VIE Structure and Arrangements

12 Months Ended

Dec. 31, 2020

VIE Structure and Arrangements

VIE Structure and Arrangements

Note 5.    VIE Structure and Arrangements

The Company consolidated certain VIEs located in the PRC in which it held variable interests and was the primary beneficiary through contractual agreements. The Company was the primary beneficiary because it had the power to direct activities that most significantly affected their economic performance and had the obligation to absorb or right to receive the majority of their losses or benefits. The results of operations and financial position of these VIEs are included in the consolidated financial statements for the year ended December 31, 2019. A shareholder in one of the VIEs is the spouse of Bruno Wu (“Dr. Wu,”) the former Chairman of the Company.

Refer to Note 10 for information on an additional VIE.

The contractual agreements listed below, which collectively granted the Company the power to direct the VIEs activities that most significantly affected their economic performance, as well to cause the Company to have the obligation to absorb or right to receive the majority of their losses or benefits, were terminated by all parties on December 31, 2019. As a result, the Company deconsolidated the VIEs as of December 31, 2019. The deconsolidation resulted in a net loss of $2.0 million recorded in “Gain (loss) on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million in the year ended December 31, 2019.

For these consolidated VIEs, their assets were not available to the Company and their creditors did not have recourse to the Company.

Prior to December 31, 2019, in order to operate certain legacy business in the PRC and to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company entered into a series of contractual agreements with two VIEs. These contractual agreements were initially set to expire in March 2030 and April 2036, respectively, and could not be terminated by the VIEs, except with the consent of, or a material breach, by the Company.

The key terms of the VIE agreements are summarized as follows:

● Equity Pledge Agreement - The VIEs’ shareholders pledged all of their equity interests in the VIEs  to a wholly-owned subsidiary of the Company in the PRC;

● Call Option Agreement - The VIEs’ shareholders granted an exclusive option to a wholly-owned subsidiary of the Company in the PRC, or its designee, to purchase all or any portion of the VIEs’ shareholders’ equity in the VIEs;

● Power of Attorney - The VIEs’ shareholders granted to a wholly-owned subsidiary of the Company in the PRC the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of VIEs;

● Technical Service Agreement – A wholly-owned subsidiary of the Company in the PRC had the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to the VIEs, and the VIEs were required to take all commercially reasonable efforts to permit and facilitate the provision of the services;

● Spousal Consent - The spouses of the VIEs’ shareholders unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement;

● Letter of Indemnification – A wholly-owned subsidiary of the Company in the PRC agreed to indemnify such nominee shareholder against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law;

● Management Services Agreement - In addition to agreements described above, another of the Company’s wholly-owned subsidiaries entered into a Management Services Agreement with each VIE.  Pursuant to such Management Services Agreement, the wholly-owned subsidiary had the exclusive right to provide to the VIE management, financial and other services related to the operation of the VIE’s business, and the VIE was required to take all commercially reasonable efforts to permit and facilitate the provision of the services by the subsidiary. In addition, at the sole discretion of the subsidiary, the VIE was obligated to transfer to the subsidiary, or its designee, any part or all of the business, personnel, assets and operations of the VIE which could be lawfully conducted, employed, owned or operated by the subsidiary; and

● Loan Agreement - Pursuant to the Loan Agreement dated April 5, 2016, a wholly-owned subsidiary of the Company in the PRC agreed to lend RMB 19.8 million and RMB 0.2 million, respectively, to the VIEs’ shareholders, one of whom is the spouse of Dr. Wu, the Company’s former Chairman.  The termination of the Loan Agreement resulted in a loss of $5.1 million in the year ended December 31, 2019.