
     
PARTNERSHIP EXPENSES — Other expenses  (60,963)
     
NET INVESTMENT LOSS  (1,704,669)
     
INCREASE IN PERFORMANCE DISTRIBUTION AT MASTER FUND  (16,768,057)
     
NET INCREASE IN PARTNERS’ CAPITAL RESULTING FROM OPERATIONS $52,613,275 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-55

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

  General  Limited    
  Partner  Partners  Total 
          
PARTNERS’ CAPITAL — January 1, 2014 $-  $154,334,159  $154,334,159 
             
DECREASE IN PARTNERS' CAPITAL RESULTING FROM CAPITAL TRANSACTIONS            
             
Capital contributions  -   40,950,000   40,950,000 
             
Capital distributions  -   (177,175,768)  (177,175,768)
             
Capital withdrawals  -   (1,233,131)  (1,233,131)
             
NET DECREASE IN PARTNERS CAPITAL RESULTING FROM CAPITAL TRANSACTIONS  -   (137,458,899)  (137,458,899)
             
INCREASE IN PARTNERS' CAPITAL RESULTING FROM INVESTMENT OPERATIONS            
             
Net realized and unrealized gain on derivative instruments and securities allocated from Master Fund  -   71,086,001   71,086,001 
             
Net investment loss allocated from Master Fund  -   (1,704,669)  (1,704,669)
             
Increase in performance distribution at Master Fund (see Note 4)  -   (16,768,057)  (16,768,057)
             
NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM INVESTMENT OPERATIONS  -   52,613,275   52,613,275 
             
PARTNERS’ CAPITAL — December 31, 2014 $-  $69,488,535  $69,488,535 

See notes to financial statements and attached financial statements of the Master Fund.

FJ-56

JAPAN MACRO OPPORTUNITIES OFFSHORE PARTNERS, L.P.

(A Cayman Islands Exempted Limited Partnership)

NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Offshore Partners, L.P. (the “Partnership”) is a Cayman Islands exempted limited partnership organized on March 22, 2010, which began operations on July 9, 2010. The limited partnership agreement (the “Partnership Agreement”) was most recently amended and restated on April 25, 2014. The Partnership is registered under the Mutual Funds Law of the Cayman Islands. The Partnership has elected to be taxed as a corporation from a U.S. federal income tax perspective. The investment objective of the Partnership is to achieve capital appreciation through investments in public and private securities and other financial instruments. This investment strategy is executed solely through an investment in Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) (a Cayman Islands Exempted Limited Partnership). Japan Macro Opportunities Partners, L.P. a Delaware limited partnership (the “Onshore Fund”), also invests in the Master Fund. As of December 31, 2014, the Partnership owns approximately 42% of the Master Fund, after the impact of the accrued performance distribution at December 31, 2014. See Note 4 Related-Party Transactions for additional details.

Hayman Offshore Management, Inc. is the general partner (the “General Partner”) of the Partnership, and a general partner of the Master Fund. Hayman Capital Management L.P. is the managing general partner of the Master Fund (the “Managing General Partner”). Hayman Advisors SLP, L.P., an affiliate of the General Partner, was designated by the General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2014, the General Partner had no partner capital balance in the Partnership.

Equinoxe Alternative Investment Services (Bermuda) Ltd. performed various administrative services for the Partnership in 2014.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying financial statements are presented using accounting principles generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. The Partnership is an investment company and therefore complies with accounting and reporting guidance presented inAccounting Standards Codification 946, Financial Services – Investment Companies.

Investment in Master Fund — The Partnership’s investment in the Master Fund is valued at fair value as determined by the General Partner based on the partners’ capital balance reflected in the financial statements of the Master Fund. The performance of the Partnership is directly affected by the performance of the Master Fund. The financial statements of the Master Fund, which are an integral part of these financial statements, are attached.

FJ-57

Income and Expense Recognition — The Partnership’s pro-rata share of income and expense and realized and unrealized gain and loss from its direct investment in the Master Fund are included in their appropriate revenue and expense categories in the Partnership’s Statement of Operations. In addition, the Partnership accrues its own direct expenses.

Cash and Cash Equivalents — The Partnership defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less.

Income Taxes — The Partnership is registered as an exempted limited partnership pursuant to the Exempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Partnership has also received an undertaking from the Cayman Islands’ government that, for a period of 50 years from May 11, 2010, the Partnership will be exempt from taxation in the Cayman Islands. The only taxes payable by the Partnership on its income are withholding taxes applicable to certain income.

The Partnership determines whether a tax position of the Partnership is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Partnership reviews and evaluates tax positions in the jurisdictions in which the Partnership operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review, management concluded that, the Partnership’s tax returns will remain open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan, Cayman Islands and foreign jurisdictions where the Partnership and Master Fund make significant investments, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). The Partnership’s tax returns will remain open for examination by tax authorities for a period of three years from when they are filed. Accordingly, the Partnership’s 2011 and subsequent tax returns remain open for examination. The Partnership is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

FJ-58

Capital Contributions, Distributions, Withdrawals and Allocation of Partnership Profits and Losses — Capital contributions received at each closing are maintained in special memorandum accounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). A new Tranche is established at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche. The Partnership is a single legal entity, and the Tranches are not separate legal entities. As of December 31, 2014, the Partnership is invested in nine Tranches in the Master Fund — E, K, R, S, U, W, X, Y, and Z. The table below summarizes the contributions, distributions, and withdrawals for each Tranche outstanding at any time during the year ended December 31, 2014:

Tranche Contributions  Distributions  Withdrawals 
          
E $-  $6,580,348  $- 
G  -   2,326,484   1,234,350 
H  -   2,218,065   - 
I  -   1,167,581   - 
J  -   2,145,995   - 
K  -   11,664,019   - 
L  -   1,959,626   - 
O  -   3,845,789   - 
P  -   24,666,034   - 
Q  -   4,941,418   - 
R  -   20,714,500   - 
S  -   19,717,060   - 
U  -   1,572,996   - 
W  -   20,794,699   - 
X  -   12,658,376   (1,219)
Y  40,000,000   38,596,000   - 
Z  950,000   1,606,778   - 
             
  $40,950,000  $177,175,768  $1,233,131 

Capital withdrawals are permitted at the end of each quarter after a limited partner has held a tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. Withdrawal fees of $1,219 were charged to limited partners that withdrew from the Onshore Fund during the year ended December 31, 2014. Withdrawal fees are reported as a reduction in withdrawals of Tranche X and were allocated pro-rata among the remaining Limited Partners in the tranche across the Partnership and the Onshore Fund. The General Partner does not charge a withdrawal fee when the partners in a Tranche are all affiliated.

Using the net asset value from the close, subsequent to the withdrawal request, the General Partner will determine the net asset value of the tranche and segregate the pro-rata portion of each asset in the tranche for the benefit of the withdrawing limited partner. The General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

FJ-59

The profits and losses of each Tranche of the Partnership are allocated to each partner based upon the amount of such partner’s capital balance of each Tranche as of the beginning of each month.

Indemnities — The General Partner on behalf of the Partnership enters into certain contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had any prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

3.FAIR VALUE MEASUREMENTS

The Partnership uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Partnership has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The General Partner believes the most relevant fair value disclosure relates to the Master Fund’s investment portfolio and can be found in Note 3 of the Master Fund’s financial statements, which are attached to these statements.

4.RELATED-PARTY TRANSACTIONS, INCLUDING MANAGEMENT AND PERFORMANCE DISTRIBUTION

Management fees and the performance distributions occur at the Master Fund level. During the year ended December 31, 2014, the Partnership was allocated management fees of $1,355,510. For the year ended December 31, 2014, the performance distribution paid to the special limited partner was $13,787,184. As of December 31, 2014, the accrued performance distribution payable to the Special Limited Partner with respect to the Partnership (based on a hypothetical liquidation of the Master Fund) is $16,758,693. The Special Limited Partner of the Master Fund has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed aggregate capital contributions to all Tranches made by such partner.

As of December 31, 2014, two affiliated limited partners, unaffiliated with the General Partner, owned approximately 86% of the Partnership. Their interests represent approximately 36% of the partners’ capital of the Master Fund.

The Partnership has investor concentration as discussed above and could be materially affected by their actions. Due to the nature of the master fund/feeder fund structure, the Partnership could be materially affected by contributions or withdrawals of the Master Fund’s interests made by investors in the Onshore Fund.

FJ-60

5.FINANCIAL HIGHLIGHTS

The following are the Partnership’s financial highlights, by Tranche, for the year ended December 31, 2014. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2,3: 
           Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
Tranche E  60.46%  (8.38)%  52.08%  (1.63)%  (11.27)%  (12.90)%  (1.63)%
Tranche K  40.68   5.96   46.64   (1.80)  12.94   11.14   (1.80)
Tranche R  77.05   (8.26)  68.79   (1.76)  (19.04)  (20.80)  (1.76)
Tranche S  66.12   (10.17)  55.95   (1.76)  (16.92)  (18.69)  (1.76)
Tranche U  88.99   (3.70)  85.29   (1.86)  (24.56)  (26.42)  (1.86)
Tranche W  55.22   (23.28)  31.94   (1.74)  (32.78)  (34.51)  (1.74)
Tranche X  52.18   (5.37)  46.81   (1.68)  (9.73)  (11.41)  (1.68)
Tranche Y  160.42   (30.92)  129.50   (1.56)  (35.60)  (37.16)  (1.56)
Tranche Z  318.08   (63.32)  254.76   (1.50)  (43.88)  (45.39)  (1.50)

1Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return has not been annualized for those Tranches created during the year.

2Average partners’ capital has been computed based on monthly valuations. Ratios have been annualized for those Tranches created during the year. Performance distribution ratios have not been annualized.

3Includes the proportionate share of the Partnership’s income and expenses allocated from the Master Fund.

6.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 27, 2015, the date these financial statements were available to be issued. Effective January 1, 2015, SEI Global Securities, Inc. was appointed as the administrator for the Partnership and the Master Fund.

* * * * * *

FJ-61

Japan Macro Opportunities

Master Fund, L.P.

(A Cayman Islands Exempted Limited Partnership)

Financial Statements as of and for the

Year Ended December 31, 2014, and

Independent Auditors’ Report

FJ-62

 

Deloitte & Touche
One Capital Place
P.O. Box 1787
Grand Cayman KY1-1109
CAYMAN ISLANDS
Tel: +1 345 949 7500
Fax:+1 345 949 8238
cayman@deloitte.com
www.deloitte.com

INDEPENDENT AUDITORS’ REPORT

To the Managing General Partner of

Japan Macro Opportunities Master Fund, L.P.:

We have audited the accompanying financial statements of Japan Macro Opportunities Master Fund, L.P. (a Cayman Islands Exempted Limited Partnership) (the “Master Fund”), which comprise the statement of assets and liabilities, including the condensed schedule of investments, as of December 31, 2014, and the related statements of operations and changes in partners’ capital for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Master Fund’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Japan Macro Opportunities Master Fund, L.P. as of December 31, 2014, and the results of its operations and changes in its partners’ capital for the year then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche

March 27, 2015

Member firm of
Deloitte Touche Tohmatsu Limited

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JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2014
(Expressed in U.S. dollars)

ASSETS    
     
DERIVATIVE INSTRUMENTS — Long — At fair value (cost $66,787,250) $157,746,553 
     
SECURITIES — At fair value (cost $10,461,054)  10,461,054 
     
CASH AND CASH EQUIVALENTS  248,848,879 
     
TOTAL $417,056,486 
     
LIABILITIES AND PARTNERS’ CAPITAL    
     
DERIVATIVE INSTRUMENTS — Short — At fair value (proceeds $3,777,309) $14,406,851 
     
COLLATERAL PAYABLE  76,101,054 
     
ACCRUED EXPENSES  99,308 
     
CAPITAL DISTRIBUTIONS PAYABLE  161,547,565 
     
TOTAL LIABILITIES  252,154,778 
     
PARTNERS’ CAPITAL  164,901,708 
     
TOTAL $417,056,486 

See notes to financial statements.

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JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

CONDENSED SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 2014
(Expressed in U.S. dollars)

  Fair Value 
    
DERIVATIVE INSTRUMENTS — Long (95.7% of partners’ capital):    
Interest rate swaptions — Japanese LIBOR (1.2% of partners’ capital):    
1 year swaptions with maturities (May 2015) $46,106 
3 year swaptions with maturities (January 2015–May 2017)  1,930,218 
     
Total interest rate swaptions — Japanese LIBOR (cost $20,600,690)  1,976,324 
     
Foreign currency options — Japanese Yen (94.5% of partners’ capital):    
1 year options with maturities (January 2015–May 2015)  19,198,769 
2 year options with maturities (January 2016–May 2016)  56,530,280 
3 year options with maturities (January 2016–May 2017)  80,041,180 
     
Total foreign currency options — Japanese Yen (cost $46,186,560)  155,770,229 
     
DERIVATIVE INSTRUMENTS — Long — (cost $66,787,250) $157,746,553 
     
SECURITIES — US GOVERNMENT OBLIGATIONS (6.3% of partners’ capital)    
US Treasury notes 2–30 year original maturities (July 2015–May 2044) $9,076,123 
     
US Treasury inflation-indexed bonds 30 year original maturities (April 2029–February 2043)  1,384,931 
     
SECURITIES — US GOVERNMENT OBLIGATIONS — (cost $10,461,054) $10,461,054 
     
DERIVATIVE INSTRUMENTS — Short (8.7% of partners’ capital):    
Foreign currency options — Japanese Yen    
2 year options with maturities (January 2016–May 2016) $(9,348,297)
3 year options with maturities (January 2016–May 2017)  (5,058,554)
     
Total foreign currency options — Japanese Yen (proceeds $3,777,309)  (14,406,851)
     
DERIVATIVE INSTRUMENTS — Short — (proceeds $3,777,309) $(14,406,851)

See notes to financial statements.

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JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

REALIZED AND UNREALIZED GAINS/(LOSSES) ON DERIVATIVE INSTRUMENTS AND SECURITIES:    
Net realized gains/losses on derivative instruments and securities $220,291,267 
Net change in unrealized appreciation/depreciation on derivative instruments and securities  (26,327,786)
     
Net realized and unrealized gains on derivative instruments and securities  193,963,481 
     
EXPENSES:    
Management fees  2,963,978 
Interest expense  65,813 
Professional, administrator and other  589,492 
     
Total expenses  3,619,283 
     
NET INVESTMENT LOSS  (3,619,283)
     
NET INCREASE IN PARTNERS’ CAPITAL RESULTING FROM OPERATIONS $190,344,198 

See notes to financial statements.

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JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

STATEMENT OF CHANGES IN PARTNERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

        Japan Macro    
  Special  Japan Macro  Opportunities    
  Limited  Opportunities  Offshore    
  Partner  Partners, L.P.  Partners, L.P.  Total 
             
PARTNERS’ CAPITAL — January 1, 2014 $30,356,678  $158,334,713  $154,358,735  $343,050,126 
                 
DECREASE IN PARTNERS' CAPITAL RESULTING FROM CAPITAL TRANSACTIONS                
                 
Capital contributions  -   14,300,000   40,950,000   55,250,000 
                 
Capital withdrawals  -   (142,223)  (1,288,870)  (1,431,093)
                 
Capital distributions  (40,106,737)  (205,029,018)  (177,175,768)  (422,311,523)
                 
NET DECREASE IN PARTNERS CAPITAL RESULTING FROM CAPITAL TRANSACTIONS  (40,106,737)  (190,871,241)  (137,514,638)  (368,492,616)
                 
INCREASE IN PARTNERS' CAPITAL RESULTING FROM INVESTMENT OPERATIONS                
                 
Net realized gains/losses on derivative instruments and securities  -   129,877,578   90,413,689   220,291,267 
                 
Net change in unrealized appreciation/depreciation on derivative instruments and securities  -   (7,000,099)  (19,327,687)  (26,327,786)
                 
Net investment loss  -   (1,975,577)  (1,643,706)  (3,619,283)
                 
NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM INVESTMENT OPERATIONS  -   120,901,902   69,442,296   190,344,198 
                 
Performance distribution (see Note 7)  41,865,970   (25,097,913)  (16,768,057)  - 
                 
PARTNERS’ CAPITAL — December 31, 2014 $32,115,911  $63,267,461  $69,518,336  $164,901,708 

See notes to financial statements.

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JAPAN MACRO OPPORTUNITIES MASTER FUND, L.P.

(A Cayman Islands Exempted Limited Partnership)

NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2014
(Expressed in U.S. dollars)

1.ORGANIZATION

Japan Macro Opportunities Master Fund, L.P. (the “Master Fund”) is a Cayman Islands exempted limited partnership organized under the laws of the Cayman Islands. In March 2012, the Master Fund registered with the Cayman Islands Monetary Authority (“CIMA”) pursuant to an amendment to the Mutual Funds Law of the Cayman Islands which requires “master funds” as defined therein to register with and be regulated by CIMA. The investment objective of the Master Fund is to generate superior risk-adjusted rates of return through investments in the Japanese foreign currency exchange and credit markets. To achieve its investment objective, the Master Fund invests in fixed-income and foreign exchange securities and derivative products in the Japanese capital markets within a broad global macroeconomic strategy focusing on the risks to Japanese interest rate and currency volatility contained within the market for sovereign credit.

The Master Fund receives capital contributions from Japan Macro Opportunities Partners, L.P. (the “Onshore Fund”) and Japan Macro Opportunities Offshore Partners, L.P. (the “Offshore Fund”). Hayman Capital Management, L.P. is the managing general partner for the Master Fund (the “Managing General Partner”) and is the general partner of the Onshore Fund. Hayman Offshore Management, Inc., a Cayman Islands exempted company, serves as the general partner of the Master Fund and Offshore Fund (the “General Partner”). Hayman Advisors SLP, L.P., an affiliate of the Managing General Partner, was designated by the Managing General Partner as the special limited partner (the “Special Limited Partner”) of the Master Fund. For the year ended December 31, 2014, the General Partner and the Managing General Partner had no partner capital balance in the Master Fund. The Master Fund, pursuant to an amended and restated agreement of the Limited Partnership (the “Agreement”), was formed on March 22, 2010, and began operations on July 9, 2010.

The Master Fund operates under a “master/feeder structure” whereby the Onshore Fund and the Offshore Fund invest substantially all of their investable assets in the Master Fund. As of December 31, 2014, the Onshore Fund, the Offshore Fund, and the Special Limited Partner owned approximately 38%, 42% and 20% of the Master Fund, respectively, after the impact of the accrued performance distribution at December 31, 2014. See Note 7 Related-Party Transactions for additional details.

Equinoxe Alternative Investment Services (Bermuda) Ltd. performed various administrative services for the Master Fund during 2014.

2.SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying financial statements are presented using accounting principles generally accepted in the United States of America (GAAP). Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. The Master Fund is an investment company and therefore complies with accounting and reporting guidance presented inAccounting Standards Codification 946, Financial Services – Investment Companies.

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Cash and Cash Equivalents — The Master Fund defines cash and cash equivalents as cash and short-term, highly liquid investments with original maturities of 90 days or less. As of December 31, 2014, $248,848,879 is invested in money market funds offered by JP Morgan.

Derivative Instruments — Derivative instruments are valued at fair value in accordance with the Managing General Partner’s valuation policy. Valuations are obtained from third-party pricing services which rely on observable market inputs and market information received from dealers, or brokers, when available and considered reliable.

Foreign Currency Translations — Assets and liabilities denominated in foreign currencies are translated into United States dollar amounts at the period-end exchange rates. Purchases and sales of investments, and income and expenses that are denominated in foreign currencies are translated into U.S. dollar amounts on the transaction date. Adjustments arising from foreign currency transactions are reflected in the Statement of Operations.

The Master Fund does not isolate the portion of the operating results that are due to the changes in foreign exchange rates. Such fluctuations are included in the net realized and unrealized gain or loss on derivative instruments and securities in the Statement of Operations. Investments in Japanese Yen denominated securities have additional risks not present in securities denominated in U.S. dollars.

Income and Expense Recognition — Interest is recorded on the accrual basis. Operating expenses are recorded on the accrual basis as incurred. Realized gains and losses on derivative instruments and securities are recorded on an identified cost basis.

Income Taxes — The partners of the Master Fund are individually liable for taxes on their share of Master Fund taxable income.

The Master Fund determines whether a tax position of the Master Fund is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position. The Master Fund reviews and evaluates tax positions in the jurisdictions in which the Master Fund operates and determines whether or not there are uncertain tax positions that require financial statement recognition. Based on this review, management concluded that the Master Fund’s tax returns will be open for examination by major tax jurisdictions, including U.S. Federal, U.S. states, Japan and the Cayman Islands, for the amount of time specified under the applicable statutes of limitations (with limited exceptions). Accordingly, the Master Fund’s 2011 and subsequent tax returns remain open for examination. The Master Fund is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. As a result, no income tax liability or expense has been recorded in the accompanying financial statements.

The Master Fund has been registered as an exempted limited partnership pursuant to the Exempted Limited Partnership Law of the Cayman Islands. No local income, profits, or capital gains taxes are levied in the Cayman Islands at the current time. The Master Fund has also received an undertaking from the Cayman Islands’ Government that, for a period of 50 years from May 11, 2010, the Master Fund will be exempt from taxation in the Cayman Islands. The only taxes payable by the Master Fund on its income are withholding taxes applicable to certain income.

Indemnities — The Managing General Partner on behalf of the Master Fund enters into certain contracts that contain a variety of indemnifications. The Master Fund’s maximum exposure under these arrangements is unknown. However, the Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

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Capital Contributions, Distributions, Withdrawals, and Income/Expenses Allocations — Capital contributions received at each closing are maintained in special memorandum accounts on the books and records of the Master Fund and invested in a portfolio of investments (each, a “Tranche”). The Managing General Partner establishes a new Tranche at each closing and only those investors making capital contributions at that closing have an interest in that Tranche. The appreciation, depreciation and expenses attributable to a Tranche are allocated only to investors with an interest in that Tranche.

The Master Fund is a single legal entity, and the Tranches are not separate legal entities. Since commencement of operations, the Managing General Partner has established 26 Tranches. As of December 31, 2014, 11 Tranches are in existence. The table below summarizes investor contributions, distributions, and withdrawals for each tranche for the year ended December 31, 2014. Withdrawals of $106,802 were made to pay for feeder fund level expenses.

Tranche Contributions  Distributions  Withdrawals 
          
Tranche E $-  $7,390,785  $2,952 
Tranche G  -   2,326,484   1,235,469 
Tranche H  -   6,941,523   2,488 
Tranche I  -   2,671,625   1,474 
Tranche J  -   2,145,995   1,495 
Tranche K  -   11,664,019   2,521 
Tranche L  -   1,959,626   2,042 
Tranche N  -   269,877   2,847 
Tranche O  -   8,485,223   3,849 
Tranche P  -   27,096,922   11,041 
Tranche Q  -   6,176,773   3,185 
Tranche R  -   23,393,125   5,456 
Tranche S  -   21,811,325   4,887 
Tranche T  -   106,575,860   23,522 
Tranche U  -   21,120,547   3,624 
Tranche V  -   36,773,547   6,486 
Tranche W  -   24,518,553   6,170 
Tranche X  -   43,960,973   100,923 
Tranche Y  40,000,000   38,596,000   8,079 
Tranche Z  15,250,000   28,432,741   2,583 
             
  $55,250,000  $422,311,523  $1,431,093 

The Master Fund may make distributions to limited partners from time to time as determined by the Managing General Partner. See Note 7 for details regarding performance distributions. Capital withdrawals are permitted at the end of each quarter after a limited partner has held a Tranche interest for at least three years. Withdrawals made within the first three years will be subject to a 5% withdrawal fee. Capital withdrawal requests must be delivered prior to the end of the quarter preceding the withdrawal date. Withdrawal fees of $4,025 were recorded by the Master Fund during the year ended December 31, 2014, and are reported as a reduction in the withdrawals of the tranche and were allocated pro-rata among the remaining Limited Partners in the tranche. The Managing General Partner does not charge a withdrawal fee for withdrawals from single investor Tranches.

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Using the net asset value from the close, subsequent to the withdrawal request, the Managing General Partner will determine the net asset value of the Tranche and segregate the pro-rata portion of each asset in the Tranche for the benefit of the withdrawing limited partner. The Managing General Partner will then sell the segregated assets prior to the withdrawal date and specially allocate the gains and losses attributable to the segregated assets to the withdrawing investor.

Capital withdrawals are recorded as liabilities, net of any performance distribution, when the amount requested in the withdrawal notice becomes fixed and determinable. Withdrawal notices received for which the dollar amount is not fixed remain in capital until the amount is determined.

3.FAIR VALUE MEASUREMENTS

The Master Fund uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Master Fund has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Managing General Partner. The Managing General Partner considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Managing General Partner’s perceived risk of that instrument.

Investments in U.S. Government obligations are valued by a third-party pricing service using market observable data, such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data and are therefore classified as Level 2.

Most derivative instruments that are not exchange-traded are considered Level 2. These over-the-counter (OTC) derivatives, including interest rate swaptions and foreign currency options, are valued by a third-party pricing service using observable inputs, such as quotations received from brokers. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in the instrument, as well as, the availability and reliability of, observable inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of such inputs.

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No level 3 holdings were held at any time during the year ended December 31, 2014.

A valuation committee established by the Managing General Partner meets on a monthly basis to review and approve the valuation of the Master Fund’s investments, to ensure that the valuations are in accordance with the pricing policy adopted by the Managing General Partner and the methods described above.

As of December 31, 2014, the financial instruments carried on the Statement of Assets and Liabilities by caption and by level within the valuation hierarchy are presented in the table that follows. The financial instruments are further classified by geography within the Condensed Schedule of Investments.

  Assets at Fair Value as of December 31, 2014 
  Level 1  Level 2  Level 3  Total 
             
Cash equivalents $248,848,879  $-  $-  $248,848,879 
U.S. Government obligations  -   10,461,054   -   10,461,054 
Interest rate swaptions  -   1,976,324   -   1,976,324 
Foreign currency options  -   155,770,229   -   155,770,229 
                 
Total $248,848,879  $168,207,607  $-  $417,056,486 

  Liabilities at Fair Value as of December 31, 2014 
  Level 1  Level 2  Level 3  Total 
             
Foreign currency options $-  $(14,406,851) $-  $(14,406,851)
                 
Total $-  $(14,406,851) $-  $(14,406,851)

4.BALANCE SHEET OFFSETTING

The Master Fund presents derivative exposure on a gross basis on the Statement of Assets and Liabilities. Below is a table that shows the gross amounts of derivative positions recorded on the Statement of Assets and Liabilities.

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        Net Amounts       
     Gross Amounts  of Assets  Cash    
     Offset in the  Presented in the  Collateral    
Offsetting of Financial Assets Gross Amounts of  Statement of  Statement of  (Received) /    
and Derivative Assets Recognized Assets  Assets and Liabilities  Assets and Liabilities  Posted  Net Amount 
                
Derivatives Instruments - Long Foreign currency options $155,770,229  $-  $155,770,229  $(84,299,514) $71,470,715 
Interest rate swaptions  1,976,324   -   1,976,324   -   1,976,324 
                     
Total Derivatives Instruments - Long $157,746,553  $-  $157,746,553  $(84,299,514) $73,447,039 

        Net Amounts       
     Gross Amounts  of Liabilities  Cash    
     Offset in the  Presented in the  Collateral    
Offsetting of Financial Assets Gross Amounts of  Statement of  Statement of  (Received) /    
and Derivative Liabilities Recognized Assets  Assets and Liabilities  Assets and Liabilities  Posted  Net Amount 
                
Foreign currency options $-  $(14,406,851) $(14,406,851) $8,198,460  $(6,208,391)

Over the Counter derivative transactions are subject to the terms and conditions of the International Swaps and Derivatives Association (“ISDA”) agreements entered into by the Master Fund and its trading counterparties. The ISDA agreements allow for the right of setoff in cases of early termination. Two of the ISDA agreements place restrictions on collateral received by the Master Fund. One of the agreements requires the Master Fund to hold the collateral in the state of New York. The amount of collateral from this counterparty held by the Master Fund at December 31, 2014 was approximately $17,370,000. Another ISDA agreement requires the Master Fund to hold collateral at The Bank of New York Mellon. The amount of collateral from this counterparty held by the Master Fund at December 31, 2014 was $10,461,054.

5.FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Derivative Contracts — In the normal course of business, the Master Fund enters into derivative financial instruments (“derivatives”). The derivatives in which the Master Fund invests are primarily interest rate swaptions and foreign currency options. Derivatives serve as a component of the Master Fund’s investment strategy and are utilized primarily to structure the portfolio or individual investments to economically match the investment objective of the Master Fund.

As of December 31, 2014, the derivative instruments carried on the Statement of Assets and Liabilities are presented in the table below.

Derivatives Not Accounted for Number of Derivative Instruments 
as Hedging Instruments Contracts (Assets)  (Liabilities) 
         
Interest rate swaption contracts 35 $1,976,324  $- 
Foreign currency option contracts 60  155,770,229   (14,406,851)
           
Total derivative instruments   $157,746,553  $(14,406,851)

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The impact of these derivative instruments on the Statement of Operations is presented in the table below.

  Net Change in    
  Unrealized  Net Realized 
  Appreciation/(Depreciation)  Gains/(Losses) 
Derivatives Not Accounted for on Derivative  on Derivative 
as Hedging Instruments Instruments  Instruments 
       
Interest rate swaption contracts $17,736,704  $(27,657,236)
Foreign currency option contracts  (44,705,736)  248,566,843 
         
Total $(26,969,032) $220,909,607 

For the year ended December 31, 2014, the volume of derivative transactions of the Master Fund was as follows:

  Contracts 
Derivatives Not Accounted for Entered  Sold/ 
as Hedging Instruments Into  Expired 
       
Interest rate swaption contracts  2   60 
Foreign currency option contracts  22   294 
         
Total  24   354 

Swaptions — The Master Fund enters into swaptions in the normal course of pursing its investment objectives. Swaptions are used to create exposure for the Master Fund based on its directional view of interest rates. Swaptions are options that grant the holder the right to enter into an underlying swap. The underlying swaps of the Master Fund’s swaptions are interest rate swaps. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Master Fund may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional principal amount. Swaptions are marked to market by a third-party pricing service and the change, if any, is recorded as a net change in unrealized appreciation or depreciation on derivative instruments in the Statement of Operations. When the swaption contract is terminated early, the Master Fund records a realized gain or loss. The risks of swaptions include changes in market conditions that affect the value of the contract or the cash flows and the possible inability of the counterparty to fulfill its obligations under the agreement. The Master Fund’s maximum risk of loss from counterparty credit risk is the market value of the positions held by the counterparty. This risk is mitigated by having a master netting arrangement between the Master Fund and the counterparty and by the posting of collateral by the counterparty to the Master Fund to cover a portion of the Master Fund’s exposure to the counterparty.

Options — The Master Fund holds foreign currency denominated interest rate swaptions and the value of these swaptions may decrease if the foreign currency depreciates in value. The Master Fund purchases options for the purpose mitigating foreign exchange risk and to enhance returns on its portfolio. Options are contracts that grant the holder, in return for payment of the purchase price (the “premium”) of the option, the right to either purchase or sell a financial instrument at a specified price within a specified period of time or on a specified date, from or to the writer of the option.

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The Master Fund’s focus is to execute an investment strategy that is primarily concentrated in Japanese LIBOR interest rate swaptions and Japanese Yen foreign currency options, and as a result will potentially be materially impacted by changes in the movement of Japanese LIBOR interest rates and the Japanese Yen.

6.DUE FROM (TO) BROKERS

The Master Fund does not clear its own derivative transactions. It has established accounts with other financial institutions for this purpose. This can, and often does, result in concentration of credit risk with one or more of these firms. Such risk, however, is mitigated by the obligation of U.S. financial institutions to comply with rules and regulations governing broker/dealers and futures commission merchants. These rules and regulations generally require maintenance of net capital, as defined, and segregation of customers’ funds and securities from holdings of the firm.

7.RELATED-PARTY TRANSACTIONS

The Master Fund pays the Managing General Partner, a management fee, as compensation for managing the business and affairs of the Master Fund, equal to 1.25% per annum of the capital account of each limited partner. Management fees are calculated and paid quarterly in advance as of the first day of each calendar quarter in accordance with the Agreement.

The Managing General Partner and the General Partner may reduce or waive the management fee for any individual investor.

The Agreement provides for a performance distribution to the Special Limited Partner at the time of withdrawals or distributions. Performance distributions only occur after capital has been returned to investors. For tranches that invested prior to April 25, 2014 the performance distribution calculation is performed in respect to aggregate contributions to all Tranches. However, for contributions made after April 25, 2014 the performance distributions calculation is performed at the Tranche level and does not take into account contributions to other Tranches (if any).

Withdrawals or distributions attributable to a Tranche initially shall be allocated to the limited partners in that Tranche Pro Rata. Thereafter, withdrawals or distributions are to be allocated as follows:

i)First, to the limited partner until the limited partner has received an aggregate amount of withdrawals or distributions to the extent of their capital contributions;

ii)Second, 80% to the limited partners and 20% to the Special Limited Partner until aggregate withdrawals or distributions to the limited partner are equal to 10 times capital contributed by the limited partner;

iii)Thereafter, 65% to the limited partner and 35% to the Special Limited Partner.

For the year ended December 31, 2014, total capital distributions to the Special Limited Partner were $40,106,737, of which $25,074,725 was payable as of December 31, 2014 and is included in capital distributions payable on the Statement of Assets and Liabilities. The accrued performance distribution is presented as the capital balance of the Special Limited Partner on the statement of changes in partners’ capital calculated, pursuant to the Agreement, based on a hypothetical liquidation of the Master Fund at December 31, 2014. The accrued performance distribution is calculated for each limited partner taking into consideration such partner’s contributions. The Special Limited Partner has no claim to, and does not receive any economic benefit from, any accrued performance distribution until distributions made to a limited partner exceed capital contributions made by such partner.

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The Managing General Partner shall be paid an annual fee of $1,000 on January 1 of each year, which shall be charged proportionally among all Tranches based on the relative net asset value of each Tranche.

8.FINANCIAL HIGHLIGHTS

The following are the Master Fund’s financial highlights, by Tranche, for the year ended December 31, 2014. Total returns are calculated by Tranche for the limited partner group as a whole, which may differ from returns for any individual partners due to certain limited partners being exempt from management fees.

  Total Return1  Ratios to Average Limited Partners’ Capital2: 
           Expenses —     Expenses —    
  Before     After  Excluding     Including  Net 
  Performance  Performance  Performance  Performance  Performance  Performance  Investment 
  Distribution  Distribution  Distribution  Distribution  Distribution  Distribution  Loss 
                      
Tranche E  60.59%  (8.47)%  52.12%  (1.57)%  (11.40)%  (12.97)%  (1.57)%
Tranche K  40.76   5.96   46.72   (1.75)  12.94   11.19   (1.75)
Tranche R  77.17   (8.26)  68.91   (1.71)  (19.04)  (20.74)  (1.71)
Tranche S  66.79   (10.73)  56.06   (1.72)  (16.92)  (18.64)  (1.72)
Tranche T  59.77   (6.52)  53.25   (1.63)  (14.78)  (16.42)  (1.63)
Tranche U  89.09   (2.93)  86.16   (1.79)  (24.82)  (26.60)  (1.79)
Tranche V  84.26   (2.39)  81.87   (1.84)  (23.31)  (25.15)  (1.84)
Tranche W  55.31   (23.28)  32.03   (1.67)  (32.77)  (34.44)  (1.67)
Tranche X  52.15   (4.60)  47.55   (1.61)  (8.96)  (10.57)  (1.61)
Tranche Y  160.51   (30.91)  129.60   (1.46)  (35.15)  (36.61)  (1.46)
Tranche Z  318.23   (63.34)  254.89   (1.43)  (43.89)  (45.31)  (1.43)

1 Computed as the percentage change in value during the period of a theoretical limited partner investment made at the beginning of the year or when a Tranche was created, net of all fees and expenses. Total return for tranches issued or withdrawn during the year have not been annualized.

2 Average partners’ capital has been computed based on monthly valuations. Ratios for Tranches issued during the year have been annualized. Performance distribution ratios have not been annualized.

9.SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, management evaluated events and transactions through and including March 27, 2015, the date these financial statements were available to be issued. Effective January 1, 2015, SEI Global Securities, Inc. was appointed as the Master Fund’s administrator.

* * * * * *

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