| Organization and Principal Activities | 1. ORGANIZATION AND PRINCIPAL
ACTIVITIES
Cheetah Mobile Inc. (formerly known as Kingsoft Internet Security
Software Holdings Limited) (the “Company”) is a limited
company incorporated in the Cayman Islands under the laws of Cayman
Islands on July 30, 2009. The Company and its consolidated
subsidiaries and variable interest entities (“VIEs”)
(collectively referred to the “Group”) are principally
engaged in the provision of utility products and related services,
mobile entertainment and others. The Company conducts its primary
business operations through its subsidiaries, VIEs and subsidiary
of VIEs. The immediate holding company and the ultimate holding
company of the Company is Kingsoft Corporation Limited
(“Kingsoft”), a company listed on the Stock Exchange of
Hong Kong Limited. In 2009, Kingsoft undertook a corporate
reorganization to establish the Group, which started to specialize
in utility products and related services on a stand-alone basis
with separate management oversight distinct from Kingsoft.
Subsequent to the reorganization in 2009, all revenues and costs
generated by the utility products and related services, are
reflected in the consolidated financial statements of the
Group.
On October 2, 2017, Kingsoft have approved the delegation of
38% voting power of the Company held by Kingsoft to Mr. Sheng
Fu, chief executive officer and director of the Company
(“Mr. Fu”), effective October 1, 2017. The
Company is no longer consolidated by Kingsoft and became a
significant equity method investee of Kingsoft thereafter.
Details of the Company’s principal subsidiaries and VIEs as
of December 31, 2017 are as follows:
Company
Date of incorporation/ registration
Place of incorporation/ registration
Percentage of ownership
Principal activities
Principle subsidiaries of the Company:
Cheetah Technology Corporation Limited (“Cheetah
Technology”) August 26, 2009 Hong Kong 100% Investment holding, provision of utility products
and related services, mobile entertainment services
Zhuhai Juntian Electronic Technology Co., Ltd.
(“Zhuhai Juntian”) September 28, 2000
The People’s Republic of China
(“PRC”) 100% Investment holding, research and development and
provision of utility products and related services
Beijing Kingsoft Internet Security Software Co., Ltd.
(“Beijing Security”) November 30, 2009 The PRC 100% Provision of mobile entertainment services and
research and development of online applications
Conew Network Technology (Beijing) Co., Ltd. (“Conew
Network”) March 19, 2009 The PRC 100% Research and development of mobile applications
and provision of utility products and related service
Cheetah Mobile America, Inc. (“Cheetah Mobile
America”) November 28, 2012 United States 100% Provision of utility products and related
services, mobile entertainment services and research and
development services
Hongkong Zoom Interactive Network Marketing Technology Limited
(“HK Zoom”) July 4, 2014 Hong Kong 100% Provision of utility products and related
services
Hong Kong Youloft Technology Limited (“Youloft HK”) August 1, 2014 Hong Kong 51.9% Provision of utility products and related
services
Chongqing Calendar Technology Co., Ltd. (“Chongqing
Calendar”) December 3, 2014 The PRC 100% Provision of utility products and related
services
Cheetah Information Technology Company Limited (“Cheetah
Information”) March 9, 2015 Hong Kong 100% Investment holding
MobPartner SAS (“MobPartner”) February 23, 2010 France 100% Provision of utility products and related
services
Principle subsidiaries of the Company:
Moxiu Technology (Beijing) Co., Ltd. (“Moxiu
Technology”) June 12, 2008 The PRC 51.58% Provision of mobile application development and
utility products and related services
Cheetah Mobile Singapore Pte. Ltd. (“Cheetah Mobile
Singapore”) May 27, 2015 Singapore 100% Provision of utility products and related services
and mobile entertainment services
Live.me Inc. (“Live.me”) September 19, 2016 Cayman 52.1% Investment holding
Hong Kong Live.Me Corporation Limited (“Hong Kong
Live.Me”) October 17, 2016 Hong Kong 100% Provision of mobile entertainment services
Taiwan Cheetah Mobile Corp (“Taiwan
Cheetah”) January 21, 2016 Taiwan 100% Sale of electronic products
Japan Kingsoft Inc. (“Kingsoft Japan”) March 9, 2005 Japan 46.1% Provision of utility products and related
services
Beijing Lewo Wuxian Technology Co., Ltd. December 14, 2016 The PRC 100% Provision of research and development
services
Baomi Information Technology (Shanghai) Co.,Ltd. (“Baomi
Technology”) January 26, 2014 The PRC 50.52% Sale of air purifiers
Cheetah Mobile Hong Kong Limited (“Cheetah Mobile Hong
Kong”) February 24, 2016 Hong Kong 100% Investment holding
VIEs
Beijing Conew Technology Development Co., Ltd. (“Beijing
Conew”) December 22, 2005 The PRC Nil Dormant
Beijing Cheetah Mobile Technology Co., Ltd. (“Beijing
Mobile”) April 15, 2009 The PRC Nil Provision of mobile entertainment services
Beijing Cheetah Network Technology Co., Ltd. (“Beijing
Network”) July 18, 2012 The PRC Nil Provision of utility products and related
services, mobile entertainment services
VIE arrangements
In order to comply with the PRC laws and regulations which prohibit
foreign control of companies involved in internet value-added
business, the Group operates its website and conducts substantially
the majority of its internet value-added services in the PRC
through Beijing Mobile, Beijing Network and Beijing Conew
(collectively referred to as the “VIEs”) and its
wholly-owned subsidiaries. Except for Beijing Conew, the registered
capital of the VIEs was funded by Beijing Security and Conew
Network (each or collectively referred to as the “Primary
Beneficiaries”) through loans extended to the VIEs’
shareholders, Sheng Fu, Ming Xu, Wei Liu, who are executives and/or
directors of the Group, as well as Ms. Weiqin Qiu, an
affiliate of the Group. The effective control of the VIEs is held
by the Primary Beneficiaries, through a series of contractual
agreements (the “Contractual Agreements”). As a result
of the Contractual Agreements, the Primary Beneficiaries have the
power to direct the activity that most significantly impacts the
economic performance of the VIEs and receive the economic benefits
of the VIEs.
The following is a summary of the Contractual Agreements amongst
the Primary Beneficiaries, the VIEs and their respective
shareholders (“Nominee Shareholders”):
Exclusive technology development, support and consulting
agreements
Pursuant to the exclusive technology development, support and
consulting agreements entered into between the Primary
Beneficiaries and the VIEs, the VIEs engaged the Primary
Beneficiaries as their exclusive provider of management consulting
services, technical development and support services in return for
service fees of not less than 20% of the VIE’s pre-tax
Loan agreements
Pursuant to the loan agreements between the Primary Beneficiaries
and the Nominee Shareholders, the Primary Beneficiaries granted
interest free loans in an aggregate amount of RMB16,800 (US$2,582)
to the Nominee Shareholders’ for their sole purpose of
contributing to the registered capital of the VIEs. The loans have
no definite maturity date. At the option of the Primary
Beneficiaries, repayment may be requested at any time, which may be
in the form of transferring the VIE’s equity interest to the
Primary Beneficiaries or its designees. The Nominee Shareholders
may offer to repay part or the entire loans at any time, to the
extent permitted by PRC laws, in the form of transferring the
VIE’s equity interest to the Primary Beneficiaries or its
designees.
Exclusive equity option agreements
Pursuant to the exclusive equity option agreements entered into
between the Primary Beneficiaries, the VIEs and the Nominee
Shareholders, the Primary Beneficiaries were granted an exclusive
and irrevocable option to purchase, or designate a third party to
purchase, all or part of the equity interest of the VIEs held by
the Nominee Shareholders. Without the prior written consent of the
Primary Beneficiaries, the Nominee Shareholders shall not assign or
transfer to any third party, or create or cause any security
interest in whatsoever form to be created on, all or any part of
the equity interest held in the VIEs. In addition, dividends and
any form of distributions are not permitted without the prior
consent of the Primary Beneficiaries. The exercise consideration
should be equal to the corresponding loan amount as described above
or the minimum consideration permitted under the PRC laws,
whichever is higher. The consideration in excess of the
corresponding loan amount shall be waived by the Nominee
Shareholders. While in the exclusive equity option agreement with
respect to Beijing Mobile, the exercise consideration is equal to
the minimum price permitted under the PRC laws and any amount in
excess of the corresponding loan amount shall be refunded by the
Nominee Shareholders to Beijing Security or Beijing Security may
deduct the excess amount upon payment of consideration. The Primary
Beneficiaries or their designee(s) may exercise such option at
any time until it has acquired all the equity interest of the VIEs.
The agreements will remain effective until all the equity interests
held by the Nominee Shareholders have been lawfully transferred to
the Primary Beneficiaries or its designee(s) pursuant to the
terms of the agreements.
Equity pledge agreements
Pursuant to the equity pledge agreements entered into between the
Nominee Shareholders, the VIEs and the Primary Beneficiaries, the
Nominee Shareholders pledged all of their equity interest in the
VIEs to the Primary Beneficiaries as collateral for all of their
payments due to the Primary Beneficiaries and to secure their
obligations under the above agreements. Without the prior written
consent of the Primary Beneficiaries, the Nominee Shareholders may
not assign or transfer to any third party, or create or cause any
security interest in whatsoever form to be created on, all or any
part of the equity interest it holds in the VIEs. The Primary
Beneficiaries are entitled to transfer or assign in full, or in
part, the shares pledged. In the event of default, the Primary
Beneficiaries as the pledgee, have first priority to be compensated
through the sale or auction of the pledged equity interest. The
Nominee Shareholders agree to waive their dividend rights in
relation to all of the pledged equity interest until such pledge
has been lawfully discharged. The equity pledge agreements will
remain effective until all the obligations under these agreements
have been satisfied in full or all of the guaranteed liabilities
have been repaid.
Shareholder voting proxy agreements
Pursuant to the shareholder voting proxy agreements signed between
the Nominee Shareholders, the VIEs and the Primary Beneficiaries,
the Nominee Shareholders irrevocably nominates, appoints and
constitutes any person designated by the Primary Beneficiaries as
its attorney-in-fact
Business operation agreements
Pursuant to the business operations agreements entered into between
the Nominee Shareholders, the VIEs and the Primary Beneficiaries,
the Nominee Shareholders must appoint candidates designated by the
Primary Beneficiaries as its board of directors and the Primary
Beneficiaries have the right to appoint senior executives of the
VIEs. In addition, the VIEs agree not to engage in any transaction
that may materially affect their assets, obligations, rights or
operation without the prior written consent of the Primary
Beneficiaries. The Nominee Shareholders also agree to
unconditionally pay or transfer to the Primary Beneficiaries any
bonus, dividends or any other profits or interest (in whatever
form) that they are entitled to as shareholders of the VIEs, and
waives any consideration connected therewith. The agreement has a
term of ten years, unless otherwise terminated by the Primary
Beneficiaries. Neither the VIEs nor the Nominee Shareholders may
terminate this agreement.
Spousal consent letters
The spouses of certain shareholders of the VIEs have executed
spousal consent letters. Pursuant to these letters, the spouses of
certain shareholders of the VIEs acknowledged that certain equity
interest in the respective VIEs held by and registered in the name
of his or her spouse will be disposed pursuant to relevant
arrangements under the shareholder voting proxy agreement, the
exclusive equity option agreement, the equity pledge agreement and
the loan agreement. These spouses undertake not to take any action
to interfere with the disposition of such equity interest,
including, without limitation, claiming that such equity interest
constitute communal marital property.
On January 17, 2014, the Contractual Agreements were
supplemented with financial support undertaking letters executed by
the Primary Beneficiaries to memorialize the Primary
Beneficiaries’ commitment to the VIEs and the commitment
shall be retrospectively effective from the date the other
contractual agreements were fully executed. Pursuant to the
financial support undertaking letters, the Primary Beneficiaries
commit to provide unlimited financial support to the VIEs to
support their operations whether or not the VIEs incur any losses,
and not request for repayment if the VIEs are unable to do so.
Despite the lack of technical majority ownership, there exists a
parent-subsidiary relationship between the Primary Beneficiaries
and the VIEs through the irrevocable shareholder voting proxy
agreements, whereby the Nominee Shareholders effectively assigned
all of the voting rights underlying their equity interest in the
VIEs to the Primary Beneficiaries. Furthermore, pursuant to the
exclusive equity option agreements, which include a substantive
kick-out
The shareholders of the VIEs elect and terminate the executive
directors of the VIEs, approve the annual budget, financial
statements and significant investing and financing activities of
the VIEs. Pursuant to the shareholder voting proxy agreements, the
shareholders of the VIEs have assigned all of their voting rights
underlying the equity interest in the VIEs to any person nominated,
appointed or designated by the Primary Beneficiaries. Senior
management of the Company, all employees of the Primary
Beneficiaries, are generally responsible for the review and
approval of sales contracts, credit approval policies, pricing
policies, significant marketing promotions, product development,
research and development, bandwidth and traffic expenditures, as
well as the appointments and terminations of personnel. Therefore,
the Primary Beneficiaries have the power to direct the activities
of the VIEs that most significantly impact their economic
performance.
Thus, Beijing Security and Conew Network are considered the primary
beneficiaries of the VIEs. As a result of the above, the Company,
through the Primary Beneficiaries, consolidate the VIEs in
accordance with SEC Regulation SX-3A-02 810-10 810-10”), Consolidation: Overall
The Company, in consultation with its PRC legal counsel, believes
that (i) the ownership structure of the Group, including its
subsidiaries in the PRC and VIEs is in compliance with all existing
PRC laws and regulations; (ii) each of the Contractual
Agreements amongst the Primary Beneficiaries, the VIEs and the
Nominee Shareholders of the VIEs governed by PRC laws, are legal,
valid and binding, enforceable against such parties, and will not
result in any violation of PRC laws or regulations currently in
effect; and (iii) each of the Company’s PRC
subsidiaries, VIEs and subsidiary of VIEs have the necessary
corporate power and authority to conduct its business as described
in its business scope under its business license, which is in full
force and effect, and the Group’s business operations in the
PRC are in compliance with existing PRC laws and regulations.
However, uncertainties in the PRC legal system could cause the
relevant regulatory authorities to find the current Contractual
Agreements and businesses to be in violation of any existing or
future PRC laws or regulations. If the Company, the Primary
Beneficiaries or any of its current or future VIEs are found in
violation of any existing or future laws or regulations, or fail to
obtain or maintain any of the required permits or approvals, the
relevant PRC regulatory authorities would have broad discretion in
dealing with such violations, including levying fines, confiscating
the income of the Primary Beneficiaries, and the VIEs, revoking the
business licenses or operating licenses of the Primary
Beneficiaries, and VIEs, shutting down the Group’s servers or
blocking the Group’s websites, discontinuing or placing
restrictions or onerous conditions on the Group’s operations,
requiring the Group to undergo a costly and disruptive
restructuring, restricting the Group’s rights to use the
proceeds from this offering to finance the Group’s business
and operations in PRC, or enforcement actions that could be harmful
to the Group’s business. Any of these actions could cause
significant disruption to the Group’s business operations and
severely damage the Group’s reputation, which would in turn
materially and adversely affect the Group’s business and
results of operations. In addition, if the imposition of any of
these penalties causes the Primary Beneficiaries to lose the rights
to direct the activities of VIEs or the right to receive their
economic benefits, the Company, through the Primary Beneficiaries,
would no longer be able to consolidate the VIEs.
In addition, if the VIEs or the Nominee Shareholders fail to
perform their obligations under the Contractual Agreements, the
Group may have to incur substantial costs and expend resources to
enforce the Primary Beneficiaries’ rights under the
contracts. The Group may have to rely on legal remedies under PRC
laws, including seeking specific performance or injunctive relief
and claiming damages, which may not be effective. All of these
Contractual Agreements 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 system in 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 the Group’s
ability to enforce these contractual arrangements. Under PRC laws,
rulings by arbitrators are final, parties cannot appeal the
arbitration results in courts, and prevailing parties may only
enforce the arbitration awards in PRC courts through arbitration
award recognition proceedings, which would incur additional
expenses and delay. In the event the Group is unable to enforce
these Contractual Agreements, the Primary Beneficiaries may not be
able to exert effective control over its VIEs, and the
Group’s ability to conduct its business may be negatively
affected.
The carrying amounts and classifications of the assets and
liabilities of the VIEs are as follows:
As of December 31,
2016 2017
RMB RMB US$
Cash and cash equivalents 40,485 48,414 7,441
Restricted cash 3,480 19,374 2,978
Short-term investments 26,250
—
—
Accounts receivable 18,027 20,807 3,198
Prepayments and other current assets 147,670 152,508 23,440
Due from related parties 272,740 276,729 42,532
Deferred tax assets 7,324
—
—
Total current assets 515,976 517,832 79,589
Property and equipment, net 45,544 28,560 4,390
Intangible assets, net 7,085 4,575 703
Goodwill 962 962 148
Investment in equity investees 34,740 29,149 4,480
Other long-term investments 62,565 75,743 11,641
Other non-current 2,833 2,733 420
Deferred tax assets 11,002 18,397 2,828
Total non-current 164,731 160,119 24,610
Total assets 680,707 677,951 104,199
Accounts payable 27,111 23,654 3,636
Accrued expenses and other current liabilities 105,445 91,097 14,001
Due to related parties (i) 420,219 407,326 62,605
Income tax payable 779 1,468 226
Total current liabilities 553,554 523,545 80,468
Other non-current 1,304 4,134 635
Total non-current 1,304 4,134 635
Total liabilities 554,858 527,679 81,103
(i) As of December 31, 2016 and
2017, the balances due to related parties of the VIEs mainly
represented amounts due to subsidiaries of the Group of RMB413,067
and RMB390,139 (US$59,963), respectively, which were eliminated
upon consolidation by the Company.
The financial performance and cash flows of the VIEs as
follows:
Year ended December 31,
2015 2016 2017
RMB RMB RMB US$
Revenues 1,817,642 517,926 369,247 56,752
Cost of revenues 1,338,932 342,979 232,500 35,735
Net (loss) income (43,325 ) (7,680 ) 22,327 3,432
Net cash provided by (used in) operating activities 110,090 (65,187 ) (15,924 ) (2,447 )
Net cash (used in) provided by investing activities (31,043 ) (42,489 ) 23,853 3,666
Net cash used in financing activities (588 )
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—
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The revenue producing assets that are held by the VIEs comprise of
leasehold improvements, servers, licensed software, network
equipment, acquired trade name and acquired domain name.
Substantially all of such assets are recognized in the
Group’s consolidated financial statements, except for certain
Internet Content Provider Licenses, internally developed software,
trademarks and patent applications which were not recorded on the
Company’s consolidated balance sheets as they do not meet all
the capitalization criteria. The VIEs also hire assembled work
force on sales, research and development and operations whose costs
are expensed as incurred.
There was no pledge or collateralization of the VIEs’ assets.
Creditors of the VIEs have no recourse to the general credit of the
Primary Beneficiaries. |
