UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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

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

 

For the fiscal year endedDecember 31, 20172019

 

OR

 

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

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

 

OR

 

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

☐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:001-33429

 

Acorn International, Inc.

(Exact name of Registrant as specified in its charter)

 

Not applicable

 (Translation(Translation of Registrant’s name into English)

 

Cayman Islands

 (Jurisdiction(Jurisdiction of incorporation or organization)

 

19/5/F, 20th Building, 487 TianlinYueShang Plaza, 1 South Wuning Road, Shanghai 200233200042, People’s Republic of China 

(Address of principal executive offices)

 

Jacob A. Fisch, jake@chinadrtv.com, 86-21-5151 8888

19/5/F, 20th Building, 487 TianlinYueShang Plaza, 1 South Wuning Road, Shanghai

200042, People’s Republic of China 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

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

 

Title of each class Name of each exchange on which registered
American Depositary Shares, each representing twenty ordinary shares, par value $0.01 per share New York Stock Exchange

 

 

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

None

None 

 (Title of Class)

 (Title(Title of Class)

 

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

None

None

 (Title(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: 53,602,810.51,619,218.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.¨ ☐ Yes x☒ No

 

If this report is an annual or transaction 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 x☒ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x ☒ Yes ¨☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x ☒  Yes ¨☐ No

 

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

 

Large accelerated filer¨ ☐   Accelerated filer¨ ☐    Non-accelerated filerx ☒   Emerging growth company¨ ☐

 

If an emerging growth company that prepares its financial statements in accordance with accounting principles generally accepted in the United States (“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:

 

US GAAPx  ☒  International 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).¨ ☐ Yesx ☒ 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

 

 

  

 

 

  

ACORN INTERNATIONAL, INC.

 

TABLE OF CONTENTS

 

  Page
INTRODUCTION3ii
   
PART I 51
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS51
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE51
ITEM 3.KEY INFORMATION51
ITEM 4.INFORMATION ON THE COMPANY4636
ITEM 4A.UNRESOLVED STAFF COMMENTS7663
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS7664
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES9480
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS10388
ITEM 8.FINANCIAL INFORMATION10791
ITEM 9.THE OFFER AND LISTING11193
ITEM 10.ADDITIONAL INFORMATION11294
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK118100
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES119101
   
PART II 120103
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES120103
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS120103
ITEM 15.CONTROLS AND PROCEDURES120103
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT121104
ITEM 16B.CODE OF ETHICS121104
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES121104
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES122105
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS122105
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT123107
ITEM 16G.CORPORATE GOVERNANCE123107
ITEM 16H.MINE SAFETY DISCLOSURE123107
   
PART III 123108
ITEM 17.FINANCIAL STATEMENTS123108
ITEM 18.FINANCIAL STATEMENTS124108
ITEM 19.EXHIBITS124109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSF-1

 

 2

i

 

  

INTRODUCTION

 

Except where the context otherwise requires and for purposes of this annual report only, references to:

 

“ordinary shares” are to our ordinary shares, par value $0.01 per share;
●“ordinary shares” are to our ordinary shares, par value $0.01 per share;

 

“ADSs” are to our American depositary shares, each of which represents twenty ordinary shares;
●“ADSs” are to our American depositary shares, each of which represents twenty ordinary shares;

 

“ADRs” are to American depositary receipts, which, if issued, evidence our ADSs;
●“ADRs” are to American depositary receipts, which, if issued, evidence our ADSs;

 

“$,” “US$,” “USD” and “U.S. dollars” are to the legal currency of the United States;
●“$,” “US$,” “USD” and “U.S. dollars” are to the legal currency of the United States;

 

“China” and the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;
●“China” and the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;

 

“variable interest entities,” or “VIEs,” refer to Shanghai Acorn Network Technology Development Co., Ltd. (“Shanghai Network”), Beijing Acorn Trade Co., Ltd. (“Beijing Acorn”) and Beijing HJX Technology Development Co., Ltd. (“Beijing HJX Technology”), the domestic PRC companies in which we do not have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP due to our having effective control over, and our being the primary beneficiary of, the three companies;
●“variable interest entities,” or “VIEs,” refer to Shanghai Acorn Network Technology Development Co., Ltd. (“Shanghai Network”), Beijing Acorn Trade Co., Ltd. (“Beijing Acorn”) and Beijing HJX Technology Development Co., Ltd. (“Beijing HJX Technology”), the domestic PRC companies in which we do not have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP due to our having effective control over, and our being the primary beneficiary of, the three companies;

 

“consolidated affiliated entities” refer to our variable interest entities and their direct and indirect subsidiaries;
●“consolidated affiliated entities” refer to our variable interest entities and their direct and indirect subsidiaries;

 

“RMB” and “Renminbi” are to the legal currency of China; and
●“RMB” and “Renminbi” are to the legal currency of China; and

 

“we,” “us,” “our,” “our Company” and “our Group” refer to Acorn International, Inc., its predecessor entities, subsidiaries and consolidated affiliated entities, as the context may require.
●“we,” “us,” “our,” “our Company” and “our Group” refer to Acorn International, Inc., its predecessor entities, subsidiaries and consolidated affiliated entities, as the context may require.

 

Our reporting currency is the U.S. dollars. This annual report contains conversion of Renminbi amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all conversions of Renminbi into U.S. dollars were made at RMB6.5342 RMB6.9762to $1, which was the official base exchange rate published by the People’s Bank of China (PBOC) on December 31, 2017.2019. Monetary assets and liabilities denominated in Renminbi are translated into U.S. dollars at the respective official base exchange rate published by the PBOC as of the balance sheet date. Equity accounts denominated in Renminbi are translated into U.S. dollars at the applicable historical exchange rate. Revenues, expenses, gains and losses denominated in Renminbi are translated into U.S. dollars at the official annual average exchange rate for the applicable year as published by the PBOC. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.

ii

  

This annual report on Form 20-F includes our audited consolidated statements of operations data for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, and audited consolidated balance sheets data as of December 31, 20162018 and 2017.2019.

 

We completed the initial public offering of our ADSs in May 2007. Our ADSs are listed on the New York Stock Exchange, or the NYSE, under the symbol “ATV”.

 

FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These statements involve known and unknown risks, uncertainties and other factors, including those listed under Item 3.D. “Key Information - Risk Factors,” which may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward- looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995. In some cases, these forward-looking statements can be identified by words or phrases such as “aim,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,” “plan,” “potential,” “will” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:

 

  3●anticipated operating results for 2020;

●the expected impact of COVID-19 on our business;
 
●our ability to generate operating income, generate cash flows and fund our operations;

 

●our goals and strategies, and our success in developing our business model;

 

anticipated operating results for 2018;
●expected trends in our “direct sales” channels (including e-commerce channels) and our distribution channels (including online distribution channels), and in our margins and certain cost or expense items as a percentage of our net revenues;

 

our ability to reduce our operating losses, generate cash flows and fund our operations;
●our future business development, financial condition and results of operations;

 

our goals and strategies, and our success in developing our business model;
●our ability to introduce successful new products and attract new customers;

 

expected trends in our e-commerce channels, our direct sales platform and our distribution network, and in our margins and certain cost or expense items as a percentage of our net revenues;
●our ability to maintain and build our brand and revenue for our products;

 

our future business development, financial condition and results of operations;
●our ability to manage our featured product lines;

 

our ability to introduce successful new products and attract new customers;
●competition from companies in a number of industries, including without limitation retail industry and e-commerce industry;

 

our ability to maintain and build our brand and revenue for our direct sales products, particularly following our decisions to suspend the purchase of TV airtime for TV direct sales;
●our ability to effectively control our cost of sales and efficiently access media channels;

 

our ability to manage our featured product lines;
●PRC governmental policies and regulations relating to our businesses;

 

competition from companies in a number of industries, including internet companies that provide direct sales marketing in China for consumer products;
●general economic and business conditions in China and elsewhere; and

 

our ability to effectively control our cost of sales and efficiently access media channels;

PRC governmental policies and regulations relating to our businesses;

general economic and business condition in China and elsewhere; and

assumptions underlying or related to any of the foregoing.
●assumptions underlying or related to any of the foregoing.

 

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in Item 3.D. “Key Information — Risk Factors.” Those risks are not exhaustive. We operate in an emerging and 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 what we expect. All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

 4

iii

 

 

PART I 

 

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.KEY INFORMATION

 

A.Selected Financial Data

  

The following selected consolidated statements of operations data for the three years ended December 31, 2015, 20162017, 2018 and 2017,2019, and the selected consolidated balance sheet data as of December 31, 20162018 and 2017,2019, have been derived from our audited consolidated financial statements for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, and are included elsewhere in this annual report. Our selected consolidated statements of operations data for the years ended December 31, 20132015 and 2014,2016, and our consolidated balance sheet data as of December 31, 2013, 20142015, 2016, and 2015,2017 have been derived from our audited consolidated financial statements that are not included in this annual report. Our selected consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

In 2017, we reached an agreement to sell a majority stake in our HJX electronic learning products business, or the HJX Business, to a third-party investor and operator, allowing us to focus on existing businesses and brands with higher profit margins, and on achieving profitable growth of new, potentially high margin businesses. We maintain a 37.5% stake in a joint venture established with this third party. As a result of this transaction, we are required by applicable accounting rules to treat the historical operations of the wholly owned HJX Business as discontinued operations and the minority stake in the HJX Business as equity in losses of affiliates in the consolidated statements of operations for all periods presented, subject to the consolidation of the HJX Business into the joint venture entity.The financial data presented herein reflect thedirect sales of Ozing branded electronic learning devices incorporating mobile internet interactive features, such as online tutoring services (the “HJX Business”)HJX Business as discontinued operations.

In the third quarter of 2019, we completed closing of our call center in Wuxi, China. As a result, we are required by applicable accounting rules to treat the historical operations of the call center operations as discontinued operations for all periods presented. The financial data derived from our audited consolidated financial statements for the years ended December 31, 2017, 2018 and 2019, presented herein present call center operations as discontinued operations.

Our historical results for any period are not necessarily indicative of results to be expected for any future period. The selected consolidated financial data should be read in conjunction with those consolidated financial statements and related notes and Item 5. “Operating and Financial Review and Prospects” in this annual report.

 For the years ended December 31,  For the years ended December 31, 
 2013 2014 2015 2016 2017  2015  2016  2017  2018  2019 
 (in thousands $, except share and per share data)  (in thousands $, except share and per share data) 
Condensed Consolidated Statements of Operations Data                      
Revenues:                      
Direct sales, net $135,212  $43,914  $18,004  $13,362  $18,942   18,004   13,362   15,867   20,297   31,659 
Distribution sales, net  8,637   6,768   4,953   3,117   1,348   4,953   3,117   1,200   4,790   5,826 
Total revenues, net  143,849   50,682   22,956   16,478   20,290   22,956   16,478   17,067   25,087   37,484 
                                        
Cost of revenues:                                        
Direct sales  56,858   23,501   12,538   2,353   5,244   12,538   2,353   3,963   5,080   8,565 
Distribution sales  4,126   3,121   2,956   2,878   827   2,956   2,878   597   1,550   1,911 
Total cost of revenues  60,985   26,622   15,494   5,230   6,072   15,494   5,230   4,560   6,630   10,476 
Gross profit  82,864   24,060   7,463   11,248   14,218   7,463   11,248   12,507   18,457   27,008 
                                        
Operating (expenses) income:                                        
Advertising expenses  (51,281)  (7,621)  (2,204)  (24)  —   (2,204)  (24)  (1,726)  (1,291)  (2,438)
Other selling and marketing expenses                      (14,418)  (7,038)  (6,980)  (9,513)  (15,741)
  (48,352)  (30,870)  (14,418)  (7,038)  (10,115)
General and administrative expenses(1)                      (21,664)  (14,153)  (9,037)  (7,132)  (9,317)
  (23,687)  (19,193)  (21,664)  (14,153)  (9,759)
Other operating income, net  2,615   2,121   1,713   7,607   1,473   1,713   7,607   1,473   2,136   6,034 
Total operating expenses  (120,706)  (55,562)  (36,574)  (13,607)  (18,401)  (36,574)  (13,607)  (16,270)  (15,800)  (21,462)
Income from continuing operations  (37,842)  (31,502)  (29,111)  (2,359)  (4,183)
(Loss) Income from continuing operations  (29,111)  (2,359)  (3,763)  2,657   5,547 
Other income, net  3,394   1,954   1,017   18,138   12,172   1,017   18,138   12,172   32,965   3,480 
Income tax (expense) benefit  (646)  (1,171)  (183)  (4,593)  7,865   (183)  (4,593)  7,892   (3,184)  1,974 
Income from continuing operations before equity in losses of affiliate  (35,093)  (30,719)  (28,277)  11,186   15,854 
Income from discontinued operations before equity in losses of affiliates  (4,609)  (13,372)  (11,746)  (6,909)  (3,475)
(Loss) income from continuing operations before equity in losses of affiliates  (28,277)  (11,186)  16,302   32,438   11,001 
Loss from discontinued operations before equity in losses of affiliates  (11,746)  (6,909)  (3,922)  (990)  (1,061)
Equity in losses of affiliates  (206)  (235)  (227)  (868)  -   (227)  (868)  —   (325)  (109)
Net income (loss)(2)(3)  (39,908)  (44,326)  (40,250)  3,409   12,380   (40,250)  (3,409)  12,380   31,123   9,830 
Net income (loss) attributable to non-controlling interests  (12)  3   (91)  (30)  (4)
Net loss attributable to non-controlling interests  (91)  (30)  (4)  (4)  (6)
Net income (loss) attributable to Acorn International, Inc. shareholders  (39,896)  (44,329)  (40,159)  3,438   12,385   (40,159)  (3,438)  12,384   31,127   9,836 
Income (loss) per ordinary share:                                        
Basic and Diluted  (0.47) $(0.54) $(0.51) $0.05  $0.19   (0.51)  (0.05)  0.19   0.60   0.19 
—Continuing operations  (0.42)  (0.37)  (0.36)  0.140.24       (0.36)  (0.14)  0.25   0.62   0.21 
—Continuing operations  (0.05)  (0.16)  (0.15)  (0.09)  (0.05)
—Discontinued operations  (0.15)  (0.09)  (0.06)  (0.02)  (0.02)
Weighted average ordinary share outstanding - basic and diluted  84,115,169   82,690,613   79,226,404   75,600,700   65,836,869   79,226,404   75,600,700   65,836,869   52,546,325   51,619,218 

 

 5

2

 

  

 As of December 31, 
 2013 2014 2015 2016 2017  As of December 31, 
       (As adjusted)    2015  2016  2017  2018  2019 
 (in thousands $)  (in thousands $) 
Condensed Consolidated Balance Sheet Data                               
Cash and cash equivalents  82,552   34,686   12,147   25,506   21,020   12,147   25,506   21,020   20,144   13,461 
Prepaid advertising expenses  3,215   6,162   475   11   -   475   11   —   —   — 
Total assets  175,354   125,732   240,719   132,731   100,907   240,719   132,731   100,907   90,137   80,164 
Deferred revenue  787   667   548   381   512   548   381   512   175   69 
Total liabilities  39,082   34,060   62,006   33,222   13,563   62,006   33,222   13,563   18,134   13,724 
Ordinary shares  949   952   890   918   919   890   918   919   919   919 
Additional paid-in capital  161,500   161,925   161,308   161,938   161,963   161,308   161,938   161,963   121,963   117,446 
Retained earnings  (41,862)  (86,191))  (126,349)  (122,911))  (110,527)
Accumulated deficits  (126,349)  (122,911)  (110,527)  (79,399)  (69,563)
Accumulated other comprehensive income  35,285   34,585   162,580   80,865   60,967   162,580   80,865   60,967   56,507   45,635 
Treasury stock  (20,109)  (20,109)  (20,109)  (21,640)  (26,335)  (20,109)  (21,640)  (26,335)  (28,320)  (28,320)
Non-controlling interests  509   510   392   340   355   392   340   355   334   323 
Total equity  136,272   91,672   178,713   99,510   87,344   178,713   99,510   87,344   72,003   66,440 
Total liabilities and equity  175,354   125,732   240,719   132,731   100,907   240,719   132,731   100,907   90,137   80,164 

 

Note:  Accumulated other comprehensive income in 20172019 primarily reflects dividends and gains from salenet change of unrealized losses of available-for-sales securities.securities, net of tax. See Notes 8 and 9Note 7 to our audited consolidated financial statements included elsewhere in this annual report.

  For the years ended December 31, 
  2015  2016  2017 
  (in thousands, except percentages) 
Selected Operating Data            
Number of inbound calls generated through direct sales platforms  92   —   — 
Conversion rate for inbound calls to product purchase orders  11.5%  —%  —%
Total TV direct sales program minutes  3   —   — 

 6

Note:  we started to reduce our TV advertising purchases for infomercials beginning in 2014, and we suspended our TV direct sales operations in the first quarter of 2015. 

 

(1)Includes share-based compensation in amounts listed below:

  For the years ended December 31, 
  2013  2014  2015  2016  2017 
     (in thousands)    
Share-based compensation $(446) $(428) $(71) $(658) $(25)

  For the years ended December 31, 
  2015  2016  2017  2018  2019 
        (in thousands)       
Share-based compensation $(71) $(658) $(25) $—  $— 

 

(2)Includes share-based compensation in amounts listed in the table in note (1) above.

 

(3)Net income (loss) for the periods presented reflect effective tax rates, which may not be representative of our long-term expected effective tax rates in light of the tax holidays and exemptions enjoyed by certain of our PRC subsidiaries and our consolidated affiliated entities. See Item 5.A, “Operating and Financial Review and Prospects—Operating Results—Taxation”.

 

Exchange Rate Information

We have reported our financial statements in U.S. dollars. Our business is primarily conducted in China and substantially all of our revenues are denominated in Renminbi. Periodic reports will be made to shareholders and will be expressed in U.S. dollars using the then current exchange rates. The conversion of Renminbi into U.S. dollars in this annual report is based on the official base exchange rate published by the People’s Bank of China. Monetary assets and liabilities denominated in Renminbi are translated into U.S. dollars at the respective official base exchange rate published by the PBOC as of the balance sheet date. Equity accounts denominated in Renminbi are translated into U.S. dollars at the applicable historical exchange rate. Revenues, expenses, gains and losses denominated in Renminbi are translated into U.S. dollars at the official annual average exchange rate for the applicable year as published by the PBOC., gains and losses are translated using the average rate for the year as published by the People’s Bank of China. Unless otherwise noted, all conversions from Renminbi to U.S. dollars in this annual report were made at RMB6.5342 to $1.00, which was the official base exchange rate published by PBOC on December 31, 2017. The prevailing rate on April 30, 2018 was RMB9.3393 to $1.00. 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, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade.

The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

Period Noon Buying Rate 
  Period End  Average(1)  Low  High 
 (RMB per U.S. Dollar) 
2013  6.0969   6.1896  6.2898  6.0969 
2014  6.1190   6.1428   6.1710   6.0930 
2015  6.4936   6.2284   6.4936   6.1079 
2016  6.9370   6.6529   6.4564   6.9508 
2017  6.5342   6.6971   6.4997   6.9526 
October  6.6397   6.6154   6.5808   6.6493 
November  6.6034   6.6186   6.5810   6.6399 
December  6.5342   6.5942   6.5342   6.6251 
2018                
January  6.3339   6.4364   6.3267   6.5207 
February  6.3294   6.3162   6.2822   6.3530 
March  6.2728   6.3220   6.2785   6.3451 
April  6.3393   6.2975   6.2674   6.3393 

(1)Annual average for any given year is calculated by using the average of the exchange rates on the end of each month during such year. Monthly average for any given month is calculated by using the average of the daily rates during such month.

  7

B.Capitalization and Indebtedness

  

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

D.Risk Factors

 

Risks Relating to Our Business and Industry

 

If various measures to reduceWhile we maintained operating expenses or generate additional cash flows are unsuccessful,profitability in 2019, in the recent past we may continue to experiencehave experienced significant net losses and negative cash flows, and we cannot assure you that our recent results constitute a new trend.Moreover, we believe we must consistently achieve operating profitability in order to position the business for long term sustainable success.

 

We had a net lossAlthough we achieved operating profit of $5.5 million and $2.7 million in 2019 and 2018, respectively, we experienced operating losses of approximately $39.9 million, $44.3 million and $40.2 million in 2013, 2014 and 2015, respectively. While we had net income of approximately $3.4 million in 2016 and approximately $12.3$3.8 million in 2017 ouras well as operating loss from continuing operations was around $2.4 millionlosses in 2016 and $4.2 million in 2017 respectively, andthe prior few years before that.

Over the past several years, we achieved profitability only duehave continued to other income of approximately $17.7 million in 2016 and $11.6 million in 2017 respectively, which primarily resulted from sales of approximately 8 million shares and 4.6 million shares of Shanghai Yimeng Software Technology Co., Ltd. (“Yimeng”) in 2016 and 2017 respectively. In our 2014 annual report filed with the United States Securities and Exchange Commission (“SEC”) in May 2015, we indicated that there was substantial doubt as to our ability to continue as a going concern. In response, we began implementingimplement a series of initiatives, some of which are ongoing, designed to liquidate our non-core assets, stabilize our core businesses, reduce our expenses and losses, and generate additional cash flow. Our liquidity position has improved in 2015, 2016 and 2017,subsequent years, in part due to these measures, allowing us to realize our assets and satisfy our liabilities in the normal course of business. Moreover, these measures have helped us to achieve profitability in recent years. Such measures include, among other related actions, the following, with a number of them continued during 2017:through early 2020:

 

 ·●on November 8, 2019, our wholly-owned subsidiary, China DRTV, Inc. entered into an equity transfer agreement to sell 100% of the equity interests in 2015its wholly-owned subsidiary, Zhuhai Acorn Electronic Technology Co., Ltd. (“Zhuhai Acorn”), to an unrelated third-party for a base purchase price of $1.45 million subject to working capital adjustment. The sale was completed in the fourth quarter of 2019 with a $1.2 million gain recorded and 2016, we sold a number of non-core properties in Shanghai and Beijing for an aggregate considerationthe receivables of approximately $14.5 million;$1.42 million (after the working capital adjustment and applicable taxes) were received on May 27, 2020;

 

 ·●in 20142017, we startedrestructured our call center operations by further reducing our TV advertising expenditures in response to increasing TV advertising pricing and increasingly restrictive applicable PRC regulations,overhead, and in the first quarter of 2015,2019, we suspendedshut down our TV directcall center operations, which have been increasingly unproductive as a sales channel;channel in China’s new digital economy;
●on December 10, 2018, we executed an agreement to sell Acorn’s former principal office in Shanghai to a third party for RMB46 million. The ownership transfer was completed on March 28, 2019;

 

 ·●In 2015, we consolidatedexecuted a share sale and purchase agreementwith Hong Kong Red Star Macalline Universal Home Furnishings Limited (“Red Star”) on April 27, 2018, in exchange for cash payment of approximately RMB360 million ($57 million), subject to a post-closing working capital adjustment, and have subsequently consummated the transaction contemplated thereunder. After the working capital adjustment, the total purchase price of Red Star was approximately RMB375 million ($59 million). Pursuant to the terms of the share sale and purchase agreement, Red Star acquired 100% of the shares in our four call centers into one call centerwholly-owned Hong Kong subsidiary Bright Rainbow Investments Limited, which owns Shanghai HJX Digital Technology Co., Ltd, which owns various non-core assets, including the land use rights to a plot of land in Wuxi, Chinathe Qingpu district of Shanghai with significant related headcount reductions;a total area of 76,799 square meters, along with the warehouse on that land plot;


 ·●in 2016 and 2017, we sold a total of approximately 12.6 million shares of Yimeng for an aggregate consideration of $28.2 million; in 2017, we received  $2.7 million dividend with respect to our ownership of Yimeng shares.

 8

·In 2015, 2016 and 2017, we subleased spare warehouse space to third parties, resulting in a decrease in associated costs and an increase in other operating income; and

·In 2017, our Company reached an agreement to sell a majority stake in its HJX Business to a third-party investor and operator,allowing Acornus to focus on its already profitable businesses and brands, as well as on achieving profitable growth of new businesses within our Group.Group;

●in 2016, 2017, and 2018, we sold a total of approximately 12.6 million shares of E-Money for an aggregate consideration of $28.2 million. In 2019, we did not sell any E-Money Shares. E-money announced on December 18, 2019 its plan to repurchase between 5 million and 10 million of its shares in the public market at a price of no more than RMB 4.5 per share for a 6-month period commencing from December 2, 2019, the date E-Money’s board of directors approved the repurchase plan. From January 1, 2020 through the date of this report, Acorn has sold 12.5 million E-Money Shares under this repurchase plan, along with sales to individual buyers in the market, and received proceeds of $ 7.5 million. As at the date of this report, Acorn holds approximately 20.2 million shares, or 4.6% of total shares of E-Money.

  

Our ability to achieve and maintain profitability and positive cash flow from operating activities depends on various factors, including our ability to grow revenue and control our costs and expenses, the effectiveness of our selling and marketing activities, consumer acceptance of our products and the growth and maintenance of our customer base. We may fail to achieve or sustain profitability or positive cash flow from operating activities. See Item 5. “Operating and Financial Review and Prospects—A. Operating Results—Overview” and “—B. Liquidity and Capital Resources”.

 

We do not believeface risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our 2017operations. Specifically the novel coronavirus could have a material adverse impact on our business, results of operations, are comparablefinancial condition, cash flows or liquidity.

Our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome (SARS), coronavirus or COVID-19, Ebola, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt our business and operations. These events could also significantly impact our industry and cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of contracting an epidemic disease, since this could require us or our business partners to quarantine some or all of these employees or disinfect the facilities used for our operations. In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. Our operations could also be severely disrupted if our consumers, merchants or other participants were affected by natural disasters, health epidemics or other outbreaks.

The outbreak of a novel coronavirus (which causes the disease now known as COVID-19), was first identified in December 2019 in Wuhan, China, and has since spread globally. Government efforts to contain the spread of the coronavirus through lockdowns of cities, business closures, restrictions on travel and emergency quarantines, among others, and responses by businesses and individuals to reduce the risk of exposure to infection, including reduced travel, cancellation of meetings and events, and implementation of work-at-home policies, among others, have caused significant disruptions to the global economy and normal business operations across a growing list of sectors and countries.  The foregoing is likely to adversely affect business confidence and consumer sentiments, and has been, and may continue to be, accompanied by significant volatility in financial and commodity markets.  The spread of the coronavirus, particularly as it develops into a worldwide health crisis, is also likely have broader macro-economic implications, including reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained.

The outbreak of the coronavirus could have a material impact on our business in 2020. There has been disruption to our historical operating results orproduction capacity and our ability to deliver to customers in parts of China. There is also uncertainty about whether our ability to import raw material for our Acorn Fresh business will be affected materially. Finally, while we are necessarilyadapting to work-from-home and flexible working arrangements, we have historically operated within a reliable indicatortraditional office environment in Shanghai. Some of our future operating results, makingemployees, including certain senior officers, are foreign passport holders and they are currently prohibited from entering China.

Some of our online businesses (such as sale of fresh seafoods) appear to be experiencing increased demand, as customers need to shop necessities such as food from home. Our Babaka® product sales experienced reduction and may continue to be negatively affected by the COVID-19. In general, the combination of supply-side disruption, delivery challenges and potential, long-term waning consumer demand caused by COVID-19, potentially exacerbated by other factors, have negatively impacted and could continue to negatively impact our business. While we continue to monitor the situation, at this point it is difficult for you to evaluateassess the probable significance or duration of any disruption. As a result, we are taking a number of defensive measures to cut costs and conserve our cash resources, including salary reductions and the indefinite suspension of the quarterly dividend until we have more confidence concerning the current situation.


We currently are unable to predict the duration and severity of the spread of the coronavirus, and responses thereto, on our business or future prospects;and operations, and on our 2018 total net revenues mayresults of operations, financial condition, cash flow and liquidity, as these depend on rapidly evolving developments, which are highly uncertain and will be lower than 2017 total net revenues.a function of factors beyond our control, such as the speed of contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions, the timing and scope of governmental restrictions on public gatherings, mobility and other activities, financial and other market reactions to the foregoing, and reactions and responses of the populace both in affected regions and regions yet to be affected.  While we expect we will suffer adverse effects, the more severe the outbreak and the longer it lasts, the more likely it is that the effects on us and our business will be materially adverse.

 

Our best-selling Babaka® product line accounted for, and is expected to continue to account for, the substantial majority of our sales in the near term. Babaka® product line sales may decline, or reach the end of a product lifecycle, and we may fail to introduce new products to offset declines in sales of our featured products.

Our best-selling featured product line, the Babaka® product line, accounted for 90.5%, 92.5% and 89.8% of our gross revenues in 2017, operating results were affected by,2018 and 2019 respectively.

Our Babaka® product line may fail to maintain consumer market popularity, and sales may decline due to, among other factors, the saleintroduction of competing products, entry of new competitors, customer dissatisfaction with the value or quality offered by our products, negative publicity or market saturation. Consequently, our future sales success depends in part on our ability to successfully identify, develop, introduce and distribute in a timely and cost-effective manner new and upgraded products. Some reasons that sales of our Yimeng shares;Babaka® product line may fail to continue to increase, or even decline, include the treatment of HJX Businessfollowing:

● Competition. Competition from current or future competitors could cause our products to lose market acceptance or require us to significantly reduce our prices or increase our promotional activities to maintain and attract customers. Our current or future competitors may have larger scale, longer operating histories, better brand recognition and consumer trust, stronger media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do. Currently, our Babaka® product line faces competition from brands such as a discontinued operation;MTG, MINGZHEN, and Nuotai.

● Counterfeit Products. We have discovered unauthorized Babaka® products on e-commerce platforms and in the utilizationmarketplace that are counterfeit reproductions of our distribution network solely for Youngleda oxygen generating products;products. The existence of such counterfeit products could reduce our market share, and if they are of lower quality than our products are, and the continued suspensioncustomers are not aware that they are using counterfeits, that could bring reputational harm to our products. In addition, the lower prices of such counterfeits could impose pressure on us to reduce our prices to attract customers.

● Negative Publicity. If our Babaka® product line faces any negative publicity, regardless of veracity, we will need to incur expenditure of funds and management time to respond to such negative publicity, and there may be material adverse effect on our reputation, our business and the trading price of our TV direct sales channel (exceptADSs. Negative publicity may arise for various reasons, such as complaints about the purchase of a small amount of TV advertising time for the purpose of testing whether we should re-initiate the TV direct sales channel. The aforesaid purchase of TV advertising time resulted in non-material sales and we subsequently decided to continue the suspension of the TV direct sale channel); our focus on direct sales through e-commerce platforms; a certain shareholders dispute; other efforts and measures to generate cash and cut cost; and the streamliningquality of our business model. Ourproducts and related services or other public relations incidents of us. For example, in 2018, resultsthere was negative news coverage about the founder of our Babaka® products who left the Company years ago and subsequently negative media coverage extended to the Babaka® products and similar posture correction products.

● Failure of Trademark Protection. We rely on a combination of patent (utility model), copyright, trademark and unfair competition laws, nondisclosure agreements and other methods to protect our intellectual property rights. In particular, we rely on the trademark law in China to protect our product brands. As of February 29, 2020, among the trademarks we maintain, 54 trademarks contain either the Chinese name of Babaka® (or Chinese characters similar to the Chinese name of Babaka®) or the English name of Babaka® for our best-selling featured product line. We take prompt actions to extend trademarks that are expiring and to apply for registration of more trademarks that contain either the Chinese name or English name of Babaka®or a mixture of both. We may be affected by these events andunable to enforce our ongoing efforts to evolve our business model in response to changing conditions.

Historically, a significant portion of our revenues were generated through TV direct sales and one of our largest expenses was our purchase of TV advertising time (90% of which was typically dedicated to TV infomercial time). Consistent with deemphasizing in 2014, and then discontinuing in the first quarter of 2015, our TV direct sales channel, TV direct sales revenues decreased from $5.7 million in 2014 to $0.3 million in 2015 and further to less than 0.1% in 2016 and 2017 (i.e. approximately 6.0%, 0.7% and 0% of our total gross revenues in those periods respectively). We believe that product sales through our distribution channel are also adversely affected by decreased advertising expenditures.

Our 2017 operating results include various charges and expensesproprietary rights in connection with these trademarks before such registrations are approved by the relevant authorities and it is possible that such registrations may not be approved at all. There can be no assurance that our effortstrademark applications will be approved, that any registered trademark will adequately protect our intellectual property, or that such trademark will not be challenged by third parties or found by a judicial authority to generate cashbe invalid or unenforceable. 


We have vigorously prosecuted our trademark rights by challenging third party trademark registration similar to our trademarks, filed law suits/claims against improper and cut costs, including severance fees paidunauthorized use of the “Babaka®” trademarks, or issued takedown notices or initiates discussions with the third parties to correct the issues. However, there can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. If we fail to maintain and enforce our trademark rights, the value of our brand could be diminished. There is also a risk that one or more of our trademarks could become generic, which could result in connectionthem being declared invalid or unenforceable. For example, there’s a risk that one or more “Babaka®” trademarks could become so commonly used that it becomes synonymous with our headcount reductions.any posture correction products, and if this happens, we could lose protection of this trademark.

 

In addition, as  Our Babaka® product line sales for a result of the shareholder dispute that is more specifically described in Item 8.A. “Financial Information—Consolidated financial statements andgiven period will depend upon, among other financial information—Legal Proceedings,” we incurred substantial direct costs associated with the legal proceedings in the Cayman Islands priorthings, a positive customer response to their settlement on July 28, 2017,our “direct sales” efforts, including fees and expenses of various professionals (primarily legal advisors) to advise us on this matter,our e-commerce channel, as well as substantial indirect coststhe efforts of our distributors, our effective management of product inventory, and the stage of our products’ lifecycles during the period. Positive customer responses depend on many factors, including the appeal of the products and services being marketed, the effectiveness of our “direct sales” platforms and the viability of competing products. Moreover, any new products we develop may not receive market acceptance. In addition, from time to us resulting fromtime, we experience delays in the dispute, including without limitation, inappropriate severance payments, excess paymentsupply of our products to third-party vendors and suppliers, distraction ofcustomers due to production delays or shortages or inadequate inventory management, and staff fromwe lose potential product sales as a result. Furthermore, during a product’s lifecycle, problems may arise regarding regulatory, intellectual property, product liability or other issues which may affect the core business to focus, and lost opportunities. We estimate that the total direct costs associated with the legal proceedings related to the shareholder dispute were approximately $0.4 million for 2015. Although the shareholder dispute was generally resolved in May 2015, on December 1, 2016, we filed a related action in the Grand Courtcontinued viability of the Cayman Islands, or Cayman Islands Court, against Mr. Andrew Yan, Gordon Xiaogang Wang, and Jing Wang (the “Former Directors”)product for damages resulting from breach of fiduciary duties and related misconduct and mismanagement, and incurred further expenses of approximately $333,365 in relation to this action prior to its settlement on July 28, 2017.

 9

As more fully described below under “Historical and future disputes regarding control of our strategic direction and control of our board of directors could adversely impact our business, operating results and prospects,” Item 7. “Major Shareholders and Related Party Transactions—Related Party Transactions— Transitional Services and Separation Agreement,” and in Item 7. “Major Shareholders and Related Party Transactions—Related Party Transactions— Reimbursement to Mr. Robert W. Roche,” with respect to the action which started in mid-2014 and generally resolved in mid-2015, we entered into settlement arrangements with Mr. Yang and Mr. Roche and exchanged certain liability releases, including most recently in January, 2016.sale.

 

As more fully described below under “Litigation against certain former directors forIf we fail to identify and introduce additional successful products, including those to replace existing featured products, such as the Babaka® product line, if they suffer from declining sales or approaching the end of their misconducts during their service,” with respect to the action filed on December 1, 2016, we entered into a settlement agreement with Roche Enterprises Ltd. (“REL”), the Former Directorsproduct lifecycle, our gross revenues may not grow or may decline and SB Asia Investment Fund II L.P., an exempted limited partnership registered in the Cayman Islands (“SAIF”), pursuant to which, all parties would discontinue and/or withdraw all claims, counterclaimsour market share and taxation proceedings in the Cayman Islands Court. Agreement was also reached for the Company to repurchase allvalue of the ordinary shares of the Company owned by SAIF, representing 27.7% of the total outstanding ordinary shares of the Company, for the purchase price of approximately $4.17 million, the equivalent of $4.05 per ADS.our brand may be materially and adversely affected. 

 

Other than those arrangements, we have not entered into any agreements settling any claims or provided or received any releases from any of the directors or shareholders involved in the dispute with respect to the matters leading up to or resulting from the dispute. We may be subject to indemnification claims or legal proceedings with respect to these matters, and consequently incur fees and expenses (including attorney’s fees) which would negatively impact our future financial results. 

The overall impact of these events on our future operating results depends on, among other things, our success in reshaping our business model, including incubation of new businesses, our ability to promote our products through our other existing platforms and distribution networks, and our ability to grow our e-commerce channel.

Our evolving business model and the evolution of China’s direct salesretail industry make it difficult to evaluate our business and future prospects.

 

Our business model has varied throughout our operating history in response to changes in the direct salesChina’s retail industry and the regulatory environment in China. In response to regulatory changes, what we refer to as our direct“direct sales” model (to contrast with sales modelwe make via distributors, whether online or offline) now consists of primarily outbound marketing andof Internet sales. Furthermore, as the direct salesChina’s retail industry has evolved, we have begun to focus on sourcing other branded products to complement our own proprietary-branded product lines (e.g. Youngleda oxygen generatingBabaka® posture correction products), for distribution through our direct sales“direct sales” channel and our distribution channel. More recently we have begun to incubateinvested significant resources in new businesses, such as Acorn Fresh and Acorn Digital, each of which represents a more significant departure from our historical business model.model and has no assurance of success.

 

The evolution of our business model makes it difficult for you to evaluate our business and future prospects. Our longer term goal is to leverage our success as the leading TV informercial company in China in prior years to now become a leading direct marketing and branding company in China that markets and distributes, particularly through our e-commerce channel, which we are continuing to develop, both our proprietary, self-owned brands and products and well-established or promising new third-party brands and products, as well as to expand Acorn Fresh and Acorn Digital, and incubate new businesses, within our Group. To achieve this goal, we need to continue to grow our business across platforms and product lines. Our ability to successfully implement our strategy is subject to various risks and uncertainties, including:

 

·●our relatively short history in the e-commerce business;

 

·●dramatic changes in success levels of our different brands from year to year;

 

·●our ability to maintain awareness of our brands, generate sales and develop customer loyalty through our direct sales“direct sales” platform, particularly our e-commerce channel;

 

·●our ability to continue to develop our e-commerce channel, including by adapting to the latest technological developments;

 

·●our ability to successfully incubate and expand new businesses that are far removed from our historical core competencies;

 

·●changes in government regulations, industry consolidation and other significant competitive and market dynamics;

 

  10

·●our ability to upgrade our technology or infrastructure to keep pace with our current and future direct sales“direct sales” platforms;

 

·●the potential need in the future for additional capital to finance our expansion of these business operations, which may not be available on reasonable terms or at all; and

 

·●the need to recruit additional skilled employees, including technicians and managers at different levels.


There can be no assurance that we will be able to effectively manage these risks or execute our business strategies, which could have a material adverse effect on our growth, results of operations and business prospects.

 

Our operating results fluctuate from period to period, making them difficult to predict.

 

Our operating results are highly dependent upon, and will fluctuate based on, the following product-related factors:

 

the mix of products selected by us for marketing through our direct sales platforms (including outbound marketing and e-commerce channels) and our distribution network, as well as their average selling prices;
●the mix of products selected by us for marketing through our “direct sales” platforms (consisting primarily of e-commerce channels, and to a lesser extent, outbound marketing) and our distributors, as well as their average selling prices;

 

the suspension of our TV direct sales and the declining impact of historical significant TV marketing spend on our primary products as time passes;
●the level of investment we make in our newest businesses, such as Acorn Fresh and Acorn Digital, as well as other new businesses we incubate, and their success in generating revenues;
●positive and negative publicity about our products and our Company generally;

 

positive and negative publicity about our products and our Company generally;
●

new product introductions by us or our competitors and our ability to identify new products, as well as to incubate successfully new businesses;

●the availability of competing products and possible reduction in the sale prices of our products over time in response to competitive offerings or in anticipation of our introduction of new or upgraded offerings;

 

new product introductions by us or our competitors and our ability to identify new products, as well as to incubate successfully new businesses;
●seasonality with respect to certain of our products;

 

the availability of competing products and possible reduction in the sale prices of our products over time in response to competitive offerings or in anticipation of our introduction of new or upgraded offerings;
●the market of certain featured products becoming saturated over time;

 

seasonality with respect to certain of our products;
●discounts offered to our distributors as part of incentive plans to stimulate sales;

 

the market of certain featured products becoming saturated over time;
●the success of our distributors in promoting and selling our products;

 

discounts offered to our distributors as part of incentive plans to stimulate sales;
●the potential negative impact distributor sales may have on our own “direct sales” efforts; and

 

the success of our distributors in promoting and selling our products locally;

the potential negative impact distributor sales may have on our own direct sales efforts; and

depletion of our pool of quality names or data for outbound marketing.
●depletion of our pool of quality names or data for outbound marketing.

 

In addition, factors not directly relating to our products which could cause our operating results to fluctuate in a particular period or in comparison to a prior period include:

 

new laws, regulations or rules promulgated by the PRC government governing the consumer product marketing and branding industries;

natural disasters, such as the severe snow storms and earthquake experienced by China in 2008;

the amount of operating expenses incurred by us and timing of such incurrence, including our media procurement expenses, inventory-related losses, bad debt expense, product returns and options grants to our employees;

gains and losses related to our sale of non-core assets and our investments in marketable and other securities; and

the level of advertising and other promotional efforts by us and our competitors in a particular period.

  11●epidemics, such as the COVID-19 outbreak in 2020

●new laws, regulations or rules promulgated by the PRC government governing the consumer product marketing and branding industries;
 
●the general factors driving China’s online retail industry, such as levels of per capita disposable income and consumer spending, the number of online shoppers, the adoption of online sales strategies by us and other manufacturers and service providers, and the availability of improved delivery services and the payment options;

 

●natural disasters, such as the severe snow storms and earthquake experienced by China in 2008;

●the amount of operating expenses incurred by us and timing of such incurrence, including our media procurement expenses, inventory-related losses, bad debt expense, product returns and options grants to our employees;

●gains and losses related to our sale of non-core assets and our investments in marketable and other securities;

●the level of advertising and other promotional efforts by us and our competitors in a particular period;

●our ability to attract and retain competent and experienced employees;

●our ability to keep pace with the rapidly changing digital landscape in China and ever changing-consumer behavior; and

●the rising cost of digital media.

 

Due to these and other factors, our operating results will likely vary from period to period, will be difficult to predict for any given period, may be adversely affected from period to period and may not be indicative of our future performance. If our operating results for any period fall below our expectations or the expectations of investors or any market analyst that may issue reports or analyses regarding our ADSs, the price of our ADSs is likely to decrease.

 

Our failure to quickly identify and adapt to changing industry conditions may have a material and adverse effect on our business, financial condition and results of operations.

The online and offline consumer marketing and sales industries are subject to changing consumer preferences and industry conditions. Consequently, we must stay abreast of emerging fashion, lifestyle, design, technological and other industry and consumer trends. This requires timely collection of market feedback, accurate assessments of market trends, deep understanding of industry dynamics and flexible manufacturing capabilities.

We must also maintain relationships with suppliers who can adapt to fast-changing consumer preferences. If one or more of our existing suppliers cannot meet these requirements effectively, we will need to find and source from new suppliers, which may be costly and time-consuming. We or our suppliers may overestimate customer demand, face increased overhead expenditures without a corresponding increase in sales and incur inventory write-downs, which will adversely affect our results of operations.

If we cannot offer appealing products on our websites or through our other “direct sales” platforms or distributors, our customers may purchase fewer products from us or stop purchasing products from us altogether. Our reputation may also be negatively affected. If we do not anticipate, identify and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate our desired level of sales. Failure to properly address these challenges may materially and adversely affect our business, financial condition and results of operations.

Our business depends significantly on the strength of our product brands and corporate reputation; our failure to develop, maintain and enhance our product brands and corporate reputation may materially and adversely affect the level of market recognition of, and trust in, our products.

In China’s fragmented, developing and increasingly competitive consumer market, product brands and corporate reputation have become critical to the success of our new products and the continued popularity of our existing products. We undertake promotional activities to market our brands and enhance our reputation, but our promotional activities may be expensive and may fail to either effectively promote our product brands or generate additional sales. In addition, our product brands, corporate reputation and product sales could be harmed by factors including but not limited to the following:

●our advertisements, or the advertisements of the owners of the third-party brands that we market or those of our distributors, are deemed to be misleading or inaccurate;

●our products fail to meet customer expectations;

●we provide poor or ineffective customer service;

●our products contain defects or otherwise fail;

●consumers confuse our products with inferior or counterfeit products;

●consumers find our outbound marketing intrusive or annoying;

●there is negative media coverage about the products we sell.

Our products may also be subject to negative publicity for various reasons, such as complaints about the quality of our products and related services or other public relation incidents relating to us, which may adversely affect our reputation and the sales of our products. For example, in 2018, there was negative news coverage about the founder of our Babaka® products and subsequently negative media coverage extended to the Babaka® products and similar posture correction products. Any such negative publicity, regardless of veracity, could result in the expenditure of funds and management time and may have a material and adverse effect on our reputation, our business and the trading price of our ADSs.


We rely on our distributors for a substantial portion of our revenues. Failure to maintain good distributor relations could materially disrupt our distribution business and harm our net revenues.

In 2017, 2018 and 2019, 7.0%, 19.1% and 15.5% respectively, of our net revenues were generated through our distributors across China. Our largest distributor accounted for approximately 2.9%, 14.1% and 13.2% of our gross revenues in 2017, 2018 and 2019, respectively. We do not maintain long-term contracts with our distributors. Maintaining relationships with existing distributors and replacing any distributor may be difficult or time consuming. In addition, we are in the process of rationalizing and streamlining our distribution business to adapt to our evolving business model. If we cannot negotiate favorable terms regarding our distribution agreement with our existing distributors, they may discontinue their relationships with us and we may not be able to identity and attract new distributors or find suitable replacement of our existing distributors. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.

We may be unable to effectively manage our distributors. Any failure by our distributors to operate in compliance with our distribution agreements and applicable law may result in liability to us, may interrupt the effective operation of our distributors, may harm our brands and our corporate image and of which may result in decreased sales.

We have limited ability to manage the activities of our distributors, who operate independently from us. In addition, our distributors may violate our distribution agreements with them. Such violations may include, among other things:

●failure to meet minimum sales targets for our products or minimum price levels for our products in accordance with relevant agreements;

●failure to properly promote our products through local marketing media, including Internet and local print media, violation of our media content requirements, or failure to meet minimum required media spending levels;

●selling products that compete with our products, including product imitations, or selling our products outside their designated territories, possibly in violation of the exclusive distribution rights of other distributors;

●providing poor customer service of the after-sale repair or return; or

●violating PRC law in the marketing and sale of our products, including PRC restrictions on advertising content or product claims.

If we determine to fine, suspend or terminate our distributors for acting in violation of our distribution agreements, our ability to effectively sell our products could be negatively impacted. In addition, violations with our distribution agreements by the distributors could negatively affect our brands and our corporate image, possibly resulting in loss of customers and a decline in sales.

The Company relies, for product sales, on third-party e-commerce platform TMall, which could adopt policies or take other actions that may negatively affect or even prevent our product sales. The Company also relies, to a lesser extent, for product sales on its Taobao Partners, who may decide to terminate their relationship with the Company in the future or fail to maintain or increase their sales volume of our products.

The Company relies heavily on the e-commerce platform, TMall, run by Alibaba, as one of the channels for its Internet sales. Specifically, the Company contracts with a number of entities which market, sell and distribute the Company’s products on TMall and calls such entities Taobao Partners, or TPs. We had 3 TPs as of December 31, 2019. If TMall were to adopt any policy or take any other action that would restrict or even prevent the sale of our products, disrupt the business of our TPs, or increase the cost of sales of our products, then our Internet sales may be materially adversely affected. The Company relies on such TPs to generate sales through e-commerce channels. However, the Company does not have long-term contracts with such TPs, and it is possible that such TPs decide not to contract with the Company in the future or terminate their existing contracts. In addition, such TPs may fail to maintain or increase their sales volume in the future, and we may fail to timely find and contract with new TPs who are capable of generating satisfactory sales volume. Further, our agreements with TPs typically do not restrict the TPs from procuring products from other sellers, and such other sellers’ products may be competing products of ours. If any such events occur, the Company may face decreasing revenue from e-commerce sales. Our agreements with TPs do restrict the TPs from procuring posture correction products similar to our Babaka® products.


Changes in the quoted prices for YimengE-Money on the China National Equities Exchange and Quotations (“NEEQ”) will cause the carrying value of our YimengE-Money shares to vary impactingand affect our comprehensive net income; and our ability to sell our YimengE-Money shares at desired prices or in desired volumes will be impactedaffected by related developments in the NEEQ market and the market for YimengE-Money shares.

 

In July 2015, YimengE-Money (NEEQ: 832950) began trading on the NEEQ and on December 31, 2016, our 8.5% ownership stake in YimengE-Money was valued at $74.7 million. During 2017 and 2018, we continued to sell YimengE-Money shares on the NEEQ. Through April 25, 2018The E-Money stock we reduced our ownership stake in Yimeng to 7.4% andhold as at such date our remaining ownership stake (consisting of approximately 32.7 million Yimeng shares)December 31, 2019 was valued at $44.4$25.7 million. Our management will consider additionalWe did not reduce the amount of shares held in 2019. E-money announced on December 18, 2019 that it would repurchase between 5 million and 10 million of its shares in the public market at a price of no more than RMB 4.5 for a 6-month period commencing from December 2, 2019 (i.e. the date E-Money’s board of directors approved the aforesaid repurchase plan). From January 1, 2020 through the date of this report, Acorn has sold 12.5 million E-Money Shares under this repurchase plan, along with sales to individual buyers in the market, and received proceeds of Yimeng$ 7.5 million. As at the date of this report, Acorn holds approximately 20.2 million shares, as it deems appropriate.or 4.6% of total shares of E-Money.

 

The NEEQ is an over-the-counter (“OTC”) market in China listing companies not otherwise eligible for listing on China’s other markets including the Shanghai and Shenzhen Main Boards. Both the NEEQ and Yimeng’sE-Money’s shares on the NEEQ have experienced significant volatility and limited liquidity, as well as periods when trading halted. For example, on November 19, 2019, E-Money announced a temporary trading halt commencing on November 20, 2019, in anticipation of a potential material event, and did not resume trading until December 4, 2019. On March 28, 2017, YimengE-Money announced that it was temporarily halting thea temporary trading of its stockhalt commencing on NEEQMarch 29, 2017, in anticipation of a potential material event, and did not resume trading until May 23,24, 2017. We may be unable to sell our YimengE-Money shares at prices equal to the then-quoted price and or in desired volumes. Sales of YimengE-Money shares by us or others could also impact the price of YimengE-Money shares due to the limited trading volume. Actions by YimengE-Money may also restrict our ability to sell YimengE-Money shares.  For example, on November 2, 2015, Yimeng publicly announced that it has engaged in a counseling period for an initial public offering. On June 5, 2017, Yimeng’sE-Money announced that on the same day its board of directors passed resolutions onhas approved the proposal for Yimeng’s initial public offering. If Yimeng’s application for theE-Money’s initial public offering, is accepted byand would choose an appropriate time to submit E-Money’s applications for initial public offering to China Securities Regulatory Commission, or the CSRC, it willafter performing all necessary procedures. The announcement further reminded investors that E-Money would apply to temporarilyfor temporary trading halt trading at NEEQ and if the application is approved, we willthe investors (including us) would not be able to sell our Yimengtheir E-Money shares within one (1) or more years after the date of such initial public offering. There is also no assurance that Yimeng’sE-Money’s application for initial public offering will be accepted or approved or YimengE-Money will conduct an initial public offering at all. Currently E-Money is still a publicly traded company on NEEQ, although with almost no trading volume.

 

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

 

As ofat the date of this annual report, our assets include an approximately 7.4%5.8% interest in Yimeng.E-Money. This may be deemed to be “investment securities” within the meaning of the Investment Company Act. Our investment in YimengE-Money and other factors may cause us to be deemed an “investment company” under the Investment Company Act. As a foreign private issuer, we would not be eligible to register under the Investment Company Act, so if we are deemed an investment company within the meaning of the Investment Company Act, we would either have to obtain exemptive relief from the SEC or dispose of investments in order to fall outside the definition of an investment company. Additionally, we may have to forego potential future acquisitions of interests in companies that may be deemed investment securities within the meaning of the Investment Company Act. Failure to avoid being deemed an investment company under the Investment Company Act coupled with our inability as a foreign private issuer to register under the Investment Company Act could make us unable to comply with our reporting obligations as a public company in the United States and lead to our being delisted from the NYSE, which would have a material adverse effect on the liquidity and value of our ADSs and ordinary shares.

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Our best-selling featuredIn fulfilling sales through our “direct sales” platforms, we face customer acceptance, delivery, payment and collection risks that could adversely impact our “direct sales” net revenues and overall operating results. We are dependent on delivery companies to make our product lines, such as our Babaka product line, have varied significantly but account for, and are expected to continue to account for, the substantial majority of our sales in the near term. Featured products sales may decline, these products may have limited product lifecycles, and we may fail to introduce new products to offset declines in sales of our featured products.deliveries.

 

Our five best-selling featured product lines accountedSubstantially all of the products that we sell through our “direct sales” platforms are delivered and paid for 91.8%, 97.8% and 97.0% of our gross revenues in 2015, 2016 and 2017 respectively. Our featured products may fail to maintain or achieve sufficient consumer market popularity, and sales may decline due to, among other factors, the introduction of competing products, entry of new competitors, customer dissatisfaction with the value or quality offered by our products, negative publicity or market saturation. Consequently, our future sales success depends on our ability to successfully identify, develop, introduce and distribute in a timely and cost- effective manner new and upgraded products.customers via electronic payment.

 

Our product sales for a given period will depend upon, among other things, a positive customer responseWe rely on delivery companies such as Cainiao, JD Delivery, Zhai-ji-song, SF Express, EMS, etc. to deliver products sold through our direct sales efforts,“direct sales” platforms, including our e-commerce channel, as well as the effortschannel. Products delivered through delivery companies accounted for over 95% of our distributors, our effective managementtotal sales in each of product inventory,2017, 2018 and the stage2019. However, of our products’ lifecycles during the period. Positive customer responses depend on many factors, including the appealtotal accounts receivable balance as of the productsDecember 31, 2017, 2018 and services being marketed, the effectiveness2019, no single delivery company accounted for more than 10% of our direct sales platforms andtotal accounts receivable. While we do use another delivery service, we rely primarily on SF Express’s cold chain delivery service, for the viabilitydelivery of competing products. Our newfresh food products may not receive market acceptance. In addition, from time to time, we experience delays in the supply of our products to customers due to production delays or shortages or inadequate inventory management, and we lose potential product sales as a result. Furthermore, during a product’s lifecycle, problems may arise regarding regulatory, intellectual property, product liability or other issues which may affect the continued viability of the product for sale.Acorn Fresh business.

 

If we fail to identify and introduce additional successful products, including those to replace existing featured products suffering from declining sales or approaching the end of their product lifecycle, our gross revenues may not grow or may decline and our market share and value of our brand may be materially and adversely affected.

Our failure to quickly identify and adapt to changing industry conditions may have a material and adverse effect on our business, financial condition and results of operations.

The online and offline consumer marketing and sales industries are subject to changing consumer preferences and industry conditions. Consequently, we must stay abreast of emerging fashion, lifestyle, design, technological and other industry and consumer trends. This requires timely collection of market feedback, accurate assessments of market trends, deep understanding of industry dynamics and flexible manufacturing capabilities.

We must also maintain relationships with suppliers who can adapt to fast-changing consumer preferences. If one or more of our existing suppliers cannot meet these requirements effectively, we will need to find and source from new suppliers, which may be costly and time-consuming. We or our suppliers may overestimate customer demand, face increased overhead expenditures without a corresponding increase in sales and incur inventory write-downs, which will adversely affect our results of operations.

If we cannot offer appealing products on our websites or through our other direct sales platforms or distributors, our customers may purchase fewer products from us or stop purchasing products from us altogether. Our reputation may also be negatively affected. If we do not anticipate, identify and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate our desired level of sales. Failure to properly address these challenges may materially and adversely affect our business, financial condition and results of operations.

Our business depends significantly on the strength of our product brands and corporate reputation; our failure to develop, maintain and enhance our product brands and corporate reputation may materially and adversely affect the level of market recognition of, and trust in, our products.

In China’s fragmented, developing and increasingly competitive consumer market, product brands and corporate reputation have become critical to the success of our new products and the continued popularity of our existing products. Our brand promotion efforts, particularly our brand promotional activities, may be materially and adversely affected by our suspending purchases of TV airtime for TV direct sales programs, and our other promotional activities may prove to be expensive and may fail to either effectively promote our product brands or generate additional sales.

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In addition, our product brands, corporate reputation and product sales could be harmed if, for example:

our advertisements, or the advertisements of the owners of the third-party brands that we market or those of our distributors, are deemed to be misleading or inaccurate;

our products fail to meet customer expectations;

we provide poor or ineffective customer service;

our products contain defects or otherwise fail;

consumers confuse our products with inferior or counterfeit products; or

consumers find our outbound marketing intrusive or annoying.

Furthermore, some of our customers reported that they have received phone calls from certain unidentified third parties impersonating our staff. These unidentified individuals called our customers to request that they modify their order because the ordered products were out of stock, or reject an ordered product upon delivery because it was damaged. In some cases, these unidentified individuals delivered counterfeit or inferior products to our customers. After our internal investigation and the investigation conducted by relevant PRC authorities, a group of impersonators was arrested by the police and was sentenced by the court in August 2011. Since 2011, we have identified other occurrences involving individuals impersonating our staff and calling our customers to achieve similar results, and in each case we identified such activities, have taken steps necessary to thwart and prosecute the impersonators. Although we continue to take steps reasonably aimed at preventing such events from recurring, including periodic internal investigations, there can be no assurance that we will be able to effectively prevent the recurrence of such events in the future, and in case such events recur in the future, it could materially adversely affect our reputation among our customers and potential customers and our result of operations.

We rely on our distribution network for a substantial portion of our revenues. Failure to maintain good distributor relations could materially disrupt our distribution business and harm our net revenues.

In 2015, 2016 and 2017, 21.6%, 18.9% and 6.6% respectively, of our net revenues were generated through our distributors across China. Our largest distributor accounted for approximately 2.2%, 4.4% and 2.9% of our gross revenues in 2015, 2016 and 2017, respectively. We primarily sell Youngleda oxygen generating products through our distribution network. We do not maintain a long-term contractscontract with any delivery companies. If they become unwilling or unable to provide these services to us, our distributors. Maintaining relationships with existing distributors and replacing any distributor maybusiness could be difficultdisrupted. If service quality of the delivery companies deteriorates, for example, if the frequency at which their personnel fail to locate a delivery address increases or time consuming. In addition, we are in the process of rationalizing and streamliningcold chain service quality deteriorates, our distribution network to adapt to our evolving business model. If we cannot negotiate favorable terms regarding our distribution agreement with our existing distributors, they may discontinue their relationships with us and we may not be able to identity and attract new distributors or find suitable replacement of our existing distributors. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.financial performance could be adversely affected as well.

We may be unable to effectively manage our distribution network. Any failure by our distributors to operate in compliance with our distribution agreements and applicable law may result in liability to us, may interrupt the effective operation of our distribution network, may harm our brands and our corporate image and of which may result in decreased sales.

 

We have limited ability to manage the activities of our distributors, who operate independently from us. In addition, our distributors or the retail outlets to which they sell our products may violate our distribution agreements with them or the sales agreements between our distributors and the retail outlets. Such violations may include, among other things:

failure to meet minimum sales targets for our products or minimum price levels for our products in accordance with relevant agreements;

failure to properly promote our products through local marketing media, including Internet and local print media, violation of our media content requirements, or failure to meet minimum required media spending levels;

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selling products that compete with our products, including product imitations, or selling our products outside their designated territories, possibly in violation of the exclusive distribution rights of other distributors;

providing poor customer service of the after-sale repair or return; or

violating PRC law in the marketing and sale of our products, including PRC restrictions on advertising content or product claims.

In particular, we have discovered that some of the retail outlets to which our distributors sell our products are selling imitation products that compete with our products. Although we continue to rigorously monitor this situation and require our distributors to abide by their contractual obligation to eliminate any such violation by the retail outlets, we may be unable to police or stop violations such as the selling of imitation products by retail outlets.

If we determine to fine, suspend or terminate our distributors for acting in violation of our distribution agreements, or if the distributors fail to address material violations committed by any of their retail outlets, our ability to effectively sell our products in any given territory could be negatively impacted. In addition, these and similar actions could negatively affect our brands and our corporate image, possibly resulting in loss of customers and a decline in sales.

We may not realize the anticipated benefits of our potential future joint ventures, acquisitions or investments or be able to integrate any acquired employees, businesses, products, which in turn may negatively affect their performance and respective contributions to our results of operations.

 

From time to time, we conduct acquisitions, make investments or enter into joint ventures or other investment structures with other entities as a means of developing new products or acquiring managerial expertise or further expanding our complementary distribution network infrastructure.expertise. In addition to the twothree joint ventures and other minority investments that we currently maintain, we may continue to enter into similar joint ventures or make other acquisitions or investments when proper opportunities occur. Risks related to our existing and future joint ventures, acquisitions and investments include, as applicable:

 

our ability to enter into, exit or acquire additional interests in our joint ventures or other acquisitions or investments may be restricted by or subject to various approvals under PRC law or may not otherwise be possible, may result in a possible dilutive issuance of our securities or may require us to secure financing to fund those activities;
●our ability to enter into, exit or acquire additional interests in our joint ventures or other acquisitions or investments may be restricted by or subject to various approvals under PRC law or may not otherwise be possible, may result in a possible dilutive issuance of our securities or may require us to secure financing to fund those activities;

 

we may disagree with our joint venture partner(s) or other investors on how the venture or business investment should be managed and/or operated;
●we may disagree with our joint venture partner(s) or other investors on how the venture or business investment should be managed and/or operated;

 

to the degree we wish to do so, we may be unable to integrate and retain acquired employees or management personnel; incorporate acquired products, or capabilities into our business; integrate and support pre-existing manufacturing or distribution arrangements; consolidate duplicate facilities and functions; or combine aspects of our accounting processes, order processing and support functions; and
●to the degree we wish to do so, we may be unable to integrate and retain acquired employees or management personnel; incorporate acquired products, or capabilities into our business; integrate and support pre-existing manufacturing or distribution arrangements; consolidate duplicate facilities and functions; or combine aspects of our accounting processes, order processing and support functions; and

 

the joint venture or investment could suffer losses and we could lose our total investment, which would have a negative effect on our operating results.
●the joint venture or investment could suffer losses and we could lose our total investment, which would have a negative effect on our operating results.

 

Any of these events could distract our management’s attention and result in our not obtaining the anticipated benefits of our joint ventures, acquisitions or investments and, in turn, negatively affect the performance of such joint ventures, acquisitions and investments and their respective contributions to our results of operations.

 

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Our business could be disrupted and our business prospects could be adversely affected if we were to lose the services of key members of our management team.

Our co-founder and Executive Chairman, Mr. Robert W. Roche.

Mr. Roche, has played an important role in the growth and development of our business since its inception. Similarly, our President and Chief Executive Officer, Mr. Jacob A. Fisch, has played an important role in the development of our Company since joining in 2014. If either Mr. Roche or Mr. Fisch is unable or unwilling to continue in his present position, we may be unable to replace him easily or at all, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. We do not maintain key-man life insurance for Mr. Roche.any of the aforesaid key members of our management team.

 

If we are unable to attract, retain and motivate key personnel or hire qualified personnel, or if such personnel do not work well together, our growth prospects and profitability will be harmed.

 

Our business is supported and enhanced by a team of highly skilled employees who are critical to maintaining the quality and consistency of our business and reputation. It is important for us to attract qualified employees, especially marketing personnel, supply chain managers call center operators and employees with high levels of experience in e-commerce.

 

During 2016 and 2017,From 2014 to 2018, we have effectedimplemented a substantial reduction in our work force across all functions of our operations and restructured our senior management, which reductions are primarily driven by cost control efforts as well as restructuring and streamlining our business structure and operation. In addition, through voluntary attrition, certain key personnel have recently left, and we have yet to recruit replacements. The reductions and adjustments in our workforce and the loss of such key personnel could seriously harm the morale of existing employees and our ability to attract prospective employees in key areas of need or retain current key personnel in critical areas of operations, which could disrupt our business and operations and negatively affect our financial performance.

 

We must also provide continuous training to our employees so that they have up-to-date knowledge of various aspects of our operations and can meet our demand for high quality services. If we fail to do so, the quality of our services may deteriorate in one or more of the markets where we operate, which may cause a negative perception of our brand and adversely affect our business. Finally, disputes between us and our employees may arise from time to time and if we are not able to properly handle our relationship with our employees, our business, financial condition and results of operations may be adversely affected.

 

In fulfilling sales through our direct sales platforms, we face customer acceptance, delivery, payment and collection risks that could adversely impact our direct sales net revenues and overall operating results. We are dependent on China Express Mail Service Corporation, or EMS and local delivery companies, to make our product deliveries and from time to time we have been required to write off certain accounts receivable from them.

We rely on EMS, the largest national express mail service operated by the China Post Office, and certain local delivery companies such as Yuantong and Zhai-ji-song to deliver products sold through our direct sales platforms, including our e-commerce channel. EMS and local delivery companies made deliveries of products representing 16.4% and 24.4% of our sales in 2015 respectively, 16.3% and 40.1% of our sales in 2016 respectively, and 8.9% and 6.1% in 2017 respectively. Although we offer credit/debit card and other payment options for our customers, substantially all of the products that we sell through our direct sales platforms are delivered and paid for by customers on a cash-on-delivery, or COD, basis. We rely on EMS and local delivery companies to remit customer payment collections to us for products delivered on COD basis. Of the total attempted product deliveries by EMS and local delivery companies on a COD basis, approximately 54%, 45%, and 53% were successful in 2015, 2016 and 2017 respectively. Reasons for delivery failure primarily include customer refusal to accept a product upon delivery or failure to successfully locate the delivery address. Although we continue to explore alternative payment methods and expand our credit card payment options, we expect to continue to be dependent on COD customer payments for the foreseeable future.

EMS typically requires two to three weeks to remit to us the COD payments received from our customers. Of our total accounts receivable balance as of December 31, 2015, 2016 and 2017, no single delivery company accounted for more than 10% of our total accounts receivable. In addition, from time to time, we have been required to write off certain EMS accounts receivable due to a difference between EMS’s collections according to our records and cash amounts actually received by EMS according to their records. While we did not record any write-off in connection with EMS-related accounts receivable in 2015, 2016 or 2017, we may be required to make such write-off in the future. We do not maintain a long-term contract with EMS or local delivery companies. Failure or inability to renew our contract with EMS or local delivery companies could disrupt our business and operations and negatively affect our financial performance.

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We expect competition in China’s consumer market to intensify. If we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.

 

Competition from current or future competitors could cause our products to lose market acceptance or require us to significantly reduce our prices or increase our promotional activities to maintain and attract customers. Many of our current or future competitors may have larger scale, longer operating histories, better brand recognition and consumer trust, strong media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do. We face competition from the following companies operating in our value chain:

numerous domestic and international sellers of consumer branded products that sell in China such products that compete with our products,products; for example, Oxygen-generatingposture-correction products from YuwellMTG, MINGZHEN, Nuotai and other brands compete with our Youngleda oxygen generating products, and mobile phones sold by local and international mobile phone manufacturers compete with our mobile phone products; and

Babaka® posture-correction products.

other Internet and e-commerce companies in China that offer consumer products online via an Internet platform, such as Tmall, JD.COM, Dang Dang Wang and Yihaodian.

 

Interruption or failure of our telephoneIT system and management information systems could impair our ability to effectively sell and deliver our products, collect payments on product sales, or result in a loss or corruption of data, which could damage our reputation and negatively impact our results of operations.

 

In 2015, we consolidated our four call centers into one call center located in Wuxi, China. In 2015, 2016 and 2017, approximately 29.7%, 14.5% and 15.9% of our total net revenues, respectively, were generated through our direct sales platforms with orders processed by our call center. Our call centere-commerce business relies heavily on our telephone and management information systems, or MIS, to receive customer calls at our call center, process customer orders, arrange product delivery and assess the effectiveness of advertising placements and consumer acceptance of our products, among other things. In addition to our call center, our e-commerce business also relies heavily on MIS, to process customer orders, arrange product delivery and collect sales-related data. Our telephoneIT system and MIS are each primarily provided and maintained by a third partythird-party vendor and we have limited in house capacity to address any interruptions or failure of the telephoneIT system or MIS. Interruptions to or failures in our telephoneIT system or MIS could prevent the timely or proper delivery of products to consumers, or payment to the delivery companies, which would harm our reputation and cause the loss of our customers. Interruptions to or failures in our MIS could also lead to loss or inaccuracy of data stored in the MIS, causing inaccuracies in our payment processing (e.g. our failure to collect payment on orders) or analysis of the data. These interruptions or failures may be due to events that are beyond our control, such as inclement weather, natural disasters, transportation disruptions or labor. As our business evolves and our MIS requirements change, we may need to modify, upgrade and replace our systems. We work closely with third-party vendors and our related party vendors to provide service tailored to our specific needs. We are and will continue to be substantially reliant on these third-party vendors for the provision of maintenance, modifications, upgrades and replacements to our systems. Any such modification, upgrading or replacement of our systems may be costly and could create disturbances or interruptions to our operations. If these third-party vendors can no longer provide these services, it may be difficult, time consuming and costly to replace them. Similarly, errors or inadequacies in our MIS may be difficult or expensive to timely correct and could result in substantial service interruptions.

 

From time to time, our computerIT systems may experience short periods of power outage resulted from unexpected damage of the facilities where our computersIT system is located, natural disasters or other reasons. Any telephoneIT or MIS failure (including as a result of natural disaster or power outage), particularly during peak or critical periods, could inhibit our ability to receive calls and complete orders or evaluate the effectiveness of our promotions or consumer acceptance of our products or otherwise operate our business. These events could, in turn, impair our ability to effectively sell and deliver our products or result in the loss or corruption of customer, supplier and distributor data, which could damage our reputation and negatively impact our results of operations.

 

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Failure to protect personal and confidential information of our customers could damage our reputation and substantially harm our business, financial condition and results of operations and expose us to liability. 

 

We collect and store personally identifiable information of our customers in our database through which we sell and market our products. We may not be able to prevent our employees or other third parties, such as hackers, criminal organizations, our external service providers and business partners, from stealing or leaking information provided by our customers to us. In addition, significant capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. The methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that the privacy of customer information is becoming increasingly unsafe or vulnerable to attack could inhibit the growth of online business generally, which in turn may reduce our customers’ confidence and materially and adversely affect our business and prospects. Moreover, we are required to comply with laws and regulations in connection with protection of electronic personal information of our customers in China and we may be obligated to comply with the privacy and data security laws of foreign countries where our customers reside. With the promulgation of the PRC Cyber Security Law on November 7, 2016 and effective from June 1, 2017 and the subsequent promulgation of related measures or regulations,practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms are under increased public scrutiny, we faceare facing more stringent requirements to protect the personal information we collect from being divulged or tampered with. We currently do not share consumer information with external service providers and business partners. However, we may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we collect, store and share data with our external service providers and business partners. For example, on March 6, 2020, the SAMR and the Standardization Administration of China, or the SAC, jointly promulgated the Information Security Technology – Personal Information Security Specification, or 2020 Specification, which will be effective on October 1, 2020. Pursuant to this 2020 Specification, the personal information controllers refer to entities or persons who are authorized to determine the purposes and methods for using and processing personal information. The personal information controller (i) shall collect personal information in accordance with the principles of legality and minimization, (ii) is required to differentiate between basic business functions and additional or expanded business functions and is prohibited from bundling all these functions together, and (iii) shall also obtain a consent from the information provider. Failure to comply with such requirements will result in more severe administrative penalties.penalties, damage to our reputation and credibility and could have a negative impact on revenues and profits. Our exposure to the PRC and foreign countries’ privacy and data security laws impacts our ability to collect and use personal data, increases our legal compliance costs and may expose us to liability. As such laws proliferate, there may be uncertainty regarding their application or interpretation, which consequently increases our exposure to potential compliance costs and liability. Even if a claim of noncompliance against us does not ultimately result in liability, investigating or responding to a claim may present significant costs and demands on our management.

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We could be liable for security breaches of our service and third-party payment systems, which may have a material and adverse effect on our reputation and business.

 

In recent years, we have generated an increasingly significant proportion of our net revenues from payments collected through third-party online payment systems, which are primarily generated from our Internet sales. In such transactions, confidential information, such as customers’ debit and credit card numbers and expiration dates, personal information and billing addresses, is transmitted over public networks and security of such information is essential for maintaining customer confidence. While we have not experienced any security breaches to date, current security measures may prove to be inadequate. In addition, we expect that an increasing number of our sales will be conducted over the Internet as a result of our expanding customer base and the growing use of online payment systems. We also expect that associated online criminal activities will likely increase accordingly. We strive to be prepared to increase our security measures and efforts in order to maintain customer confidence in the reliability of our online payment systems. However, we may not be able to prevent future breaches of our security, which may have a material and adverse effect on our reputation and business.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our product brand, reputation and competitive position. In addition, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

 

We rely on a combination of patent (utility model), copyright, trademark and unfair competition laws, nondisclosure agreements and other methods to protect our intellectual property rights. In particular, we rely on the trademark law in China to protect our product brands. We currentlyAs of February 29, 2020, we maintain 647511 trademark registrations in China which will expire between 20182020 and 2025.2025, among which, 54 trademarks contain either the Chinese name of Babaka® (or Chinese characters similar to the Chinese name of Babaka®)or the English name of Babaka® for the posture correction products. We are in the process of extending the trademarks which are expected to expire in the near future. Separately, we are in the process of applying for registration or transfer of approximately 117111 trademarks among our group companiesfrom HJX Digital Technology Co., Ltd to Acorn Trade (Shanghai) in China. The legal regime in China for the protection of intellectual property rights is still at a relatively early stage of development. Despite many laws and regulations promulgated and other efforts made by China over the years to enhance its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many western countries, including the United States, and enforcement of such laws and regulations in China has not achieved the levels reached in those countries. Although the PRC State Council approved the State Outlines on the Protection of Intellectual Property on April 9, 2008 in an effort to protect intellectual property, we shall keep on making endeavors to prevent the misappropriation of our intellectual property.

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We may be unable to enforce our proprietary rights in connection with these trademarks before such registrations or transfers are approved by the relevant authorities and it is possible that such registrations or transfers may not be approved at all. Currently we are seeking to register aThere can be no assurance that our trademark containing the Chinese name of the Babaka posture correction products in China, but are beingapplications will be approved, that any registered trademark will adequately protect our intellectual property, or that such trademark will not be challenged by certain of our competitors who claim that the mark “Beibeijia in Chinese characters” has becomethird parties or found by a generic term for orthopedic belt products. If we are not ablejudicial authority to defend our position and obtain the trademark, there would likely be negative impact on our sale of Babaka posture correction products . invalid or unenforceable.

In addition, manufacturers or suppliers in China may imitate our products, copy our various brands and infringe our intellectual property rights. We have discovered unauthorized products on e-commerce platforms and in the marketplace that are counterfeit reproductions of our products sold by the retailers within our distribution network and by third parties in retail stores and on websites. The most common counterfeit products that we found are counterfeits of our Babaka® posture correction products.

 

It is often difficult and expensive to policeregister, maintain and enforce against infringement of intellectual property rights in China. ImitationStatutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or counterfeiting ofto enforce our products or other infringementcontractual rights in China. Policing any unauthorized use of our intellectual property rights, including our trademarks, could diminishis difficult and costly and the valuesteps we take may be inadequate to prevent the infringement or misappropriation of our various brands, harm our reputation and competitive position or otherwise adversely affect our net revenues. We may haveintellectual property. In the event that we resort to litigation to enforce our intellectual property rights, through litigation. Suchsuch litigation maycould result in substantial costs and a diversion of our managerial and financial resources, and management attention.could put our intellectual property at risk of being invalidated or narrowed in scope. We can provide no assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a meaningful recovery. Any failure in maintaining, protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

We may not be able to adequately protect our intellectual property rights and exclusive rights.

We have vigorously prosecuted our trademark rights by challenging third party trademark registration similar to our trademarks, filed law suits/claims against improper and unauthorized use of the “Babaka®” trademarks, or issued takedown notices or initiates discussions with the third parties to correct the issues. However, there can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. If we fail to maintain and enforce our trademark rights, the value of our brand could be diminished. There is also a risk that one or more of our trademarks could become generic, which could result in them being declared invalid or unenforceable. For example, there’s a risk that one or more “Babaka®” trademarks could become so commonly used that it becomes synonymous with any posture correction products, and if this happens, we could lose protection of this trademark.


We have in the past been, and in the future may again be, subject to intellectual property rights infringement claims by third parties, which could be time-consuming and costly to defend or litigate, divert our attention and resources, or require us to enter into licensing agreements. These licenses may not be available on commercially reasonable terms, or at all.

 

We have in the past been, and in the future may again be, the subject of claims for infringement, invalidity, or indemnification relating to other parties’ proprietary rights. The defense of intellectual property suits, including copyright infringement suits, and related legal and administrative proceedings can be costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to pay damages, seek licenses from third parties, pay ongoing royalties, redesign our products or become subject to injunctions, each of which could prevent us from pursuing some or all of our businesses and result in our customers or potential customers deferring or limiting their purchase or use of our products, which could materially and adversely affect our financial condition and results of operations.

 

We may from time to time be involved in legal or other disputes, or become a party to legal, administrative or other proceedings which, if adversely decided, could lead to significant liabilities and materially adversely affect us.

 

We may from time to time be involved in disputes with various parties we encounter in our daily operations, including but not limited to our suppliers, customers and distributors. These disputes may lead to legal, administrative or other proceedings to which we are a party, and defense of which may increase our expenses and divert management attention and resources. For example, in September 2015, Beijing Mai-La-Ke Technology Center, or the Mai-La-Ke, the previous holder of the trademark of our Youngleda oxygen generating products, filed a suit in the Haidian People’s Court in Beijing against Beijing Acorn and Beijing Acorn Younglide Science and Technology Co., Ltd., alleging that the two defendants should provide relevant sales data of our Youngleda products from November 2000 to November 2005 in order for them to claim for 50% of the net profit we obtained from such sales during such period pursuant to a prior agreement with the two defendants. On July 25, 2016, the Haidian People’s Court in Beijing issued the first-instance judgment in which all claims raised by Mai-La-Ke were rejected. Mai-La-Ke did not appeal and this judgment is final.

 

We were also the subject of the legal dispute between our shareholders as described immediately below.

 

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Any adverse outcome in any legal, administrative or other similar proceedings that we are a party could lead to significant liabilities and could have a material adverse effect on our business, results of operations and financial condition.

 

Historical and future disputes regarding control of our strategic direction and control of our board of directors could adversely impact our business, operating results and prospects.

 

FromAs described in greater detail in Item 8.A, “Financial Information—Consolidated statements and other financial information— Legal Proceedings,” from mid-2014 through mid-2015, we and our board of directors were involved in a protracted dispute between various shareholders for the control of our strategic direction and our board of directors. The alignment of the various parties to this dispute generally fell across two lines, with Mr. Robert W. Roche, our co-founder and executive chairman, and the shareholders that are allied with him, in one camp, and the other camp comprised of our other largest shareholders, Mr. Don Dongjie Yang, our other co-founder and our former executive chairman and chief executive officer, and SAIF, an exempted limited partnership registered in the Cayman Islands.

As described in greater detail in Item 8.A, “Financial Information—Consolidated statements and other financial information— Legal Proceedings,” this dispute involved, among other things (i) the improper removal of Mr. Roche by our then-board of directors, comprising Mr. Robert W. Roche, Mr. Don Dongjie Yang, Mr. Andrew Y. Yan, Mr. Gordon Xiaogang Wang, Mr. Jing Wang and Mr. William Liang, from his role as executive chairman in August 2014 and, as a result his preclusion from involvement in our day-to-day operations and management, (ii) various efforts by Mr. Roche (which were rejected by our then-board of directors) to call an extraordinary general meeting of shareholders, or EGM, for the purpose of removing certain of our directors, (iii) Mr. Roche, through a shareholder of our Company controlled by him, filing a petition in the Cayman Islands in September 2014, seeking a winding up of the company (or, in the alternative, other remedies), (iv) a cross-petition brought by shareholders of our Company controlled or aligned with Mr. Yang also seeking a winding up of the company (or, in the alternative, other remedies) based on, among other things, allegations that Mr. Roche engaged in conduct and/or threatened to engage in conduct harmful to the company, and (v) four new directors being elected in December 2014 at our annual general meeting over Mr. Roche’s objection.

In March 2015, the Cayman Islands Court, found in Mr. Roche’s favor and made an order dismissing the cross-petition and, in lieu of making a winding-up order, granting Mr. Roche certain of the alternative remedies he (through REL, then known as Acorn Composite Corporation) sought by directing that we call an EGM on May 4, 2015 for the purpose of considering resolutions: (i) to remove four then current directors from our board of directors; (ii) to elect to our board of directors three new individuals nominated by Mr. Roche; and (iii) to amend our articles of association to allow shareholders who, together hold not less than 30% of our issued shares, to convene an EGM unilaterally. The EGM was held on May 4, 2015 with each of the resolutions passed. Following the EGM, our board of directors elected Mr. Roche as our executive chairman and chief executive officer.

In addition, the Cayman Islands Court found that certain of these directors “acted in bad faith and exercised their powers, both in connection with Mr. Roche’s removal from officethis dispute and in connection with the AGM and the related refusal to convene an EGM, for an improper purpose”.

Ontherewith, in May 27, 2015, we entered into the Transitional Services and Separation Agreement, (the “TSSA”)or the TSSA, with Mr. Dongjie Yang, in connectiona co-founder, former executive chairman and chief executive officer of our Company, with respect to his resignation as a director and officer of the Company (as described in greater detail in “Item 7 Major Shareholders and Related Party Transactions—Related Party Transactions— Transitional Services and Separation Agreement”). Among other things, pursuant to the terms of the TSSA:

¨we acquired all the ordinary shares of our Company held by Mr. Yang (i.e. 6,518,656 ordinary shares) through his wholly-owned company, D.Y. Capital, Inc., for nominal aggregate consideration of $1.00. At the time, these shares represented approximately 7.3% of our total outstanding ordinary shares, and were equivalent to 325,933 ADSs (with one ADS equivalent to twenty ordinary shares). Based on the closing price for our ADSs on the NYSE on May 27, 2015 (the last trading day before our announcement of the TSSA), the acquired shares had a value of approximately $3.3 million. Promptly following acquisition, we cancelled the shares reducing our outstanding ordinary shares; and

¨each of our Company, Mr. Yang and our and his respective associated entities and persons gave a mutual waiver and release of all claims that may have against one another for any matters arising or occurring prior to May 27, 2015 (the date of the TSSA).

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In 2015, our board of directors approved the settlement with Mr. Roche; and in January 2016, we entered into a settlement agreement with Mr. Robert Roche and REL, a company wholly owned by Mr. Roche, for the purpose of settling (i) various amounts incurred by REL and/or its associated companies on behalf of and for the benefit of securing the commercial and business interests of our Company prior to his 2014 removal from the office; and (ii) damages and legal fees incurred by Mr. Roche arising from that removal. Pursuant to the settlement agreement, we reimbursed Mr. Roche approximately $0.9 million for various costs incurred by him and REL in connection with securing certain business contracts for our Company and for the employment-related damages and legal fees incurred by Mr. Roche from August 2014 to April 2015.

The May 4, 2015 EGM and related events, including the TSSA and the settlement agreement with Mr. Roche, may not serve to completely resolve the dispute. Other than the TSSA with Mr. Yang and the settlement agreement with Mr. Roche, we have not entered into any similar releases or agreements settling any claims we or any other person may have in connection with the dispute or matters leading up to the dispute, with any of the other directors that were involved in the dispute, and therefore we may be subject to ongoing legal proceedings with them in the future.

Roche. On December 1, 2016, we filed a related action in the Cayman Islands Court against three directors, Mr. Andrew Yan, Gordon Xiaogang Wang, and Jing Wang, (the “Defendants”) for damages resulting from breach of fiduciary duties and related misconduct and mismanagement. More specifically, the complaint alleges that that the Defendants breached their fiduciary duties and are responsible for alleged misconduct in and/or mismanagement of our business resulting from, in addition to other actions outlined in the complaint, the wrongful removal of Mr. Roche as our then chief executive officer, exposing us to contractual breach of contract claims, refusing to pursue valuable business opportunities and wrongful termination of certain employees resulting in unnecessary severance costs. Relief sought in connection with the alleged breach of fiduciary duties and misconduct and/or mismanagement consists of (i) initial monetary damage claims comprised of (x) US dollar denominated damages of approximately US$26,326,389.76, and (y) Renminbi denominated damages of approximately RMB 120,045,222 (equivalent to US$17,433,989.57 utilizing a conversion rate of 0.1452 as of November 30, 2016), (ii) costs and (iii) such further or other relief as the Cayman Islands Court considers just.

On July 28, 2017, we have entered into, with REL, SAIF and the aforesaid three directors, a settlement agreement, with REL, the Former Directors and SAIF. Pursuantpursuant to the settlement,which, all parties thereto would, among other things, discontinue and/or withdraw all claims, counterclaims and taxation proceedings in the Cayman Islands Court related to the above mentioned matters. An agreement was also reached for the Company would repurchase all of the ordinary shares of the Company owned by SAIF, representing 27.7% of the total outstanding ordinary shares of the Company, for the purchase price of approximately $4.17 million, the equivalent of $4.05 per ADS. The purchase price represents an approximately 60.5%, 64.8% and 62.8% discount to the closing price of the Company’s ADSs based on the 30-day, 60-day and 90-day moving average, respectively. The repurchased shares have already been cancelled.

 

Although no appeal has been brought as of the date of this annual report, it is possible an appeal of all or part of the Cayman Islands Court’s order may occur with the winding up of our Company being one of the possible remedies sought. Continuing ramifications of the dispute may also include a public perception that our future direction, strategy or leadership is uncertain, potentially causing us to lose business opportunities, or harming our ability to attract new investors or business partners, and causing our ADS price to experience periods of volatility or stagnation. The dispute haspreviously resulted in, and, if it continues or if other related shareholder activities ensue,were to restart, could again result in disruption to our operations and diversion of the attention of management and our employees as a result of responding to these matters, which has beenwere and may continue to be costly and time-consuming. This could result in our business being adversely affected. We have retained the services of various professionals to advise us on this matter, including legal advisors, the costs of which may negatively impact our future financial results. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business, cash position or financial results.

 

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15

 

 

Mr. Robert W. Roche, our executive chairman, is a significant beneficial shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders.

 

As of April 30, 2018, 10, 2020,Mr. Roche beneficially owned (although Mr. Roche disclaims ownership of all such shares) approximately 76.20%78.88% of our outstanding ordinary shares as calculated according to the SEC rules, including the approximately 32.60%33.75% of our outstanding ordinary shares for which Ms. Ritsuko Hattori-Roche, the wife of Mr. Roche, is the record owner, giving him substantial influence over the outcome of all matters submitted to our shareholders for approval, although Mr. Roche disclaims beneficial ownership of such shares.approval. Our current memorandum and articles of association provide that the chairman of our board of directors or any one or more shareholders who collectively own at least 30% of our outstanding ordinary shares may convene an EGM, or an extraordinary general meeting of our shareholders, to vote on matters proposed for consideration at such EGM. As a 30.0%30% plus shareholder and chairman of our board of directors, Mr. Roche has the ability to unilaterally convene an EGM. This influence may conflict with the interests of our other shareholders. In addition, such concentration of ownership and influence by Mr. Roche may discourage, delay or prevent a change in control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their ADSs as part of any contemplated sale of our Company and may reduce the price of our ADSs or could create actual or perceived governance instabilities that could adversely affect the price of our ADSs.

 

We have limited general business insurance coverage and we may be subject to losses that might not be covered by our existing insurance policies, which may result in our incurring substantial costs and the diversion of resources.

 

Except theWe maintain various insurance policies to safeguard against risks and unexpected events. We have purchased product transportation insurance covering risk of product loss during transportation, and vehicle insurance for certainthree cars covering the risk of loss. We have also purchased product liability insurance for Acorn Fresh. We maintain Directors and Officers (D&O) liability insurance covering our inventory at the Zhai-ji-song warehouse,directors, supervisors and officers liabilities. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees. However, we currently do not have anymaintain business liability, disruptioninterruption or litigation insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage foris sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations in China. Any business disruption or litigation may result in our incurring substantial costscould be materially and the diversion of resources.adversely affected.

 

Our sale of our and other parties’ products could subject us to product liability claims, potential safety-related regulatory actions or product recalls. These events could damage our brand and reputation and the marketability of the products that we sell, divert our management’s attention and result in lower net revenues and increased costs.

 

The manufacture and sale of our products, in particular, our Youngleda oxygen generating products in our health product category,Acorn Fresh, and our sale of other parties’ products could each expose us to product liability claims for personal injuries.injuries or food safety related liability claims. Also, if our products are deemed by the PRC authorities to fail to conform to product quality, and personal safety or food safety requirements in China, we could be subject to PRC regulatory action. Violation of PRC product quality and safety and food safety requirements by our or others’ products sold by us may subject us to confiscation of the products, imposition of penalties or an order to cease sales of the violating products or to cease operations pending rectification. If the offense is determined to be serious, our business license could be suspended and subject to criminal liabilities. Any product liability claim or food safety claim or governmental regulatory action could be costly and time-consuming to defend. If successful, product liability claims or food safety claims may require us to pay substantial damages. Also, a material design, manufacturing or quality failure in our and other parties’ products sold by us, other safety issues or heightened regulatory scrutiny could each warrant a product recall by us and result in increased product liability claims. Furthermore, customers may not use the products sold by us in accordance with our product usage instructions, possibly resulting in customer injury. All of these events could materially harm our brand and reputation and marketability of our products, divert our management’s attention and result in lower net revenues and increased costs.

 

Any disruption of our or our manufacturing service providers’ manufacturing operations could negatively affect the availability of our products and our net revenues derived therefrom.

We manufactured approximately 6.1%2.0% of the products we sell in terms of revenues in 2017,2019, with the balance provided by third-party suppliers and manufacturers in China. We purchase the materials we need to manufacture our Youngleda oxygen generating products from outside suppliers in China. We typically purchase all production materials, including critical components, on a purchase order basis and do not have long-term contracts with our suppliers.manufacturers.

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We rely on the manufacturing services of third party suppliers to produce the substantial majority of our products. If we fail to develop or maintain our relationships with our suppliers, we may be unable to obtain our products, and we could be prevented from supplying our products to our customers in the required quantities. Problems of this kind could cause us to experience loss of market share and result in decreased net revenues. In addition, the failure of a supplier to supply materials and components that meet our quality, quantity and cost requirements in a timely manner could impair our ability to manufacture our products or increase our costs, particularly if we are unable to obtain these materials and components from alternative sources on a timely basis or on commercially reasonable terms.

 

Other risks for the products manufactured by us, include, among others:

 

●having too much or too little production capacity;

 

being unable to obtain raw materials on a timely basis or at commercially reasonable prices, which could adversely affect the pricing and availability of our products;
●being unable to obtain raw materials on a timely basis or at commercially reasonable prices, which could adversely affect the pricing and availability of our products;

 

experiencing quality control problems;
●experiencing quality control problems;

 

accumulating obsolete inventory;
●accumulating obsolete inventory;

 

failing to timely meet demand for our products; and
●failing to timely meet demand for our products; and

 

experiencing delays in manufacturing operations due to understaffing during the peak seasons and holidays.
●experiencing delays in manufacturing operations due to understaffing during the peak seasons and holidays.

 

Currently, products manufactured and supplied by third parties for us include our mobile phones, cosmetics, fitnessposture correction products, collectiblespre-packaged seafood, and other products. Some of our products are supplied by third-party manufacturers based on designs or technical requirements provided by us. These manufacturers may fail to produce products that conform to our requirements. In addition, for products manufactured or supplied by third-party manufacturers, we indirectly face many of the risks described above and other risks. For example, our third-party manufacturers may not continue to supply products to us of the quality and/or in the quantities we require. It may also be difficult or expensive for us to replace a third-party manufacturer.

 

We may incur impairment losses on our investments in equity securities.

 

We have made non-controlling investments in the equity securities of a number of companies. Under U.S. GAAP that we are subject to, if there is a decline in the fair value of the shares we hold in these companies, or any other company we invest in, over a period of time, and we determine that the decline is other-than-temporary, we will need to record an impairment loss for the applicable fiscal period. We may incur expenses related to the impairment of existing or future equity investments. Any such impairment charge could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Our asset impairment reviews may result in future write-downs.

 

We are required, among other things, to test intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. In connection with our business acquisitions, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of goodwill and intangible assets. In assessing the useful lives of the intangible assets, we must make assumptions regarding their fair value, the recoverability of those assets and our ability to successfully develop and ultimately commercialize acquired technology. If those assumptions change in the future when we conduct our periodic reviews in accordance with applicable accounting standards, we may be required to record impairment charges.

 

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We may not be able to properly implementmaintain compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and thisany such failure could have a material adverse impact on our ability to provide financial information in a timely and reliable manner.

 

As a public company with shares listed in the United States, we are subject to provisions of the Sarbanes-Oxley Act of 2002. Section 404(a) of the Sarbanes-Oxley Act requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual reports on Form 20-F. In 2014, our management identified several material weaknesses in our internal controls over financial reporting. While our management concluded that these material weaknesses were remediated in 2015, and that our internal control over financial reporting was effective as of December 31, 2015, December 31, 2016, December 31, 2017, December 31, 2018, and December 31, 2017,2019, there is no assurance that our management will conclude that our internal controls are effective in future periods. If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could result in a loss of investor confidence in the reliability of our reporting processes and could materially and adversely affect the trading price of our ADSs.

 

Our businesses and growth prospects are dependent upon the expected growth in China’s consumer retail markets. Any future slowdown or decline in China’s consumer retail markets could adversely affect our business, financial condition and results of operations.

 

Currently, all of our revenues are generated by sales of consumer products in China. Presently, the success of our business depends on the continued growth of China’s consumer retail markets. The consumer retail markets in China are characterized by rapidly changing trends and continually evolving consumer preferences and purchasing patterns and power. China’s consumer retail market is expected to grow in line with expectedThe growth in consumer disposable income and the economy in China generally. However, projected growth rates forof the Chinese economy has slowed since 2012, and such slowdown may continue. According to the National Bureau of Statistics of China, China’s consumer retail markets may not be realized.gross domestic product (GDP) annual growth rate decreased slightly from 6.9% in 2017 to 6.6% in 2018, and further to 6.1% in 2019. China’s GDP also contracted by 6.8% on a quarter-to-quarter basis (compared to the immediately preceding quarter) in the first quarter of 2020, the worst downturn since 1979 due primarily to the outbreak of COVID-19. Any slowdown could significantly reduce domestic commerce in China, including through the internet generally and through us. Any slowdown or decline in China’s consumer retail markets, or evolving consumer purchases and purchasing patterns away from our products, would have a direct adverse impact on us and could adversely affect our business, financial condition and results of operations.


Risks Relating to the Regulation of Our Business and Industry

 

PRC regulations relating to our industry are evolving. Any adverse or unanticipated regulatory changes, particularly those regarding the regulation of our direct sales“direct sales” business, could significantly harm our business or limit our ability to operate.

 

We and our distributors are subject to various laws regulating our advertising and any violation of these laws by us or our distributors could result in fines, penalties and penalties,legal liabilities, harm our product brands and result in reduced net revenues.disrupt our business.

 

We advertise and market our proprietary products and other products. Our distributors often advertise our products they distribute.

PRC advertising laws and regulations require advertisers and advertising operators, such as us and our distributors, to ensure that the contentcontents of the advertisingadvertisement they prepare, publish or broadcast isare fair and accurate, isare not misleading and isare in full compliance with applicable laws. Specifically, we, as an advertiser or advertising operator, and our distributors, as advertisers, are each required to independentlylaws, through independent review and verify the content of our respective advertising for content complianceverification before displaying the advertisingadvertisement through print media, radio or Internet portals. Moreover, the PRC unfair competition law also prohibits us and our distributors from conveyingdisplaying misleading, false or inaccurate information with respect to quality, function, use, or other features of products, through advertising. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertising, orders to publish an advertisement correcting the misleading information and criminal liabilities. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s business license.

For advertising related to certain types of our products, such as those products constituting medical devices and health related products, we and our distributors must also file the advertising content with the provincial counterpart of the China’s State Administration for Food and Drug, or SAFD, or other competent authorities, and obtain required permits and approvals for the advertising content from the SAFD or other competent authorities, in each case, before publication or broadcasting of the advertising. In addition, pursuant to the Food Safety Law of the PRC effective from October 1, 2015, the contents of food advertisements should be true and no disease-prevention or remedial function should be mentioned. We endeavor to comply, and encourage our distributors to comply, with such requirements. However, we and our distributors may fail to comply with these and other laws. Commencing on January 1, 2008, advertisements related to medical devices and health related foods are subject to the credit rating administration. The provincial counterpart of SAFD is responsible for collecting, recording, identifying and publishing the credit rating information of the advertiser. The credit rating of every advertiser will be categorized as one of good credit, dishonor credit or material dishonor credit and this rating is reviewed each year. An advertiser who receives a rating of dishonor credit or material dishonor credit may be ordered to improve its rating within a specified time limit and its business activities may be subject to special scrutiny if necessary. Therefore, any violations by us or our distributors relating to our Youngleda oxygen generating devices may result in SAFD imposing on us or our distributors a dishonor credit or material dishonor credit rating. Our and our distributors’ past and any future violations and a dishonor credit or material dishonor credit rating imposed upon us, if any, could seriously harm our corporate image, product brands and operating results.

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In addition, the PRC Advertising Law, promulgated in April 24, 2015 and effective from September 1, 2015, outlines the regulatory framework for the advertising industry and requires advertisers, advertising operators and advertising distributors to ensure that the contents of the advertisements they prepare or distribute are true and in full compliance with applicable laws and regulations. Pursuant to PRC Advertising Law, advertisements must not contain, among other prohibited contents, terms such as “the state-level,” “the highest grade,” “the best” or other similar words. 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. Pursuant to the PRC Advertising Law, the use of internet to distribute advertisements shall not affect the normal use of the internet by users. Particularly, advertisements distributed on internet pages such as pop-up advertisements shall be indicated with conspicuous mark for “close” to ensure the close of such advertisements is possible by one click. Where internet information service providers know or should know that illegal advertisements are distributed using their services, they shall prevent such advertisements from being distributed. 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 SAIC, 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.

Moreover, government actions and civil claims may be filed against us for misleading or inaccurate advertising, fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of our advertising produced by us or our distributors. We have been

In the past, we were fined by the relevant authorities for certain advertising that was considered misleading or false by the authorities. Historically, such fines have not been significant and related investigations into our advertising practices did not consume significant amounts of our management resources. In some cases, we were required to accept product returns. However, it is possible that we may have to expend significant resources in the future in defending against such actions and these actions may damage our reputation, result in reduced net revenues, negatively affect our results of operations, and even result in our business licenses being suspended or revoked and in criminal liability for us and our officers and directors.

 

Interim Measures for the Administration of Internet Advertisements was promulgated on July 4, 2016 and became effective on September 1, 2016. The Interim Measures and the Advertising Law govern advertising activities through Internet. Among other things, the Interim Measures provides that for the advertising of special goods or services, such as medical treatment, drugs, formula food for special medical purposes, medical equipment, pesticides, veterinary drugs and health food, etc. which shall be subject to examination by the advertisement examination authority in accordance with relevant laws and regulations, such advertisements shall not be published without examination.

If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties.

On September 24, 2007, we acquired 100% of the legal ownership of Shanghai Advertising, which had been one of our affiliated entities, through Shanghai Acorn Enterprise Management Consulting Co., Ltd., or Acorn Consulting. At the time of our acquisition, the advertising industry was a restricted industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2004 Revision). Acorn Consulting, as a domestic subsidiary of foreign invested enterprises, might have been required under PRC law to obtain the approval of the Ministry of Commerce, or MOFCOM, or its local counterpart to invest in restricted industries, such as the advertising industry. However, on October 31, 2007, the National Development and Reform Commission, or NDRC, and MOFCOM jointly issued the Guideline Catalog of Foreign Investment Industries (2007 Revision) which identified the advertising industry as permitted industry for foreign investment. On December 24, 2011 the NDRC and MOFCOM jointly issued the Guideline Catalog of Foreign Investment Industries (2011 Revision) as amended on March 10, 2015 (2015 Revision), and further amended on July 28, 2017 (2017 Revision), under which the advertising industry continues to remain as permitted industry. As a permitted industry, approval of MOFCOM or its local counterpart is no longer required for a foreign invested enterprise or its domestic subsidiary to invest in advertising unless required by other specific PRC laws and regulations. Based upon the published interpretation on the website of Shanghai Foreign Investment Commission, or SFIC, MOFCOM’s local counterpart in Shanghai, and oral advice we received from SFIC prior to the acquisition, we believe that it was not necessary for us to seek such approval at the time when we made the acquisition. However, because our acquisition occurred prior to, yet approaching, the removal of the advertising industry from the restricted list for foreign investment, and we did not receive the approval of SFIC, we may be deemed not in strict compliance with the then effective rules and could be subject to penalties. We were advised by SFIC in an anonymous consultation prior to the acquisition that this acquisition was a purely domestic acquisition without any foreign-related issues. Based on the advice of SFIC, Pudong Administration of Industry and Commerce in Shanghai accepted the registration of such acquisition and issued a new business license to Shanghai Advertising on September 24, 2007. We understand that it is unlikely that we would be required by the PRC regulatory authorities, in particular SAIC and MOFCOM or their local counterparts, to seek such approval to make up for our deficiency, or that any penalties would be imposed upon us for failure to obtain such approval.

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However, we cannot assure you that SAIC or MOFCOM will not take a different view from ours and we would not be subject to penalties that, if imposed, could have a material adverse effect on our business and results of operation.

If the PRC government takes the view that our acquisition of Shanghai Advertising does not comply with PRC governmental restrictions on foreign investment in advertising under Administrative Regulation on Foreign-Invested Advertising Enterprises, we could be subject to severe penalties.

Direct investment by foreign investors in the advertising industry in China was previously subject to the Administrative Regulation on Foreign-Invested Advertising Enterprises jointly promulgated by MOFCOM and SAIC on March 2, 2004 and further revised on October 1, 2008. Under this advertising regulation, foreign investors are required to have had at least three years of experience in directly operating an advertising business outside of China before they may receive approval to own 100% of an advertising business in China. Foreign investors that do not have three years of experience are permitted to invest in advertising businesses, provided that such foreign investors have at least two years of direct operations in the advertising business outside of China and that such foreign investors may not own 100% of advertising businesses in China. Furthermore, all foreign invested advertising companies must obtain approval from SAIC or MOFCOM or their local counterparts. On June 29, 2015, the Administrative Regulation on Foreign-Invested Advertising Enterprises was abolished.

On September 24, 2007, we acquired 100% of the legal ownership of Shanghai Advertising, which had been one of our affiliated entities, through Acorn Consulting. Pudong Administration of Industry and Commerce in Shanghai did not require us to show that Acorn Consulting had the requisite years of operating experience in an advertising business outside of China either before or after it accepted the registration of the acquisition and issued a new business license to Shanghai Advertising. Furthermore, according to an anonymous consultation with SFIC, because our acquisition of Shanghai Advertising was completed through Acorn Consulting, a domestic subsidiary of a foreign invested enterprise, the acquisition was not subject to the requirement that foreign investors have the requisite years of operating experience in an advertising business outside of China.

Since our acquisition of Shanghai Advertising occurred prior to the revocation of Administrative Regulation on Foreign-Invested Advertising Enterprises, if the PRC government determines that our acquisition of Shanghai Advertising violated the then-effective requirements on foreign investment or re-investment in advertising businesses in China, as neither Acorn Consulting nor its shareholders had the requisite years of experience in the advertising industry required of foreign investors, we could be subject to severe penalties including among others, the revocation of the business licenses of our related subsidiaries, discontinuance of our advertising operations, the imposition of conditions with which we or our PRC subsidiaries may be unable to comply, or the restructuring of Shanghai Advertising. The imposition of any of these penalties could result in a material adverse effect on our ability to do business.

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We may not fully comply with regulations on personal information protection which may subject us to administrative penalties.

 

Recently China has been imposing more stringent requirements on personal information protection. In particular, on December 28, 2012, the Standing Committee of the National People’s Congress promulgated the Decision on Strengthening Internet Information Protection, or Internet Information Protection Rules, which required that, among other things, internet service providers and other entities must obtain consent from relevant persons before collecting and using personal electronic information during business activities and must make public rules on collecting and using personal information; personal electronic information collected must be strictly kept confidential and must not be divulged, tampered with, damaged, sold or illegally provided to others; anyone is not allowed to send commercial electronic information to an recipient without his or her consent or request, or after he or she has given an explicit refusal. The MIIT promulgated Provisions on Protecting Personal Information of Telecommunications and Internet Users, or Personal Information Protection Rules, on July 16, 2013 which provides detailed rules for standards on collection and use of users’ personal information by telecommunications business operators and internet information service providers and security measures on protecting users’ personal information. In addition, the Law on the Protection of Consumers’ Rights and Interests amended on October 25, 2013 and effective from March 15, 2014 provides that business operators may not send commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information. Furthermore, the Measures for Punishments against Infringements on Consumer Rights and Interests promulgated on January 5, 2015 and effective from March 15, 2015 provides that a business operator must refrain from any of the following acts: (i) collecting or using the consumers'consumers’ personal information without the consent of the consumers; (ii) divulging, selling or illegally providing others with the consumers'consumers’ personal information collected; and (iii) sending commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information. On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cyber Security Law which, effective from June 1, 2017, imposes the following new requirements for the internet operators like us: (i) internet operators must notify the relevant consumers and the applicable government authority of the occurrence or potential occurrence of any divulging, damaging or loss of the personal information collected; and (ii) the internet operators must take proper measures to delete or correct the personal information collected at the request of the consumers whose personal information is used inappropriately or contains erroneous information. The PRC Cyber Security Law also increased the administrative punitive measures that the competent government authorities can take as well as the monetary penalty for any noncompliance. On March 6, 2020, the SAMR and the SAC jointly promulgated the Information Security Technology – Personal Information Security Specification, or 2020 Specification, which will be effective on October 1, 2020, to update its previous version effective on May 1, 2018. Under this 2020 Specification, (i) a data controller is required to differentiate between basic business functions and additional or expanded business functions, and is prohibited from bundling all these functions together; (ii) when displaying information, goods, services or research results to a data subject based on his browsing history or transaction records, the subject must also have the option of a non-personalized display. The data subject should be able to control the degree and extent to which his personal data can be utilized to generate a personalized display; (iii) if a third party also collects personal data via a data controller’s products or services (e.g. via plugin tools or certain cooperation mechanisms), the data controller is responsible for evaluating the third party’s data protection capabilities, requiring the third party to obtain the necessary consents from data subjects and to establish channels to receive their inquiries and complaints; (iv) a data controller must established a designated data protection officer and department if its business involves personal data processing and has more than 200 employees working towards this business; if it processes or expects to process personal data for more than one million individuals within 12 months; or if it processes the sensitive personal data of more than 100,000 individuals; and (v) a data controller must separately inform a data subject of the collection or sharing of his personal biometric data (e.g. when other non-biometric personal data is collected at the same time) and obtain his specific consent. Personal biometric data must be stored separately from personal identification data. While both versions are by nature suggested technical standards rather than mandatory regulations, they are considered best practice in China and their detailed suggestions are almost always taken into consideration during enforcement actions by authorities.


During our business activities we have collected a large amount of our customers’ information, such as names, addresses and phone numbers and from time to timefrequently send to our customers’ promotion messages and mail in connection with our products through the contact information we have collected. After effectiveness of Internet Information Protection Rules and other relevant laws and regulations, we have taken certain actions to comply with the requirements.requirements regarding collection and storage of personal information. However, given the limited interpretation on the rules,increasingly new regulations, we cannot assure you that our business practices and the additional steps we take in response to the rules will be sufficient to fully comply with the Internet Information Protection Rules and the PRC Cyber Security Law,currently effective rules, and that all of our customers’ personal information are legally collected and used and fully protected in all respects.We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store, process and share (however, we currently do not share) data with our customers, suppliers and third-party business partners. If relevant competent governmental authority holds that our business activities have violated Internet Information Protection Rules, we may be subject to certain administrative penalties, such as fines, and confiscating illegal gains.

 

If we are deemed to have failed to obtain permits or approvals applicable torequired under the complex regulatory environment for internet-based businesses in China, our past release, broadcastingbusiness, financial condition and transmissionresults of e-books and video and audio programs and internet information service, weoperations may be subject to financial penaltiesmaterially and other government sanctions.adversely affected.

PriorHistorically and prior to June 2017, during operation of our business, we have posted information includingsuch as e-books and video and audio programs on ourthe website (www.hjx.com)www.hjx.com, which was owned by us during that time, for customers to download. We have ceased posting such information on that website since June 2017.2017 and is no longer the owner of the aforesaid website. In addition, we also sell our proprietary products through the website www.xiangguo.com.

 Under applicable PRC laws, rules and regulations, our past conduct of posting information on the release, broadcasting and transmission of e-books and video and audio programswebsite may be deemed as providing internet publication services, as well as transmission of video and audio programs on the internet,pursuant to which could requireboth internet publication licenseslicense and licenses for online transmission of audio-visual programs.ICP License are required. We applied for, but failed to obtain the internet publication licenses but have not yet successfully obtained such licenses. In addition, our relevant operating entity is not qualified to obtain the licenses for online transmission of audio-visual programs under the current legal regime as it is not a wholly state-owned or state-controlled company. Therefore if our past conduct is deemed a violation of the applicable laws and regulations, welicense, which may be subject to financial penalties and other government sanctions. Furthermore, according to relevant laws and regulations, the internet information service provided through our website in the past might be deemed an operating business, which would require us to obtain an ICP License from the relevant information industry authorities. Accordingly, onpotential penalties. On January 17, 2014, Beijing HJX Technology, one of our affiliated entities, obtained an ICP License with a validity period of five years subject to annual inspection. On October 26, 2017, Beijing HJX Technology successfully renewed the ICP License, though we no longer post the aforesaid information on our website and our business now no longer requires much utilization of such license. We have in the past,However, due to management turnoverchanges and our improper management of the original ICP License had failedof Beijing HJX Technology, Beijing HJX Technology was not able to complete its annual inspection on such license, which may subject us to potential penalties. In conjunction with shifting our core business from Beijing to Shanghai and the discontinued operation of the HJX Business, we did not apply or renew such license for Beijing HJX Technology.

According to the Administrative Provisions for the Internet Audio-Video Program Service, or the Audio-Visual Provisions, promulgated by the State Administration of Radio, Film and Television, or SARFT, and the MIIT, providers of internet audio-visual program services are required to obtain a license for online transmission of audio-visual programs, or the Audio-Visual License, issued by SARFT, or complete certain registration procedures with SARFT. Furthermore, pursuant to Internet Live-Streaming Service Provisions promulgated by the State Internet Information Office and effective as of December 1, 2016, “any provider who intends to provide Internet Live-Streaming services in the form of online performances, online audio-visual programs, etc. shall also obtain relevant qualifications prescribed by laws and regulations pursuant to the law.” Pursuant to the Interim Provisions on the Administration of Internet Culture, promulgated by Ministry of Culture and effective on December 15, 2017, an internet service provider shall obtain an Internet Culture Operation License to carry out any business relating to Internet Cultural Products. With respect to our current operations through engaging in live streaming on our accounts of our “direct sales” platforms (e.g., our TMall shop) to facilitates the development of local China influencers with the objective to optimize their ability to convert Acorn’s content into product sales, we were advised by the relevant government authorities on a “no names” basis that none of the Audio-Visual License, the ICP License which,or the Internet Cultural Operation License would be required. However, if the relevant government authorities conduct a formal inquiry and as a result thereof take a different view, we cannot assure you that we would be able to obtain any of the above license in a timely manner or would be qualified to obtain one and if we failed to do so, our business would likely be disrupted and our revenues would likely be adversely affected.


With respect to our current business of selling our proprietary products through the website www.xiangguo.com, we were advised by the relevant information industry authorities on a “no names” basis that an ICP License is not required, instead an ICP registration from the relevant information industry authorities is required. One of our affiliated entity, Shanghai Network, has completed its ICP registration. However, if the relevant information industry authorities conduct a formal inquiry and as a result thereof take a different view, we cannot assure you that we would be able to obtain one in a timely manner and if we failed to do so, our business would likely be disrupted and our revenues would likely be adversely affected.

Regulation and censorship of information disseminated over the mobile and internet in China may adversely affect our business and subject us to liability for streaming content or posted on our platform.

Internet companies in China are subject to a variety of existing and new rules, regulations, policies, and license and permit requirements. In connection with enforcing these rules, regulations, policies and requirements, relevant government authorities may suspend services by, or revoke licenses of, any internet or mobile content service provider that is deemed to provide illicit content online or on mobile devices, and such activities may be intensified in connection with any ongoing government campaigns to eliminate prohibited content online. For example, in 2016, the Office of the Anti-Pornography and Illegal Publications Working Group, the State Internet Information Office, the MIIT, the Ministry of Culture and the Ministry of Public Security jointly launched a “Clean Up the Internet 2016” campaign. Based on publicly available information, the campaign aims to eliminate pornographic information and content in the Internet information services industry by, among other things, holding liable individuals and corporate entities that facilitate the distribution of pornographic information and content. During the campaign, relevant government authorities shut down approximately 2,500 websites, removed 15,000 links and closed 310,000 accounts. Publicly traded companies, such as Tencent, Baidu, and SINA, voluntarily initiated self-investigations to filter and remove content from their websites and cloud servers.

We endeavor to eliminate illicit content from our businesses under Acorn Digital. We monitor contents provided by our clients or created by us that we may post on third party platforms. We use a variety of methods to ensure the contents create a healthy and positive experience for the viewers. Although we employ these methods to filter contents, we cannot be sure that our internal content control efforts will be sufficient to remove all content that may be viewed as indecent or otherwise noncompliant with PRC law and regulations. Government standards and interpretations as to what constitutes illicit online content or behavior are subject to interpretation and may change in a manner that could render our current monitoring efforts insufficient. The Chinese government has wide discretion in regulating online activities and, irrespective of our efforts to control the contents created by us or provided by our customers, government campaigns and other actions to reduce illicit content and activities could subject us to negative press or regulatory challenges and sanctions, including fines, suspension or revocation of our licenses to operate in China or a ban from the third party platforms, including closure of one or more parts of or our entire business. Further, our senior management could be held criminally liable if we are deemed to be profiting from illicit contents posted on the third party platforms. Although our business and operations have not been materially and adversely affected by government campaigns or any other regulatory actions in the past, we cannot assure you that our business and operations will be immune from government actions or sanctions in the future. If government actions or sanctions are brought against us, or if there are widespread rumors that government actions or sanctions have been brought against us, our reputation could be harmed, we may lose users and customers, our revenues and results of operation may be materially and adversely affected and the value of our ADSs could be dramatically reduced.

We hold a violationFood Operation Permit and any failure to maintain the Food Operation Permit in the future may result in disruption of our business and fines and penalties.

China has adopted a licensing system for food supply operations under the applicable lawsFood Safety Law and regulations,its implementation rules. Entities or individuals that intend to engage in food production, food distribution or food service businesses must obtain licenses or permits for such businesses. Pursuant to the Administrative Measures on Food Operation Permits issued by the SFDA in August 2015 and was amended in November 2017, or the Food Operation Permits Measures, an enterprise needs to obtain a Food Operation Permit from the local food and drug administration, and the permits already obtained by food business operators prior to the effective date of these new measures will remain valid for their originally approved validity period. We sell pre-packaged refrigerated and frozen food, vitamin gummy bear through third party e-commerce platforms, and two of our affiliated entities, Shanghai Network, Shanghai Advertising, each currently holds a Food Operation Permit for the sale of pre-packaged food (including refrigerated and frozen food) valid until July 24, 2024 and November 23, 2024, respectively. It is possible that we may not be able to renew these permits. The failure to hold and renew such Food Operation Permits under the currently effective Food Operation Permits Measures may subject us to fines and penalties and would likely disrupt the relevant portion of our business.


We may be subject to financial penaltiesclaims under consumer protection laws, including health and other government sanctions.safety claims, if people are harmed by the products and services sold by us.

 

Through third party e-commerce platforms, we offer to sell products that are frequently purchased by consumers, such as seafood and provide e-commerce service to our customers who is selling other food products, such as vitamin gummy bears. Due to several high-profile incidents involving safety, including food safety, and consumer complaints that have occurred in China in recent years, the PRC government, media outlets and public advocacy groups are increasingly focused on consumer protection. These activities could expose us to increasing liability associated with consumer protection laws in those areas. In addition, we are facing increasing levels of activist litigation in China by plaintiffs claiming damages based on consumer protection laws. This type of activist litigation could increase in the future, and if it does, we could face increased costs defending these suits and damages should we not prevail, which could materially and adversely affect our reputation and brand and our results of operations.

We have purchased product liability insurance for products and services transacted under Acorn Fresh. Our rights of indemnity from the merchants supplying our products or using our services in connection with Acorn Fresh’s sale of pre-packaged food may not adequately cover us for any liability we may incur. Even unsuccessful claims could result in significant expenditure of funds and diversion of management time and resources, which could materially and adversely affect our business operations, net income and profitability.

As a foreign private issuer, we are permitted to and we will, rely on exemptions from certain New York Stock Exchange corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.

We are exempted from certain corporate governance requirements of the New York Stock Exchange by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the New York Stock Exchange. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:

  27●have a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act);

 ●have a compensation committee or a nominating or corporate governance committee consisting entirely of independent directors;

 

●have regularly scheduled executive sessions for non-management directors; or

●have executive sessions of solely independent directors each year.

 

Risks RelatingWe have relied on and intend to Our Corporate Structurecontinue to rely on some of these exemptions. As a result, holders of our ADSs may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.

If the PRC government takes the view that the agreements that establish the structure for operating our direct sales business in China doacquisition of Shanghai Advertising did not comply with PRC governmental restrictionsthe then rules and regulations on foreign investment, in these areas, we could be subject to severe penalties.

 

Our direct sales business is regulated by MOFCOM and SAIC. Historically, foreign investment in On September 24, 2007, we acquired 100% of the direct sales business was highly restricted andlegal ownership of Shanghai Advertising, which had to be approved by MOFCOM. To address these past restrictions, two affiliated domestic entitiesbeen one of our Company, Shanghai Network, and Beijing Acorn, were structured to operate our direct sales business. Furthermore, due to these restrictions on the direct sales business as well as certain restrictions or prohibitions on foreign ownership of companies that engage in internet and other related businesses imposed by current PRC laws and regulations, including the provision of internet content that were in place then, we have set up another consolidated affiliated entity, Beijing HJX Technology, to conduct internet interactive services through Beijing HJX Technology (which holds an ICP License). Our three affiliated domestic entities are currently owned by two PRC citizens, Mr. Kuan Song and Ms. Pan Zong, who are nominee shareholders engaged by us to hold the equity interests in our three affiliated domestic entities on our behalf. We have entered into contractual arrangements with these affiliated entities, pursuant to which our wholly owned subsidiaries,through Shanghai Acorn Information Technology (Shanghai)Enterprise Management Consulting Co., Ltd., or Acorn Information, and Acorn Trade (Shanghai) Co. Ltd., or Acorn Trade (Shanghai), provide technical support and operation and management services to these affiliated entities. In addition, we have entered into agreements with these affiliated entities and Mr. Song and Ms. Zong as their shareholders, providing us substantial ability to control each of these affiliated entities. For detailed descriptions of these contractual arrangements, see Item 4.C, “Information on the Company—Organizational Structure”.Consulting.

 

On March 10, 2015,At the NDRC and MOFCOM jointly issuedtime of our acquisition, the advertising industry was a restricted industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2015(2004 Revision). Acorn Consulting, as amended on July 28, 2017 (2017 Revision) which has removeda domestic subsidiary of foreign invested enterprises, might have been required under PRC law to obtain the direct sales and internet sales fromapproval of the Ministry of Commerce, or MOFCOM, or its local counterpart to invest in restricted industries, category.such as the advertising industry. However, since October 31, 2007, advertising industry has been a permitted industry under the Regulationsrevised versions of Guideline Catalog of Foreign Investment Industries or similar rules and regulations. As a permitted industry, approval of MOFCOM or its local counterpart is not required for a foreign invested enterprise or its domestic subsidiary to invest in advertising unless required by other specific PRC laws and regulations.

In addition, at the time of our acquisition, under the Administrative Regulation on Administration of Direct Sales, effective as of August 23, 2005Foreign-Invested Advertising Enterprises jointly promulgated by MOFCOM and SAIC on March 2, 2004 and amended on MarchOctober 1, 2017, the entities engaged in direct sales2008, foreign investors are still required to have had at least three years of experience in directly operating an advertising business outside of China before they may receive approval to own 100% of an advertising business in China. The Administrative Regulation on Foreign-Invested Advertising Enterprises was revoked on June 29, 2015.


Prior to the acquisition, in an anonymous consultation we were advised by SFIC that because our acquisition was completed through Acorn Consulting, a domestic subsidiary of a foreign invested enterprise, the acquisition should not be approved by MOFCOM,subject to the requirements of the aforesaid rules and ifregulations. Based on the advice of SFIC, Pudong Administration of Industry and Commerce in Shanghai accepted the registration of our acquisition and issued a new business license to Shanghai Advertising on September 24, 2007, without requiring approval from SFIC or us to have three-years of operating experience in the advertising industry.

As such, we did not obtain any approval for our acquisition from the SFIC, and neither Acorn Consulting nor its shareholders had the requisite years of experience in the advertising industry under the aforesaid rules and regulations. If the government takes a different view from that of SFIC, and determines that our acquisition was subject to the aforesaid rules and regulations, then we may be deemed not in strict compliance with the then effective rules and could be subject to severe penalties including among others, the revocation of the business licenses of our related subsidiaries, discontinuance of our advertising operations, the imposition of conditions with which we or our PRC subsidiaries may be unable to comply, or the restructuring of Shanghai Advertising. The imposition of any of these penalties could result in a material adverse effect on our ability to do business.

Risks Relating to Our Corporate Structure

If the PRC government takes the view that our contractual arrangements that established the structure for operating our relevant business in China in the past did not comply with the PRC laws and regulations, we may be subject to penalties.

Historically, the PRC laws and regulations required strict approvals for foreign investment enterprises to engage in retail sales through television, telephone, mail order, and internet. In order to address such entities, suchhigh-standard approval requirement on foreign investor shall have more thaninvestment enterprises, we set up three years’ experience of engaging in direct sales activities outside the territory of China.

We understand that the ownership structures of (i) Acorn Information,consolidated affiliated entities, Shanghai Network, and Beijing Acorn; and (ii) Acorn, Trade (Shanghai) and Beijing HJX Technology, to conduct our retail sales based on a series of contractual arrangements by and among these consolidated affiliated entities and its shareholders, Acorn Information, and Acorn Trade (Shanghai). As a result, we exert control over these consolidated affiliated entities (these ownership structures and contractual arrangements are in compliance with existingcollectively called the “VIE structure”). Even though (i) since November 2016, the retail sales through television, telephone, mail order, and internet have been deemed as permitted industry under the current PRC laws and regulations, and (ii) by early 2015 we suspended our TV “direct sales” business (except for the periodic procurement of an insignificant amount of TV time until final discontinuation in 2018), we still have our VIE structure.

 Based on the relevant PRC laws and regulations, we understand each of the contracts among our PRC subsidiaries (i.e., Acorn Information and Acorn Trade (Shanghai)), these consolidated affiliated entities and its shareholders is valid, binding and enforceable in accordance with its terms; we also understand in practice the PRC government will not be likely to hold us responsible for our past retail sales conduct if newly enacted laws and regulations have permitted such conduct. However, if the PRC government takes different view on our contractual arrangements among (i) Acorn Information, Shanghai Networkfor operating our past retail sales business through television, telephone and Beijing Acorn and their shareholders; and (ii) Acorn Trade (Shanghai) and Beijing HJX Technology and their shareholders are valid, binding and enforceable. However, there are uncertainties regardingothers, we may be subject to certain penalties.

Uncertainties may exist with respect to the interpretation and applicationimplementation of currentthe Foreign Investment Law and future PRC laws and regulations. If we, Acorn Information, Acorn Trade (Shanghai) or anyhow it may impact the viability of our affiliated entitiescurrent corporate structure, corporate governance and business operation.

The National People’s Congress promulgated the Foreign Investment Law on March 15, 2019, which came into effect on January 1, 2020. The State Council promulgated the Implementing Regulations of the Foreign Investment Law on December 26, 2019, which came into effect on January 1, 2020. The Foreign Investment Law and its implementing regulations (i) replace the trio of existing laws regulating foreign investment in China, (ii) 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. However, the new Foreign Investment Law stipulate three forms of foreign investment, but does not explicitly stipulate the contractual arrangements as a form of foreign investment. Notwithstanding the foregoing, the Foreign Investment Law stipulates that the concept of a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Therefore, there are foundpossibilities that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of any existing orthe foreign investment access requirements and how the above-mentioned contractual arrangements will be handled. Nevertheless, given these consolidated affiliated entities no longer conduct the above TV “direct sales” business, we understand the risks posed by these contractual arrangements is relatively low. If future PRC laws, oradministrative regulations or failprovisions prescribed by the State Council mandate further actions to obtain or maintain anybe completed by companies with existing contractual arrangements, we may face uncertainties as to the timely completion of such actions. In the required licenses, permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with these violations, including, among others:

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revoking the business and operating licenses of Acorn Information, Acorn Trade (Shanghai) and our affiliated entities;

discontinuing or restricting the operations of Acorn Information, Acorn Trade (Shanghai) and our affiliated entities;

limiting our business expansion in China by way of entering into contractual arrangements;

imposing conditions or requirements with whichextreme case scenario, we Acorn Information, Acorn Trade (Shanghai) or our affiliated entities may be unablerequired to comply;unwind the contractual arrangements and/or dispose our VIE structure, which could have an adverse effect on our business.


requiring us or Acorn Information, Acorn Trade (Shanghai) or our affiliated entities to restructure the relevant ownership structure or operations; or

restricting or prohibiting our use of the proceeds of any additional public offering or other offshore or onshore capital raising transaction to finance our business and operations in China.

Our ability to conduct our business may be negatively affected if the PRC government were to carry out any of the aforementioned actions.

The contractual arrangements with our consolidated affiliated Chinese entities and their shareholders relate to criticalcertain aspects of our operations, but may not be as effective in providing operational control as direct ownership and may be difficult and costly to enforce under PRC law.

 

We rely on contractual arrangements with our variable interestconsolidated affiliated entities and their shareholders to operate certain aspects of our business in China. For a description of these contractual arrangements, see Item 4.C, “Information on the Company—Organizational Structure”. These contractual arrangements may not be as effective as direct ownership in providing us control over our consolidated affiliated entities. Direct ownership would allow us, for example, to directly exercise our rights as a shareholder to effect changes in the board of each consolidated affiliated entity, which, in turn, could effect changes, subject to any applicable fiduciary obligations, at the management level. If our variable interestconsolidated affiliated entities or their shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated affiliated entities is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system.

 

In addition, all of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Moreover, there have been certain instances where similar contractual arrangements with variable interestconsolidated affiliated entities such as ours have been found unenforceable in PRC arbitration, and we cannot assure that will not happen to us. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over our variable interestconsolidated affiliated entities, and our ability to conduct a portion of our business and our financial conditions and results of operations may be materially and adversely affected. See “—Risks Related to Doing Business in China—The PRC legal system embodies uncertainties which could limit the available legal protections.”

 

The shareholders of our variable interestconsolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.result in our having difficulty to control our VIEs.

 

Shanghai Network, Beijing Acorn, and Beijing HJX are our variable interestconsolidated affiliated entities. Mr. Kuan Song and Ms. Pan Zong collectively hold 100% of the equity interest in Shanghai Network, Beijing Acorn and Beijing HJX Technology.

 

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The interests of Mr. Kuan Song and Ms. Pan Zong as the shareholders of our variable interestconsolidated affiliated entities may differ from the interests of our Company as a whole, as what is in the best interests of our variable interestconsolidated affiliated entities may not be in the best interests of our Company. We cannot assure you that if conflicts of interest arise, any or all of these individuals will act in the best interests of our Company or that conflicts of interest will be resolved in our favor. In addition, these individuals may breach or cause our variable interestconsolidated affiliated entities and their subsidiaries to breach or refuse to renew the existing contractual arrangements with us.

 

Currently, we do not have arrangements to address potential conflicts of interest that the shareholders of our variable interestconsolidated affiliated entities may encounter; providedencounter, except that we could, at all times, exercise our option under the optional share purchase agreement to cause them to transfer all of their equity ownership in our variable interestconsolidated affiliated entities to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could, also, in the capacity of attorney-in-fact of the then existing shareholders of our variable interestconsolidated affiliated entities as provided under the power of attorney, directly appoint new directors of our variable interestconsolidated affiliated entities. We rely on the shareholders of our variable interest entities to comply with the laws of China, which protect contractual rights. The laws also require them to avoid conflicts of interest and not to take advantage of their positions for personal gains. The laws of the Cayman Islands provide that directors owe a duty of care and a duty of loyalty to act honestly in good faith with a view to the company’s best interests. However, the legal frameworks of China and Cayman Islands do not provide guidance on how to resolve conflicts in the event of a conflict with another corporate governance regime.

 

If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our variable interestconsolidated affiliated entities, we would have to rely on legal proceedings, which could result in disruption of a portion of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. Under the current contractual arrangements, as a legal matter, if any consolidated affiliated entity or Mr. Kuan Song or Ms. Pan Zong fails to perform its or their respective obligations under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements, and rely on legal remedies under PRC law. These remedies may include seeking specific performance or injunctive relief, and claiming damages, any of which may not be effective. For example, if either Mr. Kuan Song or Ms. Pan Zong refuses to transfer his or her equity interest in any affiliated entity to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if either Mr.  Kuan Song or Ms. Pan Zong otherwise acts in bad faith toward us, we may have to take legal action to compel him or her to fulfill his or her contractual obligations. In addition, as each of our affiliated entity is jointly owned and effectively managed by Mr.  Kuan Song or Ms. Pan Zong, it may be difficult for us to change our corporate structure or to bring claims against any affiliated entity or Mr.  Kuan Song or Ms. Pan Zong if any of them fails to perform its or his or her obligations under the related contracts or does not cooperate with any such actions by us.

 


We may lose the ability to use and enjoy assets held by our PRC consolidated affiliated entities that are importantrelated to the operation of a portion of our business if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.

 

As part of our contractual arrangements with our variable interestconsolidated affiliated entities, such entities hold certain assets, such as patentstrademarks for the proprietary technologyour branded products and service that are essentialrelated to the operationsoperation of our platform and important to the operationa portion of our business. If any of our variable interestconsolidated affiliated entities goes bankrupt and all or part of its assets become subject to liens or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations.business. If any of our variable interestconsolidated affiliated entities undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate portion of our business, which could materially and adversely affect our business, financial condition and results of operations.business.

 

Our ability to enforce the equity pledge agreements between us and PRC variable interestconsolidated affiliated entities’ shareholder may be subject to limitations based on PRC laws and regulations.

 

Pursuant to the equity interest pledge agreements between our wholly owned subsidiaries in China and the shareholders of our variable interestconsolidated affiliated entities, each shareholder of each variable interestconsolidated affiliated entities agrees to pledge itshis or her equity interests in the variable interestconsolidated affiliated entity to one of our subsidiaries to secure performance by the relevant variable interestconsolidated affiliated entity, as well as by the shareholders of such variable interestconsolidated affiliated entity, of its, his or her obligations under the relevant contractual arrangements. The equity interest pledges of shareholders of variable interestconsolidated affiliated entities under these equity pledge agreements have been registered with the relevant local branch of the SAIC.SAIC (currently known as the State Administration for Market Regulation). We may change our variable interestconsolidated affiliated entities structure in the future. In addition, in the registration forms of the local branch of SAIC for the pledges over the equity interests under the equity interest pledge agreements, the aggregate amount of registered equity interests pledged to our wholly owned subsidiaries in China represents 100% of the registered capital of our variable interestconsolidated affiliated entities. The equity interest pledge agreements with each of the variable interestconsolidated affiliated entities’ shareholders provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations and liabilities under all of the principal service agreements and the scope of pledge shall not be limited by the amount of the registered capital of that variable interestconsolidated affiliated entity. However, it is possible that a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity interest pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors.

 

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Our corporate structure may limit our ability to receive dividends from, and transfer funds to, our PRC subsidiaries, which could restrict our ability to act in response to changing market conditions and reallocate funds from one affiliated PRC entity to another in a timely manner.

 

We are a Cayman Islands holding company and substantially all of our operations are conducted through our 128 PRC subsidiaries and three variable interest3 consolidated affiliated entities. We may rely on dividends and other distributions from our PRC subsidiaries to provide us with our cash flow and allow us to pay dividends on the shares underlying our ADSs and meet our other obligations. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations. In particular, under PRC law, these operating subsidiaries may only pay dividends after 10% of their net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of their respective registered capital. Such reserve may not be distributed as cash dividends. In addition, if any of our 12 PRC operating subsidiaries 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. Moreover, the retained earnings available for distribution from our Chinese operating subsidiaries are determined in accordance with generally accepted accounting principles in China, and may differ from the retained earnings determined in accordance with U.S. GAAP. As a result, we may not have sufficient distributions from our PRC subsidiaries to enable necessary profit distributions to us or any distributions to our shareholders in the future, which calculation would be based upon our financial statements prepared under U.S. GAAP. Furthermore, distributions by our PRC subsidiaries to us other than as dividends may be subject to governmental approval and taxation.

 

In addition, any transfer of funds from our offshore company to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been remitted from our offshore company to our PRC subsidiaries. These limitations on the free flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market conditions and reallocate funds from one Chinese subsidiary to another in a timely manner.

 


The contractual arrangements entered into among our consolidated affiliated entities and their shareholders and those arrangements entered into between us or one of our Chinese subsidiaries and our consolidated affiliated entities may be subject to audit or challenge by the Chinese tax authorities. A finding that we, Acorn Information, Acorn Trade (Shanghai), our consolidated affiliated entities or any of our Chinese subsidiaries owe additional taxes could substantially reduce our net earnings and the value of your investment.

 

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. As a result of our corporate structure and the contractual arrangements among our PRC subsidiaries, our PRC consolidated affiliated entities and their shareholders, we are effectively subject to 6% PRC value added tax and related surcharges on revenues generated by our subsidiaries from our contractual arrangements with our PRC consolidated affiliated entities. The current EIT Law, which became effective on January 1, 2008 and was amended on February 24, 2017 and was further amended on December 29, 2018, provides authority for the PRC tax authority to make special adjustments to taxable income as well as additional reporting requirements. In particular, an enterprise must submit its annual tax return together with information on related party transactions to the tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s-length principles. In addition, the PRC tax authorities issued Announcement of the State Administration of Taxation on Matters Relating to the Improvement of Affiliated Declaration and Contemporaneous Document Management on June 29, 2016 which set forth tax-filing disclosure and contemporaneous documentation requirements, clarify the definition of “affiliated relationship,” guide the selection and application of transfer pricing methods, and outline the due process procedures for transfer pricing investigation and assessment. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our PRC consolidated affiliated entities were not on an arm’s length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that either of our PRC consolidated affiliated entities adjust its taxable income upward for PRC tax purposes. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions for PRC tax purposes recorded by us, our consolidated affiliated entities, or our PRC subsidiaries or an increase in taxable income, all of which could increase our tax liabilities. In addition, the PRC tax authorities may impose certain late payment fees and other penalties on us, our consolidated affiliated entities or our PRC subsidiaries for under-paid taxes.

 

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The draft PRC Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance, business operations and financial results.

The MOFCOM 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. As of the date of the report, the draft Foreign Investment Law has not been enacted yet. 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. While the MOFCOM solicited public comments on this draft in January and February, 2015, substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation, if any. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework regulating the foreign investments in China and may materially impact the viability of our current corporate structure, corporate governance, business operations and financial results.

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of ‘‘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 MOFCOM or its local branches, 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, among others, 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 and its investment amount exceeds certain thresholds or its business operation falls within a ‘‘negative list’’, to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local branches would be required. Otherwise, all foreign investors may make investments on the same terms as Chinese investors without being subject to additional approval from the government authorities as mandated by the existing foreign investment legal regime.

The ‘‘variable interest entity’’ structure, or VIE structure, has been adopted by many PRC-headquartered offshore companies, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. We also set up the VIE structure to do our business in China. 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 individual, or PRC government and its branches or agencies).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.

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However, the draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies with a VIE structure, although a few possible options were proffered. Under these options, a company with VIE structures and in the business on the ‘‘negative list’’ at the time of enactment of the new Foreign Investment Law has either the option or obligation to disclose its corporate structure to the authorities, while the authorities, after reviewing the ultimate control structure of the company, may either permit the company to continue its business by maintaining the VIE structure (when the company is deemed ultimately controlled by PRC citizens), or require the company to dispose of its businesses and/or VIE structure based on circumstantial considerations. Moreover, it is uncertain whether the business that our VIEs are operating will be subject to the foreign investment restrictions or prohibitions set forth in the ‘‘negative list’’ to be issued. If the enacted version of the Foreign Investment Law and the final ‘‘negative list’’ mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

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 the 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.

Risks Relating to Doing Business in China

 

Our operations may be adversely affected by changes in China’s economic, political and social conditions.

 

All of our business operations are conducted in China and all of our revenues are derived from our marketing and sales of consumer products in China. Accordingly, our results of operations, financial condition, and future prospects are subject to a significant degree to economic, political and social conditions in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources, which have for the most part had a positive effect on our business and growth. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will not have a negative effect on us. For example, our financial condition and results of operation may be adversely affected by changes in tax regulations applicable to us.

 

Although the Chinese economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the overall economy in China, which could harm our business.

 

In particular, our business is primarily dependent upon the economy and the business environment in China. Our growth strategy is based upon the assumption that demand in China for our products will continue to grow with the growth of Chinese economy. However, the growth of the Chinese economy has been uneven across geographic regions and economic sectors, and experienced an economic slowdown in 2009 as a result of the global economic crisis. In addition, while the PRC economy has experienced significant growth in the past three decades, that growth may not continue, at least athas slowed in recent years compared to prior years. According to the sameNational Bureau of Statistics of China, China’s real GDP growth rate as evidencedwas 6.7% in 2016, which increased to 6.9% in 2017 and slowed to 6.6% in 2018 and further to 6.1% in 2019. China’s GDP also contracted by 6.8% on a quarter-to-quarter basis (compared to the slowingimmediately preceding quarter) in the first quarter of 2020, the growthworst downturn since 1979 due primarily to the outbreak of the Chinese economy since 2012.COVID-19. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such changes in China’s political or social conditions may also adversely affect our operations and financial results and may lead to reduction in demand for our services. In recent years, to encourage economic development, the PRC government has implemented various measures, many of which benefit the overall PRC economy, but may also 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 that are applicable to us. In addition, future measures to control the pace of economic growth may also cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

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Our revenues and financial results may be adversely affected by any economic slowdown in China as well as globally.

The success of our business ultimately depends on consumer spending. We derive substantially all of our revenues from China. As a result, our revenues and financial results are affected to a significant extent by economic conditions in China and globally, as well as economic conditions specific to online retail. The global macroeconomic environment is facing numerous challenges. The growth rate of the Chinese economy has gradually slowed since 2010, and then contracted in the first quarter of 2020. Slow growth or even contraction may continue in the foreseeable future, especially in light of the challenges the global economy is facing due to the COVID-19 global pandemic. Any economic slowdown could significantly reduce domestic commerce in China, including through the internet generally and through us. In addition, there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

The discontinuation of any of the preferential tax treatments and government subsidies available to us in China could materially and adversely affect our results of operations and financial condition.

Under PRC laws and regulations effective until December 31, 2007, our operatingOur subsidiaries Acorn International Electronic Technology (Shanghai) Co., Ltd., Shanghai HJX Digital Technology Co., Ltd., Zhuhai Acorn Electronic Technology Co., Ltd., Beijing Acorn Youngleda Technology Co., Ltd., or Beijing Youngleda and Yiyang Yukang Communication Equipment Co., Ltd. (“Yiyang Yukang”), enjoyed preferential tax benefits afforded to foreign-invested manufacturing enterprises and had been granted a two-year exemption from enterprise income tax beginning from their first profitable year and a 50% reduction of enterprise income tax rate for three years thereafter. The definition of a manufacturing enterprise under PRC law was vague and was subject to discretionary interpretation by the PRC authorities. Therefore there is no assurance that the aforesaid operating subsidiaries’ qualification as “manufacturing enterprises” would not be revoked. If it is determined that any of the operating subsidiaries should have been qualified as “manufacturing enterprises” and thus should not receive the aforesaid preferential tax treatments, or if the tax preferential treatments enjoyed by us in accordance with local government rules or policies were deemed in violation of national laws and regulations, we would be subject to the standard statutory tax rate, which is 25% for calendar years starting on or after January 1, 2008, and we could be required to repay the income tax for the previous three years at the applicable non-preferential tax rate.

In addition, the new Enterprise Income Tax Law, or the New EIT Law and its implementing rules, which became effective on January 1, 2008 as amended on February 24, 2017, significantly curtails tax incentives granted to foreign-invested enterprises under the previous tax law. The New EIT Law (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies to continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules, and (iii) introduces new tax incentives, subject to various qualification criteria. Under the phase- out rules, enterprises established before the promulgation date of the New EIT Law and which were granted preferential EIT treatment under the then effective tax laws or regulations may continue to enjoy their preferential tax treatments until their expiration. Additionally, our subsidiaries also received tax holidays and subsidies for certain taxes paid by us, as well as subsidies which formed part of the incentives provided by local government for our investment in our local district. These incentives were granted by local government agencies and may be deemed inappropriate by the central government. Preferentialgovernment, and the tax treatments and incentives granted to us by PRC governmental authorities are subject to review and may be adjusted or revoked at any time in the future. The discontinuation or revocation of any preferential tax treatments and incentive currently available to us will cause our effective tax rate to increase, which will decrease our net income and materially and adversely affect our financial condition and results of operations. See Item 5.A, “Operating and Financial Review and Prospects—Operating Results—Taxation”.Taxation.”

 

Under China’s New EIT Law, we may be classified as a “resident enterprise” of China and such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

The New EIT Law provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their global income. Under the implementation rules,Regulations on the Implementation of the EIT Law, promulgated on December 6, 2008 and effective on January 1, 2008 and amended on April 23, 2019 (2019 version), or the Implementation Regulations (2019 version), a “de facto management”management body” is defined as substantial and overall management and control over such aspects as the productionmanufacturing and business operations, personnel accountsand human resources, finances and properties of an enterprise. In addition, two tax circulars issued by the State Administration of Taxation, or SAT, on April 22, 2009 and amended on December 29, 2017 (or SAT Circular 82), and July 27, 2011 and amended on April 17, 2015, and June 28, 2016 and June 15, 2018 (or SAT Bulletin 45), respectively, regarding the standards used to classify certain Chinese-controlledoffshore incorporated enterprises established outside of Chinacontrolled by PRC enterprises or PRC enterprise Groups as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. These two circulars also subject such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the implementation rules to the New EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circularsSAT Circular 82 mentioned above detaildetails that certain offshore incorporated Chinese-controlled enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal,seals, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. SAT Bulletin 45 further clarifies the resident status determination, post-determination administration as well as competent tax authorities.

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Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management bodies” which are applicable to our Company or our overseas subsidiary. The above two circulars only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign corporations like us. In the absence of detailed implementing regulations or other guidance determining that offshore companies controlled by PRC individuals or foreign corporations like us are PRC resident enterprises, we do not currently consider our Company or any of our overseas subsidiaries to be a PRC resident enterprise.


However, if the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and other non-China source income would be subject to PRC enterprise income tax at a rate of 25%, in comparison to no taxation in the Cayman Islands. Second, although under the New EIT Law and its implementation rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes but not controlled by PRC enterprise or enterprise group like us. Finally, if our Cayman Islands holding company is deemed to be a PRC tax resident enterprise, a 10% withholding tax shall be imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived from our non-PRC shareholders transferring our shares or ADSs. Similar results would follow if our BVI holding company is considered a PRC “resident enterprise”.enterprise.”

 

The PRC legal system embodies uncertainties which could limit the available legal protections.

 

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. 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 investment in China. 9Seven (7) of our 12eleven (11) PRC operating subsidiaries are wholly foreign investedowned enterprises incorporated in China. They are subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to foreign-invested enterprises in particular. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely 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) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the media, ecommerce, education, advertising and retail industries, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, and our foreign investors, including you.

 

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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 Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi .Renminbi. 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, after complying with certain procedural requirements, our PRC subsidiaries are 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 Renminbi 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.

 

Because our revenues are generated in Renminbi and our results are reported in U.S. dollars, ongoing devaluation of the Renminbi could negatively impact our results of operations.

 

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowedFor instance, in August 2015, the People’s Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi to appreciate more than 20% against the U.S. dollar, between July 2005requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and July 2008. Between July 2008supply as well as changes in major currency rates. In 2017 and June 2010, this appreciation halted and2018, the exchange rate betweenvalue of the Renminbi appreciated approximately 6.3% and the U.S. dollar remained within a narrow band. From June 2010 through January 2014, the PRC government allowed the Renminbi to appreciate slowlydepreciated approximately 1.1% and against the U.S. dollar, again, though there were periods during that time whenrespectively. From the U.S. dollar appreciated againstend of 2018 through the end of 2019, the value of the Renminbi as well. In April 2012, the PRC government announced that it would allow more Renminbi exchange rate fluctuation. However, it remains unclear how this announcement might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the Renminbiappreciated by approximately 1.7% against the U.S. dollar. From June 2010 to January 2014,Specifically, the Renminbi has appreciated against the U.S. dollar from approximately RMB6.82 per U.S. dollar to RMB6.05 per U.S. dollar, reaching a new historical height. Subsequently, the Renminbi depreciated against the U.S. dollar to RMB6.48 per U.S. dollar on December 31, 2015, and further depreciated to RMB6.94 per U.S. dollar by December 31, 2016. The Renminbi appreciated against the U.S. dollar to approximately RMB6.53RMB 6.98 per U.S. dollar on December 31, 2017.2019. More recently, the Renminbi has depreciated further against the U.S. dollar, with an exchange rate equal to approximately RMB 7.13 per U.S. dollar on May 28, 2020. It is difficult to predict how market forces or PRC or U.S. government policy may impactaffect the exchange rate between the Renminbi and the U.S. dollar in the future.


There also remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciate against the U.S. dollar, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. Substantially all of our revenues and costs are denominated in Renminbi. Any significant devaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

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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 Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the annual report.

 

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

 

Regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose our PRC resident shareholders to liability under PRC law.

 

On July 4, 2014, the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, was promulgated by SAFE, which replaced the former circular commonly known as “Notice 75” promulgated by SAFE on October 21, 2005 and 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, referred to in SAFE Circular 37 as a ‘‘special“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 increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiary 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 subsidiary. 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. Pursuant to the Circular on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, or SAFE Circular 13, promulgated by SAFE on and effective from February 13, 2015, banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment. The SAFE and its branches (hereinafter referred to as the "Foreign“Foreign Exchange Bureau"Bureau”) shall conduct indirect regulation of Foreign Exchange Registration of Direct Investment via banks.

 

We have already notified our shareholders and the shareholders of the offshore entities in our corporate group, who are PRC residents known by us to urge them to make the necessary applications and filings, as required under SAFE Circular 37. We understand that the relevant shareholders have registered their offshore investments in us with Shanghai SAFE, where most of our PRC subsidiaries are located. We are committed to complying, and to ensuring that our shareholders who are subject to the regulation comply, with the relevant rules. However, we cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by SAFE Circular 37 and SAFE Circular 13. In addition, SAFE Circular 37 and SAFE Circular 13 were recently promulgated, and it is unclear how these regulations and relevant rules will be interpreted, amended and implemented by the relevant PRC government authorities. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.

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Upon the completion of our acquisition of Yiyang Yukang in December 2008, shareholders of Yiyang Yukang became our shareholders. To our knowledge, some of the prior shareholders of Yiyang Yukang did not file applications for SAFE registration, which may adversely affect our ability to distribute dividends to our shareholders as stated above. To our knowledge, a separate registration in respect of Notice 75 which was effective at the moment of the above acquisition is not applicable to our acquisition of Yiyang Yukang.

 

A failure, by us or PRC individuals who hold shares or share options granted by us pursuant to an employee share option or share incentive plan, to comply with relevant PRC laws and regulations related to share option could expose us or our PRC individual option holders to liability under PRC law.

On March 28, 2007, SAFE issued the Operating Rules for Administration of Foreign Exchange for Domestic Individuals’ Participation in Employee Stock Ownership Plans and Stock Option Plans of Overseas Listed Companies, or Circular 78. On February 15, 2012, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Companies, or Circular 7, in replacement of Circular 78. According to Circular 7, individuals in the PRC (including PRC citizens and foreign individuals who have lived in China over one year) who intend to participate in the stock incentive plan of an overseas listed company shall jointly appoint a qualified PRC domestic agent or a PRC subsidiary of such overseas listed company (“a PRC Agency”) to conduct foreign exchange registration with SAFE, open bank accounts and transfer and exchange funds. In addition, an overseas entity shall be appointed to conduct the exercise of options, buying and selling of relevant stocks or equities and transfer of relevant funds. After such individuals’ foreign exchange income from participation in the stock incentive plan is remitted to the PRC, relevant banks shall distribute the above funds from the account opened and managed by the PRC Agency to such individuals’ foreign exchange accounts. We and our employees within PRC who have been granted share options, or PRC option holders, are subject to Circular 7 upon the listing of our ADSs on NYSE. If we or our PRC option holders fail to comply with these regulations, we or our PRC option/stock appreciation right holders may be subject to fines and other legal or administrative sanctions. Furthermore, pursuant to the Notice on Relevant Issues Concerning Collection of Individual Income Tax Related to Income from Share Option issued by the Ministry of Finance and the SAT on March 28, 2005 and the Notice on Issues of Individual Income Tax Concerning Share Incentive Plan issued by the SAT on August 24, 2009 (as amended by Announcement of the State Administration of Taxation on Certain Issues Relating to Individual Income Tax which is effective from May 1, 2011), as to an overseas listed company’s share option plan, the difference obtained by a PRC individual who has been granted share options between the exercise price below the fair market price of such share on the day when such individual excises his option shall be imposed individual income tax which shall be withheld by domestic entities of such overseas listed company. If we or our PRC employees fail to comply with the above regulations, we or our PRC option holders may be subject to failure of share option plan or/and a fine, and, in the serious case, may constitute a crime.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Contract Law, which became effective on January 1, 2008, and its implementing rules impose requirements concerning contracts entered into between a PRC employer and its employees and establish time limits for probationary periods. Because the Labor Contract Law and its implementing rules lack clarity with respect to their implementation and potential penalties and fines, there may be a risk that certain of our employment policies and practices could be determined by relevant PRC authorities as being in violation of the Labor Contract Law or its implementing rules, which could result in penalties, fines or other sanctions. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, under certain cases an employee who is terminated by us is entitled to receive a severance payment equal to his or her average monthly salary during the 12-month period immediately preceding to the termination for each year of service up to the date of termination. If we terminate a labor contract in any circumstance other than those specified under the PRC Labor Contract Law and its implementing rules, including termination without cause, we must either reinstate and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating the severance payment, subject to the employee’s own request. Due to our cost controls and internal business restructuring, we are in the process of termination of our employees’ labor contracts on a large scale and we have to pay to terminated employees a large amount of severance payment or damages. As such, our business, financial condition and results of operations may be materially and adversely affected. Furthermore, the PRC Labor Contract Law and subsequently passed rules and regulations have tended to provide greater rights to employees and impose more onerous requirements on employers in China. As a result of regulations designed to enhance labor protection, our labor costs in China may increase in the future.

 

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On December 28, 2012, the Labor Contract Law was amended to impose more stringent requirements on labor dispatch which became effective on July 1, 2013. For example, an employer shall strictly control the number of dispatched employees not to exceed certain percentage of its total number of employees. Moreover, the Interim Provisions on Labor Dispatch, or the Dispatch Rule, effective on March 1, 2014, provides that dispatched employees are only allowed to work in temporary, ancillary and replaceable positions. The number of dispatched employees hired by an employer may not exceed 10% of its total labor force and the employer has a two-year transition period to comply with such requirement. Pursuant to the current Labor Contract Law, a labor-dispatching enterprise or an employer using dispatched workers who violates requirements of labor dispatching under the Labor Contract Law may be subject to fine by competent labor administrative authority and, if losses are caused to any dispatched employee, such labor- dispatching enterprise and employer shall assume liabilities jointly and severally. Currently, a majorityPrior to the sale of 100% of the equity interests of Zhuhai Acorn Electronic Technology Co., Ltd., or Zhuhai Acorn, by our call center employees are recruited as dispatched employees and such employees are not workingwholly-owned subsidiary, China DRTV, Inc. in said temporary, ancillary and replaceable positions. Besides,the fourth quarter of 2019, the number of dispatched workers in certain of our PRC subsidiaries has exceeded 10% of their respective total number of employees as required by the Dispatch Rule. Therefore,Thereafter, we have to reduce the number of ourno longer hire any dispatched workers to comply with the percentage limitation as required, which may result in an increase in our labor costs. If we fail to decrease the number of our dispatched workers, weemployees. We may be subject to penalties by competent labor administrative authority. In addition, ifauthority for our dispatched employees suffer losses arising from relevant labor-dispatching agency’s violation ofprior failure to comply with the Labor Contract Law, we, as the enterprise engaging such employees, may be required by such dispatched employees to assume liabilities. We cannot assure you that, after assumption of such liability, we will successfully obtain reimbursement from relevant labor-dispatching agency.Dispatched Rule.

 

If the custodians or authorized users of controlling non-tangible assets of our Company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.

 

Under PRC law, legal documents for corporate transactions are executed using the chops or seals of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration of Industry and Commerce.

 

Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries and consolidated affiliated entities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of our PRC subsidiaries and consolidated affiliated entities are members of our senior management team who have signed employment agreements with us or our PRC subsidiaries and consolidated affiliated entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of our chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel inand the usage of which is subject to approval by department head of relevant business unit, the legal ordepartment and finance department of each of our subsidiaries and consolidated affiliated entities.department. Although we monitor such authorized personnel, there is no assurance that such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries or consolidated affiliated entities, we or our PRC subsidiary and consolidated affiliated entity would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of such representative including both legal representative and the representativeauthorized personnel and acts in good faith.

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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board (“PCAOB”), and as such, investors may be deprived of the benefits of such inspection. Moreover, under proposed new US legislation, our securities may ultimately be banned from trading in the US.

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with 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 China, 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. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC and the Ministry of Finance of the PRC, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations, but not inspections, undertaken by the PCAOB, the CSRC, or the Ministry of Finance in the United States and China, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. stock exchanges.On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.  As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular the PRC’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear whether this proposed legislation will be enacted since it was referred to the House Committee on Financial Services on June 5, 2019 with no apparent progress since that time. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China, with respect to their audit work of U.S. reporting companies.

The Holding Foreign Companies Accountable Act (the “Proposed Legislation”) was unanimously approved by the U.S. Senate on May 20, 2020. Before the Proposed Legislation becomes a law, it also needs to be approved by the U.S. House of Representatives and signed by the President. However, the vote has not been scheduled yet in the House of Representatives, and it is uncertain whether the Proposed Legislation will be enacted eventually in its current form. The Proposed Legislation requires an issuer that, with respect to the preparation of the audit report on the financial statements of such issuer included in a report filed by such issuer under section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, retains a registered public accounting firm that has a branch or office that (i) is located in a foreign jurisdiction, and (ii) the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction (“Covered Issuer”), to submit documentation that establishes that it is not owned or controlled by a foreign government. In accordance with the Proposed Legislation, the SEC shall issue rules that establish the manner and form in which the Covered Issuer shall make the required submission no later than 90 days after the enactment of this Proposed Legislation. Furthermore, if the PCAOB determines that after the date of enactment of this Proposed Legislation, the Covered Issuer has three consecutive years in which the PCAOB is unable to inspect or investigate the Covered Issuer’s audit fully (any such year, a “non-inspection year”), the Covered Issuer’s securities are prohibited from trading on a US stock exchange or market or through any other method that is within the jurisdiction of the SEC to regulate. The initial prohibition would be removed if the issuer then certifies to the SEC that it has retained a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC. If there is any subsequent recurrence of a non-inspection year, the SEC is required to ban the issuer for at least five years. If the Proposed Legislation were enacted in its current form, Acorn would be considered as a Covered Issuer and would be required to certify that Acorn is not under the control of a foreign government by submitting documentation in accordance with the subsequent rules. Moreover, if the SEC were to determine that Acorn had three consecutive non-inspection years, which is likely if current circumstances continue as PRC rules prohibit our auditors from being inspected fully by the PCAOB, Acorn’s securities would be banned from trading on the NYSE and other US markets.

 

Inspections of other audit 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. 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, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits. In addition, investors may lose confidence in our reported financial information and procedures and the quality of our financial statements, which may have a material adverse effectimpact on our ADS price.

 

If administrative proceedings are brought by the SEC alleging our independent registered public accounting firm’s 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.

 

Starting in 2011, the Chinese affiliates of five of the largest global public accounting firms were affected by a conflict between US and PRC law. Specifically, for certain US listed companies operating and audited in 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 PRC law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through 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. 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 Commissioner 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 would 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.

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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 PRC-based, United States-listed companies and the market price of our ADSs may be adversely affected.

 

Our prior auditor was one of the five global accounting firms involved in the matter described above. Our current auditor, whose appointment was announced on October 21, 2016, was not involved in the matter described above. 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 of 1934, as amended. 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.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

On May 12, 2008 and April 14, 2010, severe earthquakes hit part of Sichuan province in southwestern China and part of Qinghai province in western China, respectively, resulting in significant casualties and property damage. While we did not suffer any loss or experience any significant increase in cost resulting from these earthquakes, if a similar disaster was to occur in the future that affected Shanghai or another city where we have major operations, our operations could be materially and adversely affected due to loss of personnel and damages to property. In addition, a similar disaster affecting a larger, more developed area could also cause an increase in our costs resulting from the efforts to resurvey the affected area. Even if we are not directly affected, such a disaster could affect the operations or financial condition of our customers and suppliers, which could harm our results of operations.

In addition, our business could be materially and adversely affected by natural disasters or public health emergencies, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Ebola virus, Zika, or another epidemic. In April 2009, a new strain of influenza A virus subtype H1N1, commonly referred to as “swine flu,” was first discovered in North America and quickly spread to other parts of the world, including China. In early June 2009, the World Health Organization, or the WHO, declared the outbreak to be a pandemic, while noting that most of the illnesses were of moderate severity. The PRC Ministry of Health has reported several hundred deaths caused by influenza A (H1N1). In March 2013, a new virus subtype H7N9, commonly known as “bird flu” or “avian flu,” was discovered in eastern China. In April 2013, the WHO has identified H7N9 as “an unusually dangerous virus for humans” but the number of cases detected after April 2013 fell abruptly. Any outbreak of avian flu, SARS, influenza A (H1N1), or their variations, or other adverse public health epidemic in China may have a material and adverse effect on our business operations. These occurrences could require the temporary closure of our offices or prevent our staff from traveling to our customers’ offices to provide on-site services. Such closures could severely disrupt our business operations and adversely affect our results of operations. 

Risks Relating to Our ADSs.

 

Our ADSs may be delisted from the New York Stock Exchange which would adversely impact our public float and the trading price of our ADSs.

 

We must comply with various listing standards to maintain our continued NYSE listing. For example, the average closing price for our ADSs is not permitted to fall below $1.00 over a 30 trading-day period. On two recent occasions we were notified by the NYSE that we were in violation of this listing standard.

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On March 19, 2015, the NYSE notified us that the closing price of our ADSs for the consecutive 30 trading-day period ended on March 13, 2015 was $0.99 and therefore below the NYSE’s continued listing standard relating to minimum average closing share price. Subsequent increases in the closing prices of our ADSs allowed us to regain compliance with the minimum share price rule by April 2015 but on September 15, 2015, the NYSE again notified us that we were below the NYSE’s continued listing criteria because the average per share closing price of our ADS for the consecutive 30 trading-day period ended on September 11, 2015 had fallen below $1.00. We regained compliance with the NYSE continued listing criteria after we changed the ratio of ordinary shares per one ADS from 1 ADS representing three ordinary shares to one ADS representing twenty ordinary shares (equivalent to a three-for-twenty reverse ADS split).

 

Our efforts to maintain our ADS average closing price at or above $1.00 to satisfy the relevant continued NYSE listing requirements may not succeed. For example, we will be considered to be below compliance of the NYSE continued listing criteria if our average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time stockholders'stockholders’ equity is less than $50 million. As of December 31, 2017,2019, our stockholder’s equity was $87.1$66.0 million.

 

There can be no assurance that any definitive offer will be made with respect to the going private transaction proposed by Mr. Robert W. Roche, that any agreement will be executed or that this or any other transaction will be approved or consummated.

Our board of directors received a preliminary non-binding proposal letter dated November 4, 2019 from Mr. Robert W. Roche, director and Executive Chairman of our Company, to acquire all of our outstanding shares not already owned by the transaction vehicle he will form for the purpose of pursing this going private transaction for $19.50 in cash per ADS (each representing twenty ordinary shares) or $0.975 per ordinary share. Our board of directors has formed a special committee comprised of three independent and disinterested directors, Urs Paul Zimmermann, Jenny Hseau-Jean Wang, Eric Haibing Wu, to consider the proposal and any other alternative proposals or other strategic alternatives that may be available to our company. The special committee has retained Duff & Phelps (Duff & Phelps, LLC and Duff & Phelps Securities, LLC) as its financial advisor and Sheppard Mullin Richter & Hampton LLP as its United States legal counsel in connection with its review and evaluation of the preliminary non-binding proposal. In February, 2020, the aforesaid buyer group informed the Company that it is not prepared to pursue acquisition of the Company citing uncertainty regarding coronavirus outbreak, although it remained interested in continuing negotiations with the special committee regarding the acquisition. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. These uncertainties may increase the volatility of the market price of our ADSs and have a material adverse effect on the market price of our ADSs.


We may be classified as a passive foreign investment company or “PFIC” for U.S. federal income tax purposes for a given taxable year pursuant to an annual factual determination made after the close of that year, and pursuant to a determination made in 20182020 we believe we were classified as a PFIC for the 20172019 taxable year.

 

Depending upon the value of our ADSs or ordinary shares and the nature of our assets and income over time, we could be classified as a PFIC for U.S. federal income tax purposes. We will be classified as a PFIC in any taxable year if either: (a) the average quarterly value of our gross assets that produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of our total gross assets, or (b) 75% or more of our gross income for the taxable year is passive income. According to these technical rules, we would likely become a PFIC for a given taxable year if our market capitalization were to decrease significantly while we hold substantial cash and cash equivalents in that year. Based on a determination made in 20182020 with respect to the 20172019 taxable year, we believe we were classified as a PFIC for the 20172019 taxable year.

 

If we are classified as a PFIC in any taxable year in which you hold our ADSs or ordinary shares and you are a U.S. investor, subject to certain exceptions described in Item 10.E, “Additional Information—Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company,” you would generally be taxed at higher ordinary income rates, rather than lower capital gain rates, if you dispose of ADSs or ordinary shares for a gain in a later year, even if we are no longer a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or in the following year. Finally, you would also be subject to special U.S. tax reporting requirements.

 

We will not able to determine our PFIC status for the 20182020 taxable year until after the close of the taxable year ending December 31, 2018.2020. Because we currently hold, and expect to continue to hold, a substantial amount of cash and other passive assets and, because the value of our assets is likely to be determined in large part by reference to the market prices of our ADSs or ordinary shares, which are likely to fluctuate, there can be no assurance that we will not be classified as a PFIC in 20182020 and any future taxable year. U.S. investors are urged to consult their independent tax advisors about the application of the PFIC rules and certain elections that may help them relieve any adverse U.S. federal income tax consequences for their particular circumstances for the 20172019 taxable year. For more information regarding such elections, please consult Item 10.E, “Additional Information— Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company” and your independent tax advisor.

 

The sale, deposit, cancellation and transfer of the ADSs issued after an exercise of rights may be restricted under applicable U.S. securities laws.

 

If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to holders of our ADSs if it is lawful and reasonably practicable to do so. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, holders of our ADSs will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

 

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The trading prices of our ADSs may be volatile, which could result in substantial losses to investors.

 

The daily closing trading prices of our ADSs ranged from US$2.4695 to $19.2000 in 2015 (adjusted to reflect the November 2015 increase in our ordinary shares to 1 ADS ratio to 20:1), and from $4.0100 to $12.3500 in 2016 and from $7.5300 to $19.5100 in 2017.2017, from $14.2200 to $37.7000 in 2018, and from $15.8500 to $31.2600 in 2019. The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in China that have listed their securities in the United States in recent years. The securities of some of these companies 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 towards 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 or other practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in such practices. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our ADSs.

 


In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to specific factors, including the following:

 

·●variations in our net revenues, earnings and cash flow;

 

·●announcements of new investments, acquisitions, strategic partnerships, or joint ventures;

 

·●announcements of new services and expansions by us or our competitors;

 

·●changes in financial estimates by securities analysts;

 

·●failure on our part to realize monetization opportunities as expected;

 

·●additions or departures of key personnel or directors;

 

·●any announcement regarding the NYSE listing status of our ADSs and actions proposed to be taken to preserve our NYSE listing;

 

·●detrimental negative publicity about us, our competitors or our industry; and

 

·●potential litigation or regulatory proceedings or changes. 

 

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

 

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.be adversely affected.

 

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

 

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Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.

 

Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.

 

For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected.

 

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, our shareholders may have less protection of their shareholder rights than they would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands, as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.


Unlike many jurisdictions in the United States, Cayman Islands law does not generally provide for shareholder appraisal rights on an approved arrangement and reconstruction of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offer be appraised or give you additional consideration if you believe the consideration offered is insufficient. Moreover, holders of our ADSs are not entitled to appraisal rights under Cayman Islands law. ADS holders that wish to exercise their appraisal or dissenter’s rights must convert their ADSs into ordinary shares by surrendering their ADSs to the depositary and paying the ADS depositary fee.

 

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

 

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Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction.

 

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries established in China. Most of our directors and officers reside outside the United States and substantially all of the assets of those persons are located outside the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the Cayman Islands or in China in the event that our shareholders believe that their rights have been infringed under the applicable securities laws or otherwise. Even if our shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render them unable to enforce a judgment against our assets or the assets of our directors and officers.

 

There are uncertainties as to whether Cayman Islands or China courts would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

There is no statutory recognition in the Cayman Islands or China of judgments obtained in the United States. The Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgmentin personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon, provided that (i) such courts had proper jurisdiction over the parties subject to such judgment, (ii) such courts did not contravene the rules of natural justice of the Cayman Islands, (iii) such judgment was not obtained by fraud, (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands, (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands, and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

 

The ability for shareholders to protect their rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

 

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, our shareholders’ ability to protect their interests if they are harmed in a manner that would otherwise enable them to sue in a U.S. federal court may be limited.

 

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

 

Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions.


You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares unless you withdraw the ordinary shares by surrendering your ADSs to the depositary and paying the ADS depositary fee. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting of shareholders is ten days. When a general meeting is convened, holders of our ADSs may not receive sufficient notice of the meeting to permit the holders to withdraw their ordinary shares to allow them to cast their vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out the holders’ voting instructions in a timely manner. We make all reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure holders of our ADSs that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their right to vote and may lack recourse if their ordinary shares are not voted as requested.

 

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The depositary of our ADSs, except in limited circumstances, grants to us a discretionary proxy to vote the ordinary shares underlying the ADSs if holders of our ADSs do not vote at shareholders’ meetings, which could adversely affect the interests and the ability of our shareholders as a group to influence the management of our Company.

 

Under the deposit agreement for the ADSs, the depositary gives us a discretionary proxy to vote our ordinary shares underlying the ADSs at shareholders’ meetings if holders of our ADSs do not vote, unless:

 

we have failed to timely provide the depositary with our notice of meeting and related voting materials;
●we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

we have instructed the depositary that\we do not wish a discretionary proxy to be given;
●we have instructed the depositary that\we do not wish a discretionary proxy to be given;

 

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
●we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
●a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

voting at the meeting is made on a show of hands.
●voting at the meeting is made on a show of hands.

 

The effect of this discretionary proxy is that holders of our ADSs cannot prevent our ordinary shares underlying ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our Company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

Holders of ADSs may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical for us to make them available.

 

The depositary of our ADSs pays holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs receive these distributions in proportion to the number of our ordinary shares their ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available. These restrictions may have a material and adverse effect on the value of the holders’ ADSs.

 

Holders of our ADSs may be subject to limitations on transfer of their ADSs.

 

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

 

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ITEM 4.INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

 Acorn International, Inc. is a Cayman Islands holding company established under the Companies Law of the Cayman Islands (as amended) on December 20, 2005, and we conduct our business in China through our subsidiaries and variable interest entities. Our ADSs are listed on the NYSE under the symbol “ATV.”

We commenced operations in 1998 through Beijing Acorn Trade Co., Ltd., or Beijing Acorn, and in 2000, established and commenced business operations of two other operating companies, Shanghai Network, and Shanghai Acorn Trade and Development Co., Ltd., or Shanghai Trade, were established and commenced business operations.Trade. Prior to January 1, 2005, our business was operated through Beijing Acorn, Shanghai Network and Shanghai Trade, including their subsidiaries. To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating China DRTV Inc., or China DRTV, in the British Virgin Islands on March 4, 2004. Commencing on January 1, 2005, our business was conducted through China DRTV and its subsidiaries and affiliated entities. In connection with our initial public offering, we incorporated Acorn International in the Cayman Islands on December 20, 2005 as our listing vehicle. On March 31, 2006, Acorn International became our ultimate holding company when it issued shares to the then existing shareholders of China DRTV in exchange for all of the shares that these shareholders held in China DRTV. For additional information on our organizational structure, see Item 4.C, “Information on the Company— Organizational Structure”.Structure.” For additional information on our business, see Item 4.B, “Information on the Company— Business Overview.”

 

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In May 2007, we completed our initial public offering, which involved the sale by us and certain of our shareholders of 8,855,000 ADSs, representing 26,565,000 ordinary shares. On November 30, 2015, we changed the ratio of our ADSs to ordinary shares from 1:3 to 1:20, which we believe was in the best interests of our shareholders as it assisted our Company in regaining compliance with the minimum average closing price continued listing standard of the NYSE.

 

 We historically had engaged in the infomercial business in China, selling products via three to ten-minute infomercials on national and local TV, which demonstrated and explained our product and provided phone numbers for customers to call to make further inquiries or to purchase the products.  However, in response to subsequent regulatory changes relating to TV advertising in China and rising media costs and after substantial restructuring and cost reduction efforts, by 2018 we transitioned our business to a marketing and branding company that developed, promoted and sold a diverse portfolio of our own proprietary branded products, as well as established and promising new products from third parties.  More recently, while product sales remain a focus, particularly through our e-commerce channel, we have expanded into new areas by launching Acorn Digital Services (focused on bringing US brands to China and creating digital content), and Acorn Fresh (which brings fresh seafood and other products to Chinese consumers).

Our principal executive offices are located at 19/5/F, 20th Building, 487 TianlinYue Shang Plaza, 1 South Wu Ning Road, Shanghai 200233,200042, People’s Republic of China, and ourChina. Our telephone number is (86 21) 5151-8888. Our websiteat this address is www.acorninternationalir.com.+86-021-5151-8888. Our registered office in the Cayman Islands is located at the offices of Campbell Corporate Services Limited, Floor 4, Willow House, Cricket Square, Grand Cayman KY1-9010, Cayman Islands. Our corporate website is http://www.acorninternationalgroup.com. The information on our website does not form a part of this annual report. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding us that we file electronically with the SEC and the address of that site is http://www.sec.gov. 

 

B.Business Overview

 

Overview

 

We areAcorn International is a leading marketing and branding company in China, withleveraging a proven track record of developing, promotingtwenty-year direct marketing history to monetize brand IP, content creation and selling a diverse portfolio ofdistribution, and product sales, through digital media in China. Previously the leading TV infomercial company in China, Acorn today has two divisions to support its growth: our proprietary-branded1) Proprietary Brand Division, and 2) Acorn Digital Services Division.

In the Proprietary Brand Division, Acorn sells its own products primarily through e-commerce channels in China. In the Acorn Digital Services Division, Acorn helps third party brands in the Chinese digital and e-commerce market, 


Acorn continues to emphasize the e-commerce channel, and in 2019, the Babaka® posture correction products maintained strong growth via its e-commerce channel and Acorn Fresh also generated meaningful growth.

In 2019, Acorn consolidated under Acorn Digital Services the following business units: Acorn Entertainment and Acorn Streaming, which are Acorn’s social media management business and digital content business, respectively, as well as well-established and promising new products from third parties. Our current primary business includes selling merchandiseA-KOL (standing for “Acorn Key Opinion Leader”), which facilitates the development of local China influencers with the objective to consumers in China. We have established Acorn Entertainment in 2018, which will charge for services.

Through 2017 we have continuedoptimize their ability to reduce operating expenses, focusing primarily on cost reduction and streamlining business operations of our Company. Our cost reduction efforts have also been part of a broader restructuring in response to rationalizing our business model in light of the evolution of the business environment and competitive landscape in China. As a result, in addition to the desire to generate more cash for the business, we continue focusing on liquidating certain none-core assets and downsizing or outsourcing related business areas, such as warehousing, manufacturing and logistics, with an aim to enhance operational efficiency. Going forward, our management will continue to turn its attention to growing revenues. We plan to devote more resources to increasing our e-commerceconvert Acorn’s content into product sales.

 

Our direct sales business involves marketing and selling products directly to consumers in China through e-commerce as well as our call center. Our call center operations directly market consumer products to individual customers in China, Over the majority of whom were previous TV direct sales purchasers who placed orders with us or made calls to our call center through 1998 to early 2015, in which year we suspended our TV direct sales. In 2017, we re-entered into the TV direct sale space with no material revenue realized, and suspended it again in the same year. We also conduct our Internet sales business primarily through the platforms of China’s leading e-commerce companies. Through our distribution network we distribute mainly our Youngleda oxygen generating device product line. We have developed several leading proprietary-branded product lines in China, such as Babaka posture correction product line. In 2017, our Company reached an agreement to sell a majority stake in its HJX Business to a third-party investor and operator.

Acorn is currently the preferred supplier for sourcing amenities, textiles, furniture, fixtures, equipment, etc. for the hotels, restaurants, clubs and other types of properties managed by Cachet Hotel Group Limited Cayman L.P.. However Acorn currently has non-material sourcing business as it is in the process of setting up the proper infrastructure in order to operate the sourcing business. Acorn, as a concurrent-business insurance agent of Sino-US United MetLife Insurance Co., Ltd., or MetLife, is jointly marketing and selling short-term accident and health insurance products with MetLife through various channels under Acorn’s direct sales platform and received a service fee/commission of approximately $0.43 million from MetLife in 2017.

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As a result of reducing our operating losses and the disposal of non-core assets,last three years, our net income increased from net losses totaling $40.2$12.4 million in 20152017 to net income of $3.4$31.1 million in 2016,2018, and further increaseddecreased to net income of $12.4million$9.8 million in 2017.2019.

 

Over the last three years, our total net revenues declinedincreased from $23.0$17.1 million in 20152017 to $16.5$25.1 million in 20162018, and further increased to $20.3$37.5 million in 20172019, with operating losses from continuing operations totaling $29.1$3.8 million in 2015, $2.42017, income from continuing operations of $2.7 million totaling in 2018, and income from continuing operations totaling $5.5 million in 2016 and $4.2 million in 2017.2019.  

 

Our Complementary Direct Sales“Direct Sales” Platforms

 

We have established and maintained complementary“direct sales” platforms, which we refer to as “direct” to contrast with sales we make via distributors, whether online or offline. Our “direct sales” business does not involve sales whereby a direct salesperson is recruited by a direct sales platforms, whichenterprise to promote its product directly to an ultimate consumer and outside any fixed place of business, and therefore does not fall into the category of “direct sales” as defined under the Regulations on Administration of Direct Sales, nor is it regulated by the aforesaid regulations. Our “direct sales” currently consist mainlyprimarily of outbound marketing and Internet sales. Through our direct salesthese “direct sales” platforms, we sell and market our proprietary products as well as certain third-party products. Approximately 78.4%93.0%, 81.1%80.9% and 93.4%84.5% of our total net revenues in 2015, 20162017, 2018 and 2017,2019, respectively, were generated from our “direct sales” platforms.

Internet Sales.We maintain e-shops on various e-commerce platforms in China, including T-mall.com, Taobao, JD.com, together with other e-commerce platforms, to provide products and services to our end-customers. Our direct Internet website sales platforms.accounted for approximately 89.8%, 80.2% and 84.4% of our total gross revenues in 2017, 2018 and 2019 respectively. We expect that our direct Internet sales will continue to grow and will be of increasing importance to our business in the future.

 

Historically, the core focus of our direct sales“direct sales” was our TV direct sales“direct sales” platform. Our TV direct sales“direct sales” platform primarily consisted of procuring TV airtime from both national and local TV channels in China to play threethree- to ten minuteten-minute infomercials demonstrating and explaining our product in an entertaining and appealing manner, and providing phone numbers for customers to call to make further inquiries or to purchase the product. However, a series of increasingly more restrictive regulations and rules on TV advertising in China and rising media costs significantly reduced our ability to effectivelyproductively access TV airtime. As a result, we significantly reduced our purchases of airtime for our TV infomercials beginning in 2014 and by early 2015 we suspended the procurement of new TV time altogether. As a result, as a percentagealtogether (except for the periodic procurement of our total gross revenues, gross revenues generated byan insignificant amount of TV direct sales declined from 30.4%time until final discontinuation in 2013 to 6.0% in 2014 and further decreased to approximately 0.7% in 2015 and 0% thereafter.2018).

 

Outbound Marketing. As of December 31, 2017, our database contained approximately 12 million names of individual customers, the majority of whom have placed ordersWe used to us or made calls to our call center from 1998 through early 2015. As of December 31, 2017, our 18engage specialized outbound marketing representatives utilize our customer database to make target calls and send text messages at customer subgroups identified as likely purchasers of particular products. We currently operate oneHowever, in 2019 we ceased the operations of our call center in Wuxi which processes telephone ordersWuxi.

Our Distribution Sales

Our distribution sale business includes primarily e-commerce distribution. In 2017, 2018 and 2019, sales generated through our distribution network accounted for 7.0%, 19.1% and 15.5% of our net revenues respectively. In 2017, 2018 and 2019, sales generated by our direct sales platforms and gathers real-time data to help determine how we shall adjust our business operations and product offerings. Our outbound marketing salestop five distributors accounted for approximately 15.9%5.6%, 17.6% and 14.9% of our total netgross revenues, in 2017.

Internet Website.We maintain e-shops on various e-commerce platforms in China, including T-mall.com, Taobao, JD.com, and Amazon to provide products and services to our end-customers. Our Internet website sales accounted for approximately 69.4% of our total net revenues in 2017. We expect that our Internet sales will continue to grow and will be of increasing importance to our business in the future.respectively.

 

Our Distribution Networke-commerce distribution business includes distribution through major e-commerce platforms that act as distributors, such as JD.com.

 

We useUntil it was sold to an unrelated third party in the fourth quarter of 2019, our offline distribution business comprised distribution of the Youngleda at-home medical devices through our offline distribution network, to distribute Youngleda oxygen generating products. Our distribution network broadens our customer reach and enhances the penetration of those products. Our network covers a majority of allwhich covered most provinces in China through 2421 distributors which allowsand allowed us to reach over 1,000600 retail outlets across China. These retail outlets includeincluded franchise drugstores, supermarkets, specialty equipment retail chains and department stores. In addition to our ground distribution network, starting from 2013, we also engaged distributors on China’s leading e-commerce platforms to promote2017, 2018 and market our products. In 2015, 2016 and 2017,2019, sales generated through our offline distribution network accounted for 21.6%7.0%, 18.9%4.8% and 6.6%2.0% of our net revenues respectively. We typically provide our distributors (other than distributors on the e-commerce websites) with the exclusive right to distribute selected products in their respective territories. In 2015, 2016 and 2017, sales generated by our top five distributors accounted for 7.3%, 13.2% and 6.0% of our gross revenues, respectively.

 

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Our distribution agreements with ground distributors are typically negotiated and entered into on an annual basis and are designed to provide incentives for our distributors to improve their sales performance, encourage them to promote Youngleda product lines, and protect the value of that brand. For example, our distributors are required to meet the monthly and annual sales volume target for our selected featured products. We also require our distributors to ensure that the retail prices of our products sold through their retail outlets are not lower than the retail prices for the same products sold through our direct sales platforms, or the minimum retail prices set by us. We regularly monitor and review our distributors’ sales performance and their compliance with the terms of our agreements.Products

 

Our Products

We sold over 460 different product types in 2017 primarily through our outbound marketing and online stores, as well as our distribution network. Our recently featured product categories include collectibles products, health products, and mobile phoneseafood products, all of which are primarily sold through our comprehensive and complimentary direct salesinternet “direct sales” platform, distribution network,distributors, or both. We periodically develop and introduce new and upgraded products under the same product brand to develop such brand into a product line.

 

In addition, to further expand our product offerings, Previously we entered into an Insurance Business Cooperation Agreement with Sino-US United MetLife Insurance Co., Ltd., or MetLife, a joint venture company established by certain wholly-owned subsidiaries of MetLife Inc. and Shanghai Alliance Investment Ltd. Pursuant to the cooperation agreement effective on August 29, 2012, we, as a concurrent-business insurance agent of MetLife, are jointly marketing and selling short-term accident and health insurance products with MetLife through various channels under our other direct sales“direct sales” platform. Pursuant to our cooperation with MetLife, we received from MetLife a service fee/commission of approximately $0.43 million, from MetLife$0.25 million and $0.22 million in 2017.2017, 2018 and 2019 respectively.

 

Recent Featured Product Categories

 

In 2017,2019, we featured products in the following categories and under the following proprietary and third-party brands:

 

•●Health Productsfeaturing BabakaBabaka® posture correction products. Health products accounted for 35.2%98.4%, 71.2%97.6% and 82.9%91.8% of our total gross revenues in 2015, 20162017, 2018 and 2017,2019 respectively. The retail prices for our health products ranged from RMB164RMB199 to RMB316RMB699 per unit in 2015, from RMB73 to RMB390 per unit in 2016, and2017, from RMB199 to RMB699 per unit in 2017.2018, and from RMB59 to RMB699 per unit in 2019.

 •
●CollectiblesSeafood ProductsCollectiblesfeaturing Acorn Fresh branded imported premium seafood. Seafood products accounted for 24.5%, 9.5%nil, 1.7% and 7.5%7.9% of our total gross revenues in 2015, 20162017, 2018 and 2017,2019 respectively. The retail prices for our collectibles products ranged from RMB4 to RMB67,521 per unit in 2015, from RMB22 to RMB27,461 per unit in 2016, and from RMB20 to RMB29,450 per unit in 2017.

•Mobile Phone Products Mobile phone products accounted for 21.9%, 10.4% and 5.4% of our total gross revenues in 2015, 2016 and 2017, respectively. The retail prices for the mobile phone products that we market ranged from RMB82 to RMB2,382 per unit in 2015, from RMB10 to RMB1,866 per unit in 2016, and from RMB164 to RMB1,347 per unit in 2017.

•Kitchen and HouseholdKitchen and household accounted for 6.9%, 2.4% and 1.1% of our total gross revenues in 2015, 2016 and 2017, respectively. The retail prices for the kitchen and household products that we market ranged from RMB4 to RMB448 per unit in 2015, from RMB1 to RMB815 per unit in 2016, and from RMB8 to RMB1,105 per unit in 2017.

 

Our fivethree best-selling products and product lines in 2015, 20162017, 2018 and 20172019 are set forth below:

 

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  2015 2016 2017     2017 2018 2019 
Product Brand Revenues % of gross
revenues		 Rank Revenues % of gross
revenues		 Rank Revenues % of gross
revenues		 Rank  Brand Revenue % of
gross
revenue		 Rank Revenue % of
gross
revenue		 Rank Revenue % of
gross
revenue		 Rank 
  (in thousands, except percentages and ranks)     (in thousands, except percentages and ranks) 
Health products Babaka, Zehom  8,102   35.2%  1   11,777   71.2%  1   17,032   82.9%  1         $17,032   98.4%  1  $24,854   97.6%  1  $34,688   91.8%  1 
Mobile phone products Gionee,  5,032   21.9%  3   1,723   10.4%  2   1,117   5.4%  3 
 K-touch, U-king                                                                            
 Lenovo, Nokia                                    
 and Konka                                    
Collectibles products    5,646   24.5%  2   1,574   9.5%  3   1,534   7.5%  2 
Kitchen and Household products Rose, True  1,591   6.9%  4   398   2.4%  4   223   1.1%  4 
Fitness Yierjian  766   3.3%  5   217   1.3%  5   25   0.1%  5 
Total top five   $21.137   91.8%     $16,169   97.8%     $19,970   97.0%    
Seafood products                 $433   1.7%  2  $2,971   7.9%  2 
Total top two     $17,032          $25,286          $37,659         
Other products revenues   $1,878   8.2%     $363   2.2%     $608   3.0%         $285          $167          $137         
Total gross revenues   $23,015   100.0%     $16,532   100.0%     $20,541   100.0%         $17,317          $25,453          $37,796         
Total sales tax   $(59)         $(53)         $(250)             $(250)         $(366)         $(311)        
Total revenues, net   $22,956          $16,478          $20,290              $17,067          $25,087          $37,485         

 

Product Development

 

We employ various approaches and means of product identification and development, such as working with third parties to gauge consumer responsiveness to various products.

 


Call Center Operations

Our sales operations and media purchase activities are supported by our call center located in Wuxi, which began operation in 2009. Sales representatives in our call center places outbound marketing calls to selected customers to market our products and are trained to identify, promote and act upon cross-selling and up-selling opportunities while processing customer orders. We regularly track and analyze real-time data generated through our call center operations to ensure the cost- effectiveness of our media purchases. We use call center-generated real time data to adjust our product mix and to maximize the profitability of our direct sales operations. As of December 31, 2017, we had 18 dedicated sales representatives and 3 customer service representatives. In 2015, 2016 and 2017, our call center processed an average of approximately 252, 364 and 28 incoming calls per day, respectively. We has suspended our TV direct sales platform and closed our call centers in Shanghai and Beijing in August 2014 and June 2015, respectively.

Order Fulfillment

 

Many of the products sold through our various sales centersplatforms are delivered to our customers throughout China by EMS the largest national express mail service operated by the China Post Office, and localother delivery companies. We generally guarantee our products will be delivered to our customers withintwo to ten days of the date of receiving the order. In 2015, 2016 and 2017, of the total attempted product deliveries by EMS and local delivery companies on a cash-on-delivery, or COD, basis, approximately 54%, 45% and 53% were successful, respectively. Reasons for delivery failure primarily include customers’ refusal to accept a product upon delivery, which tend to occur more frequently with products that have higher average selling prices, or failure to successfully locate the delivery address. We are responsible for delivery and handling fees regardless of whether the delivery is successful. We have found that, in general, the shorter the delivery time, the lower the likelihood that the customer will refuse to accept the product upon delivery. As a result, localother delivery companies enjoy higher delivery success rate than EMS due to a faster delivery time and better service quality. EMS and local deliveryDelivery companies are responsible for returning to us any undelivered products. It generally takes EMS two to three weeks, and localother delivery companies we use approximately seven days, to return undelivered products to us.

 

In 2015, 2016, 2017, approximately 38.0%, 25.5% and 70% of our direct sales were settled on a COD basis by our customers. We recognize non-COD sales revenues when products are delivered to and accepted by our customer (e.g. FOB destination). For customers settling through COD, either EMS or the local delivery company is responsible for collecting and wiring to us these cash amounts on a periodic basis once collected. EMS and local delivery companies generally charge us delivery fees based upon weight of the products and distance of delivery. Additionally, EMS charges a processing fee based upon the sales price. One of our local delivery companies charge a lower processing fee based upon the sales price, while the other companies do not charge us such fee. It typically takes two to three weeks for us to receive payments from EMS compared to approximately seven days from local delivery companies. And as of December 31, 2015, 2016 and 2017, no accounts receivables from a single delivery company were more than 10% of our total accounts receivables.

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In 2015, 2016 and 2017, approximately 16.4%, 16.3% and 8.9% of our net revenues resulted from products delivered by EMS, respectively, and approximately 24.4%, 40.1% and 6.1% of our net revenues resulted from products delivered by local delivery companies, respectively.

Some of ourOur main products, such as Youngleda oxygen generating devices andBabaka® posture-correction products and Acorn Fresh seafood products are sold and paid for online and subsequently delivered to our customers directly without collection by any third party (e.g. EMS and local delivery companies).  

 

Customer Service, Product Warranties and Return Policies

 

We believe emphasizing customer service will enhance our products brand image, facilitate cross-selling opportunities and generate customer loyalty and repeat purchasing behavior. Our customer service center within our Wuxi call center is currently staffed with approximately 18 dedicated sales representatives and 3 customer service representatives. In addition, most of our distributors generally provide their own customer service in their respective territories.

 

OurWe also have retained outsourced customer service representatives for Babaka® posture-correction products who are primarily responsible for answering our customers’ product-related inquiries, providing product information and handling product returns and customer complaints. To ensure superior customer service, we place significant emphasis on personnel selection and training. Our customer service representatives undergo product-specific training

The customers are entitled to allow them to answer product-related questions, proactively educate potential customers aboutreturn the benefits of our products and promptly resolve customer problems. We also provide customer service training to some of our distributors for productsgoods sold through our distribution network.

Underan online platform within seven days upon the receipt of goods and are not required to provide any reason for sales return, as long as the goods are returned intact and in good condition, subject to local regulations of internet shopping. In addition, under our policies, our customers generally may return products to us within seventhirty days after delivery if there is a quality defect or if a product fails to meet its specifications.specifications, subject to shorter periods provided in policies of the platforms on which our goods are sold. In most cases, product exchanges are allowed within a month of delivery. Our warranties generally provide for repair of product defects within one year at no cost to the customers. Product returns from our multiple sales platforms were insignificant in 2015, 20162017, 2018 and 2017.2019. To the extent that the manufacturer of the defective product is a third party, the manufacturer is obligated to either repair the defective product or reimburse us for any related expenses. Our distributors are allowed to exchange any defective products they receive from us. The number of products exchanged by our distributors due to defects was insignificant in 2015, 20162017, 2018 and 2017.2019.

 

Supply and Inventory

 

Supply

 

We rely on outsourced product manufacturers to produce a majority of our proprietary products (including a small percentageall of our Youngleda oxygen generating devices and posture-correction products) and on third-party suppliers for our other products. We rely on IS Seafood for the supply of seafood for Acorn Fresh; see “Item 7.B. Inventory Purchase from IS Seafood.” 

 

We historically manufactured a substantial portion of our proprietary products.  However, beginning in 2015, we began to discontinue our manufacturing operations. AsDuring the fourth quarter of the date of this annual report,2019, we have completely discontinued our manufacturing operations, and have outsourced the manufacture of our key proprietary products to various manufacturers who manufacture our products based on our design and to our specifications.  

 

Although we believe we could replace our contract manufacturers with qualified manufacturers on commercially reasonable terms within a reasonable period of time, any disruption of these arrangements could adversely impact our business. 

 

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Inventory Control

 

We closely monitor our inventory and sales levels at all of our sales and marketing platforms. In general, before or during our test-marketing stage, we do not acquire any sizable inventory position in a product. We adjust our inventory levels based on the sales forecasts we develop.

 

Majority-Owned Subsidiaries

 

To acquire managerial expertise and additional complementary distribution network infrastructure or secure exclusive product distribution rights, we have formed certain majority-owned subsidiaries. We currently have two majority-owned PRC operating subsidiaries. We may form other majority-owned subsidiaries in the future.

 

Competition

 

Because of our integrated vertical business model, we face competition from the following companies operating in our value chain:

 

numerous domestic and international sellers of consumer branded products that sell their products in China and which compete with our products, such as our Youngleda health products which compete with Oxygen-generating devices from Yuwell and other brands, and our mobile phone products which compete with similar products sold by local and international mobile phone manufacturers; and

other Internet and e-commerce companies in China that offer consumer products online via an Internet platform, such as Dang Dang Wang, Yihaodian, Tmall and JD.COM.

●numerous domestic and international sellers of consumer branded products that sell their products in China and which compete with our products, such as posture-correction products from MTG, MINGZHEN, Nuotai and other brands that compete with our Babaka® posture-correction products; and
●other Internet and e-commerce companies in China that offer consumer products and brands online via an Internet platform.

 

We also compete with companies that make imitations of our products at substantially lower prices, such as our BabakaBabaka® branded posture-correction products, which are often sold in department stores, pharmacies and general merchandise stores. See Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Business—Business and Industry—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our product brand, reputation and competitive position. In addition, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention”. and “—We may not be able to adequately protect our intellectual property rights and exclusive rights.”

 

We believe we compete primarily on the basis of the effectiveness of our sales and distribution channels in reaching customers and generating customer appeal for our products. In addition, we believe we also compete primarily on the basis of our ability to identify and develop product brands, which helps to attract new product proposals from independent third parties and product suppliers who otherwise often lack the marketing or distribution capabilities and/or resources required to effectively market and sell their products or develop their own product brands. We also compete on the basis of product quality, price, and quality of our customer service, retail outlet coverage of our distribution network and speed of delivery. Many of our current or future competitors may have longer operating histories, better brand recognition, greater levels of consumer trust, stronger media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do.

 

Seasonality

 

Certain of our products are subject to seasonality. Sales for these products are typically higher around our first and third fiscal quarters which correspond to the end and beginning of school semesters in China, respectively. Other than seasonality related to these and certain of our other products, our business generally has not been seasonal.

 

Intellectual Property

 

We rely on a combination of copyright, trademark, patent, unfair competition laws, as well as non-disclosure agreements and other methods to protect our intellectual property rights. We currently maintain 647511 trademark registrations.registrations in China. We own 17 invention,16 utilities models and packaging design patents in China pertaining to our posture-correction products, kitchen and household products, and fitness products, and Youngleda oxygen generating device.products.

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The legal regime in China for the protection of intellectual property rights is still at a relatively early stage of development. Despite many laws and regulations promulgated and other efforts made by China over the years to enhance its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many western countries, including the United States, and enforcement of such laws and regulations in China have not achieved the levels reached in those countries. Therefore, it is difficult and expensive to police and enforce against infringement of intellectual property rights in China. Imitation or counterfeiting of our products or other infringement of our intellectual property rights, including our trademarks, could diminish the value of our various brands or otherwise adversely affect our net revenues. See Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Business—We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our product brand, reputation and competitive position. In addition, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention”. and “—We may not be able to adequately protect our intellectual property rights and exclusive rights.”

 


We have in the past been, and in the future may again be, the subject of claims for infringement, invalidity, or indemnification relating to other parties’ proprietary rights. 

 

Management Information System

 

Our management information system and technology infrastructure is designed to support our key operations. Full redundancy design and data backup are built into our systems. We also have an uninterruptible power supply that can provide up to two hours of power in case of power outage to allow full functioning of our call center and customer services operations during that period.

 

We rely on third party vendors for MIS functionsfunctions. Our major system modules and functions, which facilitate various aspects of our business, include the following:

 

call center business management system, which facilitates automatic incoming call connection to available sales representatives or customer service representatives, data collection and organization of information received through call center representatives’ caller interactions, processing of after-sales service issues and monitoring of call center representatives for training and quality assurance purposes;
●Order Management System (OMS), builds an integrated order processing platform for various channels, such as TM, JD, TB, WeChat store, Acorn Call Center, etc.

 

outbound marketing management system, which facilitates automatic outgoing dialing processes from a predetermined subgroup derived from our database and matches calls with available representatives;
●Warehouse Management System (WMS), which manages Acorn’s QingPu warehouse, such as inventory, packaging, shipments, etc.

 

database management system, which facilitates the collection and updating of customer information;
●Human Resource Information System (eHR), which serves Acorn on HR related functions.

 

supply chain management system, or SCM, which aims to manage complex and dynamic supply and demand networks including our various suppliers and merchandise;
●Customer Relationship System on eCommerce (eCommerce CRM), which builds Acorn integrated customer management platform for all channels.

 

short message service, or SMS, system, which supports SMS product order confirmation and advertising; and
●Financial System (NC), which provides financial related features for the whole company.

 

database backup.
●Business Intelligence (BI), which connects various data sources, conducts the data mining, builds data models, and displays the results in visual reports.

●Acorn websites, including Acorn group homepage, Acorn Entertainment website, etc.

●Acorn WeChat official account operations and WeChat store operations.

 

We believe our information technology system is one of the key tools with which we are able to identify market trends and demands early.

 

Chinese Government Regulations

 

The PRC government extensively regulates the industries in which we operate our business. We operate our direct sales and advertising businessesbusiness in China under a legal regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority including, among others, the SAIC (currently merged into the State Administration for Market Regulation, or the SAMR), the Ministry of Commerce, or the MOFCOM, the SAPPRFT, the State Administration for Food and Drug, or the SAFD and(currently merged into the State Administration for Market Regulation, or the SAMR), the Ministry of Industry and Information Technology, or MIIT.the MIIT, the Ministry of Culture, or the MOC (currently integrated with the National Tourism Administration into the Ministry of Culture and Tourism), and the State Administration of Radio, Film and Television, or the SARFT (currently changed to the National Radio and Television Administration, or the NRTA). Meanwhile, we operate our Concurrent-Business Insurance Agency business under the regulations promulgated by the China Insurance Regulatory Commission, or the CIRC.CIRC (currently integrated with the China Banking Regulatory Commission into the China Banking and Insurance Regulatory Commission, or CBIRC).

 

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Except as disclosed in Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry— If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties.”,” and as disclosed in Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry— If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties.”,” we understand that (1) the ownership structures of our directly owned PRC subsidiaries comply with existing PRC laws and regulations; and (2) the ownership structure of our affiliated entities and our contractual arrangements with our affiliated entities and their shareholders are valid, binding and enforceable, and do not and will not result in a violation of existing PRC laws and regulations.

 

There are substantial uncertainties regarding the interpretation and application of existing or proposed PRC laws and regulations. We cannot assure you that the PRC regulatory authorities would find that our corporate structure and our business operations comply with PRC laws and regulations. If the PRC government finds us to be in violation of PRC laws and regulations, we may be required to pay fines and penalties, obtain certain licenses, approvals, or permits and change, suspend or discontinue our business operations until we comply with applicable laws.

 

The following discussion sets forth a summary of what we believe are the most significant regulations or requirements that affect our business activities in China and our shareholders’ right to receive dividends and other distributions from us.

 

Regulatory Requirements for Foreign Participation

 

Direct Sales and Wholesale Distribution Businesses

Prior to late 2016, foreign investments inOur past TV direct sales business (suspended in early 2015) and wholesale businesses were both principally governed byour current “direct sales” business, consisting primarily of Internet sales, may be deemed to consist of, among other things, “retail sales via Television, Internet and telephone,” and “wholesale distribution” under the Administrative Measures on Foreign Investment in Commercial Sector, promulgated by the MOFCOM on April 16, 2004 and effective as of June 1, 2004, as supplemented from time to time thereafter, or the Commercial Sector Measures on April 16, 2004 as supplemented. The Commercial Sector Measures lowered the previous thresholds for foreign investors to enter the commercial sector in China and completely removed the previous restrictions on the location of and maximum foreign shareholding percentage in foreign-invested commercial enterprises as of December 11, 2004.Measures. Under the Commercial Sector Measures, the establishment of a foreign-invested direct sales (including directenterprise engaging in retail sales via TV, telephones, mailthe Television, Internet and Internet) ortelephone and wholesale distribution enterprise must obtainshall be approved by MOFCOM. To address the complicated and lengthy approval from MOFCOM or its authorized local counterparts.process and MOFCOM’s uncertain position towards approving investment in retail sale business and wholesale distribution business by foreign investors under the Commercial Sector Measures, in the past we conducted our retail sales through television, Internet and telephone conducted by our consolidated affiliated enterprises owned by Kuan Song and Pan Zong —Shanghai Network and Beijing Acorn. However, on November 3, 2016, the Commercial Sector Measures were revoked on November 3, 2016.

Furthermore, due to the aforesaid reason as well as certain restrictions or prohibitions on foreign ownership of companies that engage in internet and an anonymous consultation withother related businesses imposed by current PRC laws and regulations, including the Shanghai Municipal Commissionprovision of Commerce indicatedinternet content, we set up another consolidated affiliated enterprise, Beijing HJX Technology, which previously conducted our internet interactive services business. Beijing HJX Technology is currently not engaged in the active conduct of business. As domestic companies, these three companies are not subject to the PRC regulations on foreign investment into provision of internet content business, but they are controlled by us through a set of contractual arrangements. To our knowledge:

●the ownership structures of (i) Acorn Information, Shanghai Network and Beijing Acorn and (ii) Beijing HJX Technology and Acorn Trade (Shanghai) are in compliance with existing PRC laws and regulations; and
●our contractual arrangements among (i) Acorn Information, Shanghai Network and Beijing Acorn and their respective shareholders, and (ii) Acorn Trade (Shanghai) and Beijing HJX Technology and their shareholders are valid, binding and enforceable, and do not and will not result in a violation of existing PRC laws and regulations.

However, there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the establishmentPRC regulatory authorities, in particular MIIT, SAMR and MOFCOM, which regulate foreign investment in internet and “direct sales” businesses, will not in the future take a view that is contrary to the above opinions of a foreign-invested enterprise engagingour PRC legal counsel. If the current agreements that establish the above structure were found to be in direct sales via the Internet requires only registrationviolation of existing or future PRC laws or regulations, we may be required to restructure our ownership structure and “direct sales” and internet interactive service operations in China or to carry out other actions required by relevant PRC government authorities to comply with the local district counterpart of MOFCOM, rather than requiring approval.PRC laws and regulations, or we could be subject to severe penalties.

 


Our distribution of our proprietary branded products is primarily conducted by our indirect subsidiaries which manufacture these proprietary branded products and sell such products as their self-produced products.

Under the PRC laws, sellers of special products, such as medicine, medical devices and health protection products, are required to review the necessary manufacturing permits provided by the manufacturers.

Advertising Services

The advertising industry used to be a restricted industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2004 Revision). However, on October 31, 2007, the NDRC and MOFCOM jointly issued the Guideline Catalog of Foreign Investment Industries (2007 Revision) that identified the advertising industry as permitted industry for foreign investment. On December 24, 2011 theThe NDRC and MOFCOM jointly issued the Guideline Catalog of Foreign Investment Industries (2011 Revision) on December 24, 2011, as amended on March 10, 2015 and June 28, 2017 respectively, which have been revoked by the Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2018 Revision) issued on June 28, 2018 and effective on July 28, 2018 and Catalog of Industries for Encouraging Foreign Investment (2019 Revision) issued on June 30, 2019 and effective on July 30, 2019, under which the advertising industry continues to remain as permitted industry. As a permitted industry, approval of MOFCOM or its local counterpart is no longer required for a foreign invested enterprise or its domestic subsidiary to invest in advertising unless required by other specific PRC laws and regulations.

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Previously, direct investment by foreign investors in the advertising industry in China was further subject to the Administrative Regulation on Foreign-Invested Advertising Enterprises jointly promulgated by MOFCOM and SAIC on March 2, 2004 and further revised on October 1, 2008. Under this advertising regulation, foreign investors were required to have had at least three years of experience in directly operating an advertising business outside of China before they may receive approval to own 100% of an advertising business in China. Furthermore, all foreign invested advertising companies must obtain approval from SAIC or MOFCOM or their local counterparts. On June 29, 2015, the Administrative Regulation on Foreign-Invested Advertising Enterprise was revoked. Today, foreign investors are allowed to own 100% of an advertising agency in China subject to certain qualification requirements. However, for those advertising agencies that provide online advertising services, foreign ownership restrictions on the value-added telecommunications business as discussed herein are still applicable.

Our Direct Sales Operations

Due to the complicated and lengthy approval process and MOFCOM’s uncertain position towards approving investment in direct sale business by foreign investors under the Commercial Sector Measures, our direct sales business is currently conducted by our consolidated affiliated enterprises owned by Kuan Song and Pan Zong —Shanghai Network and Beijing Acorn. Furthermore, due to the aforesaid reason as well as certain restrictions or prohibitions on foreign ownership of companies that engage in internet and other related businesses imposed by current PRC laws and regulations, including the provision of internet content, we have set up another new consolidated affiliated enterprise, Beijing HJX Technology. Beijing HJX Technology is currently not engaged in the active conduct of business although we have previously conducted internet interactive service through Beijing HJX Technology which holds an ICP License. As domestic companies, these three companies are not subject to the PRC regulations on foreign investment into provision of internet content business, but they are controlled by us through a set of contractual arrangements. To our knowledge:

The ownership structures of (i) Acorn Information, Shanghai Network and Beijing Acorn and (ii) Beijing HJX Technology and Acorn Trade (Shanghai) are in compliance with existing PRC laws and regulations; and

Our contractual arrangements among (i) Acorn Information, Shanghai Network and Beijing Acorn and their respective shareholders, and (ii) Acorn Trade (Shanghai) and Beijing HJX Technology and their shareholders are valid, binding and enforceable, and do not and will not result in a violation of existing PRC laws and regulations.

However, there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular MIIT, SAIC and MOFCOM, which regulate foreign investment in internet and direct sales businesses, will not in the future take a view that is contrary to the above opinions of our PRC legal counsel. If the current agreements that establish the above structure were found to be in violation of existing or future PRC laws or regulations, we may be required to restructure our ownership structure and direct sales and internet interactive service operations in China or to carry out other actions required by relevant PRC government authorities to comply with PRC laws and regulations, or we could be subject to severe penalties. See Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry—If the PRC government takes the view that the agreements that establish the structure for operating our direct sales business and internet interactive service in China do not comply with PRC governmental restrictions on foreign investment in these areas, we could be subject to severe penalties”.

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Our Advertising Operations

 

On September 24, 2007, we acquired 100% of the legal ownership of Shanghai Advertising, which had been one of our affiliated entities, through Shanghai Acorn Enterprise Management Consulting Co., Ltd., or Acorn Consulting. At the time of our acquisition, the advertising industry was still a restricted industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2004 Revision), and required the approval of Shanghai Foreign Investment Commission, or SFIC, MOFCOM’s local counterpart in Shanghai. However, we completed the registration of such acquisition with Pudong Administration of Industry and Commerce in Shanghai on September 24, 2007 without SFIC’s approval based on SFIC’s advice that this acquisition was a purely domestic acquisition without any foreign related issues. To our knowledge, it is unlikely that we would be required by the PRC regulatory authorities, in particular SAIC and MOFCOM, both as regulators of foreign investment, to seek such approval to make up for our deficiency or any penalties would be imposed upon us for failure to obtain such approval. However, we cannot assure you that SAIC or MOFCOM will not take a different view from ours. See Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry— If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties.”

 

According to an anonymous consultation with SFIC, because our acquisition of Shanghai Advertising was completed through Acorn Consulting, a domestic subsidiary of foreign invested enterprises, the acquisition was not subject to the requirement that foreign investors have the requisite years of operating experience in an advertising business outside of China. Similarly, Pudong Administration of Industry and Commerce in Shanghai did not require us to show that Acorn Consulting had the requisite years of operating experience either before or after it accepted the registration of the acquisition and issued a new business license to Shanghai Advertising on September 24, 2007. However, we cannot assure you that the PRC government will not take a different view from ours. Since our acquisition of Shanghai Advertising occurred prior to the revocation of Administrative Regulation on Foreign-Invested Advertising Enterprises, if the PRC government determines that we did not obtain the requisite approval or that this acquisition violated the then-effective requirements on foreign investment or re-investment in advertising businesses in China, we may be subject to severe penalties including, among others, the revocation of the business licenses of our related subsidiaries, discontinuation of our advertising operations, the imposition of conditions with which we or our PRC subsidiaries may be unable to comply, and the restructuring of Shanghai Advertising. The imposition of any of these penalties could result in a material adverse effect on our ability to conduct our business.

See Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry—If the PRC government takes the view that our acquisition of Shanghai Advertising doesdid not comply with PRC governmental restrictionsthe then rules and regulations on foreign investment, in advertising, we could be subject to severe penalties.”

 

Our Wholesale Distribution Operations

Historically, our wholesale distribution business was conducted through our two affiliated entities, Shanghai Network and Beijing Acorn due to the complicated approval process and MOFCOM’s uncertain position toward approving investment in wholesale distribution business by foreign investors. On December 5, 2007, we received approval from Shanghai Qingpu People’s government approving our setup of Acorn Trade (Shanghai) Co. Ltd., or Acorn Trade, a PRC subsidiary wholly-owned by China DRTV, to conduct our wholesale distribution business. A valid business license was issued by Shanghai Administration of Industry and Commerce on December 13, 2007.

 


Regulation of Manufacturing and Sale of Special Consumer ProductsForeign Investment Law

 

SomeOn March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which became effective on January 1, 2020 and has replaced the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Foreign Owned Enterprise Law to become the legal foundation for foreign investment in the PRC. On December 26, 2019, the State Council promulgated the Implementing Regulations of the Foreign Investment Law, which became effective on January 1, 2020. The Foreign Investment Law stipulates three forms of the foreign investment, but does not explicitly stipulate the contractual arrangements as a form of foreign investment. Notwithstanding the above, the Foreign Investment Law stipulates that the concept of a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Therefore, there are possibilities that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how the above-mentioned contractual arrangements will be handled. For the potential impact of the Foreign Investment Law on our Company, please see “Risk Factors—Risks Relating to Our Corporate Structure—We face uncertainties with respect to the implementation of the Foreign Investment Law”.

Regulations of Food Industry in General

Food Safety in General

According to the Food Safety Law of the PRC, or the Food Safety Law, which became effective on December 29, 2018, and the Implementing Regulations for the Food Safety Law of the PRC, which were promulgated by the State Council on October 11, 2019 and became effective on December 1, 2019, the food safety supervision and administration under the State Council are responsible for supervising and administering food production and distribution. The health administrative department and the food safety supervision and administration under the State Council are responsible for the formulation and publication of national food-safety standards. The Food Safety Law and its implementation regulations require:

(1)food manufacturers and distributors to apply for the food production licenses and food distribution licenses, respectively, provided that a food manufacturer who has obtained a food production licenses does not need to obtain a food distribution license for selling the food produced by it at its production facilities;
(2)food production and operation to comply with food-safety standards and certain other requirements. Food manufacturers shall not purchase or use raw food materials, food additives or food-related products which do not meet food-safety standards;
(3)each food manufacturer or trader to establish and implement a personnel health management system. Each worker who engages in food production or trading worker is required to take a physical examination each year and obtain health certificate prior to working;
(4)food manufacturers to check the licenses and food eligibility certification documents of their suppliers before purchasing raw food materials, food additives and food-related products from them. Each food manufacturing enterprise shall establish a procurement check record system and a food ex-factory check record system and ensure the records are authentic and retained for at least six months after the expiration of the shelf life of the product or at least two years if the shelf life is not available; and
(5)the packages of prepacked food to bear labels. The labels shall state matters including the name, specifications, net content, date of production, list of ingredients or components, manufacturer’s name, address and contact information, shelf life, product standard code, storage conditions, the general name of the food additives used in the national standards, category number of the food production license, and other content acquired by laws, regulations or food safety standards.

The PRC has established a food recall system. When a food manufacturer finds that the food produced by it does not comply with food safety standards, it shall immediately stop production, recall the food on the market, notify the relevant manufacturers, operators and consumers, and record the recall and notification. When a food operator finds that the food traded by it does not comply with food safety standards, it shall immediately stop trading such food, notify the relevant manufacturers, operators and consumers, and record the cessation of trading and the notification. The food manufacturers and operators shall take measures to safely recall and destroy the affected food, and report the recall and treatment of the recalled food to the quality supervision authority at or above the county level. Where the food manufacturers or operators fail to recall or stop producing or trading the food which are not in compliance with food safety standards under Article 63 of the Food Safety Law, the food supervision and administration authorities at or above the county level shall order them to recall or stop production or trading.


In the event of any breach of the Food Safety Law, relevant authorities may confiscate any illegal gains and food products, issue warnings and impose rectification orders and monetary penalties ranging from two to ten times the value of the illegal products, as well as revoke the food safety certificate and impose criminal liability in severe cases.

Food Operation Permit

Through Acorn Fresh, we offer through our direct sales platformsproducts that are frequently purchased by consumers, such as seafood and some ofother food products.We currently do not engage in any food production business as defined under the proprietary branded products we manufactureapplicable laws and sell are categorized as medical devices. Therefore, weregulations. We contract with manufacturers to produce food products.Under the Administration Measures for Food Distribution Permits promulgated by SAIC and effective on July 30, 2009, or the FoodDistribution Permits Measures, operators that engage in the food distribution business are required to comply with relevant PRC laws and regulations regardingacquire Food Distribution Permits before applying for business licenses. However, the manufacture and sale of medical devices.Food Distribution Permits Measures has been revoked on November 10, 2015.

 

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InOn November 17, 2017, the PRC, medical devices are classified into three different categories for regulation and supervision by SAFD depending on the degree of risk associated with each medical device and the extent of regulation needed to ensure safety and proper operation of the product. Class I includes medical devices posing a low risk whose safety and effectiveness can be guaranteed through routine administration. Class II includes those with medium risk whose safety and effectiveness should be ensured by strict control and administration. Class III includes those devices that pose a relatively high risk whose safety and effectiveness should be ensured by taking special measures to conduct strict control and administration. All the medical devices that we manufacture belong to Class II above. Underissued the Administrative Measures on Supervision over Manufacture of Medical Device effective on November 17, 2017, manufacturers of Class II medical devices must apply to the provincial-level SAFD for a valid Medical Device Manufacturing Enterprise License. Such Medical Device Manufacturing Enterprise License is valid for a period of five years. Under the Administrative Measures on Supervision overFood Operation of Medical Device effective on November 17, 2017, Class II medical device operators no longer need to apply for a Medical Device Operation Enterprise License under Medical Device Operation Enterprise License Measures, but instead, must make a filing with local branches of SAFD. Manufacturers of Class II medical devices must register their manufactured Class II medical devices with SAFD at the provincial level and obtain a Medical Device Registration Certificate. Such Medical Device Registration Certificate is valid for a period of five years. In addition, under the Administrative Measures on Medical Device Online SalesPermits, which became effective on March 1, 2018, any enterprisethe same day, to regulate the food operation business (including food distribution business and catering services). Under this Administrative Measures on Food Operation Permits, the operators that is engaged in online sales of medical devices shall hold Medical Device Manufacturing Enterprise License or Medical Device Operating Enterprise License, or complete the filing to being Medical Device Manufacturing or Operating Enterprises, and such enterprise shall carry out the online sales via its own website or third party platform for network transaction services of medical devices. Violation of these provisions may result in fines, termination of operations, confiscation of illegal income, or in the most serious cases, criminal prosecution.

One of our subsidiaries, Shanghai HJX, and one of our affiliated entities, Shanghai Network, have made filing with competent branches of SAFD on March 11, 2015 in connection with their operation of Class II medical device, and have completed subsequent update of filing information on April 27, 2016. Another of our subsidiaries, Acorn Trade (Shanghai) Co., Ltd., holds valid Medical Device Operation Enterprise Licenses, which we obtained as required by Medical Device Operation Enterprise License Measures and have completed the filing update of sale license in May, 2015. In addition, Zhuhai Acorn Electronic Technology Co., Ltd., or Zhuhai Acorn, holds a Medical Device Manufacturing License expiring on November 3, 2020 and a Medical Device Registration Certificate for a Youngleda oxygen generating device that will expire on January 25, 2020. We are also in the process of renewing other expired licenses and certificates that are required for our operation and products. Although we continue to maintain sufficient outsourced employees to operate the Zhuhai Acorn manufacturing facilities, due to the scope of the operations at Zhuhai Acorn as well as for cost considerations, we do not have any senior employees based in Zhuhai Acorn, nor do we send senior employees to Zhuhai Acorn, to manage the manufacturing process. 

On March 27, 2017, SAFD released a draft Measures for Punishments against Illegal Acts of Online Medical Device Operation, or the Online Medical Device Operation Regulation, to solicit public comments.  The Online Medical Device Operation Regulation imposes more stringent requirements for the online medical device operators (i.e. enterprises engage in the food operation of medical devices), including:

(1) the online medical device operatorsbusiness shall set up quality and safety management systemobtain Food Operation Permits. A Food Operation Permit is valid for the online transactions and provide relevant data to SAFD or its counterparts;

(2) the online medical device operators shall publish the detailed information of the medical device for sale online on its website so as to be consistent with the registration or filing, including its name, type, size, registration certificate, registration holder, number of the Medical Device Manufacturing Enterprise License, product number, contraindications; and

(3) the online medical device operators shall record and maintain the information of the medical device sold not less than the expiration period of such medical devices or two years after the expiration date of such medical device. In the event that the medical device sold does not have the explicit expiration period or expiration date, the information of the medical device shall be maintained for not less than five years.

As this regulation is only in draft form, there are substantial uncertainties as to its enactment timetable, final content, likely interpretation and ultimate implementation of the Online Medical Device Operation Regulation. The draft Online Medical Device Operation Regulation, if enacted as proposed, could cause us to incur substantial costs or require us to change our business practices in a manner materially adverse to our business.

We have obtained a new Food Circulation LicenseOperation Permit to sell pre-packaged food (including refrigerated foods and frozen foods) online under the name of Shanghai Network on April 28, 2016.March 13, 2018 which will expire on December 7, 2022.

 

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The laws and regulations require that operations comply with various requirements relating to food safety. Non-compliance may lead to a series of penalties, including warnings, monetary penalties, confiscation of illegal gains, revocation of the certificates, and/or even criminal liabilities.

 

ForRegulations of Product Quality

The Product Quality Law of the purposesPRC

Pursuant to the Product Quality Law of strengthening the supervisionPRC, which was promulgated on February 22, 1993, became effective on September 1, 1993, and managementwas subsequently amended on July 8, 2000, August 27, 2009 and December 29, 2018, manufacturers are liable for the quality of medical devicesthe products they produce. Where anyone produces or sells products that do not comply with the relevant national or industrial standards safeguarding the health and protectingsafety of the persons and property, the relevant authority will order such person to stop the production or sales, confiscate the products, impose a fine of an amount higher than the value of the products and less than three times of the value of the products, confiscate illegal gains (if any) as well as revoke the business license in severe cases. Where the activities constitute a crime, the offender will be prosecuted.

Product Liabilities

Manufacturers and distributors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles of the Civil Laws of the PRC, which was promulgated on March 15, 2017 and became effective on October 1, 2017, and the Law on the Protection of Consumer Rights and Interests of the PRC, which was promulgated on October 31, 1993, became effective on January 1, 1994 and was amended on August 27, 1999 and October 25, 2013, the manufacturers and distributors will be held liable for losses and damages suffered by consumers caused by the defective products manufactured or distributed by them.

Under the abovementioned laws and regulations, we are required to ensure that products which we produce and sell meet the requirements for safeguarding human health and life safety, on January 25, 2017, SAFD promulgatedensuring human and property safety. Failing to do so will lead to a series of penalties, including the Administrative Measures for the Recallsuspension of Medical Devices, or Recall Measures, to become effective from May 1, 2017, which provides that medical device manufacturing enterprises shall eliminate defects of products of certain types, models or batches that have already been launched into the market forproduction and sale, by way of warning, examination, repair, re-labelling, revision and amendmentconfiscation of the instruction manual, software upgrade, exchange, withdrawal products and earnings, imposition of fines, revocation of business licenses, and/or destruction according toeven criminal liabilities. In addition, if the prescribed procedures. The recall is classified into two categories, that is, voluntary recallproducts cause personal injuries or other form of torts, the manufacturers and compelled recall. If a medical device manufacturing enterprise discovers that a medical device is defective after conducting investigation and evaluation, it shall immediately decide to recall such device. If, upon investigation and evaluation,distributors of the drug regulatory department finds any defect in medical device that manufacturing enterprise should have voluntarily recalled, the drug regulatory department shall compel the concerned enterprise to recall the concerned medical devices. If medical device manufactured by us is found any defects prescribed in Recall Measures, we shallproducts may be subject to recalltort liability.


Regulation of the defective medical device.Internet-Related Businesses

 

Regulation of Internet Content ProvidersInformation Services

 

We currently operatewww.xiangguo.com (redirected fromwww.chinadrtv.com) andwww.hjx.com(where we cease posting information since June 2017) through which our customers can familiarize themselves with our products. We are required to comply withThe Administrative Measures on Internet Information Services, or the Telecommunications Regulations promulgatedICP Measures, issued by the State Council on September 25, 2000 and revisedamended on July 29, 2014 and again on February 6, 2016,January 8, 2011, regulate provision of internet information services in the AdministrativePRC. According to the ICP Measures, on Internet Content Services issued by the State Council on September 25, 2000, the Administrative Measures on Telecommunications Business Operating Licenses promulgated by the MIIT on July 3, 2017 and effective on September 1, 2017, Measures for the Archival Administration of Non-operational Internet Content Services issued by the Ministry of Information Industry (now the Ministry of Industry and Information Technology) on February 8, 2005 and the Administrative Measures on Internet Pharmaceuticals Information Services issued by SAFD on November 17, 2017 in our operation of the website.

Under the above regulations internet content providers must apply for a Telecommunications and Information Services Operating License, or ICP License, a Value-added Telecommunications Business Permit for Internet Information Service if they are deemedinformation services refer to be “operating business”. Internet content providers not deemed to be operating businesses are only required to file a registration with the relevant information industry authorities. The online disseminationprovision of information regarding medical devices must also be approved by SAFD atthrough internet to online subscribers, including commercial and noncommercial services. Pursuant to the provincial level and validated by an Internet Pharmaceuticals Information Service Qualification Certificate issued by SAFD. Violation of these provisions will result in a warning, an order to rectify within a certain period, a fine, or the closing of the website.

AsICP Measures, commercial internet information service providers shall obtain ICP licenses, from relevant PRC local authorities before engaging in the websites ofwww.chinadrtv.comandwww.xiangguo.comare not deemed as an operating business, we only need to file with the relevantcommercial internet information industry authorities for record, which we have finished. Furthermore, asservices in China; and noncommercial internet information service providers shall complete the ICP registration from relevant PRC local authorities. In addition, according to the ICP Measures, providers of internet information services in respect of news, publishing, education, medical treatment, health, pharmaceuticals or medical apparatus shall obtain consent of the relevant PRC competent authority before applying for operating permit or carrying out record-filing procedures. We currently sell our proprietary products through the website ofhttp://www.hjx.comis deemed as operating business, we needwww.xiangguo.com, which does not constitute a commercial internet information service, and hence are required to obtain an ICP Licenseregistration from the relevant information industry authorities. On January 17, 2014, Beijing HJX Technology, one of our affiliated entities, obtainedShanghai Network has completed its ICP registration. Although we do not believe an ICP License withlicense is required to conduct our business in its current form, it is possible the PRC authorities could take a validity perioddifferent view. See “Risk Factors— If we are deemed to have failed to obtain permits or approvals required under the complex regulatory environment for internet-based businesses in China, our business, financial condition and results of five years. Due to management changesoperations may be materially and our improper management of the original ICP License, Beijing HJX Technology was not able to complete its annual inspection on such license, which may subject us to potential penalties. As of the date of this annual report, Beijing HJX Technology has successfully renewed its ICP License, though it has very limited business that may require utilization of such license.adversely affected.”

 

Pursuant to Administrative Provisions for the Internet Audio-Video Program Service promulgated by SAPPRFTPublication and MIIT on December 20, 2007, as revised on August 28, 2015, an entity shall obtain the Permit for Audio-Video Programs Transmitted through Information Network before providing service of production, edition and integration of audio-video programs, the supply of audio-video programs to the public via the Internet.Cultural Products

 

The internet publication service is classified as a prohibited industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2017 Revision). Pursuant to Administrative Provisions on Internet Publication Service jointly promulgated by MIIT and SAPPRFT onOn February 4, 2016, effective fromState Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China, or the SAPPRFT, and the MIIT issued the Measures for Network Publication Service Administration, or Network Publication Measures, which took effect on March 10, 2016, any engagement in2016. The Network Publication Measures introduced an internet publication activities shall be subject to approval by SAPPRFT andpublishing license regime for internet publication providers shall acquire the Internet Publication Service License. The internet publication service referspublications. According to the provision of digitized works with characteristics of publication, such as editing, production or processing, toNetwork Publication Measures, the public through information networks. Digitized works include (i) original digitized works such as knowledgeableterm “online publications” includes informative and thoughtful texts,words, pictures, maps, games, animation, audio and video readings and other original digitized works in literature, art, science and other fields; (ii)fields.

Online Advertising

In July 2016, the works whose contents areSAIC 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 natural search results. In addition, consistent with thosethe Advertising Law, these interim measures require that advertisements published on internet pages in published books, newspaper, periodicals, audiothe form of pop-ups or other similar forms shall be clearly marked with a “close” button to ensure “one click to close”. Violation of these regulations may result in fine of no more than RMB 30,000, with any punishments administrated by the Administrative Authority for Industry and videoCommerce in the place where the advertisement publisher is located.

Online Cultural Products

Under the Interim Provisions on the Administration of Internet Culture, promulgated by the MOC, and is effective on December 15, 2017, internet cultural products are classified as: (i) online cultural products particularly developed for publishing via internet, which include online music and electronic publications; (iii) the worksentertainment, online games, online performance plays (programs), performance, online artworks, and online animation features and cartoons (including Flash animation); and (ii) products, such as online literature databases formedmusic and entertainment, games, plays (programs), performance, artworks and animation features and cartoons, which are produced or reproduced by wayusing certain technical means and disseminated on the Internet (collectively, Internet Cultural Products). Any internet service provider shall obtain an Internet Culture Operation License to carry out any following business relating to Internet Cultural Products for the purpose of selecting, compiling or collecting the above works, and (iv) other types of digitized works identified by the SAPPRFT. The Provisions further restricts the cooperation of internet publication providers and foreign invested enterprises, requiring the approval by the SAPPRFT in advance regarding the internet publication cooperation.making profits:

 

●production, duplication, import, publication, broadcasting of Internet Cultural Products;
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●publishing of cultural products on the internet or transmission thereof to computers, fixed-line or mobile phones, radios, television sets or gaming consoles for the purpose of browsing, reading, using or downloading such products; or
●exhibitions or contests related to Internet Cultural Products. 

Online Transmission of Audio-Visual Programs

 

On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental authorities, including the MOC, the SARFT, the GAPP, the CSRC and the MOFCOM, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. Under these provisions, non-state-owned capital and foreign investors are prohibited from engaging in the business of distributing audiovisual programs through information networks.


 On December 20, 2007, the State Administration for Radio, Film and Television and the MIIT jointly issued the Rules for the Administration of Internet Audio-Visual Program Services, or the Audio-Visual Program Provisions, commonly known as Circular 56, which came into effect as of January 31, 2008 and was amended in 2015. Circular 56 reiterates the requirement set forth in the earlier rules that the provider of internet audio-visual program services must obtain the Audio-Visual License issued by SARFT. Furthermore, Circular 56 requires all the providers of internet audio-visual program service to be either wholly state owned or state controlled, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program services determined by SARFT. According to the Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs issued by SARFT on May 21, 2008 and was amended on August 28, 2015, the internet audio-visual program service providers engaging in such services prior to the issuance of Circular 56 are able to apply for the license as long as their violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the issuance of Circular 56. These provisions have been reflected in the Application Procedure for Audio-Visual License promulgated by SAEFT on June 11, 2008. Failure to obtain Audio-Visual License may subject such provider to various penalties, including fines of up to RMB30,000 ($4,321), seizure of related equipment and servers used primarily for such activities and even suspension of its internet audio-visual program services.

 On March 17, 2010, the SARFT issued the Internet Audio-Visual Program Services Categories (Provisional), or the Provisional Categories, as amended on March 10, 2017, which classified internet audio-visual program services into four categories. In addition, the Notice concerning Strengthening the Administration of the Streaming Service of Online Audio-Visual Programs promulgated by the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT, on September 2, 2016 emphasizes that, unless a specific license is granted, audio-visual programs service provider is forbidden from engaging in live streaming on major political, military, economic, social, cultural and sports events.

 In addition, the State Internet Information Office promulgated the Administrative Provisions on Internet Live-Streaming Services, or Internet Live-Streaming Services Provisions, on November 4, 2016, which came into effect on December 1, 2016. According to the Internet Live-Streaming Services Provisions, an internet live-streaming service provider shall (a) establish a live-streaming content review platform; (b) conduct authentication registration of internet live-streaming issuers based on their identity certificates, business licenses and organization code certificates; and (c) enter into a service agreement with internet live-streaming services user to specify both parties’ rights and obligations. The Internet Live-Streaming Services Provisions also stipulate that any provider who intends to provide Internet Live-Streaming services in the form of online performances, online audio-visual programs, etc. shall also obtain relevant qualifications prescribed by laws and regulations pursuant to the law.

On December 16, 2016, the SAPPRFT issued the Rules for the Administration of Video and Audio Programs on microblog, WeChat and other Social Media Platforms, or Circular 196. Circular 196 requires that any organizations that provide online streaming through social media platforms such as microblog or WeChat must obtain an internet audio/video program transmission license. For those organizations and individuals that do not hold such a license, the hosting social networking platform shall be responsible for supervising the content of the posted programs, and the scope of the programs must not exceed the scope stated on the platform’s audio/video program transmission license. Similarly, film and TV dramas broadcast through social media is required to obtain a license for public airing, and social media platforms are not allowed to repost user-generated video or audio programs featuring political news.

On September 9, 2016, the SAPPRFT issued a notice on Strengthening the Management of Audio-Visual Program Live-Streaming Services, the providers without an Audio-Visual License specified on (i) major political, military, economics, social, cultural, sports activities or reality event streaming, or (ii) activities such as general social group cultural activities or sports events” shall not provide the applicable live-streaming services relating to the above activities.

On March 16, 2018, the SAPPRFT 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.

In August 2018, the National Office of Anti-Pornography and Illegal Publication, or the NOAPIP, the MIIT, the Ministry of Public Security, the Ministry of Culture and Tourism, the National Radio and Television Administration and the Cyberspace Administration of China, jointly issued the Notice on Strengthen the Management of Live Streaming Service, which required internet live streaming providers involving internet audio-visual program live streaming services to obtain the Audio-Visual License and complete certain registration procedures with the local public security authority.


Production of Radio and Television Programs

On July 19, 2004, the State Administration for Radio, Film and Television promulgated the Regulations for Administration on Production of Radio and Television Programs, or the “Radio and TV Programs Production Regulations,” which came into effect as of August 20, 2004 and were amended on August 28, 2015. The Radio and TV Programs Production Regulations provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit.

Information Security and Censorship

Internet content in China is also regulated and restricted from a state security point of view. The Decision Regarding the Safeguarding of Internet Security, enacted by the Standing Committee of the National People’s Congress in 2000 and amended in 2009, makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights.

The Administrative Measures for the Security Protection of International Connections to Computer Information Network, promulgated by the Ministry of Public Security in 1997 and amended on January 8, 2011, prohibit the use of the internet in ways that, 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’s national defense affairs, state affairs and other matters as determined by the PRC authorities.

Regulation of Internet Shopping

 

On June 24, 2010, the MOFCOM promulgated the Outline of Promoting Healthy Development of Internet Shopping which requires relevant authorities to encourage enterprises to develop internet sales, expand internet shopping field, attach importance to rural internet shopping market, improve support service, protect legal interests of consumers and standardize internet market order.

 

On December 28, 2010, the MOFCOM, the MITT and other departments jointly issued the Notice on Implementing Scheme of Cracking Down Infringement on Intellectual Properties and Manufacture and Sale of Fake Commodity in Internet Shopping which, among other things, requires to strengthen supervision and control over internet shopping platform and transaction parties, set up access system for tradable commodity and intensify the fight against infringement on intellectual properties and manufacture and sale of fake commodity in internet shopping.

 

On January 5, 2011, the MOFCOM issued the Notice on Regulation of Promotional Activities in Internet Shopping, pursuant to which, among other things, (1) internet shopping enterprises shall ensure the quality of promotional commodity; (2) price fraud and false promotion is strictly forbidden; and (3) infringement on intellectual properties and manufacture and sale of fake commodity in promotion will be severely cracked down.

 

On January 26, 2014, the SAIC promulgated Measures on the Administration of Internet Transactions which provide rules for internet product transactions and relevant services. Pursuant to these measures, an enterprise, which has been registered with the competent local branch of the SAIC and has obtained a business license, shall make public the information provided on its business license or provide an electronic link of its business license in a prominent position on the home page of its website or the website for engaging business activities. In addition, except for several specified products, a consumer is entitled to return products sold by an internet product business operator within seven days upon the receipt of such products and is not required to provide any reason for such return. However, the products returned by a consumer shall be intact and in good condition.

 

Law on the Protection of Consumer Rights and Interests was amended by Standing Committee of the National People’s Congress and took effect on March 15, 2014. Pursuant to the newly amended law, upon discovery of any defects in the goods or services that are likely to impact personal or property safety, enterprises or service providers shall take necessary actions such as recall of goods, and shall bear the necessary expenses incurred by such recall. Where enterprises sell goods via the Internet, or by television, phone, mail order, except for certain specified goods, consumers are entitled to return the goods delivered within seven days upon receipt of goods without providing any reason, provided that goods returned by a consumer shall be intact and in good condition. In addition, enterprises and their staff members shall strictly keep confidential the personal information of consumers collected, and shall not divulge, sell or illegally provide others with such personal information, enterprises shall not send commercial information to consumers without their consent or request or after the consumers have expressly refused to receive such information. Unless otherwise prescribed by law, enterprises that conduct fraudulent behavior in providing goods or services shall, on demand by consumers, compensate the losses suffered by the consumers by an amount that is three times to the purchase price paid by the consumers for the goods purchased or services received, or in a fixed amount of RMB500 if the total compensation is less than RMB500.

 


On January 5, 2015, the SAIC promulgated Measures for Punishments against Infringements on Consumer Rights and Interests, effective from March 15, 2015. Pursuant to these measures, a business operator that sells goods via the Internet, television or phone, by mail order or otherwise, bears the obligations to accept the return of goods by consumers without reason, and shall not deliberately delay performing, or unjustifiably refuse to perform, such obligations.

 

On March 24, 2016, the Ministry of Finance, the General Administration of Customs, or the GAC, and the SAT jointly issued the Circular on Tax Policy for Cross-Border E-commerce Retail Imports, or the Tax Circular (amended on November 29, 2018 and effective from January 1, 2019), pursuant to which, among other things, (1) the imported commodities retailed through the cross-border E-commerce shall, according to types of the goods, be levied tariff, imports value-added tax, and consumption tax; individuals who purchase the imported retail goods through cross-border E-commerce shall be taxpayers and the actual transaction prices shall be dutiable price; (2) E-commerce corporations, corporation specialized in e-commercial transaction platform or logistic enterprises shall be the withholding obligors and be responsible for deducting taxes; and (3) the lists of Imported Retail Commodities through Cross-Border E-commerce will be promulgated separately by the competent department of the Ministry of Finance. TheFinance, and (4) the e-commerce imported goods that have already been purchased shall be the ultimate goods for personal use by consumers and shall not be put in domestic market for resale. Following the Tax Circular (2016 version), the Ministry of Finance has issued two lists in connection to the Imported Retail Commodities on April 6, 2016 and April 15, 2016, respectively.respectively, however, which have been revoked by a new list issued by the Ministry of Finance, the MIIT, the MOFCOM and other authorities on November 20, 2018 and effective from January 1, 2019. In addition, On April 6, 2016, the GAC issued the Announcement on Matters relating to the Regulation of Cross-border E-commerce Retail Imports and Exports and further specify the regulation concerning cross-border e-commerce retail imports and exports, effective from April 8, 2016. On January 1, 2019, the aforesaid Announcement has also been revoked by the GAC with a new announcement issued on December 10, 2019 and effective from January 1, 2019.

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On December 27, 2016, the Standing Committee of National People'sPeople’s Congress released a draft E-commerce Law to solicit public comments. It willcomments, which has been finally adopted and issued on August 31, 2018 and effective from January 1, 2019. Pursuant to which, (i) online businesses must register their businesses and acquire all necessary licenses regulating particular activities; (ii) E-commerce operators must also meet their tax obligations and are now required to issue a tax invoice (fapiao); (iii) platform operators are prohibited from imposing unreasonable restrictions, conditions or fees on merchants, in addition, these operators must keep transaction records, as well information of products and services provided, for at least three years. This law strengthens intellectual property protection and addresses the problem of manufacturing and sale of counterfeit goods, and the operators can be fined up to RMB2 million in serious cases of intellectual property infringement. In addition, this new law also further enhances China’s first comprehensive law in the realmregime of e-commerce. It regulates electronic contracts, payments, package delivery, logistics services,privacy protection, and cross-border e-commerce As this law is only in draft form, there are substantial uncertainties as to its enactment timetable, final content, likely interpretation and ultimate implementationprotection of the E-commerce Law.consumers.

 

On January 6, 2017, theSAIC promulgated Interim Measures for Seven-day Unconditional Return of Products Purchased Online, effective from March 15, 2017, whichfurther clarifies the standard of “good condition” of the products suitable for return, the calculation of seven-day return period, and the methods of payment refund for the retuned products.

 

Regulations of Personal Information Protection

 

On December 28, 2012, the Standing Committee of the National People’s Congress promulgated the Decision on Strengthening Internet Information Protection which provides that, among other things, internet service providers and other entities shall obtain consent from relevant persons before collecting and using personal electronic information during business activities and shall make public rules on collecting and using personal information; personal electronic information collected shall be strictly kept confidential and shall not be divulged, tampered with, damaged, sold or illegally provided to others; no person is allowed to send commercial electronic information to any recipient without the recipient’s consent or request, or after the recipient gives an explicit refusal.

 

On July 16, 2013, the MIIT promulgated Provisions on Protecting Personal Information of Telecommunications and Internet Users which provides detailed rules for standards on collection and use of users’ personal information by telecommunications business operators and internet information service providers and security measures on protecting users’ personal information.

 

The Law on the Protection of Consumers’ Rights and Interests amended on October 25, 2013 and effective from March 15, 2014 provides that business operators shall not send commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information.

 


On January 5, 2015, the SAIC promulgated Measures for Punishments against Infringements on Consumer Rights and Interests, effective from March 15, 2015. Pursuant to these measures, a business operator shall refrain from any of the following acts:

 

(1) collecting or using the consumers'consumers’ personal information without the consent of the consumers;

(2) divulging, selling or illegally providing others with the consumers'consumers’ personal information collected; and

(3) sending commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information.

 

On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cyber Security Law which became effective from June 1, 2017, imposes the following new requirements for the internet operators:

 

(1) notifying the relevant consumers and the applicable government authority of the occurrence or potential occurrence of any divulging, damaging or loss of the personal information collected; and

(2) taking proper measures to delete or correct the personal information collected at the request of the consumers whose personal information is used inappropriately or contains erroneous information.

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The PRC Cyber Security Law also increased the administrative punitive measures that the competent government authorities can take as well as the monetary penalty for any noncompliance.

 

On December 29, 2017, the National Technical Committee for the Standardization Administration of Information SecurityChina, or SAC promulgated the Information Security Technology – Personal Information Security CircularSpecification effective on May 1, 2018.2018, or 2018 Specification. Under this Circular,2018 Specification, any entity or individual who collects, shares, transfers or discloses personal information shall obtain the consent of the holder of such information.

 

On January 30, 2019, the SAMR and the SAC, jointly promulgated a draft of Information Security Technology – Personal Information Security Specification which is set to revise the 2018 Specification, or 2019 Draft Specification. The major addition of this 2019 Draft Specification is that the services provider shall not force the subject of personal information to accept the business functions provided by products or services and the correspondingly requests for personal information collection against the voluntary will of the subject of personal information.

On March 6, 2020, the SAMR and the SAC, jointly promulgated the Information Security Technology – Personal Information Security Specification, or 2020 Specification, which will be effective on October 1, 2020. Under this 2020 Specification, (i) a data controller is required to differentiate between basic business functions and additional or expanded business functions, and is prohibited from bundling all these functions together; (ii) when displaying information, goods, services or research results to a data subject based on his browsing history or transaction records, the subject must also have the option of a non-personalized display. The data subject should be able to control the degree and extent to which his personal data can be utilized to generate a personalized display; (iii) if a third party also collects personal data via a data controller’s products or services (e.g. via plugin tools or certain cooperation mechanisms), the data controller is responsible for evaluating the third party’s data protection capabilities, requiring the third party to obtain the necessary consents from data subjects and to establish channels to receive their inquiries and complaints; (iv) a data controller must established a designated data protection officer and department if its business involves personal data processing and has more than 200 employees working towards this business; if it processes or expects to process personal data for more than one million individuals within 12 months; or if it processes the sensitive personal data of more than 100,000 individuals; and (v) a data controller must separately inform a data subject of the collection or sharing of his personal biometric data (e.g. when other non-biometric personal data is collected at the same time) and obtain his specific consent. Personal biometric data must be stored separately from personal identification data.

Regulations of Concurrent-Business Insurance Agency

 

On August 4, 2000 the China Insurance Regulatory Commission, or the CIRC, promulgated the Interim Measures for the Administration of Concurrent-Business Insurance Agency, or the Interim Measures, effective as of the date of promulgation. A concurrent-business insurance agent shall obtain the License for Concurrent-Business Insurance Agency before its commencement of such business, and the scope of the agency business shall be subject to the types of insurance specified in the License for Concurrent- Business Insurance Agency.

 


On June 22, 2007 CIRC promulgated the Measures for the Administration of Insurance Licenses, effective on September 1, 2007. The insurance institutions within the territory of People’s Republic of China shall obtain an insurance license, including Concurrent-Business Insurance Agencies.

 

The CIRC issued the License for Concurrent-Business Insurance Agency to Shanghai Network on October 11, 2014. The license is valid for a period of three years and we should handle the insurance agency business specified in our license. We have updated this license and it will now expire on November 12, 2020.

 

Regulation of Advertising Activities

 

The principal regulations governing advertising businesses in China include the Advertising Law (2015(2018 Revision) and the Advertising Administrative Regulations (1987). SAPPRFT and SAIC (currently merged into SAMR) are the main responsible regulatory authorities in China overseeing the entire advertising industry. SAIC has the authority to make administrative rules to regulate advertising activities, register or approve the establishment of advertising companies, and examine and oversee daily advertising activities to ensure relevant regulations are not violated. In addition to supervision by SAIC, SAPPRFT sets technical standards for broadcasting, regulates signal landings among different broadcasting networks and monitors the operations of all TV and radio stations. Due to the politically sensitive nature of China’s media industry, the contents of TV and radio programs must go through a lengthy approval process prior to broadcasting. Contents of advertisements, which are regulated to a lesser extent, must be approved by the TV or radio stations carrying the advertisements and proper advertising committee(s), effectively eliminating the possibility of broadcasting real-time, live advertising programs. The current regulations also prohibit private enterprises from owning or operating a TV or radio station.

 

Business License for Advertising Companies

 

Companies that engage in advertising activities must obtain from the SAICSAMR or its local branches a business license with advertising business specifically included in the business scope. A company conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and an order to cease advertising operations. Our subsidiary Shanghai Advertising has obtained a business license with advertising specifically included in the business scope from the local branch of SAIC.SAMR.

 

Advertising Airtime

Under PRC regulations, airtime used to broadcast TV direct sales programs and TV home shopping programs is typically considered to be advertising time. The Chinese government imposes strict regulations on TV station/channel ownership and operations, TV home shopping companies can only purchase blocks of airtime for product advertising as opposed to engaging in long-term channel leasing agreements as in some other countries. In addition to regulating TV station ownership, the SAPPRFT also sets regulatory standards on the amount of advertising time allowed on TV broadcasting. Since 2009, the SAPPRFT has issued a series of increasingly restrictive regulatory standards on the amount of advertising time allowed on TV broadcasting, including:

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·the Circular on Strengthening the Administration of TV Direct Sales Advertising and Home Shopping Programs issued by the SAPPRFT on September 10, 2009 prohibiting the broadcast of TV direct sales advertising programs on some specialized TV channels, including news channels, international channels, and TV home shopping channels, and on satellite TV channels during the period from 6:00pm to 12:00am every day;

·the Administrative Measures on Advertising on Television or Radio issued by the SAPPRFT issued by the SAPPRFT on September 8, 2009 and effective as of January 1, 2010 which was amended in November 2011 requiring that the total airtime allocated to commercial advertising on each TV channel not exceed 12 minutes per hour and not exceed 18 minutes in total during the period from 7:00pm to 9:00pm, and prohibiting commercial advertising in whatever form during broadcasting of an episode (calculated as 45 minutes) of a television drama; and

·the Circular on Strengthening Administration of Infomercials Broadcast via Satellite TV Channels issued by the SAPPRFT on October 29, 2013 and effective as of January 1, 2014, requiring satellite TV channels to follow a series of additional provisions, such as not broadcasting (i) infomercials more than once per hour, (ii) infomercials which exceed three minutes in length or (iii) infomercials with same content or selling the same product more than three times per day.

Under current PRC law, advertising operators can only sell advertising airtime to advertisers and are not allowed to sell to other advertising operators.

Advertising Content

 

PRC advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibition on, among other things, misleading content, superlative wording, socially destabilizing content, or content involving obscenities, superstition, violence, discrimination, or infringement of the public interest. Advertising for medical devices, fitness and other special products are subject to stricter regulation which prohibits any unscientific assertions or assurances in terms of effectiveness or usage, any statement on the recovery or response rate, comparison with other similar products in terms of effectiveness or safety, and any recommendation or certification by an endorser. Advertising relating to medical devices for personal use is subject to specific indications. In addition, all advertising relating to medical devices, fitness agrochemicals, as well as other advertisements that are subject to censorship by administrative authorities pursuant to relevant laws and regulations, must be submitted to the relevant administrative authorities for content review and approval prior to dissemination. Furthermore, SAPPRFT and SAIC have issued a circular temporarily prohibiting, after August 1, 2006, the advertising of pharmaceutical products, diet and slimming products, medical devices, breast enhancement products and height increasing products in the form of TV- and radio-based direct sales programs pending adoption of new government rules. On September 10, 2009, the Circular on Strengthening the Administration of TV Direct Sales Advertising and Home Shopping Programs was issued by the SAPPRFT, prohibiting the TV direct sales and home shopping programs to advertise pharmaceuticals, breast-enhancement products, diet and slimming products, and medical devices which are implantable or need instruction by experts. Meanwhile, the Administrative Measures on Advertising on Television or Radio, issued by the SAPPRFT on September 8, 2009 and effective as of January 1, 2010 which was amended in November 2011, prohibited the pharmaceutical and medical device or health related advertising program to contain the recovery rate or efficiency rate or certification by the doctors, experts, patients or public figures. Furthermore, Criteria for the Examination and Publication of Medical Device Advertisements were issued by the Ministry of Health (currently merged into National Health and Family Planning Commission), the SAIC, the SAFD and became effective on May 20, 2009, which provided strict regulation on medical device advertisements publication. According to the Circular Concerning Further Severely Punishing Illegal Advertisements of Pharmaceuticals, Medical Devices and Health Food effective in Februaryon January 20, 2010, enterprises which published the illegal advertisements will be severely punished. On February 12, 2010 SAPPRFT promulgated the Notice on Further Strengthening Examination and Supervision on Advertising on Television and Radio, which requires that, among other things, in TV shopping advertisement: (1) no host is allowed to participate in advertisement; (2) exaggerative voice, intonation and gestures are prohibited; and (3) no form such as news report, interview and news materials and information is allowed to be used. On July 31, 2015, the Notice on Further Strengthening the Examination and Supervision of Advertisement of Pharmaceuticals, Medical Devices and Health Food was issued by SAFD, which raises the standard of examining advertisements of pharmaceuticals, medical devices and health food in accordance with the new Advertising Law. See Item 3.D, “Key Information—Risk Factors— Risks Related to the Regulation of Our Business and Industry—Governmental actions to regulate TV- and radio-based direct sales programs of medical devices and diet and slimming products will adversely impact sales of our branded neck massager product line and some of our other products and may adversely impact our future overall operating results”.

 

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Entities whose products are to be advertised, or advertisers, entities offering advertising services such as linking advertisers with TV stations or newspapers, or advertising operators, and disseminators are all required by PRC laws and regulations to ensure that the content of advertising they produce or disseminate is true and in full compliance with applicable laws and regulations. In providing advertising services, advertising operators and disseminators must review the prescribed supporting documents provided by advertisers and verify that the content of advertising complies with applicable laws and regulations. In addition, prior to disseminating advertisements for certain commodities which are subject to government censorship and approval, advertising disseminators are obligated to check the relevant approval documents for those advertisements. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertising, orders to publish a correction of the misleading information and criminal punishment. In circumstances involving serious violations, SAIC or its local counterparts may revoke the violator’s licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators, and disseminators may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.

 

Beginning on January 1, 2008, advertisers dealing with advertisements that relate to pharmaceuticals, medical devices and health related foods are subject to a credit rating. SAFD and its local branches will annually collect information relating to the advertiser’s record of compliance with the relevant advertising regulations in respect of the above products, and grade the credit of distributors based on the collected information. The credit rating of each advertiser will be either good credit, dishonor credit, or material dishonor credit. Any violations of related laws and regulations within one year by the advertising operator may result in a rating of dishonor credit or material dishonor credit for that year. Distributors with dishonor credit or material dishonor credit may be ordered to take corrective measures and may be subject to special supervision and/or public disclosure of their credit ratings.

 

In addition, PRC unfair competition law prohibits us and our distributors from conveying misleading, false or inaccurate information with respect to product quality, production, functionality, or other features, through advertising.

 

We have employed advertising industry professionals who will examine the content of our advertising and who will apply for the necessary approvals and permits for advertising certain special consumer products. In addition, our advertising channels, such as TV stations, newspapers, and radio stations, employ advertising inspectors who are trained to review advertising content for compliance with relevant laws and regulations. However, we cannot assure you that all of our advertising is in compliance with relevant PRC laws and regulations, nor can we assure you that the advertising our distributors place on local media networks complies with relevant PRC laws and regulations. In the past, we have been fined for certain advertising that is considered misleading or false by authorities. In some cases, we were required to accept product returns. From January 1, 2008, any violation of advertising regulations relating to our sleeping aid product and Youngleda oxygen generating devices by us or our distributors may result in SAFD issuing a rating to us or our distributors of dishonor credit or material dishonor credit.

 

Regulation on Foreign Exchange Control and Administration

 

Foreign exchange in China is primarily regulated by:

 

The Foreign Currency Administration Rules (1996), as amended on August 5, 2008; and

The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

●The Foreign Currency Administration Regulations (1996), as amended on August 5, 2008; and
●The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

Under the Foreign Currency Administration Rules,Regulations, Renminbi is convertible for current account items, including the distribution of dividends, interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as direct investment, loans, investment in securities, and repatriation of funds, however, is still subject to the approval of SAFE.

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Under the Administration Rules, foreign-invested enterprises may only buy, sell, and remit foreign currencies at banks authorized to conduct foreign exchange transactions after providing valid commercial documents and, in the case of capital account item transactions, only after obtaining approval from SAFE. Capital investments directed outside of China by foreign-invested enterprises are also subject to restrictions, which include approvals by SAFE, MOFCOM, and the National Reform and Development Commission.

 


On November 19, 2012, the SAFE promulgated the Notice of the SAFE on Further Improving and Adjusting Foreign Exchange Administration Policies on Direct Investment, or the Notice, which came into force as of December 17, 2012.2012 and was amended on May 4, 2015, October 10, 2018 and December 30, 2019. According to the Notice, (i) the opening of and payment into foreign exchange accounts under direct investment account are no longer subject to approval by the SAFE; (ii) reinvestment with legal income of foreign investors in China is no longer subject to approval by the SAFE; (iii) the administration of foreign exchange in reinvestments by foreign-funded investment enterprises is simplified; and (iv) the procedures for capital verification and confirmation that foreign-fundedforeign-invested enterprises need to go through are simplified.

 

On March 30, 2015 SAFE promulgated the Circular on Reforming the Administrative Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises, or SAFE Circular 19, which became effective as of June 1, 2015.2015 and was amended on December 30, 2019. SAFE Circular 19 requires that, among other things, (i) capital and RMB fund converted from foreign currencies of a foreign invested enterprise shall not (a) directly or indirectly be used for expenditure beyond its business scope or prohibited by national laws and regulations; (b) directly or indirectly be used for investment into security unless otherwise provided by laws and regulations; (c) directly or indirectly be used for provision of entrusted RMB loans (unless it is within its business scope), repayment of inter-company borrowing (including third party advances) or repayment of bank RMB loans which have been sub-lent to third parties; (d) be used for payment of relevant expenses related to purchase of real properties not for self-use unless it is a foreign invested real properties enterprise; (ii) in addition to the transfer of equity investment payments in original currencies, foreign-invested enterprises whose main business is investment (including foreign-invested investment companies, foreign-invested venture capital enterprises and foreign-invested equity investment enterprises) are allowed to directly settle their foreign exchange capitals and transfer the same to, or transfer RMB fund in their account pending for foreign exchange settlement payment to, the account of an invested enterprise according to the actual amount of investment, provided that the relevant domestic investment project is real and compliant; (iii) ordinary foreign-invested enterprises other than those of the aforesaid types shall (a) be governed by the prevailing provisions on domestic re-investment if they make domestic equity investments by capital transfer in original currencies; or (b) transfer RMB funds converted from foreign exchange settlement, according to the actual amount of investment, to an account pending for foreign exchange settlement payment which has been opened by the invested enterprise after completion of domestic re-investment registration required by local branches of SAFE if they makes domestic equity investment with fund converted from foreign exchange settlement.

 

On June 9, 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange Settlement, or Circular 16. Under Circular 16, onshore enterprises (including Chinese-funded enterprises and foreign-invested enterprises, excluding financial institutions) may settle their external debts in foreign currencies according to the method of voluntary foreign exchange settlement. The banks shall, in handling each transaction of foreign exchange settlement for an onshore enterprise according to the principle of payment-based foreign exchange settlement, review the authenticity of, and compliance with, the use by the domestic institution of the foreign exchange funds settled in the previous transaction (including voluntary settlement and payment-based settlement).

 

We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from our subsidiaries in China.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.

 

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Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

 

In January and April 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued two rules that require PRC residents to register with and receive approvals from SAFE in connection with their offshore investment activities. SAFE has announced that the purpose of these regulations is to achieve the proper balance of foreign exchange and the standardization of the cross-border flow of funds.

 


On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former circular commonly known as “Notice 75” promulgated by SAFE on 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, referred to in SAFE Circular 37 as a ‘‘special“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 increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiary 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 subsidiary. 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. Pursuant to the Circular on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, or SAFE Circular 13, promulgated by SAFE, starting from June 1, 2015, the registration (including initial registration and amendment registration) under SAFE Circular 37 will be directly reviewed and handled by local banks.

 

As a Cayman Islands company, and therefore a foreign entity, if Acorn International purchases the assets or an equity interest of a PRC company owned by PRC residents in exchange for our equity interests, such PRC residents will be subject to the registration procedures described in SAFE Circular 37 and SAFE Circular 13. Moreover, PRC residents who are beneficial holders of our shares are required to register with SAFE in connection with their investment in us.

 

As a result of the uncertainties relating to the interpretation and implementation of SAFE Circular 37 and SAFE Circular 13, we cannot predict how these regulations will affect our business operations or strategies. For example, our present or future PRC subsidiaries’ ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, may be subject to compliance with such SAFE registration requirements by relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such PRC residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. We require all shareholders in Acorn International who are PRC residents known by us to comply with any SAFE registration requirements and we understand that the relevant shareholders have registered their offshore investment in us with Shanghai SAFE, but we have no control over either our shareholders or the outcome of such registration procedures. Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects. See Item 3.D, “Key Information—Risk Factors—Risks Relating to China—Regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross- border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose our PRC resident shareholders to liability under PRC law”.

 

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Regulation of Overseas Listings

 

On August 8, 2006, six PRC regulatory agencies, including MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, or SAT, SAIC, the China Securities Regulatory Commission, or CSRC, and SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006 and was amended on June 22, 2009. This New M&A Rule, among other things, purports to require offshore SPVs formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, such as our Company, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. Dividend Distributions

 

Dividend Distributions

Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and 2008, and various regulations issued by SAFE and other relevant PRC government authorities, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China.

 

The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises and Sino-foreign joint equity enterprise enterprises include:

 

The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000 and 2016;

The Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001 and 2014;

The Sino-foreign Joint Equity Enterprise Law (1979), as amended in 2001 and 2016;

The Sino-foreign Joint Equity Enterprise Law Implementing Rules (1983), as amended in 2001 and 2014; and

Company Law of the PRC (2014).

●The Foreign Investment Law (2020);
●The Implementing Regulatons of the Foreign Investment Law (2020); and
●Company Law of the PRC (2018).

 

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least a certain percentage of its after-tax profit based on PRC accounting standards each year to its general reserves. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to employee welfare and bonus funds. These funds, however, may not be distributed to equity owners except in the event of liquidation. In 2015 and 2016, Acorn Information and Shanghai HJX Digital distributed cash dividends of RMB40 million and RMB20 million respectively to China DRTV.

Regulations on Employee Share Options

In December 2006, the People’s Bank of2018, Beijing Acorn Youngleda Technology Co., Ltd. distributed RMB3 million to China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth the requirements for foreign exchange transactions by PRC individuals relating to current account items and capital account items.DRTV. The Implementation Rules of the Administrative Measures for Individual Foreign Exchange issued on January 5, 2007 by SAFE specify approval requirements for PRC citizens who are granted shares or share options by an overseas listed company according to its employee stock ownership plan or stock option plan.

On March 28, 2007, SAFE issued the Operating Rules for Administration of Foreign Exchange for Domestic Individual’s Participation in Employee Stock Ownership Plans and Stock Option Plans of Overseas Listed Companies, or the Circular 78. On February 15, 2012, SAFE promulgated the Circular on Relevant Issues concerning Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed Companies, or Circular 7, in replacement of the Circular 78. According to Circular 7, individuals in PRC (including PRC citizens and foreign individuals who have lived in China over one year) who intend to participate in the stock incentive plan of the same overseas listed company shall collectively appoint a qualified PRC domestic agent or a PRC subsidiary of such overseas listed company (“a PRC agency”) to conduct foreign exchange registration, open bank accounts and transfer and exchange funds and an overseas entity shall be appointed to conduct exercise of option, buying and selling of relevant stocks or equities and transfer of relevant funds. After such individuals’ foreign exchange income received from participation in the stock incentive plan is remitted to PRC, relevant banks shall distribute the above funds from the account opened and managed by the PRC agency to such individuals’ foreign exchange accounts. We and our employees within PRC who have been granted share options or stock appreciation rights, or PRC option/stock appreciation right holders, are subject to Circular 7 upon the listing of our ADSs on NYSE. If we or our PRC option/stock appreciation right holders fail todistributions comply with thesethe aforesaid regulations we or our PRC option/stock appreciation right holders may be subject to fines and other legal or administrative sanction.on dividend distribution.

 

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Pursuant to the Notice on Relevant Issues Concerning Collection of Individual Income Tax Related to Income from Share Option issued by the Ministry of Finance and the SAT on March 28, 2005, Supplementary Notice on Payment of Individual Income Tax for Incomes Derived from Individual Stock Option issued by the SAT on September 30, 2006, the Notice on Relevant Issues Concerning Collection of Individual Income Tax for Income Derived from Share Appreciation Rights and Restricted Share Units issued by the SAT on January 7, 2009 and the Notice on Issues of Individual Income Tax Concerning Share Incentive Plan issued by the SAT on August 24, 2009, in connection with the share option plan of an overseas listed company, the difference received by a PRC individual who had been granted share options between the exercise price and the fair market price of such shares on the exercise date shall be imposed of individual income tax which shall be withheld by the PRC subsidiary of such overseas listed company.

Regulations on Labor Protection

 

The PRC Labor Contract Law and its Implementation Rules became effective on January 1, 2008 and September 18, 2008, respectively, which set out specific provisions related to fixed-term and unlimited-term employment contracts, part-time employment, labor dispatch, probation, consultation with labor union, employment without a written contract, dismissal of employees, severance and collective bargaining. According to the PRC Labor Contract Law and its implementing rules, an employer may terminate the labor agreement of an employee under certain specified circumstances and in some cases, such termination can only be done after fulfillment of certain procedural requirements, such as 30 days’ prior notice or upon payment of one month’s salary in lieu of such notice. In certain cases, the terminated employee is entitled to receive a severance payment equal to the average monthly salary during the 12-month period immediately preceding to the termination (inclusive of all monetary income such as base salary, bonus, allowances, etc.), for each year of service up to the date of termination. If an employer terminateterminates an labor contract in any circumstance other than those specified under the PRC Labor Contract Law and its implementing rules, including termination without cause, the employer must either reinstate and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating the severance payment, subject to the employee’s own request. In the case that the employee requests for damages, the employer is not required to pay other severance or the remainder of the amount owed under the employment contract unless the employment contract has otherwise provided for. On December 28, 2012 the Labor Contract Law was amended to impose more stringent requirements on labor dispatch which became effective on July 1, 2013. Pursuant to amended Labor Contract Law, (i) it is strongly emphasized that dispatched employees shall be entitled to equal pay for equal work as a fulltime employee of an employer; (ii) labor contracts between employers and employees shall be the basic form of employment adopted by Chinese enterprises and employment by labor dispatching is only a supplementary form and shall apply only to temporary, ancillary or substitute works; and (iii) an employer shall strictly control the number of dispatched employees so that they do not exceed certain percentage of total number of employees and the specific percentage shall be prescribed by the labor administrative department of the State Council.

 

On January 24, 2014 the Ministry of Human Resources and Social Security promulgated Interim Provisions on Labor Dispatching, effective from March 1, 2014 which provides that an employer shall strictly control the number of employees under labor dispatching arrangements and dispatched employees can only be used in temporary, ancillary and replaceable positions. The number of dispatched workers used by an employer shall not exceed 10% of the total number of its employees. An employer with its dispatched employees’ number exceeding 10% of the total number of its employees prior to March 1, 2014 is allowed to reduce the said percentage to the required range within two years from March 1, 2014. However, the labor contract and labor dispatching agreement lawfully concluded prior to the promulgation date of the Decision of the Standing Committee of the National People’s Congress on Revising the “Labor Contract Law of the People’s Republic of China” may continue to be performed until the expiry of the above contract or agreement if expiry date of such contract or agreement is later than the day after two years calculating from March 1, 2014. The employer shall not use any new dispatched worker until it has reduced the percentage of dispatched workers to the required range.

 

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On April 28, 2012, the State Council announced the Special Provisions on Labor Protection of Female Employees, or Female Protection Provisions. As stated in the Female Protection Provisions, a female employee shall be entitled to 98 days of maternity leave, among which 15 days of leave will be available before her giving birth. No employer may lower the wages, dismiss or terminate the employment agreement with a female employee as a consequence of her pregnancy, giving birth or breast-feeding. The Female Protection Provisions also provide rules of the maternity allowance and the relevant medical expenses for female employees who have and have not participated in maternity insurance respectively.

 

Regulations Relating to PRC Value Added Tax

On March 23, 2016, the MOF and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added Tax Instead of Business Tax, or Circular 36, which took effect on May 1, 2016. Pursuant to the Circular 36, all of the companies operating in construction, real estate, finance, modern service or other sectors which were required to pay business tax are required to pay VAT, in lieu of business tax. The VAT rate is 6%, except for rate of 11% for real estate sale, land use right transferring and providing service of transportation, postal sector, basic telecommunications, construction, real estate lease; rate of 17% for providing lease service of tangible property; and rate of zero for specific cross-bond activities.


On April 4, 2018, MOF and SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which, (i) for VAT taxable sales or importation of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively; (ii) for purchase of agricultural products originally subject to deduction rate of 11%, such deduction rate shall be adjusted to 10%; (iii) for purchase of agricultural products for the purpose of production and sales or consigned processing of goods subject to tax rate of 16%, the input VAT will be calculated at a 12% deduction rate; (iv) for exported goods originally subject to tax rate of 17% and export tax refund rate of 17%, the export tax refund rate shall be adjusted to 16%; and (v) for exported goods and cross-border taxable acts originally subject to tax rate of 11% and export tax refund rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede any previously existing provisions in the case of any inconsistency.

Further, On March 20, 2019, the MOF, the SAT and the General Administration of Customs jointly issued the Announcement on Policies for Deepening the VAT Reform, or Announcement 39, to further slash value-added tax rates. According to the Announcement 39, (i) for general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9% respectively; (ii) for the agricultural products purchased by taxpayers to which an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a 10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%. The Announcement 39 came into effect on April 1, 2019 and shall be prevail in case of any conflict with existing provisions.

Regulations on Intellectual Property Rights

 

China has adopted legislation governing intellectual property rights, including trademarks, patents and copyrights.

Trademark. The Trademark Law, adopted in 1982 and revised in 1993, 2001, 2013 and 2013, has2019, with its implementation, have adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another trademark that has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark shall be rejected. Any person applying for the registration of a trademark must not prejudice the existing right of others obtained by priority, nor may any person register in advance a trademark that has already been used by another person and has already gained a “sufficient degree of reputation” through that person’s use. In the case of a trademark infringement, where the actual loss suffered by the right holder as a result of the infringement, the profits gained by the infringer from the infringement and the royalties of the registered trademark concerned are difficult to determine, the people’s court shall render a judgment on awarding damages of up to RMB300RMB5 million depending on the circumstances of the infringing acts.

 

Patent. The Patent Law was adopted in 1984 and amended in 1992, 2000 and 2008. The purpose of the Patent Law is to protect lawful interests of patent holders, encourage invention, foster applications of invention, enhance innovative capabilities and promote the development of science and technology. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds, substances obtained by means of nuclear transformation or a design which has major marking effect on the patterns or colors of graphic print products or a combination of both patterns and colors. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement of patent rights.

 

Copyright. The Copyright Law was adopted in 1990 and amended in 2001 and 2010. The amended Copyright Law extends copyright protection to internet activities, products disseminated over the internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge. An infringer will be subject to various civil liabilities, which include stopping the infringement, eliminating the damages, apologizing to the copyright owners and compensating the losses of copyright owners. The Copyright Law further provides that the infringer must compensate the actual loss suffered by the copyright owner. If the actual loss of the copyright owner is difficult to calculate, the illegal income received by the infringer as a result of the infringement will be deemed as the actual loss or if such illegal income is also difficult to calculate, the court can, in accordance with the particulars of the specific infringement, render a ruling to award compensation in an amount up to RMB500,000.

 

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To further clarify some key internet copyright issues, on December 27, 2012, the PRC Supreme People’s Court promulgated the Regulation on Several Issues Concerning Applicable Laws on Trial of Civil Disputes over the Infringement of Information Network Transmission Right, or the 2013 Regulation. The 2013 Regulation took effect on January 1, 2013, and replaced the Interpretations on Some Issues Concerning Applicable Laws for Trial of Disputes over Internet Copyright that was initially adopted in 2000 and subsequently amended in 2004 and 2006. Under the 2013 Regulation, where an internet information service provider work in cooperation with others to jointly provide works, performances, audio and video products of which the right holders have information network transmission right, such behavior will constitute joint infringement of third parties’ information network transmission right, and the PRC court shall order such internet information service provider to assume join liability for such infringement.

 

 To address the problem of copyright infringement related to content posted or transmitted on the internet, the PRC National Copyright Administration and MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These measures, which became effective on May 30, 2005, apply to acts of automatically providing services such as uploading, storing, linking or searching works, audio or video products, or other contents through the internet based on the instructions of internet users who publish contents on the internet, or the Internet Content Providers, without editing, amending or selecting any stored or transmitted content. When imposing administrative penalties upon the act which infringes upon any users’ right of communication through information networks, the Measures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied.

Where a copyright holder finds that certain internet content infringes upon its copyright and sends a notice to the relevant internet information service operator, the relevant internet information service operator is required to (i) immediately take measures to remove the relevant contents, and (ii) retain all infringement notices for six months and to record the content, display time and IP addresses or the domain names related to the infringement for 60 days. If the content is removed by an internet information service operator according to the notice of a copyright holder, the content provider may deliver a counternotice to both the internet information service operator and the copyright holder, stating that the removed content does not infringe upon the copyright of other parties. After the delivery of such counternotice, the internet information service operator may immediately reinstate the removed contents and shall not bear administrative legal liability for such reinstatement.

 An internet information service operator may be subject to cease-and-desist orders and other administrative penalties such as confiscation of illegal income and fines, if it is clearly aware of a copyright infringement through the internet or, although not aware of such infringement, it fails to take measures to remove relevant content upon receipt of the copyright owner’s notice of infringement and, as a result, damages public interests. Where there is no evidence to indicate that an internet information service operator is clearly aware of the existence of copyright infringement, or the internet information service operator has taken measures to remove relevant contents upon receipt of the copyright owner’s notice, the internet information service provider shall not bear the relevant administrative legal liabilities.

We have adopted measures to mitigate copyright infringement risks. But we could still face copyright infringement claims with respect to copyrighted content being streamed live, recorded or made accessible, or songs performed live, recorded or made accessible on Acorn Digital Services. See “Risk Factors—Risks Related to Our Business and Our Industry—We have in the past been, and in the future may again be, subject to intellectual property rights infringement claims by third parties, which could be time-consuming and costly to defend or litigate, divert our attention and resources, or require us to enter into licensing agreements. These licenses may not be available on commercially reasonable terms, or at all.” 

 

C.Organizational Structure

 

As of April 10, 2020, we conducted our business operations across 8 subsidiaries and consolidated entities incorporated in China and 6 subsidiaries and consolidated entities incorporated in other jurisdictions. The chart below summarizes our corporate legal structure and identifies the subsidiaries and variable interest entities that are material to our business.


(1)

For risks related to our current corporate structure, see Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry.” 

(2)Agreements that provide us with effective control over Shanghai Network, Ltd. and Beijing Acorn Trade Co., Ltd. include equity pledge agreements, irrevocable powers of attorney, a loan agreement, operation and management agreements, exclusive purchase agreements and spouse consent letters. We may modify our contractual arrangements from time to time to facilitate our operations. For previous changes in our contractual arrangements, please see Item 4.C, “Organizational Structure” for further information.
(3)The economic benefits of Shanghai Network and Beijing Acorn Trade Co., Ltd. accrue to Acorn Information Technology (Shanghai) Co., Ltd.
(4)Agreements that provide us with effective control over Beijing HJX Technology Development Co., Ltd. include equity pledge agreement, irrevocable power of attorney, a loan agreement, operation and management agreement, exclusive purchase agreement and spouse consent letters. We may modify our contractual arrangement from time to time to facilitate our operations. Please see Item 4.C, “Organizational Structure” for further information.
(5)The economic benefits of Beijing HJX Technology Development Co., Ltd. accrue to Acorn Trade (Shanghai) Co., Ltd.
(6)

The Wuxi Acorn Enterprise Management Consulting Co., Ltd. is currently under liquidation process. 

(7)The Beijing Acorn Youngleda Oxygen Generating Co., Ltd. is currently under deregistration process.


Our significant subsidiaries include the following entities:

●China DRTV, Inc., a company incorporated with limited liability under the laws of the British Virgin Islands, which is our wholly-owned subsidiary and the holding company of the PRC subsidiaries relating to Acorn’s business conducted in the PRC.
●MK AND T Communications Limited, a Hong Kong limited liability company, which is the direct wholly-owned subsidiary of China DRTV, Inc. and the direct holding company of certain PRC subsidiaries relating to Acorn Digital Services business.
●Shanghai Acorn Advertising Broadcasting Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect subsidiary of China DRTV, Inc. and a wholly-foreign owned enterprise, and is engaged in Acorn Digital Services business.
●Acorn Trade (Shanghai) Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is a direct subsidiary of China DRTV, Inc. and a wholly-foreign owned enterprise, and is engaged in operating the Babaka® business.
●Shanghai Acorn Network Technology Development Co., Ltd. a limited liability company incorporated under the laws of the PRC, which is an VIE, operates the Acorn Fresh business.
●Acorn International Electronic Technology (Shanghai) Co., Ltd. a limited liability company incorporated under the laws of the PRC, which is a direct subsidiary of China DRTV and a wholly-foreign owned enterprise.
●Acorn Information Technology (Shanghai) Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is a subsidiary of China DRTV and a wholly-foreign owned enterprise.

We commenced operations in 1998 through Beijing Acorn, and inAcorn. In 2000, we established and commenced business operations forof two other operating companies, Shanghai Acorn Network Co., Ltd., or Shanghai Network, and Shanghai Acorn Trade and Development Co., Ltd., or Shanghai Trade.

Prior to January 1, 2005, our business was operated through Beijing Acorn, Shanghai Network and Shanghai Trade, including their subsidiaries. Each of these three operating companies, referred to as the “combined entities,” was under common management, was operated on an integrated basis and was beneficially owned by the same shareholders and, with limited exception, in the same shareholding percentages.

To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating China DRTV in the British Virgin Islands on March 4, 2004. In 2004, China DRTV formed four PRC subsidiaries and two consolidated PRC affiliated entities. As part of a restructuring to implement an offshore holding company structure to comply with PRC laws imposing restrictions on foreign ownership in direct sales,“direct sales”, wholesale distributor and advertising businesses, each of the combined entities, including their subsidiaries, transferred to China DRTV’s newly created consolidated subsidiaries and affiliated entities, by means of an asset transfer and liability assumption, substantially all their assets and liabilities at their net book values,except that(a) the assets and liabilities of one of the combined entities’ subsidiaries were transferred through the transfer to China DRTV of all of that subsidiary’s capital stock, and (b) after one of the three pre-restructuring operating companies, Beijing Acorn, transferred certain of its assets to two of China DRTV’s subsidiaries, its shareholders transferred their equity interests in Beijing Acorn to two PRC individuals, with Beijing Acorn becoming an additional China DRTV affiliated entity. Commencing on January 1, 2005 our business was conducted through China DRTV and its subsidiaries and until, our affiliated entities. Other than Beijing Acorn and the other transferred subsidiary, each of the pre-restructuring companies previously engaged in the business was liquidated. We have determined that no change in basis in the assets transferred in connection with the restructuring is appropriate as the transfers constituted a transfer of net assets by entities under common control.

 

In connection with our initial public offering, we incorporated Acorn International, Inc. in the Cayman Islands on December 20, 2005 as our listing vehicle. Acorn International Inc. became our ultimate holding company when it issued shares to the existing shareholders of China DRTV on March 31, 2006 in exchange for all of the shares that these shareholders held in China DRTV.

In September 2007, we entered into a share purchase agreement to acquire MK AND T Communications Limited. The acquisition was completed in November 2008. In October 2007, we formed two Hong Kong subsidiaries wholly-owned by China DRTV, Bright Rainbow Investments Limited and EmoneyE-money Investments Limited. On December 13, 2007, we formed Acorn Trade (Shanghai) Co., Ltd., a PRC subsidiary wholly-owned by China DRTV, through which we conduct our wholesale distribution business. Prior to this, our wholesale distribution business was conducted through our two affiliated entities, Shanghai Network and Beijing Acorn. In April 2008, we transferred 100% of the ownership interest in Shanghai HJX to Bright Rainbow Investments Limited.

In September 2007, we acquired the legal ownership of Shanghai Acorn Advertising Broadcasting Co., Ltd, or Shanghai Advertising, which was previously one of our affiliated entities.

 

Shanghai Network and Beijing Acorn, two of our consolidated affiliated entities, are currently owned by two PRC citizens, Mr. Kuan Song, and Ms. Pan Zong. Shanghai Network was primarily engaged in our TV direct sales“direct sales” business throughout China except for Beijing. Beijing Acorn was primarily engaged in our TV direct sales“direct sales” business in Beijing. We have entered into contractual arrangements with these two affiliated entities pursuant to which our wholly owned subsidiary, Acorn Information, provides technical support and management services to these affiliated entities. In addition, we have entered into agreements with these two affiliated entities and their shareholders, Mr. Kuan Song and Ms. Pan Zong, providing us with the ability to effectively control each of these affiliated entities. Accordingly, we have consolidated historical financial results of these two affiliated entities in our financial statements as variable interest entities pursuant to U.S. GAAP.

 


Beijing HJX Technology, our another consolidated affiliated entity, is also currently owned by Mr. Kuan Song and Ms. Pan Zong. Beijing HJX Technology is currently not engaged in the active conduct of business. We have entered into contractual arrangements with this affiliated entity pursuant to which our wholly owned subsidiary, Acorn Trade (Shanghai) Co., Ltd. provides technical support and management services to this affiliated entity. In addition, we have entered into agreements with this affiliated entity and its shareholders, Mr. Kuan Song and Ms. Pan Zong, providing us with the ability to effectively control this affiliated entity. Accordingly, we have consolidated historical financial results of this affiliated entity in our financial statements as variable interest entities pursuant to U.S. GAAP.

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In 2014, we also established Star Education & Beijing HJX Technology Group Inc.is currently not engaged in the Cayman Islands, Star Education & Technology Limited in the British Virgin Islands and HJX International Limited in Hong Kong, respectively, with an aim to further expand our electronic learning productactive conduct of business.

 

Except as disclosed in Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry— If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties.,” we understand that (1) the ownership structures of our directly owned PRC subsidiaries comply with existing PRC laws and regulations and (2) the ownership structures of our three affiliated entities and our contractual arrangements with these affiliated entities and their shareholders are valid, binding and enforceable, and do not and will not result in a violation of existing PRC laws and regulations.

However, there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations with respect to these matters. Accordingly, we cannot assure you that the PRC regulatory authorities, in particular MIIT, SAIC and MOFCOM, which regulate foreign investment in direct sales and internet businesses, will not in the future take views that are contrary to the above opinions of our PRC legal counsel. If the current agreements that establish the structure for conducting our PRC direct sales and internet businesses were found to be in violation of existing or future PRC laws or regulations, we may be required to restructure our ownership structure and direct sales and internet interactive service operations in China or to carry out other actions required by relevant PRC government authorities to comply with PRC laws and regulations, or we could be subject to severe penalties. See Item 3.D, “Key Information—Risk Factors— Risks Related to the Regulation of Our Business and Industry—If the PRC government takes the view that the agreements that establish the structure for operating our TV and other direct sales business and internet interactive service in China do not comply with PRC governmental restrictions on foreign investment in these areas, we could be subject to severe penalties”.

As part of our reorganization, weWe deregistered U King Communications Equipment (Hong Kong) Limited in May 2011, transferred 100% of the ownership interest in Shanghai Advertising to MK AND T Communications Limited in October 2011 and disposed of our shareholding in Acorn Hong Kong Holdings Limited in December 2011. In addition, we deregistered our wholly- owned subsidiary, Shanghai Acorn Enterprise Management Consulting Co., Ltd. in January 2013. We also deregistered and dissolved Shanghai HJX Electronic Technology Co., Ltd., Star Education & Technology Group Inc. and Star Education & Technology Limited in 2016, and Shanghai Acorn HJX Software Technology Development Co., Ltd. and HJX International Limited in 2017. Zhuhai Sunrana Bio- Tech Co., Ltd has been revoked in 2012 or earlier.

 

We are currently in the process of deregistering Beijing HJZX Software Technology Development Co., Ltd was deregistered in 2019, and Wuxi Acorn Enterprise Management Consulting Co., Ltd. and Beijing Acorn Youngleda Technology Co. Ltd, which is expected to be completed by the end of 2018.,Ltd. are in process of preparing taxation deregistration in Beijing, before the ultimate deregistration at Beijing AIC.being liquidated or deregistered.

 

We have consummatedexecuted a share sale and purchase agreementwith Hong Kong Red Star Macalline Universal Home Furnishings Limited (“Red Star”) on April 27, 2018, in exchange for cash payment of approximately RMB360 million (US$($57 million), subject to a post-closing working capital adjustment.adjustment and have subsequently consummated the transaction contemplated thereunder. After the working capital adjustment, the total purchase price of Red Star was approximately RMB375 million ($59 million). Pursuant to the terms of the share sale and purchase agreement, Red Star acquired 100% of the shares in our wholly-owned Hong Kong subsidiary Bright Rainbow Investments Limited, which owns Shanghai HJX Digital Technology Co., Ltd, which owns various non-core assets, including the land use rights to a plot of land in the Qingpu district of Shanghai with a total area of 76,799 square meters, along with the warehouse on that land plot.

 

On November 8, 2019, our wholly-owned subsidiary, China DRTV, Inc. entered into an equity transfer agreement to sell 100% of the equity interests in its wholly-owned subsidiary, Zhuhai Acorn, to an unrelated third-party for a base purchase price of $1.45 million subject to working capital adjustment. The following diagram illustrates our current corporate structuresale was completed in the fourth quarter of 2019 with a $1.2 million gain recorded and the placereceivables of formation, ownership interestapproximately $1.42 million (after the working capital adjustment and affiliation of each of our subsidiaries and the affiliated entities as of the date of this Form 20-F(1):applicable taxes) were received on May 27, 2020.

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(1)For risks related to our current corporate structure, see Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry”.

(2)Agreements that provide us with effective control over Shanghai Network, Ltd. and Beijing Acorn Trade Co., Ltd. include equity pledge agreements, irrevocable powers of attorney, a loan agreement, operation and management agreements, exclusive purchase agreements and spouse consent letters. We may modify our contractual arrangements from time to time to facilitate our operations. For previous changes in our contractual arrangements, please see Item 4.C, “Organizational Structure” for further information.

(3)The economic benefits of Shanghai Network and Beijing Acorn Trade Co., Ltd. accrue to Acorn Information Technology (Shanghai) Co., Ltd.

(4)The Zhuhai Sunrana Bio-Tech Co., Ltd. is currently under the liquidation process.

(5)Agreements that provide us with effective control over Beijing HJX Technology Development Co., Ltd. include equity pledge agreement, irrevocable power of attorney, a loan agreement, operation and management agreement, exclusive purchase agreement and spouse consent letters. We may modify our contractual arrangement from time to time to facilitate our operations. Please see Item 4.C, “Organizational Structure” for further information.

(6)The economic benefits of Beijing HJX Technology Development Co., Ltd. accrue to Acorn Trade (Shanghai) Co., Ltd.

(7)The Beijing HJZX Software Technology Development Co., Ltd. is currently under deregistration process.

Material Operating Entities

 

MOFCOM, or its local counterpart, reviews the application and issues the requisite approval for business operations by foreign entities. Our direct sales“direct sales” business iswas considered commercial trading and, until 2004, foreign investment in commercial trading was highly restricted by PRC regulations. By December 2004, MOFCOM had significantly reduced these restrictions, but MOFCOM’s approval was still needed at that time.Therefore, our direct salespast “direct sales” business is currentlywas conducted by our consolidated affiliated entities, Shanghai Network and Beijing Acorn, which holdheld the necessary licenses to conduct our direct salesthis business, through contractual arrangements between Acorn Information, our wholly owned subsidiary in China, and these two consolidated affiliated entities. Our wholesale business is currently conducted by Acorn Trade (Shanghai) Co., Ltd.

 

Except as disclosed in Item 3.D, “Key Information—Risk Factors—Risks Related to the Regulation of Our Business and Industry— If the PRC government takes the view that we did not obtain the necessary approval for our acquisition of Shanghai Advertising under Guideline Catalog of Foreign Investment Industries (2004 Revision), we could be subject to penalties,” we understand that (1) the ownership structures of our directly owned PRC subsidiaries comply with existing PRC laws and regulations and (2) the ownership structures of our three affiliated entities and our contractual arrangements with these affiliated entities and their shareholders are valid, binding and enforceable, and do not and will not result in a violation of existing PRC laws and regulations.

However, there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations with respect to these matters. Accordingly, we cannot assure you that the PRC regulatory authorities, in particular MIIT, SAIC and MOFCOM, which regulate foreign investment in “direct sales” and internet businesses, will not in the future take views that are contrary to the above opinions of our PRC legal counsel. If the current agreements that establish the structure for conducting our PRC “direct sales” and internet businesses were found to be in violation of existing or future PRC laws or regulations, we may be required to restructure our ownership structure and “direct sales” and internet interactive service operations in China or to carry out other actions required by relevant PRC government authorities to comply with PRC laws and regulations, or we could be subject to severe penalties.


Contractual Arrangements with the Consolidated Affiliated Entities and Their Shareholders

 

Our relationships with previous and currentour consolidated affiliated entities and their shareholders are governed by a series of contractual arrangements. Under PRC law, each of the consolidated affiliated entities is an independent legal person and none of them is exposed to liabilities incurred by theany other party.consolidated affiliated entity. Other than pursuant to the contractual arrangements between our wholly owned subsidiary, Acorn Information Technology (Shanghai) Co., Ltd., and Beijing HJX Technology, between Acorn Trade (Shanghai) Co., Ltd., and affiliated entities, theseShanghai Acorn Network Technology Development Co., Ltd., and between Acorn Trade (Shanghai) Co., Ltd., and Beijing Acorn Trade Co., Ltd., respectively, our consolidated affiliated entities do not transfer any other funds generated from their operations to us. These contractual arrangements are as set forth below. Both Acorn Information Technology (Shanghai) Co., Ltd. and Acorn Trade (Shanghai) Co., Ltd. are our wholly owned subsidiaries.

 

Each of our contractual arrangements with theseour consolidated affiliated entities and their shareholders can only be amended with the approval of our audit committee or another independent body of our board of directors. See Item 7.B, “Major Shareholders and Related Party Transactions—Related Party Transactions” for further information on our contractual arrangements with these parties.

 

Agreements that Provide Effective Control and an Option to Acquire Shanghai Network and Beijing Acorn

These agreements provide us with effective control over these two affiliated entitiesShanghai Network and Beijing Acorn, and their shareholders, Mr. Song and Ms. Zong. They include irrevocable powers of attorney, loan agreement, equity pledge agreements, operation and management agreements and spouse consent letters. Under the exclusive purchase agreements, we also have exclusive options to purchase the equity interests of the affiliated entities.

 

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•●Irrevocable PowersPower of Attorney. Under irrevocable powers of attorney, each of the two shareholders of Shanghai Network and Beijing Acorn, Kuan Song and Pan Zong, has granted to designeesa designee of Acorn Information, Geoffrey Weiji Gao,Jacob A. Fisch, our Chief FinancialExecutive Officer and Vice President, the power to exercise all voting rights of such shareholder in the shareholders’ meetings, including but not limited to the power to determine the sale or transfer of all or part of such shareholder’s equity interest in, and appoint the directors of, Shanghai Network and Beijing Acorn. These irrevocable powers of attorney have terms of ten years and will automatically renew for another ten years unless terminated by the above-mentioned designees of Acorn Information in writing three months prior to their expiry.

 •●Loan Agreement.Under the loan agreement among Acorn Information and the shareholders of these two affiliated entities, Kuan Song and Pan Zong, Acorn Information made a loan to Kuan Song and Pan Zong in an aggregate amount of RMB118.0 million. The loan is to be used primarily for capital investments by the shareholders in Shanghai Network and Beijing Acorn. The loan can only be repaid by the shareholders’ transfer of their interests in Shanghai Network and Beijing Acorn to Acorn Information or its designee when permissible under PRC law. The initial term of the loan is ten years and will automatically be renewed for another ten years absent a written termination notice from Acorn Information.

 •●Operation and Management Agreements.Under the operation and management agreements among Acorn Information, the two shareholders and each of the affiliated entities, the parties have agreed that Acorn Information will provide guidance and instructions on daily operations and financial affairs of each of these two affiliated entities. The agreements also state that each of the directors, general managers and other senior management personnel of these affiliated entities will be appointed as nominated by Acorn Information. The designees of Acorn Information or its affiliates have the authority to exercise the voting rights on behalf of the two shareholders at the shareholder meetings of the two affiliated entities. Acorn Information has agreed to provide security for contracts, agreements or other transactions entered into by these two affiliated entities with third parties, provided that these affiliated entities shall provide counter-security for Acorn Information using their accounts receivable or assets. In addition, each of these affiliated entities agreed not to enter into any transaction that could materially affect its respective assets, obligations, rights or operations without prior written consent from Acorn Information. The terms of these agreements are ten years and will automatically renew for another ten years absent a written termination notice by Acorn Information.

 •●Equity Pledge Agreements.Under the equity pledge agreements among Acorn Information and the two shareholders of the affiliated entities, each of Kuan Song and Pan Zong has pledged all of his or her equity interests in Shanghai Network and Beijing Acorn to Acorn Information to guarantee the performance of the two affiliated entities under the operation and management agreements and the exclusive technical services agreements as described below, as well as their personal obligations under the loan agreements. Each of the shareholders also agrees not to transfer, assign or, pledge his or her interests in any of these affiliated entities without the prior written consent of Acorn Information. If any of these affiliated entities or either of the two shareholders breaches its respective contractual obligations thereunder, Acorn Information, as pledgee, will be entitled to certain rights, including but not limited to the right to sell the pledged equity interests. The terms of these agreements are ten years and will automatically renew for another ten years absent written termination notice by Acorn Information three months prior to their expiry.

 


 •●Exclusive Purchase Agreements. Pursuant to the exclusive purchase agreements among Acorn Information and each of Shanghai Network and Beijing Acorn and their shareholders, Kuan Song and Pan Zong, each of the two shareholders has irrevocably granted Acorn Information or its designee an exclusive option to purchase at any time if and when permitted under PRC law, all or any portion of their equity interests in Shanghai Network and Beijing Acorn for a price that is the minimum amount permitted by PRC law. The terms of these agreements are ten years and will automatically renew for another ten years absent a written termination notice by Acorn Information three months prior to their expiry.

 •●Spouse Consent Letter. Pursuant to the spouse consent letters, the spouse of Kuan Song, the shareholder of these two affiliated entities acknowledges that she is aware of, and consents to, the execution by her spouse of irrevocable powers of attorney, equity pledge agreements and the exclusive purchase agreements described above. With respect to establishment, grant and performance of the above irrevocable powers of attorney, equity pledge and the exclusive purchase, each spouse further agrees that, whether at present or in the future, she will not take any actions or raise any claims or objection.

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Technical Services Agreements that Transfer Economic Benefits from Shanghai Network and Beijing Acorn to Us

 

Acorn Information has entered into a technical service agreement with each of the affiliated entities to transfer economic interests in these entities to us. Pursuant to the technical service agreements, Acorn Information is the exclusive provider of technical support and consulting services to the two affiliated entities in exchange for service fees. Under these agreements, each of the affiliated entities may not, among other things, dispose of its assets, dissolve, liquidate, merge with any third parties, provide security to any third parties, distribute dividends, engage in transactions with any of its affiliates, make external investment or conduct any business outside of the ordinary course of their respective businesses without the prior consent of Acorn Information. The term of these agreements is ten years and will automatically renew for another ten years unless terminated by Acorn Information.

 

Agreements that Provide Effective Control and an Option to Acquire Beijing HJX Technology

These agreements provide us with effective control over this affiliated entity and its shareholders, Mr. Kuan Song and Ms. Pan Zong. They include irrevocable powers of attorney, a loan agreement, equity pledge agreements, operation and management agreements and spouse consent letters. Under the exclusive purchase agreements, we also have exclusive options to purchase the equity interests of the affiliated entity.

 

•●Irrevocable Power of Attorney.Under irrevocable power of attorney, each of the two shareholders of Beijing HJX Technology, Mr. Kuan Song and Ms. Pan Zong, has granted to designeesa designee of Acorn Trade (Shanghai) Co., Ltd, Geoffrey Weiji Gao,Jacob A. Fisch, our Chief FinancialExecutive Officer and Vice President, the power to exercise all voting rights of such shareholder in the shareholders’ meetings, including but not limited to the power to determine the sale or transfer of all or part of such shareholder’s equity interest in, and appoint the directors of, Beijing HJX Technology. The irrevocable power of attorney has terms of ten years and will automatically renew for another ten years unless terminated by the above-mentioned designees of Acorn Trade (Shanghai) Co., Ltd in writing three months prior to their expiry.

 •●Loan Agreement.Under the loan agreement among Acorn Trade (Shanghai) Co., Ltd and the shareholders of this affiliated entity, Mr. Kuan Song and Ms. Pan Zong, Acorn Trade (Shanghai) Co., Ltd made a loan to Mr. Kuan Song and Ms. Pan Zong in an aggregate amount of RMB40.0RMB10.0 million. The loan is to be used primarily for capital investments by the shareholders in Beijing HJX Technology. The loan can only be repaid by the shareholders’ transfer of their interests in Beijing HJX Technology to Acorn Trade (Shanghai) Co., Ltd or its designee when permissible under PRC law. The initial term of the loan is ten years and will automatically be renewed for another ten years absent a written termination notice from Acorn Trade (Shanghai) Co., Ltd.

 •●Operation and Management Agreement.Under the operation and management agreement among Acorn Trade (Shanghai) Co., Ltd, the two shareholders and Beijing HJX Technology, the parties have agreed that Acorn Trade (Shanghai) Co., Ltd will provide guidance and instructions on daily operations and financial affairs of each of the affiliated entity. The agreements also state that each of the directors, general managers and other senior management personnel of the affiliated entity will be appointed as nominated by Acorn Trade (Shanghai) Co., Ltd. The designees of Acorn Trade (Shanghai) Co., Ltd or its affiliate has the authority to exercise the voting rights on behalf of the two shareholders at the shareholder meetings of the affiliated entity. Acorn Trade (Shanghai) Co., Ltd has agreed to provide security for contracts, agreements or other transactions entered into by the affiliated entity with third parties, provided that the affiliated entity shall provide counter-security for Acorn Trade (Shanghai) Co., Ltd using their accounts receivable or assets. In addition, each of the affiliated entity agreed not to enter into any transaction that could materially affect its respective assets, obligations, rights or operations without prior written consent from Acorn Trade (Shanghai) Co., Ltd. The term of the agreement is ten years and will automatically renew for another ten years absent a written termination notice by Acorn Trade (Shanghai) Co., Ltd.

 


 •●Equity Pledge Agreement.Under the equity pledge agreement among Acorn Trade (Shanghai) Co., Ltd and the two shareholders of the affiliated entity, each of Mr. Kuan Song and Ms. Pan Zong has pledged all of his equity interests in Beijing HJX Technology to Acorn Trade (Shanghai) Co., Ltd to guarantee the performance of the affiliated entity under the operation and management agreement and the exclusive technical services agreement as described below, as well as their personal obligations under the loan agreement. Each of the shareholders also agrees not to transfer, assign or, pledge his interests in any of the affiliated entity without the prior written consent of Acorn Trade (Shanghai) Co., Ltd. If the affiliated entity or either of the two shareholders breaches its respective contractual obligations thereunder, Acorn Trade (Shanghai) Co., Ltd, as pledgee, will be entitled to certain rights, including but not limited to the right to sell the pledged equity interests. The term of the agreement is ten years and will automatically renew for another ten years absent written termination notice by Acorn Trade (Shanghai) Co., Ltd three months prior to its expiry.

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•●Exclusive Purchase Agreement. Pursuant to the exclusive purchase agreement among Acorn Trade (Shanghai) Co., Ltd and Beijing HJX Technology and its shareholders, Mr. Kuan Song and Ms. Pan Zong, each of the two shareholders has irrevocably granted Acorn Trade (Shanghai) Co., Ltd or its designee an exclusive option to purchase at any time if and when permitted under PRC law, all or any portion of their equity interests in Beijing HJX Technology for a price that is the minimum amount permitted by PRC law. The term of the agreement is ten years and will automatically renew for another ten years absent a written termination notice by Acorn Trade (Shanghai) Co., Ltd three months prior to its expiry.

 •●Spouse Consent Letter. Pursuant to the spouse consent letter, the spouse of the shareholder, of the affiliated entity, Mr. Kuan Song, acknowledges that she is aware of, and consents to, the execution by her spouse of irrevocable power of attorney, equity pledge agreement and the exclusive purchase agreement described above. With respect to establishment, grant and performance of the above irrevocable power of attorney, equity pledge and the exclusive purchase, each spouse further agrees that, whether at present or in the future, she will not take any actions or raise any claims or objection.

Technical Services Agreements that Transfer Economic Benefits from Beijing HJX Technology to Us

 

Acorn Trade (Shanghai) Co., Ltd. has entered into a technical service agreement with the affiliated entity to transfer economic interests in these entities to us. Pursuant to the technical service agreements, Acorn Trade (Shanghai) Co., Ltd. is the exclusive provider of technical support and consulting services to the affiliated entity in exchange for service fees. Under this agreement, the affiliated entity may not, among other things, dispose of its assets, dissolve, liquidate, merge with any third parties, provide security to any third parties, distribute dividends, engage in transactions with any of its affiliates, make external investment or conduct any business outside of the ordinary course of their respective businesses without the prior consent of Acorn Trade (Shanghai) Co., Ltd.. The term of this agreement is ten years and will automatically renew for another ten years unless terminated by Acorn Trade (Shanghai) Co., Ltd.

 

D.Property, Plant and Equipment

 

We are headquartered in Shanghai, and currentlywhere we lease our principal office with an aggregate floor area of approximately 1159 square meters.

 We also own office space totaling 1,927 square meters. In 2015 and 2016, we entered into certain property transfer agreements with independent third parties, pursuant to which we sold approximately 1,927 square meters of office spacewarehousing facilities in Shanghai approximately 1,451 square meterswith an aggregate floor space of our call center property in Shanghai and approximately 629 square meters of other properties in Beijing for a total consideration of approximately RMB94.4 million, or $14.5 million. We also reduced our four central warehousing hubs to only one hub in Shanghai, which covers approximately 2,000 square meters. Starting fromSince January 2016, the warehousing facilities located in Shanghai warehouse hub started to use the Zhai-ji-song as its outsourced logistic service provider which provides,to provide, among others, warehousing and delivery service.

 

Our leased manufacturing facilities in Zhuhai occupies an aggregate of approximately 2,000 square meters, which are used for the production of our Youngleda oxygen generating device product line. As part of our cost control measures, we ceased the operations of our Beijing, Shanghai and Shenzhen facilities in 2015.

During the first quarter of 2009, we obtained a fifty-year land use right of a piece of land in Qingpu district of Shanghai for aggregate consideration of approximately RMB51.2 million (approximately $7.5 million). In 2012, we completed the construction of a warehouse and a factory on this land. To better utilize our Qingpu warehouse and to generate additional revenues, starting from January 2014, we leased approximately 17,721 square meters of warehouse space to Kerry Logistics for a term of two years with an annual rent of RMB7.0 million. The lease of the Qingpu warehouse runs through the end of 2016 and extended another year to January 2017, generating annual rents totaling of RMB20.9 million. Starting from February 2017, we leased the spare warehouse to AnNen Logistics, and generating rents totaling of RMB 11.4 million in 2017.

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We have consummated a share sale and purchase agreement with Red Star on April 27, 2018, in exchange for cash payment of approximately RMB360 million (US$57 million), subject to a post-closing working capital adjustment. Pursuant to the terms of the share sale and purchase agreement, Red Star acquired 100% of the shares in our wholly-owned Hong Kong subsidiary Bright Rainbow Investments Limited, which owns Shanghai HJX Digital Technology Co., Ltd, which owns various non-core assets, including the land use rights to a plot of land in the Qingpu district of Shanghai with a total area of 76,799 square meters, along with the warehouse on that land plot.

ITEM 4A.

UNRESOLVED STAFF COMMENTS

 

Not applicable.

 


ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. For more information regarding forward-looking statements, see “Forward-Looking Statements.” In evaluating our business, you should carefully consider the information provided under Item 3.D, “Key Information—Risk Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

 

As described more fully below under “Liquidity and Capital Resources,” we believe that, based on our current revenue and cost estimates for our on-going operations and our planned cost savings efforts and other planned actions to generate cash as further described in “Item 5 — Liquidity and Capital Resources,” our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the business in the immediate near future, including for the next 12 months.

 

A.Operating Results

 

Overview

 

We areAcorn International is a leading marketing and branding company in China, withleveraging a proven track record of developing, promotingtwenty-year direct marketing history to monetize brand IP, content creation and selling a diverse portfolio of our proprietary-branded products, as well as well-establisheddistribution, and promising new products from third parties. Our business generates revenue principallyproduct sales, through digital media in China. Previously the leading TV infomercial company in China, we have refocused our direct sales platforms, particularly e-commercemarketing know-how on digital media in China. Acorn today has two divisions to support its growth: 1) Proprietary Brand Division, and call center, and our distribution network.2) Acorn Digital Services Division.

 

Our direct salesIn the Proprietary Brand Division, Acorn sells its own products primarily through e-commerce channels in China. In the Acorn Digital Services Division, Acorn helps third party brands in the Chinese digital and e-commerce market,

What we call our “direct sales” business platform involvesplatforms involve marketing and selling products directly to consumers in China through our outbound marketing platform (which until early 2015 included TV direct sales, or infomercials) and our Internet/e-commerce sales platform. Our outbound marketing platform includes our call center operations to directly market consumer products to individual customers in China, the majority of whom were previous TV direct sales purchasers who placed orders with us or made calls to our call center from 1998 through early 2015. We also conduct our Internet/e-commerce sales business both throughplatform includes our official website and onWeChat store as well as the platforms of China’s leading e-commerce companies. We expect our Internet/e-commerce sales to continue to have an increasingin importance to our business in the future.

 

ThroughIn 2018, we launched our distribution network, we distributeAcorn Digital Services Division, formerly known as Acorn Entertainment and Acorn Streaming Division. In 2019, Acorn consolidated under Acorn Digital Services the Youngleda oxygen generating devices.following business units: Acorn Entertainment and Acorn Streaming, which are Acorn’s social media management business and digital content business, respectively, as well as A-KOL (standing for “Acorn Key Opinion Leader”), which facilitates the development of local China influencers with the objective to optimize their ability to convert Acorn’s content into product sales. Our distribution network covers all provincessales business primarily consists of e-commerce distribution. Our e-commerce distribution business includes distribution through major e-commerce platforms that act as distributors, and primarily JD.com. Sales of Acorn Fresh, an e-commerce business within Acorn that sells high-quality frozen seafood directly to Chinese consumers which was also launched in 2018, have been increasing recently, driven by, among other things, live streaming content supported by our Acorn Digital Division. Acorn expects this focus on new media in China, through 24 distributorsalong with further expansion on additional e-commerce B2C platforms, to continue to drive e-commerce sales over the longer-term. In the near and allows usmedium term, the COVID-19 crisis could have a material adverse effect on our business. We continue to reach over 1,000 retail outlets across China.monitor the situation and have taken and will continue to take measures to cut costs and conserve our cash reserves.

 

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Our longer term goal is to become one of the leading marketing and branding companies for developing, promoting and selling products in China and to capitalize on our integrated multi-channel platform with an aim to become partners of choice for both well-established and promising new businesses to market and distribute their products in China. To date, we have developed several of our own branded products, includingsuch as Babaka® posture-correction products, along with our Youngleda oxygen generating devices and Babaka posture-correctionmost recent addition, Acorn Fresh premium food products, and have entered into or are in the process of negotiating various arrangements with select third parties to better identify and offer potentially promising new products. Some of these potential counterparties are affiliated with our chairman, Robert Roche. see Item 7.B, “Related Party Transactions.”

 

In 2017, we reached an agreement to sell a majority stake in our HJX Business to a third-party investor and operator, allowing Acornus to focus primarily on its already profitable businesses and brands, as well as on achieving profitable growth of new businesses within our Group. We retained a 37.5% stake in a joint venture established with this third party. As a result of this transaction, which we sometimes refer to as the “HJX Transaction”, we are required by applicable accounting rules to treat the HJX Business as discontinued operations in 2017 and prior years. At times, trends in our results of operations are more difficult to discern as a result of, or otherwise affected by, this accounting treatment, which we will highlight in this discussion from time to time.

 

In the third quarter of 2019, we completed closing of our call center in Wuxi, China. As a result, we are required by applicable accounting rules to treat the historical operations of the call center operations as discontinued operations for all periods presented. At times trends in our results of operations are more difficult to discern as a result of, or otherwise affected by, this accounting treatment, which we will highlight in this discussion from time to time.


Over the last three years, our total net revenues from continuing operations declinedincreased from $23.0$17.1 million in 20152017 to $16.5$25.1 million in 20162018, and further increased to $20.3$37.5 million in 20172019, with operating losses from continuing operations totaling $29.1that totaled $3.8 million in 2015, $2.42017, and operating profit from continuing operations that totaled $2.7 million and $5.5 million in 20162018 and $4.22019, respectively. We realized an operating profit from continuing operations of $2.7 million in 2017. Among2018, primarily due to increases in net revenue from an increase in e-commerce sales of Babaka® branded products as well as other factors,products combined with lower general and administrative expenses and an increase in other operating income from loan interest income and net revenue from Acorn Digital Division, which were partially offset by an increase in selling and marketing expenses to support e-commerce. We realized an operating profit from continuing operations of $5.5 million in 2019, primarily due to the general declinecontinued strong growth in our totalBabaka® posture correction products sales and Acorn Fresh sales, net revenuesof more investment into media expense to drive sales and our operating losses during the period reflect primarily the adverse impact of the following events:increasing logistics expense associated with rising Acorn Fresh sales, as well as increased staff costs and office rent.

 

·increasingly restrictive government regulations on TV infomercials which drove a substantial reduction in our purchase of TV advertising time in 2014 and the termination of our TV direct sales operations in the first quarter of 2015. These actions, in turn, resulted in significantly lower direct sales and lower distribution sales (distribution sales often benefit from TV advertising exposure);

·continuous internal restructuring, transition, and efforts to reduce our costs at the expense of revenue, and cutting back on distributor incentives; and

·a legal dispute between two groups of our shareholders relating to the management and direction of our Company and the related diversion of our management’s attention from our business and litigation-related prohibitions on our pursuing transactions outside our ordinary course of business. This dispute resulted in a court case that was adjudicated and resulted in the following: by May 2015, (i) a Cayman Islands court issued a final order in connection with the dispute, (ii) Robert Roche, our co-founder, Chairman and controlling shareholder, returnedOur net income increased from $12.4 million in 2017 to $31.1 million in 2018 as our CEO and chairman; (iii) we held an extraordinary general meeting (EGM) of our shareholders at which a significant change in the composition of our board of directors was approved by our shareholders and effected and (iv) a business operations and sales team headed by our former co-founder Mr. Don Dongjie Yang has left us. We estimate that the total direct costs associated with the legal proceedings related to the shareholder dispute were approximately $0.4 million for 2015. Although the aforesaid shareholder dispute was generally resolved in May 2015, on December 1, 2016, we filed a related action in the Cayman Islands Court against Mr. Andrew Yan, Gordon Xiaogang Wang, and Jing Wang for damages resulting from breach of fiduciary duties and related misconduct and mismanagement, and incurred  further expenses of $333,365 in relation to this action prior to its settlement on July 28, 2017.

As a result of reducing our operating losses and the disposal of non-core assets, our net income increased from net losses totaling $40.2but decreased to $9.8 million in 2015 to net income of $3.4 million in 2016, and further increased to net income of $12.5 million in 2017. These2019. The improving results in 2018 as compared to 2017 reflect somein part success in our management’s implementation of its priorities since May 2015: restructuring our business in light of the evolution of our business model (including the exit from TV direct sales“direct sales” and our increased focus on the e-commerce channel) and the competitive landscape in China, with a view to increasing existing, and identifying new revenue streams;streams such as from live streaming and pre-recorded video content creation and distribution and from bringing, through the creation of digital social content, leading U.S. brands to China, representing their in-country digital presence; reducing our operating expenses and cash outflow; and liquidating non-core assets and investments to generate cash. The lower net income in 2019 as compared to 2018 is primarily because of a larger one-time revenue gain from the sale of Bright Rainbow in 2018 versus the smaller one-time gain from the sale of the Company’s prior office and Zhuhai Acorn in 2019.

 

Our ongoing restructuring and cost saving activities include:

 

·●significant headcount reductions—we have reduced our total headcount from 305129 at December 31, 20152017 to 254121 at December 31, 2016, and to 128 at December 31, 20172019 (with this headcount reduction including a number of senior level individuals and a large number of employees who worked for the HJX Business)Business, call center operations and Zhuhai Acorn; but we also made new hires for Acorn Digital and to support the rising sales of Babaka® and Acorn Fresh sales);

 

·●rationalizing our distribution channel, with the number of outlets in our offline distribution network reduced from approximately 2,600 at December 31, 2016 to approximately 1,000 at December 31, 2017;

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·downsizing and consolidating our call center operations, particularly given our exit from TV direct sales,2017 to a single facility located in Wuxi, China;0 at December 31, 2019 as we sold the business related to Youngleda oxygen-generating products;

 

·●downsizing and eventually closing our call center operations; and

●reducing the number of our central warehousing hubs from four to a single facility in Shanghai; andShanghai.

·leasing out spare warehouse space to a third party.

In 2015, 2016 and 2017, non-recurring expenses, i.e. restructuring and severance costs, included in our cost of sales and general and administrative expenses, totaled $14.9 million, $1.5 million and nil, respectively.

 

As part of our continued efforts to generate additional cash flow and liquidate non-core assets:

 

 ·●On November 8, 2019, our wholly-owned subsidiary, China DRTV, Inc. entered into an equity transfer agreement to sell 100% of the equity interests in its wholly-owned subsidiary, Zhuhai Acorn, to an unrelated third-party for a base purchase price of $1.45 million subject to working capital adjustment. The sale was completed in the fourth quarter of 2019 with a $1.2 million gain recorded and the receivables of approximately $1.42 million (after the working capital adjustment and applicable taxes) were received on May 27, 2020.
●Beginning in January 2016, we started to sell shares of E-Money Holding Co., Ltd., or E-Money (formerly known as Shanghai Yimeng sharesSoftware Technology Co., Ltd.), or E-Money Shares, on China National Equities Exchange and Quotations, or the NEEQ.  In 2016, we sold approximately 8.0 million shares of Yimeng, representing a decrease in ownership in Yimeng from 12.9% to 8.5% and generating total sale proceeds of RMB126.0 million, or $18.9 million. In 2017, we sold approximately 4.6 million shares,E-Money Shares, representing a further decrease in ownership in YimengE-Money from 8.5% to 7.4% and generating total sale proceeds of RMB64.3 million, or $9.3 million. We mayIn 2018, we sold 1,000 E-Money Shares, representing a negligible further decrease in ownership in E-Money and generating immaterial total sale proceeds. In 2019, we didn’t sell additionalany E-Money Shares. E-money announced on December 18, 2019 that it would repurchase between 5 million and 10 million of its shares in the public market at a price of no more than RMB 4.5 per share for a 6-month period commencing from December 2, 2019 (i.e. the date E-Money’s board of directors approved the aforesaid repurchase plan). From January 1, 2020 through the date of this report, Acorn has sold 12.5 million E-Money Shares under this repurchase plan, along with sales to individual buyers in the market, and received proceeds of $ 7.5 million. As at the date of this report, Acorn holds approximately 20.2 million shares, or 4.6% of total shares of Yimeng as our management deems appropriate; andE-Money. 

 ·
●We have consummatedexecuted a share sale and purchase agreement with Red Star on April 27, 2018, in exchange for cash payment of approximately RMB360 million (US$($57 million), subject to a post-closing working capital adjustment.adjustment and have subsequently consummated the transaction contemplated thereunder. After the working capital adjustment, the total purchase price of Red Star was approximately RMB375 million ($59 million). Pursuant to the terms of the share sale and purchase agreement, Red Star acquired 100% of the shares in our wholly-owned Hong Kong subsidiary Bright Rainbow Investments Limited, which owns Shanghai HJX Digital Technology Co., Ltd, which owns various non-core assets, including the land use rights to a plot of land in the Qingpu district of Shanghai with a total area of 76,799 square meters, along with the warehouse on that land plot.
●On December 10, 2018, we executed an agreement to sell Acorn’s former principal office in Shanghai to a third party for RMB46 million. The ownership transfer was completed on March 28, 2019.

 


In 2018,2020, we are seekingseek to continue to increase revenue by growing sales of our proprietary-branded products as well as third-party branded products through “direct sales” channels primarily including internet sales, and e-commerce our other directdistribution sales channels, and ourgenerating additional revenue from live streaming and pre-recorded video content creation and distribution network.and from bringing, through the creation of digital social content, leading U.S. brands to China, representing their in-country digital presence. Management will remain focused on maintaining healthy margins, managing expenses and generating additional cash flow.  Our medium-term goal is

More specifically, in the year ahead, Acorn seeks to achieve operating profitabilitybuild on its achievements in order2019 by focusing on growing e-commerce sales, as well as to position the business for long term sustainable success.drive further revenue from Acorn Digital Division.

 

Factors Affecting Our Results of Operations

 

Company-specific factorsFactors that may affect our future financial condition and results of operations include, among other things, the following:

 

●the impact of regulations on our business:

Our results of operations are affected by PRC regulations and industry policies related to our business operations, licenses and permits and corporate structure. For example, the product quality and consumer protection laws require us to ensure the quality of the goods we sell and give customers the right to return goods within seven days of receipt with no questions asked; regulations on foreign ownership and on transfer of funds into and out of China affect our business:

corporate structure and financing; and regulations on business licenses affect our legal and compliance functions. 

 

●General risks associated with retail and e-commerce industry in China:

We operate

Our results of operations and financial condition are affected by the general factors driving China’s retail industry, including levels of per capita disposable income and consumer spending in a highly regulated market with regulation potentially subject to significantChina. In addition, they are also affected by factors driving online retail in China, such as the growing number of online shoppers, the adoption of online sales strategies by manufacturers and frequent change, either of which could force us to change our business model significantly. For example, increasing regulation limiting the length and frequency of TV infomercials led to a significant reduction inservice providers, the availability of TV airtime for infomercials promotingimproved delivery services and the increasing variety of payment options. Our results of operations are also affected by general economic conditions in China. In particular, we have experienced and expect to continue to experience upward pressure on our products. As a result, in 2014 we substantially decreased our purchases of air time for our TV infomercials and in the first quarter of 2015 we ceased our TV direct sales operations. One of the consequences of reducing and then terminating our TV airtime purchases, is that without direct TV exposure, it is more difficult for us to build or maintain our brand and expand our customer base, and harder to maintain the average margins and selling prices for some of our products due to a drop in exposure for our products resulting from a shift to other media channels. To help offset related revenue decreases, we are continuing to devote more resources to increasing our e-commerce sales of Babaka posture-correction products and Youngleda oxygen generating devices to help drive sales, build our brand and attract new customers. We also sell Youngleda oxygen generating devices via our existing distribution network.operating expenses.

 

the mix of product lines selected by us for marketing through our various sales platforms:

  78●General risks associated with events that can significantly disrupt our business operations:

Our business could be materially and adversely affected by the outbreak of epidemic disease, natural disasters or other events that can significantly disrupt our business operations. For example,the COVID-19 pandemic has caused significant downward pressure for the global economy. The pandemic led to the temporary closure of our offices, and our revenue and profitability could be materially reduced to the extent that such event harms the economy in China, and affects our consumers, merchants or other participants of our business.

 ●the mix of product lines selected by us for marketing through our various sales platforms:

 

Although we maintain and offer a diverse product portfolio, we generally focus on marketing and selling a limited number of featured product lines at any one time through our direct sales“direct sales” platforms and our distribution network.e-commerce. Consequently, we have been, and expect to continue to be, dependent on a limited number of featured product lines to generate a large percentage of our gross revenues. For example, sales of our BabakaBabaka® products, our top selling product line in 2017,2019, generated approximately $15.7$33.9 million in revenue, representing approximately 76.3%89.8% of our total gross revenues in 2017.2019, which is up from $23.5 million in revenue representing 92.5% of our gross revenues in 2018. Currently, our featured product lines mainly include health products collectible products, and mobile phone products. We currently expect to particularly feature our new models of Babaka products on our sales platforms in 2018.premium imported seafood.

 

the mix of our direct sales and distribution sales:
●the mix of our “direct sales” and distribution sales:

 

We sell our products through (i) our direct sales“direct sales” platforms, which consist primarily of our outbound marketing platformstore website and Internet sales and, before the first quarter of 2015, TV direct sales,stores on third-party e-commerce platforms, and (ii) our distribution network. With our move away from TV direct sales channels which consist primarily of third-party e-commerce platforms. In the past, the mix of our total net revenues had shifted proportionately to more distribution sales over the past few years, but sales. However,with our increasing recent focus on e-commerce sales, particularly of our BabakaBabaka® and seafood products, our direct sales platforms againthrough E-commerce sales channels represented an increasinga significant percentage of our total net revenues in 20162017, 2018 and 2017.2019. In 2015, 20162017, 2018 and 2017,2019, our direct sales“direct sales” accounted for 78.4%93.0%, 81.1%80.9% and 93.4% 84.5%, respectively, of our total net revenues compared to 21.6%7.0%, 18.9%19.1% and 6.6% 15.5%, respectively, for distribution sales. The overall impact of having discontinued our TV direct sales platform on our future operating results depends on, among other things, our success in promoting our products through our other existing platforms and distribution networks, particularly the e-commerce, and our ability to establish new direct sales platforms or distribution networks.

 

new products introduced by us and our ability to identify new products:
●new products introduced by us and our ability to identify new products:

 

Our ability to maintain or grow our revenue depends on our ability to successfully identify, develop, introduce and distribute in a timely and cost-effective manner new and upgraded product offerings. We employ a systematic identification and development process. After a potential featured product has been identified and tested, we evaluate a number of key benchmarks, particularly estimated profitability relative to our media expenses, in determining whether to conduct full-scale sales and marketing. We also seek to diversify our product offerings by adding products that offer recurring revenue opportunities.

the amount As an example, sales of advertising expensesour Acorn Fresh product category, which sells premium imported food items to Chinese consumers, have been steadily increasing since its introduction in mid-2018. Acorn Fresh currently has approximately 100,000 retail customers. Total sales from Acorn Fresh reached RMB 20 million for 2019, 6.5 times more than that of 2018. Acorn Fresh’s business model is oriented around providing premium products and time incurredsuperior customer experience in order to drive customer loyalty and repeat purchases, which offers higher margin opportunities and, we believe, significant growth prospects. Acorn Fresh’s flagship stores are available on China’s largest e-commerce platforms including TMall and JD.com, along with other, niche platforms. Traffic is driven primarily through in platform media, streaming and other content and other events produced and supported by us:

Historically, our revenues are driven significantly by our spending on advertising. Consistent with our decreased spending on TV airtime starting in 2014, our total advertising expenses have decreased dramatically from $16.2 million in 2014 to $2.2 million in 2015 and further to $0.1 million in 2016 and to nil in 2017. Also, the total number of inbound calls to our call centers decreased from 1.2 million in 2014 to 92,000 in 2015 and further to 0 in 2016 and 2017, respectively, with the conversion rate for inbound calls, which is the percentage of inbound calls that result in product purchase orders, decreasing from 13.0% to 11.5% and further to 0%, in 2014, 2015, 2016 and 2017, respectively.Acorn Digital Division.

 

In addition to the factors above, intensified competition in the direct sales“direct sales” industry in China presents new challenges to our business. Related challenges include the evolving nature of our industry and our business model and a continuously evolving competitive landscape. To address these challenges, among other things, we regularly evaluate developments and the competitive landscape in the consumer retail market in China. In turn, as appropriate, we adjust our product offerings, sales and marketing efforts and business strategy. We undertake these adjustments in connection with constant evaluation of our media allocation for each product to maximize return on our media expenditures.

 

For a detailed discussion of other factors that may cause our results of operations to fluctuate, see Item 3.D, “Key Information—Risk Factors—Risks Relating to Our Business.”

 

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Revenues

 

Revenues For the years ended December 31, 
 For the years ended December 31, 
 2015  2016  2017  2017  2018  2019 
 Amount  

% of total
revenue,

net

  Amount  

% of total
revenue,

net

  Amount  

% of total
revenue,

net

  Amount  % of total
revenue, net		  Amount  % of total
revenue, net		  Amount  % of total
revenue, net		 
 (in U.S. dollars, except percentage)  (in U.S. dollars, except percentages) 
Revenues:                           
Direct sales, net $18,003,617   78.4% $13,361,915   81.1%  18,942,436   93.4 
“Direct sales,” net $15,866,782   93.0% $20,297,424   80.9% $31,658,751   84.5%
Distribution sales, net $4,952,548   21.6% $3,116,540   18.9%  1,347,851   6.6  $1,200,247   7.0% $4,789,845   19.1% $5,825,742   15.5%
Total revenues, net $22,956,165   100% $16,478,455   100% $20,290,287   100% $17,067,029   100.0% $25,087,269   100.0% $37,484,493   100.0%

 

Our net revenues consist of direct sales“direct sales” net revenues generated from our direct sales platforms and distribution sales net revenues. The decrease in direct“direct sales” net revenues as a percentage of our net revenues from 2017 to 2018 and the increase in distribution sales net revenues as a percentage of our net revenues from 20152017 to 20162018 primarily resulted from decreased salesincreased utilization of e-commerce distributors. The increase in “direct sales” net revenues as a percentage of our Babaka products. Thenet revenues from 2018 to 2019 and the decrease in distribution sales net revenues as a percentage of our net revenues from 20152018 to 2016 primarily resulted from decreased sales of our Youngleda products. The increase in direct sales net revenues as a percentage of our net revenues from 2016 to 2017 primarily resulted from increased sales of Babaka products, which were sold through various e-commence platforms. The decrease in distribution sales net revenues as a percentage of our net revenues from 2016 to 20172019 primarily resulted from the decreased salephasing out of the Youngleda products.business which was primarily conducted via distribution sales and the stronger growth of sales on e-commerce platform (e.g. Tmall) via “direct sales.”

 

“Direct salessales” net revenues represent product sales through our direct sales“direct sales” platforms, including outbound marketing,consisting primarily of Internet sales and, until the end of the first quarter of 2015, our TV direct sales platform. Our TV direct sales revenues constituted 0.7%, nil and less than 0.1% of our total net revenues in 2015, 2016 and 2017 respectively. While we have moved away from our historic core TV direct sales platform, we have focused on our other direct sales platforms, which currently consist of outbound marketing and e-commerce sales.

 

Distribution net revenues represent product sales to the distributors that constitute our distribution network.e-commerce distributors. We sell products to our distributors at a discount to the retail price for the same product.

 

Our total net revenues are presented net of certain adjustments, including sales and business taxes, cash rebates on distribution sales, product returns, customer rejections, and costs of membership points on direct“direct sales.” We net the cash rebates used in connection with promotional distribution sales activities and membership points used in connection with our customer loyalty program for direct sales“direct sales” against revenue at the time revenue is recorded.

 


Cost of Revenues

 

Cost of revenues represents our direct costs to manufacture, purchase or develop products sold by us to consumers or our distributors. For a particular product, the related cost of revenues is the same regardless of whether sold by us directly to consumers or to our distributors. The most significant factor in determining cost of revenues as a percentage of revenue in any period is our product mix for the period. For example, our collectible and mobile phoneseafood products generally have a higher per unit cost of revenues as compared to other products such as our health products, which often results in a lower gross margin for such products.

 

Cost of revenues does not include advertising or other selling and marketing expenditures. These expenditures are incurred for the benefit of eachall of our sales and distribution platforms and, as such, are treated as operating expenses and not as cost of revenues.

 

Operating (Expenses) Income

 

Our operating (expenses) income consist of advertising expenses, other selling and marketing expenses, general and administrative expenses and other operating income, net.

Advertising Expenses

 

Advertising expenses historically consisted primarily of the expenses of purchasing our advertising media, such as TV advertising time, Internet, print and radio advertising. Historically, we used our purchased TV advertising time to broadcast our TV direct sales programs and our product-oriented promotional advertising. Our advertising expenses primarily contributed to the cost of the TV advertising time used to broadcast our TV direct sales programs. We also promote brands through printIn 2017, 2018 and other media, primarily Internet, print and radio advertising. Historically, the largest component of2019, our advertising expensesexpense was the purchases of TV airtime for infomercials. We ceased to purchase TV advertising time for infomercials in early 2015. In 2016, our advertising expenses$1.7 million, $1.3 million and $2.4 million, respectively, primarily consisted of Internet advertising for BabakaBabaka® posture correction products, and in 2017, the advertising expense was nil.products.

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Other Selling and Marketing Expenses

 

Other selling and marketing expenses consist primarily of costs related to the marketing and promotional expenses of our e-commerce business, including the third-party service fees as well as other platforms’ service and promotion fees; product delivery and handling,handling; and salary and benefits for our call center sales and marketing personnel, the marketingpersonnel. We accept online payments through various third-party online payment platforms such as JD Pay, Alipay, credit card payment, etc., which payments are subject to interchange and promotional expenses of our e-commence business, including the third-party service fee as well as other platforms’ service and promotion fees other advertising and expenses associated with the production of our TV direct sales programs prior to early 2015.in some cases. We rely significantly on EMSdelivery companies, such as Cainiao, JD Delivery, Zhai-ji-song, SF Express, and local delivery companiesEMS, to deliver our products and to collect payments in connection with our products delivered on a cash-on-delivery, or COD, payment method. In general, weproducts. We are generally responsible for the delivery and handling feefees regardless of whether thea delivery is successful. OurIn 2019, our average monthly mediamarketing and promotional expense on marketing Babakafor Babaka® posture correction products iswas around RMB 2 Million.10.9 million. We increased our marketing and promotional expenses for Acorn Fresh by 3200% during 2019, compared with that of 2018, amounting roughly RMB 5.2 million, to help drive higher sales.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of compensation and benefits for general management, finance and administrative personnel costs, depreciation and amortization with respect to equipment used for general corporate purposes, professional fees, research and development expenditures and other expenses for general corporate purposes.

 

Other Operating Income, Net

 

Other operating income, net consists primarily of proceeds from disposal of certain non-core real property assets, rental income, and commission income from our insurance sales business and government subsidies. We regularly receive government subsidies from local government agencies for certain taxes paid by us, including value-added, business and income taxes, as well as part of the incentives provided by local governments for our investment in the local district. In 2017, 2016 and 2015, we recorded proceeds from disposal of certainloan interest revenues. A lease of our properties in Shanghai and Beijing for a total considerationwarehouse of nil, $10.6 million and $1.8 million, respectively. In 2014, we rented out 17,721 square meters of our warehouse located in Shanghai Qingpu District to a third party for two years. The lease of the Qingpu warehouse ran through the end of 2015 and was extended to January 2017, generating rents of $1.2 million in 2014, $1.2 million in 2015,has generated $1.0 million in 2016 and $1.0$0.9 million in 2017 and 2018, respectively. The lease was discontinued during 2018 after the sale of the land use rights to the plot of land in Shanghai Qingpu District along with the warehouse. The commission income from our insurance sales business was $0.5$0.43 million, $0.25 million and $0.43$0.22 million 2016in 2017, 2018 and 2017,2019, respectively.

 


Taxation

 

We are incorporated in the Cayman Islands and are not subject to tax in this jurisdiction. Our subsidiaries China DRTV, and Smooth Profit, and Acorn Media Group Limited are incorporated in the British Virgin Islands and are not subject to tax in thisthat jurisdiction. Our subsidiaries Bright Rainbow Investments Limited andsubsidiary MK AND T Communications Limited areis incorporated in Hong Kong and areis subject to statutory income tax on their Hong Kong sourced income (of which there areis none). Our other subsidiaries and affiliated companies are PRC companies. In addition to enterprise income tax, in 2019, our PRC subsidiaries and affiliated companies are subject to a 17%16% prior to April 1, 2019 and 13% from April 1, 2019 for sales value added tax, or VAT, on sales of products except for seafood products in accordance with relevant PRC tax laws. VAT rate for sales of seafood products is 9% or 13%, respectively, depending on whether the product is raw or processed, respectively. VAT taxes payable are accounted for through the balance sheet and do not have an income statement effect. The statutory income tax rate applicable to PRC companies is 25% for calendar years starting on or after January 1, 2008.

 

We have adopted the provisions of ASC740-10,Accounting Standards Codification (“ASC”) 740-10, “Income Taxes—Overall” (previously FASB Interpretation No. 48, “Accounting Forfor Uncertainty in Income Taxes—an Interpretation of SFAS No. 109”). Based on our analyses under ASC740-10, we have made our assessment of the level of uncertainty for each tax position (including the potential application of interest and penalties) based on the technical merits of the position, and have measured the unrecognized benefits associated with the tax positions accordingly. As of December 31, 2015, 20162017, 2018 and 2017,2019, we had unrecognized tax benefits of approximately $1.9$2.2 million, $2.0$1.2 million and $2.2$1.2 million respectively.

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Critical Accounting Policies

 

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of net revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment.

 

Revenue Recognition

 

On January 1, 2018, we adopted ASU 2014-09 on revenue from contracts with customers using the modified retrospective method. The adoption did not have a material impact on our consolidated financial statements. We recognize net revenue foron product sales throughin the period in which we satisfy our direct sales platforms upon deliveryperformance obligation and control of the productsproduct is transferred to and acceptance by, our customers (F.O.B. Destination). Thesethe customer.

“Direct sales”

What we refer to as “direct sales” revenues are recognized netconsist primarily of product sales tax incurred. We rely significantly on EMS and local delivery companies to deliver products through our outbound marketing platforms. Our Group relies on Cainiao, JD, and Yuantong, each a local delivery company, to provide data to our Group as to their successful deliveries for our Group’s direct sales products through our Internet sales platforms. ItOur sales arrangements with customers are predominately short term in nature and generally takes two to three weeksprovide for a product to be delivered by EMS and local delivery companies, with these companies regularly reporting to us product delivery status. For unsuccessful deliveries, EMS and local delivery companies are required to returntransfer of control at the undelivered products to us. It generally takes EMS two to three weeks, and local delivery companies approximately seven days, to returntime when the undelivered products to us. Direct sales revenues are adjusted in the current accounting period based on actual unsuccessful product deliveries experience reported by EMS and local delivery companies.

We recognize net revenues for products sold through our distribution network when products are delivered to and accepted by ourthe customers (e.g. “F.O.B. Destination”) as this is the point at which title and risk of loss of the product transfers to the customer. At the end of each period, we adjust revenues and cost of sales for the unsuccessful product deliveries, data of which was provided by the delivery companies used by us. The amount of revenue recorded reflects the consideration to which we expect to be entitled in exchange for goods.

Distribution sales

Our sales arrangements with distributors (F.O.B. Destination). In most cases,are predominately short term in nature and generally provide for transfer of control at the time when the products are delivered to and accepted by the distributors are required(e.g. “F.O.B. Destination”) as this is the point at which title and risk of loss of the product transfers to paythe distributors. The amount of revenue recorded reflects the consideration to which we expect to be entitled in advanceexchange for our products. Some distributors are given customary credit terms within the industry based on their creditworthiness.goods and may include adjustments for customer allowance and rebates. The distributor agreements do not provide discounts, chargebacks, price protection andor stock rotation rights. Accordingly, we record

Revenue and billing

We generally accept orders from customers through receipt of orders from e-commerce platforms, purchase orders and purchasing contracts. The pricing and selling terms are based on market factors, costs, and competition. Customers are billed through e-commerce platforms at the revenuestime they place the order, while distributors are billed when our products are delivered to and accepted by them in accordance with the distributors asterms of the sales agreement. As our standard payment terms are less than one year, we have no future remaining obligations. However, certain distributor agreements provide performance-based cash rebates which we net againstelected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. We also elected the practical expedient provided in ASC 606-10-25-18B to treat all product shipping and handling activities as fulfillment activities, and therefore recognize the gross revenue at the time revenue is recorded. In 2015, 2016 and 2017, the costs associated with cash rebates were insignificant.the contract, inclusive of any shipping and handling revenue. This approach is similar to our prior practice and therefore the effect of the new guidance is immaterial.


Inventory returns

Customers are entitled to return the goods sold through an online platform within seven days upon the receipt of goods and are not required to provide any reason for sales return, as long as the goods are returned intact and in good condition, subject to local regulations of internet shopping. We establish an estimated allowance for these returns based on past experience. Sales revenue and cost of sales are presented net of anticipate estimated returns. In addition, customers generally may return products to us within thirty days after delivery if there is a quality defect or if a product fails to meet its specifications, subject to shorter periods provided in policies of the platforms on which the goods are sold. Our warranties generally provide for repair of product defects within one year following the purchase date at our cost. To the extent that the manufacturer of the defective product is a third party, the manufacturer is contractually obligated to either repair the defective product or reimburse us for any related expenses. The distributors are allowed to return any defective products they receive from us.

 

Impairment of Long-lived Assets

 

We evaluate our long-lived assets and finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the fair value of the assets. The determination of fair value of the intangible and long lived assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future. This analysis also relies on a number of factors, including changes in strategic direction, business plans, regulatory developments, economic and budget projections, technological improvements, and operating results. Any write-downs would be treated as permanent reductions in the carrying amounts of the assets and an operating loss would be recognized.

 

Inventory

 

Our cost of inventory comprises all costs of purchase, costs of conversion, and other costs incurred to bring inventory to its present location and condition. Our cost of inventory is calculated using the weighted-average method.

 

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Our inventory is stated at the lower of cost or net realizable value. Adjustments are recorded to write down the inventory to the estimated net realizable value. We estimate excess and slow-moving inventory based upon assumptions of future demands and market conditions. If actual market conditions are less favorable than projected by our management, additional inventory write-downs may be required.

 

Allowance for Doubtful Accounts

 

We maintain allowancesan allowance for doubtful accounts primarily based on the age of receivables and factors surrounding the credit risk of specific customers. If there is a deterioration of a major customer’s creditworthiness or actual defaults are higher than our historical experience, we may need to provide an additional allowances.allowance.

We evaluate credit risk of our loan receivable and loan to related party by taking into consideration existing economic conditions, the current financial condition of the borrower and historical losses, if any, and any other risks/factors that may affect its future financial condition and its ability to meet its obligations. See Item 7.B, “Related Party Transactions.”

 

Investment in Affiliates; Available-for-sale Securities

 

Certain of our investments in affiliates have been accounted for under the cost method and others have been accounted for under the equity method. 

 

We initially accounted for our Yimeng investment in E-Money under the cost method.  We helped form YimengE-Money in 2005, with our initial ownership stake being 51%. By December 31, 2014, our ownership stake was diluted to 12.9% reflecting prior third partythird-party capital contributions and sales by us of Yimeng shares.E-Money Shares.  Because we exerted no significant influence in Yimeng,E-Money, we recorded our YimengE-Money investment at a cost of $7 million at December 31, 2013 and 2014.

 

In July 2015, YimengE-Money became listedpublicly traded on China National Equities Exchange and Quotations, or the NEEQ. After the listing, quoted market prices became available and we reclassified our YimengE-Money investment as available-for-sale securities.  As a result, (i) at December 31, 2015, 2016, 2017, 2018 and 2017,2019, our YimengE-Money investment was recorded at a fair value of $181.2 million, $74.7 million, $44.5 million, $38.9 million and $44.5$25.7 million, respectively, and (ii) in 2015, 2016, 2017, 2018 and 2017,2019, we recognized unrealized gains (losses) of $178.5 million, $(72.7) million, $(42.0) million, $(4.7) million and $(42.0),$(13.2) million, respectively (before deducting potential taxes of $44.6 million, $18.2 million, $10.5 million, $1.2 million and $10.5$3.3 million, respectively), which we recorded in other comprehensive income.  See notes 7 and 8 in our audited consolidated financial statements included elsewhere in this annual report. Further, our investment in YimengE-Money and Yimeng’sE-Money’s subsequent listingtrading on the NEEQ may cause us to be deemed to be an “investment company” under the Investment Company Act of 1940. See Item 3D, “Key Information — Risk Factors—If we are deemed an “investment company” under the U.S. Investment Company Act of 1940 (as amended, the “Investment Company Act”), it would adversely affect the price of our ADSs and ordinary shares and could have a material adverse effect on our business”.business.”

 


Beginning in January 2016, we started to sell Yimeng sharesE-Money Shares on the NEEQ. In 2016, we sold approximately 8.0 million shares,E-Money Shares, representing a decrease in ownership in YimengE-Money from 12.9% in 2015 to 8.5% and generating total sale proceeds of RMB126.0 million, or $18.9 million. In 2017, we sold approximately 4.6 million shares,E-Money Shares, representing a further decrease in ownership in YimengE-Money from 8.5% to 7.4% and generating total sale proceeds of RMB65RMB64.3 million, or $9.3 million. In 2018, we sold 1,000 E-Money Shares, representing a negligible further decrease in ownership in E-Money and generating immaterial total sale proceeds. In 2019, we did not sell any E-Money Shares. E-money announced on December 18, 2019 that it would repurchase between 5 million and 10 million of its shares in the public market at a price of no more than RMB 4.5 per share for a 6-month period commencing from December 2, 2019 (i.e. the date E-Money’s board of directors approved the aforesaid repurchase plan). From January 1, 2020 through the date of this report, Acorn has sold 12.5 million E-Money Shares under this repurchase plan, along with sales to individual buyers in the market, and received proceeds of $ 7.5 million. As at the date of this report, Acorn holds approximately 20.2 million shares, or 4.6% of total shares of E-Money. E-Money is still a publicly traded company on NEEQ.  

 

Our management will consider additional sales of Yimeng sharesE-Money Shares as it deems appropriate. We may be unable to sell our Yimeng sharesE-Money Shares at prices equal to the then-quoted price and or in desired amounts and sales by us or others could adversely impact the price of Yimeng shares.E-Money Shares. See Item 3D., “Key Information — Risk Factors— Changes in the quoted prices for YimengE-Money on the China National Equities Exchange and Quotations (“NEEQ”) will cause the carrying value of our Yimeng sharesE-Money Shares to vary impacting our comprehensive net income; and our ability to sell our Yimeng sharesE-Money Shares at desired prices or in desired volumes will be impacted by related developments in the NEEQ market and the market for Yimeng shares”.E-Money Shares.” Moreover, we cannot assure you that E-Money will remain traded on the NEEQ or otherwise.

 

Valuation of Deferred Tax Assets

 

Deferred tax assets are reduced by a valuation allowance when, in the assessment of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability.

 

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We recognize the impact of an uncertain income tax position at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. We classify interest and penalties related to income tax matters in income tax expense.

 

Fair value of financial instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price) and expands disclosure requirements about assets and liabilities measured at fair value. The guidance establishes a hierarchy for inputs used in measuring fair value that gives the highest priority to observable inputs and the lowest priority to unobservable inputs as follows:

 

 ·☐Level 1—Observable unadjusted quoted prices in active markets for identical assets or liabilities.

 

 ·☐Level 2—Observable inputs other than quoted prices in active markets for identical assets or liabilities, for which all significant inputs are observable, either directly or indirectly.

 

 ·☐Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

When available, we measure the fair value of financial instruments based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities measured at fair value are classified in the categories of Level 1, Level 2, and Level 3 based on the lowest level input that is significant to the fair value measurement in its entirety. Pricing information we obtain from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, we generally estimate the fair value using valuation techniques that rely on alternate market data or inputs that are generally less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as economic and market factors vary and our evaluation of those factors changes. Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. In these cases, a minor change in an assumption could result in a significant change in its estimate of fair value, thereby increasing or decreasing the amounts of our consolidated assets, liabilities, equity and net income or loss.

 


Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, notesloan receivable (previously convertible loan receivable,receivable), loan to related party, available-for-sale securities, and accounts payable and long-term debt.payable. For cash and cash equivalents, restricted cash, accounts receivable, notes receivable, and accounts payable, the carrying amounts of these financial instruments as of December 31, 2015, 20162017, 2018 and 20172019 were considered representative of their fair values due to their short-term nature. The marketable securities are carried at fair values. The carrying values of long-term debt andloan receivable (previously convertible loan receivablereceivable), and loan to related party approximate their fair values as the impacts to discount the long-term debtloan receivable and convertible loan receivableto related party with a market based interest rate are insignificant.

 

We periodically evaluateOperating leases

On January 1, 2019, we adopted ASU 2016-02 - Leases using the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward periods available to us for tax reporting purposes and other relevant factors.alternative modified retrospective transition method provided in ASU 2018-11, “Leases (Topic 842): Target Improvements”.

 

We recognizedetermine if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the impactpresent value of an uncertain income tax positionthe remaining lease payments, discounted using the discount rate for the lease at the largestcommencement date. As the rate implicit in the lease is not readily determinable for our operating leases, we generally use an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use (“ROU”) assets are generally recognized based on the amount thatof the initial measurement of the lease liability. Lease expense is more-likely-than-not to be sustained upon audit byrecognized on a straight-line basis over the relevant tax authority.lease term. We classify interestsaccount for lease and penalties related to income tax matters in income tax expense.

Results of Operationsnon-lease components as a single lease component for all leases.

 

The following table sets forth our condensed consolidated statements of operations by amount and as a percentage of our total net revenues for 2015, 20162017, 2018 and 2017:2019:

 

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  For the years ended December 31, 
  2017  2018  2019 
  

Amount

($)

  % of total
revenues, net		  

Amount

($)

  % of total
revenues, net		  

Amount

($)

  % of total
revenues, net		 
  (in thousands, except for percentages) 
Condensed Consolidated                  
Statements of Operations Data                  
Revenues:                        
Direct sales, net  15,867   93.0%  20,297   80.9%  31,659   84.5%
Distribution sales, net  1,200   7.0%  4,790   19.1%  5,826   15.5%
Total revenues, net  17,067   100.0%  25,087   100.0%  37,484   100.0%
Cost of revenues:                        
Direct sales  3,963   86.9%  5,080   76.6%  8,565   81.8%
Distribution sales  597   13.1%  1,550   23.4%  1,911   18.2%
Total cost of revenues  4,560   100.0%  6,630   100.0%  10,476   100.0%
Gross profit  12,507   73.3%  18,457   73.6%  27,008   72.1%
Operating (expenses) income                        
Advertising expenses  (1,726)  (10.1)%  (1,291)  (5.1)%  (2,438)  (6.5)%
Other selling and marketing expenses  (6,980)  (40.9)%  (9,513)  (37.9)%  (15,741)  (42.0)%
General and administrative expenses  (9,037)  (53.0)%  (7,132)  (28.4)%  (9,317)  (24.9)%
Other operating income, net  1,473   8.6%  2,136   8.5%  6,034   16.1%
Total operating expenses  (16,270)  (95.3)%  (15,800)  (63.0)%  (21,462)  (57.3)%
(Loss) income from continuing operations  (3,763)  (22.0)%  2,657   10.6%  5,547   14.8%
Other income, net  12,172   71.3%  32,965   131.4%  3,480   9.3%
Income tax expenses (benefit)  7,892   46.2%  (3,184)  (12.7)%  1,974   5.3%
Income from continuing operations before equity in losses of affiliates  16,302   95.5%  32,438   129.3%  11,001   29.3%
Loss from discontinued operations before equity in losses of affiliates  (3,922)  (23.0)%  (990)  (3.9)%  (1,061)  (2.8)%
Equity in losses of affiliates  —   —   (325)  (1.3)%  (109)  (0.3)%
Net income  12,380   72.5%  31,123   124.1%  9,831   26.2%
Net loss attributable to non- controlling interest  (4)  (0.02)%  (4)  (0.02)%  (6)  (0.02)%
Net income attributable to Acorn International, Inc.  12,384   72.6%  31,127   124.1%  9,837   26.2%

 


 

  For the years ended December 31, 
  2015  2016  2017 
  Amount ($)  

% of total
revenues,

net

  

Amount

($)

  

% of total
revenues,

net

  

Amount

($)

 

% of total
revenues,

net

 
                  
  (in thousands, except for percentages)
Condensed Consolidated Statements of Operations Data                       
Revenues:                       
Direct sales, net  18,004   78.4%  13,362   81.1%  18,942  93.4%
Distribution sales, net  4,953   21.6%  3,117   18.9%  1,348  6.6%
Total revenues, net  22,956   100.0%  16,478   100.0%  20,290  100%
Cost of revenues:                       
Direct sales  12,538   80.9%  2,353   45.0%  5,244  86.4%
Distribution sales  2,956   19.1%  2,878   55.0%  827  13.6%
Total cost of revenues  15,494   100%  5,230   100%  6,072  100%
Gross profit  7,463   32.5%  11,248   68.3%  14,218  70.1%
Operating (expenses) income                       
Advertising expenses  (2,204)  -9.6%  (24)  -0.1%  -  - 
Other selling and marketing expenses  (14,418)  -62.8%  (7,038)  -42.7%  (10,115) -49.9%
General and administrative expenses  (21,664)  -94.4%  (14,153)  -85.9%  (9,759) -48.1%
Other operating income, net  1,713   7.5%  7,607   46.2%  1,473  7.3%
Total operating expenses  (36,574)  -159.3%  (13,607)  -82.6%  (18,401) -90.7%
Income from continuing operations  (29,111)  -126.8%  (2,359)  -14.3%  (4,183) -20.6%
Other income (expense), net  1,017   4.4%  18,138   110.1%  12,172  60.0%
Income tax expenses  (183)  -0.8%  (4,593)  -27.9%  7,865  38.8%
Income from continuing operations before equity in losses of affiliates  (28,277)  -123.2%  11,186   67.9%  15,854  78.1%
Income from discontinued operations before equity in losses of affiliates  (11,746)  -51.2%  (6,909)  -41.9%  (3,475) -17.1%
Equity in losses of affiliates  (227)  -1.0%  (868)  -5.3%  -  - 
Net (loss) income  (40,250)  -175.3%  3,409   20.7%  12,380  61.0%
Net income (loss) attributable to non- controlling interest  91   0.4%  30   0.2%  4  0.02%
Net (loss) income attributable to Acorn International, Inc.  (40,159)  -174.9%  3,438   20.9%  12,384  61.0%

The table below summarizes our gross revenues for 2015, 20162017, 2018 and 2017,2019, broken down by major product categories:

 

  2015  Sales  2016  Sales  2017  Sales 
  $‘000  %  $‘000  %  $‘000  % 
                   
Health products  8,102   35.2   11,777   71.2   17,032   82.90 
Collectible products  5,646   24.5   1,574   9.5   1,534   7.5 
Mobile phones  5,032   21.9   1,723   10.4   1,117   5.4 
Other products  1,520   6.6   698   4.2   585   2.8 
Kitchen and household  1,591   6.9   398   2.4   223   1.1 
Fitness products  766   3.3   217   1.3   25   0.1 
Cosmetics products  220   1.0   103   0.6   14   0.1 
Auto products  49   0.2   1   0.0   10   0.1 
Consumer electronics products  89   0.4   41   0.3   0   0 
Total gross revenues  23,015       16,532       20,540     
Less: sales taxes  (59)      (53)      (250)    
Total revenues, net  22,956       16,478       20,290     

 85

  2017  2018  2019 
  $’000  %  $’000  %  $’000  % 
                
Health products  17,032   98.4   24,854   97.6   34,688   91.8 
Seafood products  —       433   1.7   2,971   7.8 
Other products  285   1.6   167   0.7   137   0.4 
Total gross revenues  17,317       25,453       37,796     
Less: sales taxes  (250)      (366)      (311)    
Total revenues, net  17,067       25,087       37,485     

 

Comparison of Years Ended December 31, 2015,2017, December 31, 20162018 and December 31, 20172019

 

Revenues

 

Our total net revenues, which include direct sales“direct sales” net revenues and distribution sales net revenues, decreasedincreased by 28.2%46.8% from $23.0$17.1 million in 20152017 to $16.5$25.1 million in 20162018, and further increased by 23.1%49.4% to $20.3$37.5 million in 2017.2019. The increase in our net revenues in 20172019 compared to 20162018 was primarily due to increased sales of Babaka® posture correction products via e-commerce channels, as well as increased sales of Acorn Fresh products. The increase in our net revenues in 2018 compared to 2017 was primarily due to the increased sales revenue of BabakaBabaka® posture correction products via e-commerce channels, on which we placed strong emphasis in 2017. The decrease in our net revenues in 2016 compared to 2015 was primarily due to decreased distribution sales revenue, which decrease was partially offset by higher sales of our health products.

channels.

 

In 2015, 20162017, 2018 and 2017,2019, approximately 78.4%93.0%, 81.1%80.9% and 93.4%84.5% of our total net revenues, respectively, were generated through our direct sales“direct sales” platforms, while approximately 21.6%7.0%, 18.9%19.1% and 6.6%15.5% of our total net revenues were generated from our e-commerce and offline distribution network,sales channels, respectively.

 

The following table sets forth our threetwo best-selling product lines for our direct sales“direct sales” platforms by net revenues and as a percentage of applicable total direct sales“direct sales” gross revenues for the periods indicated, together with reconciliation to direct sales“direct sales” net revenues:

 

   2015  2016  2017    2017  2018  2019 
Product Brand Revenues  percentage  Rank  Revenues  percentage  Rank  Revenues  percentage  Rank  Brand Revenues  Percentage  Rank  Revenues  Percentage  Rank  Revenues  Percentage  Rank 
   (in thousands, except percentages and ranks)    (in thousands, except percentages and ranks) 
Direct Sales:                                           
Health products Babaka $3,710   20.6%  3  $9,150   68.2%  1   15,626   81.7%  1  Babaka® $15,626   97.30%  1  $19,952   97.16%  1  $28,903   90.43%  1 
Collectibles products   $5,561   30.8%  1  $1,306   9.7%  3   1,508   7.9%  2 
Cell phone COMIO I2,VK7 PLUS, Skyworth P818 $4,981   27.6%  2  $1,721   12.8%  2   1,046   5.5%  3 
Direct sales-total top three   $14,252   78.9%     $12,177   90.8%      18,180   95.0%    
Seafood products    -   -      $433   2.11%  2  $2,971   9.30%  2 
Direct sales-total top two   $15,626   97.30%     $20,385   99.26%     $31,874   99.73%  �� 
Other products revenues   $3,801   21.1%     $1,230   9.2%      956   5.0%       $434   2.70%     $151   0.74%     $86   0.27%    
Total direct sales gross revenues   $18,053   100%     $13,407   100%      19,136   100%       $16,060   100%     $20,536   100%     $31,960   100%    
Total sales tax   $(49)         $(45)          (193)           $(193)         $(239)         $(301)        
Total direct sales net revenues   $18,004          $13,362           18,942            $15,867          $20,297          $31,659         

 

“Direct salessales” net revenues, which historically included both net proceeds from products sold through our TV direct sales platform, and still include net proceeds from products sold through our call center operations to direct market consumer products to individual customers in China andprimarily consists of Internet/e-commerce sales both through our official website and on the platforms of some of China’s leading e-commerce companies, decreasedincreased by 25.8%27.9% from $18.0$15.9 million in 20152017 to $13.4$20.3 million in 20162018, and further increased by 41.8%56.0% to $19.0$31.7 million in 2017. The decrease comparing 2015 to 2016 was mainly due to our exit from TV direct sales in early 2015, as we were unable to fully offset the resulting significant revenue declines with sufficient additional revenues from our call center and Internet/e-commerce sales.2019. The increase comparing 20162017 to 20172018 resulted primarily from our strong emphasiscontinuing focus on the e-commerce channel in 2017, and particularly2018, especially from sales of our proprietary BabakaBabaka® posture correction products through that channel. The increase comparing 2018 to 2019 resulted primarily from increased sales of our proprietary Babaka® posture correction products, as well as increased sales of Acorn Fresh products.


The net increase of $5.6$11.4 million in direct sales“direct sales” net revenues in 20172019 compared to 20162018 primarily reflected a $6.5$9.0 million, or 70.8%44.9%, increase in sales of health products, a $0.2$2.5 million, or 15.5%586.5%, increase in sales of collectiblesseafood  products and a $0.7 million, or 39.2%, decrease in sales of cell phones, as compared to 2016, primarily due to growing momentum in sales of our proprietary Babaka posture correction products throughout the year.2018. Our top threetwo products sold through our direct sales“direct sales” platforms in 20172019 were health products collectibles products and mobile phoneseafood products, which collectively accounted for $18.2$31.9 million, or 95.0%99.7%, of our direct sales“direct sales” gross revenues in 2017.2019.

 86

 

The net decreaseincrease of $4.6$4.4 million in direct sales“direct sales” net revenues in 20162018 compared to 20152017 primarily reflected a $4.3 million, or 76.5%, decrease in sales of collectibles products, a $3.3 million, or 65.4%, decrease in sales of mobile phones, and a $5.4 million, or 146.6%27.7%, increase in sales of health products, and a $0.4 million increase in sales of seafood products, as compared to 2015, primarily due to our exit from TV direct sales and our inability to fully offset the resulting significant revenue declines with sufficient additional revenues from our call center and Internet/e-commerce sales.2017. Our top threetwo products sold through our direct sales“direct sales” platforms in 20162018 were health products mobile phone products and collectibleseafood products, which collectively accounted for $12.2$20.4 million, or 90.8%99.3%, of our direct sales“direct sales” gross revenues in 2016.2018.

  

The following table sets forth our three best-selling product lines for our e-commerce and offline distribution networksales channels by net revenues and as a percentage of applicable total distribution sales gross revenues for the periods indicated, together with reconciliation to distribution sales net revenues:

 

   2015  2016  2017    2017  2018  2019 
Product Brand Revenues  Percentage  Rank  Revenues  percentage  Rank  Revenues  percentage  Rank  Brand Revenues  Percentage  Rank  Revenues  Percentage  Rank  Revenues  Percentage  Rank 
      (in thousands, except percentages and ranks)    (in thousands, except percentages and ranks)  
Distribution Sales:                                        
Health products Zehom, OXY $2,172   43.8%  2  $1,768   56.6%  2   1,219   86.8%  2  Zehom $1,219   96.97%  1  $1,213   24.67%  2  $734   12.57%  2 
Cell phones    51   1%  3   2   0.1%  3   71   5.1%   3  
Posture correction products Babaka $2,220   44.7%  1  $859   27.5%  3   39   2.8%   3   Babaka® $38   3.02%  2  $3,596   73.13%  1  $5,032   86.23%  1 
Distribution sales-total top three   $4,443   89.5%     $2,629   84.1%      1,329   94.6%    
Distribution sales-total top two   $1,257   99.99%     $4,809   97.80%     $5,766   98.80%    
Other products revenues   $519   10.5%     $496   15.9%      76   5.4%       $0.1   0.01%     $108   2.20%     $70   1.20%    
Total distribution sales gross revenues   $4,962   100.0%     $3,125   100.0%      1,405   100%       $1,257   100.00%     $4,917   100%     $5,836   100%    
Total sales tax   $(10)         $(8)          (57)           $(57)         $(127)         $(10)        
Total distribution sales net revenues   $4,953          $3,117           1,348            $1,200          $4,790          $5,826         

 

Distribution sales net revenues, which are derived from sales of products to our distributors, decreasedincreased by 37.1%299.1% from $5.0$1.2 million in 20152017 to $3.1$4.8 million in 20162018, and further decreasedincreased by 56.8%21.6% to $1.3$5.8 million in 2017. We experienced a significant decrease2019. The increase in distribution sales from 2018 to 2019 was primarily due to increased sales of Babaka® posture correction products via JD.com. The increase in 2015, 2016 anddistribution sales from 2017 whichto 2018 was primarily because of the decreaseincreased utilization of the sales of our Youngleda oxygen generatinge-commerce distributors such as JD.com for selling Babaka® posture correction products. Our top threetwo distribution sales products in 20172019 were our Youngleda cell phones and posture correctionBabaka® products, which together accounted for $1.3$5.8 million, or 94.7%,98.9% of our distribution sales gross revenues in 2017.2019.

 

Cost of Revenues

 

Our cost of revenues is primarily dependent upon the mix of products and units sold during the relevant period.

 

Our total cost of revenues decreasedincreased from $15.5$4.6 million in 20152017 to $5.2$6.6 million in 20162018, and further increased to $6.1$10.5 million in 2017.2019. As a percentage of total net revenues, total cost of revenues was 67.5%26.7%, 31.7%26.4% and 29.9%27.9% in 2015, 20162017, 2018 and 2017,2019, respectively. The fluctuationsreduction in cost of revenues as a percentage of total net revenues in 2016 and 2017,2018 as compared to the prior year, were2017 was primarily as athe result of shiftslower input costs, particularly for our Babaka® posture correction products. The slight increase in our product mix in 2016 and 2017, respectively.

Direct sales cost of revenues decreasedas a percentage of total net revenues in 2019 as compared to 2018 was primarily due to a higher proportion of Acorn Fresh products, which have a slightly lower margin than Babaka branded products, in the product mix.


“Direct sales” cost of revenues increased by 81.2%28.2% from $12.5$4.0 million in 20152017 to $2.4$5.1 million in 20162018 and increased by 122.9%68.6% to $5.2$8.6 million in 2017.2019. The declineincrease comparing 20162018 to 20152017 and 2019 to 2018, was primarily reflected the decrease indue to higher direct sales in 2016. The subsequent increase primarily reflected the increase in direct sales in 2017.2018 and 2019, respectively.

 

 87

Distribution sales cost of revenues decreasedincreased by 2.6%160.0% from $3.0$0.6 million in 20152017 to $2.9$1.6 million in 2016,2018, and further decreasedthen increased by 71.2%23.3% to $0.8$1.9 million in 2017.2019. These declineschanges primarily reflected the decreasesincreased usage of e-commerce distributors in distribution sales in compared to each prior period.year.

 

Gross Profit and Gross Margin

 

The following table sets forth gross profits and gross margins (being gross profit divided by the related net revenues) for our direct sales“direct sales” and distribution sales platforms:

 

  For the years ended December 31, 
  2015  2016  2017 
  Gross
profit		  Gross
margin		  Gross
profit		  Gross
margin		  Gross
profit		  Gross
margin		 
  (in thousands, except percentages) 
Direct sales $5,466   30.4% $11,009   82.4%  13,698   72.3%
Distribution sales $1,997   40.3% $239   7.7%  520   38.6%
Total $7,463   32.5% $11,248   68.3%  14,218   70.1%

  For the years ended December 31, 
  2017  2018  2019 
  Gross
profit		  Gross
margin		  Gross
profit		  Gross
margin		  Gross
profit		  Gross
margin		 
  (in thousands, except percentages) 
Direct sales $11,904   75.0% $15,217   75.0% $23,093   72.9%
Distribution sales $603   50.3% $3,240   67.6% $3,915   67.2%
Total $12,507   73.3% $18,457   73.6% $27,008   72.1%

 

Our total gross profitsprofit increased from $7.5$12.5 million in 20152017 to $11.2$18.5 million in 20162018, and thenfurther increased to $14.2$27.0 million in 2017.2019. Our overall gross margin increased from 32.5% in 2015 to 68.3% in 2016 and further increased to 70.1% in 2017. Ignoring the HJX Transaction and related discontinued operations accounting treatment for the HJX Business in each year, our overall gross margin was 62.1%73.3% in 2017 up from 51.2%to 73.6% in 2016. Changes2018 and decreased slightly to 72.1% in our gross margins from period to period are driven by changes in our product mix and the platforms through which we sell them.2019. The increase in total gross margin in 2016 and2018 compared to 2017 was largely due to a shift in product mix to include more sales contribution of BabakaBabaka® products sold through our e-commencee-commerce channels, which generally have higher margins. The slight decrease in total gross margin in 2019 compared to 2018 was primarily the result of a change in the mix of Babaka® products sold to slightly lower margin products, as well as a higher contribution of sales of Acorn Fresh products to total revenue, which generally have lower margins than Babaka® products.

 

We are generally able to maintain stable margins for our individual product lines. Although we discount the prices of individual products as competition enters the market over time, this discounting is typically done in conjunction with our introduction of an upgraded or replacement product with improved features and functions and similar or better pricing. If we are unable to maintain satisfactory gross profits relative to our expenses, we replace or cease marketing such product.

  

In addition to product mix-related variations, the difference between the sales price charged by us to our historical TV direct sales customers and what we charge our distributors for the same product accounts for a portion of the difference in gross margins on direct sales and on distribution sales, and the partial exit from the Ozing electronic learning device business.

Gross margin on direct sales increased from 30.4%“direct sales” were 75.0% in 2015 to 82.4% in 20162017 and 2018, respectively, and decreased to 72.3%72.9% in 2017.2019. In 2017,2019, the decrease in gross margin on direct sales was primarily due to the increased sales cost of Babaka products. In 2016, the significant increase in gross margin on direct sales“direct sales” was primarily due to a shifthigher proportion of Acorn Fresh products, which have a slightly lower margin than Babaka branded products, in the product mix to include more sales contribution of our higher margin Babaka products.mix.

 

Gross margin on distribution sales increased from 50.3% in 2017 to 67.6% in 2018, and slightly decreased from 40.3%to 67.2% in 2015 to 7.7% in 2016 and increased to 38.6% in 2017. The decrease in gross margin on distribution sales in 2016 was mainly due to our write-down of inventories. The principal reasons for the need to write down inventories include excess inventory, product obsolescence, product defects, and changes in the market that we did not foresee.2019. In 2017,2018, the increase in gross margin on distribution sales was mainly due to our partial exit fromincreased distribution of Babaka® products through e-commerce distributors. In 2019, the Ozing electronic learning device business throughslightly decrease in gross margin on distribution sales was mainly due to the HJX Transaction.decreasing gross margin of Youngleda products with decreased sales volume.

 

Operating (Expense) Income

 

Our total operating expense decreased from expenses of $36.6$16.3 million in 20152017 to expenses of $13.6$15.8 million in 20162018, and increased to expense of $18.4$21.5 million in 2017.2019. Of the total increasedecrease in operating expenses in 20172018 as compared to 2016, $3.12017, $2.5 million represented an increase in selling and marketing expenses, which was mainly attributable toprimarily resulted from higher selling and marketing expenses associated with e-commerce sales.sales, offset by a $0.4 million decrease in advertising expenses, a $1.9 million decrease in general and administrative expenses and a $0.7 million increase in other operating income, net. Of the total decreaseincrease in operating expenses in 20162019 as compared to 2015, $2.22018, $9.5 million represented a decreasean increase in TV advertising expenses, which was mainly attributable to our exit from TV direct sales in early 2015. There was also a $7.4 million decrease in other selling and marketing expenses and general and administrative expenses, which was mainly attributableprimarily resulted from more investment into advertising and media expenses to the decreased labor costs ofdrive sales and marketing personnelincreasing logistics expense associated with rising Acorn Fresh sales, as well as increased staff costs and office rent, partially offset by a result$3.9 million increase in other operating income, net which mainly included a $3.8 million gain on sale of our cost saving activitiescertain office space in 2016.Shanghai. Total operating expenses, as a percentage of total net revenue, decreased from 159.3%95.3% in 20152017 to 82.6%63.0% in 20162018, and then increasedfurther decreased to 90.8%57.3% in 2017.2019.

 88

75

 

Advertising Expenses

 

Our advertising expenses decreased from $2.2$1.7 million in 20152017 to $0.2$1.3 million in 20162018 and further decreasedincreased to $0$2.4 million in 2017.2019. As a percentage of total net revenues, advertising expenses decreased from 9.6%10.1% in 20152017 to 0.1%5.1% in 20162018 and further decreasedincreased to 0%6.5% in 2017.2019. The overall decrease in advertising expenses in 2018 as compared to 2017 was primarily due to our decreased purchases of TVInternet advertising. The increase in advertising timeexpenses in 2019 as a result of our exitcompared to 2018 was primarily due to primarily resulted from TV direct sales starting from the first quarter of 2015.   more investment into Internet advertising to drive sales.

Other Selling and Marketing Expenses

 

Our other selling and marketing expenses decreasedincreased by 51.2%36.3% from $14.4 million in 2015 to $7.0 million in 20162017 to $9.5 million in 2018, and further increased by 44.0%65.5% to $10.1million$15.7 million in 2017.2019. Our other selling and marketing expenses as a percentage of total net revenues were 62.8%40.9%, 42.7%37.9% and 49.9%42.0% in 2015, 20162017, 2018 and 2017,2019, respectively. Of the total $3.1$2.5 million increase in other selling and marketing expenses in 20172018 compared to 2016, $2.32017, $1.4 million was attributable to selling and marketing expenses for the e-commerce business. Of the total $7.4$6.2 million decreaseincrease in other selling and marketing expenses in 20162019 compared to 2015, $3.02018, $4.2 million was attributable to reductions in consulting feesselling and $2.7 millionmarketing expenses for the e-commerce business. The increase comparing 2019 to 2018 was attributabledriven by more investment into media expenses to lower salary expenses paid to ourdrive sales force as part of our cost control measures.and increasing logistics expense associated with rising Acorn Fresh sales.

 

General and Administrative Expenses

 

Our general and administrative expenses decreased by 34.7%21.1% from $21.7$9.0 million in 20152017 to $14.2$7.1 million in 20162018 and further decreasedincreased by 31.0%30.6% to $9.8$9.3 million in 2017.2019. Our general and administrative expenses as a percentage of total net revenues were 94.4%52.9%, 85.0%28.4% and 48.1%24.9% in 2015, 20162017, 2018 and 2017,2019, respectively. Of theThe total $4.4$1.9 million decrease in general and administrative expenses in 20172018 compared to 2016, $1.8 million2017 was primarily attributable to reductionslower consulting and legal fees expense in salary and social insurance, housing accumulation fund, stock based compensation, and other benefits payments on behalf of personnel as part of our cost control measures. Of the2018 versus 2017. The total $7.5$2.2 million decreaseincrease in general and administrative expenses in 20162019 compared to 2015, $4.5 million2018 was primarily attributable to reductionshigher staff costs and office rent in salary and social insurance, housing accumulation fund, and other benefits payments on behalf of personnel as part of our cost control measures in 2016.2019 versus 2018.

 

Other Operating Income, Net

 

Other operating income, net, consisting of government subsidygain on sale of non-core assets, loan interest, and miscellaneous commission income, was $1.7 million, $7.6 million and $1.5 million, in 2015, 2016 and 2017, respectively. In 2015, we recognized $1.4$2.1 million and $1.8 million, respectively, in other operating income for our sublease of excess warehouse space to third parties and sales of certain non-core properties in Beijing and other fixed assets; and we recognized $2.2 million of other operating expenses in connection with the disposal of fixed assets. In 2016, we sold more of our non-core properties, in Shanghai, and recognized $6.0 million, in our other operating income.2017, 2018 and 2019, respectively. In 2017, we recognized $1.0 million in other operating income for our sublease of excess warehouse space to third parties. In 2018, we recognized $2.2 million in other operating income due primarily to loan interest income and net revenue from Acorn Digital Division, partially offset by a loss of rental income following the sale of Bright Rainbow Investments Limited. In 2019, we recognized $2.3 million in other operating income due primarily to loan interest income and net revenue from Acorn Digital Division as well. We also recorded a $3.8 million gain on sale of certain office space in Shanghai.

Income (Loss) from Continuing Operations

We recorded losses from operations of $3.8 million in 2017, and income from continuing operations of $2.7 million and $5.5 million in 2018 and 2019 respectively. Ignoring the HJX Transaction, call center operations and related discontinued operations accounting treatment for the HJX Business and call center operations in each year, our loss from operations was $7.7 million in 2017. Ignoring the discontinued operations accounting treatment for the HJX Business in each year, the HJX Transaction allowed us to significantly reduce our total operating losses as the HJX Business contributed operating losses of $3.5 million to our total operating losses in 2017 (with the 2017 HJX Business operating loss contribution limited to the first half of that year, prior to completion of the HJX Transaction). As a percentage of total net revenues, our losses from operations were 22.0% in 2017, and our income from continuing operations was 10.6% and 14.8% of total net revenues in 2018 and 2019 respectively.

Other Income (Expense), Net

Our other income (expense), net was $11.6 million, $32.6 million and $3.2 million in 2017, 2018 and 2019, respectively. In 2017, 2018 and 2019, our other income included $0.5 million, $0.4 million and $0.3 million, in interest income, respectively. We recorded a $9.1 million investment gain in 2017, a $0.001 million investment gain in 2018, and a nil investment gain in 2019, in connection with our sales of E-Money Shares. In 2018, we also recorded a $32.5 million gain on sale of share transfer of Bright Rainbow Investments Limited, which owns Shanghai HJX Digital Technology Co., Ltd., which owns various non-core assets, including the land use rights to a plot of land in the Qingpu district of Shanghai. In 2019, we also recorded a $1.2 million gain on sale of share transfer of Zhuhai Acorn. The remainder of other operating income (expenses), net in those periods primarily related to our receipt of subsidies from local government agencies for certain taxes paid, including value-added, business and income taxes as well as part of the incentives provided by local government for our investment in our local district. The subsidy income in 2015, 20162017, 2018 and 20172019 amounted to $0.2nil, $53,965 and $1.3 million $70,000 and nil, respectively. We may not continue to enjoy such government subsidies in the future. See Item 3.D, “Key Information—Risk Factors—The discontinuation of any of the preferential tax treatments and government subsidies available to us in the PRC could materially and adversely affect our results of operations and financial condition”.

 

 89

Loss from Continuing Operations

We recorded losses from operations of $29.1 million, $2.4 million and $4.2 million in 2015, 2016 and 2017, respectively. Ignoring the HJX Transaction and related discontinued operations accounting treatment for the HJX Business in each year, our loss from operations was $7.3 million in 2017 as compared to $9.3 million in 2016. The foregoing loss from operations for 2016 benefited from a $6.0 million gain from the sale of certain real estate assets, without which it would have been $15.3 million. Ignoring the discontinued operations accounting treatment for the HJX Business in each year, the HJX Transaction allowed us to significantly reduce our total operating losses as the HJX Business contributed operating losses of $11.7 million, $6.9 million and $3.5 million to our total operating losses in each of 2015, 2016 and 2017, respectively (with the 2017 HJX Business operating loss contribution limited to the first half of that year, prior to completion of the HJX Transaction). As a percentage of total net revenues, our losses from operations were 126.8%, 14.3% and 20.7% in 2015, 2016 and 2017, respectively.

Other Income (Expense), Net

Our other income (expense), net was $1.0 million, $18.1 million and $12.2 million, in 2015, 2016, and 2017, respectively. In 2015, 2016 and 2017, our other income included $0.8 million, $0.5 million and $0.3 million, in interest income, respectively. We also recorded a $18.1 million investment gain in 2016 and a $9.1 investment gain in 2017 in connection with our sales of Yimeng shares.

Income Tax Expenses

 

We had a net tax benefit of $7.9 million, a net tax expense of $0.2 million, $4.6$3.2 million and $8.0a net tax benefit of $2.0 million in 2015, 20162017, 2018 and 20172019 respectively. Our effective income tax rate for 2015, 20162017, 2018 and 20172019 was 0%, 52% and -174%, respectively.9% and -26%, respectively, with the changes resulted from fluctuations of valuation allowance.

 

Equity in losses of affiliates

 

On December 31, 2012,In June 2017, we acquired 9.3%reached an agreement to sell a majority interest in our HJX Business to a third-party investor and operator. Specifically, the agreement includes the establishment of the equity interests in China Branding Company Limited, or CBG, for cash of $1.3 million. Mr. Roche, a co-founderjoint venture that will be controlled and a member of our board of directors, individually holds an additional 7.6% equity interests in CBGoperated by such third party, and holds one out of five board seats of CBG and accordingly, Mr. Roche is able to exercise significant influence through his participation on the board of directors of CBG. As such, management believes that it can exercise significant influence over CBG through our direct equity investment, our deemed indirect investment through Mr. Roche’swe will hold 37.5% equity interest in this joint venture. Under the agreement, we agreed to sell the HJX Business at the price of RMB6.0 million ($918,246). The joint venture was set up in January 2018. During 2018 and Mr. Roche’s significant influence over CBG. Therefore,2019, we accounted for this investment using the equity method of accounting. In February 2013, our investment in CBG decreased from 9.3% to 8.7%recorded $324,900 and $109,102 as a result of dilution due to issuance of additional shares by CBG to a new investor, which we accounted for as if we sold 0.6% equity interests in CBG, with the gains from such deemed sale being immaterial. Our equity in losses of CBG in 2014, 2015, 2016 and 2017 was $235,161, $226,780, $718,121 and nil, respectively, and were recognized in equity in losses of affiliates in the consolidated statements of operations.

On August 10, 2016, our Group acquired 5%as a result of the then fully diluted share capital of ClearCut Corporation, or ClearCut, a Delaware corporation, for cash of US$150,000. our Group exerted no significant influenceminority stake in ClearCut and accounted for this investment using the cost method of accounting. Our equity in losses of ClearCut in 2016 and 2017 was $150,000 and nil, respectively, and were recognized in equity in losses of affiliates in the consolidated statements of operations.joint venture.

 

Net Income (Loss)Loss Attributable to Non-controlling Interests

 

Net income (loss)loss attributable to non-controlling interests consist of the 49% or less outside ownership interests in our majority- ownedmajority-owned subsidiaries. In 2015, 20162017, 2018 and 2017,2019, the non-controlling interests totaled $(91,127)$(4,457), $(29,707)$(4,436) and $(4,457)$(5,776), respectively.

 

Net LossIncome Attributable to Acorn International, Inc.

 

As a result of the foregoing, while we had a net loss of $40.2 million in 2015, we achieved net income of $3.4 million in 2016 and $12.4 million in 2017.2017, $31.1 million in 2018, and $9.8 million in 2019. As a percentage of total net revenues, our net income (loss) was 174.9% in 2015,72.6%, 124.1% and our net income was 20.9% and 61.4%26.2% of total net revenues in 20162017, 2018 and 20172019 respectively.

 

B.Liquidity and Capital Resources

 

Although weWe had net income of $12.4$9.8 million in the year ended December 31, 2017, we still2019, and experienced negative cash flows from operations of $0.1 million in the year ended December 31, 2017 and had accumulated deficits of $118.8 million as of that date.2019.

 

Primarily beginning in the second half of 2015, we commenced significant actions to improve our liquidity position, including sales of non-core assets, and reducing our cash burn. As of December 31, 2017,2019, we had approximately $21$13.5 million in cash and cash equivalents, term deposits and restricted cash and we believe we will be able to realize our assets and satisfy our liabilities in the normal course of business.

 

 90

Our anticipated cash flows for 20182020 and planned actions to reduce costs and generate cash flows are based on our current expectations, beliefs and estimates and are not guarantees of our future operating results, liquidity and ability to continue operations.

 

  For the years ended December 31, 
  2015  2016  2017 
  (in thousands) 
Cash and cash equivalents  12,147   25,506   21,020 
Net cash provided by (used in) operating activities  (22,333)  (14,332)  (8,926)
Net cash provided by (used in) investing activities  9,399   28,718   7,896 
Net cash provided by (used in) financing activities  (8,896)  (1,531)  (4,695)

  For the years ended December 31, 
  2017  2018  2019 
  (in thousands) 
Cash and cash equivalents $21,098  $20,220  $13,537 
Net cash used in operating activities $(5,937) $(3,467) $(144)
Net cash provided by/(used in) investing activities $7,899  $46,659  $(183)
Net cash used in financing activities $(4,695) $(41,810) $(4,558)

 

For purposes of clarification, net cash provided by investing activities in 2017 was inclusive of movements of restricted cash. The Company adopted ASU 2016-18 Statement of Cash Flows-Restricted Cash on January 1, 2018.


Operating Activities

 

As of December 31, 2017,2019, we had $21.0$13.5 million in cash and cash equivalents. Net cash used in operating activities were $22.3$5.9 million, $14.3$3.5 million and $9.1$0.1 million in 2015, 20162017, 2018 and 2017,2019, respectively. These amounts were adjusted for non-cash items such as gains on disposal of available-for-sale securities, gains on disposal of held-for-sale assets and subsidiaries, depreciation and amortization, allowance for doubtful receivables,bad debt expense (recoveries), inventory write- downs,write-downs (reversals), deferred income tax expenses(benefits),benefits, share-based compensation and changes in various assets and liabilities such as accounts receivables, inventories, prepaid advertising and other expenses, other current assets, accounts payable, accrued expenses, and other current liabilities, and notes payable, as applicable.

 

Investing Activities

 

Investing activities include proceeds from disposal of non-core real estate,held-for-sale assets and subsidiaries, proceeds from sales of Yimeng shares,E-Money Shares, purchases of property and equipment, disbursement for convertible loan receivable, disbursement for loan to related party, purchase of long-term assets, proceeds from disposal of equipment and decrease (increase) in restricted cash. Net cash provided by investing activities were $9.4$7.9 million, $28.7$46.7 million and $8.9$0.2 million in 2015, 20162017, 2018 and 2017,2019, respectively.

 

Net cash used in investing activities in 2019 primarily reflects the $3.9 million of proceeds from remainder receivables for sale of the shares in Bright Rainbow and disposal of former principle office offset by $4.8 million in disbursement for loan to related party. Net cash provided by investing activities in 2018 primarily reflects the $47 million of proceeds from the sale of the shares in Bright Rainbow offset by $6.2 million in disbursement for loan to related party. Net cash provided by investing activities in 2017 primarily reflects $9.3 million of proceeds from sales of our investment in Yimeng sharesE-Money Shares and $3.6 million decrease in disbursement for loan to related party. Net cash provided by investing activities in 2016 primarily reflects $18.9 million of proceeds from sales of our investment in Yimeng shares and $11.3 million proceeds from disposal of certain non-core properties of our Company. Net cash provided by investing activities in 2015 primarily reflects $9.6 million of our decrease in restricted cash in connection with our long-term bank borrowings and $3.3 million of proceeds from disposal of certain non-core properties of our Company, which we net against $3.0 million cash used for disbursement of convertible loan receivable.

 

Financing Activities

 

In 2019, our net cash used in financing activities mainly reflected $4.6 million paid as cash dividends on the Company’s ordinary shares. In 2018, our net cash used in financing activities mainly reflected $40 million paid as a one-time cash dividend on the Company’s ordinary shares. In 2017, our net cash used in financing activities mainly reflected $0.2 million which was used for our share buy-back plan, $0.3 million used to repurchase our ordinary shares from Mr. Tadashi Nakamure and $4.2 million used to repurchase our ordinary shares from SAIF. In 2016, our net cash used in financing activities mainly reflected repurchasing our ordinary shares valued at $1.5 million which was authorized by our share buy-back plan. In 2015, our net cash used in financing activities mainly reflected the repayment of our long-term bank borrowings of $8.5 million and $0.4 million used to repurchase our ordinary shares.

 

Capital Expenditures

 

Our capital expenditures consisted principally of the purchases and construction of property and equipment, investments in buildings related to expansions and upgrades to our call center and offices and purchases of management information systems.

 

  91C.

C.Research and Development

 

We spent $1.5$0.06 million, $0.3 millionnil and $0.06 millionnil on research and development in 2015, 20162017, 2018 and 2017,2019, respectively.

 

D.Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 20152017 to December 31, 20172019   that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

E.Off-Balance Sheet Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

F.Tabular Disclosure of Contractual Obligations

 

A summary of our contractual obligations at December 31, 20172019 is as follows:

 

 Payments due by period 
    Less than     More than  Payments due by period (in thousands$)    
Contractual obligations Total 1 year 1-3 years 3 years  Total  

Less than

1 year

  1-3 years  3-5 years  More than 5
years		 
Operating leases* $121,402  $120,784  $618  $-   2,016   964   1,034   18   — 
                
Total $121,402  $120,784  $618  $-   2,016   964   1,034   18   — 

 

*Operating leases are for office, warehouse and manufacturing facilities.

 

G.

Recently Adopted and Issued Accounting Pronouncements

ASU 2015-09 - Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update on revenue recognition that will be applied to all contracts with customers. The update requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, deferring the effective date for ASU 2014-09 by one year, and thus, the new standard will be effective for fiscal years beginning after December 15, 2017, with early application permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance allows for either a full retrospective or a modified retrospective transition method. The Company evaluated the effect of these accounting pronouncements on its financial statements and adopted this new guidance on January 1, 2018 using the modified retrospective application method. Our revenue is primarily generated from the sale of non-customized consumer products to customers. Each product represents a performance obligation that is satisfied at a single point in time control transfers, which is generally when we ship the product. The timing and amount of revenue recognized will not be impacted by the new standard. As a result, we expect that the standard will not have a material impact on our consolidated financial statements and internal controls over financial reporting but we are still evaluating the impact on our financial statement disclosures.

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ASU 2015-17 - Deferred income taxes. In November 2015, the FASB issued ASU 2015-17, to simplify the presentation of deferred income taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update and within a particular tax jurisdiction. The Company has elected to adopt ASU 2015-17 prospectively. As a result, the Company has presented all deferred tax assets and liabilities as non-current on the Company’s consolidated balance sheet as of December 31, 2017.There was no impact on the Company's result of operations as a result of the adoption of ASU 2015-17.

ASU 2016-01 - Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU 2016-01 also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Entities will have to assess the realizability of such deferred tax assets in combination with the entities other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and for interim periods within that reporting period. The Company evaluated the effect of these accounting pronouncements on its financial statements and adopted this new guidance on January 1, 2018. We expect that the standard will not have a material impact on our consolidated financial statements and internal controls over financial reporting but we are still evaluating the impact on our financial statement disclosures.

   

ASU 2016-02 - Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”)(ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating

We adopted the impactstandard on January 1, 2019 using the alternative modified retrospective transition method provided in ASU 2018-11, “Leases (Topic 842): Target Improvements”. Under this method, we recorded a cumulative-effect adjustment as of its pendingJanuary 1, 2019 and did not record any retrospective adjustments to comparative periods to reflect the adoption of ASU 2016-02ASC 842. The new standard provides a number of optional practical expedients in transition. We have elected the ‘package of practical expedients’ which permits our Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Our Company has not elected the use-of-hindsight. Adoption of ASC 842 resulted in the recognition of ROU assets of $2.1 million and lease liabilities of $2.1 million, as of January 1, 2019 for operating leases on itsour consolidated financial statements.balance sheets, with no impact to our Company’s consolidated statements of operations and consolidated statements of cash flows.

 

ASU 2016-13 - Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)(ASU 2016-13). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company isWe are currently evaluating the timing of adoption and impact of this new standardASU 2016-13 and estimate that the adoption will not have a material impact on its consolidated financial statements. ASU 2016-15 - Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (“Topic 230”): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.

ASU 2016-15 - Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating the impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.

ASU 2016-16 - Income Taxes. In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods therein with early application permitted. Upon adoption, the Company must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, as well as its planned adoption date. 

 93

ASU 2016-18 - Restricted Cash. In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows-Restricted Cash (a consensus of the FASB Emerging Issues Task Force),” effective for fiscal years beginning after December 15, 2017, and interim periods within that fiscal year. The standard addresses whether restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company is currently evaluating the impact of its pending adoption of ASU 2016-18 on itsour consolidated financial statements.

 

ASU 2018-02 - Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, “ReclassificationReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which is effective for the annual report period beginning after the December 15,201815, 2018 including the interim reporting period within that period. This update allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings standard tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). TheOur Company is currently evaluatingevaluated the impact of its pending adoptioneffect of ASU 2018-02 and concluded that adoption did not have a material impact on itsour consolidated financial statements. We adopted this new guidance on January 1, 2019.

 

G. Safe Harbor

The Section titled “Forward-Looking Statements” of this annual report is hereby incorporated by reference.


ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report. There is no family relationship between any of the persons named below. There is also no arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred below was selected as a director or member of senior management. The business address of each of our directors and executive officers is 19/5/F, 20th Building, 487 TianlinYueShang Plaza, 1 South Wuning Road, Shanghai 200233,200042, People’s Republic of China.

 

Name Age Position/Title
Robert W. Roche 5557 Chairman of the Board of Directors, Executive Chairman
Pierre E. Cohade 5658 Independent Director, Lead Director
Jenny Hseau-Jean Wang 62Independent Director
David Leung5664 Independent Director
Urs P. Zimmerman 5557 Independent Director
Eric Haibing Wu 4547 Independent Director
Jacob A. Fisch 4143 Chief Executive Officer, President
Geoffrey Weiji GaoMartin Oneal Key 4540 Chief Financial Officer Vice President
Jan Jie Lu 4042 Vice President – Business Operation
Bethy Jie Wu  5254 Vice President – Human Resources
Lei Li39General Counsel

 

Mr. Robert W. Rochehas served as a director of our Company since March 31, 2006 and has served as the Executive Chairman of our Company since May 4, 2015 (previously October 18, 2010 to August 26, 2014). He is a co-founder and the executive chairman of Acorn, and the chairman of our board of directors. He also serves as the chairman of Oak Lawn Marketing, a company incorporated in Japan. In addition, Mr. Roche conducts numerous business operations throughout Asia and the United States. President Obama named Mr. Roche to the United States Trade Representative’s (USTR) Advisory Committee for Trade Policy and Negotiations. He is also a member of the Advisory Council for the non-profit 100,000 Strong Foundation. Mr. Roche’s other civic contributions include serving as prior Chairman of the Board of Governors of the American Chamber of Commerce in Shanghai, member of the American Chamber of Commerce Japan Board of Governors, and a Board Member at the USA Pavilion, Expo 2010 Shanghai. In addition to funding his own foundation, Mr. Roche’s philanthropic work includes endowing a chair at Nanzan University in Nagoya, Japan, and establishing a Masters of Laws (LLM) in International Business Transactions program at the University of Denver, Sturm College of Law. Mr. Roche received his bachelor’s degree in Economics and Japanese Studies from Illinois State University in 1985 and a J.D. degree from the University of Denver in 1988.

 

 94

Mr. Pierre E. Cohade, until recently, was has served as a director of our Company since February 1, 2017. Mr. Cohade served as the CEOChief Executive Officer of Triangle Tyre, China’s largest private tire manufacturer. Between 2004 and 2011,manufacturer from 2015 to 2016. From 2013 to 2015, Mr. Cohade was the president of Goodyear Asia Pacific. Cohade has also served asa Senior Advisor toat ChinaVest, Wells Fargo’s Investment Bankinvestment banking affiliate in China,China. During 2012, he served as wellan independent consultant for various private equity concerns. Prior thereto he served as the Center for Creative Leadership. InPresident, Asia Pacific, of The Goodyear Tire & Rubber Company from 2004 to 2011. From 2003 Group Danone choseto 2004, Mr. Cohade to run its global Walterserved as the Division Executive Vice President of the Global Water and Beverage division basedof Danone SA. From 1985 to 2003, Mr. Cohade served in Paris, France. Cohade started to work forroles of increasing responsibility at Eastman Kodak inCo., ultimately serving as the USA as a financial analyst in 1985 and subsequently held business management and executive positions in Brazil, Mexico, the United States, Singapore and Switzerland. He was named General Manager of Kodak Worldwide Consumer Films in 1996 and assumed leadership of the Asia Pacific region for Kodak’s Consumer business in 1999. Mr. Pierre E. Cohade was named Chairman of Kodak’s Europe, Africa, Middle East and Russia Region in 2001.Region. Mr. Pierre E. Cohade actedserves as a consultant todirector of Johnson Controls International plc, (a global diversified technology and industrial leader creating intelligent buildings, efficient energy solutions, integrated infrastructure and next generation transportation systems), CEAT Ltd. (one of India’s leading tire manufacturers), Acorn International Inc. from October 2016, (a leading marketing and branding company in China focused on content creation, distribution, and product sales through digital media), and Deutsche Bank China. Mr. Cohade is currently the Chairman of IMA in China, a leading peer group forum for CEOs and senior executives located in China, and is an independent advisor to January 2017. Cohade received a degree in business management from the SKEMA business school in Sophia-Antipolis, France, in 1984companies on China, strategy and an MBA from Penn State University in 1985.operations.


Ms. Jenny Hseau-Jean Wangishas served as an independent director of our Company.Company since August 25, 2017. Ms. Wang has over 30 years of experience in executive management, finance and business strategy for the Asia Pacific operations of several high-profile multinational organizations. From 2012 to 2013, Ms. Wang served as Senior Vice President for TE Connectivity (formerly Tyco Electronics) where she led China operations with a focus on growth through good corporate governance and strategic positioning. From 2005 to 2012, Ms. Wang led the growth of Goodyear Tire and Rubber Company in Asia, most recently in the role of Vice President, Investment and Business Development, Asia Pacific. From 2004 to 2005, she served as CFO and Vice President of Semiconductor Manufacturing International Company (SMIC), one of the world'sworld’s largest semiconductor foundries. From 1993 to 2003, she served in various executive and finance positions for Motorola'sMotorola’s Asia operations. Prior to that, she served as a Tax Manager at Arthur Andersen in the U.S. Ms. Wang is currently focused on community service in youth development and family and business financial planning in China. Ms. Wang has a Bachelor'sBachelor’s degree in Business from Taiwan Providence University, a Master of Science in Accounting from the University of Houston and is a Certified Public Accountant in the US. Ms. Wang is fluent in Mandarin and English.

 

Mr. David LeungUrs P. Zimmermanishas served as an independent director of our Company. Mr. Leung served as the Chief Business Officer at Duke Kunshan University between 2013 and 2017 building it into a mature institution from at start-up. Prior to joining Duke Kunshan University, Mr. Leung served as Chief Financial and Business Officer at the Shanghai American School from 2007 to 2013. From 2004 to 2006, Mr. Leung served as Vice President at the Tasly Group Co. helping it manage its portfolio of investments in the pharmaceutical industry. Mr. Leung was with Motorola Hangzhou from 1997 to 2004, where he served as General ManagerCompany since 2002 and as Chief Financial Officer since 1997 with the responsibility over the mobile device business. From 1994 to 1996, Mr. Leung served as the Chief Financial Officer of AT&T Qingdao, and before that, Mr. Leung worked for AT&T in finance, network planning, market planning, and new business development roles. Mr. Leung received his bachelor’s degrees in applied mathematics and in political economy from the University of California at Berkeley, his MBA from Rutgers University, and his master’s in public policy from the University of Chicago. Mr. Leung is a certified public accountant and a certified School Business Administrator in the U.S.

Mr. Urs P. Zimmermanis an independent director of our Company.January 15, 2018. Mr. Zimmermann brings a wealth of expertise and knowledge to his role at Acorn, gained from spending more than 12 years working in multiple countries in Asia. Since April of 2015 he has served as the Senior Director and Country Head of DKSH China, a leading Swiss Market Expansion Service provider with a strong global brand portfolio focused on Asia. From May 2013 to March 2015 Mr. Zimmerman served as Country Head and Interim Manager in Thailand for IngenioCorp Co. Ltd., a logistics and supply chain solutions provider. Prior to that, Mr. Zimmerman held various executive roles in Europe, Africa and the Asia-Pacific Region with some of the world'sworld’s leading logistics and supply chain management and healthcare companies. During his time in Asia, he held several Senior Director positions, including Regional CFO Asia in Hong Kong and had the responsibility for business development in several Asian countries. Born and raised in Switzerland, Mr. Zimmermann speaks German, English, French and is proficient in Spanish and Portuguese. He holds a Federal Certificate in Commerce and Administration in Switzerland. He gained his professional qualification through management courses from the International Institute for Management Development (IMD), Lausanne with a focus on business strategy, entrepreneurship, marketing, finance and leadership and holds an executive MBA from the IMD in Lausanne, Switzerland.

 

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Mr. Eric Haibing Wu has served as an independent director of our Company since September 14, 2016. He has over 20 years of experience in finance. He worked for PricewaterhouseCoopers in the United States from May 2000 to February 2006 and later worked as a senior manager in the assurance department of PricewaterhouseCoopers Zhong Tian CPAs Limited Company from February 2006 to October 2007. Since October 2007, he has been serving as the chief financial officer of Plateno Hotels Group (formerly known as 7 Days Group Holdings Limited). Mr. Wu graduated from Shanghai Jiao Tong University with a bachelor’s degree in economics in July 1994 and received a master’s degree in business administration from Michigan State University in May 2000.

 

Mr. Jacob A. Fischishas served as the Chief Executive officer and President of Acorn.our Company since October 31, 2017. Mr. Fisch was previously Senior Advisor to Acorn from April 2014. Mr. Fisch’s background includes top executive roles with publicly-listed, global supply chain manager and consumer products giant Li & Fung Limited (HKSE: 494) from 2006 to 2010 and then with its controlling shareholder, the Fung Group, from 2010 to 2012. Such roles included Director of Corporate Development for the Fung Group, and Senior Vice President – General Counsel for Li & Fung Limited, where he was part of the core leadership team and global head of Legal responsible for Li & Fung’s then over 80 offices in over 40 countries. Mr. Fisch also co-founded Hong Kong venture firm, Nest, in 2010, and founded Mile Point Capital Partners in 2011. In 2013, Mr. Fisch also co-founded and became the non-executive Chairman of Dragon Law (now renamed Zegal), a technology company, from 2013 - 2017 after which time he became a non-executive director. Prior to these roles and activities, Mr. Fisch was an attorney at leading international law firms in New York City, Hong Kong and Shanghai. Mr. Fisch has been a term member at the Council on Foreign Relations in New York City, and a member of the Hong Kong-based Hong Kong Forum, affiliated with the Council on Foreign Relations and formed by former Hong Kong Chief Executive, CH Tung, and is a member of the Executive Forum, a fifty-person forum for the most senior managers of multinational corporations headquartered in Asia. Mr. Fisch is a member of YPO, Manhattan chapter. Mr. Fisch holds a J.D. from Harvard Law School and a B.A. from Columbia University.

 

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Mr. Geoffrey Weiji GaoMartin Oneal Keyishas served as the Chief Financial Officer of Acorn since August 20, 2018. Mr. Key also serves as the Chief Financial Officer of Cachet Hotels & Resorts, an international hotel branding and management company, a Senior Vice President of Acorn.position that he has held since October 2013. Previously, Mr. Gao has extensive experienceKey served as an executive director for ARC China, a Shanghai-based private-equity firm focused on investments in financial controlconsumer-oriented Chinese companies, from 2008 to 2013. Mr. Key began his career as an investment banker in debt capital markets at J.P. Morgan Securities in New York, where he executed credit-facility, term-loan and planning, cash management, procurement & supplier chain management and process optimization.corporate-bond transactions, from 2003 to 2006. Mr. Gao joined our Company in February 2012. Prior to joining our Company, Mr. Gao accumulated 16 years’ experience in different MNCs (multi-national companies), including Merck China & Hong Kong from June 2005 to February 2012, YUM! China from November 1999 to June 2005 and Societe Generale Shanghai Branch from September 1996 to November 1999. Mr. Gao received his bachelor’sKey holds a Bachelor’s degree in EconomyAccounting from Shanghaithe University (International Business Institute)of South Carolina, a Master of Science in Finance from Boston College, and is a holderan MBA from the UCLA Anderson School of FCMA and CGMA since May 2014.Management.

Ms. Jan Jie Luishas served as the Vice President – Business Operations of the Company since April, 2016, responsible for supporting the day-to-day operations of the business, focusing, in particular, on driving the growth of our brands, media and content divisions. Her background includes experience in operations, business development (deal sourcing and execution) as well as government relations in China. Prior to becoming Vice President – Business Operations in April 2016, Ms. Lu served as our General Manager – Media and Creative from September 2015 to March 2016. Prior to joining Acorn in September 2015, she was Vice President at Cachet Hotel Group, focused on Operations and Business Development from July 2013 to May 2015. Prior to Cachet, Ms. Lu was Junior Partner & General Manager at David Laris Creates (DLC) from August 2008 to June 2013, a Food & Beverage consultancy company, focusing on licensing, project management, and the operation of DLC, as well as various restaurants DLC invested in or managed. Ms. Lu graduated with a degree in International Finance in 1999 from Zhongnan University of Economics and Law.

Ms. Bethy Jie Wu is currentlyhas served as the Vice President, Human Resources with Acorn International, Inc.of the Company since November 17, 2017. She formally joined the organization on August 1st, 2017 at her transitional position as Senior Director, Human Resources and was soon appointed to her current job title in November 2017. Ms. Wu has more than twenty years of corporate HR leadership and talent & organization consulting experience, of which over ten years are in China with multinational companies and another ten years overseas in Canada. Before joining Acorn International, Inc., Ms. Wu was in Canada working for one of the biggest door components distributors in North America as Director of Human Resources & Corporate Culture between 2014 and 2017. She has also served as the HR Leader as well as the Head of Circulation & Customer Service with a reputable local Canadian investment and portfolio management company from 2012 to 2014. Prior to that, Ms. Wu has six years of experience as Senior HR Professional with two international consulting firms based in Canada between 2007 and 2012. Ms. Wu moved to Canada from China late 2006 from her position at Human Resources Director, Asia Pacific Region with Hewitt Associates, a well-known US based HR consulting and outsourcing firm, where she has served since 2001 and also acted as Senior Talent & Organization Consultant providing HR and leadership consulting service to external clients. Between 1998 and 2001 Ms. Wu took the China HR leadership role for Dun & Bradstreet based in Shanghai. She has also served as HR Manager for AIU Insurance Company Shanghai Branch, one of the subsidiaries of American International Group since 1995. Being an active member of HRPA (Human Resources Professional Association) in Canada since 2013, Ms. Wu holds her professional designations of CHRL (Certified Human Resources Leader) and CHRP (Certified Human Resources Professional). She is also a certified MBTI (Myers-Briggs Type Indicator) facilitator accredited by Australian Asianic Psychologists Press in 2005. Ms. Wu received her Master Degree in International Relations in Nanjing University in 1990, including one year of research and studies in the Johns Hopkins University – Nanjing University Centre for Chinese & American Studies. She also received her Bachelor Degree in History in Nanjing University in 1987.

Ms. Lei Li has served as the General Counsel of the Company since July 2018. Ms. Li also serves as the General Counsel of Cachet Hotels & Resorts, an international hotel branding and management company, a position that she has held since March 2015. Ms. Li is admitted to practice in both China and New York. She previously worked with Orrick, Herrington & Sutcliffe LLP and AllBright Law Offices, representing U.S.- and Asia-based corporations in a diverse range of commercial transactions, including cross-border direct investments, mergers and acquisitions, private-equity and venture-capital investments. Ms. Li earned her bachelor’s degree in law from Tongji University, and LL.M. degrees from Fudan University and the Columbia University School of law.

 

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B.Compensation

B.Compensation

 

Compensation of Directors and Executive Officers

 

In 2017,2019, the aggregate compensation paid to all of our executive officers and all of our directors was approximately $2,83$1.9 million. We did not grant rights to purchase ordinary shares of the Company to any of our directors and executive officers in 2017.2019. No benefits in kind were granted to our executive officers or directors. For information regarding options granted to officers and directors, see “—Equity Incentive Plans”.Share Options.” We do not pay or set aside any amounts for pensions, retirement or other benefits for our officers and directors.

 

Bonus Program

Mr. Jacob A. Fisch received compensation under a bonus program during 2019. In September 2017, our compensation committee and board of directors approved athis bonus program pursuant to which participating executive officers were entitled to bonus compensation upon satisfaction of certain performance objectives or otherwise based on performance as determined at the discretion of the board. Under this program, our Executive Chairman, CEO and CFO are each entitled tocertain executive officers of the Company can be awarded a cash bonus equal to 100%, 70% and 50% respectively, of each one’s base salary if certain operating targets are achieved, with additional amounts payable at the discretion of the compensation committee and board of directors based on their further assessment of the officers’ performance. Mr. Jacob A. Fisch participates in this program on the basis of his position as the Chief Executive Officer and President of the Company.

 

Equity Incentive PlansShare Options

 

The board ofCompany granted no options to its directors of China DRTV adopted a 2005 Equity Incentive Plan, or the 2005 Plan, on March 18, 2005. On June 30, 2005, the board of directors of China DRTV approved a 2005 Equity Incentive Plan B, or the 2005 Plan B,and executive officers in connection with China DRTV’s acquisition of the 49% non-controlling interest of Shanghai HJX not already owned by China DRTV at that time. On March 31, 2006, Acorn International assumed all of the options that had been granted under the 2005 Plan and the 2005 Plan B in connection with its acquisition of all of the outstanding shares of China DRTV in exchange for the issuance of shares by Acorn International to the shareholders of China DRTV. The board of directors of China DRTV terminated the 2005 Plan and the 2005 Plan B after the assumption by Acorn International of all of the options that had been granted under the 2005 Plan and the 2005 Plan B. Our 2006 Equity Incentive Plan, or the 2006 Plan, was adopted by the board of directors of Acorn International on May 1, 2006. The 2006 Plan terminated on April 30, 2016.2019.

 

All of our incentive plans are intended to promote our success and to increase shareholder value by providing an additional means to attract, motivate, retain and reward selected directors, officers, employees and other eligible persons.C.Board Practices

Each of our incentive plans permits us to issue options to purchase our ordinary shares and to issue stock appreciation rights, or SARs, which entitle the SAR holder to acquire the benefit of any appreciation in the value of the underlying ordinary shares. Options and SARs granted under our incentive plans generally do not vest unless the grantee remains employed by us or in service with us on the given vesting date. However, in circumstances where there is a death or disability of the grantee, or a change in the control of our Company, the vesting will be accelerated to permit immediate exercise of all options and SARs granted to a grantee. In addition, the vesting of options and SARs held by a director who is appointed by the holders of our preferred shares who terminates his service will be accelerated to permit immediate exercise of all options and SARs granted to such director upon termination of that director’s service with us.

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Generally, to the extent that an outstanding option or SAR initially granted under the 2005 Plan, the 2005 Plan B or the 2006 Plan has not vested by the date when the grantee’s employment or service with us terminates, the option or SAR would terminate and no longer be exercisable, except as described above. However, any remaining outstanding SARs or options remain governed by the terms of the applicable Plan as well as the respective option or equity incentive agreements pursuant to which they were issued.

Each SAR granted under our equity plans will be settled upon exercise solely in ordinary shares. Upon exercise, a holder of an SAR will receive ordinary shares having a market price, on the date of exercise, equal to the excess of the fair market value of our ordinary shares on the date of exercise over the exercise price of the applicable SAR.

As of the date of this annual report, no option or SAR grants made to our directors or executive officers under the 2006 Plan is outstanding, except that 136,080 restricted ordinary shares granted Geoffrey Weiji Gao at a purchase price of $0.01 are yet to vest per share subject to time-based and performance-based thresholds.

For risks related to registrations required of our PRC option holders, see Item 3.D, “Key Information—Risk Factors—Risks Relating to China—A failure by PRC individuals who hold shares or share options granted pursuant to an employee share option or share incentive plan to make any required applications and filings could expose our PRC individual option holders to liability under PRC law”.

Employment Agreements

We have entered into, and will enter into, employment agreements with each of our executive officers. Pursuant to these employment agreements, our executive officers each may be terminated by us with cause. We may also terminate their employment in circumstances prescribed under and in accordance with the requirements of applicable labor law, including notice and payment in lieu. Executive officers may terminate their employment with us at any time upon written notice. Although our employment agreements with our executive officers do not provide for severance pay, where severance pay is mandated by law, our executive officers will be entitled to severance pay in the amount mandated by law when his or her employment is terminated. In addition, each executive officer has agreed to hold, both during and after his or her employment agreement expires or is terminated, in strict confidence and not to use, except for our benefit (including our affiliated entities and our subsidiaries), any proprietary or confidential information, including technical data and trade secrets of our Company or the confidential information of any third party, including our affiliated entities and our subsidiaries, that we receive.

C.Board Practices

 

Duties of Directors

 

Under Cayman Islands law, our directors have a duty of loyalty to act honestly and in good faith with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed to us by our directors is breached.

 

The functions and powers of our board of directors include, among others:

 

convening shareholders’ meetings and reporting its work to shareholders at such meetings;

implementing shareholders’ resolutions;

determining our business plans and investment proposals;

formulating our profit distribution plans and loss recovery plans;

determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance of debentures;

  98●convening shareholders’ meetings and reporting its work to shareholders at such meetings;

 ●implementing shareholders’ resolutions;

 

●determining our business plans and investment proposals;

 

formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
●formulating our profit distribution plans and loss recovery plans;

 

proposing amendments to our amended and restated memorandum and articles of association; and
●determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance of debentures;

 

exercising any other powers conferred by the shareholders’ meetings or under our amended and restated memorandum and articles of association.
●formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;

●proposing amendments to our amended and restated memorandum and articles of association; and

●exercising any other powers conferred by the shareholders’ meetings or under our amended and restated memorandum and articles of association.

 

Terms of Directors and Executive Officers

 

We currently have sixfive directors on our board of directors. On February 7, 2017, Mr. Pierre E. Cohade was appointed as a director byDavid Leung resigned from our board of directors. David Naphtali and Cosimo Borelli resigned from the board of directors of the Company for personal reasons effective July 17, 2017. The Company’s board of directors has appointed Pierre E. Cohade as Lead Director of Acorn on August 16, 2017. Our board of directors has appointed Ms. Jenny Hseau-Jean Wang as a director ofJune 15, 2018 in connection with his relocation back to the Company effective September 13, 2017. Our board of directors has appointedUnited States from China. Mr. Urs P. Zimmerman was appointed as a director of the Company effective January 15, 2018 by our board of directors to fill the vacancy created by Mr. Leung’s resignation. Ms. Bethy Jie Wu was appointed to serve as our Vice President, Human Resources on November 17, 2017. She previously served as our Senior Director, Human Resources. Mr. Martin Oneal Key was appointed to serve as our chief financial officer on August 20, 2018. Ms. Lei Li was appointed to serve as the general counsel on August 20, 2018. Our prior vice president and chief financial officer Mr. Geoffrey Gao Weiji left the Company on August 24, 2018. Under our current articles of association, each of our directors will be subject to retirement and reelection at each of our annual general meetings.

 

All of our officers are appointed by and serve at the discretion of our board of directors and are elected by, and may be removed by, a majority vote of our board of directors.

 


Board Committees

 

Our board of directors has established an audit committee, a compensation committee and a corporate governance and nominating committee. Our corporate governance guidelines provide that a majority of the members of our compensation committee and nominating and corporate governance committee will be independent directors within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual. All members of our audit committee shall be independent within the meaning of Section 303A of the New York Stock Exchange Listed Company Manual and the criteria for independence set forth in Rule 10A-3 of the Exchange Act.

 

Audit Committee

 

Our audit committee consists of Ms. Jenny Hseau-Jean Wang, Mr. Mr. Eric Haibing Wu, Mr. Pierre E. Cohade and Mr. David LeungUrs Paul Zimmerman.Ms. Jenny Hseau-Jean Wang is the chairman of our audit committee. Each member of our audit committee satisfies the “independence” requirements of the NYSE Rules and meets the criteria for independence set forth in Section 10A(m)10A-(3) of the U.S. Securities Exchange Act of 1934, or the Exchange Act.

 

The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our Company. Our audit committee is responsible for, among other things:

 

selecting the independent auditor and pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;

at least annually, obtaining and reviewing the independent auditor’s report describing its internal quality-control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditors and our Company;

setting clear hiring policies for employees or former employees of the independent auditors;

reviewing with the independent auditors any audit problems or difficulties the independent auditor may have encountered in the course of its work, and management’s response;

reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the U.S. securities laws;

reviewing and discussing the annual audited financial statements with management and the independent auditors;

  99●selecting the independent auditor and pre-approving auditing and non-auditing services permitted to be performed by the independent auditor;

 ●at least annually, obtaining and reviewing the independent auditor’s report describing its internal quality-control procedures, any material issues raised by the most recent internal quality control review, or peer review, of the independent auditors and all relationships between the independent auditors and our Company;

 

●setting clear hiring policies for employees or former employees of the independent auditors;

 

reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;
●reviewing with the independent auditors any audit problems or difficulties the independent auditor may have encountered in the course of its work, and management’s response;

 

reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments made in connection with the preparation of our financial statements;
●reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the U.S. securities laws;

 

reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off- balance sheet structures, on our financial statements;
●reviewing and discussing the annual audited financial statements with management and the independent auditors;

 

discussing policies with respect to risk assessment and risk management;
●reviewing and discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;

 

reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
●reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments made in connection with the preparation of our financial statements;

 

obtaining and timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our Company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management, and all other material written communications between the independent auditor and management;
●reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off- balance sheet structures, on our financial statements;

 

●discussing policies with respect to risk assessment and risk management;
establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
●reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;

 

reviewing and reassessing the adequacy of our audit committee charter at least annually and recommending any changes to our board of directors;
●obtaining and timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our Company, all alternative treatments of financial information within U.S. GAAP that have been discussed with management, and all other material written communications between the independent auditor and management;

 

meeting separately and periodically with management, the internal auditors and the independent auditors;
●establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

reporting regularly to the full board of directors; and
●reviewing and reassessing the adequacy of our audit committee charter at least annually and recommending any changes to our board of directors;

 

exercising such other powers and performing such other duties as may from time to time be delegated to the audit committee by our board of directors.
●meeting separately and periodically with management, the internal auditors and the independent auditors;

●reporting regularly to the full board of directors; and

●exercising such other powers and performing such other duties as may from time to time be delegated to the audit committee by our board of directors.

 

Compensation Committee

 

Our compensation committee consists of Ms. Jenny Hseau-Jean Wang,Mr. Eric Haibing Wu, Mr. Pierre E. Cohade and David Leung. Each ofMr. Urs Paul Zimmermann. Mr. Pierre Cohade is the memberschairman of our compensation committeecommittee. Each of Mr. Wu and Mr. Zimmerman satisfies the “independence” requirements of the NYSE Rules.

 

Our compensation committee is responsible for, among other things:

 

reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, reporting the results of such evaluation to our board of directors, and determining (either as a committee or with our board of directors) our chief executive officer’s compensation level based on this evaluation;

at least annually, reviewing and approving all compensation arrangements with our chief executive officer and our other senior executive officers;

reviewing and making recommendations to our board of directors with respect to our compensation for executive officers other than our chief executive officer, incentive-compensation plans and equity-based plans, and overseeing the administration of these plans; and

periodically reviewing the compensation of our directors and making recommendations to our board of directors with respect thereto.

  100●reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, reporting the results of such evaluation to our board of directors, and determining (either as a committee or with our board of directors) our chief executive officer’s compensation level based on this evaluation;

 ●at least annually, reviewing and approving all compensation arrangements with our chief executive officer and our other senior executive officers;

 

●reviewing and making recommendations to our board of directors with respect to our compensation for executive officers other than our chief executive officer, incentive-compensation plans and equity-based plans, and overseeing the administration of these plans; and

●periodically reviewing the compensation of our directors and making recommendations to our board of directors with respect thereto.

 

Corporate Governance and Nominating Committee

 

Our corporate governance and nominating committee consists of Mr. David Leung, Ms. Jenny Hseau-Jean Wang, Mr. Eric Haibing Wu and Mr. Pierre E. Cohade. Mr. David LeungPierre Cohade is the chairman of this committee. Of the membersEach of our corporate governanceMs. Wang and nominating committee, all of the members satisfyMr. Wu satisfies the “independence” requirements of the NYSE Rules.

 

Our corporate governance and nominating committee is responsible for, among other things:

 

●identifying and recommending to our board of directors candidates for election or re-election to the board of directors, or for appointment to fill any vacancy;
identifying and recommending to our board of directors candidates for election or re-election to the board of directors, or for appointment to fill any vacancy;
●identifying and recommending directors to fill vacancies on any committee of the board of directors; and

 

identifying and recommending directors to fill vacancies on any committee of the board of directors; and

overseeing our system of corporate governance, including developing and recommending to our board of directors a set of corporate governance guidelines, reviewing and reassessing the adequacy of the guidelines at least annually, and recommending to our board of directors for approval any such changes to the guidelines as the committee believes are appropriate.
●overseeing our system of corporate governance, including developing and recommending to our board of directors a set of corporate governance guidelines, reviewing and reassessing the adequacy of the guidelines at least annually, and recommending to our board of directors for approval any such changes to the guidelines as the committee believes are appropriate.

 

Corporate Governance

 

Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. Our code of ethics for the Senior Executive and Financial Officers is publicly available on our website at http://www.acorninternationalgroup.com/. In addition, our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. Our code of ethicsemployees, and is filed as an exhibit to our code of conduct are publicly availableregistration statement on our website atwww.acorninternationalir.comForm F-1 (No. 333-141860).

  

In addition, our board of directors has adopted a set of corporate governance guidelines.guidelines, which is also publicly available on our website at http://www.acorninternationalgroup.com/. The guidelines reflect certain guiding principles with respect to our board of directors’ structure, procedures and committees.

 

The guidelines are not intended to change or interpret any law or our amended and restated memorandum and articles of association. As a foreign private issuer with ADSs listed on the NYSE, we are subject to corporate governance requirements imposed by the NYSE. Please refer to Item 16.G., “Corporate Governance” for further details.

 

Remuneration and Borrowing

 

The directors may determine remuneration to be paid to the directors. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. The directors can exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whether outright or as security for any debt obligations of our Company or of any third party.

 

Qualification

 

There is no shareholding qualification for directors.

 

Summary of Corporate Governance Differences

 

As a foreign private issuer with shares listed on the NYSE, we are required by Section 303A.11 of the NYSE’s Listed Company Manual to disclose any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under NYSE listing standards. A summary of the differences between

The following summarizes some significant ways in which our current corporate governance practices differ from those followed by domestic companies under the listing standards of the New York Stock Exchange.

The NYSE Manual requires U.S. domestic listed companies to have a compensation committee and a nominating/corporate governance committee, each composed entirely of independent directors, which are not required under the Companies Law of the Cayman Islands. Currently, our compensation committee is composed of three members, only two of whom are independent directors. Our nominating and corporate governance committee is composed of three members, only two of whom are independent directors.In addition, the NYSE corporate governanceManual requires shareholder approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to those plans, which is not required under the Cayman Islands law. We intend to comply only with the requirements applicable to domestic U.S. companies can be found on our website atwww.acorninternationalir.com. of Cayman Islands law in determining whether shareholder approval is required.

Please refer to Item 16.G., “Corporate Governance” for further details.


  101D.

D.Employees

 

We have been focusing on enhancing the efficiency and per person productivity of our call center by (i) optimizing the call center to supervisor ratio, and (ii) identifying and retaining highly effective call center salespersons. Meanwhile, we continuously adapt our employee numbers to fit for the changing business scope and scale in all supporting function departments. As of December 31, 2015, 20162017, 2018 and 2017,2019, we had 305, 185128 (excluding 1 part-time employee), 142 and 128113 (excluding 8 part-time employees) employees, respectively. The most labor intensive area of operation is our supportingsales and marketing functions, which employed approximately 28%54.5% of our total employees at the end of 2017. The salary for call center employees includes a base salary plus a variable amount based on an incentive bonus structure.2019.

 

The following table sets forth the number of our employees categorized by our areas of operation and as a percentage of our total workforce as of December 31, 2017:2019:

 

  Number of  Percentage 
Operations employees  of total 
 Supporting Functions (Admin/HR/IT/Financial/Legal)  36   28%
Call center  31   24%
Sales and marketing (all BU except the Call center)  30   23%
 Operational Functions (Inventory/Logistic/Creative)  16   13%
Management (Chairman’s Office)  9   7%
 Customer service  6   5%
Total  128   100.0%

Although we undertake a rigorous selection process for our call center employees, the turnover rate for our call center employees located in our Wuxi call center was approximately 181% in 2015, 132% in 2016 and 40% in 2017, respectively, reflecting both voluntary terminations and termination of employees failing to meet our performance standards.

  Number of  Percentage 
Operations employees  of total 
Supporting Functions (Admin/HR/IT/Financial/Legal)  33   27%
Sales and marketing  66   54.5%
Operational Functions (Inventory/Logistics)  14   11.5%
Management (Chairman’s Office)  7   6%
Internal Audit  1   1%
Total  121   100%

  

E.Share Ownership

 

The following table sets forth information known to us with respect to the beneficial ownership of our ordinary shares, as of April 30, 2018,March 31, 2020, of:

 

each of our directors and executive officers; and
●each of our directors and executive officers; and

 

each person known to us to own beneficially more than 5% of our ordinary shares (collectively “Principal Shareholders”).
●each person known to us to own beneficially more than 5% of our ordinary shares (collectively “Principal Shareholders”).

 

Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The percentage of beneficial ownership is based on 53,437,89051,619,218 ordinary shares outstanding as of April 30, 2018.March 31, 2020:

   

  Shares beneficially owned as 
  of April 30, 2018 
Name Number  Percent 
Directors and Executive Officers        
Robert W. Roche(1)  40,719,697   76.20 
Eric Haibing Wu  —   — 
Ms. Jenny Hseau-Jean Wang  —   — 
David Leung  —   — 
Urs P. Zimmerman  —   — 
Pierre E. Cohade(2)  65,884   0.12 
Jacob A. Fisch  980,000   1.83 
Geoffrey Weiji Gao  246,580   0.46 
Jan Jie Lu  —   — 
Bethy Jie Wu  —   — 
All directors and executive officers as a group  42,012,161   78.61 
Principal Shareholders        
Bireme Limited(3)  19,999,990   37.43 
Ritsuko Hattori-Roche(4)  38,967,937   72.92 

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  Shares beneficially
owned as of		 
  March 31, 2020 
Name Directors and Executive Officers Number  Percent 
Robert W. Roche(1)  40,719,697   78.88%
Eric Haibing Wu  —   — 
Ms. Jenny Hseau-Jean Wang  —   — 
Urs P. Zimmerman  —   — 
Pierre E. Cohade(2)  85,884   0.16%
Jacob A. Fisch(3)  980,000   1.90%
Martin Oneal Key  — �� — 
Jan Jie Lu  —   — 
Bethy Jie Wu  —   — 
Lei Li  —   — 
All directors and executive officers as a group  41,785,581   80.94%
Principal Shareholders        
Bireme Limited(4)  19,999,990   38.75%
Ritsuko Hattori-Roche(5)  38,967,937   75.49%

 

(1)includes (i) 87,588 ADSs held by Moore Bay Trust, which is a charitable trust with Mr. Robert W. Roche’s children being the beneficiaries of the remainder, (ii) 129,770 ordinary shares and 993,511 ADSs held by Bireme Limited, which is wholly owned by Mr. Robert W. Roche’s wife, (iii) 77,250 ADSs held by Catalonia LLC, which is owned by Mr. Robert W. Roche’s wife’s trust, and (iv) 13,899,267 ordinary shares and 176,184 ADSs held by Ms. Ritsuko Hattori-Roche.Mr. Robert W. Roche’s wife. Mr. Robert W. Roche disclaims beneficial ownership of the aforesaid shares.

 


(2)includes 65,884 ordinary shares owned by Artemis Ventures Ltd.; Mr. Cohade disclaims beneficial ownership of the 65,884 shares held by Artemis Ventures Ltd., except to the extent of his one percent ownership interest in that entity.

 

(3)includes 980,000 ordinary shares owned by TFMPP Holdings Limited Partnership. Mr. Fisch disclaims beneficial ownership of these 980,000 shares, but his wife controls TFMPP Holdings Limited Partnership, and accordingly he may be deemed to have beneficial ownership of these shares.

(4)includes 129,770 ordinary shares and 993,511 ADSs.

 

(4)(5)includes (i) 13,899,267 ordinary shares and 176,184 ADSs held by Ritsuko Hattori-Roche, (ii) 129,770 ordinary shares and 993,511 ADSs.heldADSs held by Bireme Limited which is wholly owned by Ms. Ritsuko Hattori-Roche and (iii) 77,250 ADSs held by Catalonia LLC, which is owned by Ms. Ritsuko Hattori-Roche’s trust.

None of our existing shareholders has voting rights that differ from the voting rights of other shareholders. According to our register of members for our ordinary shares dated April 30, 2018, there are 83 record holders among our ordinary shareholders in the United States. Citibank, N.A. has advised us that, as of April 30, 2018, 2,395,729 ADSs, representing 47,914,581 underlying ordinary shares, were held of record by China DRTV, Inc. and CEDE & Co., who is domiciled in the United States. We have no further information as to ADSs held, or beneficially owned, by U.S. persons. 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. We are not aware of any arrangement which may at a later date result in a change of control of our Company.

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.Major Shareholders

 

Please refer toThe information stated in Item 6.E, “Directors, Senior Management and Employees—Share Ownership”. is hereby incorporated by reference.

None of our existing shareholders has voting rights that differ from the voting rights of other shareholders.

To our knowledge, as of March 31, 2020, a total of 34,480,219 ordinary shares were held by 42 record holders in the United States, representing approximately 66.8% of our total outstanding shares on an as-converted basis. One of these holders is Citibank, N.A. the depositary of our ADS program, which held 34,473,080 ordinary shares on record, representing approximately 66.8% of our total outstanding shares on record as of March 31, 2020.

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, except as disclosed in Item 6.E, “Directors, Senior Management and Employees—Share Ownership.”

We are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.

 

B.Related Party Transactions

 

Contractual Agreements with Affiliated Entities and their Shareholders

 

Historically, PRC law used to restrictlaws and regulations limited foreign equity ownership of companies that are engagedengage in direct salesTV informercials and internet businesses. To comply withvalue-added telecommunications service business. Due to these restrictions, we operated our direct sales and internet interactive servicesuch businesses in China through a series of contractual arrangements with Shanghai Network, Beijing Acorn, Beijing HJX Technology, Shanghai HJX Electronicour variable interest entities. We no longer operate the TV informercials business and their shareholders, Mr. Song, and Mr. Pan. See Item 4.C, “Informationwe currently have a limited portion of our business operated by our variable interest entities. For a description of these contractual arrangements, see “Item 4.C. Information on the Company—Organizational Structure”.

Exclusive Partnership Agreement with Oak Lawn Marketing International, Inc.

We entered into an exclusive partnership agreement on July 21, 2011 with Oak Lawn Marketing International, Inc. (formerly known as Global Infomercial Services, Inc.), or OLMI, a full-service international direct-response television distributor which is currently a wholly-owned subsidiary of Oak Lawn Marketing, Inc.

Structure.”

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Mr. Robert W. Roche, our co-founder and chairman of the board of directors is the Chairman and one of the largest shareholders of Oak Lawn Marketing, Inc. The agreement has an initial term of two years with the option for successive one year term renewals thereafter. Pursuant to the exclusive partnership agreement, OLMI will:

be appointed as our exclusive agent with respect to all infomercial products (defined as all products sold with a short or long form infomercial) that have been or are being sold in North America, South America, or Europe;

provide certain services to our Company, which services include, among others, searching for and identifying products of interest for us, obtaining rights to such products, providing product marketing analysis, assisting in vendor relationship management and arranging certain marketing activities; and

receive a fee paid by us based on a percentage of the cost of all products introduced to us by OLMI, which percentage will be negotiated on a case-by-case basis but in no event shall exceed 10% of the cost of the applicable product.

The exclusive partnership agreement was approved by our audit committee. As of the date of this Form 20-F, we had identified six products through OLMI. In 2016 and 2017, we had no transactions with OLMI and therefore no service fee and royalty fees or royalties were paid to OLMI.

Software License and Service Trial Agreement with Dreamstart (Hong Kong) Ltd.

We discontinued our business with Dreamstart (Hong Kong) Ltd., or Dreamstart, in August 2017. DreamStart is a company which provides one-stop solutions for telemarketing businesses through a proprietary software designed to increase the efficiency and capability of call centers. Mr. Roche currently owns approximately 20% shares in Dreamstart. In 2014, we paid approximately US$1.2 million to Dreamstart as a setup fee and trial fee for the dialing software and call center management system. Pursuant to the terms of the proposed agreement, if the software licensed by Dreamstart fails to achieve certain key performance indicators, all the monthly fees would be refunded to us. If the trial result was satisfactory to us, we had the option to enter into a definitive agreement with Dreamstart with terms and conditions not less favorable to us than those provided in the trial agreement. We terminated all business relations with Dreamstart in October 2014, and, that same month, we received a letter from Dreamstart demanding certain fees relating to our use of Dreamstart’s dialing software and call center management system following the trial period. In 2015, due to the settlement of the shareholder dispute, by approval of the board of directors on June 9, 2015, the management reconsidered the cooperation with Dreamstart and determined to pay US$1.6 million as the service fees for use of the call center management system developed by Dreamstart. On July 6, 2015, we entered into a settlement agreement with Dreamstart and reduced the settlement fees to US$1 million. See Item 8.A, “Financial Information—Consolidated statements and other financial information—Legal Proceedings”.

In 2015, we decided to continue our business with Dreamstart and re-negotiated the licensing arrangement for our use of its software for the call center. On September 15, 2015, we entered into a master agreement with Dreamstart and its affiliate, pursuant to which, Dreamstart granted a non-exclusive, non-transferable and non-assignable license of the software of Leverage Point System to us, and we shall pay a minimum monthly fee of US$50,000 and a variable fee of US$250 to Dreamstart and its affiliate during the term of the agreement. On September 9, 2015, we entered another software system development agreement with Dreamstart and its affiliate to customize the Leverage Point System pursuant to section 4.1 and section 8.E of the Master Agreement, pursuant to which Dreamstart shall explore and development the customized system for us and we shall pay Dreamstart an aggregate fee of RMB164,441.86. In 2016, we paid US$454,845 to DreamStart for the use of its call center management system. In 2017, we paid nil to DreamStart.

Convertible Borrowing with Ryecor China Investment Limited

 

In October 2014, Ryecor China Investment Limited, or Ryecor, a company wholly owned by the Mr. Robert W. Roche, entered into an loan agreement with Shanghai E-surere-Surer Financial Services Co., Ltd., or E-surer, on October 2014, pursuant to whichwhereby E-surer borrowed from Ryecor lent E-surera RMB 20,000,000 with aconvertible line of credit at 6% annual interest rate andpayable at maturity ofon August 22, 2018. Under the loan agreement, interestthe line of credit up to RMB20.0 million is due at maturity and Ryecor may lend an additional RMB20.0 millionavailable to E-surer at any time prior tountil the maturity date. All or part of outstanding principle and interest may be converted into such amount of equity interest of E-surer that represents a percentage of equity basedownership obtained by dividing the aggregate outstanding principal and unpaid accrued interest on an agreed formula.the date of conversion, by RMB 100,000,000. The loan was secured by the 51% of E-surer’s equity interest in its wholly-owned subsidiary. The total amount lent

In September 2015, we entered into an assignment with Ryecor, pursuant to E-surer by Mr. Rochewhich Ryecor assigned to us all of its rights and delegated to us all of its obligation in exchange of a cash payment of $3,024,933 to Ryecor and Acorn Composite Corporation, Inc. (wholly, which is also a company owned by Mr. Roche) under the loan agreement was $3,024,993. In September 2015, Ryecor and Acorn Composite assigned to us all rights and all obligations under the loan agreement at par, and the E-Surer loan wasRoche. The Assigned Contracts were personally guaranteed by Mr. Roche. In exchange,

The loan matured on August 22, 2018 and we paid $1,154,386continue to Ryecornegotiate with the borrower on a repayment plan. The loan continues to be personally guaranteed by Mr. Roche until fully repaid or converted and $1,870,547we believe the loan to Acorn Composite. be fully collectable.

As of the issuance date of this annual report,the consolidated financial statements, E-surer has not repaid the loan assigned to us has not been repaid by E-surer.Acorn. We continued to accrue interest on the unpaid loan. As of December 31, 2017, 2018 and 2019, the loan advance was $3,587,204, $3,597,392 and $3,754,735 respectively, which includes accrued interest of $183,785, $184,395 and $181,880 in 2017, 2018 and 2019, respectively.

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Strategic Cooperation Framework Agreement with Cachet Hotel Group

 

In November, 2017, the Companywe entered into a Strategic Cooperation Framework Agreement with Cachet Hotel Group Limited Cayman L.P. (“Cachet”), an international hospitality branding and management company. It is also part of the Roche Enterprises Limited group of companies. Roche Enterprises Limited is owned by Acorn’s Executive Chairman, Mr. Robert Roche and Mr. Roche is the Executive Chairman and the majority shareholder of Cachet. In addition, Mr. Jacob A. Fisch, Acorn’s Chief Executive Officer is a shareholder and member of the Board of Directors of Cachet. This Strategic Cooperation Framework Agreement is part of Acorn’s growth strategy to leverage its affiliate connections and, to the extent possible, build a stronger relationship with its fellow Roche Enterprises Limited portfolio companies.

  

Under the Strategic Cooperation Framework Agreement, Acorn will becomebecame Cachet’s preferred supplier for THEthe sourcing of all amenities, textiles, other hotel goods as well as various furniture, fixtures and equipment for the hotels, restaurants, clubs and other types of properties managed by Cachet, subject to Acorn’s ability to procure the products satisfying Cachet’s requirements on commercially reasonable terms. BestCachet is required to use best efforts will be used to ensure that the owners of these properties purchase their products from Acorn.

 

The Secured Revolving Credit Agreement, as amended, entered into in connection with the Strategic Cooperation Framework Agreement also provides a credit facility for Acorn to loan to Cachet up to $10.0$15.0 million at an interest rate of 8% per annum for amounts borrowed in USD and 10% for amounts borrowed in RMB, with each drawdown subject to Acorn’s consent in its sole and absolute discretion. The facility has a three-year term with two one-year renewal options. Cachet’s repayment of all loans under the credit facility are personally guaranteed by Mr. Roche. As of September 30, 2017,December 31, 2019, Acorn had approximately $23.0$13.5 million in cash and equivalents earning interest at standard bank interest rates. The credit facility affords Acorn the opportunity to invest its cash reserves at above market rates and on preferential terms while also allowing it to use such support to strengthen its strategic relationship with Cachet. The largest amount outstanding under this credit facility up to May 22, 2020 was $14.7 million, and the amount outstanding as of May 22, 2020 was $14.7 million.


Arrangement Regarding Shared Services

 

We have started collecting interests paymententered into an arrangement regarding shared services with Cachet Hotel Group Limited Cayman L.P., or Cachet, thereby forming Roche Enterprises Corporate Services, under this agreement. We have also started providing sourcing and procurementwhich Roche Enterprises Corporate Services will provide or cause its affiliates to provide certain services to Cachet.Cachet, our Company and potentially other affiliates. The services provided include financial and tax services, legal services, human resource services, administrative services, information and technology services, marketing and branding services. Each of the Company and Cachet will reimburse Roche Enterprises Corporate Services or its affiliates for certain costs in connection with this arrangement.

Inventory Purchase from IS Seafood

Shanghai Acorn Network Technology Development Co., Ltd, or Acorn Network, renewed its Seafood Purchase and Sale Contract with IS Seafood on December 1, 2019 for the period from December 1, 2019 to November 30, 2020. The parties’ previous Seafood Purchase and Sale Contract was effective from December 15, 2017 to November 30, 2019. The partnership includes the appointment of IS Seafood to be the major supplier of imported fresh seafood to Acorn for its Acorn Fresh business.

Before October 2018, we had an insignificant amount of transactions with IS Seafood.

During 2017, 2018 and 2019, we purchased Iceland sourced seafood, such as cod, lobster, halibut and scampi, from IS Seafood in the amounts of $2,656, $495,276 and $1,732,670, respectively, to sell to Chinese consumers via the internet.

As of December 31, 2019, we have made an advance of $1,115,009 to IS Seafood for purchases of Iceland sourced seafood to sell to Chinese consumers via the internet.

Payment Agent Agreement with GA Homes Inc. and 510 W42 Retail LLC

China DRTV, Inc. entered into a series of agreements with GA Homes Inc. and 510 W 42nd Retail LLC, both of which are affiliates of our Chairman Mr. Roche, respectively in 2018. Under these agreement, China DRTV, Inc., agreed to pay the purchase price for certain equipment purchase orders of the aforesaid entities, in consideration of a payment that is equal to 10% of such purchase price. As of April 30, 2020, China DRTV, Inc. has fulfilled all of its obligations under these agreements and has received $400,000 as consideration.

 

Waiver of Debts

 

As of the end of year 2017, Acorn Information2018, Shanghai HJX Digital Technology Co., Ltd waived the debts owed by three companies in our Group (i.e. Acorn Trade (Shanghai), Shanghai Network and Beijing Acorn), in an aggregate amount of approximately RMB231.72RMB202 million.

As of the end of 2019, Zhuhai Acorn waived the debts owed by Acorn Trade and Shanghai Network in an aggregate amount of approximately RMB4.7 million.

 

Employment Agreements

 

See Item 6.B, “Directors, Senior ManagementWe have entered into, and Employee—Compensation—Employment Agreements”.will enter into, employment agreements with each of our executive officers. Pursuant to these employment agreements, our executive officers each may be terminated by us with cause. We may also terminate their employment in circumstances prescribed under and in accordance with the requirements of applicable labor law, including notice and payment in lieu. Executive officers may terminate their employment with us at any time upon written notice. Although our employment agreements with our executive officers do not provide for severance pay, where severance pay is mandated by law, our executive officers will be entitled to severance pay in the amount mandated by law when his or her employment is terminated. In addition, each executive officer has agreed to hold, both during and after his or her employment agreement expires or is terminated, in strict confidence and not to use, except for our benefit (including our affiliated entities and our subsidiaries), any proprietary or confidential information, including technical data and trade secrets of our Company or the confidential information of any third party, including our affiliated entities and our subsidiaries, that we receive.

 


Share Options

 

See Item 6.B, “Directors, Senior Management and Employee—Compensation—Equity Incentive Plans”Share Options”.

Shareholder Dispute

Our co-founders, Mr. Robert W. Roche and Mr. Don Dongjie Yang, as well as various other shareholders who are aligned with them, were involved in a dispute with each other for the control of our strategic direction and our board of directors. This shareholder dispute resulted in various proceedings being brought before the Cayman Islands Court during the fourth quarter of 2014 seeking a winding up order in respect of our Company or, in the alternative, various other remedies. In March 2015 the Cayman Islands court issued a final order related to the shareholder dispute and on May 4, 2015 we convened the EGM required to be called by the court’s final order that resulted in changes to our board members and our management. Please refer to the sections headed “Reimbursement to Mr. Robert W. Roche” for the details of the arrangements entered into by the parties.

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In connection with the settlement, our board formed a committee comprised of directors who our board determined were independent, namely Mr. William Liang (who has since resigned from the Board without any subsequent replacement on this committee), Mr. Cosimo Borrelli (resigned on July 17, 2017) and Mr. David Leung, to evaluate and consider any actions to be taken our Company in connection the settlement and the terms thereof as they may apply to our Company (including potential conditions to any company action, the consideration to be received by our Company and measures designed to protect the interests of our Company and its other shareholders). As of the date of this annual report, the settlement has been fully paid.

On December 1, 2016, Acorn International, Inc., or Acorn International, brought a lawsuit against three former directors, namely Andrew Y. Yan, Gordon Xiaogang Wang, and Jing Wang for their misconduct, alleging that three defendants had breached their fiduciary duties and were responsible for alleged misconduct in and/or mismanagement of Acorn international's business resulting from the wrongful removal of Mr. Roche as the Acorn international's chief executive officer, exposing Acorn international to breach of contract claims, refusing to pursue valuable business opportunities and wrongful termination of certain employees resulting in unnecessary severance costs. The relief consists of (1) initial monetary damage claims comprised of US dollar denominated damages of approximately US$26,326,389.76, and Renminbi denominated damages of approximately RMB 120,045,222, (2) costs and (3) such further or other relief as the court considers just. On July 28, 2017, we have entered into a settlement agreement with REL, the Former Directors and SAIF. Pursuant to such settlement agreement, all parties thereto would, among other things, discontinue and/or withdraw all claims, counterclaims and taxation proceedings in the Cayman Islands Court related to the above mentioned matters. An agreement was also reached for the Company to repurchase all of the ordinary shares of the Company owned by SAIF, representing 27.7% of the total outstanding ordinary shares of the Company, for the purchase price of approximately $4.17 million, the equivalent of $4.05 per ADS. The purchase price represents an approximately 60.5%, 64.8% and 62.8% discount to the closing price of the Company’s ADSs based on the 30-day, 60-day and 90-day moving average, respectively. The repurchased shares have already been cancelled.

Transitional Services and Separation Agreement

On May 27, 2015, we entered into the TSSA with Mr. Dongjie Yang in connection with his resignation as a director and officer of the Company. Pursuant to the TSSA, we acquired all the ordinary shares in our Company held by Mr. Yang (i.e. 6,518,656 ordinary shares) through his wholly-owned company, D.Y. Capital, Inc., for nominal aggregate consideration of $1.00. At the time, these shares represented approximately 7.3% of our total outstanding ordinary shares, and were equivalent to 325,933 ADSs (with one ADS equivalent to twenty ordinary shares). Based on the closing price for our ADSs on the NYSE on May 27, 2015, i.e. the last trading day before our announcement of the TSSA, the acquired shares had a value of approximately $3.3 million. Promptly following acquisition, we cancelled the shares reducing our outstanding ordinary shares. Each of the company, Mr. Yang and our and his respective associated entities and persons gave a mutual waiver and release of all claims that may have against one another for any matters arising or occurring prior to May 27, 2015, the date of the TSSA.

Reimbursement to Mr. Robert W. Roche

In 2015, our board approved the settlement with Mr. Roche and in January 2016, we reached a settlement agreement with Mr. Robert W. Roche and Acorn Composite Corporation, Inc., or the ACCI, a company wholly owned by Mr. Roche, for the purpose of settling (i) various amounts incurred by ACCI and/or its associated companies on behalf of and for the benefit of securing the commercial and business interests of our Company; and (ii) Mr. Roche’s employment related damages and certain legal fees incurred in connection with such damages. Pursuant to the settlement agreement, we agreed to reimburse Mr. Roche approximately $0.9 million in total for various costs incurred by Mr. Roche and ACCI and for the employment-related damages and legal fees incurred by Mr. Roche from August 2014 to April 2015. In addition, each of Mr. Roche (together with ACCI) and us agreed to irrevocably discharge and release each other from all actions that may result from the shareholder dispute. The settlement agreement was discussed and approved by the board of directors.

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Settlement with Mr. Robert W. Roche’s affiliated entities

On May 7, 2017, our board of directors passed a resolution to pay to Acorn Composite Corporation, Inc. and other affiliates of Mr. Robert W. Roche’s (the “Roche Entities”) the sum of US$924,757 to extinguish all the claims that Roche Entities previously had against us. As of the date of this annual report, such amount has been fully paid by us.

Grant of Shares to Artemis Ventures Ltd.

Artemis Ventures Ltd., or Artemis Ventures, a company then wholly owned by Mr. Pierre E. Cohade, entered into a service agreement with China DRTV, Inc. on November 10, 2016 before Mr. Pierre E. Cohade joined us as an independent director on February 1, 2017. On January 12, 2017, our board of granted shares having a value equal to USD25,000 as the consideration for the consultancy services provided by Mr. Pierre E. Cohade from the middle October 2016 to the end of January 2017. On January 31, 2017, the service agreement with Artemis Ventures was terminated. Artemis Ventures was granted 65,884 ordinary shares in total. Mr. Pierre E. Cohade currently owns 1% of the shares of Artemis Ventures.  

 

C.  Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8.FINANCIAL INFORMATION

 

A.  Consolidated statements and other financial information.

 

We have appended consolidated financial statements filed as part of this annual report. See Item 18, “Financial Statements”

 

Legal Proceedings

 

We may from time to time become a party to various general legal or administrative proceedings arising in the ordinary course of our business.

  

In early 2016, Acorn Information Technology (Shanghai) Co., Ltd filed a lawsuit at the People’s Court of Pudong District of Shanghai against Jinqiu Fitness Facility Co., Ltd., or Jinqiu Fitness, alleging that Jinqiu Fitness should stop infringing our registered trademark for our Babaka posture correction products and advertising online with relevant characters. Besides, we also required Jinqiu Fitness to pay us the indemnification of RMB 1,000,000. In May 9, 2016, the People’s Court of Pudong District of Shanghai held that Jinqiu Fitness shall pay us the indemnification in the amount of RMB 759,000. As of the date of this annual report, Jinqiu Fitness has not paid such indemnification and we have applied Pudong District of Shanghai for the enforcement of such payment by Jinqiu Fitness..

In March 2016, Shanghai Acorn Advertising Broadcasting Co., Ltd. filed a lawsuitlawsuits against four advertisement companies, among which, two registered in Beijing, one registered in Xi’an and one registered in Shanghai, respectively, requesting the defendants to repay deposits and advertising fees totaling RMB10,226,490.06RMB10,070,750 previously paid by us.us plus liquidated damages calculated on annual rate of 24%. We also claimed that the defendants should be responsible for paying damages of RMB 2,157,442 in aggregate as well as attorney fees, court filing fees and other relevant expenses. The court has accepted our application to freeze the defendants’ assets on March 14, 2016. As of the date of this annual report,On November 2, 2016, we reached a settlement agreement with anone of the advertisement company registered in Beijing, and all the outstanding and due payment owed to us has been paid. Asby this company equivalent to RMB 2,164,050 was repaid to us as of the date of this annual report, theNovember 2016. On November 28, 2016, we obtained final court supported some ofjudgement on our claimsclaim against another advertisement company registered in Beijing, and after the second appealing such defendant hascourt supported our claim of RMB 2,146,200 against this company, however, the court also supported the counter claim of RMB 1,258,950 raised by this company, therefore this company paid us RMB 887,250 in full supported by the court. .as of April 2017. In the case against anthe advertisement company registered in Xi’an, we reached a settlement with such defendant on November 2, 2016. However, since such defendant has not paid us in accordance with such settlement agreement as of the date of this annual report, we have2016 and had applied to the court to enforce such settlement agreement. We received the settlement amount of RMB 3.7 million in 2018. In the case against anthe advertisement company registered in Shanghai, the court supported our claims for the full principal amount of RMB 2,078,500 and damages equal to four times of bank loan interests counting since January 9, 2015 against such defendant. As of the date of this annual report, the defendant has not paid such principal and damages and we haveWe applied for the enforcement of such payment.payment, but the court ended the forcible enforcement procedure on May 26, 2017 because there was no enforceable assets of the defendant and listed the defendant on the List of Dishonest Parties Subject to Enforcement.

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In March 2016, Acorn Trade filed a lawsuit in Shanghai Xuhui District People’s Court against Henan Feifan Electronic Technology Co., Ltd., Mr. Li Dengke and Mr. Nie Yafei, to claimclaiming for payment for goods, in a sum of RMB2,319,790, together with the interest of RMB92,791.6RMB92,792 accrued to it and all relevant attorney fees and costs of preservation. The court has accepted our case and ordered to freeze the defendant’s assets. In February 20, 2017, the judgment issued by Shanghai Xuhui District People’s Court supported the principal amount and damages equal to bank loan interests counting from July 17, 2015 to June 15, 2017. Such payments have not been received yet.made to the Company in full as of March 2019.

 

In early 2016, Acorn Trade filed a lawsuit in Shanghai Xuhui District People’s Court against Nanjing Rongchuan Electronic Trade Co., Ltd. and Mr. Sun Shigong, to claimclaiming for payment for goods, in a sum of RMB3,228,009, together with the interest of RMB 129,120.36129,120 accrued and the relevant penalty. InOn December 22, 2016, the court issued the first-instance judgment which supported all the claims raised by Acorn Trade. The defendants then appealed to Shanghai No.1 Intermediate People’s Court. The second-instance judgment issued  by Shanghai No.1 Intermediate People’s Court on March 22, 2017 affirmed all the claims raised by Acorn Trade. As of the date of this annual report, Acorn Trade has applied to the people’s court to enforcefor a forcible enforcement of the judgment against the defendants.

On August 1, 2016, Acorn Information, filed a lawsuit in Zhuzhou Intermediate People’s Court against Zhuzhou Xiangguo Trading Co., Ltd. and Mr. Su Yisong for its infringement upondefendants  on April 20, 2017, however, due to the registered trademark owned by Acorn Information. In January 24, 2017,reason that no enforceable assets have been identified from the defendants, the court rejected our claims.

On October 1, 2016, Acorn Information filed a lawsuit in Beijing Xi Cheng Court against Taian De’ang Trading Co., Ltd. for its infringement uponended the trademarks hold by Acorn Informationforcible enforcement procedure on August 31, 2017 and listed the court accepted the case. Accordingdefendants on List of Dishonest Parties Subject to the reconciliation agreement achieved between us in December 2016, Taian De’ang paid RMB 100,000 to us.

On October 1, 2016, Acorn Information filed a lawsuit in Beijing Intellectual Property Court against Taian De’ang Trading Co., Ltd. for its infringement upon the patent hold by Acorn Information and the court accepted the case. As of the date of this annual report, we are still waiting for the court to determine the date for the first hearing.

On January 1, 2017,Acorn Information filed a lawsuit in Shanghai Intellectual Property Court against Nanji E-Commerce (Shanghai) Co., Ltd., Nanji E-Commerce Holding Co., Ltd., Jinan Xuelai Electronic Technology Co., Ltd., Yongkang Juyixuan Trading Co., Ltd. and Ningbo Tangpai E-Commerce Co., Ltd. for their joint infringement upon the patent hold by Acorn Information and the court accepted the case. We have withdrawn the lawsuit as of the date hereof.

On February 2, 2017,Acorn Information filed a lawsuit in Shenzhen Bao’an District People’s Court against Shenzhen City Yangfuren Environmental Protection Technology Co., Ltd. for its infringement upon the registered trademark owned by Acorn Information claiming for damages of RMB 1000,000. The court accepted the case but supported only RMB 150,000. We have applied to the court for enforcement of such payment.

On April 7, 2017, Acorn Trade filed a lawsuit in Shanghai Xuhui District People’s Court against Chongqin Heda Technology Co., Ltd. for payment for goods, in a sum of RMB534,700 and the interest accrued to it. On November 1, 2017 the court affirmed the claims raised by Acorn Trade. As of the date of this annual report, Acorn Trade has applied the court to enforce the judgment against the defendants.

On April 8, 2017, Acorn Trade filed a lawsuit in Shanghai Xuhui District People’s Court against Sichuan Heda Technology Co., Ltd. for payment for goods, in a sum of RMB 1,109,127 and the interest accrued to it. On November 1, 2017 the court affirmed the claims raised by Acorn Trade. As of the date of this annual report, Acorn Trade has applied the court to enforce the judgment against the defendants.Enforcement.

 

 108

91

 

On April 14, 2017, Acorn Trade filed a lawsuit against Shenzhen City Oriental Forest Co., Ltd. for payment for goods, in a sum of RMB1,068,200, and the damages in a sum of RMB1,500,000. According to the reconciliation agreement achieved between us on September 18, 2017, Shenzhen City Oriental Forest Co., Ltd. paid RMB 550,000 to us.

 

We have in the past been and in the future may again be, the subject of investigation by SAIC.

 

On July 20, 2016, Shanghai Network received a penalty notice from SAIC, Shanghai Pudong District branch, in which Shanghai Network was required to pay RMB250,000 as a penalty for its alleged non-compliance with certain requirements under PRC Advertising Law. As of the date of this annual report,In August 2016, Shanghai Network has paid such penalty in full.

In June 2017, Shanghai HJX Digital Technology Co., Ltd or Shanghai HJX received a penalty notice from SAIC, Shanghai Qingpu District branch requiring the penalty payment of RMB40,000 for its forklift truck in warehouse not being properly inspected according to government requirements. Shanghai HJX has already paid this penalty as of the date of this annual report.

 

In December 2017, SAIC, Shanghai Qingpu District branch issued two penalty payment notices of RMB1500RMB1,500 and RMB21,500 respectively to Acorn Trade (Shanghai) Co., Ltd or Acorn Trade and Shanghai Network for the two companies publishing misleading advertisement online. Acorn Trade and Shanghai Network both have paid such penalty as of the date of this annual report.in January 2018.

 

We have in the past been, currently are, and in the future may again be, the subject of claims for contractual disputes, intellectual property right infringement or other claims during our course of business.

 

On May 2, 2017, Acorn Trade (Shanghai) Co., Ltd. or Acorn Trade, received a notice from Shenzhen Bao'an District People’s Court that Shenzhen City Hong Cai Presentation Equipment Co., Ltd. filed a lawsuit regarding a contractual dispute in Shenzhen Bao'an District People’s Court against Acorn Trade, claiming that Acorn Trade must pay a sum of RMB720,107, including the overdue payment of RMB667,535 and the liquidated damages of RMB52,572. We received the decision from the court on October 23, 2017 supporting Hong Cai’s all claims. As of the date hereof we have made an appeal to a higher court.

On May 9, 2017, Acorn Trade received a notice from Shanghai Xuhui District People’s Court that Shenzhen City Sang Di Technology Co., Ltd., or Sang Di Technology, filed a lawsuit regarding a contractual dispute in Shanghai Xuhui District People’s Court against Acorn Trade, claiming that Acorn Trade must continue to perform its obligations under the contract with Sang Di Technology, pay a sum of RMB3,984,750, including the overdue payment of RMB3,869,787, the liquidated damages of RMB14,963 and attorney fees paid by Sang Di Technology of RMB100,000. As of the date of this annual report, Sang Di has withdrawn all its claims filed at the court.

On May 2, 2017, Shanghai Network, received a notice from Shanghai Intellectual Property Court that Shanghai Hai Tao Information Technology Co., Ltd. filed a lawsuit regarding a contractual dispute in Shanghai Intellectual Property Court against Acorn Network, claiming that Acorn Network must pay an overdue payment amount of RMB85,000, together with the relevant interest accrued to it. As of the date of this annual report, we have entered into a reconciliation agreement with Hai Tao and have paid them RMB15,000 according to the agreement.

In July 2017, ArcherMind Technology (Nanjing) Co., Ltd. Or ArcherMind, filed a suitcase at Shanghai Intellectual Property Court claiming for Acorn Trade paying them a sum of RMB445,936 including testing development fee of RMB392,545, software development fee of RMB46,800 and damage of RMB6,590.19. As of the date of this annual report, we achieved a reconciliation agreement with ArcherMind and have paid them RMB358,000 according to the agreement.

In August 2017, Beijing Zhong Wu Xian Display and Demonstration Co., LtdLtd., or Zhong Wu Xian, filed a suitcaselawsuit at the court of Qingpu district, Shanghai against Acorn Trade, claiming for processing and logistics fee of RMB1,717,710approximately RMB1.72 million with interestsinterest based on relevant bank loan rate, and litigation costs of RMB4,040. The court opened for hearing on November 14, 2017, and we are waiting for2017. In November 2018, the court decision.issued the first-instance judgment which supported all the claims raised by Zhong Wu Xian. Acorn Trade then appealed to No.2 Intermediate Court. Zhong Wu Xian and Acorn Trade reached a settlement on April 16, 2019. Acorn Trade has paid RMB 1.28 million to Zhong Wu Xian pursuant to the settlement terms in May 2019. 

 

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In October 2017 one of our ex-employees Mr. Han Xue in BeijingAcorn Trade filed a lawsuit at Chao Yangagainst China Great Wall Technology Group Limited or Great Wall on January 1, 2019 in Xuhui District the Arbitration CommissionCourt for Labor and Personnel Disputes claiming for Shanghai Network paying himproduct defect, seeking compensation of RMB355,848 in total, including RMB310,878 for terminatingabout RMB 2.4 million, and the labor contract, payment for unused sick leave of RMB14,400, and payment for unused annual leave of RMB30,570. On December 5, 2017 the commission opened for hearing in Beijing and their final judgment is for us to pay Mr. Han XUE RMB146,438 for terminating the labor contract, payment for unused sick leave of RMB882 and payment for unused annual leave of RMB3,688.

In January 2018, Acorn Information Technology (Shanghai) Co., LtdOEM filed a suitcase at the People’s Courtcounter claim against Acorn Trade for outstanding payment of Nanjing Xuanwu District against Yong Kang Pei Tai Industryabout RMB 230,000. The parties reached settlement pursuant to which Great Wall should return RMB 370,364 to Acorn Trade and Trade Co., Ltd or Yong Kang Pei Tai, for their infringing our well-known trademark “babaka”. Before the court open for hearing, we achieved reconciliation agreement with Yong Kang Pei Tai and they alreadyChina Great Wall paid us RMB250,000 according to the agreement.

In February 2018, Hebei Education Press Co., Ltd filed three similar suitcases against Shanghai Network together with Shanghai HJX Digital Technology Co., Ltd and Beijing Jingdong Three Hundred and Sixty-Degree Electronic Commerce Co., Ltd claiming for infringing its copyright, and asked for RMB522,500 each case. We are waiting for the court to determine the date for hearing.such settlement in January 2020.  

 

Litigation against certain former directors for their misconductsmisconduct during their service.

 

Please refer to Item 7.B, “Major Transactions and Related Party Transactions—Related Party Transactions- shareholder dispute”.Shareholder Dispute

  

On December 1, 2016, Acorn International, Inc., or Acorn International, brought a lawsuit against three former directors, namely Andrew Y. Yan, Gordon Xiaogang Wang, and Jing Wang for their misconduct, alleging that three defendants had breached their fiduciary duties and were responsible for alleged misconduct in and/or mismanagement of Acorn international’s business resulting from the wrongful removal of Mr. Roche as Acorn International’s chief executive officer, exposing Acorn international to breach of contract claims, refusing to pursue valuable business opportunities and wrongful termination of certain employees resulting in unnecessary severance costs. The relief sought consisted of (1) initial monetary damage claims comprised of US dollar denominated damages of approximately $26,326,389.76, and Renminbi denominated damages of approximately RMB120,045,222, (2) costs and (3) such further or other relief as the court considers just.

On July 28, 2017, we have entered into a settlement agreement with REL, the Former Directors and SAIF. Pursuant to such settlement agreement, all parties thereto would, among other things, discontinue and/or withdraw all claims, counterclaims and taxation proceedings in the Cayman Islands Court related to the above mentioned matters. An agreement was also reached for the Company to repurchase all of the ordinary shares of the Company owned by SAIF, representing 27.7% of the total outstanding ordinary shares of the Company, for the purchase price of approximately $4.17 million, the equivalent of $4.05 per ADS. The purchase price represents an approximately 60.5%, 64.8% and 62.8% discount to the closing price of the Company’s ADSs based on the 30-day, 60-day and 90-day moving average, respectively. The repurchased shares have already been cancelled.

Settlement with Mr. Robert W. Roche’s affiliated entities

On May 7, 2017, our board of directors passed a resolution to pay to Acorn Composite Corporation, Inc. and other affiliates of Mr. Robert W. Roche’s (the “Roche Entities”) the sum of $924,757 to extinguish all the claims that Roche Entities previously had against us. As of the date of this annual report, such amount has been fully paid by us.


Dividend Policy

 

We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. In 2015, 2016 and 2017, we did not declare any dividends. In 2018, we paid a one-time cash dividend on the Company’s ordinary shares of $0.75 per ordinary share. This cash dividend was paid on June 22, 2018 to shareholders of record on June 4, 2018. The aggregate amount of cash dividends paid was approximately $40 million. In May, 2019, our board announced a dividend policy calling for a recurring quarterly dividend of $0.0125 per ordinary share subject to quarterly review, approval and declaration by the board. The aforesaid policy was subsequently suspended in February 2020 due to current business impact and uncertainties concerning the potential longer-term impact of the COVID-19 outbreak on the Company’s e-commerce business. In each of May, September, and December, 2019, our board announced a quarterly dividend of $0.0125 per ordinary share, and the aggregate amount of cash dividends paid in connection therewith was approximately $4,557,934.

 

OurA Cayman Islands company may pay dividends out of its profits, retained earnings and/or its share premium account (or any combination of these). When declaring a dividend, the directors must be satisfied that the company can pay its debts as they fall due. Subject to applicable laws of the Cayman Islands, our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future results of 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, 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. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their respective accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to makepay dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange laws and other laws and regulations. In particular, under Chinese law, these operating subsidiaries may distribute their profits only after the losses incurred in previous accounting years have been offset, and they may only pay dividends after 10% of their net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of their respective registered capital. Such reserve funds may not be distributed as cash dividends. In addition, if any of our 11 PRC operating subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

 

B.Significant Changes

B.  Significant Changes

 

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

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ITEM 9.THE OFFER AND LISTING

 

A.Offering and listing details. Price Range of Our ADSs

 

Our ADSs are listed for trading on the NYSE under the symbol “ATV,” and have been listed since May 3, 2007.

On March 19, 2015, the NYSE notified us that the closing price of our ADSs for the consecutive 30 trading-day period ended on March 13, 2015 was $0.99 and therefore below the NYSE’s continued listing standard relating to minimum average closing share price. Subsequent increases in the closing prices of our ADSs allowed us to regain compliance with the minimum share price rule by April 2015 but on September 15, 2015, the NYSE again notified us that we were below the NYSE’s continued listing criteria because the average per share closing price of our ADS for the consecutive 30 trading-day period ended on September 11, 2015 has fallen below $1.00.

On November 19, 2015, we announced the ratio change of our ADSs to ordinary shares, par value $0.01 per share from 1:3 to 1:20. The effective date of such ratio change was November 30, 2015. On January 5, 2016, the NYSE notified us that we had regained compliance with the NYSE’s minimum share price standard and continuing listing standards by virtue of the fact that the average closing price of the ADSs for the 30-trading days ended December 31, 2015 was above US$1.00.

The following table sets forth the high and low daily closing trading prices of our ADSs on the NYSE for the periods indicated as adjusted to reflect our ADS ratio change:

  Price per ADS (US$) 
  High  Low 
Annual:        
2013  2.97   1.42 
2014  2.81   1.32 
2015  19.20   2.47 
2016  11.11   3.90 
2017  18.9   7.9 
Quarterly:        
First Quarter, 2016  8.35   4.01 
Second Quarter, 2016  7.30   4.11 
Third Quarter, 2016  10.50   5.20 
Fourth Quarter, 2016  11.11   5.99 
First Quarter, 2017  11.71   7.9 
Second Quarter, 2017  13.91   8.87 
Third Quarter, 2017  16.8   9.36 
Fourth Quarter, 2017  18.9   13.58 
First Quarter, 2018  21.59   18.01 
Monthly        
October 2017  14.63   13.58 
November 2017  18.9   13.97 
December 2017  17.69   15.99 
January 2018  21.13   18.4 
February 2018  21.59   18.01 
March 2018  19.62   18.35 
April 2018  10.2   8.87 

 

B.Plan of Distribution

 

Not applicable.

 

C.Markets

 

See Item 9.A above

 

  111D.

D.Selling Shareholders

E.Dilution

 

Not applicable.

 

F.E.Expenses of the IssueDilution

 

Not applicable.

 

F.Expenses of the Issue

Not applicable.


ITEM 10.ADDITIONAL INFORMATION

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our registration statement on Form F-1 (File No. 333-141860), as amended, originally filed with the Securities and Exchange Commission on April 3, 2007.

 

At an extraordinary general meeting of our shareholders held on May 4, 2015, our shareholders approved, among other things, the amendments to our Amended and Restated Articles of Association to permit the requisition of general meetings by shareholders holding not less than thirty percent of our issued and outstanding shares. In addition, at our annual general meeting held on November 17, 2015, 70.82% of our shareholders voted in favor of the proposal in connection with the adoption of the amendments to our Amended and Restated Articles of Association regarding board declassification.

 

C.Material Contracts

 

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information on the Company” or elsewhere in this annual report on Form 20-F.

 

D.Exchange Controls

 

See “Item 4. Information on the Company — B. Business Overview — Regulation on Foreign Exchange Control and Administration”

 

E.Taxation

 

The following is a summary of the material Cayman Islands, People’s Republic of China and U.S. federal income tax consequences relevant to an investment in our ADSs and ordinary shares. The summary is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The summary is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different interpretations, possibly with retroactive effect. The summary does not address United StatesU.S. state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands, People’s Republic of China and the United States. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers, Dill and Pearman,Walkers (Singapore) Limited Liability Partnership, special Cayman Islands counsel to us. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and ordinary shares.

 

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Cayman Islands Taxation

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties, which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies, except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

 

Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council:Governor in Cabinet of the Cayman Islands:

 

 (1)that no law which is enacted in the Cayman Islands imposing any tax or duty to be levied on profits or income or gains or appreciation shall apply to us or our operations; and

 

 (2)that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on our shares, debentures or other obligations.

 

The undertaking for us is for a period of twenty years from January 10, 2006.

 

People’s Republic of China Taxation

 

Under the New EIT Law, enterprises organized under the laws of jurisdictions outside China with “de facto management bodies” located within China may be considered PRC tax resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. Further, an enterprise organized under the laws of jurisdictions outside China without “de facto management body” located within China may be deemed a PRC non-resident enterprise that is also subject to PRC enterprise income tax: (i) if such enterprise has established agencies or offices in China, it shall pay the income tax at the rate of 25% on its income (x) earned by such agencies or offices from inside China and (y) outside China but is actually associated with such agencies or office, or at the rate of 20% on its income directly coming from China without any association with its agencies or offices,  (ii) if such enterprises haven’t established agencies or offices in China, it shall pay the income tax at the rate of 20% on its income earned from inside China. The implementation regulations of the New EIT Law define the term “de facto management body” as a management body that exercises full or substantial and comprehensive control and management authority over the production, operation, personnel, accountsfinance and properties of an enterprise. While we do not currently consider our Company or any of our overseas subsidiaries to be either a PRC resident enterprise or a PRC non-resident enterprise, there is a risk that the PRC tax authorities may deem our Company or any of our overseas subsidiaries as either a PRC resident enterprise or a PRC non-resident enterprise, in which case we would be subject to the PRC enterprise income tax at the rate of 25% or 20% on our applicable worldwide income.income in accordance with the above provisions. If we are deemed to be a PRC tax resident enterprise, any dividends that we pay to our non-PRC enterprise shareholders or ADS holders, as well as gains realized by such shareholders or ADS holders from the transfer of our shares or ADSs, may be regarded as PRC-sourced income and as a result become subject to PRC withholding tax at a rate of 10%. See “Risk Factors—Risks relating to Doing Business in China—Under China’s New EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”

 

 U.S. Federal Income Taxation

 

This discussion describes certain material U.S. federal income tax consequences to U.S. Holders (as defined below) relating to the purchase, ownership and disposition of our ADSs and ordinary shares. This discussion does not address any aspect of U.S. federal gift or estate tax, or the state, local or non-U.S. tax consequences of an investment in our ADSs and ordinary shares. This discussion does not apply to U.S. Holders who are members of a class of holders subject to special rules, such as:

 

dealers in securities or currencies;

traders in securities who elect to use a mark-to-market method of accounting for securities holdings;

banks or other financial institutions;

insurance companies;

tax-exempt organizations;

partnerships and other entities treated as partnerships or other pass through entities for U.S. federal income tax purposes or persons holding ADSs and ordinary shares through any such entities;

  113●dealers in securities or currencies;

 ●traders in securities who elect to use a mark-to-market method of accounting for securities holdings;

 

●banks or other financial institutions;

 

regulated investments companies or real estate investment trusts;
●insurance companies;

 

persons that hold ADSs and ordinary shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;
●tax-exempt organizations;

 

persons whose functional currency for tax purposes is not the U.S. dollar;
●partnerships and other entities treated as partnerships or other pass through entities for U.S. federal income tax purposes or persons holding ADSs and ordinary shares through any such entities;

 

persons liable for alternative minimum tax; or
●regulated investments companies or real estate investment trusts;

 

persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including ADSs and ordinary shares) entitled to vote.
●persons that hold ADSs and ordinary shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;

●persons whose functional currency for tax purposes is not the U.S. dollar;

●persons liable for alternative minimum tax; or

●persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including ADSs and ordinary shares) entitled to vote.

 

This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which we refer to in this discussion as the Code, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. In addition, this discussion relies on our assumptions regarding the value of our ADSs and ordinary shares and the nature of our business over time.

 

Prospective purchasers and U.S. Holders of our ADSs and ordinary shares are urged to consult their own tax advisor concerning the particular U.S. federal income tax consequences to them relating to the purchase, ownership and disposition of our ADSs and ordinary shares, as well as the consequences to them arising under the laws of any other taxing jurisdiction.

 

For purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own our ADSs or ordinary shares as capital assets for U.S. federal income tax purposes and are:

 

an individual citizen or resident of the United States for U.S. federal income tax purposes;
●an individual citizen or resident of the United States for U.S. federal income tax purposes;

 

a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States or any state thereof or the District of Columbia;
●a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

 

an estate the income of which is subject to U.S. federal income tax regardless of its source; or
●an estate the income of which is subject to U.S. federal income tax regardless of its source; or

 

a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person.
●a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person.

 

For U.S. federal income tax purposes, income earned through a non-U.S. or U.S. partnership or other flow-through entity is attributed to its owners. Accordingly, if a partnership or other flow-through entity holds ADSs or ordinary shares, the tax treatment of the holder will generally depend on the status of the partner or other owner and the activities of the partnership or other flow-through entity.

 

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 will be complied with in accordance with their terms. If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares represented by such ADSs. Accordingly, the conversion of ADSs into common shares will not be subject to U.S. federal income tax.


Dividends on ADSs and Ordinary Shares

We do not anticipate paying dividends on our ADSs and ordinary shares in the foreseeable future. See Item 8.A, “Financial Information—Consolidated statements and other financial information—Dividend policy”.

 114

 

Subject to the “Passive Foreign Investment Company” discussion below, if we do make distributions and you are a U.S. Holder, the gross amount of any distributions with respect to your ADSs and ordinary shares (including the amount of any taxes withheld therefrom) will generally be includible in your gross income on the day you actually or constructively receive such income as dividend income if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. However, if you are a non-corporate U.S. Holder, including an individual, and have held your ADSs and ordinary shares for a sufficient period of time, certain dividend distributions on our ADSs and ordinary shares will generally constitute qualified dividend income taxed at a reduced rate of taxation as long as our ADSs continue to be readily tradable on the NYSE. However, based on existing guidance, it is not entirely clear whether dividends you receive with respect to the ordinary shares will be taxed as qualified dividend income, because the ordinary shares are not themselves listed on a U.S. exchange. You should consult your own tax advisor as to the rate of tax that will apply to you with respect to dividend distributions, if any, you receive from us.

 

Subject to the “Passive Foreign Investment Company” discussion below, to the extent, if any, that the amount of any distribution by us on ADSs and ordinary shares exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s adjusted tax basis in the ADSs and ordinary shares and thereafter as capital gain. However, we do not intend to calculate our earnings and profits according to U.S. federal income tax principles. Accordingly, distributions on our ADSs and ordinary shares, if any, will generally be reported to you as dividend distributions for U.S. federal income tax purposes. Corporations will not be entitled to claim a dividends-received deduction with respect to distributions made by us. Dividends generally will constitute foreign source passive income for purposes of the U.S. foreign tax credit rules. You should consult your own advisor as to your ability, and the various limitations on your ability, to claim foreign tax credits in connection with the receipt of dividends.

 

Sales and Other Dispositions of ADSs or Ordinary Shares

 

Subject to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of ADSs or ordinary shares, you will generally recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADSs or ordinary shares. Your adjusted tax basis will generally equal the amount you paid for the ADSs or ordinary shares. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in our ADSs or ordinary shares is more than one year at the time of disposition. If you are a non-corporate U.S. Holder, including an individual, any such long-term capital gain will be taxed at preferential rates. Your ability to deduct capital losses will be subject to various 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.

 

Passive Foreign Investment Company

 

In general, we will be classified as a passive foreign investment company (“PFIC”) in any taxable year if either: (a) the average quarterly value of our gross assets that produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of our total gross assets or (b) 75% or more of our gross income for the taxable year is passive income (such as certain dividends, interest or royalties). For purposes of the above tests, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. For purposes of the first test: (a) any cash and cash invested in short-term, interest bearing, debt instruments, or bank deposits that are readily convertible into cash will generally count as producing passive income or held for the production of passive income, and (b) the total value of our assets is calculated based on our market capitalization.

 


We believe we were classified as a PFIC for U.S. federal income tax purposes in the taxable year ended December 31, 2017.2019. Although we intend to conduct our business activities in a manner to reduce the risk of our classification as a PFIC in the future, we currently hold, and expect to continue to hold, a substantial amount of cash and other passive assets, and, because the value of our assets is likely to be determined in large part by reference to the market prices of our ADSs and ordinary shares, which are likely to fluctuate, there can be no assurance that we will not continue to be classified as a PFIC for 2018the 2020 taxable year or any future taxable year.

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For any taxable year in which we were a PFIC during which you held our ADSs or ordinary shares, certain adverse U.S. federal income tax rules would apply. You would generally be subject to additional taxes and interest charges on certain “excess distributions” we make and on any gain realized on the disposition or deemed disposition of your ADSs or ordinary shares, regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution” or dispose of or are deemed to dispose of your ADSs or ordinary shares. Distributions in respect of your ADSs or ordinary shares during a taxable year would generally constitute “excess distributions” if, in the aggregate, they exceed 125% of the average amount of distributions with respect to your ADSs or ordinary shares over the three preceding taxable years or, if shorter, the portion of your holding period before such taxable year.

 

To compute the tax on “excess distributions” or any gain, (a) the “excess distribution” or the gain would be allocated ratably to each day in your holding period, (b) the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income in the current year, (c) the amount allocated to other taxable years would be taxable at the highest applicable marginal rate in effect for that year, and (d) an interest charge at the rate for underpayment of taxes for any period described under (c) above would be imposed on the resulting taxability on the portion of the “excess distribution” or gain that is allocated to such period.

 

For any taxable year in which we were a PFIC during which you held our ADSs or ordinary shares, under certain attribution rules, you will be deemed to own your proportionate share of lower-tier PFICs, and will be subject to U.S. federal income tax on (a) a distribution on the shares of a lower-tier PFIC and (b) a disposition of shares of a lower-tier PFIC, both as if you directly held the shares of such lower-tier PFIC. In addition, no distribution that you receive from us would qualify for taxation at the reduced rate of taxation discussed in the “—Dividends on ADSs and Ordinary Shares” section above.

 

You would generally be able to avoid the “excess distribution” rules described above by making a timely so-called “market-to- market”“mark-to-market” election with respect to your ADSs provided our ADSs are “marketable”. Our ADSs will be “marketable” as long as they remain regularly traded on a national securities exchange, such as the NYSE. If you made a mark-to-market election in a timely fashion, you would generally recognize as ordinary income or ordinary loss the difference between the fair market value of your ADSs on the first day of any taxable year and their value on the last day of that taxable year. Any ordinary income resulting from this election would generally be taxed at ordinary income rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult your own tax advisor regarding potential advantages and disadvantages to you of making a “mark-to- market”“mark-to-market” election with respect to your ADSs. The mark-to-market election will not be available for any lower tier PFIC that is deemed owned pursuant to the attribution rules discussed above.

 

Alternatively, you can make a qualified electing fund or QEF“QEF” election to include annually your pro rata share of our earnings and net capital gains currently in income each year, regardless of whether or not dividend distributions are actually distributed. This means you could have a tax liability for the earnings or gain without a corresponding receipt of cash. Your basis in your ADSs or ordinary shares will be increased to reflect the amount of the taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the ADSs or ordinary shares and will not be taxed again as a distribution to you. To make a QEF election you will need to have an annual information statement from the PFIC setting forth the earnings and capital gains for the taxable year.

 

Since we believe we were classified as a PFIC for the 20172019 taxable year, we may arrange to provide a PFIC annual information statement (including information for lower tier PFICs) to U.S. Holders upon their request. We may post this 20172019 statement on our corporate website in the “Investor Relations” section. Information contained on our website does not constitute a part of this annual report. If not posted on our corporate website, you would have to contact us to make a request. If you decide to make a QEF election, it must be made on or before the due date for filing your U.S. federal income tax return (including extensions) for the 20172019 taxable year or the first year to which the QEF election will apply.

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You are urged to consult your own tax advisor concerning the making of such a QEF election and in particular with regard to the application of the “excess distribution” rules to you on any gain realized on the disposition or deemed disposition of your ADSs or ordinary shares, regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution” or dispose of or are deemed to dispose of your ADSs or ordinary shares should you not make the QEF election with respect to the 20172019 taxable year.

 

For any taxable year in which we were a PFIC during which you held our ADSs or ordinary shares, you must file IRS Form 8621 for each taxable year in which you recognize any gain on the sale or other disposition of your ADS or ordinary shares, receive deemed or actual distributions from us, or make certain elections (including a QEF and mark-to-market election) with respect to your ADSs or ordinary shares. In addition, unless otherwise provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. You should consult your own tax advisor as to the application of any information reporting requirements to you resulting from our status as a PFIC.

 

U.S. Information Reporting and Backup Withholding Rules

 

In general, dividend payments with respect to the ADSs and ordinary shares and the proceeds received on the sale or other disposition of ADSs and ordinary shares may be subject to information reporting to the IRS and to backup withholding (currently imposed at a rate of 28%24%). Backup withholding will not apply, however, if you provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with the applicable backup withholding rules. To establish your status as an exempt person, you will generally be required to provide certification on IRS Form W-9. Any amounts withheld from payments to you under the backup withholding rules that exceed your U.S. federal income tax liability will be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you timely furnish the required information to the IRS. Certain individuals holding ordinary shares or ADSs other than in an account at a U.S. financial institution may be subject to additional information reporting requirements.

 

PROSPECTIVE PURCHASERS OF OUR ADSS AND ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISOR REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY OTHER TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR ADSS AND ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION AND INCLUDING ESTATE, GIFT AND INHERITANCE LAWS.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

We previously filed with the Securities and Exchange Commission our registration statement on Form F-1 (File No. 333- 141860), as amended.

 

We have filed this annual report on Form 20-F with the Securities and Exchange Commission under the Exchange Act. Statements made in this annual report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

 

We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which we filed with the Securities and Exchange Commission, including this annual report on Form 20-F, may be inspected and copied at the public reference room of the Securities and Exchange Commission at 100 F Street, N.E., Washington D.C., 20549.

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You can also obtain copies of this annual report on Form 20-F by mail from the Public Reference Section of the Securities and Exchange Commission, 100 F Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s Internet site athttp://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330.

 

I.Subsidiaries Information

 

Not applicable.

 


ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A.Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Exchange Risk

  

The conversion of Renminbi is highly regulated. In addition, the value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar.

 

The U.S. dollar is the reporting and functional currency for our consolidated financial statements. Since we conduct our operations through our PRC subsidiaries and affiliated companies, the functional currency of our PRC subsidiaries and affiliated entities is Renminbi. Substantially all our revenue and related expenses, including cost of revenues and advertising expenses, are denominated and paid in Renminbi. Transactions in other currencies are recorded in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.

 

Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our costs and operating margins, as well as our net income reported in U.S. dollars. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.

 

Interest Rate Risk

 

As of December 31, 2017,2019, we did not have any outstanding borrowing balance. If we borrow money in future periods, we may be exposed to interest rate risk. We believe our exposure to interest rate risk and other relevant market risks is not material.

 

Inflation

 

Inflation in China has not materially affected our results of operations in recent years. According to the National Bureau of Statistics of China, the change of consumer price index in China was 1.4%1.6%, 2.0%2.1% and 1.6%2.9% in 2015, 20162017, 2018 and 2017,2019, respectively.

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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 Payable by ADS Holders

 

Citibank, N.A., the depositary of our ADS program, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary service fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date. In the case of cash distributions, the depositary fees are generally deducted from the cash being distributed. In the case of distributions other than cash (e.g., stock dividends, rights, etc.), 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 in DRS), 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 settlement 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.

 

In the event of refusal to pay the depositary fees the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.

 

Persons depositing or withdrawing shares must pay: For:
   
Up to $5.00 per 100 ADSs (or fraction thereof). Issuance of ADSs.
   
  Cancellation of ADSs.
   
  Distribution of cash dividends or other cash distributions.
   
  Distribution of ADSs pursuant to share dividends or other free share distributions or exercise of rights.
   
  Depositary Service Fee
   
  Distribution of securities other than ADSs or rights to purchase additional ADSs.

$1.50 per certificate presented for transfer. Transfer of ADRs.
   
Taxes and other governmental charges the depositary or the custodian has to pay on any ADS or ordinary share. As necessary.
   
Registration or transfer fees. Transfer and registration of ordinary shares on the share register to or from the name of the custodian or depositary in connection with the deposit or withdraw of ordinary shares.
   
Expenses of the depositary. Cable, telex, fax transmissions and delivery expenses.
   
  Converting foreign currency to U.S. dollars
   
Any charges incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to the shares, deposited securities, ADSs and ADRs. As necessary.
   
Any charges incurred by the depositary for servicing or delivering the ordinary shares on deposit. As necessary.

 

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Fees Payable by the Depositary to Us

 

From January 1, 20172019 to March 31, 2018,2020, we did not receive any reimbursement from the depositary.

 


PART II

 

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Material Modifications to the Rights of Security Holders

 

The rights of securities holders have not been materially modified.

 

ITEM 15.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this annual report, Our management, with the participation of our chief executive officer and our principalchief financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) at December 31, 2017.2019. Based on that evaluation, our CEO and principal financial and accounting officerCFO concluded that our disclosure controls and procedures were effective as of December 31, 2017.2019.

 

Management’s Report on Internal Controls over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of any of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 120

Under the supervision and with the participation of our chief executive officer and chief financial officer, our management conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 20172019 based on the criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2017.2019.

 

Remediation and Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting in the year ended December 31, 2017,2019, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT

 

Our audit committee is comprised of Ms. Jenny Hseau-Jean Wang, Mr. Eric Haibing Wu, Mr. Pierre E. Cohade and Mr. David Leung.Urs P Zimmerman. Ms. Jenny Hseau-Jean Wang is the chairman of our audit committee who is qualified as an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K under the Securities Act.Act based on her finance and accounting experience as described under Item 6.A – “Directors, Senior Management and Employees – Directors and Senior Management.” Each of these directors satisfies the “independence” requirements of Section 303A of the Corporate Governance Rules of the NYSE and Rule 10A-3 under the Exchange Act.

 

ITEM 16B.CODE OF ETHICS

 

Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. Our code of ethics for the Senior Executive and Financial Officers is publicly available on our website at http://www.acorninternationalgroup.com/. In addition, our board of directors has adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. Our code of ethicsemployees, and our code of conduct are publicly available on our website at www.acorninternationalir.com, and each is filed as an exhibit to our registration statement on Form F-1 (No. 333-141860). We also will post any amendments to or waivers from a provision of our code of ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions on our website.

 

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate fees by specified category in connection with certain professional services rendered by Grant Thornton, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.

 

 2016  2017  2018  2019 
Audit fees(1) $255,528  $252,140  $248,522  $217,644 
Audit-related fees(2)  —   —   —   — 
Tax fees(3)  7,215   33,091   —   — 
All other fees  —   —   —   — 

 

(1)“Audit fees” means the aggregate fees billed for professional services rendered by our principal auditors for the assurance and related services. The audit fee for 20172018 mainly represents audit and review of financial statements.

 

(2)Audit-related fees represent aggregate of fees billed for professional services rendered for the assurance and related services that are not reported under audit fees.

 

(3)“Tax fees” includes fees billed for tax consultations.

 121

The policy of our audit committee or our board of directors is to pre-approve all auditing services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof (subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act which are approved by the audit committee or our board of directors prior to the completion of the audit).

 

ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

None.

 

ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Share Repurchase Program

On January 11, 2016, our BoardDecember 8, 2015, the board of Directors adopteddirectors of the Company (the “Board”) approved the implementation of a share repurchase program under which we may, from timebuyback plan (“First Prior Plan”).

The Board further approved an adjustment to timethe First Prior Plan on the open market at prevailing market prices, in privately negotiated transactions and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations, repurchase up to US$2 million worth of our ADSs. On August 8, 2016, to the Board of Directors ofeffect that the Company authorized an expansion of the sharemay repurchase program – the Board increased the Company’s repurchase authority so that up to US$4 million worth of its ADSs can be repurchased. The Company’s proposedfor a per ADS purchase price not exceeding US$10.00, until the earlier of (i) January 31, 2017; and (ii) the date the aggregate repurchases may be made from timeunder the First Prior Plan reached a total of US$4 million.

On February 1, 2017, the Board extended the First Prior Plan for another year, such that the Company was authorized to time onrepurchase up to the open market at prevailing market prices, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations. The timing and extentremaining portion of any purchases will depend upon market conditions, the trading pricepreviously authorized US$4 million worth of ADSs, i.e., US$2,071,953.73 worth of its ADSs, for a per ADS purchase price not exceeding US$10.00, with a daily limit of not exceeding the 10b-18 daily max, until the earlier of (i) January 31, 2018; and other factors, and are subject to(ii) the restrictions relating to volume, price and timingdate the aggregate repurchases under applicable law.the First Prior Plan reach a total of US$4 million.

 

AsIn March 2017, the Board management temporarily suspended repurchases under the First Prior Plan;

On December 8, 2017, the Board terminated the First Prior Plan and set up a new share buyback plan (the “Second Prior Plan”) on the following terms: (i) the Company may repurchase up to US$2 million worth of April 30,ADSs for a per ADS purchase price not exceeding US$22.00, with a daily limit not to exceed the 10b-18 daily max, until the earlier of (i) December 31, 2018; and (ii) the date the aggregate repurchases under the Second Prior Plan reach a total of US$2 million worth of ADSs.

The Second Prior Plan was terminated on November 1, 2018 when the aggregate repurchases thereunder reached a total of US$2 million worth of ADSs. Under the Second Prior Plan, we had repurchased an aggregate of 247,686100,342 ADSs, representing 4,953,7202,006,840 underlying ordinary shares, on the open market for total cash consideration of approximately $2.3 million under the aforesaid share repurchase program.$2 million. The repurchased ADSs are currently held by our subsidiary China DRTV as treasury stocks. Ourstock.

On May 4, 2020, the Company started to execute a new share buyback plan (the “Current Plan”) approved by the Board on the following terms: the Company may repurchase up to US$2.5 million worth of Directors will reviewADSs, with a daily limit not to exceed the share repurchase program periodically,10b-18 daily max, until the earlier to occur of (i) May 4, 2021; and may authorize adjustment(ii) the date the aggregate repurchases under the Current Plan reach a total of its terms and size.US$2.5 million worth of ADSs.


Additional Repurchases

 

On February 6, 2017, China DRTV repurchased 40,334 ADSs, representing 806,699 ordinary shares from Mr. Tadashi Nakamura for of the purchase price of approximately $306,744, at US$ 7.6051 per ADS.

 

On August 3, 2017, the Company repurchased 20,591,970 ordinary shares from SB Asia Investment Fund II, L.P. for the purchase price of approximately $4.17 million, at US$ 4.05 per ADS.

 

The table below details our purchases of our own equity securities pursuant to our share repurchase program:the Prior Plan and the New Plan:

 

Period Total Number
 of
ADS
purchased		  Average Share Price
Paid Per ADS		  Total Number of
ADS Purchased as
Part of Publicly
Announced Plans
or Programs		  

Approximate
Dollar Amount

that May Yet be

Purchased Under

the Plans or

Program

 
03/2016  4,196   4.4608   4,196   1.7 million 
04/2016  8,809   4.3566   8,809   1.7 million 
08/2016  55,617   7.3494   55,617   1.7 million 
09/2016  71,941   8.3443   71,941   1.7 million 
10/2016  24,847   9.1781   24,847   1.7 million 
11/2016  16,746   8.0407   16,746   1.7 million 
12/2016  14,057   7.2434   14,057   1.7 million 
01/2017  11,476   8.7484   11,476   1.7 million 
02/2017  1,400   9.1623   1,400   1.7 million 
03/2017  9,526   8.9918   9,526   1.7 million 
12/2017  1,162   16.8010   1,162   1.7 million 
01/2018  11,564   19.7995   11,564   1.7 million 
02/2018  7,092   19.6013   7,092   1.7 million 
03/2018  7,393   19.5445   7,393   1.7 million 
04/2018  1,860   20.3765   1,860   1.7 million 
Total  247,686             

Period Total Number
of ADS
purchased		  Average Share
Price
Paid Per ADS		  Total Number of
ADS Purchased as
Part of Publicly
Announced Plans
or Programs		  

Approximate
Dollar Amount

that May Yet be

Purchased
Under

the Plans or
Program

 
03/2016  4,196   4.4608   4,196   — 
04/2016  8,809   4.3566   8,809   — 
08/2016  55,617   7.3494   55,617   — 
09/2016  71,941   8.3443   71,941   — 
10/2016  24,847   9.1781   24,847   — 
11/2016  16,746   8.0407   16,746   — 
12/2016  14,057   7.2434   14,057   — 
01/2017  11,476   8.7484   11,476   — 
02/2017  1,400   9.1623   1,400   — 
03/2017  9,526   8.9918   9,526   — 
12/2017  1,162   16.8010   1,162   — 
01/2018  11,564   19.7995   11,564   — 
02/2018  7,092   19.6013   7,092   — 
03/2018  7,393   19.5445   7,393   — 
04/2018  1,860   20.3765   1,860   — 
05/2018  —   —   —   — 
06/2018  —   —   —   — 
07/2018  28,205   20.3885   28,205   — 
08/2018  26,625   19.4632   26,625   — 
09/2018  10,237   20.0201   10,237   — 
10/2018  5,860   20.4685   5,860     
11/2018  344   20.2413   344   — 
12/2018  —   —   —   — 
Total  318,957   11.6774   318,957   — 
 122

ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

On October 17, 2016, we dismissed Deloitte Touche Tohmatsu Certified Public Accountants LLP, or Deloitte, as our independent registered public accounting firm. On November 22, 2016, we engaged Grant Thornton as our independent registered public accounting firm in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2016, effective immediately. During the fiscal years ended December 31, 2014 and 2015 and in the subsequent interim period through October 17, 2016, neither we nor anyone acting on our behalf consulted Grant Thornton regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the consolidated financial statements of our company, and neither a written report nor oral advice was provided to us by Grant Thornton that Grant Thornton concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a “disagreement” (as that term is used in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a “reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

Deloitte’s audit report on our company’s consolidated financial statements as of and for the year ended December 31, 2014 expresses an unqualified opinion and includes an explanatory paragraph concerning substantial doubt about our company’s ability to continue as a going concern. Deloitte’s audit report on our company’s consolidated financial statements as of and for the year ended December 31, 2015 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. Deloitte did not audit any financial statements of our company as of any date or for any period subsequent to December 31, 2015.

Our decision to dismiss Deloitte and engage Grant Thornton was approved by our independent audit committee.

During the years ended December 31, 2014 and 2015 and the subsequent interim period through our dismissal of Deloitte on October 17, 2016, there were no disagreements between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make references thereto in their reports on the financial statements for such years. In addition, there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F.

We provided Deloitte with a copy of the foregoing disclosure, and requested that Deloitte furnish us with a letter addressed to the SEC stating whether it agrees with the above statements, and if not, stating the respects in which it does not agree. We have received the requested letter from Deloitte, a copy of which is filed as Exhibit 15.1 to this Form 20-F.Not applicable.

 

ITEM 16G.CORPORATE GOVERNANCE

 

As a foreign private issuer with shares listed on the NYSE, we are subject to corporate governance requirements imposed by the NYSE. Under Section 303A of the NYSE’s Listed Company Manual, NYSE listed non-US companies may, in general, follow their home country corporate governance practices in lieu of some of the NYSE corporate governance requirements. We are committed to a high standard of corporate governance. As such, we endeavor to comply with most of the NYSE corporate governance practices. However, the following are the ways in which our current corporate governance practices differ from NYSE corporate governance requirements since the laws of Cayman Islands do not require such compliance:

 

Our corporate governance and nominating committee of our board of directors is not comprised entirely of independent directors.
●Our corporate governance and nominating committee of our board of directors is not comprised entirely of independent directors.

 

Our compensation committee of our board of directors is not comprised entirely of independent directors.
●Our compensation committee of our board of directors is not comprised entirely of independent directors.

●The NYSE Manual requires shareholder approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to those plans, which is not required under the Cayman Islands law. We intend to comply with the requirements of Cayman Islands law only in determining whether shareholder approval is required.

 

We may in the future determine to voluntarily comply with one or more of the foregoing provisions as required by NYSE’s Listed Company Manual.

 

ITEM 16H.MINE SAFETY DISCLOSURE

 

Not applicable.

 


PART III

 

ITEM 17.FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

 123

ITEM 18.FINANCIAL STATEMENTS

 

Our consolidated financial statements are included at the end of this annual report.

 


ITEM 19.

EXHIBITS

  

EXHIBITS INDEX

 

Exhibit  
Number Description
1.1*1.1 Amended and Restated Memorandum and Articles of Association of Acorn International, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the Securities and Exchange Commission on April 3, 2007), as amended by shareholder resolutions (incorporated by reference to Proposal 4 in the Proxy Statement filed as Exhibit 99.2 of the Company’s Form 6-K filed with the Securities and Exchange Commission on October 16, 2015)
   
2.1**2.1 Specimen American Depositary Receipt (included in Exhibit 2.33)
   
2.2*2.2 Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the Securities and Exchange Commission on April 27, 2007)
   
2.33**2.33 Form of Deposit Agreement among Acorn International, Inc., Citibank, N.A., and holders and beneficial owners of American Depositary Shares issued thereunder (incorporated by reference to the Company’s Registration Statement on Form F-6 (File No. 333-142177), which was filed with the Securities and Exchange Commission with respect to American depositary shares representing ordinary shares on April 17, 2007)
   
4.1*4.1 Form of Indemnification Agreement with the directors of Acorn International, Inc. (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the Securities and Exchange Commission on April 3, 2007)
   
4.2*4.2 Form of Employment Agreement of Acorn International, Inc. (incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the Securities and Exchange Commission on April 3, 2007)
   
4.3***4.3 Loan Agreement undated, by and among Acorn Trade (Shanghai) Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.5 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.4***4.4 Exclusive Technical Service Agreement undated, by and between Acorn Trade (Shanghai) Co., Ltd. and Beijing HJX Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.6 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)

4.5***4.5 Operation and Management Agreement undated, by and among Acorn Trade (Shanghai) Co., Ltd., Beijing HJX Technology Development Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.7 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.6***4.6 Equity Pledge Agreement undated, by and among Acorn Trade (Shanghai) Co., Ltd., Kuan Song and Pan Zong in connection with shares of Beijing HJX Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.8 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.7***4.7 Exclusive Purchase Agreement undated, by and among Acorn Trade (Shanghai) Co., Ltd., Kuan Song, Pan Zong and Beijing HJX Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.9 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.8***4.8 Power of Attorney undated, issued by Kuan Song and Pan Zong in favor of a designee of Acorn Trade (Shanghai) Co., Ltd. in connection with Beijing HJX Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.10 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.9***4.9 Termination Agreement undated, by and among Shanghai HJX Digital Technology Co., Ltd.Ltd., Kuan Song, Pan Zong, Beijing HJX Technology Development Co., Ltd., Acorn Trade (Shanghai) Co., Ltd. and Weiji Gao in connection with the termination of prior contractual arrangements regarding Beijing HJX Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.11 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.10***4.10 Letter of Consent undated, issued by Kai Wang (incorporated by reference to Exhibit 4.12 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.11***4.11 Loan Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.13 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.12***4.12 Exclusive Technical Service Agreement dated May 27, 2015, by and between Acorn Information Technology (Shanghai) Co., Ltd. and Beijing Acorn Trade Co., Ltd. (incorporated by reference to Exhibit 4.14 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)


 124

4.13***4.13 Operation and Management Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Beijing Acorn Trade Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.15 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.14***4.14 Equity Pledge Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song and Pan Zong in connection with shares of Beijing Acorn Trade Co., Ltd. (incorporated by reference to Exhibit 4.16 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.15***4.15 Exclusive Purchase Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song, Pan Zong and Beijing Acorn Trade Co., Ltd. (incorporated by reference to Exhibit 4.17 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.16***4.16 Power of Attorney dated May 27, 2015, issued by Kuan Song and Pan Zong in favor of a designee of Acorn Information Technology (Shanghai) Co., Ltd. in connection with Beijing Acorn Trade Co., Ltd. (incorporated by reference to Exhibit 4.18 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.17***4.17 Termination Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Dongjie Yang, Weiguo Ge, Beijing Acorn Trade Co., Ltd., Kuan Song and Pan Zong in connection with the termination of prior contractual arrangements regarding Beijing Acorn Trade Co., Ltd. (incorporated by reference to Exhibit 4.19 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.18***4.18 Letter of Consent dated May 27, 2015, issued by Kai Wang (incorporated by reference to Exhibit 4.20 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.19***4.19 Loan Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.21 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.20***4.20 Exclusive Technical Service Agreement dated May 27, 2015, by and between Acorn Information Technology (Shanghai) Co., Ltd. and Shanghai Acorn Network Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.22 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)


4.21***4.21 Operation and Management Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Shanghai Acorn Network Technology Development Co., Ltd., Kuan Song and Pan Zong (incorporated by reference to Exhibit 4.23 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.22***4.22 Equity Pledge Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song and Pan Zong in connection with shares of Shanghai Acorn Network Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.24 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.23***4.23 Exclusive Purchase Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Kuan Song, Pan Zong and Shanghai Acorn Network Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.25 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.24***4.24 Power of Attorney dated May 27, 2015, issued by Kuan Song and Pan Zong in favor of a designee of Acorn Information Technology (Shanghai) Co., Ltd. in connection with Shanghai Acorn Network Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.26 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.25***4.25 Termination Agreement dated May 27, 2015, by and among Acorn Information Technology (Shanghai) Co., Ltd., Dongjie Yang, Weiguo Ge, Shanghai Acorn Network Technology Development Co., Ltd., Kuan Song and Pan Zong in connection with the termination of prior contractual arrangements regarding Shanghai Acorn Network Technology Development Co., Ltd. (incorporated by reference to Exhibit 4.27 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.26***4.26 Letter of Consent dated May 27, 2015, issued by Kai Wang (incorporated by reference to Exhibit 4.28 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.27***Exclusive Technical Service Agreement dated May 27, 2015, by and between Shanghai HJX Digital Technology Co., Ltd. and Shanghai HJX Electronic Technology Co., Ltd.
4.28***Operation and Management Agreement dated May 27, 2015, by and among Shanghai HJX Digital Technology Co., Ltd., Shanghai HJX Electronic Technology Co., Ltd., Kuan Song and Pan Zong

 125

4.29***Equity Pledge Agreement dated May 27, 2015, by and among Shanghai HJX Digital Technology Co., Ltd., Kuan Song and Pan Zong in connection with shares of Shanghai HJX Electronic Technology Co., Ltd.
4.30***Exclusive Purchase Agreement dated May 27, 2015, by and among Shanghai HJX Digital Technology Co., Ltd., Shanghai HJX Electronic Technology Co., Ltd., Kuan Song and Pan Zong
4.31***Power of Attorney dated May 27, 2015, issued by Kuan Song and Pan Zong in favor of a designee of Shanghai HJX Digital Technology Co., Ltd. in connection with Shanghai HJX Electronic Technology Co., Ltd.
4.32***Termination Agreement dated May 27, 2015, by and among Shanghai HJX Digital Technology Co., Ltd., Yang Dongjie, Ge Weiguo, Shanghai HJX Electronic Technology Co., Ltd., Kuan Song and Pan Zong in connection with the termination of prior contractual arrangements regarding Shanghai HJX Electronic Technology Co., Ltd.
4.33***Letter of Consent dated May 27, 2015 issued by Kai Wang
4.34***Loan Agreement dated May 27, 2015, by and among Shanghai HJX Digital Technology Co., Ltd., Kuan Song and Pan Zong
4.35***4.27 Settlement Agreement between the Company, Acorn Composite Corporation, Inc. and Robert W. Roche (incorporated by reference to Exhibit 4.37 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.36***4.28 Transitional Services and Separation Agreement between Mr. Don Dongjie Yang, the Company and D.Y. Capital Inc. dated May 27, 2015 (incorporated by reference to Exhibit 4.38 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)

4.37***4.29 Form of Employment Agreement with Management (incorporated by reference to Exhibit 4.39 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 16, 2016)
   
4.384.30 Deed of Settlement by and among the Company, Roche Enterprises Ltd., Mr. Andrew Yan, Gordon Xiaogang Wang, and Jing Wang, and SB Asia Investment Fund II L.P., dated July 28, 2017 (incorporated by reference to Exhibit 4.38 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 15, 2018)
   
4.394.31 Strategic Cooperation Framework Agreement between the Company and Cachet Hotel Group Limited Cayman L.P., dated November 20, 2017 (incorporated by reference to Exhibit 4.39 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 15, 2018)
   
4.404.321 Share sale and purchase agreement between China DRTV, Inc. and Hong Kong Red Star Macalline Universal Home Furnishings Limited, dated March 28, 2018 (incorporated by reference to Exhibit 4.40 of the Company’s annual report on Form 20-F, filed with the Securities and Exchange Commission on May 15, 2018)
   
8.1***8.1 List of Subsidiaries
   
11.1***11.1 Code of Business Conduct and Ethics of Acorn (incorporated by reference to Exhibit 99.1 of the Company’s Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the Securities and Exchange Commission on April 3, 2007)
   
12.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
12.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
13.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
13.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1Letter from Deloitte Confirming No Disagreement under Item 16F(a)(3)
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 1261

*Previously filed as an exhibitCertain schedules to the Registration Statement on F-1 registration (File No. 333-141860), as amended, initially filed with the SecuritiesShare Sale and Exchange Commission on April 3, 2007.
**Incorporated by referencePurchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to provide a copy of all omitted schedules to the Registration Statement on Form F-6 (File No. 333-142177), which was filed with the Securities and Exchange Commission with respect to American depositary shares representing ordinary shares on April 17, 2007.
***Previously filed with the Registrant’s annual report on Form 20-F, filed with the SEC on May 16, 2016.upon request.


1Certain schedules to the Share Sale and Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to provide a copy of all omitted schedules to the Commission upon request.113

 127

 

 

SIGNATURE

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 ACORN INTERNATIONAL, INC.
  
 /s/ Jacob A. Fisch
 Name: Jacob A. Fisch
 Title: Chief Executive Officer

 

Date: May 15, 2018June 3, 2020 

 

 128


ACORN INTERNATIONAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting FirmF-2
Report of Independent Registered Public Accounting FirmF-3
Consolidated Balance Sheets as of December 31, 20162018 and 20172019F-4F-3
Consolidated Statements of Operations for the years ended December 31, 2015, 20162017, 2018 and 20172019F-6F-5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 20162017, 2018 and 20172019F-7F-6
Consolidated Statements of Changes in Equity for the years ended December 31, 2015, 20162017, 2018 and 20172019F-8F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 20162017, 2018 and 20172019F-9F-8
Notes to the Consolidated Financial StatementsF-11F-10
Additional Information—Financial Statement Schedule IF-42
Additional Information—Financial Statement Schedule IIF-47

 

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

ACORN INTERNATIONAL, INC.

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheets of Acorn International, Inc. and its subsidiaries and variable interest entities (the “Company”) as of December 31, 20162018 and 2017,2019, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the twothree years in the period ended December 31, 2017,2019, and the related notes and financial statement schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20162018 and 2017,2019, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.

Change in accounting principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for operating leases as of January 1, 2019 due to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).

 

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 consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

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 supporting 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.

 

We also have audited the adjustments to the 2015 financial statements to retrospectively apply the discontinued operations, as described in Note 21. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2015 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2015 financial statements taken as a whole./s/ Grant Thornton

/s/ Grant Thornton

 

We have served as the Company’s auditor since 2016.

 

Shanghai, China

May 15, 2018

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMJune 3, 2020

 


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

ACORN INTERNATIONAL, INC.

 

We have audited, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 21 to the consolidated financial statements, the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for the year ended December 31, 2015 of Acorn International, Inc. and its subsidiaries and variable interest entities (collectively, the “Group”), and the related financial statements schedules included in Schedule 1 and Schedule II (the 2015 financial statements before the effects of the retrospective adjustments for the discontinued operations discussed in Note 21 to the financial statements are not presented herein). These financial statements and related financial statement schedules are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements and related financial statement schedules based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2015 financial statements, before the effects of the retrospective adjustments for the discontinued operations discussed in Note 21 to the financial statements, present fairly, in all material respects, the results of Group's operations and Group's cash flows for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We were not engaged to audit, review, or apply any procedures to the retrospective adjustments for the discontinued operations discussed in Note 21 to the consolidated financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.

/s/Deloitte Touche Tohmatsu Certified Public Accountants LLP

Shanghai, China

May 16, 2016

F-3

ACORN INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(In US dollars, except share data)

 

 December 31,  December 31, 
 2016  2017  2018  2019 
          
Assets                
Current assets:                
Cash and cash equivalents $25,505,731  $21,019,834  $20,143,783  $13,461,368 
Restricted cash  72,077   78,051   76,243   75,543 
Accounts receivable, net of allowance for doubtful accounts of $3,702,514 and $3,978,604 as of December 31, 2016 and 2017, respectively  1,271,209   1,442,750 
Inventory  3,977,336   1,516,283 
Prepaid advertising expenses  10,689   — 
Accounts receivable, net of allowance for doubtful accounts of $4,023,663 and $551,195 as of December 31, 2018 and 2019, respectively  3,520,440   3,611,177 
Inventory, net  1,590,319   3,042,762 
Other prepaid expenses and current assets  2,440,816   4,030,812   7,339,525   5,997,033 
Current portion of convertible loan receivable  —   3,587,204 
Advance to related party supplier  596,575   1,115,009 
Loan receivable  3,597,392   3,754,735 
Current portion of loan to related party  —   14,804,052 
Held-for-sale assets  2,881,370   468,191 
Assets to be abandoned  579,644   116,559 
Total current assets  33,277,858   31,674,934   40,325,291   46,446,429 
Prepaid land use right, net  6,578,765   — 
Property and equipment, net  13,885,079   4,037,294   660,157   559,964 
Held-for-sale assets  802,387   17,022,630 
Available-for-sale securities  74,666,865   44,479,922   38,858,216   25,681,848 
Convertible loan receivable  3,218,665   — 
Loan to related party  —   3,628,415   10,050,054   — 
Deferred tax assets, net  —   4,997,111 
Rights of use assets, net  —   1,785,194 
Other long-term assets  301,752   64,176   243,236   693,518 
                
Total assets $132,731,371  $100,907,371  $90,136,954  $80,164,064 
Liabilities and equity                
Current liabilities:                
Accounts payable $2,614,118  $2,100,933  $2,057,539  $3,172,263 
Dividend payable  174,658   133,405 
Accrued expenses and other current liabilities  9,132,166   8,643,756   12,726,641   6,564,390 
Current operating lease liabilities  —   881,349 
Income taxes payable  3,665,757   353,635   2,096,987   1,648,520 
Deferred revenue  380,526   512,009   174,826   68,798 
        
Liabilities to be abandoned  272,428   222,578 
Total current liabilities  15,792,567   11,610,333   17,503,079   12,691,303 
Deferred tax liability  17,429,117   1,952,990 
Deferred tax liability, net  630,574   — 
Non-current operating lease liabilities  —   1,032,645 
                
Total liabilities  33,221,684   13,563,323   18,133,653   13,723,948 
                
Commitments and contingencies (Note 17)        
Commitments and contingencies (Note 16)        
Equity:                
Acorn International, Inc. shareholders’ equity:                
Ordinary shares ($0.01 par value; 100,000,000 shares authorized 91,818,518 and 91,884,402 shares issued and 75,406,875 and 53,602,810 shares outstanding as of December 31, 2016 and 2017, respectively)  918,185   918,844 
Ordinary shares ($0.01 par value; 100,000,000 shares authorized 91,884,402 and 91,884,402 shares issued and 51,619,218 and 51,619,218 shares outstanding as of December 31, 2018 and 2019, respectively)  918,844   918,844 
Additional paid-in capital  161,938,330   161,962,670   121,962,650   117,445,969 
Accumulated deficits  (122,910,876)  (110,526,573)  (79,399,389)  (69,563,158)
Accumulated other comprehensive income  80,865,261   60,968,963   56,507,394   45,635,771 
Treasury stock, at cost (16,411,643 and 38,281,592 shares as of December 31, 2016 and 2017, respectively)  (21,640,346)  (26,335,296)
Treasury stock, at cost (40,265,184 and 40,265,184 shares as of December 31, 2018 and 2019, respectively)  (28,320,324)  (28,320,324)
                
Total Acorn International, Inc. shareholders’ equity  99,170,554   86,988,608   71,669,175   66,117,102 
Noncontrolling interests  339,133   355,440 
Non-controlling interests  334,126   323,014 
                
Total equity  99,509,687   87,344,048   72,003,301   66,440,116 
                
Total liabilities and equity $132,731,371  $100,907,371  $90,136,954  $80,164,064 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


ACORN INTERNATIONAL, INC.

 

CONSOLIDATED BALANCE SHEETS—(Continued)

(In US dollars, except share data)

 

The following table presents the carrying amounts and classification of the assets of the consolidated variable interest entities (“VIEs”), which are included in the Consolidated Balance Sheetsconsolidated balance sheets above. The assets in the table below exclude intercompany balances that eliminate in consolidation. The assets of the consolidated VIEs as presented in the following table can only be used to settle obligations of those VIEs.

 

 December 31,  December 31, 
 2016  2017  2018  2019 
          
Assets of consolidated VIEs:                
Current assets:                
Cash and cash equivalents $1,365,895  $1,425,629  $2,516,248  $6,284,218 
Restricted cash  72,077   78,051   76,243   75,543 
Accounts receivable, net of allowance for doubtful accounts of $238,651 and $255,596 as of December 31, 2016 and 2017, respectively  404,057   211,272 
Inventory  134,632   41,539 
        
Accounts receivable, net of allowance for doubtful accounts of $242,767 and $4,538 as of December 31, 2018 and 2019, respectively  33,178   447,714 
Inventory, net  326,734   2,289,116 
Other prepaid expenses and current assets  630,111   1,380,911   2,171,913   3,059,649 
Deferred tax assets, net  401,808   426,577 
Held-for-sale assets  159,573   — 
Assets to be abandoned  296,658   18,359 
Total current assets  3,008,580   3,563,979   5,580,547   12,174,599 
Property and equipment, net  957,103   1,058,704   539,145   430,835 
Deferred tax assets, net  406,129   3,872,076 
Rights of use lease assets, net  —   1,062,965 
Total assets of consolidated VIEs $3,965,683  $4,622,683  $6,525,821  $17,540,475 

 

The following table presents the carrying amounts and classification of the liabilities of the consolidated VIEs, which are included in the Consolidated Balance Sheetsconsolidated balance sheets above. The liabilities in the table below include third party liabilities of the consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation. All the liabilities of the consolidated VIEs as presented in the following table are without recourse to the general credit of Acorn International, Inc.

 

 December 31,  December 31, 
 2016  2017  2018  2019 
          
Liabilities of consolidated VIEs:             
Current liabilities:                
Accounts payable $179,215  $159,383  $328,265  $2,012,762 
Accrued expenses and other current liabilities  1,061,350   947,890   589,506   1,705,115 
Income taxes payable  435,100   468,021 
Deferred revenue  380,526   293,806   174,826   68,798 
Income taxes payable  401,808   439,326 
Current operating lease liabilities  —   574,201 
Liabilities to be abandoned  2,854   107,726 
Total current liabilities  1,530,551   4,936,623 
Non-current operating liabilities  —   576,593 
Total liabilities of consolidated VIEs $2,022,899  $1,840,405  $1,530,551  $5,513,216 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


ACORN INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In US dollars, except share data)

 

 For the years ended December 31,  For the years ended December 31, 
 2015  2016  2017  2017  2018  2019 
              
Revenues:                        
Direct sales, net $18,003,617  $13,361,915  $18,942,436  $15,866,782  $20,297,424  $31,658,751 
Distribution sales, net  4,952,548   3,116,540   1,347,851   1,200,247   4,789,845   5,825,742 
                        
Total revenues, net  22,956,165   16,478,455   20,290,287   17,067,029   25,087,269   37,484,493 
                        
Cost of revenues:                        
Direct sales  12,537,965   2,352,556   5,244,490   3,963,203   5,080,307   8,565,312 
Distribution sales  2,955,637   2,877,620   827,495   596,823   1,550,081   1,910,990 
                        
Total cost of revenues  15,493,602   5,230,176   6,071,985   4,560,026   6,630,388   10,476,302 
                        
Gross profit  7,462,563   11,248,279   14,218,302   12,507,003   18,456,881   27,008,191 
                        
Operating (expenses) income                        
Advertising expenses  (2,203,996)  (23,701)  —   (1,725,940)  (1,290,527)  (2,438,131)
Other selling and marketing expenses  (14,417,878)  (7,037,783)  (10,114,870)  (6,980,009)  (9,513,317)  (15,740,742)
General and administrative expenses  (21,664,447)  (14,153,048)  (9,759,145)  (9,036,971)  (7,132,340)  (9,316,541)
Other operating income, net  1,712,774   7,607,334   1,473,055   1,473,055   2,136,263   6,033,728 
                        
Total operating expenses  (36,573,547)  (13,607,198)  (18,400,960)  (16,269,865)  (15,799,921)  (21,461,686)
                        
Loss from continuing operations  (29,110,984)  (2,358,919)  (4,182,658)
(Loss) income from continuing operations  (3,762,862)  2,656,960   5,546,505 
Interest expense  (14,183)  —   —   —   (95)  — 
Interest income  836,211   466,530   533,622   533,622   400,439   295,294 
Other income (expense), net  195,355   17,671,023   11,638,843 
Other income (expenses), net  11,638,843   32,564,328   3,185,154 
                        
Income (loss) from continuing operations before income taxes and equity in losses of affiliates  (28,093,601)  15,778,634   7,989,807 
Income tax expense (benefit)  (183,091)  (4,592,783)  7,864,545 
Income (loss) from continuing operations before equity in losses of affiliates  (28,276,692)  11,185,851   15,854,352 
Income from continuing operations before income taxes and equity in losses of affiliates  8,409,603   35,621,632   9,026,953 
Income tax benefit (expense)  7,892,169   (3,183,749)  1,973,691 
Income from continuing operations before equity in losses of affiliates  16,301,772   32,437,883   11,000,644 
                        
Discontinued operations :            
Discontinued operations:            
Loss from discontinued operations  (11,746,310)  (6,909,067)  (3,474,506)  (3,921,926)  (990,235)  (1,061,087)
Loss from discontinued operations before equity in losses of affiliates  (11,746,310)  (6,909,067)  (3,474,506)  (3,921,926)  (990,235)  (1,061,087)
                        
Equity in losses of affiliates  (226,779)  (868,121)  —   —   (324,900)  (109,102)
                        
Net income (loss)  (40,249,781)  3,408,663   12,379,846 
Net income  12,379,846   31,122,748   9,830,455 
Net loss attributable to non-controlling interests  (91,127)  (29,707)  (4,457)  (4,457)  (4,436)  (5,776)
                        
Net income (loss) attributable to Acorn International, Inc. $(40,158,654) $3,438,370  $12,384,303 
Income (Loss) per ordinary share:            
Net income attributable to Acorn International, Inc. $12,384,303  $31,127,184  $9,836,231 
Income per ordinary share:            
Basic and diluted $(0.51) $0.05  $0.19  $0.19  $0.60  $0.19 
—Continuing operations  (0.36)  0.14   0.24   0.25   0.62   0.21 
—Discontinued operations  (0.15)  (0.09)  (0.05)  (0.06)  (0.02)  (0.02)
Shares used in calculating income (loss) per ordinary share:            
Shares used in calculating income per ordinary share:            
Basic and diluted  79,226,404   75,600,700   65,836,869   65,836,869   52,546,325   51,619,218 
                        
Includes share-based compensation related to:                        
General and administrative expenses $71,333  $658,000  $25,000  $25,000  $—  $— 

The accompanying notes are an integral part of these consolidated financial statements.


ACORN INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In US dollars, except share data)

  For the years ended December 31, 
  2017  2018  2019 
             
Net income $12,379,846  $31,122,748  $9,830,455 
Other comprehensive income (loss), net of tax:            
Foreign currency translation adjustments  11,167,377   (988,967)  (1,008,346)
Net unrealized loss of available-for-sale securities, net of tax of $(10,347,637), $(1,163,160) and $(3,307,755) in 2017, 2018 and 2019, respectively  (31,042,912)  (3,489,480)  (9,868,613)
             
Comprehensive income (loss)  (7,495,689)  26,644,301   (1,046,504)
Comprehensive income (loss) attributable to non-controlling interest  16,307   (21,314)  (11,112)
             
Comprehensive income (loss) attributable to Acorn International, Inc.  (7,511,996)  26,665,615   (1,035,392)

The accompanying notes are an integral part of these consolidated financial statements.


ACORN INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In US dollars, except share data)

  Acorn International, Inc. shareholders’ equity       
  Ordinary shares  Additional
paid-in		  Accumulated  Accumulated
other
comprehensive		  Treasury stock, at cost     Non-controlling  Total 
  Shares  Amount  capital  deficits  income  Shares  Amount  Total  interests  equity 
Balance at January 1, 2017  91,818,518  $918,185  $161,938,330  $(122,910,876) $80,865,261   (16,411,643) $(21,640,346) $99,170,554  $339,133  $99,509,687 
Net income (loss)  —   —   —   12,384,303   —   —   —   12,384,303   (4,457)  12,379,846 
Foreign currency translation adjustments  —   —   (1)  —   11,146,614   —   —   11,146,613   20,764   11,167,377 
Net unrealized loss of available-for-sale securities  —   —   —   —   (31,042,912)  —   —   (31,042,912)  —   (31,042,912)
Exercise of restricted share units  65,884   659   (659)  —   —   —   —   —   —   — 
Share-based compensation expenses  —   —   25,000   —   —   —   —   25,000   —   25,000 
Share buy-back  —   —   —   —   —   (21,869,949)  (4,694,950)  (4,694,950)  —   (4,694,950)
                                         
Balance at December 31, 2017  91,884,402  $918,844  $161,962,670  $(110,526,573) $60,968,963   (38,281,592) $(26,335,296) $86,988,608  $355,440  $87,344,048 
Net income (loss)  —   —   —   31,127,184   —   —   —   31,127,184   (4,436)  31,122,748 
Dividend appropriation  —   —   (40,000,020)  —   —   —   —   (40,000,020)  —   (40,000,020)
Foreign currency translation adjustments  —   —   —   —   (972,089)  —   —   (972,089)  (16,878)  (988,967)
Net unrealized loss of available-for-sale securities  —   —   —   —   (3,489,480)  —   —   (3,489,480)  —   (3,489,480)
Share buy-back  —   —   —   —   —   (1,983,592)  (1,985,028)  (1,985,028)  —   (1,985,028)
                                         
Balance at December 31, 2018  91,884,402  $918,844  $121,962,650  $(79,399,389) $56,507,394   (40,265,184) $(28,320,324) $71,669,175  $334,126  $72,003,301 
Net income (loss)  —   —   —   9,836,231   —   —   —   9,836,231   (5,776)  9,830,455 
Dividend appropriation  —   —   (4,516,681)  —   —   —   —   (4,516,681)  —   (4,516,681)
Foreign currency translation adjustments  —   —   —   —   (1,003,010)  —   —   (1,003,010)  (5,336)  (1,008,346)
Net unrealized loss of available-for-sale securities  —   —   —   —   (9,868,613)  —   —   (9,868,613)  —   (9,868,613)
Balance at December 31, 2019  91,884,402  $918,844  $117,445,969  $(69,563,158) $45,635,771   (40,265,184) $(28,320,324) $66,117,102  $323,014  $66,440,116 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


ACORN INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWS

(In US dollars, except share data)

 

  For the years ended December 31, 
  2015  2016  2017 
          
Net income (loss) $(40,249,781)  3,408,663   12,379,846 
Other comprehensive income, net of tax            
Foreign currency translation adjustments  (5,895,181)  (27,222,102)  11,167,377 
Unrealized gain (loss) of available-for-sales securities, net of tax of $44,621,498, $ (18,172,231) and $ (10,347,637) in 2015, 2016 and 2017, respectively  133,864,495   (54,516,694)  (31,042,912)
             
Comprehensive income (loss)  87,719,533   (78,330,133)  (7,495,689)
Comprehensive income (loss) attributable to non-controlling interest  (117,409)  (53,364)  16,307 
             
Comprehensive income (loss) attributable to Acorn International, Inc.  87,836,942   (78,276,769)  (7,511,996)
  For the years ended December 31, 
  2017  2018  2019 
          
Operating activities:            
Income from continuing operations $16,301,772  $32,112,983  $10,891,542 
Adjustments to reconcile net income to net cash used in operating activities:            
Share-based compensation  25,000   —   — 
Equity in losses of affiliates  —   324,900   109,102 
Bad debt expense (recoveries)  149,858   372,272   (25,974)
Inventory write-downs (reversals)  (147,804)  23,299   19,683 
Depreciation and amortization  1,232,393   871,189   167,189 
Loss from disposal of equipment and other long-term assets  151,397   82,805   — 
Deferred income taxes  (7,848,378)  (397,477)  (2,501,381)
Interest on convertible loan receivable  (183,785)  (184,395)  (181,880)
Interest on loan to related party  —   (578,896)  (1,259,941)
Gains on disposal of available-for-sale securities  (11,845,796)  (960)  — 
Gains on disposal of held-for-sales assets and subsidiaries  —   (32,503,096)  (5,303,626)
Other  —   —   137,029 
Changes in operating assets and liabilities:            
Accounts receivable  (835,842)  (2,486,954)  (53,844)
Inventory  2,456,821   (227,339)  (1,566,701)
Prepaid advertising expenses  10,747   —   — 
Other prepaid expenses and current assets  (1,228,770)  (1,802,105)  (115,736)
Other long-term assets  —   —   (31,448)
Accounts payable  (521,269)  (21,815)  1,188,510 
Accrued expenses and other current liabilities  (456,584)  (558,951)  (1,075,808)
Income taxes payable  (3,327,743)  1,844,566   (434,465)
Deferred revenue  131,483   (337,183)  (106,028)
Net cash used in operating activities $(5,936,500) $(3,467,157) $(143,777)
             
Investing activities:            
Purchase of property and equipment  (337,635)  (98,290)  (137,914)
Proceeds from disposal of equipment  11,452   1,204   41,170 
Proceeds from disposal of held-for-sale assets and subsidiaries  —   47,530,540   3,855,122 
Interest on loan to related party  —   553,938   1,259,941 
Disbursement of loan to related party  (3,628,415)  (6,247,432)  (4,778,956)
Purchase of other long-term assets  7,741   (181,101)  (422,773)
Proceeds from disposal of available-for-sale securities  11,845,796   1,038   — 
Proceeds from advance from third party for sale of assets  —   5,099,365   — 
Net cash provided by (used in) investing activities $7,898,939  $46,659,262  $(183,410)

The accompanying notes are an integral part of these consolidated financial statements


ACORN INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In US dollars, except share data)

  For the years ended December 31, 
  2017  2018  2019 
          
Financing activities:            
Repurchase of ordinary shares  (4,694,950)  (1,985,028)  — 
Disbursement of dividend  —   (39,825,362)  (4,557,934)
Net cash used in financing activities $(4,694,950) $(41,810,390) $(4,557,934)
Effect of exchange rate changes on cash, cash equivalents and restricted cash $1,251,812  $(1,583,891) $(1,148,341)
             
Cash flows from discontinued operations:            
Operating activities  (2,989,951)  (670,276)  (649,825)
Investing activities  (9,273)  (5,407)  172 
Financing activities  —   —   — 
Net cash flows used in discontinued operations  (2,999,224)  (675,683)  (649,653)
             
Net decrease in cash, cash equivalents and restricted cash $(4,479,923) $(877,859) $(6,683,115)
Cash, cash equivalents and restricted cash at the beginning of the year  25,577,808   21,097,885   20,220,026 
Cash, cash equivalents and restricted cash at the end of the year $21,097,885  $20,220,026  $13,536,911 
             
Supplemental disclosure of cash flow information:            
Income taxes paid $3,512,489  $1,745,993  $902,469 
Interest paid $—  $—  $— 
             
Supplemental disclosure of non-cash investing and financing activities:            
Receivable from sale of non-core assets and subsidiaries $—  $2,443,404  $1,508,956 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7


ACORN INTERNATIONAL, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In US dollars, except share data)

  Acorn International, Inc. shareholders’ equity       
  Ordinary shares  Additional
paid-in		  Accumulated  Accumulated
other
comprehensive		  Treasury stock, at cost     Noncontrolling    
  Shares  Amount  capital  deficits  income  Shares  Amount  Total  interests  Total equity 
Balance at January 1, 2015  95,237,174  $952,372  $161,924,810  $(86,190,592) $34,584,804   (12,487,383) $(20,109,451) $91,161,943  $509,906  $91,671,849 
Net income (loss)  —   —   —   (40,158,654)  —   —   —   (40,158,654)  (91,127)  (40,249,781)
Foreign currency translation adjustments  —   —   —   —   (5,868,899)  —   —   (5,868,899)  (26,282)  (5,895,181)
Unrealized gain of available-for-sales securities  —   —   —   —   133,864,495   —   —   133,864,495   —   133,864,495 
Exercise of restricted share units  300,000   3,000   (3,000)  —   —   —   —   —   —   — 
Share-based compensation  —   —   71,333   —   —   —   —   71,333   —   71,333 
Share buy-back and cancellation  (6,518,656)  (65,187)  (684,813)  —   —   —   —   (750,000)  —   (750,000)
                                         
Balance at December 31, 2015  89,018,518  $890,185  $161,308,330  $(126,349,246) $162,580,400   (12,487,383) $(20,109,451) $178,320,218  $392,497  $178,712,715 
Net income (loss)  —   —   —   3,438,370   —   —   —   3,438,370   (29,707)  3,408,663 
Foreign currency translation adjustments  —   —   —   —   (27,198,445)  —   —   (27,198,445)  (23,657)  (27,222,102)
Fair value fluctuation of available-for-sale securities  —   —   —   —   (54,516,694)  —   —   (54,516,694)  —   (54,516,694)
Exercise of restricted share units  2,800,000   28,000   (28,000)  —   —   —   —   —   —   — 
Share-based compensation expenses  —   —   658,000   —   —   —   —   658,000   —   658,000 
Share buy-back              —   —   (3,924,260)  (1,530,895)  (1,530,895)  —   (1,530,895)
                                         
Balance at December 31, 2016  91,818,518  $918,185  $161,938,330  $(122,910,876) $80,865,261   (16,411,643) $(21,640,346) $99,170,554  $339,133  $99,509,687 
Net income (loss)  —   —   —   12,384,303   —   —   —   12,384,303   (4,457)  12,379,846 
Foreign currency translation adjustments  —   —   (1)  —   11,146,614   —   —   11,146,613   20,764   11,167,377 
Fair value fluctuation of available-for-sale securities  —   —   —   —   (31,042,912)  —   —   (31,042,912)  —   (31,042,912)
Exercise of restricted share units  65,884   659   (659)  —   —   —   —   —   —   — 
Share-based compensation expenses  —   —   25,000   —   —   —   —   25,000   —   25,000 
Share buy-back              —   —   (21,869,949)  (4,694,950)  (4,694,950)  —   (4,694,950)
                                         
Balance at December 31, 2017  91,884,402  $918,844  $161,962,670  $(110,526,573) $60,968,963   (38,281,592) $(26,335,296) $86,988,608  $355,440  $87,344,048 

The accompanying notes are an integral part of these consolidated financial statements.

F-8

ACORN INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In US dollars, except share data)

  For the years ended December 31, 
  2015  2016  2017 
          
Operating activities:            
Net income (loss) $15,854,352 $10,317,730  $(28,503,471)
Adjustments to reconcile net loss to net cash used in operating activities:            
Share-based compensation  71,333   658,000   25,000 
Equity in losses of affiliates  226,779   868,121   — 
Bad debt expense (recoveries)  3,856,777   (187,193)  149,858 
Inventory write-downs (reversals)  3,954,771   470,069   (117,585)
Depreciation and amortization  3,077,030   2,104,597   1,307,966 
Loss(gain) from disposal of equipment and other long-term assets  (787,160)  672,667   151,397 
Deferred income taxes  (179,990)  423,423   (7,842,672)
Accrued interests on long-term debt  14,183   —   — 
Accrued interests on convertible loan receivable  (232,690)  (184,170)  (183,785)
             
Gains on disposal of available-for-sale securities  —   (18,088,327)  (11,845,796)
Gains on disposal of held-for-sales assets  —   (5,838,768)  — 
Changes in operating assets and liabilities:            
Accounts receivable  2,913,228   652,386   (447,631)
Notes receivable  (153,610)  276,062   — 
Inventory  4,691,346   (311,781)  2,578,638 
Prepaid advertising expenses  4,579,347   460,984   10,747 
Other prepaid expenses and current assets  2,532,275   3,257,691   (1,236,651)
Accounts payable  (7,343,894)  (447,401)  (513,185)
Accrued expenses and other current liabilities  (343,890)  (4,382,664)  (488,410)
Income taxes payable  289,717   1,574,198   (3,312,122)
Deferred revenue  (118,673)  (167,540)  131,483 
Net cash used in operating activities $(11,456,592) $(7,871,916) $(5,778,396)
             
Investing activities:            
Purchase of property and equipment  (21,388)  (483,922)  (346,908)
Proceeds from disposal of equipment  3,922,958   80,748   11,452 
Proceeds from disposal of held-for-sale assets  —   11,291,342   — 
Investment in an affiliate  —   (150,000)  — 
Disbursement for loan receivable  (3,024,932)  —   — 
Disbursement for loan to related party  —   —   (3,628,415)
Purchase of other long-term assets  (477,220)  (358,938)  7,741 
Proceeds from disposal of available-for-sale securities  —   18,258,139   11,845,796 
Change in restricted cash  9,633,487   54,201   5,974 
Net cash provided by investing activities $10,032,905  $28,691,570  $7,895,640 

The accompanying notes are an integral part of these consolidated financial statements

F-9

ACORN INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In US dollars, except share data)

  For the years ended December 31, 
  2015  2016  2017 
          
Financing activities:            
Repurchase of ordinary shares  (375,000)  (1,530,895)  (4,694,950)
Repayment of long-term debt  (8,520,507)  —   — 
Net cash used in  financing activities $(8,895,507) $(1,530,895) $(4,694,950)
Effect of exchange rate changes on cash and cash equivalents $(709,544) $498,045  $1,239,864 
             
Cash flows from discontinue operations:            
Operating activities  (10,876,482)  (6,427,927)  (3,148,055)
Investing activities  (634,305)        
Financing activities            
Net cash flows from discontinue operations  (11,510,787)  (6,427,927)  (3,148,055)
             
Net increase (decreased) in cash and cash equivalents $(22,539,525) $13,358,877  $(4,485,897)
Cash and cash equivalents at the beginning of the year  34,686,379   12,146,854   25,505,731 
Cash and cash equivalents at the end of the year $12,146,854  $25,505,731  $21,019,834 
             
Supplemental disclosure of cash flow information:            
Income taxes paid $129,780  $2,236,119  $3,512,489 
Interest paid $70,507  $—  $— 
             
Supplemental disclosure of non-cash investing and financial activities:            
Receivable for the sale of property and equipment  1,301,227   —   — 

The accompanying notes are an integral part of these consolidated financial statements.

F-10

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

1. Organization and principal activities

 

Acorn International, Inc. (“Acorn International” or the “Company”) was incorporated in Cayman Islands on December 20, 2005.

 

Acorn International and its subsidiaries and variable interest entities (“VIEs”) (collectively, “Acorn International” or the “Company”) is an integrated multi-platform marketing company in the People’s Republic of China (“PRC”) which develops, promotes and sells products. The Company’s two primary sales platforms are integrated direct sales and a nationwide distribution network. Direct sales platforms include an outbound marketing platform (which until early 2015 included television (“TV”) direct sales and until middle 2019 included call center direct sales) and an Internet sales platform. Nationwide distribution network includes an offline distribution network through late 2019, and on-going e-commerce distribution through major e-commerce platforms in China.

 

Consolidated subsidiaries and changes to consolidated subsidiaries

 

As of December 31, 2017,2019, the consolidated subsidiaries of Acorn International were as follows:

 

Name of subsidiaries Percentage of
ownership		  Date of registration Place of registration
China DRTV, Inc. (“China DRTV”)  100% March 4, 2004 BVI
Smooth Profit Limited (“Smooth Profit”)  100% September 18, 2007 BVI
MK AND T Communications Limited (“MK AND T”)  100% October 27, 1998Hong Kong
Bright Rainbow Investments Limited (“Bright Rainbow”)100%October 29, 2007 Hong Kong
Shanghai Acorn Advertising Broadcasting Co., Ltd. (“Shanghai Advertising”)  100% August 19, 2004PRC
Shanghai HJX Digital Technology Co., Ltd. (“Shanghai HJX”)100%August 23, 2004 PRC
Acorn International Electronic Technology (Shanghai) Co., Ltd. (“Acorn Electronic”)  100% August 23, 2004 PRC
Acorn Information Technology (Shanghai) Co., Ltd. (“Acorn Information”)  100% August 27, 2004 PRC
Beijing Acorn Youngleda Oxygen Generating Co., Ltd. (“Beijing Youngleda”)  100% October 20, 2004 PRC
YiyangYukang Communication Equipment Co., Ltd. (“YiyangYukang”)  100% November 29, 2005 PRC
Zhuhai Sunrana Bio-tech Co., Ltd. (“Zhuhai Sunrana”)51%June 16, 2006PRC
Zhuhai Acorn Electronic Technology Co., Ltd. (“Zhuhai Acorn”)100%September 26, 2006PRC
Beijing HJZX Software Technology Development Co., Ltd. (“Beijing HJZX”)100%January 22, 2007PRC
ZhongshanMeijinZhongshan Meijin Digital Technology Co., Ltd. (“ZhongshanMeijin”)  75% February 13, 2007 PRC
Acorn Trade (Shanghai) Co., Ltd. (“Acorn Trade”)  100% December 13, 2007 PRC
Wuxi Acorn Enterprise Management Consulting Co., Ltd. (“Wuxi Acorn”)  100% January 29, 2010 PRC
Acorn Media Group Limited (“Acorn Media”)PRC100%June 1, 2018BVI

 

F-11


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

1. Organization and principal activities—(Continued)

 

Consolidated subsidiaries and changes to consolidated subsidiaries—(Continued)

  

In February 2017, HJX International Limited, a previously consolidated subsidiary of the Company, was deregistered.

 

In March 2017, Shanghai Acorn HJX Software Technology Development Co., Ltd., a previously consolidated subsidiary of the Company, was deregistered.

 

Acorn has consummated a share sale and purchase agreement with Hong Kong Red Star Macalline Universal Home Furnishings Limited (“Red Star”) on April 27, 2018, in exchange for cash payment of approximately RMB375 million (US$59 million). Renminbi (“RMB”) is the currency of the PRC. Pursuant to the terms of the share sale and purchase agreement, Red Star acquired 100% of the shares in the Company’s wholly-owned Hong Kong subsidiary Bright Rainbow Investments Limited (“Bright Rainbow”), which owns Shanghai HJX Digital Technology Co., Ltd (“Shanghai HJX”), which owns various non-core assets, including the land use rights to a plot of land in the Qingpu district of Shanghai with a total area of 76,799 square meters, along with the warehouse on that land plot.

In June 2019, Beijing HJZX Software Technology Development Co., Ltd., a previously consolidated subsidiary of the Company, was deregistered.

Acorn has entered into an equity transfer agreement to sell 100% of the equity interests in its wholly-owned subsidiary, Zhuhai Acorn Electronic Technology Co., Ltd. (“Zhuhai Acorn”), which is engaged in oxygen-generating products business, to an unrelated third-party on November 8, 2019, for a base purchase price of US$1,450,000 subject to working capital adjustment. The sale was completed in December 2019.

VIE Arrangements

 

As of December 31, 2017,2019, the variable interest entities of Acorn International were as follows:

 

Name of variable interest
entities		 Date of incorporation Place of incorporation
Beijing Acorn Trade Co., Ltd. (“Beijing Acorn”) March 19, 1998  PRC
Shanghai Acorn Network Technology Development Co., Ltd. (“Shanghai Network”) November 2, 2004  PRC
Beijing HJX Technology Development Co., Ltd. (“Beijing HJX”) September 16, 2013  PRC

 

Due to the complicated and lengthy approval process and uncertain position of the PRC’s Ministry of Commerce of People’s Republic of China (“PRC”) towards approving investment in direct salesales business by foreign investors under the Administrative Measures on Foreign Investment in Commercial Sector, Acorn International conducts its direct sales through two VIEs (Beijing Acorn and Shanghai Network) which hold direct sales licenses. Beijing Acorn and Shanghai Network are wholly owned 100% by two PRC nationals: Mr. Kuan Song and Ms. Pan Zong, who did not hold any share of Acorn International as of the date of these financial statements. Acorn Information, Technology (Shanghai) Co., Ltd. (“Acorn Information”), a wholly-owned subsidiary of Acorn International, entered into various agreements with each of Beijing Acorn and Shanghai Network and their shareholders, Mr. Kuan Song and Ms. Pan Zong, including (i) Irrevocable Powers of Attorney, under which each of the two shareholders of the VIEs granted to designees of Acorn Information the power to exercise all voting rights as a shareholder of these VIEs, (ii) Loan Agreement, under which Acorn Information made interest-free loans to the shareholders of these VIEs in an aggregate amount of approximately RMB118.0 million (equivalent to US$18.2 million) for capital contributions by the shareholders in these VIEs, (iii) Operation and Management Agreements, under which the parties thereto agreed that Acorn Information directs the day-to-day operational and financial activities of these VIEs, each of the directors, general managers and other senior management personnel of these affiliated entities will be appointed as nominated by Acorn Information, and that these VIEs do not conduct any transactions which might substantially affect their assets, obligations, rights and business operations without the prior written consent of Acorn Information, (iv) Equity Pledge Agreements, under which the shareholders of these VIEs pledged all of their equity interests in these VIEs to Acorn Information as collateral to guarantee the performance of these VIEs under the Operation and Management Agreements and the Technical Services Agreements as described below, as well as their personal obligations under the Loan Agreement, (v) Exclusive Purchase Agreements, under which the shareholders of these VIEs irrevocably granted Acorn Information or its designees an exclusive option to purchase at any time if and when permitted under PRC law, all or any portion of their equity interests in these VIEs for a price that is the minimum amount permitted by PRC law, (vi) Technical Service Agreements, under which Acorn Information became the exclusive provider of technical support and consulting services to these VIEs in exchange for service fees, and (vii) Spouse Consent Letters, pursuant to which the spouse of each of the shareholders of these two affiliated entities acknowledges that she or he is aware of, and consents to, the execution by her or his spouse of irrevocable powers of attorney, equity pledge agreements and the exclusive purchase agreements described above and, with respect to establishment, grant and performance of the above irrevocable powers of attorney, equity pledge and the exclusive purchase, each spouse further agrees that, whether at present or in the future, she or he will not take any actions or raise any claims or objection.

 

F-12


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

1. Organization and principal activities—(Continued)

 

VIE Arrangements—(Continued)

 

Through the above arrangements, Acorn Information holds all the variable interests of Beijing Acorn and Shanghai Network and has power to direct the activities that most significantly impactaffect the economic success of Beijing Acorn and Shanghai Network and absorbs the majority of the economic risks and rewards of Beijing Acorn and Shanghai Network through service fees. The nominal shareholders lack the authority to make decisions that have a significant effect on the operations of Beijing Acorn and Shanghai Network and do not absorb the expected losses because the capital of Beijing Acorn and Shanghai Network were funded using loans borrowed from Acorn Information. Therefore, Acorn International is the primary beneficiary of these two VIEs and accordingly, the financial statements of Beijing Acorn and Shanghai Network have been consolidated with Acorn International as its subsidiaries since the VIE structure were established.

 

Due to the aforesaid complicated and lengthy approval process and uncertain position of the Ministry of Commerce of PRC towards approving investment in direct sale business by foreign investors as well as certain restrictions or prohibitions on foreign ownership of companies that engage in internet and other related businesses imposed by current PRC laws and regulations, including the provision of internet content, in 2013, Acorn International set up two new VIEs, Beijing HJX and Shanghai HJX Electronic Technology Co., Ltd. (“HJX Electronic”), and began to conduct its internet interactive service through Beijing HJX which holds the service license of telecommunication and information operation, and its Ozing product direct sales through HJX Electronic. Like Beijing Acorn and Shanghai Network, Beijing HJX and HJX Electronic are each also collectively owned 100% by Mr. Kuan Song and Ms. Pan Zong. Acorn Trade (previously Shanghai HJX), a wholly-owned subsidiary of Acorn International, entered into various agreements with each of Beijing HJX and HJX Electronic and their shareholders, Mr. Kuan Song and Ms. Pan Zong, including (i) Irrevocable Powers of Attorney, under which each of the two shareholders of these VIEs granted to designees of Acorn Trade the power to exercise all voting rights as a shareholder of these VIEs, (ii) Loan Agreement, under which Acorn Trade made interest-free loans to the shareholders of these VIEs in an aggregate amount of approximately RMB53.0 million (equivalent to US$8.7 million) for capital contributions by the shareholders in these VIEs, (iii) Operation and Management Agreements, under which the parties thereto agreed that Acorn Trade directs the day-to-day operational and financial activities of these VIEs, each of the directors, general managers and other senior management personnel of these affiliated entities will be appointed as nominated by Acorn Trade, and that these VIEs do not conduct any transactions which might substantially affect their assets, obligations, rights and business operations without the prior written consent of Acorn Trade, (iv) Equity Pledge Agreements, under which the shareholders of the VIEs pledged all of their equity interests in these VIEs to Acorn Trade as collateral to guarantee the performance of these VIEs under the Operation and Management Agreements and the Technical Services Agreements as described below, as well as their personal obligations under the Loan Agreement, (v) Exclusive Purchase Agreements, under which the shareholders of these VIEs irrevocably granted Acorn Trade or its designees an exclusive option to purchase at any time if and when permitted under PRC law, all or any portion of their equity interests in these VIEs for a price that is the minimum amount permitted by PRC law, (vi) Technical Service Agreements, under which Acorn Trade became the exclusive provider of technical support and consulting services to these VIEs in exchange for service fees, and (vii) Spouse Consent Letters, pursuant to which the spouse of each of the shareholders of these two affiliated entities acknowledges that she or he is aware of, and consents to, the execution by her or his spouse of irrevocable powers of attorney, equity pledge agreements and the exclusive purchase agreements described above and with respect to establishment, grant and performance of the above irrevocable powers of attorney, equity pledge and the exclusive purchase, each spouse further agrees that, whether at present or in the future, she or he will not take any actions or raise any claims or objection.

 

F-13


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

1. Organization and principal activities—(Continued)

 

VIE Arrangements—(Continued)

 

Through the above arrangements, Acorn Trade holds all the variable interests of Beijing HJX and HJX Electronic and has power to direct the activities that most significantly impact the economic success of Beijing HJX and HJX Electronic and absorbs the majority of the economic risks and rewards of Beijing HJX and HJX Electronic through service fees. The nominal shareholders lack the authority to make decisions that have a significant effect on the operations of Beijing HJX and HJX Electronic and do not absorb the expected losses because the capital of Beijing HJX and HJX Electronic were funded using loans borrowed from Acorn Trade. Therefore, Acorn International is the primary beneficiary of these two VIEs and accordingly, the financial statements of Beijing HJX and HJX Electronic have been consolidated with Acorn International as its subsidiaries since the VIE structure was established. In May 2016, HJX Electronic was deregistered.

 

The Company believes that the current ownership structure and the contractual arrangements that Acorn Information and Acorn Trade entered into with the consolidated VIEs and their equity owners are in compliance with existing PRC laws and regulations. The contractual arrangements among Acorn Information and each of Beijing Acorn and Shanghai Network and their shareholders, Acorn Trade and Beijing HJX and their shareholders are valid, binding and enforceable. However, there are uncertainties regarding the interpretation and application of current and future PRC laws and regulations. The PRC competent regulatory authorities may take a view in the future that is contrary to the above opinions of the Company’s PRC legal counsel. If the current agreements that establish the structure for conducting the Company’s PRC direct sales business and internet interactive service were found to be in violation of existing or future PRC laws or regulations, the Company may be required to restructure its ownership structure and direct sales and internet interactive service operations in the PRC to comply with PRC laws and regulations, which may affect the Company’s financial position and cash flows related to these VIE structures. In addition, there are uncertainties in the PRC legal system that could limit the Company’s ability to enforce these contractual agreements in the event that the consolidated VIEs or their shareholders fail to meet their contractual obligations. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

 

F-14●revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;

 

●discontinue or restrict the operations of any related-party transactions among the Company’s PRC subsidiaries and VIEs;

 


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

1. Organization and principal activities—(Continued)

 

VIE Arrangements—(Continued)

revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;

discontinue or restrict the operations of any related-party transactions among the Company’s PRC subsidiaries and VIEs;

limit the Company’s business expansion in China by way of entering into contractual arrangements;

impose fines or other requirements with which the Company’s PRC subsidiaries may not be able to comply;

 

 •●limit the Company’s business expansion in the PRC by way of entering into contractual arrangements;

●impose fines or other requirements with which the Company’s PRC subsidiaries may not be able to comply;

●require the Company or the Company’s PRC subsidiaries to restructure the relevant ownership structure or operations; 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.the PRC.

 

The Company’s ability to conduct its business 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 in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their shareholders, and it may lose the ability to receive economic benefits from the VIEs. The Company, however, believes that alternative solutions could be found if these actions were to happen in the future.

 

The Company believes that its ability to direct the activities of the three VIEs that most significantly impact the VIEs’ economic performance is not affected by the above uncertainties in the PRC legal system. Accordingly, the three VIEs continue to be consolidated VIEs of the Company.

 

Summary financial information of the Company’s three VIEs included in the accompanying consolidated financial statements is included on page F-4 and as follows:

  For the years ended December 31, 
  2015  2016  2017 
Net revenues $18,469,195  $12,251,518  $7,156,742 
             
Net income (loss) $(9,920,207) $(998,709) $(579,948)

  For the years ended December 31, 
  2017  2018  2019 
Net revenues $3,933,484  $1,570,505  $4,083,805 
             
Net (loss) income $(181,682) $(1,254,359) $2,282,755 

 

The VIEs contributed an aggregate of 80.5%23.0%, 74.3%6.3% and 35.3 %10.9% of the consolidated net revenues for the years ended December 31, 2015, 20162017 , 2018 and 2017,2019, respectively. The Company’s operations not conducted through contractual arrangements with the VIE primarily consist of its distribution sales business. As of the fiscal years ended December 31, 20162018 and 2017,2019, the VIEs accounted for an aggregate of 3.0%7.2% and 4.2%21.9%, respectively, of the consolidated total assets, and 6.0%8.4% and 8.3%40.2%, respectively, of the consolidated total liabilities. The assetssubsidiaries not associated with the VIEs hold assets that primarily consist of cash and cash equivalents, accounts receivable, net, inventory, prepaid land use right,net, loan receivable, property and equipment, net, right of use assets, net, held-for-sale assets, available-for-sale securities, loan to related party and investments in affiliates.other long-term assets.

 

The consolidated VIEs’ assets are not used as 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. Should the VIEs require 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 their 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.

 

F-15


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies

 

(a) Basis of presentation

 

The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).

 

(b) Basis of consolidation

 

The consolidated financial statements include the financial statements of Acorn International, its subsidiaries and consolidated VIEs. All intercompany transactions and balances are eliminated upon consolidation.

 

Net income or loss of a subsidiary is attributed to the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Non-controlling interests in subsidiaries are presented separately from the Company’s equity therein.

 

(c) Use of estimates

 

The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates reflected in the Company’s financial statements include allowance for doubtful accounts, inventory valuation, impairment of long-lived assets, fair value of available-for-sale investments, present value of operating lease assets and liabilities, and valuation allowance on deferred tax assets and provision for uncertain tax positions.

 

(d) Going concern

 

Although the Company incurred an operating loss anda negative cash flows from operations for the year ended December 31, 20172019 and had accumulated deficits as of that date, the Company improved its liquidity position by selling non-core assets and investments. Furthermore, the Company continually focused on reducing operating costs, including at the Company management level by reducing headcount, changing to lower cost vendors and reducing travel expenses. As a result, the accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.

 

(e) Fair value of financial instruments

  

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as an exit price) and expands disclosure requirements about assets and liabilities measured at fair value. The guidance establishes a hierarchy for inputs used in measuring fair value that gives the highest priority to observable inputs and the lowest priority to unobservable inputs as follows:

 

•● Level 1—Observable unadjusted quoted prices in active markets for identical assets or liabilities.

  

•● Level 2—Observable inputs other than quoted prices in active markets for identical assets or liabilities, for which all significant inputs are observable, either directly or indirectly.

  

•● Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

F-16


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies—(Continued)

 

(e) Fair value of financial instruments—(Continued)

 

When available, the Company measures the fair value of financial instruments based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities measured at fair value are classified in the categories of Level 1, Level 2, and Level 3 based on the lowest level input that is significant to the fair value measurement in its entirety. Pricing information the Company obtains from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, the Company generally estimates the fair value using valuation techniques that rely on alternate market data or inputs that are generally less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as economic and market factors vary and the Company’s evaluation of those factors change. Although the Company uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. In these cases, a minor change in an assumption could result in a significant change in its estimate of fair value, thereby increasing or decreasing the amounts of the Company’s consolidated assets, liabilities, equity and net income or loss.

 

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, convertible loan receivable, loan to related party, available-for-sale securities and accounts payable and long-term debt.payable. For cash and cash equivalents, restricted cash, accounts receivable, and accounts payable, the carrying amounts of these financial instruments as of December 31, 20162018 and 20172019 were considered representative of their fair values due to their short-term nature. The carrying values of long-term debtloan receivable and convertible loan receivableto related party approximate their fair values as the impact of discounting the long-term debtloan receivable and convertible loan receivableto related party with a market based interest rate is insignificant. The marketable securities are carried at fair values based on an independent valuation report.

 

(f) Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased. At December 31, 2016 and 2017, cash equivalents were comprised of investments in time deposits and money market funds stated at cost plus accrued interest totaling $7.5 million and nil, respectively.

 

Cash balances of the Company that are included in the cash and cash equivalents of the consolidated balance sheets, including those denominated in RMB. The PRC government imposes certain controls on the convertibility of the RMB into foreign currencies, and in certain cases, the remittance of currency out of China. However, the Company does not consider the process for converting RMB into foreign currency in compliance with these controls to be a usage restriction and such process is not expected to result in any penalties provided that the Company complies with all above-mentioned processes mentioned below as required.

 

The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in China’s foreign exchange trading system market. The Company’s aggregate amount of cash and cash equivalents and restricted cash denominated in RMB amounted to RMB 133,023,148RMB120,159,160 ($19,175,890)17,507,746) and RMB 123,510,697RMB56,795,796 ($18,902,191)8,141,366) as of December 31, 20162018 and 2017,2019, respectively.

 

PRC state-owned banks, such as Bank of China, are subject to a series of risk control regulatory standards, and PRC bank regulatory authorities are empowered to take over the operation and management when any of those banks faces a material credit crisis. The Company does not foresee substantial credit risk with respect to cash and cash equivalents and restricted cash and short-term investments held at the PRC state-owned banks. Meanwhile, China does not have an official deposit insurance program, nor does it have an agency similar to what was the Federal Deposit Insurance Corporation (FDIC) in the U.S. In the event of bankruptcy of one of the financial institutions in which the Company has deposits or investments, it may be unlikely to claim its deposits or investments back in full. The Company selected reputable international financial institutions with high rating rates to place its foreign currencies. The Company regularly monitors the rating of the international financial institutions to avoid any potential defaults. There has been no recent history of default in relation to these financial institutions.

 

(g) Restricted cash

 

Under third-party bank channel sales arrangements, the Company is required to maintain certain cash balances in the banks. TheseSuch balances related to the third-party bank channel sales arrangements were reflectedare classified as restricted cash in the balance sheet and amounted to $72,077$76,243 and $78,051$75,543 as of December 31, 20162018 and 2017,2019, respectively.

 

F-17

F-16

 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies—(Continued)

  

(h) Inventory, net

 

The cost of inventory comprises all costs of purchase, costs of conversion, and other costs incurred to bring inventory to its present location and condition. The cost of inventory is calculated using the weighted-average method.

 

The inventory is stated at the lower of cost or marketnet realizable value. Adjustments are recorded to write down the inventory to the estimated marketnet realizable value. The Company estimates excess and slow-moving inventory based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than projected by management, additional inventory write-downs may be required.

 

(i) Available for sale securities

 

The Company invests in marketable equity securities to meet business objectives. These marketable securities are reported at fair value, classified and accounted for as available-for-sale securities in investment securities. The assessment of a decline in the fair value of an individual security is based on whether the decline is other-than-temporary. The Company assesses its available-for-sale securities for other-than-temporary impairment by considering factors including, but not limited to, its ability and intent to hold the individual security, severity of the impairment, expected duration of the impairment and forecasted recovery of fair value. Investments classified as available-for-sale are reported at fair value with unrealized gains or losses, if any, recorded in accumulated other comprehensive income in shareholders'shareholders’ equity. If the Company determines a decline in fair value is other-than-temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is accounted for as a realized loss charged in the consolidated statement of operations and comprehensive income (loss). The new cost basis of the investments would not be adjusted for subsequent recoveries in fair values. The Company recorded no impairments of available-for-sale securities for the years ended December 31, 2015, 20162017, 2018 and 2017.2019.

 

(j) Prepaid land use right

Prepaid land use right is valued at the cost to obtain the right less accumulated amortization. Amortization is computed on a straight-line basis over the 50 year useful life of the right.

(k) Property and equipment, net

 

Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line method over the following estimated useful lives:

 

  Estimated useful lives
Buildings 20 years
Machinery 10 years
Information Technologytechnology equipment 5 years
Computers and office equipment 3-5 years
Vehicles 3-4 years

 

(l)(k) Acquired intangible assets, net

 

Acquired intangible assets, which consist primarily of distribution networks and trademarks, are valued at cost less accumulated amortization. Amortization is computed using the straight-line method over their expected useful lives of 5 to 15 years.

 

F-18


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies—(Continued)

(m)(l) Held-for-sale assets

 

Assets are classified as held-for-sale when management, having the authority to approve the action, commits to a plan to sell the asset, the sale is probable within one year, and the asset is available for immediate sale in its present condition. Consideration is given to whether an active program to locate a buyer has been initiated, whether the asset is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. A long-lived asset classified as held-for-sale shall be measured at the lower of its carrying amount or fair value less cost to sell. An impairment test is required and an impairment charge is recognized when the carrying value of the asset exceeds the estimated fair value, less transaction costs. Assets classified as held for sale are no longer depreciated.

 

During 2015, the Company classified certain real estate properties of $3,808,471 as held-for-sale at the time management committed to a plan to sell these properties to third parties. The Company entered into sale agreements for total cash consideration of approximately $11.3 million. The sales were subsequently completed in early 2016.

During 2017, the Company classified HJX product related assets, intangible assets and prepaid copyright expense, of $475,936 as held-for-sale as the Company reached an agreement in June 2017 to sell a majority stake in its HJX related business to a third-party investor and operatoroperator.Specifically, the agreement includes the establishment of a joint venture that will be controlled and operated by such third party. Refer to Note 20 for related discussion.

 

During 2017, the Company also classified land use rights and related building with carrying amount $16,546,694 as held-for-sale at the time management committed to a plan to sell the shares of Bright Rainbow Investments Limited to a third-party. Bright Rainbow owns the entire share capital of Shanghai Hao Ji Xing Digital Technology Co., Ltd.,HJX, which owns the land use rights to the land plot located onin the Qingpu district of Shanghai and all the buildings, fixtures and related facilities. The sale was subsequently completed in early 2018.

 

During 2018, the Company classified buildings with carrying amount $2,411,294 as held-for-sale as the Company reached an agreement on December 10, 2018 to sell its prior principal office to a third-party. The sale was subsequently completed in early 2019.

(n)(m) Impairment of long-lived assets

 

The Company evaluates its long-lived assets and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Company measures impairment by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the future undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets.

 

(o)(n) Investment in affiliates

 

Affiliated companies are entities which the Company owes equity interest in common stock or in-substance common stock. The affiliated companies are classified by the companies in which the Company has significant influence or non-significant influence. The Company generally considers an ownership interest of 20% or higher to represent significant influence.

 

The affiliated companies in which the Company has non-significant influence are accounted for using the cost method of accounting. Dividends received that are distributed from the net accumulated earnings of the investee are recognized in the Company’s consolidated statements of operations. Dividends received in excess of earnings are recorded as reductions of cost of the investment. A series of operating losses of the investee or other factors may indicate that a decrease in value of the investment has occurred which is other-than-temporary and should accordingly is recognized.

 

Affiliated companies in which the Company has significant influence are accounted for using equity method of accounting. The share of earnings or losses of the investee are recognized in the Company’s consolidated statements of operations and adjusts the carrying amount of the investment. Dividends received reduce the carrying amount of the investment. The Company evaluates each equity method investment separately for impairment indicators and whether any decrease in value of the investment has occurred which is other-than-temporary. If the fair value of the investment is less than its cost and the impairment is other-than-temporary, then the Company would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the investment.

 

F-19

In the periods presented in the consolidated financial statements, the Company did not hold any investment in affiliates.

 


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

2. Summary of principal accounting policies—(Continued)

 

(p) Convertible loan(o) Loan receivable

 

The convertible loan receivable in the consolidated balance sheets as of December 31, 20162018 and 20172019 represents a loan receivable (the “Note”) from a third party (the “Borrower”), net of provision for credit losses, if any. Interest income derived from the loan is recognized as earned. The Company has the option to convert, all or any part of the outstanding principal and unpaid accrued interest in a single tranche at any time prior to the maturity date of the loan, into such amount of equity interest in the borrower that represents a percentage of equity ownership obtained by dividing the aggregate outstanding principal and unpaid accrued interest on the Note on the date of conversion, by RMB 100,000,000. The Company has evaluated the conversion feature and believes it is not considered an embedded derivative instrument subject to bifurcation as the conversion option does not provide the Company with means to net settle the contracts in accordance with ASC 815,Accounting for Derivative Instruments and Hedging Activities. At each balance sheet date, amounts due under the Note are assessed for purposes of determining the appropriate provision for credit losses. In order to estimate the allowance for credit losses, the Company assesses at each period end the ability of the Borrower to meet its obligations under the loan agreement by taking into consideration existing economic conditions, the current financial condition of the Borrower and historical losses, if any, and any other risks/factors that may affect its future financial condition and its ability to meet its obligations. The Note was personally guaranteed by Mr. Robert W. Roche the Chairman of the Company.(“Mr. Roche”), Acorn International’s co-founder and current executive chairman. Mr. Roche unconditionally and irrevocably guarantees to Acorn the due and prompt payment by the Borrower of any unpaid principal and interest. See Note 8.

 

(q)(p) Revenue recognition

 

On January 1, 2018, the Company adopted ASU 2014-09 on revenue from contracts with customers using the modified retrospective method. The adoption did not have a material impact on the Company’s consolidated financial statements. The Company recognizes revenue on product sales in the period in which the Company satisfies its performance obligation and control of the product is transferred to the customer.

Direct sales

 

The Company’s direct sales revenues consist primarily of product sales through ourits outbound marketing platforms (which until early 2015 included TV directand Internet sales or informercials)platforms. The Company’s sales arrangements with customers are predominately short term in nature and our internet sales platform. The Company recognizes revenuesgenerally provide for products sold through its direct sales platforms oncetransfer of control at the time when the products are delivered to and accepted by the customers (“F.O.B.(e.g. “F.O.B. Destination”), net as this is the point at which title and risk of loss of the product transfers to the customer. At the end of each period, the Company adjusts revenues and cost of sales for the unsuccessful product deliveries.deliveries, data for which was provided by the delivery companies used by the Company. The amount of revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods.

 

The Company relies on China Express Mail Service Corporation (“EMS”) and local delivery companies to provide the Company data as to their successful deliveries for the Company’s direct sales products through our outbound marketing platforms. The Company relies on EMS and other local delivery companies to provide the Company data as to their successful deliveries for the Company’s direct sales products through our internet sales platforms. EMS and other local delivery companies regularly report product delivery information. In 2015, 2016 and 2017, direct sales net revenues were adjusted in respective years based on actual unsuccessful product deliveries experience reported by EMS and other local delivery companies. For unsuccessful deliveries, EMS and other local delivery companies are required to return the undelivered products to the Company. It generally takes two to three weeks for EMS to return the undelivered products to the Company whereas it generally takes approximately seven days for local delivery companies to do so.

F-20

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

2. Summary of principal accounting policies—(Continued)

(q) Revenue recognition—(Continued)

Distribution sales

 

The Company’s distribution sales consist of product sales to distributors across the country. The Company’s nationwide distribution network. The distributor agreements do notsales arrangements with distributors are predominately short term in nature and generally provide discounts, chargeback, price protection or stock rotation rights. The Company recognizes revenues for products sold through its nationwide distribution networktransfer of control at the time when the products are delivered to and accepted by the distributors (e.g. “F.O.B. Destination”). In most cases, as this is the point at which title and risk of loss of the product transfers to the distributors. The amount of revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods and may include adjustments for customer allowance and rebates. The distributor agreements do not provide discounts, chargebacks, price protection or stock rotation rights.

Revenue and billing

The Company generally accepts orders from customers through receipt of orders from e-commerce platforms, purchase orders and purchasing contracts. The pricing and selling terms are based on market factors, costs, and competition. The customers through e-commerce platforms are billed at the time they place the order, while distributors are required to pay in advance forbilled when the Company’s products. Historically, some distributors were given customary creditproducts are delivered to and accepted by them in accordance with the terms based on their creditworthiness. Starting from 2016,of the sales agreement. As the Company’s standard payment terms are less than one year, the Company stopped granting credit termshas elected the practical expedient under Accounting Standards Codification (“ASC”) 606-10-32-18 to distributors.not assess whether a contract has a significant financing component. The Company also elected the practical expedient provided in ASC 606-10-25-18B to treat all product shipping and handling activities as fulfillment activities, and therefore recognizes the gross revenue associated with the contract, inclusive of any shipping and handling revenue. This approach is similar to the Company’s prior practice and therefore the effect of the new guidance is immaterial.


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

2. Summary of principal accounting policies—(Continued)

(p) Revenue recognition—(Continued)

Inventory returns

The customers are entitled to return the goods sold through an online platform within seven days upon the receipt of goods and are not required to provide any reason for sales return, as long as the goods are returned intact and in good condition, subject to local regulations of internet shopping. The Company establishes an estimated allowance for these returns based on past experience. Sales revenue and cost of sales are presented net of anticipate estimated returns. In addition, customers generally may return products to the Company within thirty days after delivery if there is a quality defect or if a product fails to meet its specifications, subject to shorter periods provided in policies of the platforms on which the goods are sold. The Company’s warranties generally provide for repair of product defects within one year following the purchase date at the Company’s cost. To the extent that the manufacturer of the defective product is a third party, the manufacturer is contractually obligated to either repair the defective product or reimburse the Company for any related expenses. The distributors are allowed to return any defective products they receive from the Company.

Sales taxes

 

The Company presents revenues net of sales taxes incurred. Sales taxes amounted to $58,636, $53,415$250,291, $365,849 and $250,291$311,435 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively. Before subtracting sales taxes, gross direct sales revenues were $18,052,749, $13,406,943$16,059,979, $20,536,235 and $19,135,633$31,959,787 and gross distribution sales revenues were $4,962,052, $3,124,927$1,257,341, $4,916,883 and $1,404,945$5,836,141 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

 

(r)(q) Advertising expenses

 

The Company records cash advances paid to advertising companiesfor advertisements as prepaid advertising expenses in the consolidated balance sheets. The Companyand then expenses the prepaid advertising expenses at the time of the first advertisement is shown. In the first quarter of 2015, the Company decided to stop purchasing TV advertising time.takes place. Advertising expenses were $2,203,996, $23,701$1,725,940, $1,290,527 and nil$2,438,131 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively. The significant decrease in advertising expenses was associated with our exit from TV direct sales in early 2015.

 

(s)(r) Shipping and handling costs

 

The Company records costs incurred for outbound shipping and handling as part of other selling and marketing expenses in the consolidated statements of operations. Shipping and handling costs were $2,059,934, $1,158,019$735,815, $447,329 and $ 982,175$828,686 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

 

(t)(s) Operating leases

 

On January 1, 2019, the Company adopted ASU 2016-02 - Leases where substantially allusing the rewards and risksalternative modified retrospective transition method provided in ASU 2018-11,“Leases (Topic 842): Target Improvements”.

The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of ownership of assets remain with the leasing company are accountedremaining lease payments, discounted using the discount rate for as operating leases. Payments made underthe lease at the commencement date. As the rate implicit in the lease is not readily determinable for the Company’s operating leases, the Company generally use an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use (“ROU”) assets are charged togenerally recognized based on the consolidated statementsamount of operationsthe initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease periods.term. The Company accounts for lease and non-lease components as a single lease component for all leases.

Operating leases are included in ROU assets, current operating lease liabilities and non-current operating lease liabilities on the consolidated balance sheets.

 

(u)(t) Government subsidies

 

The Company receives unrestricted government subsidies from local government agencies. The government agencies use their discretion to determine the amount of the subsidies with reference to certain taxes paid by the Company, including value-added and income taxes. The Company records unrestricted government subsidies as other operating income (expenses), net in the consolidated statements of operations when these subsidies from the government agencies are received.

 

The government subsidies in 2015, 20162017, 2018 and 20172019 were $201,168, $66,648nil, $53,965 and nil,$1,295,884, respectively.

 

F-21


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies—(Continued)

 

(v)(u) Income taxes

 

Current income taxes are provided for in accordance with the relevant statutory tax laws and regulations.

 

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Net operating losses are carried forward and credited by applying enacted statutory tax rates applicable to future years. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more-likely-than-not that some portion or all of the deferred tax assets will not be realized. In November 2015, the FASB issued ASU 2015-17, to simplify the presentation of deferred income taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company has elected to adopt ASU 2015-17 prospectively. As a result, the Company has presented all deferred tax assets and liabilities as non-current on the Company's consolidated balance sheet as of December 31, 2017.There was no impact on the Company's result of operations as a result of the adoption of ASU 2015-17.

 

The Company recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. The Company classifies interests and penalties related to income tax matters in income tax expense.

 

(w)(v) Foreign currency translation

 

The functional currency and reporting currency of Acorn International, China DRTV, Smooth Profit, MK AND T, and Bright Rainbow are the United States dollar (“US dollar”).dollar. Monetary assets and liabilities denominated in currencies other than the US dollar are translated into the US dollar at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the US dollar during the year are converted into US dollar at the applicable rates of exchange prevailing on the first day of the month in which the transactions occurred. Transaction gains and losses are recognized in the consolidated statements of operations as general and administrative expenses.

 

The financial records of the Company’s PRC subsidiaries and VIEs are denominated in their local currency, the Renminbi (“RMB”),RMB, which is the functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date. Equity accounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments are reported as component of comprehensive income (loss) in the consolidated statements of comprehensive income (loss).

 

The aggregated losses through foreign currency transactions in 2015, 20162017, 2018 and 20172019 were $(687,163)$(241,771), $(380,350)$(126,582) and $(241,771)$(58,824), respectively.

 

(x)(w) Concentration of credit risk

 

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, loan receivable and convertible loans.loan to related party. All of the Company’s cash and cash equivalents and restricted cash are held with large PRC state-owned financial institutions. The Company engages delivery companies, mainly EMS, to deliver products to customers and to collect cash from the customers using direct sales platforms. The Company conducts credit evaluations of delivery companies and generally does not require collateral or other security from its delivery companies. The Company establishes an allowance for doubtful accounts primarily based on the age of the receivables and factors surrounding the credit risk of specific customers. The Company evaluated its credit risk with the convertible loan receivable and loan to related party by performing ongoing evaluation on the borrower’s financial condition. The loan agreement hasagreements have a personal guarantee from Mr. Robert W. Roche Acorn International’s co-founder and current executive chairman, and isare pledged with the equity of the borrower.

 

F-22


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

2. Summary of principal accounting policies—(Continued)

 

(x) Concentration of credit risk—(Continued)

As of December 31, 2016 and 2017, no accounts receivables from a single delivery company were more than 10% of total accounts receivables.

(y) Share-based compensation

 

Share-based compensation cost is measured at grant date, based on fair value of the award, and recognized in expense over the requisite service period. For performance-based awards, the Company uses graded vesting when the performance condition is considered probable. The Company has made an estimate of expected forfeitures and recognizes compensation costs only for those equity awards expected to vest.

 

(z)(y) Income (loss) per share

 

Basic income (loss) per share is computed by dividing income attributable to the Company’s shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted income (loss) per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares and is calculated using the treasury stock method for stock options and unvested shares. Common equivalent shares for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on income per share and, accordingly, are excluded from the calculation. Common equivalent shares are also excluded from the calculation in loss periods as their effects would be anti-dilutive.

 

(aa)(z) Non-controlling interest

 

A non-controlling interest in a subsidiary of the Company represents the portion of the equity (net assets) in the subsidiary not directly or indirectly attributable to the Company. Non-controlling interests are presented as a separate component of equity in the consolidated balance sheet and earnings and other comprehensive income (loss) are attributed to controlling and non-controlling interests.

 

(ab)(aa) Recently adopted and issued accounting pronouncements

ASU 2015-09 - Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update on revenue recognition that will be applied to all contracts with customers. The update requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, deferring the effective date for ASU 2014-09 by one year, and thus, the new standard will be effective for fiscal years beginning after December 15, 2017, with early application permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance allows for either a full retrospective or a modified retrospective transition method. The Company evaluated the effect of these accounting pronouncements on its financial statements and concluded that adoption of ASU 2015-09 will not have a material impact on its consolidated financial statements. The Company adopted this new guidance on January 1, 2018 using the modified retrospective application method.

ASU 2015-17 - Deferred income taxes. In November 2015, the FASB issued ASU 2015-17, to simplify the presentation of deferred income taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update and within a particular tax jurisdiction. The Company has elected to adopt ASU 2015-17 prospectively. As a result, the Company has presented all deferred tax assets and liabilities as non-current on the Company's consolidated balance sheet as of December 31, 2017. There was no impact on the Company's result of operations as a result of the adoption of ASU 2015-17.

ASU 2016-01 - Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The ASU 2016-01 also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Entities will have to assess the realizability of such deferred tax assets in combination with the entities other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and for interim periods within that reporting period. The Company evaluated the effect of these accounting pronouncements on its financial statements and concluded that adoption of ASU 2016-01 will not have a material impact on its consolidated financial statements. The Company adopted this new guidance on January 1, 2018.

F-23

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

2. Summary of principal accounting policies—(Continued)

(ab) Recently issued accounting pronouncements—(Continued)

 

ASU 2016-02 - Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

The Company is currently evaluatingadopted the impactstandard on January 1, 2019 using the alternative modified retrospective transition method provided in ASU 2018-11, “Leases (Topic 842): Target Improvements”. Under this method, the Company recorded a cumulative-effect adjustment as of its pendingJanuary 1, 2019 and did not record any retrospective adjustments to comparative periods to reflect the adoption of ASU 2016-02ASC 842. The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’ which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight. Adoption of ASC 842 resulted in the recognition of ROU assets of $2.1 million and lease liabilities of $2.1 million, as of January 1, 2019 for operating leases on its consolidated financial statements.balance sheets, with no impact to the Company’s consolidated statements of operations and consolidated statements of cash flows. See Note 16, Lease Commitments, for further discussion.

 

ASU 2016-13 - Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the timing of adoption and impact of this new standard on its consolidated financial statements.

ASU 2016-15 - Statement of Cash Flows. In August 2016,2016-13 and estimates that the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted, provided that all of the amendments are adopted in the same period. The Company is currently evaluating thewill not have a material impact of its pending adoption of ASU 2016-15 on its consolidated financial statements.

ASU 2016-16 - Income Taxes. In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods therein with early application permitted. Upon adoption, the Company must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, as well as its planned adoption date. 

ASU 2016-18 - Restricted Cash. In November 2016, the FASB issued ASU 2016-18,"Statement of Cash Flows-Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" effective for fiscal years beginning after December 15, 2017, and interim periods within that fiscal year. The standard addresses whether restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company is currently evaluating the impact of its pending adoption of ASU 2016-18 on its consolidated financial statements.

 

ASU 2018-02 - Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, "ReclassificationReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income",Income, which is effective for the annual report period beginning after the December 15,201815, 2018 including the interim reporting period within that period. This update allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings standard tax effects resulting from the enactment of the Tax Cuts and Jobs Act in the United States (the "Tax Act"“Tax Act”). The Company is currently evaluatingevaluated the impact of its pending adoptioneffect of ASU 2018-02 and concluded that adoption did not have a material impact on its consolidated financial statements. The Company adopted this new guidance on January 1, 2019.

 

F-24


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

3. Inventory, net

 

Inventory consisted of the following:

 

 December 31,  December 31, 
 2016  2017  2018  2019 
Raw materials and work in progress $114,664  $129,970 
Raw materials $63,830  $1,193 
Finished goods and merchandise goods  3,862,672   1,386,313   1,526,489   3,041,569 
 $3,977,336  $1,516,283  $1,590,319  $3,042,762 

 

As of December 31, 20162018 and 2017,2019, a portion of finished goods, and merchandise goods, and certain raw materials and work in process inventory were in excess of the Company’s current requirements based on the recent level of sales. The Company recordedprovided inventory write-downsvaluation allowances (reversals) of $470,069$(147,804), $23,299 and ($117,585)$19,683 for the years ended December 31, 20162017, 2018 and 2019, respectively. Reversals in 2017 respectively.resulted from sales and disposal of previously impaired goods.

 

4. Other prepaid expenses and current assets

 

Other prepaid expenses and current assets consisted of the following:

 

  December 31, 
  2016  2017 
Advances to suppliers $638,782  $54,594 
Value-added tax recoverable  738,221   947,408 
Deposits  409,804   361,747 
Prepaid media expenses  —   1,135,043 
Prepaid service fees  114,183   294,350 
Other prepaid expenses  539,826   1,237,670 
  $2,440,816  $4,030,812 

  December 31, 
  2018  2019 
Advances to suppliers $307,774  $87,591 
Value-added tax recoverable  942,710   1,106,954 
Deposits  416,609   452,353 
Prepaid media expenses  809,389   490,526 
Prepaid insurance fee and service fees  294,458   315,700 
Receivable from third party for sale of non-core assets and subsidiaries (Refer to Note 5)  2,443,404   — 
Receivable from third party for sale of subsidiary (Refer to Note 13)  —   1,508,956 
Other receivables from related parties (Refer to Note 18)  1,516,148   1,482,460 
Other receivables and prepaid expenses  609,033   552,493 
  $7,339,525  $5,997,033 

 

F-25


 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

5. Property and equipment, net

 

Property and equipment, net consisted of the following:

 

 December 31,  December 31, 
 2016  2017  2018  2019 
Buildings $18,098,589  $4,764,519  $—  $— 
Computers and office equipment  4,711,617   4,498,081   2,275,931   1,806,604 
Vehicles  445,391   344,788   230,356   151,391 
Information technology equipment  294,549   263,007   154,733   7,068 
Machinery  210,551   83,175   44,574   41,347 
 $23,760,697  $9,953,570  $2,705,594  $2,006,410 
Less: accumulated depreciation  (9,875,618)  (5,916,276)  (2,045,437)  (1,446,446)
                
 $13,885,079  $4,037,294  $660,157  $559,964 

 

Depreciation expense for property and equipment was $2,599,961, $1,455,654$1,010,811, $871,189 and $1,126,590$167,189 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

In 2015, the Company early terminated leases on certain of its offices, wrote-off the related leasehold improvement with the carrying amount of $325,341, and recognized a loss on disposal of $325,341 in the consolidated statements of operations.

In 2015, the Company sold three apartments in Beijing for $3,195,454 to different third party individuals, which were previously recognized in Buildings with cost of $426,220 and carrying amount of $192,504. In connection with this sale, the Company recognized a gain of $1,739,443 in other operating income.

In early 2016, the Company sold certain of its properties located in Beijing and Shanghai with cost of $ 6,076,530 and carrying amount $ 3,808,471. The Company recognized a gain of $5,778,669 in other operating income in connection with these sales.

 

In 2017, the Company committed to a plan to sell the shares of Bright Rainbow Investments Limited to a third-party. Bright Rainbow owns the entire share capital of Shanghai Hao Ji Xing Digital Technology Co., Ltd.,HJX, which owns the land use rights to the land plot located onin the Qingpu district of Shanghai and all the related buildings, fixtures and related facilities with carrying amount $16,546,694. The land use rights and related building were reclassified to held-for-sale assets as of December 31, 2017. The sale was subsequently completed in 2018. The Company recognized a gain of $32,503,096 in other income, in connection with this sale during 2018. As of December 31 2018, the Company had received net proceeds (“Proceeds”) of $47.5 million from the sale and recorded a remaining receivable of $2.4 million, net of withholding taxes, from the buyer in the consolidated balance sheets. In 2019, the Company received the remaining Proceeds of $2.8 million, net of withholding taxes, and recorded an additional gain of $348,318 in other income.

 

In 2018, the Company paid a one-time cash dividend on the Company’s ordinary shares of $0.75 per ordinary share. This cash dividend was paid on June 22, 2018 to shareholders of record on June 4, 2018. The aggregate amount of cash dividends paid was approximately $40 million, comprising the Proceeds and an amount of share premium.

As of December 31, 2018, the Company classified buildings with carrying amount $2,411,294 as held-for-sale as the Company reached an agreement on December 10, 2018 to sell its prior principal office to a third-party. The Company received an advance of $5,099,365 from the buyer as of December 31, 2018. The Company subsequently completed the sale in 2019 and recognized a gain of $3,751,471 in other operating income.

6. Acquired intangible assets, net

 

Acquired intangible assets, net consisted of the following:

 

 December 31,  December 31, 
 2016  2017  2018  2019 
Distribution networks $—  $—  $—  $— 
Trademarks  614,624   614,624   614,624   614,624 
 $614,624  $614,624  $614,624  $614,624 
Less: accumulated amortization  (614,624)  (614,624)  (614,624)  (614,624)
 $—  $—  $—  $— 

 

In 2017, the Company reached an agreement to sell a majority interest in its HJX business to a third-party investor and operator. The Company reclassified HJX related distribution networks and trademarks with carrying amount $ 353,691$353,691 to held-for-sale assets as of December 31, 2017.

 

The Company recorded amortization expense of $301,697, $301,697$221,582, nil and $221,582nil for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

 

F-26


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

7. Investments in affiliates

Investments accounted for under the cost method of accounting

Shanghai Yimeng Software Technology Co., Ltd. (“Yimeng”) was established with the shareholding of 51% by the Company and 49% by Shanghai Yimeng Digital Technology Co., Ltd. on December 28, 2005. After the series of the capital contributions from third-parties and sales of equity shares held by Company, the Company's equity interests in Yimeng were diluted to 12.9% as of December 31, 2014. The Company exerted no significant influence in Yimeng and recorded the investment at cost of approximately $ 6,996,949 as of December 31, 2014. On July 29, 2015, Yimeng became listed on China National Equities Exchange and Quotations (“NEEQ”). Upon such listing, the Company reclassified this investment as available-for-sale securities. (Refer to Note 8)

On August 10, 2016, the Company acquired 5% of the then fully diluted share capital of ClearCut Corporation (“ClearCut”), a Delaware corporation, for cash of $150,000. The Company exerts no significant influence in Clearcut and accounted for this investment using the cost method of accounting. Our equity in losses of ClearCut in 2016 was $150,000, and were recognized in equity in losses of affiliates in the consolidated statements of operations.

Investments accounted for under the equity method of accounting

On December 31, 2012, the Company acquired a 9.3% equity interest in China Branding Company Limited (“CBG”) for cash of $1.3 million. Mr. Robert W. Roche, Acorn International’s co-founder and current executive chairman, individually holds an additional 7.6% equity interests in CBG and holds one out of five Board of Directors seats of CBG and accordingly, Mr. Roche is able to exercise significant influence through his participation on the Board of Directors. As such, management believes that it can exercise significant influence over CBG through the Company’s direct equity investment, the Company’s indirect investment through Mr. Roche’s equity interest, and Mr. Roche’s significant influence over CBG. Therefore, the Company accounts for this investment using the equity method of accounting. In February 2013, the Company’s investment in CBG decreased from 9.3% to 8.7% as a result of dilution due to issuance of additional shares by CBG to a new investor, which was accounted for as if the Company sold 0.6% equity interests in CBG, and the gains from this dilution were immaterial. Starting from incorporation, CBG suffered operational losses and the Company recognized equity in losses of $226,780 in 2015. In 2016, a law firm filed a winding up petition seeking to wind up CBG with the Grand Court of the Cayman Islands and then CBG was deregistered. Our investment in CBG amounted to $718,121 was recognized as equity in losses of affiliates in the 2016 consolidated statements of operation.

8. Available-for-sale securities

 

The Company’s available-for-sale securities represent marketable equity securities investments in Yimeng. On July 29, 2015,Shanghai Yimeng became listed on NEEQ and quoted prices of the investment in active market became available, the Company's equity interests in Yimeng were diluted to 10.34%Software Technology Co., and the Company reclassified its investment in Yimeng to available-for-sale securities in 2015 accordingly.Ltd. (“Yimeng”). As of December 31, 2015, 20162018 and 2017,2019, the carrying amount and fair value of the Company’s available-for-sale securities investment were $181,164,778, $74,666,865$38,858,216 and $44,479,922,$25,681,848, respectively. The Company recognized net unrealized gains (losses)losses of $178,485,994, ($72,688,925)$(41,390,549), $(4,652,640) and ($41,961,147)$(13,176,368), net of tax of $44,621,498, $18,172,231$10,347,637, $1,163,160 and $10,347,637$3,307,755 during 2015, 20162017, 2018 and 2017,2019, respectively, which is recorded in other comprehensive income.income (loss).

 

9. Convertible loan8. Loan receivable

 

In October 2014, Ryecor China Investment Limited (“Ryecor”), a company owned by the Mr. Robert W. Roche, entered into an agreement with Shanghai e-Surer Financial Services Co., Ltd. (“E-surer”) on October 2014,, whereby E-surer borrowed from RvecorRyecor a RMB 20,000,000 convertible line of credit at 6% annual interest payable at maturity on August 22, 2018. Under the loan agreement, the line of credit up to RMB20.0 million is available to E-surer at any time until the maturity date. All or part of outstanding principle and interest may be converted into such amount of equity interest of E-surer that represents a percentage of equity ownership obtained by dividing the aggregate outstanding principal and unpaid accrued interest on the date of conversion, by RMB 100,000,000. The loan was secured by the 51% of E-surer’s equity interest in its whole-ownedwholly-owned subsidiary.

F-27

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

9. Convertible loan receivable—(Continued)

 

In September 2015, the Company entered into an assignment contracts (“Assignment Contracts”) with Ryecor, pursuant to which Ryecor assigned to the Company all of its rights and delegated to the Company all of its obligation in exchange of a cash payment of $3,024,933 to Ryecor and Acorn Composite Corporation, Inc., which is also a company owned by Mr. Roche. The AssignmentAssigned Contracts were personally guaranteed by Mr. Roche.

The Assignment Contracts areloan matured on August 22, 2018 and management continues to negotiate with the borrower on a repayment plan. The loan continues to be personally guaranteed by Mr. Roche until fully repaid or converted and the management believes the loan to be fully collectable.

As of the date of these financial statements, E-surer has not repaid the loan assigned to Acorn International. The Company continued to accrue interest on unpaid loan. As of December 31, 2018 and 2019, the Company classified the loan advance of $3,597,392 and $3,754,735 respectively, which includes accrued interest income of $184,395 and $181,880 in 2018 and 2019, as a convertible loan receivable on the consolidated balance sheets. As of December 31, 2016

Management is closely monitoring developments related to the coronavirus outbreak and 2017,is proactively coping with the balanceimpacts on business operation and finance, including assessing the financial position of the Assignment Contracts were $3,218, 665borrower and $ 3,587,204, respectively, which includes accrued interestguarantor that would have an impact on recoverability of $184,170 and $183,785, respectively.this loan receivable.

 

10.

F-25

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

9. Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

 December 31,  December 31, 
 2016  2017  2018  2019 
Other taxes payable $901,027  $1,344,814  $506,465  $1,168,109 
Accrued employee payroll and welfare  3,618,234   1,685,492   1,734,528   1,470,982 
Other payable  608,232   832,548 
Other payables  366,575   465,817 
Accrued expenses  3,574,243   4,717,604   4,672,641   2,906,519 
Advances from customers  430,430   63,298   19,421   122,929 
Advances from third party for sale of non-core assets (Refer to Note 5)  5,099,365   — 
Provision for equity of losses in affiliates  327,646   430,034 
         $12,726,641  $6,564,390 
 $9,132,166  $8,643,756 

 

Other taxes payable mainly consist of value-added tax and related surcharges and PRC individual income tax of employees that was withheld by the Company. The Company’s PRC subsidiaries are subject to value-added tax at a rate of 17% before May 1, 2018, 16% from May 1, 2018 to April 1, 2019, and 13% thereafter on product purchases and sales.sales except for seafood. Value-added tax rate for purchases and sales of seafood is 9% or 13%, respectively, depending on whether the product is raw or processed, respectively. Value-added tax payable on sales is computed net of value-added tax paid on purchases.

 

F-28

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

11.10. Share-based compensation

 

In May 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006 Option Plan”) which allows the Company to offer a variety of incentive awards to employees, officers, directors or individual consultants or advisors who render services to the Company and authorized the issuance of 24,133,000 ordinary shares. Under the 2006 Option Plan, the share options and stock appreciation rights (“SARs”) are generally granted with an exercise price equal to the fair market value of the underlying shares, as determined by the Company’s Board of Directors at the date of grant and expire after ten years and six years, respectively, with vesting occurring 25% upon grant and the remaining 75% vesting ratably over three years. Certain share options and SARs granted vest immediately upon grant, and certain share options and SARs granted vest upon the satisfaction of certain performance targets. The proceeds from the exercise of the SARs by the grantee will be equity settled by delivery of equivalent fair value of ordinary shares of the Company.

 

On April 8, 2016, the Company granted 2,800,000 restricted share units (“RSUs”) under the 2006 Plan to Jacob Alexander Fisch, President of the Company. The grant includes time-based shares of 1,800,000 shares and performance-based shares of 1,000,000 shares which shall vest upon certain performance targets being met. All the RSUs granted were subsequently fully vested in 2016.

On March 6, 2017, the Company granted 65,884 ordinary shares to Mr. Pierre E. Cohade, Lead Director of the Company, under the company Artemis Ventures Ltd.shares.

 

The Company recorded compensation expense of $71,333, $658,000$25,000, nil and $25,000nil for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively, which were all associated with the RSUs granted by the Company.

 

The fair value of each RSU granted from 2012 to 20172019 were based on quoted market price of the Company’s ordinary shareshares on the grant date.

 

There was no share options granted, vestedIn 2017, 2018 and exercised during 2015, 2016 and 2017.

F-29

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

11. Share-based compensation—(Continued)

A summary of the RSUs activity for the year ended December 31, 2016 was as follows:

  Number of RSUs  Weighted average
grant date fair value		 
Nonvested at January 1, 2016  —  $— 
Granted  2,800,000  $4.7 
Forfeited  —  $— 
Vested  (2,800,000) $4.7 
         
Nonvested at December 31, 2016  —  $— 

In 2017,2019, the Company granted no RSUs.

 

As of December 31, 2017,2018 and 2019, there was no unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2006 Option Plan.

 


12.ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

11. Fair value measurements

 

ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1–Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

Level 2–Include observable inputs other than quoted prices included in Level 1, such as 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, or other inputs that are observable or can be corroborated by observable market data.

Level 3–Unobservable inputs which are supported by little or no market activity

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company'sCompany’s financial assets and liabilities or nonfinancial assets and liabilities that were required to be measured at fair value on a recurring basis as at December 31, 20162018 and 20172019 include available-for-sale securities investments.

 

Available-for-sale securities investments represent the marketable equity securities invested by the Company. The marketable equity securities are carried at fair values.

 

As of December 31, 2017,2018 and 2019, information about inputs into the fair value measurements of the Company'sCompany’s assets and liabilities that are measured at fair value based on independent valuation report as follows.described below. The Company uses a combination of valuation methodologies, including market and income approaches based on the Company’s best estimate, which is determined by using information including but not limited to the quoted price, liquidity factors and selection of the comparable companies. The Company classifies the valuation techniques that use these inputs as Level 2.

 

 Fair Value Measurements at
Reporting Date Using		  Fair Value Measurements at
Reporting Date Using		 
Description As of
December 31,
2017		  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		  Significant
Other
Observable
Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		  As of
December 31,
2019		  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		  Significant
Other
Observable
Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		 
                                
Available-for-sale investments- marketable equity securities  44,479,922   —   44,479,922   — 
Available-for-sale investments - marketable equity securities $25,681,848   —  $25,681,848   — 

 

F-30


 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

12.11. Fair value measurements—(Continued)

  

The Company measures its listed equity securities using quoted prices for the underlying securities in active markets, and accordingly, the Company classifies the valuation techniques that use these inputs as Level 1. As of December 31, 2016, information about inputs into the fair value measurements of the Company's assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows.

 Fair Value Measurements at
Reporting Date Using		  Fair Value Measurements at
Reporting Date Using		 
Description As of
December 31,
2016		  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		  Significant
Other
Observable
Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		  As of
December 31,
2018		  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)		  Significant
Other
Observable
Inputs
(Level 2)		  Significant
Unobservable
Inputs
(Level 3)		 
                                
Available-for-sale investments- marketable equity securities  74,666,865   74,666,865   —   — 
Available-for-sale investments - marketable equity securities $38,858,216   —  $38,858,216   — 

 

The Company did not have any assets and liabilities that were measured at fair value on a nonrecurring basisbasis.

 

13.From January 1, 2020 through the date of the report, the Company has sold a total of 12.5 million shares of the marketable equity securities for approximately $7.5 million of cash consideration.

Management is closely monitoring developments related to the coronavirus outbreak and proactively coping with the impacts on business operation and finance, including assessing the impact on the fair value of the available-for-sale securities.

12. Taxation

 

Acorn International is incorporated in the Cayman Islands and is not subject to tax in that jurisdiction.

 

China DRTV, and Smooth Profit and Acorn Media are incorporated in the British Virgin Islands and are not subject to tax in that jurisdiction.

 

The Company’s Hong Kong subsidiaries,subsidiary, MK AND T, Bright Rainbow, and HJX International Limited, areis subject to Hong Kong statutory income tax on theirits Hong Kong sourced income.

 

All of the Company’s PRC subsidiaries are subject to the statutory rate of 25% in 2015, 20162017, 2018 and 20172019 in accordance with the PRC government promulgated Law of the People’s Republic of China on the Enterprise Income Tax (“New EIT Law”).

 

Under the New EIT Law and implementation regulations issued by the PRC State Council, income tax at the rate of 10% is applicable to interest and dividends payable to investors that are “non-resident enterprises” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such interest or dividends have their sources within the PRC. Undistributed earnings of the Company’s PRC subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for PRC dividend withholding tax has been provided thereon. Upon distribution of these earnings in the form of dividends or otherwise in the future, the Company would be subject to PRC withholding tax at 10% or a lower treaty rate.

 

A deferred tax liability should be recorded for the VIEs to the extent of their accumulated profit. As the VIEs have accumulated losses, no deferred tax liability has been provided by the Company.

 

F-31


 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

13.12. Taxation—(Continued)

 

The Company has made its assessment of each tax position (including the potential application of interest and penalties) based solely on the technical merits of the position and has measured the unrecognized benefits associated with the tax positions. As of December 31, 2015, 20162018 and 2017,2019, the Company had unrecognized tax benefits of approximately $1.9 million, $2.0$1.2 million and $2.2$1.2 million, respectively. During 2015, 20162017, 2018 and 2017,2019, the Company recorded uncertain tax benefits of $0.1$0.2 million, $0.1 millionnil and $0.2 millionnil, respectively, associated with intercompany transfer pricing results falling below the median of the inter-quartile range of comparable companies. The unrecognized tax benefits would impact the effective income tax if recognized.

 

As of December 31, 20162018 and 2017,2019, the amount of recorded interest and penalties related to uncertain tax positions was $99,024$204,156 and $160,057,$277,233, respectively.

 

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding RMB100,000 (approximately $15,000) is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The Company’s PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2011 through 20172019 on non-transfer pricing matters, and from 2006 through 20172019 on transfer pricing matters.

 

The current and deferred portion of income tax benefit (expense) benefit included in the consolidated statements of operations were as follows:

 

  For the years ended December 31, 
  2015  2016  2017 
Current income tax expenses $(363,081) $(4,169,360) $21,873 
Deferred income tax benefit (expense)  179,990   (423,423)  7,842,672 
Total income tax expense (benefit)  (183,091)  (4,592,783)  7,864,545 
  For the years ended December 31, 
  2017  2018  2019 
Current income tax benefit (expense) $43,791  $(3,581,226) $(527,690)
Deferred income tax benefit  7,848,378   397,477   2,501,381 
Total income tax benefit (expense) $7,892,169  $(3,183,749) $1,973,691 

 

Reconciliation between the effective income tax rate and the PRC statutory income tax rate was as follows: 

 

  For the years ended December 31, 
  2015  2016  2017 
PRC statutory tax rate  25%  25%  25%
Expenses not deductible(Income not taxable) for tax purposes  (1)%  4%  (1)%
Effect of different tax rate of subsidiary operations in other jurisdiction  (2)%  (15)%  22%
Change in valuation allowance  (22)%  36%  (217)%
Utilization (Recognition) of the unrecognized tax benefit  (0)%  2%  (0)%
Others  —   —   (3)%
Effective tax rate  0%  52%  (174)%

  For the years ended December 31, 
  2017  2018  2019 
PRC statutory tax rate  25%  25%  25%
Expenses not deductible (income not taxable) for tax purposes  (1)%  1%  (8)%
Effect of different tax rate of subsidiary operations in other jurisdictions  22%  (22)%  (12)%
Change in valuation allowance  (217)%  6%  (36)%
Utilization of the unrecognized tax benefit  (0)%  (0)%  (1)%
Others  (3)%  (1)%  6%
Effective tax rate  (174)%  9%  (26)%

 

F-32

F-29

 

 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

13.12. Taxation—(Continued)

 

The principal components of the Company’s deferred income tax assets and liabilities as of December 31, 20162018 and 20172019 were as follows:

 

 December 31,  December 31, 
 2016  2017  2018  2019 
Deferred tax assets:             
Allowance and reserves for inventory and accounts receivable $2,344,940  $1,648,979  $1,777,103  $642,596 
Accrued expenses  969,498   915,809   1,023,275   887,318 
Revenue recognition difference  145,504   97,153   89,567   17,199 
Advertising expenses  650,244   363,155 
Unrealized profit  —   289,794 
Net operating losses  29,490,696   28,469,713   16,443,637   12,629,118 
 $33,600,882  $31,494,809  $19,333,582  $14,466,025 
Less: valuation allowance  (33,012,389)  (22,932,999)  (10,825,754)  (3,638,267)
 $588,493  $8,561,810  $8,507,828  $10,827,758 
Deferred tax liabilities:                
Unrealized gain on available-for-sale securities  (18,017,610)  (10,514,800)  (9,138,402)  (5,830,647)
 $(18,017,610) $(10,514,800) $(9,138,402) $(5,830,647)
 $(17,429,117) $(1,952,990)        
        
Total deferred tax liabilities, net $(17,429,117) $(1,952,990)
Total deferred tax (liabilities) assets, net $(630,574) $4,997,111 

 

As of December 31, 2017,2019, the Company had tax losses carrying forward of $117,360,400.$50,909,550. The tax losses will expire between 20182020 and 20222024 if not utilized.

 

 In November 2015, the FASB issued ASU 2015-17, to simplify the presentation of deferred income taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company has elected to adopt ASU 2015-17 prospectively. As a result, the Company has presented all deferred tax assets and liabilities as non-current on the Company's consolidated balance sheet as of December 31, 2017.There was no impact on the Company's result of operations as a result of the adoption of ASU 2015-17.

The Company considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is not more-likely-than-not that the Company will realize the benefits of all these deductible differences. As of December 31, 20162018 and 2017,2019, the Company had a valuation allowance at $33.0of $11.0 million and $23.0$4.0 million, respectively. The remainder amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carry forward periods are reduced.

 

F-33


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

14.

13. Other income (expenses), net

 

Other income (expense) consisted of the following:

 

 For the years ended December 31,  For the years ended December 31, 
 2015  2016  2017  2017  2018  2019 
Gain on sale of investments  —   18,088,327   11,845,796 
Gains on disposal of available-for-sale securities $11,845,796  $960  $— 
Gain on disposal of held-for-sale assets and subsidiaries (Refer to Note 5)  —   32,503,096   348,318 
Gain on disposal of subsidiary  —   —   1,203,837 
Government subsidies (Refer to Note 2(t))  —   53,965   1,295,884 
Other  195,355   (417,304)  (206,953)  (206,953)  6,307   337,115 
                        
 $195,355  $17,671,023  $11,638,843  $11,638,843  $32,564,328  $3,185,154 

 

From January 2016, the Company started to sell its shares in Yimeng. In 2016, the Company sold 8.0 million shares, for cash consideration of RMB 126.0 million, and recognized a gain of $18.1 in other income. In 2017, the Company sold 4.6 million shares of available-for-sale securities, for cash consideration of RMB 64.3RMB64.3 million, and recognized a gain of $9.1 million and $2.7 million dividend in other income.

 

15.

Acorn has entered into an equity transfer agreement to sell 100% of the equity interests in its wholly-owned subsidiary, Zhuhai Acorn, which is engaged in oxygen-generating products business, to an unrelated third-party on November 8, 2019, for a base purchase price of US$1,450,000 subject to working capital adjustment. The sale was completed in December 2019. The Company recognized a gain of $1,203,837 in other income in connection with this sale and recorded a total receivable of $1,508,956 from the buyer in the consolidated balance sheets as of December 31, 2019. The receivable of approximately $1.42 million, after the working capital adjustment and applicable taxes, was received on May 27, 2020.

14. Earnings (Loss)(loss) per share

 

The computation of basic and diluted earnings (loss) per ordinary share from operations for the years ended December 31, 2015, 20162017, 2018 and 20172019 was as follows:

 

 For the years ended December 31,  For the years ended December 31, 
 2015  2016  2017  2017  2018  2019 
Numerator:                   
Net income (loss) attributable to Acorn International, Inc. from operations—basic and diluted $(40,158,654) $3,438,370  $12,384,303 
Net income attributable to Acorn International, Inc. from operations—basic and diluted $12,384,303  $31,127,184  $9,836,231 
—Continuing operations  (28,412,344)  10,347,437   15,858,809   16,306,229   32,117,419   10,897,318 
—Discontinued operations  (11,746,310)  (6,909,067)  (3,474,506)  (3,921,926)  (990,235)  (1,061,087)
                        
Denominator:                        
Weighted average ordinary shares outstanding—basic and diluted  79,226,404   75,600,700   65,836,869   65,836,869   52,546,325   51,619,218 
                        
Income (Loss) per ordinary share:                        
Basic and diluted $(0.51) $0.05  $0.19  $0.19  $0.60  $0.19 
—Continuing operations  (0.36)  0.14   0.24   0.25   0.62   0.21 
—Discontinued operations  (0.15)  (0.09)  (0.05)  (0.06)  (0.02)  (0.02)

 

The Company did not have outstanding stock options, SARs and RSUs outstanding in 2015, 20162017, 2018 and 2017.2019.

 

F-34

On December 8, 2017, the Board approved a new share buyback plan (the “Second Prior Plan”) on the following terms: (i) the Company may repurchase up to US$2 million worth of ADSs for a per ADS purchase price not exceeding US$22.00, with a daily limit not to exceed the SEC Rule 10b-18 daily max, until the earlier of (i) December 31, 2018; and (ii) the date the aggregate repurchases under the Second Prior Plan reach a total of US$2 million worth of ADSs.

 

The Second Prior Plan has terminated on November 1, 2018 when the aggregate repurchases thereunder reached a total of US$2 million worth of ADSs. Under the Second Prior Plan, the Company had repurchased an aggregate of 100,342 ADSs, representing 2,006,840 underlying ordinary shares, on the open market for total cash consideration of approximately $2 million. The repurchased ADSs are currently held as treasury stock.

On May 4, 2020, the Company started to execute a new share buyback plan (the “Current Plan”) approved by the Board on the following terms: (i) the Company may repurchase up to US$2.5 million worth of ADSs, with a daily limit not to exceed the SEC Rule 10b-18 daily max, until the earlier to occur of (i) May 4, 2021; and (ii) the date the aggregate repurchases under the Current Plan reach a total of US$2.5 million worth of ADSs.


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

16.15. Mainland China contribution plan and profit appropriation

 

Employees of the Company in the PRC are entitled to retirement benefits calculated with reference to their salary basis upon retirement and their length of service in accordance with a PRC government-managed retirement plan. The PRC government is directly responsible for the payments of the benefits to these retired employees. The Company is required to make contributions to the government-managed retirement plan based on certain percentages of the employees’ monthly salaries. The amounts contributed by the Company were $908,355, $558,385$418,045, $400,219 and $418,045$456,782 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

 

In addition, the Company is required by law to contribute medical, unemployment, housing and other statutory benefits based on certain percentages of the employees’ monthly salaries. The PRC government is directly responsible for the payments of the benefits to these employees. The amounts contributed by the Company were $963,160, $659,855$443,305, $419,750 and $443,305$527,967 for the years ended December 31, 2015, 20162017, 2018 and 2017,2019, respectively.

 

In accordance with relevant PRC Company Law and regulations and the Company’s Articles of Association, the Company’s PRC subsidiaries were required to appropriate 10% of their respective profit after taxation reported in their statutory financial statements prepared under the Accounting Standards for Business Enterprises (“PRC GAAP”) to the statutory surplus reserve. The Company has a statutory reserve balance of $8,351,153$8,350,141 and $8,350,141 as of December 31, 20162018 and 2017,2019, respectively. The appropriation of statutory surplus reserve will cease upon the balance of the statutory surplus reserve reaching 50% of the companies’Company’s PRC subsidiaries’ registered capital. The statutory surplus reserves may be used to make up losses or for conversion into the shareholders’ equity.

 

17.16. Commitments and contingencies

 

(A) Leases commitments

The Company leases office premises and buildings under various non-cancellable operating leases that expire no later than 2023. Certain real estate leases include one or more options to renew. The exercise of lease renewal options is at the Company’s sole discretion. Options to extend the lease are included in the lease term when it is reasonably certain the Company will exercise the option. The lease agreements do not contain any material residual value guarantee or material restrictive covenants.

The Company does not have a published credit rating because it has no publicly traded debt; therefore, the Company is generating its incremental borrowing rate (IBR), by taking reference to borrowing rate of entities similar to the Company. The reference rate will be adjusted by taking market borrowing rate and the term of the lease into consideration.

All leases with an initial term of 12 months or less that do not include an option to extend or purchase the underlying asset that the Company is reasonably certain to exercise (“short-term leases”) are not recorded on the consolidated balance sheets. Short-term lease expenses are recognized on a straight-line basis over the lease term.

The following table presents the classification of ROU assets and lease liabilities as of December 31, 2019:

    December 31, 
Leases Consolidated balance sheets classification 2019 
Assets     
Operating ROU assets Right of use assets, net $1,785,194 
       
Liabilities      
Current operating lease liabilities Current operating lease liabilities  (881,349)
Non-current operating lease liabilities Non-current operating lease liabilities  (1,032,645)
 Total lease liabilities   $(1,913,994)


ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

16. Commitments and contingencies—(Continued)

(A) Leases commitments—(Continued)

The following table represents the lease costs for 2019:

    For the year ended December 31, 
Lease costs Consolidated statement of operations classification 2019 
Operating lease expenses Other selling and marketing expenses, General and administrative expenses $1,039,783 
Short-term lease expenses Other selling and marketing expenses, General and administrative expenses  296,791 
 Total operating lease costs   $1,336,574 

 

The Company leases certain office premises and buildings under non-cancelable operating leases. Rental expenses under operating leases for 2015, 20162017, 2018 and 20172019 were $1,553,580, $619,262$585,375, $672,601, and $585,375,$1,336,574, respectively.

 

AsMaturity of December 31, 2017, future minimum lease paymentsliabilities under non-cancelable operating leases agreements wereas of December 31, 2019 are as follows:

 

2018 $120,784 
2019  618 
2020 and therafter  — 
     
  $121,402 
Maturity of lease liabilities as of December 31, 2019   
2020 $964,389 
2021  811,757 
2022 and thereafter  240,146 
Total lease payments  2,016,292 
Less: interest  (102,298)
Present value of lease liabilities $1,913,994 

The following table provides a summary of the Company’s lease terms and discount rates for 2019:

For the year ended December 31,
Operating lease term and discount rate2019
Weighted average remaining lease term (years)2.23
Weighted average discount rate4.75%

Supplemental information related to the Company’s leases for 2019 is as follows:

  For the year ended December 31, 
Other information 2019 
Cash paid for amounts included in the measurement of lease liabilities    
Operating cash flow payments for operating leases $902,754 
Leased assets obtained in exchange for operating lease liabilities $598,734 

Under ASC 840, future minimum payments for all non-cancellable operating leases with initial terms of one year or more at December 31, 2018 are as follows:

2019 $709,029 
2020  715,253 
2021  647,190 
  $2,071,472 


ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

16. Commitments and contingencies—(Continued)

(B) Legal matters

 

The Company is a party to legal matters and claims that are normal in the course of its operations. While the Company believes that the ultimate outcome of these matters will not have a material adverse effect on its financial position, results of operations and cash flows, the outcome of these matters is not determinable with certainty and negative outcomes may adversely affect the Company.

 

F-35

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

18.17. Segment and geographic information

 

The Company’s two primary sales platforms are integrated direct sales and a nationwide distribution network. Direct sales platforms include an outbound marketing platform (which until early 2015 included TV direct sales and until late 2019 included call center direct sales) and an Internet sales platform. Nationwide distribution network includes an offline distribution network through late 2019 and on-going e-commerce distribution through major e-commerce platforms in China.

 

The Company’s chief operating decision maker has been identified as the chairman of the Board of Directors and the CEO.Directors. The Company uses the management approach to determine operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision makers for making decisions, allocating resources and assessing performance. Based on this assessment, the Company has determined that it has two operating and reportable segments, which are direct sales and distribution sales.

 

The Company’s chief operating decision maker evaluates segment performance based on revenues, cost of revenues and gross profit. Accordingly, all other expenses are considered corporate level activities and are not allocated to segments. Therefore, it is not practical to show profit or loss by reportable segments. Also, the Company’s chief decision maker does not assign assets to these segments.

 

The Company’s revenues are all generated from direct sales platform and nationwide distribution networks in the PRC. Segment and geographic information below has been adjusted by excludingto exclude discontinued operations, which is disclosed in Note 21.20. The revenues by each Company of similar productsproduct lines are as follows:

 

  For the years ended December 31, 
Product 2015  2016  2017 
Health products $8,101,683  $11,776,863  $17,032,191 
Collectible products  5,646,352   1,573,757   1,534,151 
Mobile phones  5,032,111   1,722,626   1,117,158 
Kitchen and household  1,591,090   397,722   223,497 
Fitness products  765,679   217,226   25,085 
Cosmetics products  220,364   103,330   14,192 
Auto products  49,461   1,026   9,532 
Consumer electronics products  88,811   41,437   — 
Other products  1,519,250   697,883   584,772 
             
Total gross revenues $23,014,801  $16,531,870  $20,540,578 
Less: sales taxes  (58,636)  (53,415)  (250,291)
             
Total revenues, net $22,956,165  $16,478,455  $20,290,287 
  For the years ended December 31, 
Product 2017  2018  2019 
Health products $17,032,191  $24,853,660  $34,688,299 
Seafood products  —   432,756   2,970,673 
Other products  285,129   166,702   136,956 
             
Total gross revenues $17,317,320  $25,453,118  $37,795,928 
Less: sales taxes  (250,291)  (365,849)  (311,435)
             
Total revenues, net $17,067,029  $25,087,269  $37,484,493 

 

F-36


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

18.17. Segment and geographic information—(Continued)

 

The gross profit by segments is as follows:

 

Year ended December 31, 2015 Direct sales  Distribution sales  Total 
Year ended December 31, 2017 

Direct

sales

 

Distribution

sales

  Total 
Revenue, net $18,003,617  $4,952,548  $22,956,165  $15,866,782  $1,200,247  $17,067,029 
Cost of revenue  (12,537,965)  (2,955,637)  (15,493,602)  (3,963,203)  (596,823)  (4,560,026)
Gross profit $5,465,652  $1,996,911  $7,462,563  $11,903,579  $603,424  $12,507,003 

Year ended December 31, 2016 Direct sales  Distribution sales  Total 
Year ended December 31, 2018 

Direct

sales

 

Distribution

sales

  Total 
Revenue, net $13,361,915  $3,116,540  $16,478,455  $20,297,424  $4,789,845  $25,087,269 
Cost of revenue  (2,352,556)  (2,877,620)  (5,230,176)  (5,080,307)  (1,550,081)  (6,630,388)
Gross profit $11,009,359  $238,920  $11,248,279  $15,217,117  $3,239,764  $18,456,881 

Year ended December 31, 2017 Direct sales  Distribution sales  Total 
Year ended December 31, 2019 

Direct

sales

 

Distribution

sales

  Total 
Revenue, net $18,942,436  $1,347,851  $20,290,287  $31,658,751  $5,825,742  $37,484,493 
Cost of revenue  (5,244,490)  (827,495)  (6,071,985)  (8,565,312)  (1,910,990)  (10,476,302)
Gross profit $13,697,946  $520,356  $14,218,302  $23,093,439  $3,914,752  $27,008,191 

Geographic information

 

The Company operates in the PRC and all of the Company’s long-lived assets are located in the PRC.

 

In 2015, 2016 and 2017, no customer accounted for 10% or more of the Company’s net revenues. In 2018 and 2019, one customer accounted for 14.1% and 13.2% of the Company’s net revenues, respectively.

 

F-37


ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

19.18. Related party transactions

 

In 20162017, 2018 and 2017,2019, the Company entered into a series of business arrangements with certain entities in which Mr. Robert W. Roche a major shareholder, a director, and the executive chairman of Acorn International, owns substantial equity interests. The table below sets forth major related parties and their relationships with the Company:

 

Company Name Relationship with the Company
Dreamstart (Hong Kong) Ltd., (“Dreamstart”)Affiliate of Mr. Roche
IS SeafoodAffiliate of Mr. Roche
China Branding Group (“ CBG”)Affiliate of the Company
JG Fashion Group LLC (“JG Fashion”) Affiliate of Mr. Roche
Ryecor China Investment Limited (“Ryecor”) Affiliate of Mr. Roche
Acorn Composite Corporation (“Acorn Composite”) Affiliate of Mr. Roche
Lu&co Consultancy Co., Ltd. (“Lu&co”)Affiliate of VP of the Company
Dragon Law Limited (“Dragon Law”)Affiliate of CEO of the Company
URBN Hotels & Resorts (“URBN Hotels”) Affiliate of Mr. Roche
Jia He Hotel Affiliate of Mr. Roche
Cachet Hotel Group (“Cachet Hotel”) Affiliate of Mr. Roche
510 W 42nd Retail LLC (“510 W”)Affiliate of Mr. Roche
GA Homes Inc. (“GA Homes”)Affiliate of Mr. Roche

 

Details of the transactions for the years ended December 31, 2015, 20162017, 2018 and 20172019 were as follows: 

 

  For the years ended December 31, 
  2015  2016  2017 
Dreamstart $1,611,256  $454,845  $— 
CBG $208,330  $—  $— 
JG Fashion $207,461  $—  $— 
Lu&co $9,402  $10,675  $— 
Acorn Composite $—  $924,757  $— 
IS Seafood $—  $22,810  $2,656 
Dragon Law $2,026  $2,785  $— 
URBN Hotels $—  $2,820  $3,949 
Jia He Hotel $—  $2,513  $4,874 
Cachet hotel $—  $1,307  $619 
  For the years ended December 31, 
  2017  2018  2019 
Purchase of goods and services         
IS Seafood $2,656  $495,276  $1,732,670 
Cachet Hotel $—  $—  $1,230,887 
             
Sale of goods            
URBN Hotels $3,949  $2,577  $14,818 
Jia He Hotel $4,874  $7,937  $27,899 
Cachet Hotel $619  $—  $— 
             
Rendering of services            
Cachet Hotel $—  $—  $114,982 
IS Seafood $—  $—  $49,278 

 

During 2015, 20162017, 2018 and 2017,2019, the Company paid $1.6 million, $0.5 millionmade sales of $3,949, $2,577 and $14,818, respectively, to URBN hotels; made sales of $4,874, $7,937 and $27,899, respectively, to Jia He Hotel, and made sales of $619, nil and nil, respectively, to DreamstartCachet Hotel for the use of the call center management system.hotel uniforms.


ACORN INTERNATIONAL, INC.

 

In 2015, the Company received advertising production and celebrity endorsement services from CBG and paid $0.2 million.

F-38

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

19.18. Related party transactions—(Continued)

 

Lu&co, a company wholly owned by Ms. Jan Jie Lu, Business Operation Vice President of the Company, entered into a consultancy agreement with the Company on September 1, 2015 prior to Ms. Lu joining the Company. Under the agreement, the Company should pay Lu&co consultancy fees of RMB15,000 per month for a term of 12 months. The agreement remained in effective after Ms. Lu became an employee of the Company. In 2016, the Company paid $10,675 to Lu&co. The agreement was terminated in 2017.

In 2015,During 2017, 2018 and 2019, the Company purchased fashion accessories such as shoes and handbags for Internet sales from JG Fashion and paid $207,461.

In 2016 and 2017, the Company purchasedIceland sourced seafood, such as cod, lobster, halibut and scampi, which originated from Iceland for Internet sales from IS FoodSeafood amounting to $2,656, $495,276 and paid $22,810 and $2,656, respectively.$1,732,670, respectively, to sell to consumers via the Internet.

 

In 2015 and 2016,During 2019, the Company paid $2,026 and $2,785 respectively to Dragon Law for law service.

In 2016 and 2017, the Company sold $2,820 and $3,949 respectively to UBRN hotels, $2,513 and $4,874 respectively, to Jia He hotel, and $1,307 and $619 respectively, topurchased service of $1,230,887 from Cachet Hotel for hotel uniforms.various shared services provided by Cachet Hotel, including finance and tax services, legal services, and administrative services. The Company earned shared service income of $114,982 and $49,278 from Cachet Hotel and IS Seafood, respectively, for providing shared services, including human resources and information technology services.

 

As of December 31, 20162018 and 2017,2019, the balance due from and due to related parties were as follows:

 

  December 31, 
  2016  2017 
Other receivables - Mr. Robert W. Roche $—  $13,862 
Other receivables - IS  seafood $—  $6,042 
Other receivables - Cachet Hotel $—  $3,628,415 
Account payable - IS  seafood $15,537  $— 
Other receivables - URBN Hotels $3,171  $— 
  December 31, 
  2018  2019 
Accounts receivable - Jia He Hotel $5,560  $21,750 
Accounts receivable - URBN Hotel $2,605  $19,283 
Accounts receivable - GA Homes $35,837  $58,258 
Accounts receivable - 510 W $72,302  $114,397 
Other receivables - Mr. Roche $40,196  $41,795 
Other receivables - CEO $394,558  $494,511 
Other receivables - IS Seafood $—  $12,901 
Other receivables - Cachet Hotel $—  $251,859 
Other receivables - GA Homes $358,370  $358,370 
Other receivables - 510 W $723,024  $323,024 
Loan receivables - Cachet Hotel $10,050,054  $14,804,052 
Advance to suppliers - IS Seafood $596,575  $1,115,009 

 

Mr. Roche has incurred certain costs amounting to $ 924,757 on behalf and for the benefit of the Company for the purpose of securing the commercial and business interests of the Company during 2015 when Mr. Roche and Mr. Don Dongjie Yang (Ex-CEO), as well as various other shareholders, were involved in an ongoing dispute with each other for control of the Company’s strategic direction and the Company’s board of directors. The nature of the costs included the payroll and travelling expenses. Upon settlement of the dispute, the Company’s board of directors approved to reimburse these costs and the Company accrued the liability due to Mr. Roche and recorded the amount in general and administrative expense for the year endedAs of December 31, 2015. The2018 and 2019, the Company paidhas made an advance of $596,575 and $1,115,009 to IS Seafood for purchases of Iceland sourced seafood to sell to consumers via the amount in full in 2016.Internet.

 

F-39

F-37

 

  

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

  

19.18. Related party transactions—(Continued)

 

In November 2017, the Company entered into a Strategic Cooperation Framework Agreement (the “Framework Agreement”) with Cachet Hotel, which is part of the Roche Enterprises Limited group of companies. Roche Enterprises Limited is owned by Acorn International’s Executive Chairman, Mr. Robert Roche and Mr. Roche is also the Executive Chairman and the majority shareholder of Cachet.Cachet Hotel. The Framework Agreement was personally guaranteed by Mr. Roche.Roche and management believes the loan to be fully collectable.

 

Under the Strategic Framework Agreement, Acorn will become Cachet Hotel’s preferred supplier for sourcing of all amenities, textiles, other hotel goods as well as various furniture, fixtures and equipment for the hotels, restaurants, clubs and other types of properties managed by Cachet, subject to Acorn’s ability to procure the products satisfying Cachet’s requirements on commercially reasonable terms. Best efforts will be used to ensure that the owners of these properties purchase their products from Acorn.

 

The Framework Agreement also provides a credit facility for the Company to loan to Cachet up to $10.0 million at an interest rate of 8% per annum for amounts borrowed in USD and 10% for amounts borrowed in RMB, with each drawdown subject to the Company’s consent in its sole and absolute discretion. The facility has a three-year term with two one-year renewal options. In February 2019, the Company entered into an amendment agreement to the Framework Agreement to increase the credit facility up to $15.0 million with all other terms remained in effect. As of December 31, 2017,2018 and 2019, the Company provided the loan advances in USD of $3,628,415$10.0 million and $14.8 million, respectively, which are presented as a loan to a related party on the consolidated balance sheets.

Management is closely monitoring developments related to the coronavirus outbreak and proactively coping with the impacts on business operation and finance, including assessing the financial position of the borrower and guarantor that would have an impact on the recoverability of the loan receivable.

 

20.In September 2015, the Company entered into an assignment with Ryecor, pursuant to which Ryecor assigned to the Company all of its rights on the loan agreement with E-surer signed in October 2014, and delegated to the Company all of its obligation in exchange of a cash payment of $3,024,933 to Ryecor and Acorn Composite Corporation, Inc., which is also a company owned by Mr. Roche. The Assigned Contracts were personally guaranteed by Mr. Roche (See Note 8).

19. Restricted net assets

 

Relevant PRC laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC GAAP.accounting standards. As a result of these PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets either in the form of dividends, loans or advances, which restricted portion amounted to $33,011,516$9,793,083 as of December 31, 2017.2019. This amount is comprised of the registered equity of the Company’s PRC subsidiaries and the statutory reserves. In addition, as a result of the Company’s restructuring effective January 1, 2005, retained earnings of $20,336,734 related to the pre-restructuring companies was unavailable for distribution as a normal dividend to Acorn International in accordance with relevant PRC laws and regulations.regulations, unless and until the PRC subsidiaries are dissolved and the net assets are returned to the investors.

 

21.

F-38

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

20. Discontinued operation of HJX and Call Center business

(A) Discontinued operation of HJX business

 

In June 2017, the Company reached an agreement to sell a majority interest in its HJX business to a third-party investor and operator. Specifically, the agreement includes the establishment of a joint venture that will be controlled and operated by such third party, and the Company will hold 37.5% equity interest in this joint venture.

 

The Company’s management concluded that HJX business related assets met the standard and shouldrelevant accounting considerations to be reclassified as Held for Sale in the consolidated balance sheet as of December 31, 2017. The following tables present the aggregate carrying amounts of assets classified as Heldheld for Salesale in the consolidated balance sheet:sheets:

 

  December 31, 
  2016  2017 
       
Carrying amount of assets held for sale:        
Intangible assets, net- trademark $495,159  $353,691 
Intangible assets, net- distribution network  80,114   — 
Prepaid expense-copyright $227,114  $122,245 
Total assets held for sale $802,387  $475,936 

F-40

ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 2016 AND 2017

(In US dollars, except share data, unless otherwise stated)

21. Discontinued operation of HJX business—(Continued)

  December 31, 
  2018  2019 
       
Carrying amount of assets held for sale:        
     Intangible assets, net - trademark $353,691  $353,691 
     Intangible assets, net - distribution network  —   — 
     Prepaid expense - copyright  116,385   114,500 
Total assets held for sale $470,076  $468,191 

 

The results of operations associated with discontinued operations of HJX business are presented in the following table:

 

 For the years ended December 31,  For the years ended December 31, 
 2015  2016  2017  2017  2018  2019 
              
Net revenues:                        
Direct sales  1,402,176   471,293   195,589  $195,589  $639  $— 
Distribution sales  23,187,270   7,578,128   1,771,829   1,771,829   55,807   — 
Total net revenues  24,589,446   8,049,421   1,967,418   1,967,418   56,446   — 
                        
Cost of revenues:                        
Direct sales  (850,458)  (375,834)  (185,664)  (185,664)  (3,939)  — 
Distribution sales  (18,543,098)  (6,366,283)  (2,187,001)  (2,187,001)  (326,097)  — 
Total cost of revenues  (19,393,556)  (6,742,117)  (2,372,665)  (2,372,665)  (330,036)  — 
                        
Gross profit  5,195,890   1,307,304   (405,247)
Gross loss  (405,247)  (273,590)  — 
            
Operating expenses:                        
Other selling and marketing expenses  (10,767,567)  (5,932,307)  (1,922,342)
Other selling and marketing (expenses) recovery  (1,922,342)  (189,269)  68,538 
General and administrative expenses  (6,174,634)  (2,284,064)  (1,146,917)  (1,146,917)  (774,125)  (14,775)
Total operating expenses  (16,942,200)  (8,216,371)  (3,069,259)  (3,069,259)  (963,394)  53,763 
Income from discontinued operations before income taxes $(11,746,310) $(6,909,067) $(3,474,506)
            
(Loss) income from discontinued operations before income taxes $(3,474,506) $(1,236,984) $53,763 
Income tax expense  —   —   —   —   —   — 
Income from discontinued operations $(11,746,310) $(6,909,067)  $(3, 474,506) 
(Loss) income from discontinued operations $(3,474,506) $(1,236,984) $53,763 

 

Under the agreement, the Company agreed to sell the HJX Business at the price of RMB 6.0RMB6.0 million ($918,246).

22. Subsequent events

In The joint venture was set up in January 2018, Acorn Information Technology (Shanghai) Co., Ltd filed a suitcase at the People’s Court of Nanjing Xuanwu District against Yong Kang Pei Tai Industry and Trade Co., Ltd or Yong Kang Pei Tai, for their infringing our well-known trademark “babaka”. Before the court open for hearing, we achieved reconciliation agreement with Yong Kang Pei Tai and they already paid us RMB250,000 according to the agreement.

In February 2018, Hebei Education Press Co., Ltd. filed three similar suits against Shanghai Network together with Shanghai HJX Digital Technology Co., Ltd. and Beijing Jingdong Three Hundred and Sixty-Degree Electronic Commerce Co., Ltd. claiming infringement of copyright. Each suit claims asks for RMB522,500 of compensation. We are waiting for the court to determine the date for hearing. The Company accrued for the expected losses in connection with these cases as of December 31, 2017.

On April 27, 2018, the Company consummated the sale of the shares of Bright Rainbow Investments Limited to Hong Kong Red Star Macalline Universal Home Furnishings Limited ("Red Star") in exchange for cash payment of approximately RMB360 million (US$57 million).2018. As of December 31, 20172018 and 2019, the carrying valuetransfer of trademark and copyright is still pending approval by local authorities. During 2018 and 2019, the Company recorded $324,900 and $109,102 as equity in losses of affiliates as a result of the real estate was approximately RMB108 million (US$17 million). Bright Rainbow owns the entire share capital of Shanghai Hao Ji Xing Digital Technology Co., Ltd., which owns the land use rights to the land plot located on Qingpu and all the buildings, fixtures and related facilities.minority stake in this joint venture.

 

F-41

F-39

 

 

ACORN INTERNATIONAL, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2015, 20162017, 2018 AND 20172019

(In US dollars, except share data, unless otherwise stated)

 

20. Discontinued operation of HJX and Call Center business—(Continued)

(B) Discontinued operation of Call Center business

In the third quarter of 2019, the Company completed closure of its Call Center in Wuxi, China. The Company’s management concluded that the closure of Call Center business met the relevant accounting considerations and treated the historical operations of the Call Center as discontinued operations for all periods presented.

The following tables present the aggregate carrying amounts of assets classified as asset to be abandoned in the consolidated balance sheets:

  December 31, 
  2018  2019 
       
Carrying amount of assets to be abandoned        
     Accounts receivable, net $116,674  $16,925 
     Inventory, net  103,930   — 
     Other prepaid expenses and current assets  2,690   1,365 
     Total current assets  223,294   18,290 
Property and equipment, net  356,350   — 
Deferred tax assets, net  —   98,269 
Total assets to be abandoned $579,644  $116,559 
         
Carrying amount of liabilities to be abandoned        
     Accounts payable $29,419  $5,979 
     Accrued expenses and other current liabilities  147,456   114,489 
     Income taxes payable  95,553   102,110 
Total liabilities to be abandoned $272,428  $222,578 

The results of operations associated with discontinued operations of Call Center business are presented in the following table:

  For the years ended December 31, 
  2017  2018  2019 
          
Net revenues:            
Direct sales $3,075,654  $3,347,273  $916,954 
Distribution sales  147,604   10,483   29,809 
Total net revenues  3,223,258   3,357,756   946,763 
             
Cost of revenues:            
Direct sales  (1,281,287)  (1,568,626)  (424,383)
Distribution sales  (230,672)  (9,841)  (26,205)
Total cost of revenues  (1,511,959)  (1,578,467)  (450,588)
             
Gross profit  1,711,299   1,779,289   496,175 
             
Operating expenses:            
Other selling and marketing expenses  (1,408,921)  (1,109,531)  (891,828)
General and administrative expenses  (722,174)  (419,337)  (498,295)
Total operating expenses  (2,131,095)  (1,528,868)  (1,390,123)
             
(Loss) income from discontinued operations  (419,796)  250,421   (893,948)
Other income (expenses), net  —   —   (311,543)
             
(Loss) income from discontinued operations before income taxes  (419,796)  250,421   (1,205,491)
Income tax benefit (expense)  (27,624)  (3,672)  90,641 
(Loss) income from discontinued operations $(447,420) $246,749  $(1,114,850)


ACORN INTERNATIONAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In US dollars, except share data, unless otherwise stated)

21. Subsequent events

The Company has evaluated subsequent events through the date of these consolidated financial statements and other than disclosed below, is not aware of other significant subsequent events that would require recognition or disclosure.

The outbreak of COVID-19 in the first quarter of 2020 has resulted in certain disruption to the Company’s production capacity and ability to deliver to customers in parts of China. There has also been certain disruption in the Company’s supply chain for the Company’s Acorn Fresh business that is dependent on imports of fresh seafood from overseas. The Company has additionally had to adapt to certain work-from-home and flexible working arrangements whereas the Company has operated within a traditional office environment in the past. Some of the Company’s online businesses appear to be experiencing gradually increased demand as customers prefer to shop from home, but there is still concern that the combination of supply-side disruption, delivery challenges and potentially adversely affected consumer demand caused by COVID-19, potentially exacerbated by other factors, could negatively impact the Company’s business over the medium to long term. As a result of the post COVID-19 business environment, the Company has taken a number of defensive measures to cut costs and conserve cash resources, including certain salary reductions and reductions in headcount, deferrals of discretionary spending, and the indefinite suspension of the quarterly dividend. Management is closely monitoring developments related to the outbreak and is proactively coping with the impacts on the Company’s operations and finances.

F-41

ADDITIONAL INFORMATION—FINANCIAL STATEMENT SCHEDULE I

 

ACORN INTERNATIONAL, INC.

 

These parent company financial statements have been prepared in conformity with accounting principles generally accepted in the United States.

 

FINANCIAL INFORMATION OF PARENT COMPANY

 

CONDENSED BALANCE SHEETS

(In US dollars, except share data)

 

 December 31,  December 31, 
 2016  2017  2018  2019 
          
Assets                
Current assets:                
Cash and cash equivalents $6,324,046  $2,122,380  $174,658  $133,405 
Amounts due from subsidiaries  722,696   467,747 
Loan receivable  1,909,741.   2,124,133 
Other current assets  113,826   501,819 
Held-for-sale assets  —   353,691 
        
Total current assets  9,070,309   5,569,770   174,658   133,405 
Loan to related party  —   2,450,000 
Investments in subsidiaries  91,603,716   87,517,739 
Investments in subsidiaries and VIEs  71,669,175   66,117,102 
Total assets $100,674,025  $95,537,509  $71,843,833  $66,250,507 
                
Liabilities and equity                
Current liabilities:                
Other current liabilities $1,503,471  $1,408,533 
Amount due to subsidiaries  —   7,140,367 
Dividend payable $174,658  $133,405 
Total current liabilities  1,503,471   8,548,900   174,658   133,405 
Total liabilities  1,503,471   8,548,900   174,658   133,405 
                
Equity:                
Ordinary shares ($0.01 par value; 100,000,000 shares authorized, 91,818,518 and 91,884,402 shares issued and 75,406,875 and 53,602,810 shares outstanding as of December 31, 2016 and 2017, respectively)  918,185   918,844 
Ordinary shares ($0.01 par value; 100,000,000 shares authorized 91,884,402 and 91,884,402 shares issued and 51,619,218 and 51,619,218 shares outstanding as of December 31, 2018 and 2019, respectively)  918,844   918,844 
Additional paid-in capital  161,938,330   161,962,671   121,962,650   117,445,969 
Accumulated deficits  (122,910,876)  (110,526,573)  (79,399,389)  (69,563,158)
Accumulated other comprehensive income  80,865,261   60,968,963   56,507,394   45,635,771 
Treasury stock, at cost (16,411,643 and 37,333,921 shares as of December 31, 2016 and 2017, respectively)  (21,640,346)  (26,335,296)
Treasury stock, at cost (40,265,184 and 40,265,184 shares as of December 31, 2018 and 2019, respectively)  (28,320,324)  (28,320,324)
        
Total equity  99,170,554   86,988,609   71,669,175   66,117,102 
        
Total liabilities and equity $100,674,025  $95,537,509  $71,843,833  $66,250,507 

 

F-42

FINANCIAL INFORMATION OF PARENT COMPANY

CONDENSED STATEMENTS OF OPERATIONS

(In US dollars)

  For the years ended December 31, 
  2017  2018  2019 
          
Income from operations $—  $—  $— 
             
Income before income taxes  —   —   — 
Income taxes  —   ��   — 
Equity in gains of subsidiaries and VIEs  12,384,303   31,127,184   9,836,231 
Net income of Acorn International, Inc. $12,384,303  $31,127,184  $9,836,231 

F-43

 

 

FINANCIAL INFORMATION OF PARENT COMPANY

 

STATEMENTS OF OPERATIONS

(In US dollars)

  For the years ended December 31, 
  2015  2016  2017 
          
Operating expenses:            
Other selling and marketing expenses $207,461  $270  $— 
General and administrative expenses  2,638,398   2,800,959   4,026,312 
Total operating expenses  2,845,859   2,801,229   4,026,312 
Loss from operations  (2,845,859)  (2,801,229)  (4,026,312)
Other expenses  112,848   128,188   246,603 
Loss before income taxes  (2,733,011)  (2,673,041)  (3,779,709)
Equity in losses of an affiliate  —   (150,000)  — 
Income taxes  —   —   — 
Equity in gains (losses) of subsidiaries  (37,425,643)  6,261,411   16,164,012 
Net income (loss) of Acorn International, Inc. $(40,158,654) $3,438,370  $12,384,303 

F-43

FINANCIAL INFORMATION OF PARENT COMPANY

CONDENSED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)

(In US dollars, except share data)

 

  For the years ended December 31, 
  2015  2016  2017 
          
Net income (loss) $(40,158,654) $3,438,370  $12,384,303 
Other comprehensive income, net of tax            
Unrealized gain (loss) of available-for-sales securities in the subsidiaries, net of tax of $ (18,172,231) and $ (10,490,287) in 2016 and 2017, respectively.  130,928,599   (53,999,944)  (34,823,436)
Foreign currency translation adjustments  (2,933,003)  (27,715,195)  14,927,138 
Comprehensive Income (loss) of Acorn International, Inc.  87,836,942   (78,276,769)  (7,511,995)
  For the years ended December 31, 
  2017  2018  2019 
          
Net income $12,384,303  $31,127,184  $9,836,231 
Other comprehensive income (loss), net of tax            
Net unrealized loss of available-for-sale securities, net of tax of $(10,347,637), $(1,163,160) and $(3,307,755) in 2017, 2018 and 2019, respectively  (31,042,912)  (3,489,480)  (9,868,613)
Foreign currency translation adjustments  11,146,613   (972,089)  (1,003,010)
Comprehensive income (loss) of Acorn International, Inc. $(7,511,996) $26,665,615  $(1,035,392)

 

F-44

F-44

 

 

FINANCIAL INFORMATION OF PARENT COMPANY

 

CONDENSED STATEMENTS OF CASH FLOWS

(In US dollars)

 

  For the years ended December 31, 
  2015  2016  2017 
          
Operating activities:            
Net income (loss) of Acorn International, Inc. $(40,158,654) $3,438,370  $12,384,303 
Share-based compensation  71,333   658,000   25,000 
Exchange losses of convertible loan  —   213,330   (102,159)
Equity in losses of affiliates  —   150,000   — 
Equity in losses (gains) of subsidiaries  37,425,643   (6,261,411)  (16,164,012)
             
Accrued interests on convertible loan  (140,291)  (112,233)  (112,233)
Changes in operating assets and liabilities:            
Other current assets  (24,389)  (1,019)  (387,993)
Other current liabilities  1,135,638   (213,579)  (94,938)
Net cash used in operating activities $(1,690,720) $(2,128,542) $(4,452,032)
             
Investing activities:            
             
Disbursement for loan receivables  (1,870,547)  —   — 
Disbursement for loan to related party      —   (2,450,000)
Investment in an affiliate  —   (150,000)  — 
Investment in an subsidiary  —   (1,567,757)  — 
Dividend received  6,506,710   5,400,000   — 
Net cash provided by (used in) investing activities $4,636,163  $3,682,243  $(2,450,000)
             
Financing activities:            
Repayment of Long-term debt  (8,506,324)  —   — 
Amounts due from subsidiaries  3,178,570   4,980,294   254,949 
Amounts due to subsidiaries  (57,527)  (792,257)  7,140,367 
Repurchase of ordinary shares  (375,000)  (1,530,895)  (4,694,950)
Net cash provided by (used in) financing activities $(5,760,281) $2,657,142  $2,700,366 
Net increase (decrease) in cash and cash equivalents $(2,814,838) $4,210,843  $(4,201,666)
Cash and cash equivalents at the beginning of the year  4,928,041   2,113,203   6,324,046 
Cash and cash equivalents at the end of the year $2,113,203  $6,324,046  $2,122,380 
  For the years ended December 31, 
  2017  2018  2019 
Operating activities:         
Net income of Acorn International, Inc. $12,384,303  $31,127,184  $9,836,231 
Equity in gains of subsidiaries and VIEs  (12,384,303)  (31,127,184)  (9,836,231)
Net cash provided by operating activities $—  $—  $— 
             
Investing activities:            
Dividend received $—  $40,000,020  $4,516,681 
Net cash provided by investing activities $—  $40,000,020  $4,516,681 
             
Financing activities:            
Disbursement of dividends $—  $(39,825,362) $(4,557,934)
Net cash used in financing activities $—  $(39,825,362) $(4,557,934)
Net increase (decrease) in cash and cash equivalents $—  $174,658  $(41,253)
Cash and cash equivalents at the beginning of the year  —   —   174,658 
Cash and cash equivalents at the end of the year $—  $174,658  $133,405 

 

F-45


FINANCIAL INFORMATION OF PARENT COMPANY

 

Note to Schedule I

 

1) Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04(c) of Regulation S-X, which require condensed financial information as to the financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.

 

2) As disclosed in Note 1 to the consolidated financial statements, the Company was incorporated in the British VirginCayman Islands (“BVI”) on March 4, 2004December 20, 2005 to be the holding company of the Company. The Company is an integrated multi-platform marketing company in ChinaPRC which develops, promotes and sells products. The Company’s two primary sales platforms are integrated direct sales and a nationwide distribution network. Direct sales platforms include an outbound marketing platform (which until early 2015 included TVtelevision (“TV”) direct sales and until late 2019 included call center direct sales) and an Internet sales platform. Nationwide distribution network includes an offline distribution network through late 2019 and on-going e-commerce distribution through major e-commerce platforms in China.

  

3) The condensed financial information has been prepared using the same accounting policies as set out in the consolidated financial statements except that the equity method has been used to account for investments in its subsidiaries and VIE.VIEs. For the parent company, the Company records its investments in subsidiaries and VIEVIEs under the equity method of accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures ..Ventures. Such investments are presented on the Condensed Balance Sheets as “Investment in subsidiaries and VIE”VIEs” and the subsidiaries and VIE’VIEs’ profit or loss as “Equity in income/loss of subsidiaries” on the Condensed Statements of Comprehensive Loss. 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 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 and VIEVIEs regardless of the carrying value of the investment even though the parent company is not obligated to provide continuing support or fund losses.

  

4) As of December 31, 20162018 and 2017,2019, there were no material contingencies, significant provisions of long-term obligations, mandatory dividend or redemption requirements of redeemable stocks or guarantees of the Company. $6,506,710, $5,400,000Dividends of $40,000,020 and nil dividend was$4,516,681 were paid by the Company'sCompany’s subsidiaries to the Company in 2015, 20162018 and 2017.2019, respectively.

 

* * *

 

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ADDITIONAL INFORMATION—FINANCIAL STATEMENT SCHEDULE II

 

ACORN INTERNATIONAL, INC.

VALUATION AND QUALIFYING ACCOUNTS

 

Description Balance at
Beginning
of Year		  

Charged to/

(Reversed
from)
Costs and
Expenses

  Write-off  

Balance at
End

of Year

  Balance at
Beginning
of Year		  Charged to/ (Reversed from)
Costs and
Expenses		  Write-off  Other  Balance at End of Year 
              
Allowance for accounts receivable                           
-2019 $4,023,663  $(25,974) $(3,381,495) $(64,999) $551,195 
-2018 $3,978,604�� $45,059  $—  $—  $4,023,663 
-2017 $3,702,514  $276,090  $—  $3,978,604  $3,702,514  $276,090  $—  $—  $3,978,604 
-2016 $5,398,166  $(18,096) $(1,677,556) $3,702,514 
-2015 $3,127,348  $2,270,818  $—  $5,398,166 
Allowance for prepaid advertising expenses                                    
-2019 $318,418  $—  $—  $—  $318,418 
-2018 $897,397  $(578,979) $—  $—  $318,418 
-2017 $1,036,904  $(139,507) $—  $897,397  $1,036,904  $(139,507) $—  $—  $897,397 
-2016 $1,107,706  $—  $(70,802) $1,036,904 
-2015 $—  $1,107,706  $—  $1,107,706 
Allowance for prepaid expenses and current assets                                    
-2019 $637,330  $—  $—  $(10,323) $627,007 
-2018 $310,117  $327,213  $—  $—  $637,330 
-2017 $436,348  $(126,231) $—  $310,117  $436,348  $(126,231) $—  $—  $310,117 
-2016 $605,445  $(169,097) $—  $436,348 
-2015 $127,192  $478,253  $—  $605,445 
Allowance for deferred tax assets                                    
-2019 $10,825,754  $(6,258,245) $(842,896) $(86,346) $3,638,267 
-2018 $22,932,999  $(12,107,245) $—  $—  $10,825,754 
-2017 $33,012,389  $(10,079,390) $—  $22,932,999  $33,012,389  $(10,079,390) $—  $—  $22,932,999 
-2016 $35,657,594  $(2,645,205) $—  $33,012,389 
-2015 $30,287,901  $5,369,693  $—  $35,657,594 

  

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*Other represents foreign currency translation adjustments

 

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