Securities registered or to be registered pursuant
to Section 12(b) of the Act:
* Not for trading, but only in connection with
the listing on the NASDAQ Global Market of American depositary shares, each representing two ordinary shares.
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of
each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of
December 31, 2016, 125,629,779 ordinary shares, par value US$0.001 per share, were outstanding.
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
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.
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).
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 the definitions
of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
If an emerging growth company that prepare
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a)
of the Exchange Act.
¨
†The term “new or revised financial
accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
x
International Financial Reporting Standards
as issued by the International Accounting Standards Board
¨
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.
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).
(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
¨
Although AirMedia does not directly or indirectly
own any equity interests in its consolidated VIEs or their subsidiaries, AirMedia is the primary beneficiary of and effectively
controls these entities through a series of contractual arrangements with these entities and their record owners. We have consolidated
the financial results of these VIEs and their subsidiaries in our consolidated financial statements in accordance with the Generally
Accepted Accounting Principles in the United States, or U.S. GAAP. See “Item 4. Information on the Company—C. Organizational
Structure,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” and
“Item 3. Key Information—D. Risk Factors” for further information on our contractual arrangements with these
parties.
Our financial statements are expressed in U.S.
dollars, which is our reporting currency. Certain Renminbi figures in this annual report are translated into U.S. dollars solely
for the reader’s convenience. Unless otherwise noted, all convenience translations from Renminbi to U.S. dollars in this
annual report were made at a rate of RMB6.9430 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal
Reserve Board on December 31, 2016. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could
be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, at the rate stated above, or at all.
This annual report on Form 20-F contains statements
of a forward-looking nature. These statements are made under the “safe harbor provisions” of the U.S. Private Securities
Litigation Reform Act of 1995.
You can identify these forward-looking statements
by words or phrases such as “may”, “will”, “expect”, “anticipate”, “aim”,
“estimate”, “intend”, “plan”, “believe”, “likely to” or other similar
expressions. We have based these forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements include but are not limited to:
Also, forward-looking statements represent
our estimates and assumptions only as of the date of this annual report. You should read this annual report and the documents that
we referred and filed as exhibits to this report in their entirety and with the understanding that our actual future results may
be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements
publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements,
even if new information becomes available in the future.
PART
I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
Selected Financial Data
|
Selected Consolidated
Financial Data
The following table represents our selected
consolidated financial information. The selected consolidated statements of operations data for the years ended December 31, 2014,
2015 and 2016 and the consolidated balance sheet data as of December 31, 2015 and 2016 have been derived from our audited consolidated
financial statements, which are included in this annual report. The selected consolidated statements of operations data for the
years ended December 31, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012, 2013 and 2014,
except for the impact of retrospective adjustments for the deconsolidation of our media business in airports (excluding digital
TV screens in airports and TV-attached digital frames) and all billboard and LED media business outside of airports (excluding
gas station media network and digital TV screens on airplanes), all of which have been classified as discontinued operations, have
been derived from our financial statements for the relevant periods, which are not included in this annual report. Our consolidated
financial statements are prepared and presented in accordance with U.S. GAAP.
These selected consolidated financial data
below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements
and related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects”
below. Our historical results do not necessarily indicate results expected for any future periods.
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(In thousands of U.S. Dollars, except share, per share and per ADS data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
$
|
88,564
|
|
|
$
|
80,002
|
|
|
$
|
59,200
|
|
|
$
|
38,917
|
|
|
$
|
12,178
|
|
Gas Station Media Network
|
|
|
14,217
|
|
|
|
12,726
|
|
|
|
11,164
|
|
|
|
9,840
|
|
|
|
4,009
|
|
Other Media
|
|
|
2
|
|
|
|
36
|
|
|
|
5,583
|
|
|
|
2,109
|
|
|
|
410
|
|
Total revenues
|
|
|
102,783
|
|
|
|
92,764
|
|
|
|
75,947
|
|
|
|
50,866
|
|
|
|
16,597
|
|
Business tax and other sales tax
|
|
|
(2,212
|
)
|
|
|
(1,511
|
)
|
|
|
(1,254
|
)
|
|
|
(633
|
)
|
|
|
(84
|
)
|
Net revenues
|
|
|
100,571
|
|
|
|
91,253
|
|
|
|
74,693
|
|
|
|
50,233
|
|
|
|
16,513
|
|
Cost of revenues
|
|
|
(101,044
|
)
|
|
|
(97,741
|
)
|
|
|
(96,608
|
)
|
|
|
(89,577
|
)
|
|
|
(49,042
|
)
|
Gross profit/(loss)
|
|
|
(473
|
)
|
|
|
(6,488
|
)
|
|
|
(21,915
|
)
|
|
|
(39,344
|
)
|
|
|
(32,529
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(9,110
|
)
|
|
|
(9,202
|
)
|
|
|
(12,916
|
)
|
|
|
(9,611
|
)
|
|
|
(12,056
|
)
|
General and administrative
|
|
|
(13,978
|
)
|
|
|
(15,104
|
)
|
|
|
(20,620
|
)
|
|
|
(27,102
|
)
|
|
|
(45,227
|
)
|
Impairment of goodwill
|
|
|
(12,819
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment of intangible assets
|
|
|
(5,059
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
(40,966
|
)
|
|
|
(24,306
|
)
|
|
|
(33,536
|
)
|
|
|
(36,713
|
)
|
|
|
(57,283
|
)
|
Loss from operations
|
|
|
(41,439
|
)
|
|
|
(30,794
|
)
|
|
|
(55,451
|
)
|
|
|
(76,057
|
)
|
|
|
(89,812
|
)
|
Interest (expense) income
|
|
|
(250
|
)
|
|
|
(224
|
)
|
|
|
1,058
|
|
|
|
472
|
|
|
|
843
|
|
Other income, net
|
|
|
505
|
|
|
|
695
|
|
|
|
979
|
|
|
|
1,383
|
|
|
|
4,243
|
|
Loss before income taxes
|
|
|
(41,184
|
)
|
|
|
(30,323
|
)
|
|
|
(53,414
|
)
|
|
|
(74,202
|
)
|
|
|
(84,726
|
)
|
Income tax expenses/ (benefits)
|
|
|
2,685
|
|
|
|
(537
|
)
|
|
|
(1,512
|
)
|
|
|
6,421
|
|
|
|
4,483
|
|
Loss from continuing operations before (loss) income on equity method investments
|
|
|
(43,869
|
)
|
|
|
(29,786
|
)
|
|
|
(51,902
|
)
|
|
|
(80,623
|
)
|
|
|
(89,209
|
)
|
(loss)income on equity method investments
|
|
|
(22
|
)
|
|
|
(69
|
)
|
|
|
(212
|
)
|
|
|
2,352
|
|
|
|
(33
|
)
|
Net loss from continuing operations
|
|
|
(43,891
|
)
|
|
|
(29,855
|
)
|
|
|
(52,114
|
)
|
|
|
(78,271
|
)
|
|
|
(89,242
|
)
|
Net income from discontinued operations, net of tax
|
|
|
11,650
|
|
|
|
18,335
|
|
|
|
20,288
|
|
|
|
221,183
|
|
|
|
—
|
|
Net (loss) income
|
|
|
(32,241
|
)
|
|
|
(11,520
|
)
|
|
|
(31,826
|
)
|
|
|
142,912
|
|
|
|
(89,242
|
)
|
Less: Net (loss)/ income attributable to noncontrolling interests
|
|
|
487
|
|
|
|
(894
|
)
|
|
|
(6,131
|
)
|
|
|
(6,735
|
)
|
|
|
23,617
|
|
-Continuing operations
|
|
|
487
|
|
|
|
(894
|
)
|
|
|
(6,808
|
)
|
|
|
(7,620
|
)
|
|
|
23,617
|
|
-Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
677
|
|
|
|
885
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders
|
|
|
(32,728
|
)
|
|
|
(10,626
|
)
|
|
|
(25,695
|
)
|
|
|
149,647
|
|
|
|
(65,625
|
)
|
-Continuing operations
|
|
|
(44,378
|
)
|
|
|
(28,961
|
)
|
|
|
(45,306
|
)
|
|
|
(70,651
|
)
|
|
|
(65,625
|
)
|
-Discontinued operations
|
|
|
11,650
|
|
|
|
18,335
|
|
|
|
19,611
|
|
|
|
220,298
|
|
|
|
—
|
|
Weighted average shares outstanding used in computing net (loss) income per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
124,269,245
|
|
|
|
120,386,635
|
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
Discontinued operations
|
|
|
124,269,245
|
|
|
|
120,386,635
|
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
—
|
|
-diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
124,269,245
|
|
|
|
120,386,635
|
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
Discontinued operations
|
|
|
124,275,255
|
|
|
|
120,391,294
|
|
|
|
119,924,927
|
|
|
|
129,372,158
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ordinary share—basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.36
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
Discontinued operations
|
|
|
0.09
|
|
|
|
0.15
|
|
|
|
0.16
|
|
|
|
1.81
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ordinary share—diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.36
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
Discontinued operations
|
|
|
0.09
|
|
|
|
0.15
|
|
|
|
0.16
|
|
|
|
1.70
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ADS—basic
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.71
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(0.52
|
)
|
Discontinued operations
|
|
|
0.19
|
|
|
|
0.30
|
|
|
|
0.33
|
|
|
|
3.62
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ADS—diluted
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.71
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(0.52
|
)
|
Discontinued operations
|
|
|
0.19
|
|
|
|
0.30
|
|
|
|
0.33
|
|
|
|
3.41
|
|
|
|
—
|
|
|
(1)
|
Each ADS represents two ordinary shares.
|
The following table presents a summary of our
consolidated balance sheet data as of December 31, 2012, 2013, 2014, 2015 and 2016:
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
61,020
|
|
|
$
|
38,846
|
|
|
$
|
60,117
|
|
|
$
|
86,960
|
|
|
$
|
117,547
|
|
Total assets
|
|
|
343,867
|
|
|
|
402,791
|
|
|
|
395,597
|
|
|
|
531,601
|
|
|
|
381,190
|
|
Total liabilities
|
|
|
104,432
|
|
|
|
111,448
|
|
|
|
126,725
|
|
|
|
133,968
|
|
|
|
114,593
|
|
Total AirMedia Group Inc.’s shareholders’ equity
|
|
|
241,876
|
|
|
|
270,966
|
|
|
|
248,736
|
|
|
|
386,568
|
|
|
|
268,737
|
|
Noncontrolling interests
|
|
|
(2,441
|
)
|
|
|
20,377
|
|
|
|
20,136
|
|
|
|
11,065
|
|
|
|
(2,140
|
)
|
Total equity
|
|
$
|
239,435
|
|
|
$
|
291,343
|
|
|
$
|
268,872
|
|
|
$
|
397,633
|
|
|
$
|
266,597
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
An investment
in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together with all
of the other information included in this annual report, before making an investment decision. If any of the following risks actually
occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our capital
stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR
BUSINESS
We have incurred
net losses in the past and may incur losses in the future.
We have incurred net losses in recent years
and in spite of our efforts to transition into our new business, we may continue to incur loss in the future. In 2015, we divested
most of our air travel advertising business. In our efforts to launch and operate our new Wi-Fi business, we have incurred, and
expect to continue to incur, substantial expenses in the form of acquisition of concession rights, initial system development and
installation investments and ongoing system operation and maintenance costs. In the event of any significant technology development,
we may need to incur further system development expenses. We pay concession fees to the railway administrative bureaus for our
operation of on-train Wi-Fi business and purchase bandwidth from mobile data service providers and incur system maintenance costs
for both our on-train and on-bus Wi-Fi business. We also pay concession fees for our business of digital TV screens on airplanes
and our gas station platform. Those fees constitute a significant part of our cost of revenues and most of our concession fees
are fixed under the concession rights contracts with an escalation clause. These fees payments are usually due in advance. However,
our revenues may fluctuate significantly from period to period for various reasons. For instance, when new concession rights contracts
are signed for a period, additional concession fees are incurred immediately, but it may take some time for us to achieve revenues
from these concession rights contracts because it takes time to find advertisers for the time slots and locations made available
under these new contracts. Similarly, we need to purchase the bandwidth before we sell our Wi-Fi services to users and we need
to maintain our system regardless of the level of revenue. If we are not able to attract enough advertisers and customers, or at
all, our revenue will decrease and we may continue to incur losses given most of our costs and expenses are fixed.
We have a
limited operating history, which may make it difficult for you to evaluate our business and prospects.
We began our business operations in August
2005 but started our gas station business only in 2013 and started to explore the Wi-Fi business in as recently as 2015. Our limited
operating history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. It
is also difficult to evaluate the viability of our new business model because we do not have sufficient experience to address the
risks that we may encounter as we explore Wi-Fi platform as a new form of advertising media and enter the new and evolving travel
Wi-Fi advertising market. Certain members of our senior management team, especially those who joined us only recently due to our
new Wi-Fi business, have worked together for only a relatively short period of time and it may be difficult for you to evaluate
their effectiveness, on an individual or collective basis, and their ability to address future challenges to our business. Because
of our limited operating history, we may not be able to:
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manage our relationships with relevant parties to retain existing concession rights and obtain
new concession rights on commercially advantageous terms or at all;
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retain existing and acquire new advertisers and third party content providers;
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secure a sufficient number of low-cost hardware for our business from our suppliers;
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successfully launch new business and operate our existing business;
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respond to competitive market conditions;
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respond to changes in the PRC regulatory regime;
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maintain adequate control of our costs and expenses; or
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attract, train, motivate and retain qualified personnel.
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If advertisers
or the viewing public do not accept, or lose interest in, our air travel advertising network, we may be unable to generate sufficient
cash flow from our operating activities and our business and results of operations could be materially and adversely affected.
Our success in our air travel advertising business
depends on the acceptance of our advertising network by advertisers and their interest in it as a part of their advertising strategies.
In this annual report, the term “advertisers” refer to the ultimate brand-owners whose brands and products are being
publicized by our advertisements, including both advertisers that purchase advertisements directly from us and advertisers that
do so through third-party advertising agencies. Our advertisers may elect not to use our services if they believe that consumers
are not receptive to our media network or that our network is not a sufficiently effective advertising medium. If consumers find
our network to be disruptive or intrusive, airplane companies may refuse to allow us to place our programs on airplanes, and our
advertisers may reduce spending on our network.
If we are not able to adequately track air
traveler responses to our programs, in particular track the demographics of air travelers most receptive to air travel advertising,
we will not be able to provide sufficient feedback and data to existing and potential advertisers to help us generate demand and
determine pricing. Without improved market research, advertisers may reduce their use of air travel advertising and instead turn
to more traditional forms of advertising that have more established and proven methods of tracking the effectiveness of advertisements.
Demand for our advertising services and the
resulting advertising spending by our advertisers may fluctuate from time to time, and our advertisers may reduce the money they
spend to advertise on our network for any number of reasons. If a substantial number of our advertisers lose interest in advertising
on our media network for these or other reasons or become unwilling to purchase advertising time slots or locations on our network,
we will be unable to generate sufficient revenues and cash flow to operate our business, and our business and results of operations
could be materially and adversely affected.
If we do not
succeed in launching our new Wi-Fi business, our future results of operations and growth prospects may be materially and adversely
affected.
Our current strategy mainly includes launching
our new Wi-Fi business. We began to explore the new Wi-Fi business in 2015 and are still in the investment and development stage.
We have obtained several concession rights from railway administration bureaus and long-haul bus operators in China to install
and operate our Wi-Fi systems. We have installed and will continue to install the system hardware on trains and busses in accordance
with our concession rights. However, we have not yet tested any monetization models and although we expect to generate advertising
fee revenues from our Wi-Fi platform, there is no assurance that our intended advertising customers will find our Wi-Fi advertising
platform attractive or that the intended users will find our Wi-Fi services attractive. Advertisers may not find our Wi-Fi services
an effective or efficient way of reaching their target audience. Potential new developments in mobile network technologies may
make our on-train and on-bus Wi-Fi services less attractive to the passengers. Furthermore, our Wi-Fi business might be regarded
as value-added telecommunication service. To provide this type of services, we are required to obtain the relevant telecommunication
license from the communication authorities. As a result, we cannot assure you that we will be able to obtain the necessary license
soon, if at all, to provide Wi-Fi service. We may also face unexpected new risks as we continue to launch this new business. As
a result, we cannot assure you that we will be able to generate enough, or any, revenue from this new business. If we fail to do
so, our considerable amounts of fixed concession fees, combined with our lost investment on system development, will materially
and adversely affect our business and financial results.
In our new business, we may face new competition.
If we cannot successfully address the foregoing new challenges and compete effectively, we may not be able to develop a sufficiently
large advertiser base, recover costs incurred for developing and marketing our new business, and eventually achieve profitability
from these businesses, and, consequently, our future results of operations and growth prospects may be materially and adversely
affected.
We may be
adversely affected by a significant or prolonged economic downturn in the level of consumer spending in the industries and markets
served by our customers.
Our business depends on demand for our advertising
services from our customers, which is affected by the level of business activity and economic condition of our customers and is
in turn affected by the level of consumer spending in the markets our customers serve. Therefore, our businesses and earnings are
affected by general business and economic conditions in China as well as abroad.
Advertising revenues from advertisers in the
automobile industry accounted for a significant portion of our revenues. Any significant or prolonged slowdown or decline of this
industry or the economy of China, countries with close economic ties with China or the overall global economy will affect consumers’
disposable income and consumer spending in these industries, and lead to a decrease in demand for our services. Furthermore, the
campaign launched by the Chinese government to curb waste by officials may also lead to decrease in demand for products of our
key customers and in turn adversely affect demand for our services.
We derive
a significant portion of our revenues from the provision of air travel advertising services. A contraction in the air travel advertising
industry in China may materially and adversely affect our business and results of operations.
A significant part of our revenues from continuing
operations in 2016 were generated from the provision of air travel advertising services through the display of advertisements on
digital TV screens on airplanes. We expect digital TV screens on airplanes to contribute substantially all of our air travel network
revenue and a majority of all our revenue in the foreseeable future. If we cannot substantially increase our revenues from our
gas station advertising business and cannot successfully generate revenues from our Wi-Fi business, this situation will continue
into the foreseeable future. A contraction in air travel advertising industry in China could therefore have a material adverse
effect on our business and results of operations.
If we are
unable to carry out our operations as specified in existing concession rights contracts, retain or renew existing concession rights
contracts or to obtain new concession rights contracts on commercially advantageous terms, we may be unable to maintain or expand
our network coverage and our costs may increase significantly in the future.
Our ability to carry out almost all of our
business depends on the availability of the necessary concession rights. However, we cannot assure you that we will be able to
carry out our operations as specified in our concession rights contracts, and any failure to perform may affect the availability
of our concession rights and materially and negatively affect our business.
We may also be unable to retain or renew concession
rights contracts when they expire. Most of our concession rights contracts have no automatic renewal provisions. We cannot assure
you that we will be able to renew any or all of our concession contracts when they expire. In particular, failure to renew our
Wi-Fi concession right contracts will render it hard or impossible for us to recoup our investment in related system development
and installation. We enter into on-train Wi-Fi concession rights contracts with railway administrative bureaus, which are governmental
agencies, and their renewal decisions may be influenced by their supervising authorities and the changes in policies or regulations
in relevant areas. We enter into long-haul bus Wi-Fi concession rights contracts with private companies operating those buses and
those companies are price sensitive and may choose not to renew our concession rights but instead enter into contracts with other
players who can offer more competitive pricing. Furthermore, even if we manage to renew a concession right contract, the terms
of the new contract may not be commercially favorable to us. The concession fees that we incur under our concession rights contracts
comprise a significant portion of our cost of revenues, which may further increase upon renewals. If we cannot pass increased concession
costs onto our customers, our earnings and our results of operations could be materially and adversely affected. In addition, many
of our concession rights contracts contain provisions granting us certain exclusive concession rights. We cannot assure you that
we will be able to retain these exclusivity provisions when we renew these contracts. If we were to lose exclusivity, our advertisers
may decide to advertise with our competitors or otherwise reduce their spending on our network and we may lose market share.
We cannot assure you that our concession rights
contracts will not be unilaterally terminated during their terms, whether with or without justification. In addition, many of our
concession rights contracts were entered into with the advertising companies operated by or advertising agencies hired by airline
companies, and not with the airline companies directly. Although these advertising companies and agents have generally represented
to us in writing that they have the rights to operate advertising media on airplanes and all of them have performed their contractual
obligations, we cannot assure you that airline companies will not challenge or revoke the contractual concession rights granted
to us by their advertising companies or agents; if such challenges or revocations occur, our revenues and results of operations
could be materially and adversely affected.
If we fail to properly perform our existing
concession rights contracts, retain existing concession rights contracts or obtain new concession rights contracts on commercially
advantageous terms, we may be unable to maintain or expand our network coverage and our costs may increase significantly in the
future.
A significant
portion of our revenues has been derived from a limited number of airline companies in China. If any of these airline companies
experiences a material business or flight disruption or if there are changes in our arrangements with these airline companies,
we may incur substantial losses of revenues.
We derived a significant portion of our revenues
from continuing operations in 2016 from six airline companies in China. As of May 31, 2017, we have concession rights contracts
to place our programs on China Southern Airline and China Eastern Airline, respectively, which in the aggregate contributed more
than a majority of our revenue from digital TV screens on airplanes in 2016. A material business or flight disruption of any of
those airline companies could negatively affect our advertising media on airplanes operated by those companies.
We expect our advertising platform with these
abovementioned airline companies to continue to contribute a significant portion of our revenues in the foreseeable future. If
any such companies experiences a material business or flight disruption, we would likely lose a substantial amount of revenues.
We depend
on third-party program producers to provide the non-advertising content that we include in our programs. Failure to obtain high-quality
content on commercially reasonable terms could materially reduce the attractiveness of our network, harm our reputation and materially
and adversely affect our business and results of operations.
The programs on the majority of our digital
TV screens include both advertising and non-advertising content. Third-party content providers such as Travel Channel, Jiangsu
TV, Enlight Media, and Youku Tudou and various other television stations and television production companies have contracts with
us to provide the majority of the non-advertising content played over our network, particularly on our digital TV screens on airplanes.
There is no assurance that we will be able to renew these contracts, enter into substitute contracts to obtain similar contents
or obtain non-advertising content on satisfactory terms, or at all. In addition, some of the third-party content providers that
currently do not charge us for their content may do so in the future. To make our programs more attractive, we must continue to
secure contracts with these and other third-party content providers. If we fail to obtain a sufficient amount of high-quality content
on a cost-effective basis, advertisers may find advertising on our network unattractive and may not wish to purchase advertising
time slots or locations on our network, which would materially and adversely affect our business and results of operations.
When our current
advertising network of digital TV screens and LED screens becomes saturated on the airlines and in the gas stations where we operate,
we may be unable to offer additional time slots or locations to satisfy all of our advertisers’ needs, which could hamper
our ability to generate higher levels of revenues and profitability over time.
When our network of digital TV screens and
LED screens becomes saturated in any particular airline or gas stations where we operate, we may be unable to offer additional
advertising time slots or locations to satisfy all of our advertisers’ needs. We would need to increase our advertising rates
for advertising in such airlines or other locations to increase our revenues. However, advertisers may be unwilling to accept rate
increases, which could hamper our ability to generate higher levels of revenues over time. In particular, the utilization rates
of our advertising time slots and locations on the three largest airlines in China are higher than those on other airlines, and
saturation or oversaturation of digital TV screens on these airlines could have a material adverse effect on our growth prospects.
Our advertising
agencies could engage in activities that are harmful to our reputation in the industry and to our business.
We engage third-party advertising agencies
to help source advertisers from time to time. These third-party advertising agencies assist us in identifying advertisers and introduce
advertisers to us. In return, we pay fees to these advertising agencies if they generate advertising revenues for us. Fees that
we pay to these third-party agencies are calculated based on a pre-set percentage of revenues generated from the advertisers introduced
to us by the third-party agencies and are paid when payments are received from the advertisers. Our contractual arrangements with
these advertising agencies do not provide us with control or oversight over their everyday business activities, and one or more
of these agencies may engage in activities that violate PRC laws and regulations governing the advertising industry and related
non-advertising content, or other laws and regulations. If the advertising agencies we use violate PRC advertising or other laws
or regulations, it could harm our reputation in the industry and have detrimental effects on our business operations.
Because we
rely on third-party advertising agencies to help obtain advertisers, if we fail to maintain stable business relations with key
third-party agencies or to attract additional agencies on competitive terms, our business and results of operations could be materially
and adversely affected.
We engage third-party advertising agencies
to help obtain advertisers from time to time. We do not have long-term or exclusive agreements with these advertising agencies,
including our key third-party advertising agencies, and cannot assure you that we will continue to maintain stable business relations
with them. Furthermore, the fees we pay to these third-party advertising agencies constitute a significant portion of our cost
of revenues. If we fail to retain key third-party advertising agencies or to attract additional advertising agencies, we may not
be able to retain existing advertisers or attract new advertisers or advertising agencies, or the fees we pay them may have to
significantly increase. If any of the above happens, our business and results of operations could be materially and adversely affected.
A limited
number of advertisers have historically accounted for a significant portion of our revenues and this dependence may reoccur in
the future, which would make us more vulnerable to the loss of major advertisers or delays in payments from these advertisers.
A limited number of advertisers historically
accounted for a significant portion of our revenues, but for the years ended December 31, 2014, 2015 and 2016, no individual customer
accounted for over 10% of total revenue.
If we fail to sell our services to one or more
of our major advertisers in any particular period, or if a major advertiser purchases fewer of our services, fails to purchase
additional advertising time on our network, or cancels some or all of its purchase orders with us, our revenues could decline and
our operating results could be adversely affected. The dependence on a small number of advertisers could leave us more vulnerable
to payment delays from these advertisers. We are required under some of our concession rights contracts to make prepayments and
although we do receive some prepayments from advertisers, there is typically a lag between the time of our prepayment of concession
fees and the time that we receive payments from our advertisers. As our business expands and revenues grow, we have experienced
and may continue to experience an increase in our accounts receivable. If any of our major advertisers are significantly delinquent
with its payments, our liquidity and financial conditions may be materially and adversely affected.
We face significant
competition in the advertising industry in China, and if we do not compete successfully against new and existing competitors, we
may lose our market share, and our profits may be reduced.
We face significant competition in the advertising
industry in China. We compete for advertisers primarily on the basis of price, program quality, the range of services offered and
brand recognition. We primarily compete for advertising dollars spent in the air travel advertising industry. We may also face
competition from new competitors as we enter into new markets.
Significant competition could reduce our operating
margins and profitability and lead to a loss of market share. Some of our existing and potential competitors may have competitive
advantages such as significantly greater brand recognition, a longer history in the out-of-home advertising industry and financial,
marketing or other resources, and may be able to mimic and adopt our business model. In addition, several of our competitors have
significantly larger advertising networks than we do, which gives them an ability to reach a larger number of overall potential
consumers and which may make them less susceptible than we are to downturns in particular advertising sectors, such as air travel.
Moreover, significant competition will provide advertisers with a wider range of media and advertising service alternatives, which
could lead to lower prices and decreased revenues, gross margins and profits focus. We cannot assure you that we will be able to
successfully compete against new or existing competitors, and failure to compete may reduce for existing market share and profits.
Our results
of operations are largely subject to fluctuations in the demand for air travel and the traffic at Sinopec gas stations. A decrease
in the demand for air travel or the traffic at Sinopec gas stations may make it difficult for us to sell our advertising time slots
and locations.
To a large extent, our results of operations
are linked to the demand for air travel, which fluctuates greatly from period to period, and is subject to seasonality due to holiday
travel and weather conditions. The results of our gas station media network may be affected by the traffic at Sinopec gas stations.
Other factors that may affect our results include:
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Downturns in the economy
. Business travel is one of the primary drivers of the air travel
industry and it tends to increase in times of economic growth and decrease in times of economic slowdown. A decrease in air passengers
in China could lead to lower advertiser spending on our air travel advertising network. Similarly, a downturn in the Chinese economy
could lead to less car usage and in turn less traffic at the Sinopec gas station within our network.
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Plane crashes or other accidents
. An aircraft crash or other accident, such as those in
2014 involving certain Asian-based airlines, could create a public perception that air travel is not safe or reliable, which could
result in air travelers being reluctant to fly. Significant aircraft delays due to capacity constraints, weather conditions or
mechanical problems could also reduce demand for air travel, especially for shorter domestic flights.
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If the demand for air travel or the traffic
at the Sinopec gas stations within our network decreases for any of these or other reasons, advertisers may be reluctant to advertise
on our network and we may be unable to sell our advertising time slots or locations or charge premium prices.
Past and future
acquisitions may have an adverse effect on our ability to manage our business.
We have acquired and may continue to acquire
businesses, technologies, services or products which are complementary to our core air travel advertising network business in the
future. Past and future acquisitions may expose us to potential risks, including risks associated with:
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the integration of new operations, services and personnel;
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unforeseen or hidden liabilities;
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the diversion of resources from our existing business and technology; or
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failure to achieve the intended objectives of our acquisitions.
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Any of these potential risks could have a material
and adverse effect on our ability to manage our business, our revenues and net income.
We may need to raise additional debt or sell
additional equity securities to make future acquisitions. The raising of additional debt funding by us, if required, would increase
debt service obligations and may lead to additional operating and financing covenants, or liens on our assets, that would restrict
our operations. The sale of additional equity securities could cause additional dilution to our shareholders.
Our acquisition strategy also depends on our
ability to obtain necessary government approvals. See “– Risks Related to Doing Business in China – The M&A
Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue
growth through acquisitions.”
Our quarterly
and annual operating results are difficult to predict and have fluctuated and may continue to fluctuate significantly from period
to period.
Our quarterly and annual operating results
are difficult to predict and have fluctuated and may continue to fluctuate significantly from period to period based on the performance
of our new business, the seasonality of air travel, consumer spending and corresponding advertising trends in China. Air travel,
gas station traffic and advertising spending in China generally tend to increase during major national holidays in October and
tend to decrease during the first quarter of each year. Air travel and advertising spending in China is also affected by certain
special events and related government measures. As a result, and also due to the unpredictable performance of our new business,
you may not be able to rely on period-to-period comparisons of our operating results as an indication of our future performance.
Other factors that may cause our operating results to fluctuate include a deterioration of economic conditions in China and potential
changes to the regulation of the advertising industry in China. If our revenues for a particular quarter are lower than we expect,
we may be unable to reduce our operating costs and expenses for that quarter by a corresponding amount, and it would harm our operating
results for that quarter relative to our operating results for other quarters.
Our business
depends substantially on the continuing efforts of our senior executives and other key employees, and our business may be severely
disrupted if we lose their services.
Our future success heavily depends upon the
continued services of our senior executives and other key employees. We rely on their industry expertise, their experience in business
operations and sales and marketing, and their working relationships with our advertisers, airports and airlines, and relevant government
authorities.
If one or more of our senior executives and
other key employees were unable or unwilling to continue in their present positions, we might not be able to replace them easily
or at all. If any of our senior executives and other key employees joins a competitor or forms a competing company, we may lose
advertisers, suppliers, key professionals and staff members. Each of our executive officers and other key employees has entered
into an employment agreement with us which contains non-competition provisions. However, if any dispute arises between any of our
executive officers and other key employees and us, we cannot assure you the extent to which any of these agreements could be enforced
in China, where most of these executive officers and other key employees reside, in light of the uncertainties with China’s
legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system
could limit the legal protections available to us or result in substantial costs and the diversion of resources and management
attention.”
Failure to
maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures could
have a material and adverse effect on the trading price of our ADSs.
We are subject to reporting obligations under
the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted
rules requiring every public company to include a management report on such company’s internal control over financial reporting
in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal
control over financial reporting. In addition, an independent registered public accounting firm must attest to the effectiveness
of the company’s internal control over financial reporting. SEC rules also require every public company to include a management
report containing management’s assessment of the effectiveness of such company’s disclosure controls and procedures
in its annual report.
Our management has concluded that we
had not maintained effective internal control over financial reporting and disclosure controls and procedures as of December
31, 2016 due to the material weaknesses identified by our independent registered public accounting firm during the audit of
our internal control over financial reporting as of December 31, 2016. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a
timely basis. The material weaknesses relate to the weak operating effectiveness and lack of monitoring of controls over
financial reporting due to inadequate resources or resources with insufficient experience or training in our financial
reporting and internal control team and adminstration team including information technology department. See “Item 15. Controls
and Procedures.” Any failure to achieve and maintain effective internal control over financial reporting could
negatively affect the reliability of our financial information and reduce investors’ confidence in our reported
financial information, which in turn could result in lawsuits being filed against us by our shareholders, otherwise harm our
reputation or negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will
continue to incur considerable costs and use significant management time and other resources in an effort to comply with
Section 404 of the Sarbanes-Oxley Act and other requirements of the Sarbanes-Oxley Act.
We may need
additional capital which, if obtained, could result in dilution or significant debt service obligations. We may not be able to
obtain additional capital on commercially reasonable terms, which could adversely affect our liquidity and financial position.
We may require additional cash resources due
to changed business conditions or other future developments, especially given our investment in our new Wi-Fi business. If our
current resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or
obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution
to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating
and financing covenants that would restrict our operations and liquidity.
In addition, our ability to obtain additional
capital on acceptable terms is subject to a variety of uncertainties, including:
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investors’ perception of, and demand for, securities of alternative advertising media companies;
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conditions of the market;
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our future results of operations, financial condition and cash flows; and
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PRC governmental regulation of foreign investment in advertising services companies in China.
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We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on favorable terms could have
a material adverse effect on our liquidity and financial condition.
Compliance
with PRC laws and regulations may be difficult and could be costly, and failure to comply could subject us to government sanctions.
As an advertising service provider, we are
obligated under PRC laws and regulations to monitor the advertising content shown on our network for compliance with applicable
law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders
to cease dissemination of the offending advertisements and orders to publish advertisements correcting the misleading information.
In case of serious violations, the PRC authorities may revoke our license for advertising business operations. In general, the
advertisements shown on our network have previously been broadcast over public television networks and have been subjected to internal
review and verification by such networks, but we are still required to independently review and verify these advertisements for
content compliance before displaying them. In addition, if a special government review is required for certain product advertisements
before they are shown to the public, we are required to confirm that such review has been performed and approval obtained. For
advertising content related to certain types of products and services, such as food products, alcohol, cosmetics, pharmaceuticals
and medical procedures, we are required to confirm that the advertisers have obtained requisite government approvals, including
review of operating qualifications, proof of quality inspection of the advertised products, government pre-approval of the contents
of the advertisement and filing with local authorities.
We endeavor to comply with such requirements
through means such as requesting relevant documents from the advertisers. However, we cannot assure you that each advertisement
that an advertiser provides to us and which we include in our network programs is in full compliance with all relevant PRC advertising
laws and regulations or that such supporting documentation and government approvals provided to us are complete. Although we employ
qualified advertising inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations,
the content standards in the PRC are less certain and less clear than those in more developed countries such as the United States
and we cannot assure you that we will always be able to properly review all advertising content to comply with the PRC standards
imposed on us with certainty.
In addition, although we use our best efforts
to comply with all relevant laws and regulations and to obtain all necessary certificates, registrations and approvals for our
business, due to the complexity of local laws and regulations across China governing outdoor media advertising platforms, there
can be no assurance that we will be able to obtain or maintain all necessary approvals. For example, our Wi-Fi business might be
regarded as value-added telecommunication service. To provide this type of services, we are required to obtain the relevant telecommunication
license from the communication authorities. As a result, we cannot assure you that we will be able to obtain the necessary license
soon, if at all, to provide Wi-Fi service. Any delay or failure in obtaining such approvals or licenses could materially and adversely
affect our results of operations.
We may be
subject to, and may expend significant resources in defending against government actions and civil suits based on the content we
provide through our advertising network.
Because of the nature and content of the information
displayed on our network, civil claims may be filed against us for fraud, defamation, subversion, negligence, copyright or trademark
infringement or other violations. Offensive and objectionable content and legal standards for defamation and fraud in China are
less defined than in other more developed countries and we may not be able to properly screen out unlawful content. If consumers
find the content displayed on our network to be offensive, the relevant airlines, gas stations, railway bureaus and long-haul bus
companies may seek to hold us responsible for any consumer claims or may terminate their relationships with us.
In addition, if the security of our content
management system is breached and unauthorized images, text or audio sounds are displayed on our network, viewers or the PRC government
may find these images, text or audio sounds to be offensive, which may subject us to civil liability or government censure despite
our efforts to ensure the security of our content management system. Any such event may also damage our reputation. If our advertising
viewers do not believe our content is reliable or accurate, our business model may become less appealing to viewers in China and
our advertisers may be less willing to place advertisements on our network.
We may be
subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined
adversely against us, may materially and adversely affect our business.
Our commercial success depends to a large extent
on our ability to operate without infringing the intellectual property rights of third parties. We cannot assure you that our displays
or other aspects of our business do not or will not infringe patents, copyrights or other intellectual property rights held by
third parties. We may become subject to legal proceedings and claims from time to time relating to the intellectual property of
others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we
may be enjoined from using such intellectual property, incur licensing fees or be forced to develop alternatives. In addition,
we may incur substantial expenses and diversion of management time in defending against these third-party infringement claims,
regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities,
which may materially and adversely affect our business.
We face risks
related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be materially and adversely
affected by natural disasters or the outbreak of health epidemic. Any such occurrences could cause severe disruption to our daily
operations, and may even require a temporary closure of our facilities. In August 2014, a strong earthquake hit part of Yunnan
province in south, and resulted 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 were to occur in the future affecting Beijing
or another city where we have major operations in China, our operations could be materially and adversely affected due to loss
of personnel and damages to property. In addition, any outbreak of avian flu, severe acute respiratory syndrome (SARS), influenza
A (H1N1), H7N9, Ebola, 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 services. Such closures could severely disrupt our business operations and adversely affect our results of operations.
These occurrences could reduce air and train traveling in China and adversely affect the results of operations of our related business.
RISKS RELATED TO OUR
CORPORATE STRUCTURE
If the PRC
government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental
restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our business could
be materially and adversely affected.
Substantially all of our operations are conducted
through contractual arrangements with our consolidated VIEs in China: AirMedia Online Network Technology Co., Ltd. or AM Online,
Beijing AirMedia Shengshi Advertising Co., Ltd. (previously known as Beijing Shengshi Lianhe Advertising Co., Ltd.), or AirMedia
Shengshi, Beijing AirMedia Jiaming Advertising Co., Ltd. (formerly known as Beijing AirMedia UC Advertising Co., Ltd.), or Jiaming
Advertising, and Beijing Yuehang Digital Media Advertising Co., Ltd., or AM Yuehang. Although the Foreign-invested Advertising
Enterprise Management Regulations, or the Foreign-invested Advertising Regulations, which became effective on October 1, 2008,
currently permit 100% foreign ownership of companies that provide advertising services, subject to approval by relevant PRC government
authorities, these regulations also require any foreign entities that establish a wholly owned advertising company must have at
least three years of direct operations in the advertising industry outside of China. In addition, the Foreign Investment Industrial
Guidance Catalogue (revised in 2015), which became effective on April 10, 2015, stated that television program production and operation
companies fall into the category of a prohibited foreign investment industry. We believe that these regulations apply to our business
and are therefore carrying out the portions of our business that involve the production of non-advertising content through our
VIEs. Our wholly owned Hong Kong subsidiary AirMedia (China) Limited, or AM China, the 100% shareholder of our three wholly foreign
owned subsidiaries in China, has been operating an advertising business in Hong Kong since 2008, and thus it is allowed to directly
invest in advertising business in China. In December 2014, we transferred 100% equity interest in Shenzhen AirMedia Information
Technology Co., Ltd., or Shenzhen AM, to AM China to provide advertising services in China directly. In July 2015, Shenzhen AM
obtained the approval to include advertising in its scope of business. We therefore intent to gradually shift our advertising business
to Shenzhen AM to gradually reduce our reliance on the current VIE structure in terms of our advertising business. Our advertising
business is currently primarily provided through our contractual arrangements with certain of our consolidated VIEs in China. These
entities directly operate our air advertising network, enter into concession rights contracts related to our air advertising network
and sell advertising time slots and locations to our advertisers. In addition, under current PRC regulations, a foreign entity
is prohibited from owning more than 50% of any PRC entity that provides value-added telecommunication services, and Wi-Fi services
might be regarded as value-added telecommunication business. As a result, we enter into concession rights contracts related to
our Wi-Fi business via AM Online, which is expected to directly operate this business. We have contractual arrangements with these
VIEs pursuant to which we, through AirMedia Technology (Beijing) Co., Ltd., or AM Technology, provide technical support and consulting
services and other services to these entities. We also have agreements with our VIEs and each of their individual shareholders
(except Yi Zhang) that provide us with the substantial ability to control these entities. For a description of these contractual
arrangements, see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.”
In January 2016, we, through the nominee shareholders
of the respective VIEs, transferred 3.5% equity interest in each of AM Online, AirMedia Shengshi and Jiaming Advertising to Yi
Zhang. Yi Zhang is an unrelated third party minority shareholder of those VIEs and did not enter into the same VIE arrangements
with us as did the other nominee shareholders. We therefore cannot exert the same level of control over the 3.5% interests of the
VIEs owned by Yi Zhang.
Some of our VIE arrangements with AirMedia
Shengshi and Jiaming Advertising may expire on June 13, 2027 if any party thereto sends a no-extension notice to the other at least
twenty (20) days in advance. Although we believe we can renew those agreements with the VIEs and their shareholders at that time,
if we fail to do so, our control over such VIEs might be adversely affected.
In the opinion of Commerce & Finance Law
Offices, our PRC counsel, except as described in this annual report, the VIE arrangements between AM Technology and our consolidated
VIEs, as described in this annual report, do not violate PRC law and are valid, binding and legally enforceable. However, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of the VIEs were
to reduce their interest in us, their interests may diverge from ours and that may potentially increase the risk that they would
seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to
do so.
Our ability to control the VIEs also depends
on the power of attorney AM Technology has to vote on all matters requiring shareholder approval in the VIEs. As noted above, we
believe this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the PRC government were to
find that the VIE arrangements do not comply with PRC governmental restrictions on foreign investment in the advertising industry
and in the operating of non-advertising content, or if the legal structure and contractual arrangements were found to be in violation
of any other existing PRC laws and regulations, the PRC government could:
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revoke the business and operating licenses of the our PRC subsidiaries and affiliates;
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discontinue or restrict the our PRC subsidiaries’ and affiliates’ operations;
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impose conditions or requirements with which we or our PRC subsidiaries and affiliates may not
be able to comply; or
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require us or our PRC subsidiaries and affiliates to restructure the relevant ownership structure
or operations.
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While we do not believe that any penalties
imposed or actions taken by the PRC government would result in the liquidation of us, AM Technology, or the VIEs, the imposition
of any of these penalties may result in a material and adverse effect on our ability to conduct the our business. In addition,
if the imposition of any of these penalties causes us to lose the power to direct the activities of the VIEs (and VIEs’ subsidiaries)
that most significantly impact the VIEs (and VIEs’ subsidiaries) economic performance or the right to receive substantially
all of the benefits from the VIEs (and VIEs’ subsidiaries), we would no longer be able to consolidate the VIEs (and VIEs’
subsidiaries).
In January 2015, the Ministry of Commerce of
the PRC, or the MOFCOM, released for public comments a proposed PRC law regarding foreign invested enterprises, or the Draft FIE
Law, which includes VIEs within the scope of entities that could be considered to be foreign invested enterprises, or FIEs, and
may be subject to restrictions under existing PRC law on foreign investment in certain categories of industries. Specifically,
the Draft FIE Law introduces the concept of “actual control” for determining whether an entity is considered to be
an FIE. In addition to control through direct or indirect equity ownership, the Draft FIE Law includes control through contractual
arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress
of the PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could
be construed to reach our VIE arrangements, and our VIEs might be found as controlled by foreign investors. As a result, our VIEs
could become explicitly subject to the current restrictions on foreign investment in certain categories of industry. The Draft
FIE Law includes provisions that would exempt from the definition of FIEs certain entities where the ultimate controlling shareholders
are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent as to what type of
enforcement action might be taken against existing VIEs that operate in restricted or prohibited industries and are not controlled
by entities organized under PRC law or individuals who are PRC citizens. If the contractual arrangements establishing our VIE structure
are found to be in violation of any existing law and regulations or future PRC laws and regulations or under the Draft FIE Law
if it becomes effective, the relevant PRC government authorities will have broad discretion in dealing with such violation, including,
without limitation, levying fines, confiscating our income or the income of our affiliated Chinese entities, revoking our business
licenses or the business licenses of our affiliated Chinese entities, requiring us and our affiliated Chinese entities to restructure
our ownership structure or operations and requiring us or our affiliated Chinese entities to discontinue any portion or all of
our value-added telecommunications, air-ticketing, travel agency or advertising businesses. Any of these actions could cause significant
disruption to our business operations, and have a severe adverse impact on our cash flows, financial position and operating performance.
If the imposing of these penalties causes us to lose our rights to direct the activities of and receive economic benefits from
our VIEs, which in turn may restrict our ability to consolidate and reflect in our financial statements the financial position
and results of operations of our VIEs.
Because some
of the shareholders of our VIEs in China are our directors and officers, their fiduciary duties to us may conflict with their respective
roles in the VIEs, and their interest may not be aligned with the interests of our unaffiliated public security holders. If any
of the shareholders of our VIEs fails to act in the best interests of our company or our shareholders, our business and results
of operations may be materially and adversely affected.
Certain of our directors and officers are shareholders
in the VIEs, AM Online, AirMedia Shengshi, Jiaming Advertising, and AM Yuehang. Mr. Herman Man Guo, our chairman and chief executive
officer, in addition to holding 15.3% in our company, also directly and indirectly holds approximately 77.2% of AM Online, 77.1%
of AirMedia Shengshi and 1.00% of Jiaming Advertising. Mr. Qing Xu, our director and executive president, in addition to holding
1.3% of our company, also directly and indirectly holds approximately 14.5% of AM Online, 19.44% of AirMedia Shengshi and 0.21%
of Jiaming Advertising. In addition, Mr. Guo and Mr. Xu are each a director of Jiaming Advertising, AirMedia Shengshi and AM Advertising,
Mr. Guo is the legal representative of each of AirMedia Shengshi and Jiaming Advertising and Mr. Xu is the sole director and legal
representative of AM Yuehang and the legal representative of AirMedia Online. For these directors and officers, their fiduciary
duties toward our company under Cayman law—to act honestly, in good faith and with a view to our best interests—may
conflict with their roles in the VIEs, as what is in the best interest of the VIEs may not be in the best interests of our company
or the unaffiliated public shareholders of our company.
Currently, we do not have agreements in place
that solely target to resolve conflicts of interest arising between our company and the VIEs and their operations. In addition,
we have not appointed a separate fiduciary—one without potential conflicts of interest—to serve as the fiduciary of
the public unaffiliated security holders of our company. Although our independent directors or disinterested officers may take
measures to prevent the parties with dual roles from making decisions that may favor themselves as shareholders of the VIEs, we
cannot assure you that these measures would be effective in all instances. If the parties with dual roles do find ways to make
and carry out decisions on our behalf that are detrimental to our interest, our business and results of operations may be materially
and adversely affected.
Certain provisions in the contractual agreements
between AM Technology and our VIEs do impose limits on the rights of the shareholders of the VIEs. For example, each of the individual
shareholders of the VIEs (except Yi Zhang) has signed an irrevocable power of attorney authorizing the person designated by AM
Technology to exercise its rights as shareholder, including the voting rights, the right to enter into legal documents and the
right to transfer its equity interest in the VIEs. However, we cannot assure you that when conflicts of interest arise that each
of our VIEs and its respective shareholders will act completely in our interests or that conflicts of interests will be resolved
in our favor, or that the above contractual provisions would be sufficient protection for us in the event that shareholders of
the VIEs fail to perform under their contracts with AM Technology. In any such event, we would have to rely on legal remedies under
PRC law, which may not be effective. See “—We rely on contractual arrangements with our consolidated variable interest
entities and their shareholders for a substantial portion of our China operations, which may not be as effective as direct ownership
in providing operational control” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Contractual Arrangements.”
We rely on
contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of our
China operations, which may not be as effective as direct ownership in providing operational control.
We rely on contractual arrangements with AM
Online, AirMedia Shengshi, Jiaming Advertising and AM Yuehang to operate our Wi-Fi and air advertising business. For a description
of these arrangements, see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7.
Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements.” These
contractual arrangements may not be as effective as direct ownership in providing control over our VIEs. Under these contractual
arrangements, if our VIEs or their shareholders fail to perform their respective obligations, we may have to incur substantial
costs and resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance
or injunctive relief and claiming damages, and we may not be successful.
Many of these contractual arrangements are
governed by PRC law and provide for disputes to be resolved through arbitration or litigation in the PRC. 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, which may make it difficult to exert effective control
over our VIEs, and our ability to conduct our business may be negatively affected.
We have not
registered the pledge of equity interest by certain shareholder of our consolidated affiliated entities with the relevant authority,
and we may not be able to enforce the equity pledge against any third parties who acquire the equity interests in good faith in
the relevant consolidated affiliated entities before the pledge is registered.
Except for Yi Zhang, who acquired 3.5% minority
equity interest in each of AM Online, AirMedia Shengshi and Jiaming Advertising in January 2016, the individual shareholders of
our VIEs, each a consolidated affiliated entity of ours, have pledged all of their equity interests, including the right to receive
declared dividends, in the relevant VIEs to AM Technology, our wholly-owned subsidiary. An equity pledge agreement becomes effective
among the parties upon execution, but according to the PRC Property Rights Law, an equity pledge is not perfected as a security
property right unless it is registered with the relevant local administration for industry and commerce. We have not yet registered
the share pledges by shareholders of AM Online, AirMedia Shengshi and Jiaming Advertising. As the registration of these pledges
has not yet been completed so far, the pledges, as property rights, have not yet become effective under the PRC Property Rights
Law. Before the registration procedures are completed, we cannot assure you that the effectiveness of these pledges will be recognized
by PRC courts if disputes arise with respect to certain pledged equity interests or that AM Technology’s interests as pledgee
will prevail over those of third parties. AM Technology may not be able to successfully enforce these pledges against any third
parties who have acquired property right interests in good faith in the equity interests in AM Online, AirMedia Shengshi and Jiaming
Advertising. As a result, if AM Online, AirMedia Shengshi or Jiaming Advertising breaches their respective obligations under the
various agreements described above, and there are third parties who have acquired equity interests in good faith, AM Technology
would need to resort to legal proceedings to enforce its contractual rights under the equity pledge agreements, or the underlying
agreements secured by the pledges. We do not have agreements that pledge the assets of the VIEs and their respective subsidiaries
for the benefit of us or our wholly owned subsidiaries.
Contractual
arrangements we have entered into among our subsidiaries and variable interest entities may be subject to scrutiny by the PRC tax
authorities and a finding that we owe additional taxes could substantially increase our taxes owed and reduce our net income and
the value of your investment.
Under PRC law, arrangements and transactions
among related parties may be audited or challenged by the PRC tax authorities. If any transactions we have entered into among AM
Technology and our VIEs are found not to be on an arm’s length basis, or to result in an unreasonable reduction in tax under
PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective
PRC entities and assess late payment interest and penalties. A finding by the PRC tax authorities that we are ineligible for the
tax savings we achieved would substantially increase our taxes owed and reduce our net income and the value of your investment.
We may rely
principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash and
financing requirements we may have, and any limitation on the ability of our operating subsidiaries to pay dividends to us could
have a material adverse effect on our ability to conduct our business.
We are a holding company, and we may rely principally
on dividends and other distributions on equity paid by AM Technology, Shenzhen AM and Xi’an AM for our cash requirements,
including the funds necessary to service any debt we may incur. If AM Technology, Shenzhen AM or Xi’an AM incurs debt on
its own behalf in the future, the instruments governing the debt may restrict the ability of these entities to pay dividends or
make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual
arrangements AM Technology currently has in place with our VIEs in a manner that would materially and adversely affect AM Technology’s
ability to pay dividends and other distributions to us.
Furthermore, relevant PRC laws and regulations
permit payments of dividends by AM Technology, Shenzhen AM and Xi’an AM only out of their accumulated profits, if any, as
determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, AM Technology, Shenzhen
AM and Xi’an AirMedia Chuangyi Technology Co., Ltd., or Xi’an AM, are also required to set aside at least 10% of after-tax
income based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reaches
50% of their respective registered capital.
The registered capital of AM Technology, Shenzhen
AM and Xi’an AM is $45.0 million, $96.4 million (approximately RMB700 million) and $50.0 million, respectively. Xi’an
AM has made the applicable annual appropriations required under PRC law. AM Technology and Shenzhen AM are not currently required
to fund any statutory surplus reserve because AM Technology incurred loss this year and Shenzhen AM still has accumulated losses.
Any direct or indirect limitation on the ability of our PRC subsidiaries to distribute dividends and other distributions to us
could materially and adversely limit our ability to make investments or acquisitions at the holding company level, pay dividends
or otherwise fund and conduct our business.
Although none of AM Technology, Shenzhen AM
or Xi’an AM has any present plan to pay any cash dividends to us in the foreseeable future, any limitation on the ability
of AM Technology, Shenzhen AM or Xi’an AM to pay dividends or make other distributions to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, or otherwise fund and conduct
our business.
RISKS RELATED TO DOING
BUSINESS IN CHINA
Adverse changes
in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth
of China, which could reduce the demand for our services and have a material adverse effect on our competitive position.
Substantially all of our assets are located
in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition,
results of operations and prospects are affected significantly by China’s economic, political and legal developments. The
Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement
and the level and growth rate of economic development.
While the Chinese economy has experienced significant
growth in the past decades, growth has been uneven both geographically and among various sectors of the economy, and the rate of
growth has been slowing. The PRC government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures may benefit the overall Chinese economy, but may also have a negative effect on us. We cannot
predict the future direction of political or economic reforms or the effects such measures may have on our business, financial
position or results of operations. Any adverse change in the political or economic conditions in China, including changes in the
policies of the PRC government or in laws and regulations in China, could have a material adverse effect on the overall economic
growth of China and the industries in which we operate. Such developments could have a material adverse effect on our business,
lead to a reduction in demand for our services and materially and adversely affect our competitive position.
Uncertainties
with respect to the PRC legal system could limit the legal protections available to us or result in substantial costs and the diversion
of resources and management attention.
We conduct our business primarily through AM
Technology, Shenzhen AM and Xi’an AM, which are subject to PRC laws and regulations applicable to foreign investment in China
and, in particular, laws applicable to wholly-foreign owned companies. The PRC legal system is based on written statutes. Prior
court decisions may be cited for reference but have limited precedential value. PRC legislation and regulations afford significant
protections to various forms of foreign investments in China, but since these laws and regulations are relatively new and the PRC
legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and the
enforcement of these laws, regulations and rules involve uncertainties, which may limit the legal protections available to us.
In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources and management
attention.
Fluctuations
in the value of the Renminbi may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar
and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange
policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008
and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict
how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
The reporting and functional currency of our
Cayman Islands parent company is the U.S. dollar. However, substantially all of the revenues and expenses of our consolidated operating
subsidiaries and affiliate entities are denominated in Renminbi. Substantially all of our sales contracts are denominated in Renminbi
and substantially all of our costs and expenses are denominated in Renminbi. To the extent that we need to convert U.S. dollars
into Renminbi for our operations, depreciation 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 dividend
distribution or for other business purposes, depreciation of the U.S. dollar against the Renminbi would have a negative effect
on the U.S. dollar amount available to us. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we
make in the future.
Very limited hedging transactions 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 so that we may not be able to successfully hedge our
exposure 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.
Restrictions
on currency exchange may limit our ability to receive and use our revenues or financing effectively.
Substantially all of our revenues and expenses
are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet our foreign currency
obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs. Under
China’s existing foreign exchange regulations, AM Technology, Shenzhen AM and Xi’an AM are able to pay dividends in
foreign currencies, without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government will not take measures in the future to restrict
access to foreign currencies for current account transactions.
Foreign exchange transactions by our subsidiaries
and VIEs in China under capital accounts continue to be subject to significant foreign exchange controls and require the approval
of, or registration with, PRC governmental authorities. In particular, if we or other foreign lenders make foreign currency loans
to our subsidiaries or VIEs in China, these loans must be registered with the SAFE, and if we finance them by means of additional
capital contributions, these capital contributions must be approved by or registered with certain government authorities including
the SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of our subsidiaries
in China to exchange the foreign currencies obtained through debt or equity financing, and could affect our business and financial
condition.
On August 29, 2008, SAFE promulgated the Circular
on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign
currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB
capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used within the purpose
within the business scope approved by the applicable government authority and unless otherwise provided by law, such RMB capital
may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the
RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not
be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On November 16, 2011, SAFE
promulgated the Circular of the State Administration of Foreign Exchange on Issues Relating to Further Clarification and Regulation
of Certain Capital Account Items under Foreign Exchange Control (“Circular 45”) to further strengthen and clarify its
existing regulations on foreign exchange control under SAFE Circular 142. Circular 45 expressly prohibits foreign invested entities,
including wholly foreign owned enterprises such as AM Technology, from converting registered capital in foreign exchange into RMB
for the purpose of equity investment, granting certain loans, repayment of inter-company loans, and repayment of bank loans which
have been transferred to a third party. Further, Circular 45 generally prohibits a foreign invested entity from converting registered
capital in foreign exchange into RMB for the payment of various types of cash deposits. If our VIEs require financial support from
us or our wholly foreign-owned enterprises in the future and we find it necessary to use foreign currency-denominated capital to
provide such financial support, our ability to fund the VIEs’ operations will be subject to statutory limits and restrictions,
including those described above.
Circular 45 was abolished by SAFE on March
19, 2015 according to a Circular on Promulgating the Abolishment and Invalidation of 50 Foreign Exchange-related Regulatory Documents.
On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement
of Foreign-invested Enterprises, or SAFE Circular 19, which will take effect on June 1, 2015 and will replace SAFE Circular 142.
SAFE Circular 19 allows foreign-invested enterprises to settle 100% of their foreign exchange capitals on a discretionary basis
and allows ordinary foreign-invested enterprises to make domestic equity investments by capital transfer in the original currencies,
or with the amount obtained from foreign exchange settlement, subject to complying with certain requirements. According to SAFE
Circular 19, the RMB funds obtained by foreign-invested enterprises from the discretionary settlement of foreign exchange capitals
shall be managed under the accounts pending for foreign exchange settlement payment, and foreign-invested enterprise shall not
use its capital and the RMB funds obtained from foreign exchange settlement for the purposes within the following negative list:
for expenditure beyond its business scope or expenditure prohibited by laws and regulations, for investments in securities, unless
otherwise prescribed by laws and regulations, for disbursing RMB entrusted loans (unless it is within its business scope), for
repaying inter-corporate borrowings (including third-party advances) and repaying RMB bank loans that have been sub-lent to third
parties, or for expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real estate enterprise.
PRC regulations
relating to the establishment of offshore special purpose companies by PRC residents and registration requirements for employee
stock ownership plans or share option plans may subject our PRC resident beneficial owners or the plan participants to personal
liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their
registered capital or distribute profits to us, or may otherwise adversely affect us.
Regulations promulgated by the SAFE require
PRC residents and PRC corporate entities to register with local branches of the SAFE in connection with their direct or indirect
offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore
acquisitions that we make in the future.
On February 15, 2012, the SAFE promulgated
the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in an Employee
Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, “Application Procedure of Foreign
Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed
Company” promulgated on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens
who participate in a share incentive plan of an overseas publicly listed company are required to register with SAFE and complete
certain other procedures. All such participants need to retain a PRC agent through a PRC subsidiary to register with SAFE and handle
foreign exchange matters such as opening accounts, transferring and settlement of the relevant proceeds. The New Share Incentive
Rule further requires that an offshore agent should also be designated to handle matters in connection with the exercise or sale
of share options and proceeds transferring for the share incentive plan participants.
We and our PRC employees who have been granted
stock options are subject to the New Share Incentive Rule. We are in the process of completing the registration and procedures
which the New Share Incentive Rule requires, but the application documents are subject to the review and approval of SAFE, and
we can make no assurance as to when the registration and procedures could be completed. If we or our PRC employees fail to comply
with the New Share Incentive Rule, we and/or our PRC employees may face sanctions imposed by the foreign exchange authority or
any other PRC government authorities.
In addition, the State Administration of Taxation,
or SAT, has issued a few circulars concerning employee stock options. Under these circulars, our employees working in China who
exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related
to employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their
stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities
or any other PRC government authorities.
Under the SAFE regulations, PRC residents who
make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments.
In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update the
registration with the local branch of the SAFE, with respect to that offshore company, any material change involving its round-trip
investment and capital variation. The PRC subsidiaries of that offshore company are required to urge the PRC resident shareholders
to make such updates. If any PRC shareholder fails to make the required SAFE registration or file or update the registration, the
PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited
from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions, such as restrictions
on distributing dividend to our offshore entities or monetary penalties against us. We cannot assure you that all of our shareholders
who are PRC residents will make or obtain any applicable registrations or approvals required by these SAFE regulations. The failure
or inability of our PRC resident shareholders to comply with these SAFE registration procedures may subject us to fines and legal
sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends
to or obtain foreign-exchange-dominated loans from our company.
As it is uncertain how the SAFE regulations
will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy.
For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such
as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and
financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of
such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect
our business and prospects.
Certain measures promulgated by the People’s
Bank of China on foreign exchange for individuals set forth the respective requirements for foreign exchange transactions by PRC
individuals under either the current account or the capital account. Implementing rules for these measures were promulgated by
the SAFE which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s
participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. The SAFE also
promulgated rules under which PRC citizens who are granted stock options by an overseas publicly-listed company are required, through
a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with the SAFE and complete certain other procedures.
We and our PRC employees who have been granted stock options are subject to these rules, and we are in the process of completing
the required registration and procedures, but the application documents are subject to the review and approval of SAFE, and we
can make no assurance as to when the registration and procedures could be completed. If we or our PRC optionees fail to comply
with these regulations, we or our PRC optionees may be subject to fines and legal sanctions. See “Item 4. Information on
the Company—B. Business Overview—Regulation— SAFE Regulations on Offshore Investment by PRC Residents and Employee
Stock Options.”
The M&A
Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue
growth through acquisitions.
The PRC Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the M&A Rule, sets forth complex procedures and requirements that could make
merger and acquisition activities by foreign investors more time-consuming and complex. Part of our growth strategy includes acquiring
complementary businesses or assets. Complying with the requirements of the M&A Rule to complete such transactions could be
time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit
the completion of such transactions, which could affect our ability to expand our business or maintain our market share. In addition,
if any of our acquisitions were subject to the M&A Rule and were found not to be in compliance with the requirements of the
M&A Rule in the future, relevant PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit
our operating privileges in the PRC, or take other actions that could materially and adversely affect our business and results
of operations.
Changes in
laws and regulations governing air travel advertising or otherwise affecting our business in China may result in substantial costs
and diversion of resources and may materially and adversely affect our business and results of operations.
There are no existing PRC laws or regulations
that specifically define or regulate air travel advertising. Changes in existing laws and regulations or the implementation of
new laws and regulations governing the content of air travel advertising and our business licenses or otherwise affecting our business
in China may result in substantial costs and diversion of resources and may materially and adversely affect our business prospects
and results of operations.
The enforcement
of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of operations.
The Labor Contract Law, which came into effect
January 1, 2008 and was amended on July 1, 2013, established more restrictions and increased costs for employers to dismiss employees
under certain circumstances, including specific provisions relating to fixed-term employment contracts, non-fixed-term employment
contracts, task-based employment, part-time employment, probation, consultation with the labor union and employee representative’s
council, employment without a contract, dismissal of employees, compensation upon termination and for overtime work, and collective
bargaining. Under the Labor Contract Law, unless otherwise provided by law, an employer is obligated to sign a labor contract with
a non-fixed term with an employee, if the employer continues to hire the employee after the expiration of two consecutive fixed-term
labor contracts, or if the employee has worked for the employer for 10 consecutive years. Severance pay is required if a labor
contract expires and is not renewed because of the employer’s refusal to renew or seeking to renew with less favorable terms.
In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who
have served more than one year for an employer are entitled to a paid vacation for five to 15 days, depending on the employee’s
number of years of employment. Employees who waive such vacation at the request of employers are entitled to compensation that
equals to three times their regular daily salary for each waived vacation day. As a result of these new labor protection measures,
our labor costs are expected to increase, which may adversely affect our business and our results of operations. It is also possible
that the PRC government may enact additional labor-related legislations in the future, which would further increase our labor costs
and affect our operations.
We have limited
insurance coverage in China, and any business disruption or litigation we experience may result in our incurring substantial costs
and the diversion of resources.
Insurance companies in China offer limited
business insurance products and do not, to our knowledge, offer business liability insurance. While business disruption insurance
is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties
associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As
a result, except for our liability insurance for directors and officers, we do not have any business liability, disruption or litigation
insurance coverage for our operations in China. Any business disruption or litigation may result in our incurring substantial costs
and the diversion of resources.
We may have
claims and lawsuits against us that may result in material adverse outcomes.
We have been and will be possibly subject to
a variety of claims and lawsuits. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial
Information—Legal Proceedings.” This litigation and other claims that may be made against us from time to time are
subject to inherent uncertainties. Adverse outcomes in one or more of those claims may result in significant monetary damages or
injunctive relief that could adversely affect our ability to conduct our business. A material adverse impact on our financial statements
also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.
If one or
more of our PRC subsidiaries fails to maintain or obtain qualifications to receive PRC preferential tax treatments, we will be
required to pay more taxes, which may have a material adverse effect on our result of operations.
The EIT Law, which became effective on January
1, 2008, imposes a uniform income tax rate of 25% on most domestic enterprises and foreign investment enterprises. Under this law,
entities that qualify as “high and new technology enterprises strongly supported by the state,” or HNTE, are entitled
to the preferential EIT rate of 15%. A company’s status as a HNTE is valid for three years, after which the company must
re-apply for such qualification in order to continue to enjoy the preferential EIT rate. In addition, according to relevant guidelines,
“new software enterprises” can enjoy an income tax exemption for two years beginning with their first profitable year
and a 50% tax reduction to a rate of 12.5% for the subsequent three years.
One of our PRC subsidiaries, AM Technology,
was recognized as a HNTE under the new rules and therefore, it is entitled to enjoy a preferential EIT rate of 15%. It was also
eligible for a 50% tax reduction from 2009 to 2010 under the applicable tax laws and regulations that were in effect before January
1, 2008, the date the EIT Law came into effect. As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and 2010.
In September 2011, AM Technology received the HNTE certificate, and in October 2014, AM Technology successfully renewed its HNTE
status and obtained the renewed certificate issued by the competent governmental authority. As a result, AM Technology is expected
to be subject to an EIT rate of 15% until 2016 as long as it maintains its HNTE status.
Xi’an AirMedia Chuangyi Technology Co.,
Ltd., one of our PRC subsidiaries, or Xi’an AM, qualified as a “software enterprise” in August 2008 by the Technology
Information Bureau of Shaanxi Province and has received a written approval from Xi’an local tax bureau that it is granted
a two-year exemption from EIT commencing on its first profitable year and a 50% reduction of the 25% EIT rate for the succeeding
three years. As Xi’an AM first made profit in 2009, it was exempted from EIT in 2009 and 2010, and enjoyed the preferential
income tax rate of 12.5% from 2011 to 2013. Xi’an AM received the HNTE certificate jointly issued by the competent governmental
authorities in Shaanxi Province in September 2014. As such, Xi’an AM is expected to enjoy a preferential income tax rate
of 15% from 2014 to 2016 as long as it maintains its HNTE status.
Shenzhen AirMedia Information Technology Co.,
Ltd., one of our PRC subsidiaries, or Shenzhen AM, was subject to a 15% preferential EIT rate in 2007 as it is located in Shenzhen
and then was subject to EIT on its taxable income from 2008 at the gradual rate as set out in Notice of the State Council Concerning
Implementation of Transitional Rules for Enterprise Income Tax Incentives, or “Circular 39.” Since Shenzhen AM is also
qualified as a “manufacturing foreign-invested enterprise” incorporated prior to the effectiveness of the EIT Law,
it is further entitled to a two-year exemption from EIT for the years 2008 and 2009 and preferential rates of 11%, 12% and 12.5%
for the years 2010, 2011 and 2012, respectively. Shenzhen AM is subject to EIT at a rate of 25% from 2013 afterwards.
Hainan Jinhui Guangming Media Advertising Co.,
Ltd., or Hainan Jinhui, one of our VIEs’ PRC subsidiaries, is subject to EIT on the taxable income at the gradual rate, which
was 22% in 2010, 24% in 2011, 25% in 2012 as set out in Circular 39. Hainan Jinhui is subject to EIT at a rate of 25% in 2013 and
thereafter.
We cannot assure you that our PRC subsidiaries
will be able to maintain or obtain qualifications to receive the above preferential tax treatments; we will be required to pay
more taxes if they fail to become or continue to be eligible to receive PRC tax benefits, which may materially and adversely affect
our business and results of operations.
Dividends
payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation
on our worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax
law.
Under the EIT Law and related regulations,
dividends payable by a foreign-invested enterprise in China to its foreign investors who are non-resident enterprises are subject
to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that
provides for a different withholding arrangement. The British Virgin Islands, or BVI, where Broad Cosmos Enterprises Ltd., or Broad
Cosmos, our wholly-owned subsidiary, is incorporated, does not have such a tax treaty with AM China, the 100% shareholder of AM
Technology, Shenzhen AM and Xi’an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative
Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income between China and Hong Kong and the relevant rules,
dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding
tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). However,
under recently implemented PRC regulations, now our Hong Kong subsidiary must obtain approval from the competent local branch of
the State Administration of Taxation in accordance with the double-taxation agreement among the PRC and Hong Kong in order to enjoy
the 5% preferential withholding tax rate. In February 2009, the State Administration of Taxation issued Notice No. 81. According
to Notice No. 81, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial
owner” of the relevant dividend income, and no enterprise is entitled to enjoy preferential treatment pursuant to any tax
treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose
of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable
tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction
or arrangement. In October 2009, the State Administration of Taxation issued another notice on this matter, or Notice No. 601,
to provide guidance on the criteria to determine whether an enterprise qualifies as the “beneficial owner” of the PRC
sourced income for the purpose of obtaining preferential treatment under tax treaties. Pursuant to Notice No. 601, the PRC tax
authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form”
principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities
and own and have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company
will not be regarded as a beneficial owner of such income. Since the two notices were issued, it has remained unclear how the PRC
tax authorities will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends
distributed by our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong
subsidiary is a conduit company and does not qualify as the “beneficial owner” of the dividend income it receives from
our PRC subsidiaries, the higher 10% withholding tax rate may apply to such dividends.
Under the EIT Law and EIT Implementation Rules,
an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a PRC resident
enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The EIT Implementation Rules define the term “de
facto management bodies” as “establishments that carry out substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The SAT issued the Notice
Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis
of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining
whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located in China.
In addition, the SAT issued a bulletin on July
27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date to be September 1, 2011. The
bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent
tax authorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a
resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced
dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both SAT Circular 82
and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not to those that, like our company, are controlled
by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification made in the bulletin
may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining
the tax residency status of offshore enterprises and the administration measures that should be implemented, regardless of whether
they are controlled by PRC enterprises or PRC individuals.
After consulting with our PRC counsel, we do
not believe that our holding company and other overseas subsidiaries should be deemed PRC resident enterprises as, among other
things, certain of our company’s key assets and records, including register of members, board resolutions and shareholder
resolutions, are located and maintained outside of the PRC, and we also hold our board and board committee meetings outside of
the PRC from time to time. However, we have been advised by our PRC counsel, Commerce & Finance Law Offices, that because there
remains uncertainty regarding the interpretation and implementation of the EIT Law and EIT Implementation Rules, it is uncertain
whether we will be deemed a PRC resident enterprise. If the PRC authorities were to subsequently determine, or any further regulations
provide, that we should be treated as a PRC resident enterprise, we would be subject to a 25% EIT on our global income. To the
extent our holding company earns income outside of China, a 25% EIT on our global income may increase our tax burden and could
adversely affect our financial condition and results of operations.
If we are regarded as a PRC resident enterprise,
dividends distributed from our PRC subsidiaries to us could be exempt from the PRC dividend withholding tax, since such income
is exempt under the EIT Law and the EIT Implementation Rules to the extent such dividends are deemed “dividends among qualified
PRC resident enterprises.” If we are considered a resident enterprise for enterprise income tax purposes, dividends we pay
with respect to our ADSs or ordinary shares may be considered income derived from sources within the PRC and subject to PRC withholding
tax of 10%. In addition, non-PRC shareholders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs
or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC shareholders would
be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event that we are considered as
a PRC resident enterprise.
With the 10% PRC dividend withholding tax,
we will incur an incremental PRC tax cost when we distribute our PRC profits to our ultimate shareholders if we are deemed not
to be a PRC resident enterprise. On the other hand, if we are determined to be a PRC resident enterprise under the EIT Law and
receive income other than dividends, our profitability and cash flow would be adversely impacted due to our worldwide income being
taxed in China under the EIT Law.
Moreover, under the EIT Law, foreign ADS holders
may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs
or ordinary shares, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC.
Although we are incorporated in the Cayman Islands, it is unclear whether the dividends payable by us or the gains our foreign
ADS holders may realize on disposition will be regarded as income from sources within the PRC if we are classified as a PRC resident
enterprise. Any such tax on our dividend payments will reduce the returns of your investment.
Enhanced scrutiny
over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in
the future.
In connection with the PRC Enterprise Income
Tax Law, or the EIT Law, the Ministry of Finance and the State Administration of Taxation jointly issued, on April 30, 2009, the
Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December
10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident
Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008.
By promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect
transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
On February 3, 2015, the SAT issued the Announcement
on Several Issues concerning the Enterprise Income Tax on Indirect Transfers of Properties by Non-Resident Enterprises, or Public
Notice 7, to supersede tax rules in relation to the Indirect Transfer of Shares under the original SAT Circular 698, while the
other provisions of SAT Circular 698 remain in force. Public Notice 7 covers transactions involving not only Indirect Transfer
of Shares as set forth under SAT Circular 698 but also transactions involving an overseas company’s indirect transfer of
other property or assets (such as real properties) located in China (collectively, ‘‘PRC Taxable Properties’’)
through transfer of shares of an offshore intermediary company. Pursuant to Public Notice 7, in the event that non-residential
enterprises indirectly transfer PRC Taxable Properties without reasonable commercial purposes in order to evade PRC enterprise
income tax, such indirect transfer will be deemed as direct transfer of PRC Taxable Properties and, therefore, be subject to PRC
enterprise income tax. In addition, Public Notice 7 provides clearer criteria on how to assess reasonable commercial purposes and
allows for safe harbor scenarios applicable to internal group restructurings. Under Public Notice 7, subject to certain exceptions
such as internal group restructurings and purchase and sale of shares of the same publicly-listed oversea enterprise in a public
securities market, an indirect transfer of PRC Taxable Properties shall be directly deemed as having no reasonable commercial purposes
if the following circumstances are satisfied: (i) more than 75% of the value of overseas enterprises’ shares directly or
indirectly comes from PRC Taxable Properties; (ii) at any time within one year before the indirect transfer of PRC Taxable Properties,
more than 90% the total amount of overseas enterprises’ assets (excluding cash) are directly or indirectly constituted by
their investment within the PRC, or within one year before the indirect transfer of PRC Taxable Properties, more than 90% of the
overseas enterprises’ income directly or indirectly derive from the PRC; (iii) the overseas enterprises and their controlling
enterprises, which directly or indirectly hold PRC Taxable Properties, cannot justify the economic substance of the corporate structure;
and (iv) overseas tax payment regarding indirect transfer of PRC Taxable Properties is lower than PRC tax payment regarding direct
transfer of PRC Taxable Properties. Public Notice 7 also brings uncertainties to the offshore transferor and transferee of the
indirect transfer of PRC Taxable Properties as they have to make self-assessment on whether the transaction should be subject to
PRC tax and to file or withhold the PRC tax accordingly. As a result, where non-resident investors were involved in our private
equity financing or share transfer of our company between two or more offshore parties, if such transactions were determined by
the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed
under SAT Circular 698 and Public Notice 7 and may be required to expend valuable resources to comply with SAT Circular 698 and
Public Notice 7 or to establish that we should not be taxed under SAT Circular 698 and Public Notice 7, which may have an adverse
effect on our financial condition and results of operations.
The PRC tax authorities have the discretion
under Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity
interests transferred and the cost of investment. We may pursue acquisitions in the future that may involve complex corporate structures.
If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments
to the taxable income of the transactions under SAT Circular 59, SAT Circular 698 or Public Notice 7, our income tax costs associated
with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of
operations.
If we become
directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation
and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Occasionally, U.S. public companies that have
substantially all of their operations in China, particularly companies which have completed so-called reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in many cases, allegations of fraud. For example, in December 2012, the SEC initiated administrative
proceedings against the China affiliates of the Big Four public accounting firms for allegedly refusing to produce audit work papers
and other documents related to certain China-based companies under investigation by the SEC for potential accounting fraud against
U.S. investors. Although the firms reached a settlement with the SEC and although we were not and are not subject to any ongoing
SEC investigations, many U.S. listed Chinese companies are now subject to, or may become subject to, shareholder lawsuits and SEC
enforcement actions and are conducting internal and external investigations into the allegations. As a result of this proceeding
and the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply
decreased in value and, in some cases, has become virtually worthless. It is not clear what effect this sector-wide scrutiny, criticism
and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing
our company.
Our prior
audit reports are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you
are deprived of the benefits of such inspection.
Deloitte
Touche Tohmatsu Certified Public Accountants LLP (DTT), which acted as our independent registered public accounting firm up
to March 3, 2017, issued audit reports included in our prior annual reports filed with the United States Securities and
Exchange Commission. Auditors of companies that are traded publicly in the United States and a firm registered with the
Public Company Accounting Oversight Board (United States), or the PCAOB, are required by the laws of the United States to
undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional
standards. Because DTT is located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable
to conduct inspections without the approval of the Chinese authorities, they are not currently inspected by the
PCAOB.
Inspections of other
firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality
control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB
inspections in China prevents the PCAOB from regularly evaluating DTT’s audits and its quality control procedures. As a
result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of
DTT’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements
issued by DTT.
If additional
remedial measures are imposed on the “Big Four” PRC-based accounting firms, including DTT, our previous independent
registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific
criteria set by the SEC, with respect to requests for the production of documents, investors’ confidence in our reported
financial information and the price of our ADSs could be adversely affected.
Starting in 2011, the Chinese affiliates of
the “big four” accounting firms, including DTT, our previous independent registered public accounting firm, were affected
by a conflict between the United States’ and Chinese laws. Specifically, for certain U.S. listed companies operating and
audited in mainland China, the SEC and the PCAOB sought to obtain from these Chinese accounting firms access to their audit work
papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly
to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be
channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012, this impasse led the SEC to commence
administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the
Chinese accounting firms, including DTT. A first instance trial of the proceedings in July 2013 in the SEC’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 such proposed penalties 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 will receive matching Section 106 requests, and are required to abide by a detailed
set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they
fail to meet the specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms,
depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month
bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme
cases, the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to not be in compliance with the requirements of the Exchange Act and possible delisting. Moreover, any negative news about any
such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies
and the market price of our ADSs may be adversely affected.
RISKS RELATED TO THE
MARKET FOR OUR ADSs
There can
be no assurance that the proposed going-private transaction will continue to be pursued, approved by our shareholders or successfully
consummated. Potential uncertainty involving the proposed going private transaction may adversely affect our business and the market
price of our ADSs.
On June 19, 2015, Mr. Herman Man Guo submitted
to the board of directors of the Company a preliminary non-binding proposal letter (the “Proposal Letter”) to acquire
the Company in a going private transaction for $3.00 in cash per Share (or $6.00 in cash per ADS) other than any ordinary shares
or ADSs of the Company beneficially held by Mr. Herman Man Guo, his affiliates or other management shareholders who may choose
to roll over their Shares in connection with the proposed acquisition (the “Proposal”). The proposed purchase price
represents a premium of approximately 70.5% to the closing trading price of our ADS on June 18, 2015, the last trading day prior
to the date of the going-private proposal. Our board of directors formed a special committee consisting of three independent directors,
Messrs. Conor Chia-hung Yang (to serve as chairman of the committee), Shichong Shan and Songzuo Xiang, to consider the Proposal.
On September 28, 2015, the Company
entered into a definitive agreement and plan of merger (the “Merger Agreement”) with AirMedia Holdings Ltd.
(“Parent”) and AirMedia Merger Company Limited, a wholly owned subsidiary of Parent, pursuant to which Parent
will acquire the Company for US$3.00 per Share (or US$6.00 per ADS). Under the terms of the Merger Agreement, either the
Company or Parent could terminate the Merger Agreement if the merger contemplated by the Merger Agreement has not been
completed by the date of June 28, 2016. On June 27, 2016, the parties entered into Amendment No. 1 to the
Merger Agreement to extend this termination date to December 31, 2016. On December 19, 2016, the parties entered into
Amendment No. 2 to the Merger Agreement to further extend the termination date to June 30, 2017. The special committee
received a proposed amendment to the Merger Agreement from the buyer group, comprised of Mr. Guo, Ms. Dan Shao and
Mr. Qing Xu, on May 23, 2017 to (a) acquire all of the outstanding shares not already owned by the buyer group for
US$4.00 per ADS or US$2.00 per ordinary share in cash, and (b) extend the Termination Date to December 31, 2017. The special
committee is evaluating the proposed amendment with the assistance of its financial and legal advisors. On June 28, 2017,
the parties entered into Amendment No. 3 to the Merger Agreement to further extend the termination date to July 31, 2017 so
as to give the special committee sufficient time to consider the proposed amendment.
There can be no assurance that this going private
transaction will continue to be pursued, approved by sufficient affirmative vote or consummated. The going private transaction,
whether or not pursued or consummated, presents a risk of diverting management focus, employee attention and resources from other
strategic opportunities and from operational matters.
If the buyers
of our equity interest in AM Advertising exercise their respective revocation rights and require us to repurchase the equity interest
sold or if we need to compensate the buyers as earnout, our business and financial results may experience material adverse effect.
In June 2015, we entered into an equity interest
transfer agreement with Beijing Longde Wenchuang Investment Fund Management Co., Ltd. to sell 75% equity interest of AM Advertising
for RMB2.1 billion in cash. In November 2015, Beijing Longde Wenchuang Investment Fund Management Co., Ltd. assigned and transferred
its rights and obligations under the equity interest transfer agreement relating to 46.43% equity interest of AM Advertising to
Beijing Cultural Center Construction and Development Fund (Limited Partnership). We have completed the equity interest transfer
and have received the payments for the transfer. However, under that equity interest transfer agreement, the buyers may require
us to repurchase the 75% equity interest upon the occurrence of certain events. In addition, the agreement’s earnout provisions
will continue to apply until all profit targets have been achieved. See “Item 4. Information on the Company—A. History
and Development of the Company.” As of the date of this annual report, we have not received any notice from any buyer that
any such events had occurred which might trigger the repurchase provisions of the agreement. However, if the buyers
become entitled to exercise the revocation right and demand us to repurchase the equity interest, we will need to reverse the transaction
and pay the buyers applicable damages. In addition, if we fail to meet the profit targets, we, as a shareholder of AM Advertising,
may be required to transfer our equity interest in AM Advertising to the buyers for nil consideration or provide other forms of
compensation. In those events, we may not be able to successfully implement our strategy to exit the airport advertising market
and we may experience significant disruption to our business in order to re-integrate our sold business. Our financial position
may also be materially and adversely affected.
The trading
price of our ADSs has been and may continue to be volatile.
The trading price of our ADSs has been and
may continue to be subject to wide fluctuations. During the year of 2016, the trading prices of our ADSs on the NASDAQ Global Select
Market ranged from $2.38 to $5.71 per ADS. The price of our ADSs may fluctuate in response to a number of events and factors including,
changes in the economic performance or market valuations of other advertising companies, conditions in the air travel advertising
industry and the sales or perceived potential sales of additional ordinary shares or ADSs.
In addition, the securities market has from
time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies.
These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Additional sales of our ordinary shares in
the public market, or the perception that these sales could occur, could also cause the market price of our ADSs to decline.
We have been
named as a defendant in a putative shareholder class action lawsuit that could have a material adverse impact on our business,
financial condition, results of operation, cash flows and reputation.
We will have to defend against the putative
shareholder class action lawsuit described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial
Information—Legal Proceedings,” including any appeals of such lawsuits should our initial defense be unsuccessful.
We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these
lawsuits. In the event that our initial defense of these lawsuits is unsuccessful, there can be no assurance that we will prevail
in any appeal. Any adverse outcome of these cases, including any plaintiff’s appeal of a judgment in these lawsuits, could
have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition,
there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may
arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s
attention from the day-to-day operations of our company, all of which could harm our business. 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
or financial results.
You may not
have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise
your right to vote.
Except as described in this annual report and
in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our
ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise
the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the
depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties,
will not have the opportunity to exercise a right to vote.
Your right
to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive
cash dividends if it is impractical to make them available to you.
We may from time to time distribute rights
to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United
States unless we register both the rights and the securities to which the rights relate under the U.S. Securities Act of 1933,
as amended, or the Securities Act, or an exemption from the registration requirements is available. Under the deposit agreement,
the depositary bank will not make rights available to you unless both the rights and the underlying securities to be distributed
to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under
no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration
statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities
Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The depositary of our ADSs has agreed to pay
to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your
ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution
available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property
through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary
may decide not to distribute such property to you.
You may be
subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of
the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in
connection with the performance of its duties.
In addition, the depositary may refuse to deliver,
transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we
or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under
any provision of the deposit agreement, or for any other reason.
You may face
difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited,
because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and most of our directors
and officers reside outside the United States.
We are incorporated in the Cayman Islands,
and conduct substantially all of our operations in China through our subsidiaries and VIEs. Most of our directors and officers
reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result,
it may be difficult for you to effect service of process within the United States and bring an action against us or against these
individuals in a U.S. court if you believe that your rights have been infringed under the securities laws or otherwise. Even if
you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce
a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands
of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and
enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our memorandum
and articles of association, as amended and restated from time to time, and by the Companies Law (2016 Revision) and common law
of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders
and the fiduciary duties of our directors are to a large extent governed by the common law of the Cayman Islands. The rights of
our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would
be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities
laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may
not have standing to initiate a shareholder derivative action in U.S. federal courts.
As a result, our public shareholders may have
more difficulty in protecting their interests through actions against us, our management, our directors or our controlling shareholders
than shareholders of a corporation incorporated in a jurisdiction in the United States.
Our memorandum
and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary
shares and ADSs.
We have included certain provisions in our
memorandum and articles of association that could limit the ability of others to acquire control of our company and deprive our
shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties
from seeking to obtain control of our company in a tender offer or similar transactions. The following provisions in our articles
may have the effect of delaying or preventing a change of control of our company:
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Our board of directors has the authority to establish from time to time one or more series of preferred
shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights
of that series, including the designation of the series, the number of shares of the series, the dividend rights, dividend rates,
conversion rights, voting rights, and the rights and terms of redemption and liquidation preferences.
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Subject to applicable regulatory requirements, our board of directors may issue additional ordinary
shares or rights to acquire ordinary shares without action by our shareholders to the extent of available authorized but unissued
shares.
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Our corporate
actions are substantially controlled by our principal shareholders who could exert significant influence over important corporate
matters, which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.
Certain principal shareholders hold a substantial
percentage of the outstanding shares of our company. For example, as of May 31, 2017, our principal shareholder, Mr. Herman Man
Guo, along with his wife, Ms. Dan Shao, beneficially owned approximately 31.9% of our outstanding ordinary shares. Mr. Guo and
other principal shareholders of our company could exert substantial influence over matters such as electing directors and approving
material mergers, acquisitions or other business combination transactions. This concentration of ownership may also discourage,
delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity
to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be
taken even if they are opposed by our other shareholders.
We are a “foreign
private issuer,” and have disclosure obligations that are different from those of U.S. domestic reporting companies so you
should not expect to receive the same information about us at the same time as a U.S. domestic reporting company may provide.
We are a foreign private issuer and, as a result,
we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required
by the SEC or the federal securities laws to issue quarterly reports or proxy statements with the SEC. We are required to file
our annual report within four months of our fiscal year end. We are not required to disclose certain detailed information regarding
executive compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required
to report equity holdings under Section 16 of the Securities Act. We are also exempt from the requirements of Regulation FD (Fair
Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an
issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as
Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different from those required
by other U.S. domestic reporting companies, our shareholders should not expect to receive information about us in the same amount
and at the same time as information is received from, or provided by, other U.S. domestic reporting companies. We are liable for
violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations of these rules
could affect our business, results of operations and financial condition.
We believe
we were a passive foreign investment company for our taxable year ended December 31, 2016, which could subject United States investors
in the ADSs or ordinary shares to significant adverse United States income tax consequences.
Based on the market price of our ADSs and composition
of our assets ( in particular the retention of a substantial amount of cash), we believe that we were a “passive foreign
investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxable year ended December 31,
2016, and we will likely be a PFIC for our current taxable year ending December 31, 2017 unless the market price of our ADSs increases
and/or we invest a substantial amount of cash and other passive assets we hold in assets that produce or are held for the production
of non-passive income. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) 75% or more of its gross
income for such year consists of certain types of “passive” income or (2) 50% or more of the average quarterly value
of its assets (as generally determined on the basis of fair market value) during such year produce or are held for the production
of passive income.
If we were to be classified as a PFIC in any
taxable year, a U.S. Holder (as defined in Item 10. Additional Information—E. —Taxation—United States Federal
Income Taxation) may incur significantly increased United States income tax on gain recognized on the sale or other disposition
of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution
is treated as an “excess distribution” under the U.S. federal income tax rules. Furthermore, a U.S. Holder will generally
be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding period in which
we become a PFIC and subsequent taxable years even if, we, in fact, cease to be a PFIC in subsequent taxable years. Accordingly,
a U.S. Holder of our ADSs or ordinary shares is urged to consult its tax advisor concerning the U.S. federal income tax consequences
of an investment in our ADSs or ordinary shares, including the possibility of making a “mark-to-market” election. For
more information, see “Item 10. Additional Information – E. Taxation – United States Federal Income Taxation”.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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We were incorporated in the Cayman Islands
on April 12, 2007 and conducted our operations in China through our subsidiaries, consolidated VIEs and the VIEs’ subsidiaries.
We commenced operations in August 2005 in China through AirMedia Shengshi, a consolidated variable interest entity of our principal
subsidiary, AM Technology. Later, we established additional PRC consolidated VIEs to conduct our operations in China. Substantially
all of our current operations are conducted through contractual arrangements with these VIEs.
On November 7, 2007, we listed our ADSs on
the Nasdaq Global Market under the symbol “AMCN”. We and certain of our then shareholders completed the initial public
offering of 17,250,000 ADSs, representing 34,500,000 of our ordinary shares, on November 13, 2007. Our ADSs were subsequently transferred
to the NASDAQ Global Select Market.
During 2014 and 2015, we dissolved certain
non-operating holding entities, including Glorious Star Investment Limited, Dominant City Ltd. and Easy Shop Limited.
In 2015, we sold all equity interest of Jinsheng
Advertising, the operating entity of our TV-attached digital frames business. In connection with such equity interest transfer,
we have transferred all relevant assets, liabilities and managerial duties related to the TV-attached digital frames to Jinsheng
Advertising with net carrying value of $1.1 million. In 2015, we also divested our digital TV screens in airports and did not renew
the relevant concession right contracts as they expired. As a result, we ceased our operation of the business line of digital TV
screens in airports.
In June 2015, we entered into a definitive
agreement with Beijing Longde Wenchuang Investment Fund Management Co., Ltd. to sell 75% equity interest of AirMedia Group Co.,
Ltd., or AM Advertising, for a consideration of RMB2.1 billion in cash. In November 2015, Beijing Longde Wenchuang Investment Fund
Management Co., Ltd. assigned and transferred its rights and obligations under the equity interest transfer agreement relating
to 46.43% equity interest of AM Advertising to Beijing Cultural Center Construction and Development Fund (Limited Partnership).
As part of the transaction, we effected an internal business reorganization and transferred all our media business in airports
(excluding digital TV screens in airports and TV-attached digital frames) and all billboard and LED media business outside of airports
(excluding gas station media network and digital TV screens on airplanes) to AM Advertising to form the target business to be sold
(the “Disposed Business”) and transferred our other business out of AM Advertising. To effectuate the sale, we removed
the VIE structure with respect to AM Advertising. The change in the equity ownership of AM Advertising was registered with the
local branch of the State Administration for Industry and Commerce, or the SAIC, in December 2015. We now hold 20.2% equity interest
in AM Advertising and has ceased to consolidate the results of AM Advertising. The buyers may require the Company to repurchase
the equity interest of AM Advertising upon the occurrence of any of the following events:
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the audited net profit (before or after adjustment for non-recurring gains and losses, whichever
is less) in relation to the Target Business is less than RMB150 million in 2015;
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eighty per cent of the concession right contracts (as calculated based on the contract subject
amount) with respect to the Target Business in the area of the Beijing Capital Airport effective as of the date of the equity interest
transfer agreement which were entered into by AirMedia Advertising, AirMedia and any of its subsidiaries and/or VIE companies (as
set forth in detail in Schedule 6 hereto) are not renewed with AirMedia Advertising as a party to the contract upon the expiration
of the respective contracts; and
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the internal restructuring as required under the equity interest transfer agreement has not been
fully completed by June 30, 2016.
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In addition, the agreement’s earnout
provisions will continue to apply until all profit targets are achieved. In the event the adjusted net profit of AM Advertising
after the provided restructuring in 2015, 2016 and 2017 is less than the profit target provided for in the agreement, we, as a
shareholder of AM Advertising, will be obligated to compensate the buyers for the deficiency by nil-consideration equity interest
transfers or other means of compensation.
In April 2015, we established AM Online, a
variable interest entity of us, to operate the new Wi-Fi business.
In June 2015, Mr. Herman Man Guo submitted
to the board of directors of the Company a preliminary nonbinding proposal letter (the “Proposal Letter”) to acquire
the Company in a going private transaction for $3.00 in cash per Share (or $6.00 in cash per ADS) other than any ordinary shares
or ADSs beneficially held by Mr. Guo, his affiliates or other management shareholders who may choose to roll over their Shares
in connection with the proposed acquisition (the “Proposal”). The board of directors of the Company formed a special
committee comprised of three independent and disinterested directors, Messrs. Conor Chia-hung Yang, Shichong Shan and Songzuo
Xiang, to negotiate the Proposal with the buyer group. On September 28, 2015, the Company entered into a definitive agreement
and plan of merger (the “Merger Agreement”) with AirMedia Holdings Ltd. (“Parent”) and AirMedia Merger
Company Limited, a wholly owned subsidiary of Parent, pursuant to which Parent will acquire the Company for US$3.00 per Share
(or US$6.00 per ADS). Under the terms of the Merger Agreement, either the Company or Parent could terminate the Merger Agreement
if the merger contemplated by the Merger Agreement has not been completed by the date of June 28, 2016. On June 27,
2016, the parties entered into Amendment No. 1 to the Merger Agreement to extend this termination date to December 31, 2016.
On December 19, 2016, the parties entered into Amendment No. 2 to the Merger Agreement to further extend the termination
date to June 30, 2017. The special committee received a proposed amendment to the Merger Agreement from the buyer group, comprised
of Mr. Guo, Ms. Dan Shao and Mr. Qing Xu, on May 23, 2017 to (a) acquire all of the outstanding shares not already
owned by the buyer group for US$4.00 per ADS or US$2.00 per ordinary share in cash, and (b) extend the Termination Date to December
31, 2017. The special committee is evaluating the proposed amendment with the assistance of its financial and legal advisors.
On June 28, 2017, the parties entered into Amendment No. 3 to the Merger Agreement to further extend the termination date to
July 31, 2017 so as to give the special committee sufficient time to consider the proposed amendment.
In January 2017, we, through AM Online, established
Unicom AirMedia (Beijing) Network Co., Ltd., or Unicom AirMedia, jointly with Unicom Boardband Online Co., Ltd., a wholly owned
subsidiary of China Unicom, and Chengdu Haite Kairong Aeronautical Technology Co., Ltd., a wholly owned subsidiary of a listed
company providing aeronautical technical services. Pursuant to a capital contribution agreement entered into by the relevant parties,
AM Online invested an aggregate of RMB117.9 million in Unicom AirMedia. AM Online currently holds 39% of equity interests in Unicom
AirMedia, and can designate three directors to its seven-member board. We and the other two shareholders of Unicom AirMedia
intend to build global network for aeronautical communication and provide in-flight Internet and other value-added services through
this newly established company. We believe that our respective expertise and advantages in telecommunication and aeronautical technology
can be fully utilized under this joint venture.
Our principal executive offices are located
at 17/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027, People’s Republic of China. Our telephone
number at this address is +86-10-8438-6868 and our fax number is +86-10-8460-8658. Our registered office in the Cayman Islands
is at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
See “Item 5. Operating and Financial
Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures” for a discussion of our capital
expenditures.
General
We are an operator of out-of-home advertising
platforms in China targeting mid-to-high-end consumers as well as a first-mover in the travel Wi-Fi market. As of May 31, 2017,
we hold concession rights to install and operate Wi-Fi systems on trains administered by ten regional railway administrative bureaus
in China. We also hold concession rights to install and operate Wi-Fi systems on many long-haul buses in China. We are
working with major bus manufactures in China to pre-install our Wi-Fi systems on their new buses. In terms of in-flight
Wi-Fi, we have been in discussion with major Chinese airlines to obtain in-flight concession rights. With respect to our
air travel advertising business, as of May 31, 2017, we operated digital TV screens on airplanes operated by six airlines, including
Air China, China Eastern Airlines, China Southern Airlines, Shanghai Airlines, Hainan Airline and Xiamen Airlines. We also hold
concession rights to operate the advertising media platforms at Sinopec gas stations throughout China until 2020.
The digital TV screens on our network airplanes
are located in highly visible locations in passenger compartments and on the backs of passenger seats. We also provide in-flight
advertising and non-advertising contents. We enable our advertisers to target air travelers in China, whom we believe are an attractive
demographic for our advertisers because they generally have higher-than-average disposable income compared to the rest of China’s
population.
We combine advertising content with non-advertising
content, such as weather, sports and comedy clips, in our digital TV screen programs. We have contracts with many Chinese TV stations
such as Dragon TV, the Travel Channel and CCTV-5, to show video clips of their programs in airports and on airplanes. We also obtain
TV programs such as documentaries and “hidden camera” type reality shows from other third-party content providers.
In January 2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which
manages the internet TV business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast
network TV programs to air travelers in China. We believe non-advertising program content make air travelers more receptive to
the advertisements included in our programs and ultimately make our programs more effective for our advertisers. The length of
our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximately five to 15 minutes of
which consist of advertising content.
We derive revenues principally by selling advertising
time slots to our advertisers, including both direct advertisers and advertising agencies. In 2015 and 2016, we divested our business
lines of digital frames in airports, digital TV screens in airports, our traditional media in airports and most of our outdoor
media business.
Wi-Fi Business
We have obtained concession rights to install
and operate Wi-Fi systems on trains administered by ten regional railway bureaus in China. We also have concession rights
to install and operate Wi-Fi systems on many long-haul buses. We are in the process of installing tablet devices at
passenger seats on those trains and buses that will give each passenger access to free Wi-Fi as well as a broad range of entertainment
and information resources. We plan to place advertisements on our devices and charge advertising fees from our advertiser
or agent clients. We also plan to offer passengers with pay-as-you-see movies, TV shows, books, music and other contents.
We are in discussion with major Chinese airlines to jointly develop the in-flight Wi-Fi business.
Advertising
Network and Services
After our divestitures in 2015, we primarily
generate revenues from advertising services from the following platforms: digital TV screens on airplanes and gas station media
displays.
Digital TV Screens on Airplanes
As of May 31, 2017, our programs were placed
on digital TV screens on planes operated by six airlines in China. The displays on our network airplanes, which have been installed
by aircraft manufacturers, are located at the top of passenger compartments and on the back of passenger seats. The digital TV
screens at the top of passenger compartments typically range from 9 to 15 inches in size, while the display screens on the back
of passenger seats typically range from 7 to 9 inches in size. There are approximately 10 to 280 on an airplane. The TV system
installed on each plane differs from one another according to the requirements of each specific airline. For instance, if the airline
chooses to implement audio-video on demand, or AVOD, systems and personal TV, or PTV, systems, then it would have to install TV
screens on the back of each and every seat on the airplane.
Our airplane display programs are played once
for approximately 45 minutes to an hour per flight. Approximately 4.5 to 15 minutes of each program consist of advertising content
provided to us by our advertisers and the rest of the program consists of non-advertising content. The non-advertising content
on these planes includes travel shows, documentaries, sports and other content similar to that shown on our airport programs. We
also promote brand names of our advertisers through our programs by naming our programs after their brand names or displaying their
logos on the corner of the screens during the programs. We have obtained rights to play popular films on airplanes in our network.
As most of the airplanes on which our programs are played use video tape or DVD players to play video messages and most of these
airplanes only have one video tape or DVD player, passengers are not typically given a selection of channels and thus viewership
of our programs is generally high.
Gas Station Media Network
We hold concession rights to operate the advertising
media platforms at Sinopec gas stations throughout China until 2020. This network consists of outdoor advertising platforms strategically
placed in Sinopec gas stations where there is high visibility and significant waiting time. These outdoor advertising platforms
consist of LED screens as well as traditional advertising formats such as light boxes and billboards, and display advertising content
in week-long slots.
Our Sales
Contracts
Our digital TV screens sales contracts typically
fix the duration, time and frequency of advertisements. Our gas station advertising sales contracts also have fixed durations,
time and frequency of advertisements in general. We offer advertisers spaces on a weekly basis.
We have not yet entered into any substantial
advertising sales contracts in relation to our Wi-Fi business.
Payments under certain sales contracts are
subject to our advertisers’ receipt of monitoring reports which verify the proper display of the advertisements and payment
terms mutually agreed by both parties. We generally require our advertisers to submit advertising content at least 10 working days
for digital media and 14 working days for traditional media prior to the campaign start date, and reserve the right to refuse to
display advertisements not in compliance with content requirements under PRC laws and regulations.
Our Concession
Rights Contracts
Airlines
As of May 31, 2017, our programs were placed
on digital TV screens located on routes operated by the following airlines
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China Eastern Airlines;
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China Southern Airlines;
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As of May 31, 2017, we have concession rights
contracts with six Chinese airlines to place our programs on their planes. We also pay AM Advertising to use their concessions
to place our programs on three other network airlines. The amount of concession fees or concession use fees payable under these
contracts for 2017 is expected to be approximately RMB76 million. The scope of the exclusivity, however, varies from contract to
contract. Most of these exclusivity provisions limit the exclusivity to certain types of programs played on airplanes. Most of
the concession fees are fixed by escalation clauses under the relevant concession rights contracts, and their amounts vary by the
number of routes and airplanes, type of aircraft and the departure and destination cities.
Some of the concession rights contracts set
forth the number and model of airplanes on which our programs can be played. In 2013, in order to control our concession cost,
we changed our business cooperation model with Air China so that instead of holding the exclusive concession rights for Air China,
we now purchase advertising time and space slots from a third party with greater flexibility. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Business—A significant portion of our revenues has been derived from the five largest
airports and three largest airlines in China. If any of these airlines experiences a material business disruption or if there are
changes in our arrangements with these airlines, we may incur substantial losses of revenues.”
We hold 49% of the equity interests in a joint
venture, Beijing Eastern Media Corporation, Ltd., or BEMC. BEMC is formed in partnership with China Eastern Media Corporation,
Ltd., a subsidiary of China Eastern Group and China Eastern Airlines Corporation Limited operating the media resources of China
Eastern Group, which holds 51% equity interests in BEMC. BEMC obtained concession rights of certain media resources from its shareholders,
including the digital TV screens on airplanes of China Eastern Airlines, and paid concession fees to its shareholders as consideration.
We believe this innovative strategic partnership further strengthened our relationship with China Eastern Group and we renewed
our concession rights contract with China Eastern Airlines to operate digital TV screens on China Eastern Airlines on an exclusive
basis until December 31, 2020.
Gas Station Media
In April 2009, we entered into a concession
rights agreement with Sinopec under which we hold the right to exclusively operate all of the outdoor advertising media at Sinopec
gas stations throughout China until December 31, 2014, except for those stations in a limited number of cities whose media platforms
have previously been leased by Sinopec to third parties. In August 2013, we extended the concession period with Sinopec to December
31, 2020. For stations with existing media platform lease agreements with third parties, Sinopec will not renew the contracts with
third parties when the contracts expire, and will deliver these media platforms to us within a reasonable period. The minimal amount
of concession fees payable under these contracts for 2017 is RMB46 million.
Wi-Fi Services on Trains
As of May 31, 2017, we have entered into concession
rights contracts with authorized affiliates of Beijing, Shanghai, Jinan and Guangzhou railway administrative authorities to provide
Wi-Fi services on high speed trains administered by those authorities. Certain concession rights from Beijing, Shanghai, Jinan
and Guangzhou railway administrative authorities will expire in December 2020, March 2018, January 2018 and May 2017, respectively.
Upon contract expiration, we can extend our concession rights for three years contracts with the Beijing and Jinan authorities
in the absence of material breach of contract by us during the contract term. We may also enter into new agreements with Shanghai
and Guangzhou authorities to extend the concession rights period if we duly perform our obligations under those contracts.
As of May 31, 2017, we have entered into concession
rights contracts with authorized affiliates of Beijing, Shanghai, Jinan, Zhengzhou, Harbin, Hohhot, Nanchang, Nanning, Guangzhou
and Urumqi railway administrative authorities to provide Wi-Fi services on regular speed trains administered by those authorities.
Expiration dates of those concession rights range from August 2017 to November 2021 and are generally eligible for an extension
of three more years subject to the discretion of the relevant authorities.
The amount of concession fee payable under
these contracts for 2017 is approximately RMB52.4 million.
Wi-Fi Services on Long-Haul Buses
In April 2017, we had concession rights contracts
with long-haul bus operators in 11 cities to provide Wi-Fi services on approximately 650 buses under their operation. Concession
rights contracts with respect to approximately 130 buses have a five-year term. Concession rights contracts with respect to approximately
340 buses have a ten-year term. The rest of the contracts have a one-year or three-year term. Our concession rights under those
contracts are exclusive and none of those contracts contains an automatic renewal clause.
Advertisers,
Sales and Marketing
Our Advertisers
Our advertisers purchase advertising time slots
and locations on our advertising network either directly from us or through advertising agencies. Many advertisers negotiate the
terms of the advertising purchase agreements directly with us, however we also rely on advertising agencies for a significant portion
of our sales.
We have a broad base of international and domestic
advertisers in various industries. In each of 2014, 2015 and 2016, advisors from one industry, which is automobiles, accounted
for more than 10% of our total revenues from continuing operations. Automobile industry advertisers accounted for 21.8%, 12.8%
and 58.9% of our total revenues from continuing operations in 2014, 2015 and 2016, respectively. None of our customers accounted
for more than 10% of our total revenues for 2014, 2015 and 2016.
Sales and Marketing
We rely on our experienced sales team to assist
advertisers in structuring advertising campaigns by analyzing advertisers’ target audiences and the form and contents of
the advertisement they may be interested in, as well as consumer products and services. We conduct market research, consumer surveys,
demographic analysis and other advertising industry research for internal use to help our advertisers to create effective advertisements.
We also use third-party market research firms from time to time to obtain the relevant market study data, and at the same time
hire such research firms to evaluate the effects of our advertising, so as to evaluate the effectiveness of our network for our
advertisers and to illustrate to our advertisers our ability to reach targeted demographic groups effectively.
Our experienced advertising sales team is organized
by region and city with a presence in many cities in China. We provide in-house education and training to our sales force to ensure
they provide our current and prospective advertisers with comprehensive information about our services, the advantages of using
our advertising network as a marketing channel, and relevant information regarding the advertising industry. Our performance-linked
compensation structure and career-oriented training are key drivers that motivate our sales employees.
We actively attend various public relation
events to promote our brand image and the value of air travel digital advertising. We market our advertising services by displaying
our name and logo on all of our digital TV screens on airplanes and gas station LED screens and by placing advertisements on third-party
media from time to time, including China Central Television. We also engage third-party advertising agencies to help source advertisers.
Pricing
The listing prices of our air travel advertising
services depend on the passenger flow of each airport and airline, the needs of each airline, the number of time slots and display
locations purchased, the cost of the relevant media assets, our costs for the relevant concession rights, and competition. The
listing prices of our advertising network in Sinopec gas stations depend on economic conditions, GDP, average discretionary income,
average income levels and advertising trends in the cities in which the gas stations are located, taking into account the mainstream
media advertising pricing and costs (including local news stations, newspapers, bus stop light boxes and outdoor signs) in each
city as well as our own display equipment and resource costs for setting up such advertising network. Going forward, we intend
to review our listing prices periodically and make adjustments as necessary in light of market conditions.
Prices for advertisements on our network are
fixed under our sales contracts with advertisers or advertising agencies, typically at a discount to our listing prices.
Programming
Our digital TV screens on network airplanes
play programs ranging from 45 minutes to one hour once per flight. We compile each cycle from advertisements of 5-, 15- or 30-seconds
in length provided by advertisers to us and from non-advertising content generated by our VIEs in China or provided by third-party
content providers. We generally create a programming list on a weekly and monthly basis for programs played in airports and on
airplanes, respectively. We create this list by first fixing the schedule for advertising content according to the respective sales
contracts with our advertisers to guarantee the agreed duration, time and frequency of advertisements for each advertiser, then
adding the non-advertising content to achieve an optimal blend of advertising and non-advertising content.
Substantially all of the advertisements on
our network are provided by our advertisers. All of the advertising content displayed on our advertising network is reviewed by
us to ensure compliance with PRC laws and regulations. See “—Regulation—Regulation of Advertising Services—Advertising
Content.” We update advertising content for our programs played on digital TV screens on airplanes on a monthly basis. A
majority of the non-advertising content played on our network is provided by third-party content providers such as Dragon TV, the
Travel Channel and various satellite and cable television stations and television production companies. In January 2014, we entered
into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which manages the internet TV
business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to
air travelers in China.
Our programming team edits, compiles and records
into digital format for all of our network programs according to the programming list. Each programming list and pre-recorded program
is carefully reviewed to ensure the accuracy of the order, duration and frequency as well as the appropriateness of the programming
content.
Display Equipment
Supplies and Maintenance
The primary hardware required for the operation
of our air travel advertising network are the digital TV screens that we use in our media network. The majority of our digital
TV screens consist of plasma display panels and LCDs. Maintaining a steady supply of our display equipment is important to our
operations and the growth of our network. Our TV screen suppliers typically provide us with one-year warranties. Our service team
cleans, maintains and monitors our digital TV screens on airplanes regularly.
For our traditional media platforms in airports,
the primary hardware was already established when we purchased the traditional media from airports, and we do not incur significant
maintenance costs in relation to these platforms.
For our gas stations media network, the primary
hardware consist of basic display equipment that we install and maintain. In 2014, 2015 and 2016, 54, 57 and 45 suppliers, respectively,
together supplied a majority of our gas station display equipment. We employed a team of approximately 66 members as of December
31, 2016 to maintain the conditions of our gas station display equipment.
Customer Service
Our customer service team is responsible for
contacting third-party research firms to compile evaluation reports based on selective sampling of the status of advertising on
our network and providing advertisers with monthly monitoring reports once the relevant advertising campaign is launched on our
network. At the same time, we also provide our advertisers with monthly reports prepared by third parties that verify the proper
functioning of our displays and the proper dissemination of the advertisement when required by our advertisers; such reports are
done through online survey to analyze the effectiveness of and public reaction to the advertisements. In addition, our network
airports and airlines as well as gas stations are also actively involved in the monitoring process.
Competition
We compete primarily with several different
groups of competitors in the air travel advertising market:
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in-house advertising companies of airlines that may operate their own advertising networks; and
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traditional advertising media, such as newspapers, television, magazines and radio, some of which
may advertise in the airports and gas stations where we have operations.
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We compete for advertisers primarily on the
basis of location, price, program quality, range of services offered and brand recognition. See “Item 3. Key Information—D.
Risk Factors — Risks Related to Our Business — We face significant competition in the PRC advertising industry, and
if we do not compete successfully against new and existing competitors, we may lose our market share, and our profits may be reduced.”
Intellectual
Property
To protect our brand and other intellectual
property, we rely on a combination of trademark and trade secret laws as well as confidentiality agreements with our employees,
sales agents, contractors and others. We have registered 21 major trademarks and one patent in China, including “
“,
“
“, “
“ and “AIRMEDIA”. We cannot be certain that our efforts to protect our intellectual
property rights will be adequate or that third parties will not infringe or misappropriate these rights.
Regulation
We operate our business in China under a legal
regime consisting of the State Council, which is the highest authority of the executive branch of the National People’s Congress,
and several ministries and agencies under its authority including the SAIC.
China’s Advertising Law was promulgated
in 1994, and was revised in 2015. In addition, the State Council, SAIC and other ministries and agencies have issued regulations
that regulate our business, all of which are discussed below.
Limitations
on Foreign Ownership in the Advertising Industry
The Foreign Investment Industrial Guidance
Catalogue, and relevant provisions provide that foreign investment projects are divided into four categories: encouraged, permitted,
restricted and prohibited. The foreign investment projects that are encouraged, restricted and prohibited shall be listed in the
Foreign Investment Industrial Guidance Catalogue. The foreign investment projects that do not fall into the categories of encouraged,
restricted or prohibited projects are considered permitted foreign investment projects and are not listed in the Foreign Investment
Industrial Guidance Catalogue. Applicable regulations and approval requirements vary based on the different categories. Investments
in the PRC by foreign investors through wholly foreign-owned enterprises must be in compliance with the applicable regulations,
and such foreign investors must obtain governmental approvals as required by these regulations. Since the advertising industry
is not listed in the Foreign Investment Industrial Guidance Catalogue, it falls into the permitted foreign investment category.
Since December 10, 2005, foreign investors
have been permitted to directly own a 100% interest in advertising companies in China. PRC laws and regulations do not permit the
transfer of any approvals, licenses or permits, including business licenses containing a scope of business that permits engaging
in the advertising industry. In the event we are permitted to acquire the equity interests of our VIEs under the rules allowing
for complete foreign ownership, our VIEs would continue to hold the required advertising licenses consistent with current regulatory
requirements.
Currently, our advertising business is mainly
conducted through contractual arrangements with our consolidated VIEs in China, including AM Online, AirMedia Shengshi, Jiaming
Advertising and AM Yuehang.
Our VIEs are the major companies through which
we provide advertising services in China. Our subsidiary, AM Technology, has entered into a series of contractual arrangements
with our PRC operating affiliates and their respective subsidiaries and shareholders under which:
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we are able to exert effective control over our PRC operating affiliates and their respective subsidiaries;
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a substantial portion of the economic benefits of our PRC operating affiliates and their respective
subsidiaries could be transferred to us; and
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we have an exclusive option to purchase all of the equity interests in our PRC operating affiliates
(except for those owned by Yi Zhang) in each case when and to the extent permitted by PRC law.
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See “Item 4. Information on the Company—C.
Organizational Structure” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual
Arrangements.”
In the opinion of Commerce & Finance Law
Offices, our PRC legal counsel: except as described in this annual report, the respective ownership structures of AM Technology
and our consolidated VIEs do not violate existing PRC laws and regulations, and the contractual arrangements among AM Technology
and our consolidated VIEs, in each case governed by PRC law, are valid, binding and enforceable.
We have been advised by our PRC legal counsel,
however, that there are some 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 the SAIC (which regulates advertising
companies), will not in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised
by our PRC counsel that if the PRC government determines that the agreements establishing the structure for operating our PRC advertising
business do not comply with PRC government restrictions on foreign investment in the advertising industry, we could be subject
to certain penalties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If
the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC
governmental restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our
business could be materially and adversely affected.”
Regulation of Advertising Services
Business License for Advertising Companies
Under applicable regulations governing advertising
businesses in China, companies that engage in advertising activities must obtain from the SAIC or its local branches a business
license which specifically includes within its scope the operation of an advertising business. Companies conducting advertising
activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to
cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless
the license is suspended or revoked due to a violation of any relevant law or regulation. We do not expect to encounter any difficulties
in maintaining our business licenses. Each of our VIEs has obtained such a business license from the local branches of the SAIC
as required by existing PRC regulations.
Each of Shenzhen AM, AM Technology and Xi’an
AM has valid business license as of the date of this report. The business scope of these three entities as set forth in their business
licenses include the development of electronic, computer and media-related technologies and products and do not include advertising,
due to certain restrictions on foreign ownership of advertising enterprises under PRC law.
Advertising Content
PRC advertising laws and regulations set forth
certain content requirements for advertisements in China, which include prohibitions on, among other things, misleading content,
superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. The
dissemination of tobacco advertisements via media is also prohibited as well as the display of tobacco advertisements in public
areas. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products
or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition, all advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through any media, together
with any other advertisements subject to censorship by administrative authorities under relevant laws and administrative regulations,
must be submitted to the relevant administrative authorities for content approval prior to dissemination. We do not believe that
advertisements containing content subject to restriction or censorship comprise a material portion of the advertisements displayed
on our network.
Advertisers, advertising operators and advertising
distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare
or distribute are true and in full compliance with applicable law. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify
that the content of the advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements
for certain items which are subject to government censorship and approval, advertising distributors are obligated to ensure that
such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including
fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement
correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke
violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertising
distributors may be subject to civil liability if they infringe the legal rights and interests of third parties in the course of
their advertising business.
Outdoor Advertising
The PRC Advertising Law stipulates that the
exhibition and display of outdoor advertisements must not:
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utilize traffic safety facilities and traffic signs;
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impede the use of public facilities, traffic safety facilities and traffic signs;
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obstruct commercial and public activities or create an unpleasant sight in urban areas;
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be placed in restrictive areas near government offices, cultural landmarks or historical or scenic
sites; or
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be placed in areas prohibited by the local governments at or above county level from having outdoor
advertisements.
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In addition, according to a relevant SARFT
circular, displaying audio-video programs such as television news, films and television shows, sports, technology and entertainment
through public audio-video systems located in automobiles, buildings, airports, bus or train stations, shops, banks and hospitals
and other outdoor public systems must be approved by the SARFT. The relevant authority in China has not promulgated any implementation
rules on the procedure of applying for the requisite approval pursuant to the SARFT circular.
Regulations on Foreign Exchange
The principal regulation governing foreign
currency exchange in China is the Foreign Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB is freely
convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration
with, SAFE or its local counterparts (as the case may be) is obtained.
Pursuant to the Foreign Currency Administration
Rules, foreign invested enterprises, or FIEs, in China may purchase foreign currency without the approval of SAFE for trade and
service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain
foreign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition,
if a foreign company acquires a company in China, the acquired company will also become an FIE. However, the relevant PRC government
authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currencies in the future. They may also conduct
examination of past foreign exchange transactions. In addition, foreign exchange transactions for direct investment, loan and investment
in securities outside China are still subject to limitations and require approvals from, and/or registration with, SAFE.
Regulations on Dividend Distribution
Under applicable PRC regulations, wholly foreign-owned
companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards
and regulations. Additionally, these wholly foreign-owned companies are required to set aside at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve funds until their cumulative total reserve funds have reached 50%
of the companies’ registered capitals. At the discretion of these wholly foreign-owned companies, they may allocate a portion
of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare
and bonus funds are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital
purposes.
In addition, under the EIT Law, dividends generated
after January 1, 2008 and payable by a FIE in China to its foreign investors who are non-resident enterprises will be subject to
a 10% withholding tax unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides
for a different withholding arrangement. BVI, where Broad Cosmos, our wholly owned subsidiary, is incorporated, does not have such
a tax treaty with China. AM China, the 100% shareholder of AM Technology, Shenzhen AM and Xi’an AM, is incorporated in Hong
Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion
of Taxation on Income agreed between China and Hong Kong in August 2006, dividends paid by a foreign-invested enterprise in China
to its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign investor owns directly
at least 25% of the shares of the foreign-invested enterprise). In August 2015, the State Administration of Taxation released the
Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), which took effect on November 1,
2015. Under these measures, our Hong Kong subsidiary needs to obtain approval from the competent local branch of the State Administration
of Taxation in order to enjoy the preferential withholding tax rate of 5% in accordance with the Double Taxation Arrangement. In
February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the preferential
treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend
income, and no enterprise is entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies
for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential
tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines that
any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In October 2009,
the State Administration of Taxation issued another notice on this matter, or Notice No. 601, to provide guidance on the criteria
to determine whether an enterprise qualifies as the “beneficial owner” of the PRC sourced income for the purpose of
obtaining preferential treatment under tax treaties. Pursuant to Notice No. 601, the PRC tax authorities will review and grant
tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review. Notice
601 specifies that a beneficial owner should generally carry out substantial business activities and own and have control over
the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as
a beneficial owner of such income. Since the two notices were issued, it has remained unclear how the PRC tax authorities will
implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by
our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary is
a conduit company and does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries,
the higher 10% withholding tax rate may apply to such dividends.
The EIT Law provides, however, that dividends
distributed between qualified resident enterprises are exempted from the withholding tax. According to the Implementation Regulations
of the EIT Law, the qualified dividend and profit distribution from equity investment between resident enterprises shall refer
to investment income derived by a resident enterprise from its direct investment in other resident enterprises, except the investment
income from circulating stocks issued publicly by resident enterprises and traded on stock exchanges where the holding period is
less than 12 months. As the term “resident enterprises” needs further clarification and interpretation, we cannot assure
you that the dividends distributed by AM Technology, Shenzhen AM and Xi’an AM to their direct shareholders would be regarded
as dividends distributed between qualified resident enterprises and be exempted from the withholding tax.
Under the EIT Law and related regulations,
an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a PRC resident
enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The related regulations define the term “de
facto management bodies” as “establishments that carry out substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The SAT issued the Notice
Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis
of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining
whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located in China.
In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with
an effective date to be September 1, 2011. The bulletin provided clarification in the areas of resident status determination, post-determination
administration, as well as competent tax authorities. It also specifies that when provided with a copy of a Chinese tax resident
determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10%
income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated
enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not
to those that, like our company, are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and
administration clarification made in the bulletin may reflect the SAT’s general position on how the “de facto management
body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures
that should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
Moreover, under the EIT Law, if we are classified
as a PRC resident enterprise and such income is deemed to be sourced from within the PRC, foreign ADS holders may be subject to
a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares.
See “Item 3. Key Information —
D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-owned operating subsidiaries
may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income, and dividends distributed
to our investors may be subject to more PRC withholding taxes under the PRC tax law.”
SAFE Regulations on Offshore Investment
by PRC Residents and Employee Stock Options
In October 2005, the SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005. SAFE Notice
75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by the SAFE. On July 4, 2014,
SAFE issued the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in
Outbound Investment and Financing and Inbound Investment via Special Purpose Vehicles, or SAFE Circular 37, which has superseded
SAFE Circular 75. Under SAFE Circular 75, SAFE Circular 37 and other relevant foreign exchange regulations, PRC residents who make,
or have previously made, prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore
companies will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder
of an offshore company is also required to file or update the registration with the local branch of SAFE, with respect to that
offshore company for any material change involving its round-trip investment, capital variation, such as an increase or decrease
in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or the creation of any security interest.
If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiary
of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from injecting
additional capital into its PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements
described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
In December 2006, the People’s Bank of
China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting forth
the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital
account. In January 2007, the SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval
requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership
plans or stock option plans of an overseas publicly-listed company. On February 15, 2012, the SAFE promulgated the Circular on
Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in an Employee Share Incentive
Plan of an Overseas-Listed Company (which replaced the old Circular 78, “Application Procedure of Foreign Exchange Administration
for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company”
promulgated on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens who participate
in a share incentive plan of an overseas publicly listed company are required to register with SAFE and complete certain other
procedures. All such participants need to retain a PRC agent through a PRC subsidiary to register with SAFE and handle foreign
exchange matters such as opening accounts and transferring and settlement of the relevant proceeds. The New Share Incentive Rule
further requires that an offshore agent should also be designated to handle matters in connection with the exercise or sale of
share options and proceeds transferring for the share incentive plan participants.
We and our PRC employees who have been granted
stock options are subject to the New Share Incentive Rule. We are in the process of completing the required registration and the
procedures for the New Share Incentive Rule under PRC laws, but the application documents are subject to the review and approval
of the SAFE, and we can make no assurance as to when the registration and procedures will be completed. If we or our PRC employees
fail to comply with the New Share Incentive Rule, we and/or our PRC employees may face sanctions imposed by the foreign exchange
authority or any other PRC government authorities.
In addition, the State Administration of Taxation
has issued a few circulars concerning employee stock options. Under these circulars, our employees working in China who exercise
stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to
employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their
stock options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities
or any other PRC government authorities.
Seasonality
Our operating results and operating cash flows
historically have been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities
or new product introductions.
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C.
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Organizational Structure
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The following diagram illustrates our principal
subsidiaries, VIEs and VIEs’ subsidiaries as of May 31, 2017:
Notes:
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(1)
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AirMedia Online Network Technology Co., Ltd. is 77.2%, 14.5%, 4.8% and 3.5% owned by Herman Man
Guo, Qing Xu, Tao Hong and Yi Zhang, respectively.
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(2)
|
On December 15, 2016, AM Online and an individual signed concurrently
an equity transfer agreement and an entrusted equity holding agreement, pursuant to which AM Online transferred 100% equity interests
in Beijing Yuehang Digital Media Advertising Co., Ltd., or Beijing Yuehang, to the individual and entrusted the individual to act
as the nominee shareholder of the foregoing equity interests. The entrusted equity holding agreement terminates upon the earlier
of (i) two years from the date of the entrusted equity holding agreement or (ii) the transfer of all entrusted equity by AM Online
to AM Online itself or a third party designated by AM Online. AM Online as the actual investor in Beijing Yuehang continues to
hold actual shareholder rights and receive benefits from the investment in Beijing Yuehang.
|
|
(3)
|
Beijing AirMedia Jiaming Advertising Co., Ltd. is 1.0%, 0.2%, 3.5 % and 95.3% owned by Herman Man
Guo, Qing Xu, Yi Zhang and
AirMedia Online Network Technology Co., Ltd.
, respectively.
|
|
(4)
|
Beijing AirMedia Shengshi Advertising Co., Ltd. is 77.1%, 19.4% and 3.5% owned by Herman Man Guo,
Qing Xu and Yi Zhang, respectively.
|
Substantially all of our operations are conducted
through contractual arrangements with our consolidated VIEs in China, AirMedia Shengshi, Jiaming Advertising, AM Yuehang and AM
Online. We do not have any equity interests in our VIEs, but instead enjoy the economic benefits derived from them through a series
of contractual arrangements. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual
Arrangements” for a description of these arrangements.
|
D.
|
Property, Plants and Equipment
|
Our headquarters are located in Beijing, China,
where we lease approximately 3,954 square meters of office space. Our branch offices lease approximately 4,421 square meters of
office space in seven other locations.
In addition, we own approximately 2,109 square
meters of office space in China. In September 2014 and April 2015, we entered into the agreements to purchase an office space of
approximately 2,109 square meters in Beijing for a total consideration of RMB65 million (US$9.4 million).
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
None.
|
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and
the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements.
Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors,
including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report
on Form 20-F. See “Forward-looking Information.”
We are still at an early stage in our expansion
into the travel Wi-Fi market. We have obtained several concession rights in this respect and plan to sell advertising spaces to
advertisers and advertising agencies and sell pay-per-view contents such as movies, literatures and other contents, to users of
our Wi-Fi systems.
Important
Factors Affecting the Results of Operations of Our Air Travel Advertising and Gas Station Media Business
The operating results of our air travel advertising
and gas station advertising business are substantially affected by the following factors and trends.
Demand for Our Advertising Time Slots
and Locations
The demand for our advertising time slots and
locations for each of the last three fiscal years was directly related to our customers’ available advertising budgets and
the attractiveness of our network to our customers. Our network’s attractiveness is largely affected by the coverage of our
network, which in turn depends on the number of intended audience that our network has the ability to reach. In terms of our air
travel advertising network, the number of intended audience we can reach is largely affected by the number of air travelers in
China in generally and the scale of our network. The demand for air travel is in turn affected by general economic conditions,
the affordability of air travel in China and certain special events that may attract air travelers into and within China. Our customers’
advertising spending was also particularly sensitive to changes in general economic conditions. In terms of our gas station media,
in addition to the general economic conditions in China, its scope of coverage is also affected by the number of Sinopec gas stations
covered by our network and the number of automobile passengers who access those gas stations.
Number of Our Advertising Time Slots
and Locations Available for Sale
The number of time slots available for our
digital TV screens on airplanes during the period presented is calculated by multiplying the time slots per month for a given airline
by the number of months during the period presented when we had operations on such airline and then calculating the sum of all
the time slots for each of our network airlines. The number of locations available for sale for our light boxes and billboards
in gas stations is defined as the number of light boxes and billboards we operated in Sinopec gas stations.
By increasing the number of airlines and gas
stations in our network, we can increase the number of advertising time slots and locations that we have available to sell. In
addition, the length of our advertising cycle for our digital TV screens can potentially be extended to longer durations depending
on demand on airline. However, advertisers may be unwilling to accept placement of their advertisements on a longer time cycle
which decreases the frequencies of their advertisements displayed each day.
Pricing
The average selling price for our advertising
time slots is generally calculated by dividing our advertising revenues from these time slots by the number of 30-second equivalent
advertising time slots for digital TV screens on airplanes sold during that period. The average selling price for our gas station
media is calculated by dividing the revenues derived from all the locations sold by the number of locations sold during the period
presented. The primary factors that affect the effective price we charge advertisers for time slots and locations on our network
and our utilization rate include the attractiveness of our network to advertisers, which depends on the number of displays and
locations, the number and scale of airplanes in our network, the level of demand for time slots and locations, and the perceived
effectiveness by advertisers of their advertising campaigns placed on our network. We may increase the selling prices of our advertising
time slots and locations from time to time depending on the demand for our advertising time slots, spaces and locations.
A significant percentage of the programs played
on our digital TV screens on airplanes included non-advertising content such as TV programs or public service announcements. We
did not directly generate revenues from non-advertising content, but we either generated such content through our VIEs or obtained
such content from third party content providers. We believe that the combination of non-advertising content with advertising content
makes people more receptive to our programs, which in turn makes the advertising content more effective for our advertisers. We
believe this in turn allows us to charge a higher price for each advertising time slot. We closely track the program blend and
advertiser demand to optimize our ability to generate revenues for each program cycle.
Utilization Rate
The utilization rate of our advertising time
slots is the total time slots sold as a percentage of total time slots available during the relevant period. In order to provide
meaningful comparisons of the utilization rate of our advertising time slots, we generally normalize our time slots into 30-second
units for digital TV screens on airplanes, which we can then compare across network airlines and periods to chart the normalized
utilization rate of our network by airlines over time. The utilization rate of our gas stations media is the total number of locations
sold as a percentage of the total number of locations available during the relevant period. Our overall utilization rate was primarily
affected by the demand for our advertising time slots and locations and our ability to increase the sales of our advertising time
slots and locations. We plan to strengthen our sales efforts in these cities by building local sales teams to increase our direct
sales of advertising time slots and locations in these cities and ultimately improve our utilization rate.
Network Coverage and Concession Fees
The demand for our advertising time slots and
locations and the effective price we charged advertisers for time slots and locations on our network depended on the attractiveness
and effectiveness of our network as viewed by our advertisers which, in turn, related to the breadth of our network coverage, including
significant coverage on major airlines that advertisers wish to reach. As a result, it has been, and will continue to be, important
for us to secure and retain concession rights contracts to place our programs on major airlines and to increase the number of programs
we place on those airlines. In addition, it is also important for us to secure and maintain the coverage of our gas station network.
Concession fees constituted a significant portion
of our cost of revenues. Concession fees tend to increase over time, and a significant increase in concession fees will increase
our cost while our revenues may not increase proportionately, or at all. It will therefore be important to our results of operations
that we secure and retain these concession rights contracts on commercially advantageous terms.
Important
Factors Affecting the Results of Operations of Our Wi-Fi Business
As of the date of this annual report, our Wi-Fi
business is still in an early stage of development. Based on information currently available to us, we expect our results of business
of our Wi-Fi business to be substantially affected by the following factors and trends.
Successful Completion of the Installation
of Our Wi-Fi Systems
In order to operate our Wi-Fi business, we
must install certain hardware and software systems on the trains and buses to be covered by our Wi-Fi services. We are still in
the process of such installation and may incur technical and other difficulties. Any delay in the installation process could postpone
the launching of our business.
Demand for Advertising Time Slots and
Locations
The demand for our time slots and locations
on our train and bus Wi-Fi systems is expected to relate to the amount of our customers’ advertising spending budget and
the attractiveness of our Wi-Fi system as a platform for their advertisements. The amount of available advertising budget is largely
affected by the general economic conditions in China. The attractiveness of our Wi-Fi system as an advertising platform depends
on whether our Wi-Fi system has the ability to reach the advertisers’ intended audience, which will in turn be affected by
factors including the number and types of travelers who will use our Wi-Fi systems and whether advertisements on our Wi-Fi systems
can effectively attract the attention of such travelers.
Number of Our Advertising Time Slots
and Locations Available for Sale
The results of our Wi-Fi business can also
be affected by the number of advertisement time slots and spaces available for sale on our Wi-Fi systems. They are determined by
the number of trains, buses and airplanes within our Wi-Fi service network and the number of advertisement time slots and spaces
available on the system for each train, bus and airplane. By increasing the number of trains, buses and airplanes within our network,
we can increase the number of advertising time slots and locations that we have available to sell. In addition, we may also increase
the total number of advertisement time slots and spaces by increasing the frequency of the advertisements and designating more
space on our Wi-Fi system’s interface for advertising.
Pricing
The results of our Wi-Fi business will also
be affected by the level of pricing for our services. We have not yet formulated and implemented any detailed pricing model for
our Wi-Fi business as of the date of this annual report.
Concession Fees
Concession fees are expected to constitute
a significant portion of our cost of revenues in connection with our Wi-Fi business. Those concession fees are typically fixed
under our concession rights with the railway administrative bureaus. We do not pay fixed concession fees to the operators of the
long-haul buses. Any increase in concession fees will increase our cost while our revenues may not increase proportionately, or
at all. It will therefore be important to our results of operations of our Wi-Fi business that we secure and retain these concession
rights contracts on commercially advantageous terms.
Revenues
We mainly generate revenues from the sale of
advertising time slots and locations on our advertising network.
(All amounts are in thousands of U.S. dollars,
except percentages)
|
|
Fiscal Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
Air Travel Media Network
|
|
$
|
59,200
|
|
|
|
77.9
|
%
|
|
$
|
38,917
|
|
|
|
76.5
|
%
|
|
$
|
12,178
|
|
|
|
73.4
|
%
|
Gas station Media Network
|
|
|
11,164
|
|
|
|
14.7
|
%
|
|
|
9,840
|
|
|
|
19.4
|
%
|
|
|
4,009
|
|
|
|
24.1
|
%
|
Other Media
|
|
|
5,583
|
|
|
|
7.4
|
%
|
|
|
2,109
|
|
|
|
4.1
|
%
|
|
|
410
|
|
|
|
2.5
|
%
|
Total revenues
|
|
|
75,947
|
|
|
|
100.0
|
%
|
|
|
50,866
|
|
|
|
100.0
|
%
|
|
|
16,597
|
|
|
|
100.0
|
%
|
Business tax and other sales tax
|
|
|
(1,254
|
)
|
|
|
(1.7
|
)%
|
|
|
(633
|
)
|
|
|
(1.2
|
)%
|
|
|
(84
|
)
|
|
|
(0.5
|
)%
|
Net revenues
|
|
$
|
74,693
|
|
|
|
98.3
|
%
|
|
$
|
50,233
|
|
|
|
98.8
|
%
|
|
$
|
16,513
|
|
|
|
99.5
|
%
|
Revenues from Air Travel Media Network
Our air travel media network revenues from
continuing operations in 2014, 2015 and 2016 consisted of revenues from digital frames in airports in the form of TV-attached digital
frames, digital TV screens in airports, digital TV screens on airplanes, traditional media in airports and other revenues in air
travel. As we have completed in 2015 the divestiture of our business lines of digital frames in airports, digital TV screens in
airports and traditional media in airports, we do not expect to have significant increase of our revenues from those business in
the foreseeable future.
Revenues from our air travel media network
accounted for 77.9%, 76.5% and 73.4% of our total revenues for the years ended December 31, 2014, 2015 and 2016, respectively.
Our network consisted of seven, six and six airlines as of December 31, 2014, 2015 and 2016.
Other revenues in air travel mainly include
revenues from the production of media contents played in air travel and from the provision of system maintenance services.
The most significant factors that directly
or indirectly affect our revenues from digital TV screens on airplanes and other revenues in air travel include the following:
|
·
|
our ability to retain existing advertisers and attract new advertisers;
|
|
·
|
our ability to retain existing concession rights to operate digital TV screens on airplanes and
to add additional airlines to our network;
|
|
·
|
our ability to continue providing effective advertising solutions that enable advertisers to reach
their target audiences;
|
|
·
|
the demand in general for air travel advertising; and
|
|
·
|
the state of the PRC and global economy.
|
Revenues from Gas Station Media Network
We started our gas station media network in
2009, when we gained concession rights to develop and operate an outdoor advertising network in Sinopec gas stations throughout
China. Revenues from our gas station media network, consisting of outdoor advertising platforms such as LED screens, billboards
and light boxes at Sinopec gas stations in China, accounted for 14.7%, 19.4% and 24.1% of our total revenues for the years ended
December 31, 2014, 2015 and 2016, respectively.
The most significant factors that directly
or indirectly affect our gas station media network include the following:
|
·
|
our ability to retain existing advertisers and attract new advertisers;
|
|
·
|
our ability to retain existing concession rights to operate at the Sinopec gas stations and to
add additional gas stations to our network;
|
|
·
|
our ability to continue providing effective advertising solutions that enable advertisers to reach
their target audiences;
|
|
·
|
the demand in general for gas station advertising; and
|
|
·
|
the state of the PRC and global economy.
|
Business Tax, Value-added Tax (“VAT”)
and Other Sales Related Tax
Our PRC subsidiaries are subject to value-added
tax at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases. The net VAT balance
between input VAT and output VAT is reflected in the account under input VAT receivable or other taxes payable. In July 2012, the
Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in
lieu of business tax in certain areas and industries in the PRC, including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin,
Zhejiang, and Hubei between September and December 2012. Also a circular issued in May 2013 provided that such VAT pilot program
is rolled out nationwide since August 2013. Since then, certain of our subsidiaries and VIEs became subject to VAT at the rates
of 6% or 3%, on certain service revenues which were previously subject to business tax. Our gross revenue is presented net of the
VAT.
Our net revenue is presented net of such business
tax and other sale related taxes. Pursuant to the Circular on Comprehensively Promoting the Pilot Program of Replacing Business
Tax with Value Added Tax promulgated by the Ministry of Finance of China and the State Administration of Taxation of China on March
23, 2016, which took effect on May 1, 2016, the Chinese government will levy VAT in lieu of business tax on a trial basis across
China, and the tax rate for taxpayers who are service providers, such as us, is 6%.
Cost of Revenues
During the periods covered by this report,
our cost of revenues consisted primarily of concession fees, agency fees and other costs, including digital frames and digital
TV screen depreciation costs, operating costs and non-advertising content costs. The following table sets forth the major components
of our cost of revenues, both in absolute amounts and as percentages of net revenues for the periods indicated.
|
|
Fiscal Years Ended December 31,
|
|
|
|
(All amounts are in thousands of U.S. Dollars, except percentages)
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Net revenues
|
|
$
|
74,693
|
|
|
|
100.0
|
%
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
16,513
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concession fees
|
|
|
(71,533
|
)
|
|
|
(95.8
|
)%
|
|
|
(64,752
|
)
|
|
|
(128.9
|
)%
|
|
|
(23,470
|
)
|
|
|
(142.1
|
)%
|
Agency fees
|
|
|
(10,602
|
)
|
|
|
(14.2
|
)%
|
|
|
(4,938
|
)
|
|
|
(9.8
|
)%
|
|
|
(4,388
|
)
|
|
|
(26.6
|
)%
|
Others
|
|
|
(14,473
|
)
|
|
|
(19.4
|
)%
|
|
|
(19,887
|
)
|
|
|
(39.6
|
)%
|
|
|
(21,184
|
)
|
|
|
(128.3
|
)%
|
Total cost of revenues
|
|
$
|
(96,608
|
)
|
|
|
(129.3
|
)%
|
|
$
|
(89,577
|
)
|
|
|
(178.3
|
)%
|
|
$
|
(49,042
|
)
|
|
|
(297.0
|
)%
|
Concession
Fees
We incur concession fees to airlines for placing
our programs on their digital TV screens and to gas stations for operating our media displays such as light boxes, billboards and
LEDs and to train administration authorities for Wi-Fi system installation and operation rights. These fees constitute a significant
portion of our cost of revenues. Most of the concession fees paid to airlines were fixed under the relevant concession rights contracts
with escalation clauses, which required fixed fee increases over each year of the relevant contract, and payments were usually
due three or six months in advance. For gas stations, the actual concession fees paid to Sinopec were based on the actual number
of developed gas stations with our operating LEDs and other displays and associated standard annual concession fees for each developed
gas station or a fixed minimum payment if any base on negotiation with the petroleum company. Most of the concession fees paid
to railway administrative bureaus were fixed under the relevant concession rights contracts and payments were usually one month
in advance. Upon the expiration of the existing contracts, the respective railway administrative bureaus have the discretion to
renew the contracts with us or not and upon renewal, they may request an increase in concession fees.
We began to incur concession fees related to
our Wi-Fi business from 2013. We recorded these concession fees amounting to $6.3 million, $7.5 million and $5.3 million in 2014,
2015 and 2016, respectively. The rest of our concession fees consisted of those related to our non-Wi-Fi business and decreased
from $65.2 million in 2014 to $57.3 million in 2015 and to $18.2 million in 2016 as we ceased some of our related operations during
those periods.
Concession fees tend to increase over time
as we obtain more concession rights to further develop our network. As we have obtained several concession rights to operate Wi-Fi
systems on trains, we may experience an increase in our concession fees in order to retain these concession rights contracts.
Agency Fees
We engaged third-party advertising agencies
to help source advertisers from time to time. These third-party advertising agencies assisted us in identifying and introducing
advertisers to us. In return, we paid fees to these third-party agencies if they generated advertising revenues for us. Fees that
we paid to these third-party agencies were calculated based on a pre-set percentage of revenues generated from the advertisers
introduced to us by the third-party agencies and were paid when payments were received from the advertisers. We recorded these
agency fees as cost of revenues ratably over the period in which the related advertisements were displayed. We expect to continue
using these third-party advertising agencies in the near future.
Others
Our other cost of revenues include the following:
|
·
|
Display Equipment Depreciation
. Generally, we capitalized the cost of our digital TV screens,
light boxes, LED screens and billboards and related equipment in the gas station media network and PAD on high-speed trains and
recognized depreciation costs on a straight-line basis over the term of their useful lives, which we estimate to be five years.
The primary factors affecting our depreciation costs were the number of digital TV screens and LED screens in gas stations and
the unit cost for those displays, as well as the remaining useful life of the displays.
|
|
·
|
Display Equipment Maintenance Cost
. Our display maintenance cost consisted of salaries for
our network maintenance staff, travel expenses in relation to on-site visits and monitoring and costs for materials and maintenance
in connection with the upkeep of our advertising network. The primary factor affecting our display equipment maintenance cost was
the size of our network maintenance staff.
|
|
·
|
Non-advertising Content Cost
. The programs on the majority of our digital TV screens combine
advertising content with non-advertising content, such as weather, sports and comedy clips. Our standard programs in airports currently
include 40 minutes of non-advertising content during each hour of programming and are shown for approximately 16 hours per day.
The length of our in-flight programs typically ranges from approximately 45 to 60 minutes per flight, approximately 40 to 45 minutes
of which consist of non- advertising content. We believe that the non-advertising program content makes air travelers more receptive
to the advertisements included in our programs and ultimately make our program more effective for our advertisers. This in turn
allows us to charge a higher price for each advertising time slot. We also promoted the brand names of our advertisers through
our program content by naming our programs after their brand names or displaying their logos on the corner of the digital TV screens
during the programs. We produced some of the non-advertising content shown on our network through our VIEs. The majority of the
non-advertising content broadcast on our network was provided by third-party content providers such as Shanghai Media Group and
various local television stations and television production companies. In January 2014, we entered into a strategic partnership
with China Radio International Oriental Network (Beijing) Co., Ltd, which manages the internet TV business of China International
Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air travelers in China. We pay a
fixed price for some content. Other content is provided free to us and the provider of the content benefits by having its logo
shown on the content in addition to experiencing greater exposure to a wider audience. These providers of free content receive
no benefit from us and do not place advertising with us. We do not directly generate revenues from these non-exchange transactions.
Some of the third-party content providers that currently do not charge us for their content may do so in the future and other third-party
content providers may increase the prices for their programs over time. This may increase our cost of revenues in the future.
|
As we launch our new Wi-Fi business, we expect
to also incur cost of revenues in the form of bandwidth fees paid to mobile data service providers and Wi-Fi system maintenance
fees.
Operating Expenses
During the periods covered by this report,
our operating expenses consisted of general and administrative expenses and selling and marketing expenses. The following table
sets forth the two components of our operating expenses, both in absolute amount and as a percentage of net revenues for the periods
indicated.
|
|
Fiscal Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Net revenues
|
|
$
|
74,693
|
|
|
|
100.0
|
%
|
|
$
|
50,233
|
|
|
|
100.0
|
%
|
|
$
|
16,513
|
|
|
|
100.0
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(20,620
|
)
|
|
|
(27.6
|
)%
|
|
|
(27,102
|
)
|
|
|
(54.0
|
)%
|
|
|
(45,227
|
)
|
|
|
(273.9
|
)%
|
Selling and marketing expenses
|
|
|
(12,916
|
)
|
|
|
(17.3
|
)%
|
|
|
(9,611
|
)
|
|
|
(19.1
|
)%
|
|
|
(12,056
|
)
|
|
|
(73.0
|
)%
|
Total operating expenses
|
|
$
|
(33,536
|
)
|
|
|
(44.9
|
)%
|
|
$
|
(36,713
|
)
|
|
|
(73.1
|
)%
|
|
$
|
(57,283
|
)
|
|
|
(346.9
|
)%
|
We expect that our operating expenses will
further increase in the future as we expand our network and operations and enhance our sales and marking activities.
General and Administrative Expenses
Our general and administrative expenses included
share-based compensation expenses of $1.1 million, $0.6 million and $0.8 million in the fiscal years ended December 31, 2014, 2015
and 2016, respectively. General and administrative expenses consisted primarily of office and utility expenses, salaries and benefits
for general management, finance and administrative personnel, allowance for doubtful accounts, depreciation of office equipment,
public relations related expenses and other administration related expenses.
Selling and Marketing Expenses
Our selling and marketing expenses consisted
primarily of salaries and benefits for our sales and marketing personnel, office and utility expenses related to our selling and
marketing activities, travel expenses incurred by our sales personnel, expenses for the promotion, advertisement and sponsorship
of media events, and other sales and marketing related expenses. Our selling and marketing expenses included share-based compensation
expenses of approximately $0.1 million, nil and nil in the years ended December, 31, 2014, 2015 and 2016, respectively.
Taxation
Cayman Islands
. We are an exempted company
incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gains
tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.
British Virgin Islands.
We are exempted
from income tax in the British Virgin Islands on our foreign-derived income. There are no withholding taxes in the British Virgin
Islands.
Hong Kong
. Our Hong Kong subsidiary,
Air Media (China) Ltd, did not record any Hong Kong profits tax for the year ended December 31, 2014, 2015 and 2016, on the basis
that our Hong Kong subsidiaries did not have any assessable profits arising in or derived from Hong Kong for 2014, 2015 and 2016.
Dividends from our Hong Kong subsidiaries to us are exempt from withholding tax. No dividend from our Hong Kong subsidiaries was
declared for the years ended December 31, 2014, 2015 and 2016.
PRC
. Prior to the effective date of
the new EIT Law on January 1, 2008, enterprises in China were generally subject to EIT at a statutory rate of 33% unless they qualified
for certain preferential treatment. Effective as of January 1, 2008, the EIT Law applies a uniform EIT rate of 25% to all domestic
enterprises and foreign-invested enterprises and defines new tax incentives for qualified entities. Under the EIT Law, entities
that qualify as HNTE are entitled to the preferential income tax rate of 15%. A company’s status as a HNTE is valid for three
years, after which the company must re-apply for such qualification in order to continue to enjoy the preferential income tax rate.
In addition, according to the Administrative Regulations on the Recognition of High and New Technology Enterprises, the Guidelines
for Recognition of High and New Technology Enterprises and the Notice of Favorable Enterprise Income Tax Policies jointly issued
by the PRC Ministry of Science and Technology, the PRC Ministry of Finance and the PRC State Administration of Taxation in April
2008, July 2008 and February 2008, respectively, “new software enterprises” can enjoy an income tax exemption for two
years beginning with their first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years.
On December 26, 2007, the PRC State Council
issued Circular 39. Based on Circular 39, certain enterprises established before March 16, 2007 that were eligible for tax exemptions
or reductions according to the then-effective tax laws and regulations can continue to enjoy such exemption or reduction until
it expires. Furthermore, according to Circular 39, enterprises that were eligible for preferential tax rates according to the then-effective
tax laws and regulations may be eligible for a gradual rate increase to 25% over the 5-year period beginning from January 1, 2008.
Specifically, the applicable rates under such an arrangement for such enterprises that enjoyed a 15% tax rate prior to the effectiveness
of the EIT Law are 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. However, according to the Notice on Prepayment
of EIT issued by the State Administration of Taxation on January 30, 2008, the gradually increased EIT rate during the transition
period is not applicable to entities that qualified for preferential rates as high and new technology enterprises alone and they
would be subject to EIT at 25% from January 2008 if they cannot qualify as high and new technology enterprises under the EIT Law
and related regulations.
AM Technology was recognized as a HNTE under
the new rules and therefore, it is entitled to enjoy a preferential EIT rate of 15%. It was also eligible for a 50% tax reduction
from 2009 to 2010 under the applicable tax laws and regulations that were in effect before January 1, 2008, the date the EIT Law
came into effect. As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and 2010. In September 2011, AM Technology
received the HNTE certificate, and in October 2014, AM Technology successfully renewed its HNTE Status and obtained the certificate
issued by the competent governmental authority. As a result, AM Technology is expected to be subject to an EIT rate of 15% until
2016 as long as it maintains its HNTE status.
Xi’an AM qualified as a “software
enterprise” in August 2008 by the Technology Information Bureau of Shaanxi Province and has received a written approval from
Xi’an local tax bureau that it is granted a two-year exemption from EIT commencing on its first profitable year and a 50%
reduction of the 25% EIT rate for the succeeding three years. As Xi’an AM first made profit in 2009, it was exempted from
EIT in 2009 and 2010, and enjoyed the preferential income tax rate of 12.5% from 2011 to 2013. Xi’an AM received the HNTE
certificate jointly issued by the competent governmental authorities in Shaanxi Province in September 2014. As such, Xi’an
AM is expected to be subject to a preferential income tax rate of 15% from 2014 to 2016 as long as it maintains its HNTE status.
Shenzhen AM was subject to a 15% preferential
EIT rate in 2007 as it is located in Shenzhen and then was subject to EIT on its taxable income from 2008 at the gradual rate as
set out in Notice of the State Council Concerning Implementation of Transitional Rules for Enterprise Income Tax Incentives, or
“Circular 39”. Since Shenzhen AM is also qualified as a “manufacturing foreign-invested enterprise” incorporated
prior to the effectiveness of the EIT Law, it is further entitled to a two-year exemption from EIT for the years 2008 and 2009
and preferential rates of 11%, 12% and 12.5% for the years 2010, 2011 and 2012, respectively. Shenzhen AM is subject to EIT at
a rate of 25% from 2013 afterwards.
Hainan Jinhui is subject to EIT on the taxable
income at the gradual rate, which was 22% in 2010, 24% in 2011, 25% in 2012 as set out in Circular 39. Hainan Jinhui is subject
to EIT at a rate of 25% in 2013 and thereafter.
Furthermore, under the EIT Law, a “resident
enterprise,” which includes an enterprise established outside of China with “de facto management bodies” located
in China, is subject to PRC income tax. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated
Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, i.e. SAT Circular 82, on April 22, 2009.
SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled
overseas-incorporated enterprise is located in China.
In addition, the SAT issued a bulletin on July
27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date of September 1, 2011. The bulletin
made clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities.
It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese
controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends,
interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both SAT Circular 82 and the bulletin
only apply to offshore enterprises controlled by PRC enterprises, not to those that, like our company, are controlled by PRC individuals,
the determination criteria set forth in SAT Circular 82 and administration clarification made in the bulletin may reflect the SAT’s
general position on how the “de facto management body” test should be applied in determining the tax residency status
of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC
enterprises or PRC individuals.
We do not believe we and our subsidiaries established
outside of the PRC are PRC resident enterprises. However, if the PRC tax authorities subsequently determine that we and our subsidiaries
established outside of China should be deemed as a resident enterprise, we and our subsidiaries established outside of China will
be subject to PRC income tax at a rate of 25%. In addition, under the EIT law, dividends generated after January 1, 2008 and payable
by a foreign-invested enterprise in China to its foreign investors who are non-resident enterprises are subject to 10% withholding
tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding arrangement. The BVI, where Broad Cosmos, our wholly owned subsidiary and the 100% shareholder of Shenzhen AM, is incorporated,
does not have such a tax treaty with China. Air Media (China) Ltd, the 100% shareholder of AM Technology Shenzhen AM and Xi’an
AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding
Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in August 2006, dividends paid by a foreign-invested
enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign
investor owns directly at least 25% of the shares of the foreign-invested enterprise). However, if the Hong Kong company is not
considered to be the beneficial owner of dividends paid to it by its PRC subsidiaries under a tax notice promulgated on October
27, 2009 and the bulletin No.30 of 2012, such dividends would be subject to withholding tax at a rate of 10%. See “Item 3.
Key Information — D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-owned
operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income, and
dividends distributed to our investors may be subject to more PRC withholding taxes under the PRC tax law.”
Critical Accounting
Policies
We prepare our financial statements in conformity
with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and
liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and assumptions
based on the most recently available information, our own historical experiences and other factors that we believe to be relevant
under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual
results could differ from our expectations. This is especially true with some accounting policies that require higher degrees of
judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited
consolidated financial statements because they involve the greatest reliance on our management’s judgment.
Discontinued Operation
A disposal of a component of an entity or a
group of components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that
has (or will have) a major effect on an entity’s operations. Classification as a discontinued operation occurs upon disposal
or when the operation meets the criteria to be classified as held for sale, if earlier. Where an operation is classified as discontinued,
a single amount is presented on the face of the consolidated statements of operations. The amount of total current assets, total
non-current assets, total current liabilities and total non-current liabilities are presented separately on the consolidated balance
sheets.
Revenue Recognition
Our revenues are derived from selling advertising
time slots on our advertising networks. For the years ended December 31, 2014, 2015 and 2016, the advertising revenues were generated
from air travel media network, gas station media network and other media.
We typically sign standard contracts with our
advertising customers, who require our company to run the advertiser’s advertisements on our network in specified locations
for a period of time. We recognize advertising revenues ratably over the performance period for which the advertisements are displayed,
so long as collection of the fees remains probable.
We also wholesale the advertising platforms
such as scrolling light boxes and billboards in the gas stations located in some major cities, except Beijing, Shanghai and Shenzhen,
to advertising agents, and sign fixed fee contracts with the agents for a specified period. The revenue is recognized on a straight-line
basis over the specified period.
Deferred Revenue
Prepayments from customers for advertising
service are deferred and recognized as revenue when the advertising services are rendered.
Non-monetary Exchanges
We occasionally exchange advertising time slots
and locations with other entities for assets or services, such as equipment and other assets. The amount of assets and revenue
recognized is based on the fair value of the advertising provided or the fair value of the transferred assets, whichever is more
readily determinable.
Concession Fees
We enter concession right agreements with vendors
such as airports, airlines, railway administrative bureaus and a petroleum company, under which we obtain the right to use the
spaces or equipment of the vendors to display the advertisements. The concession right agreements are treated as operating lease
arrangements.
Fees under concession right agreements are
usually due every three, six or twelve months. Payments made are recorded as current assets and current liabilities according to
the respective payment terms. Most of the concession fees with airports and airlines are fixed with escalation, which means fixed
increase over each year of the agreements. The total concession fee under the concession right agreements with airports and airlines
is charged to the consolidated statements of operations on a straight-line basis over the agreement periods, which is generally
between three and five years.
The fee structure of the concession right agreement
with the petroleum company is based on the actual number of developed gas stations and associated standard annual concession fee
for each developed gas station. Each gas station has its specific lease term starting from the time when it is actually put into
operation. The calculation of rental payments is based on how many months the gas stations are actually put into operation during
the year and the standard annual concession fee determined based on the location of the gas station. Accordingly, each gas station
is treated as a separate lease and rental payments are recognized on a straight-line basis over its lease term. The amount of annual
concession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum payment, if any, based on negotiation
with the petroleum company.
Agency Fees
We pay fees to advertising agencies based on
certain percentage of revenues made through the advertising agencies upon receipt of payment from advertisers. The agency fees
are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the advertising is
displayed. Prepaid and accrued agency fees are recorded as current assets and current liabilities according to relative timing
of payments made and advertising service provided.
From time to time, we and certain advertising
agencies may renegotiate and mutually agree, as permitted by applicable laws, to reduce existing agency fee liabilities as calculated
under the terms of existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales
in the period the renegotiations are finalized.
Allowance for Doubtful Accounts
We conduct credit evaluations of clients and
generally do not require collateral or other security from clients. We establish an allowance for doubtful accounts based upon
estimates, historical experience and other factors surrounding the credit risk of specific clients, and utilize both specific identification
and a general reserve to calculate allowance for doubtful accounts. The amount of receivables ultimately not collected by us has
generally been consistent with expectations and the allowance established for doubtful accounts. If the frequency and amount of
customer defaults change due to the clients’ financial condition or general economic conditions, the allowance for uncollectible
accounts may require adjustment. As a result, we continuously monitor outstanding receivables and adjust allowances for accounts
where collection may be in doubt. We believe the increase or decrease of allowance for doubtful accounts is usually attributable
to the growth or decrease of aged accounts receivables, especially in relation to receivables aged over 720 days, for which a full
allowance is provided.
Income Taxes
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
loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to
us as enacted by the relevant tax authorities.
The impact of an uncertain income tax position
on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained upon audit by the
relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, we classify the interest and penalties, if any, as a component of the income tax position.
Value-added Tax (“VAT”)
Our PRC subsidiaries are subject to value-added
tax at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases. The net VAT balance
between input VAT and output VAT is reflected in the account under input VAT receivable or other taxes payable.
In July 2012, the Ministry of Finance and the
State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business tax in certain
areas and industries in the PRC including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September
and December 2012. Also, a circular issued in May 2013 provided that such VAT pilot program was rolled out nationwide in August
1, 2013. Since then, certain of our subsidiaries and VIEs became subject to VAT at the rates of 6% or 3% on certain service revenues
which were previously subject to business tax. Our gross revenue are presented net of VAT.
Share-based Compensation
Share-based payment transactions with employees
are measured based on the grant date fair value of the equity instrument issued, and recognized as compensation expenses over the
requisite service periods based on a straight-line method, with a corresponding impact reflected in additional paid-in capital.
Share-based payment transactions with non-employees
are measured based on the fair value of the options as of each reporting date through the measurement date, with a corresponding
impact reflected in additional paid-in capital.
Our Results
of Operations
The following table sets forth a summary of
our consolidated results of operations for the periods indicated. This information should be read together with our consolidated
financial statements, including the related notes that appear elsewhere in this annual report. We do not believe our historical
consolidated results of operations are indicative of our results of operations you may expect for any future period.
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
(In thousands of U.S. Dollars, except share,
per share and per ADS data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
|
59,200
|
|
|
|
38,917
|
|
|
|
12,178
|
|
Gas Station Media Network
|
|
|
11,164
|
|
|
|
9,840
|
|
|
|
4,009
|
|
Other Media
|
|
|
5,583
|
|
|
|
2,109
|
|
|
|
410
|
|
Total revenues
|
|
|
75,947
|
|
|
|
50,866
|
|
|
|
16,597
|
|
Business tax and other sales tax
|
|
|
(1,254
|
)
|
|
|
(633
|
)
|
|
|
(84
|
)
|
Net revenues
|
|
|
74,693
|
|
|
|
50,233
|
|
|
|
16,513
|
|
Cost of revenues
|
|
|
(96,608
|
)
|
|
|
(89,577
|
)
|
|
|
(49,042
|
)
|
Gross loss
|
|
|
(21,915
|
)
|
|
|
(39,344
|
)
|
|
|
(32,529
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(12,916
|
)
|
|
|
(9,611
|
)
|
|
|
(12,056
|
)
|
General and administrative
|
|
|
(20,620
|
)
|
|
|
(27,102
|
)
|
|
|
(45,227
|
)
|
Total operating expenses
|
|
|
(33,536
|
)
|
|
|
(36,713
|
)
|
|
|
(57,283
|
)
|
Loss from operations
|
|
|
(55,451
|
)
|
|
|
(76,057
|
)
|
|
|
(89,812
|
)
|
Interest (expense) income, net
|
|
|
1,058
|
|
|
|
472
|
|
|
|
843
|
|
Other income, net
|
|
|
979
|
|
|
|
1,383
|
|
|
|
4,243
|
|
Loss from continuing operations before income taxes and (loss) income on equity method investments
|
|
|
(53,414
|
)
|
|
|
(74,202
|
)
|
|
|
(84,726
|
)
|
Income tax (benefits)/expenses from continuing operations
|
|
|
(1,512
|
)
|
|
|
6,421
|
|
|
|
4,483
|
|
Net loss before (loss) income on equity method investments
|
|
|
(51,902
|
)
|
|
|
(80,623
|
)
|
|
|
(89,209
|
)
|
(Loss) income on equity method investments
|
|
|
(212
|
)
|
|
|
2,352
|
|
|
|
(33
|
)
|
Net loss from continuing operations
|
|
|
(52,114
|
)
|
|
|
(78,271
|
)
|
|
|
(89,242
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(6,808
|
)
|
|
|
(7,620
|
)
|
|
|
23,617
|
|
Net loss from continuing operations attributable to AirMedia Group Inc.’s shareholders
|
|
|
(45,306
|
)
|
|
|
(70,651
|
)
|
|
|
(65,625
|
)
|
Discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
22,230
|
|
|
|
272,879
|
|
|
|
—
|
|
Income tax benefits (expenses) from discontinued operations
|
|
|
(1,942
|
)
|
|
|
(51,696
|
)
|
|
|
—
|
|
Net income from discontinued operations, net of tax
|
|
|
20,288
|
|
|
|
221,183
|
|
|
|
—
|
|
Less: Net income from discontinued operations attributable to non-controlling interests
|
|
|
677
|
|
|
|
885
|
|
|
|
—
|
|
Net income from discontinued operations attributable to AirMedia Group Inc.’s shareholders
|
|
|
19,611
|
|
|
|
220,298
|
|
|
|
—
|
|
Net (loss)/income
|
|
|
(31,826
|
)
|
|
|
142,912
|
|
|
|
(89,242
|
)
|
Net (loss)/income attributable to AirMedia Group Inc.’s shareholders
|
|
$
|
(25,695
|
)
|
|
$
|
149,647
|
|
|
$
|
(65,625
|
)
|
Year Ended December 31, 2016 Compared
to Year Ended December 31, 2015
Net Revenues
. Our net revenues decreased
by 67.1% to $16.5 million in 2016 from $50.2 million in 2015. The decrease was primarily due to the decrease in revenues from air
travel media network.
Revenues from air travel media network
:
Revenues from air travel media network decreased by 68.7% from $38.9 million in 2015 to $12.2 million in 2016. Among our revenues
from air travel media network, revenues from digital TV screens on airplanes were $13.3 million and $10.3 million in 2015 and 2016,
respectively. The revenue from billboards and painted advertisement in airport and other traditional media decreased $23.7 million.
The decrease in revenues from digital TV screens on airplanes mainly resulted from a soft advertising market and a decrease in
advertisers’ demand for digital TV screens due to the availability of more choices of in-flight entertainment. We are in
a transition period
of the divestiture, and we had terminated the operations of all billboards
and painted advertisements on gate bridges. As a result,
revenues from digital frames and TV screens in airports and other
traditional media in airports significantly decreased from 2015.
Revenues from the gas station media network
:
Revenues from the gas station media network decreased by 59.3% from $9.8 million in 2015 to $4.0 million in 2016 due to a soft
advertising market.
Revenues from other media
: Revenues
from other media were primarily revenues from our film distribution business. Revenues from other media decreased by 80.6% year-over-year
to $0.4 million in 2016 from $2.1 million in 2015, primarily due to a decrease of $1.1 million in film distribution revenue as
a result of a competitive film market.
Cost of Revenues.
Our cost of revenues
decreased by 45.3% to $49.0 million in 2016 from $89.6 million in 2015. Our cost of revenues as a percentage of our net revenues
increased to 297.0% in 2016 from 178.3% in 2015. This increase was mainly due to the significant decrease in our revenues. Concession
fees, as one of the major component in our cost of revenue, decreased by 63.9% to $23.4 million in 2016 from $64.8 million in 2015.
Concession fees as a percentage of net revenues increased to 141.9% in 2016 from 128.9% in 2015. Our revenues decreased significantly
as we exited many of the business lines, but we continued to pay much of the related concession fees in 2016 due to our obligations
under the concession rights. As of the date of this annual report, concession rights contracts in connection with the business
that we no longer operate have either expired or been transferred to third parties. We expect to incur concession fee costs associated
only with the business lines of digital TV screens on airplanes, gas station media and our Wi-Fi business in the foreseeable future.
Operating Expenses
. Our operating expenses
increased by 56.0% to $57.3 million in 2016 from $36.7 million in 2015. Our total operating expenses in 2015 included share-based
compensation expenses of $0.6 million while our total operating expenses in 2016 included share-based compensation expenses of
$0.8 million.
|
·
|
Selling and Marketing Expenses
. Our selling and marketing expenses increased by 25.4% to
$12.1 million in 2016 from $9.6 million in 2015. For 2016, our selling and marketing expenses mainly consisted of $8.6 million
staff expenses. We restructured our selling and marketing team and incurred higher expenses compared to last year.
|
|
·
|
General and Administrative Expenses
. Our general and administrative expenses increased by
66.9% to $45.2 million (including $0.8 million of share-based compensation expenses) in 2016 from $27.1 million (including $0.6
million of share-based compensation expenses) in 2015, primarily due to approximately $12.7 million in bad debt expenses and $0.8
million impairment charge to the gas statement equipment incurred in 2016. During 2015, we incurred a recovery of bad debt expenses
of $2.7 million and nil impairment charge.
|
Loss from Continuing Operations.
We
recorded a loss from continuing operations of $89.8 million in 2016, as compared to a loss from continuing operations of $76.1
million in 2015 as a cumulative result of the above factors.
Net income from discontinued operations
.
We recorded nil of net income from discontinued operations in 2016 compared with $272.9 million in 2015.
Year Ended December 31, 2015 Compared
to Year Ended December 31, 2014
Net Revenues
. Our net revenues decreased
by 32.7% from $74.7 million in 2014 to $50.2 million in 2015. The decrease was primarily due to the decrease in revenues from air
travel media network.
Revenues from air travel media network
:
Revenues from air travel media network decreased by 34.3% to $38.9 million in 2015 from $59.2 million in 2014. Among our revenues
from air travel media network, revenues from digital TV screens on airplanes were $13.3 million and $16.2 million in 2015 and 2014,
respectively. The remainder of revenues from air travel media network mainly consisted of (i) revenues from the stand-alone digital
frames in one airport and LEDs in two airports for part of 2015, which were not included in the disposed business, and (ii) certain
revenues from traditional media in three airports for part of 2015, which were not included in the disposed business. Changes in
revenues from air travel media network from 2014 to 2015 also reflected the sale of our business of TV-attached digital frames
and digital TV screens in airports in 2015.
The number of time slots sold on digital TV
screens on airplanes decreased by 22.6% to 432 time slots in 2015 from 558 time slots in 2014 primarily due to a soft advertising
market. The number of time slots available for sale decreased by 0.5% to 1,620 time slots in 2015 from 1,628 time slots in 2014.
Utilization rate decreased to 26.7% in 2015 from 34.3% in 2014 primarily due to the decrease in the number of time slots sold.
The average selling price per time slot of digital TV screens on airplanes increased by 6.4% to $30,904 in 2015 from $29,054 in
2014 primarily due to lower discounts offered in 2015 than in 2014.
Revenues from the gas station media network
:
Revenues from the gas station media network decreased by 11.9% to $9.8 million from $11.2 million in 2014 due to a soft advertising
market.
Revenues from other media
: Revenues
from other media were primarily revenues from our film distribution business. Revenues from other media decreased by 62.2% year-over-year
from $5.6 million in 2014 to $2.1 million in 2015, primarily due to a decrease of $4.8 million in film distribution revenue as
a result of a competitive film market.
Cost of Revenues.
Our cost of revenues
decreased by 7.2% from $96.6 million in 2014 to $89.6 million in 2015. Our cost of revenues as a percentage of our net revenues
increased from 129.3% in 2014 to 178.3% in 2015. This increase was mainly due to a combined effect of the decrease in our revenues
and the increase in our concession fees. Concession fees decreased by 9.4% from $71.5 million in 2014 to $64.8 million in 2015,
primarily due to an decrease in the prices of our concession rights. Concession fees as a percentage of net revenues increased
from 95.8% in 2014 to 128.9% in 2015. Our revenues decreased significantly as we exited many of the business lines, but we continued
to pay much of the related concession fees in 2015 due to our obligations under the concession rights. As of the date of this annual
report, concession rights contracts in connection with the business that we no longer operate have either expired or been transferred
to third parties. We expect to incur concession fee costs associated only with the business lines of digital TV screens on airplanes,
gas station media and our Wi-Fi business in the foreseeable future.
Operating Expenses
. Our operating expenses
increased by 9.5% from $33.5 million in 2014 to $36.7 million in 2015. Our total operating expenses in 2014 included share-based
compensation expenses of $1.3 million while our total operating expenses in 2015 included share-based compensation expenses of
$0.6 million.
|
·
|
Selling and Marketing Expenses
. Our selling and marketing expenses decreased by 25.6% from
$12.9 million in 2014 (including $0.1 million of share-based compensation expenses) to $9.6 million in 2015 (including nil share-based
compensation expenses) mainly due to a decrease of $1.8 million in marketing expenses.
|
|
·
|
General and Administrative Expenses
. Our general and administrative expenses increased by
31.4% from $20.6 million (including $1.1 million of share-based compensation expenses) in 2014 to $27.1 million (including $0.6
million of share-based compensation expenses) in 2015, primarily due to higher professional service fees in connection with the
sale of AM Advertising.
|
Loss from Continuing Operations.
We
recorded a loss from continuing operations of $76.1 million in 2015, as compared to a loss from continuing operations of $55.5
million in 2014 as a cumulative result of the above factors.
Net income from discontinued operations
.
We recorded $272.9 million of net income from discontinued operations in 2015 compared with $22.2 million in 2014. Such increase
was mainly attributable to a one-off gain of $244.2 million upon the disposal of equity interest of AM Advertising in 2015.
Share-based
Compensation
2007 Share incentive plan
On July 2, 2007, the Board of Directors adopted
the 2007 share incentive plan (the “2007 Option Plan”), which allows the Group to grant options to its employees and
directors to purchase up to 12,000,000 ordinary shares of the Company subject to vesting requirement.
On December 29, 2008, the Board of Directors
amended 2007 Option Plan to allow the Group to grant options to its employees and directors to purchase up to 17,000,000 ordinary
shares.
On September 1, 2012, the
Board of Directors approved to grant options to the employees under 2007 Share Incentive Plan to purchase an aggregate of 1,857,538
ordinary shares of the Company, at an exercise price of $0.72 per ordinary share. One twelfth of the options will vest each quarter
from September 4, 2012. The expiration date will be 5 years from the grant date.
On April 15, 2014, the
Board of Directors approved to extend the expiration dates of the options granted on November 29, 2007 and July 10, 2009 from April
28, 2014 to April 28, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of
the stock options, which was $0.21 and $0.21 per share, respectively, as of the modification dates, was estimated using the Black-Scholes
model. The incremental compensation cost of the modified award were $4,000 and $4,000, respectively, which were recognized as share-based
compensation expense for the year ended December 31, 2014.
On May 31, 2014, the former CFO resigned and
the Board of Directors approved the amendment of his share option agreement. On the date of resignation, 575,440 unvested options
were cancelled and the expiration date of 1,282,098 vested options was modified from September 3, 2017 to May 31, 2016. The fair
value of the stock options, which was $0.43 per share as of the modification date, was estimated using the Black-Scholes model.
The incremental compensation cost of the modified award was $0.2 million, which was recognized as share-based compensation expense for
the year ended December 31, 2014.
On June 9, 2014, the Board
of Directors approved to extend the expiration date of the options granted on July 10, 2009 from July 11, 2014 to July 11, 2016.
Modified awards are viewed as an exchange of the original award for a new award. The fair value were $0.22 and $0.12 per share
for the stock options whose exercise price were $1.15 and $1.57 per share, respectively, as of the modification date, was estimated
using the Black-Scholes model. The incremental compensation costs of the modified award were $0.7 million and $5,000, respectively, which were
recognized as share-based compensation expense for the year ended December 31, 2014.
On June 9, 2014, Board
of Directors of the Group approved to extend the expiration date of the options granted on November 1, 2012 from November 11, 2014
to November 11, 2016. Modified award is viewed as an exchange of the original award for a new award. The fair value of the stock
options, which was $0.25 per share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation
cost of the modified award was $4,000 which was recognized as share-based compensation expense for the year ended December 31, 2014.
2011 Share incentive plan
On March 18, 2011, the Board of Directors adopted
2011 Share Incentive Plan (the “2011 Option Plan”), which allows the Group to grant options to its employees and directors
to purchase up to 2,000,000 ordinary shares of the Company subject to vesting requirement.
On March 22, 2011, the Board of Directors
granted options to Group’s employees to purchase an aggregate of 2,180,000 ordinary shares of the Company under 2007
Option Plan and 2011 Option Plan, at an exercise price of $2.3 per share. The contractual term of the options was 5 or 10
years. One twelfth of these options will vest each quarter through March 22, 2014. Subsequently on June 7, 2011, the Board of
Directors approved to modify the exercise price of these stock options to $1.57 per share. The fair value of these options at
the modification date was estimated to be $0.75 per option. The incremental share based compensation costs of the re-priced
options was $0.3 million to be recognized over the remaining service period through March 22, 2014.
On August 23, 2011, the Board
of Directors approved the adjustment of the exercise price of certain stock options that were granted on July 2, 2007, July
20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011, which were subsequently modified from $1.57 per share to
$1.15 per share. The fair value of the options on the modification date was $0.21, $0.22, $0.26, $0.39 and $0.53 per
share, respectively, calculated using the Black-Scholes model. The incremental compensation cost of the re-priced options was
$1.3 million of which $1.0 million was recognized on the modification date, and the remainder to be recognized over the
remaining service period.
In September 2012, the former CFO of the
Group resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vested through her date of resignation.
In conjunction with her resignation, she signed a supplementary agreement with the Group that granted her 100,000 immediately
exercisable options and 200,000 options that would vest through September 22, 2013. During the vesting period, she would
provide consulting service as a consultant. For the 100,000 immediately exercisable options, a measurement date was
reached upon grant and the Group immediately recognized $35,000 share-based compensation expenses. For the 200,000 options that
vested through September 22, 2013, the Group recognized expense based on the fair value of the options as of each reporting
date through the measurement date. For the years ended December 31, 2013, 2014 and 2015, the Group recognized $59,000, nil and
nil share-based compensation expense for these options, respectively.
2012 Share incentive plan
On November 30, 2012, the Board of Directors
adopted 2012 Share Incentive Plan (the “2012 Option Plan”), which allows the Group to grant options to its employees
and directors to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement.
On November 1 and November 30, 2012, the Group
granted 20,000 options to a consultant under the 2007 Option Plan and 60,000 options under the 2012 Option Plan to purchase the
Company’s ordinary shares at an exercise price of $1.11 per share. 20,000 share options were vested immediately and one-third
of the 60,000 share options vested on February 1, May 1 and August 1, 2013, respectively.
On June 1 and August 1,
2014, the Group granted 2,376,620 options and 140,000 options to its employees under the 2012 Option Plan to purchase the Company’s
ordinary shares at an exercise price of $1.025 and $1.045 per share, respectively. One twelfth of these options will vest each
quarter through June 1, 2017 and August 1, 2017, respectively. The expiration date will be 5 years from the grant dates.
On October 13, 2014, an
employee terminated his employment with the Group but continued to provide service as a nonemployee consultant. 50,000 options
granted to him on August 1, 2014 were not modified in connection with the change in status, but future service is still necessary
to earn the award. The compensation cost was measured as if the options were newly granted at the date of the change of status.
The incremental share-based compensation expense for the year ended December 31, 2014 was not material. On October 31, 2015, the
consultant service contract terminated. Of the 50,000 options granted to him, 20,830 were vested through the service period end
and the expiration date of the vested options was modified from August 1, 2019 to January 31, 2016. The rest 29,170 unvested options
were cancelled at the service period end.
On May 12, 2015, the Group granted 660,000
options its employees under the 2012 Option Plan to purchase the Company’s ordinary shares at an exercise price of $1.675
per share. One twelfth of these options will vest each quarter through May 12, 2018. The expiration date will be 5 years from the
grant date.
On June 15, 2015, an employee terminated his
employment with the Group but continued to provide service as a nonemployee consultant. 200,000 options granted to him on June
1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2015 was not material.
On October 31, 2015, an employee terminated
his employment with the Group but continued to provide service as a nonemployee consultant. 100,000 options granted to him on May
12, 2015 were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2015 was not material.
On December 31, 2015, two consultants resigned.
Of the 200,000 options granted to one of them on May 12, 2015, 3,332 were vested through the date of resignation. The expiration
date of the vested options was modified from May 12, 2020 to May 31, 2016. For the rest 166,668 unvested options, one twelfth of
the total granted options will still vest on February 12, 2016 following the original vesting schedule and the rest 150,002 options
were cancelled on the date of resignation. The fair value of the stock options, which was $1.12 per share as of the modification
date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified award was immaterial for the
year ended December 31, 2015. Of the 100,000 options granted to the other consultant on May 12, 2015, 16,664 were vested through
the date of resignation. The expiration date of the vested options was modified from May 12, 2020 to January 31, 2016, and the
83,336 unvested options were cancelled on the date of resignation.
On March 10, 2016, the Board of Directors approved
to extend the expiration dates of the 685,000 options from various original expiration dates in March and April 2016 to December
31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options
of $1.67 as of the modification dates was estimated using the Black-Scholes model. The incremental share-based compensation expense
for the year ended December 31, 2016 was not material.
On July 10, 2016, Board of Directors
approved to extend the expiration dates of the 2,139,918 options from original expiration date of July 11, 2016 to December
31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock
options of $0.38 as of the modification date was estimated using the Black-Scholes model. The incremental share-based
compensation expense of $79,000 was recognized for the year ended December 31, 2016.
For the year ended December 31, 2016, four
employees terminated their employment relationships with us, but continued to provide service as nonemployee consultant. Their
options were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense of $0.2 million was recognized for the year ended December 31, 2016.
The fair value of each option granted was estimated
on the date of grant/modification using the Black-Scholes option pricing model.
We recorded share-based compensation of $1.3
million, $0.6 million and $0.8 million for the years ended December 31, 2014, 2015 and 2016, respectively.
Inflation
Historically inflation has not had a significant
effect on our business. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer
price index for December 2014, 2015 and 2016 was increase of 1.5%, 1.6% and 2.1%, respectively.
Although it has not materially impacted our
results of operations in 2016, we can provide no assurance that we will not be affected in the future by potentially higher rates
of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses,
may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and short-term
investments, high inflation could significantly reduce the value and purchasing power of these assets. We are not able to hedge
our exposure to higher inflation in China.
|
B.
|
Liquidity and Capital Resources
|
To date, we have financed our operations primarily
through internally generated cash, the sale of preferred shares in private placements and the proceeds we received from our initial
public offering.
The Group incurred losses from operations of
US$76.1 million and US$89.8 million for the years ended December 31, 2015 and 2016. As of December 31, 2016, the Group had shareholders’
deficit of US$15.8 million. The Group had negative cash flows from operating activities for the years ended December 31, 2015 and
2016, the net cash used in operating activities was US$69.1 million and US$103.6 million for the years ended December 31, 2015
and 2016. As of December 31, 2016, the Group had cash and cash equivalents of US$117.5 million and working capital of $115.0 million.
From 2017 and onwards, the Group will focus on improving operation efficiency and cost reduction, and enhancing marketing function
to attract more users. The Group regularly monitors its current and expected liquidity requirements to ensure that it maintains
sufficient cash balances and accessible credit to meet its liquidity requirements in the short and long term. Based on the existing
cash and cash equivalents, working capital condition and forecast for future operations, the Group believes that it will be able
to meet its payment obligations and other commitments for at least through the following twelve months from the date of filing.
However, there is no assurance that management will be successful in their plans.
We generally deposit our excess cash in interest
bearing bank accounts. Although we consolidate the results of our VIEs in our consolidated financial statements, we can only receive
cash payments from them pursuant to our contractual arrangements with them and their shareholders. See “Item 4. Information
on the Company — C. Organizational Structure.” Our principal uses of cash primarily include capital expenditures, contractual
concession fees, business acquisitions, share repurchases, and other investments and, to a lesser extent, salaries and benefits
for our employees and other operating expenses. We expect that these will remain our principal uses of cash in the foreseeable
future. We may also use additional cash to fund strategic acquisitions.
Cash Flow
The following table shows our cash flows with
respect to operating activities, investing activities and financing activities for the years ended December 31, 2014, 2015 and
2016:
|
|
Years Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,814
|
)
|
|
|
(69,062
|
)
|
|
|
(103,610
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(6,157
|
)
|
|
|
88,142
|
|
|
|
130,582
|
|
Net cash provided by (used in) financing activities
|
|
|
16,823
|
|
|
|
2,141
|
|
|
|
11,130
|
|
Effect of exchange rate changes
|
|
|
(1,067
|
)
|
|
|
(1,698
|
)
|
|
|
(7,515
|
)
|
Net increase/(decrease) in cash
|
|
|
7,785
|
|
|
|
19,523
|
|
|
|
30,587
|
|
Cash at the beginning of the year
|
|
|
59,652
|
|
|
|
67,437
|
|
|
|
86,960
|
|
Cash at the end of the year
|
|
|
67,437
|
|
|
|
86,960
|
|
|
|
117,547
|
|
Operating Activities
Net cash used in operating activities was $103.6
million for the year ended December 31, 2016. Net cash used in continuing operating activities was primarily attributable to (1)
a net loss of $89.2 million, (2) a decrease in income tax payable of $27.4 million and (3) a decrease due to related parties of
$15.0 million, partially offset by (1) certain non-cash expenses that did not result in cash outflow (principally bad debt expenses
of $12.7 million) and (2) depreciation and amortization of $13.0 million
Net cash used in operating activities was $69.1
million for the year ended December 31, 2015, consisting of net cash used in continuing operating activities of $28.0 million and
net cash used in discontinued operating activities of $41.0 million. Net cash used in continuing operating activities was primarily
attributable to (1) certain non-cash expenses that did not result in cash outflow, principally the depreciation and amortization
of $5.8 million, (2) an increase of other current assets of $16.0 million, (3) a decrease of $8.6 million in accounts payable and
(4) a decrease of $6.8 million in accrued expenses and other current liabilities.
Net cash used in operating activities was $1.8
million for the year ended December 31, 2014, consisting of net cash used in continuing operating activities of $42.6 million and
net cash provided by discontinued operating activities of $40.8 million. The net cash used in continuing operating activities was
primarily attributable to (1) certain non-cash expenses that did not result in cash outflow, principally depreciation and amortization
of $6.3 million and allowance for doubtful accounts of $3.2 million, (2) an increase of other non-current assets of $5.1 million,
(3) a decrease of $1.9 million in deferred revenue and (4) a decrease of $1.7 million in accounts payable.
Investing Activities
Net cash provided by investing activities for
the year ended December 31, 2016 amounted to $130.6 million. The amount of net cash provided by continuing investing activities
was principally attributable to receipt of consideration receivable of $196 million as a result of disposition of our 75% equity
interest in AM Advertising in 2015, partially offset by (1) purchase of property and equipment of $21.6 million, (2) purchase of
equity in subsidiary of $32.8 million and (3) increase of loan to third parties by $17.1 million.
Net cash provided by investing activities for
the year ended December 31, 2015 amounted to $88.1 million, consisting of net cash used in continuing investing activities of $5.1
million, offset by net cash provided by discontinued investing activities of $93.2 million. The amount of net cash used in continuing
investing activities was principally attributable to (1) purchase of property and equipment of $10.4 million, (2) purchase of long
term investments of $3.0 million, (3) acquisition of Guangzhou Xinyu of $4.8 million, offset by (4) net amount received upon settlement
of short-term investment of $14.2 million.
Net cash used in investing activities for the
year ended December 31, 2014 amounted to $6.2 million, consisting of net cash provided by continuing investing activities of $6.0
million, offset by net cash used in discontinued investing activities of $12.1 million. The amount of net cash provided by continuing
investing activities was principally attributable to net amount received upon settlement of short-term investment of $26.1 million,
and partially offset by purchase of property and equipment of $4.3 million and prepaid equipment costs of $11.2 million.
Prepaid Equipment Costs
On
May 12, 2013, we entered into an agreement with Elec-Tech International Co., Ltd., or Elec-Tech, to exchange the equity interests
of GreatView Media, one of our VIE subsidiaries, with LED screens from Elec-Tech, pursuant to which Elec-Tech would invest $104.0
million in total (equivalent to RMB640 million) to purchase approximately 21.27% of the equity interest of GreatView Media. In
exchange, GreatView Media undertook to exclusively use the equal amounts of such injections to purchase LED screens from Elec-Tech
or its subsidiaries. We considered this transaction a nonmonetary transaction. We measured the fair value of equity interests surrendered
based on the fair value of LED screens received, which is more clearly determinable. We would not recognize any gain or loss from
this transaction. As of December 31, 2015 and 2016, the prepaid equipment cost amounted to $27,708 and $16,200, respectively.
Capital Expenditures
Our capital expenditures were made primarily
to purchase equipment for our network, including network construction for our gas station media network and our Wi-Fi business.
We also exchange advertising time slots with other entities for digital TV screens and other equipment through barter transactions.
Our capital expenditures were $15.5 million
in 2014, $9.4 million in 2015 and $21.6 million in 2016, respectively.
We believe that our current cash and anticipated
cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and
capital expenditures for the next 12 months. We may, however, require additional cash due to changing business conditions or other
future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to
meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending institutions.
Financing Activities
Net cash provided by financing activities amounted
to $11.1 million for the year ended December 31, 2016, consisting of capital contribution from non-controlling interest holders
of $9.8 million and proceeds received from stock option exercise of $1.3 million.
Net cash provided by financing activities amounted
to $2.1 million for the year ended December 31, 2015, consisting of net cash provided by continuing financing activities of $2.1
million.
Net cash provided by financing activities amounted
to $16.8 million for the year ended December 31, 2014, consisting of net cash provided by continuing financing activities of $16.8
million.
Intra-Company Transfers
Transfers of cash between our PRC operating
subsidiaries and our non-PRC entities are regulated by certain PRC laws. For a description of these laws and the effect that they
may have on our ability to meet cash obligations, please refer to “Item 3. Key Information — D. Risk Factors —
Risks Related to our Business — Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC
withholding taxes, or we may be subject to PRC taxation on our worldwide income, and dividends distributed to our investors may
be subject to more PRC withholding taxes under PRC tax law,” “Item 3. Key Information — D. Risk Factors —
Risks Related to our Corporate Structure — We may rely principally on dividends and other distributions on equity paid by
our wholly-owned operating subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability
of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business,”
“Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Restrictions on
currency exchange may limit our ability to receive and use our revenues or financing effectively,” “Item 3. Key Information
— D. Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents and registration requirements for employee stock ownership plans or share
option plans may subject our PRC resident beneficial owners or the plan participants to personal liability, limit our ability to
inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute
profits to us, or may otherwise adversely affect us,” “Item 4. Information on the Company — A. History and Development
of the Company — B. Business Overview — Regulation — Regulations on Dividend Distribution,” and “Item
4. Information on the Company — A. History and Development of the Company — B. Business Overview — Regulation
— SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options”. None of these regulations have
had a material effect on our ability to meet our cash obligations.
Recently Issued
Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17,
Income Taxes-Balance Sheet Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred
income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The amendments in ASU 2015-17 are effective for fiscal years beginning after December 15, 2016 including
interim periods within those fiscal years. Earlier application is permitted for all entities as of the beginning of an interim
or annual reporting period. The Group adopted this ASU 2015-17 for the year ended December 31, 2016, as a result, the current portion
of deferred tax assets of $41 as of December 31, 2015 was reclassified and included in the non-current deferred tax assets.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which amends the scope of
modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or
conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an
entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the
same immediately before and after the modification. The amendments in this Update are effective for all entities for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments
in this Update should be applied prospectively to an award modified on or after the adoption date. The Group is currently evaluating
the impact of this new standard on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
"Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this ASU clarify the
definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to determine
when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered a business,
a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create
output and second, remove the evaluation of whether a market participant could replace missing elements. These amendments take
effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those periods, and all
other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The Group does not expect that the adoption of this guidance will have a material impact
on its consolidated financial statements.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally
Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition
method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”
(“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning January 1, 2018. In March
2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU
2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition
standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU
2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the
operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability,
noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”),
which makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current
accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation
issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying
the new revenue standard. These amendments have the same effective date as the new revenue standard. Preliminarily, we plan to
adopt Topic 606 in the first quarter of our fiscal 2018 using the retrospective transition method, and are continuing to evaluate
the impact our pending adoption of Topic 606 will have on our consolidated financial statements.
The Company’s current revenue recognition
policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to
input measures are not expected to be pervasive to the majority of the Company’s contracts. While no significant impact is
expected upon adoption of the new guidance, the Group will not be able to make that determination until the time of adoption based
upon outstanding contracts at that time.
In November 2016, the FASB issued ASU No. 2016-18,
"Statement of Cash Flows: Restricted Cash". The amendments address diversity in practice that exists in the classification
and presentation of changes in restricted cash on the statement of cash flows. The amendment is effective for public companies
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Group is currently
evaluating the impact of this new standard on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17,
Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control, to provide guidance on the evaluation
of whether a reporting entity is the primary beneficiary of a VIE by amending how a reporting entity, that is a single decision
maker of a VIE, treats indirect interests in that entity held through related parties that are under common control. The amendments
are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 31, 2016, and
interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim
period. The Group does not expect the adoption of the ASU to have any impact on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
“Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory.” This amendment is intended to improve
accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance,
an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs. The ASU is effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018 with modified
retrospective application. The Company is continuing to evaluate the impact of the adoption of this guidance on its consolidated
financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on the presentation
and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance specifically addresses
cash flow issues with the objective of reducing the diversity in practice. The guidance will be effective for the Company in fiscal
year 2018, but early adoption is permitted. The Group is currently evaluating the impact of this new standard on its consolidated
financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses”, which will require the measurement of all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within
those fiscal years. The Company is currently evaluating this statement and its impact on its results of operations or financial
position.
In May 2016, the FASB issued ASU No. 2016-11
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of Accounting Standards
Updates 2014-09 and 2014-16. Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which is rescinding certain SEC
Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and
Gas, effective upon adoption of Topic 606. The Group does not expect the adoption of the ASU to have any impact on its consolidated
financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple
provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and
complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and
the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based
payment activities. The ASU is effective for public companies in annual periods beginning after December 31, 2016, and interim
periods within those years. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated
financial statements.
In March 2016, the FASB issued ASU 2016-07,
Equity Method and Joint Ventures (Topic 323). The guidance eliminates the requirement that an investor retrospectively apply equity
method accounting when an investment that it had accounted for by another method initially qualifies for use of the equity method.
The guidance also requires an investor that has an available-for-sale security that subsequently qualifies for the equity method
to recognize in net income the unrealized holding gains or losses in accumulated other comprehensive income related to that security
when it begins applying the equity method. The guidance is effective for all entities for fiscal years beginning after December
31, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period. The guidance will
be adopted on a prospective basis. The Group does not expect that the adoption of this guidance will have a material impact on
its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating
leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured
at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make
an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the
guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period
presented using a modified retrospective approach. The Group is in the process of evaluating the impact that this guidance will
have on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01,
"Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities"
This guidance revises the accounting related to the classification and measurement of investments in equity securities as well
as the presentation for certain fair value changes in financial liabilities measured at fair value, and amends certain disclosure
requirements. The guidance requires that all equity investments, except those accounted for under the equity method of accounting
or those resulting in the consolidation of the investee, be accounted for at fair value with all fair value changes recognized
in income. For financial liabilities measured using the fair value option, the guidance requires that any change in fair value
caused by a change in instrument-specific credit risk be presented separately in other comprehensive income until the liability
is settled or reaches maturity. The guidance is effective for interim and annual reporting periods in fiscal years beginning after
December 15, 2017, with early adoption permitted for certain provisions. A reporting entity would generally record a cumulative-effect
adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The
Group is in the process of evaluating the impact that this guidance will have on its consolidated financial statements and related
disclosures.
|
C.
|
Research and Development, Patents and Licenses, Etc.
|
We have been developing certain technologies
for broadcasting purposes. However, our financial commitment to development of these technologies has been limited. During the
past three years, we have not incurred a significant amount of research and development expense. While we are interested in and
may experiment with new technologies from time to time, we do not intend to materially increase our research and development spending
in the foreseeable future.
Other than as disclosed elsewhere in this annual
report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material
effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause
reported financial information not necessarily to be indicative of future operating results or financial condition.
|
E.
|
Off-Balance Sheet Arrangements
|
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development
services with us.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
We have entered into operating lease agreements
primarily for our office spaces in China. These leases expire through 2018 and are renewable upon negotiation. In addition, the
contract terms of our concession rights contracts are usually three to five years. Most of these concession rights expire through
2018 and are renewable upon negotiation. The following table sets forth our contractual obligations and commercial commitments
as of December 31, 2016:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
|
(in thousands of U.S. Dollars)
|
|
Operating lease agreements
|
|
$
|
4,527
|
|
|
$
|
2,364
|
|
|
$
|
2,163
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Concession rights contracts
|
|
|
95,214
|
|
|
|
29,621
|
|
|
|
41,487
|
|
|
|
18,057
|
|
|
|
6,049
|
|
Total
|
|
$
|
99,741
|
|
|
$
|
31,985
|
|
|
$
|
43,650
|
|
|
$
|
18,057
|
|
|
$
|
6,049
|
|
See the section headed “Forward-Looking
Information”.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
The following table sets forth certain information
regarding our directors and executive officers as of May 31, 2017. Masseurs. James Zhonghua Feng and Peixin Xu each resigned as
a member of our board of directors effective as of December 28, 2016 for personal reasons. The resignations of Mr. Feng
and Mr. Xu were not due to any disagreement with us regarding our business, finance, accounting and/or any other affairs.
NAME
|
|
AGE
|
|
POSITION
|
Herman Man Guo
|
|
53
|
|
Chairman and Chief Executive Officer
|
Richard Peidong Wu
|
|
52
|
|
Chief Financial Officer
|
Qing Xu
|
|
56
|
|
Director and Executive President
|
Conor Chiahung Yang
|
|
54
|
|
Independent Director
|
Shichong Shan
|
|
86
|
|
Independent Director
|
Dong Wen
|
|
51
|
|
Independent Director
|
Songzuo Xiang
|
|
52
|
|
Independent Director
|
Hua Zhuo
|
|
47
|
|
Independent Director
|
Song Ye
|
|
36
|
|
Vice President
|
Bo Yang
|
|
36
|
|
Vice President
|
Peng Zhou
|
|
37
|
|
Vice President
|
Hong Li
|
|
46
|
|
Vice President
|
Rong Guo
|
|
48
|
|
Vice President
|
Mr. Herman Man Guo
is our founder and
has served as the chairman of our board of directors and our chief executive officer since our inception. He was the general manager
of Beijing Sunshine Media Co., Ltd. from 1997 to 2004. From 1991 to 1996, Mr. Guo served as the deputy general manager of Beijing
Trade & Technology Development Company. Prior to that, he worked in China Civil Aviation Development Service Company from 1988
to 1990. Mr. Guo received his bachelor’s degree in applied mathematics from People’s Liberation Army Information Engineering
University in China in 1983 and an Executive MBA degree from Peking University in China in 2011.
Mr. Richard Peidong Wu
has served as
our chief financial officer since June 2014. Prior to joining our company, Mr. Wu worked as the head of legal and compliance at
the greater china division of Nokia Solutions and Networks. Prior to that, he was the chief financial officer of Vimicro International
Corporation from 2011 to 2012. Mr. Wu also worked as a managing director at Dragon Bay Capital, a China-focused investment advisory
firm specializing in private placement, pre-IPO turnarounds, pre-auditing and investor relations. Mr. Wu started his career as
a senior legal counsel at Beijing Bei Fang Law Offices. Mr. Wu received his MBA degree from the Wharton School of the University
of Pennsylvania, a master’s degree in criminal justice from Indiana University and a postgraduate law diploma from the Chinese
University of Political Science and Law. Mr. Wu is a licensed attorney in China.
Mr. Qing Xu
has served as our director
since our inception and as our executive president since June 2010. From October 2005 to our inception, Mr. Xu served as a director
of certain of our pre-existing affiliated entities. From 2003 to 2005, Mr. Xu served as a vice president of Zhongyuan Guoxin Investment
Guarantee Co., Ltd. Prior to that, he served as a department director of China Haohua Group Co., Ltd. from 1997 to 2003 and as
a department manager of Beijing Trade & Technology Development Company from 1991 to 1997. Mr. Xu was a secretary at the PRC
State Council Secretary Bureau from 1984 to 1991. Mr. Xu received his associate’s degree in business and economics management
from Beijing Normal University in 1996.
Mr. Conor Chiahung Yang
has served as
our independent director since March 2013. Mr. Yang has serves as the chief financial officer of Tuniu Corporation since January
2013. Previously, Mr. Yang was the chief financial officer of E-Commerce China Dangdang Inc. from March 2010 to July 2012 and the
chief financial officer of our company, from March 2007 to March 2010. Mr. Yang was the chief executive officer of Rock Mobile
Corporation from 2004 to February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of the Asia Pacific region
for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from 1997 to 1999. Prior to that,
Mr. Yang was a vice president of Lehman Brothers Asia Limited from 1994 to 1996 and an associate at Morgan Stanley Asia Limited
from 1992 to 1994. Mr. Yang currently serves as an independent director of Leyou Technologies Holdings Limited, Mr. Yang received
his MBA degree from University of California, Los Angeles in 1992 and his bachelor’s degree from Fu Jen University in Taiwan
in 1985.
Mr. Shichong Shan
has served as our
independent director since July 2007. Mr. Shan has retired since 1996. Before he retired, Mr. Shan had held a number of senior
executive positions in various government agencies and other organizations in the aviation industry in China, including the General
Administration of Civil Aviation of China. Mr. Shan graduated from Shanghai Lixin University of Commerce and attended the college
program at the Eastern China Military and Politics Institute.
Mr. Dong Wen
has served as our independent
director since July 2015. Mr. Wen has been the general manager of the home furnishing business division of Leju Holdings Limited
(NYSE: LEJU) since 2011. Prior to that, he worked for four years as the chief executive officer of Lianlian Technology Group, which
is the largest channel management vendor for authorized third-party prepayment for China Mobile subscribers according to that company.
From 2002 to 2007, Mr. Wen worked as a senior vice president of B&Q China.
Dr. Songzuo Xiang
has served as our
independent director since November 2008. He currently serves on the board of China Digital TV Co. Ltd., an NYSE-listed company
providing conditional access systems to China’s digital television market. From March 2009 to October 2009 and from July
2000 to July 2009, Dr. Xiang served as chief executive officer and director, respectively, of Ku6 Media Co., Ltd., a NASDAQ-listed
company. He previously served as the Deputy Director of the Fund Planning Department at the People’s Bank of China Shenzhen
Branch and was an investment manager at Shenzhen Resources & Property Development Group. He was a visiting scholar at Columbia
University from May 1999 to July 2000 and at Cambridge University from October 1998 to May 1999. Dr. Xiang received his bachelor’s
degree in engineering in Huazhong University of Science and Technology in 1986, his master’s degree in international affairs
from Columbia University in 1999, his master’s degree in management science in 1993 and his Ph.D. degree in economics in
1993 from Renmin University in China.
Mr. Hua Zhuo.
Mr. Zhuo has served as
our independent director since July 2015. He has worked as the chairman and president of Zhongyuan Guoxin Credit Financing Guarantee
Co., Ltd. since 2003. Prior to that, he worked as the general manager at several other companies. Mr. Zhuo received his MBA degree
from Peking University.
Mr. Song Ye
has served as our vice president
in charge of product development since September 2015. Prior joining us, Mr. Ye was the product director of Qihoo 360 Technology,
a major internet security software provider in China. Mr. Ye has extensive experience in developing customer orientated online
products with his ability of design planning, operating, marketing and creating innovative business modes. Mr. Ye received his
MBA degree from Guanghua School of Management, Peking University and his bachelor’s degree from Nanjing University.
Mr.
Bo Yang
has served as our vice president
in charge of the business development of our group companies since November 2015. From August 2010 to November 2015, Mr. Yang served
as the business director of the mobile service section of Baidu.com, a leading searching engine in China, during which Mr Yang
was in charge of the management and development of Baidu Mobile Searching Union. Prior to that, Mr. Yang was the business development
manager of Borqs International Holding Corp and the operating director of Prosten Technology Holdings Limited. Mr. Yang received
his EMBA degree from the University of Texas at Arlington, his master degree in software engineering from Nanjing and his bachelor’s
degree from University of Science and Technology of China
Mr.
Peng Zhou
has served as our vice
president in charge of marketing and public relationship since January 2016. Mr. Peng Zhou has had an intimate knowledge in marketing
and strategic planning for online products. Previously, Mr. Zhou served as the senior vice president of Tianji.com from January
2015 to November 2015. From January 2012 to December 2014, Mr. Zhou was the senior director of industry analysis in the marketing
consultant department of Baidu.com. From August 2007 to August 2011, Mr. Zhou served as the marketing director of baicheng.com.
Prior to that, Mr. Zhou worked in elong.com and Sohu.com. Mr. Zhou received his bachelor’s degree from Tianjin University
of Commerce.
Mr.
Hong Li
has served as our vice president
in charge of in-bus Wi-Fi business since May 2015. Prior to joining us, Mr. Li served as the vice president of Green Energy GP
from March 2014 to May 2015, vice president of Greka Energy International Corp. from June 2008 to June 2013 and the executive director
and president of Zhongyou Hengran Petroleum and Gases Co., Ltd from September 2003 to June 2008. Mr. Li received his bachelor’s
degree from Beijing International Studies University.
Ms.
Rong Guo
has served as our vice
president in charge of In-train WIFI business since early 2015. Prior joining us, Ms. Guo has accumulated an abundant management
experience on the online media industry. Ms. Guo served as the as the vice general manager of Baiyun International Airport Advertising
Co., Ltd. and the account director of Shanghai Shengshi Great Wall Advertising Co., Ltd.
No family relationship exists between any of
our directors and executive officers. There are no arrangements or understandings with major shareholders, customers, suppliers
or others pursuant to which any person referred to above was selected as a director or member of senior management.
Employment
Agreements
We have entered into employment agreements
with Herman Man Guo and Richard Peidong Wu. Our employment agreements with Mr. Guo has an unfixed duration as required by the PRC
Employment Law. Mr. Guo may terminate the respective agreement with a one-month prior notice while we will only be able to terminate
such agreement in limited circumstances, such as for cause. Our employment agreement with Mr. Wu has a fixed duration and can be
terminated by either us or Mr. Wu with a one-month prior notice. We have also entered into employment agreements with our other
executive officers. Each of the contract terms was a period of two or three years. We may terminate the employment for cause, at
any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of
guilty to certain crimes, negligence or dishonesty to our detriment and failure to perform the agreed-to duties after a reasonable
opportunity to cure the failure. Furthermore, either we or an executive officer may terminate the employment at any time without
cause upon advance written notice to the other party. These agreements do not provide for any special termination benefits, nor
do we have other arrangements with these executive officers for special termination benefits.
Each executive officer has agreed to hold,
both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except as
required in the performance of his duties in connection with the employment, any confidential information, trade secrets and know-how
of our company or the confidential information of any third party, including our VIEs and our subsidiaries, received by us. In
addition, each executive officer has agreed to be bound by non-competition restrictions set forth in his or her employment agreement.
Specifically, each executive officer has agreed not to, for a period ranging from one to two years following the termination or
expiration of the employment agreement, (i) carry on or be engaged or interested, directly or indirectly, as shareholder, director,
employee, partner, agent or otherwise carry on any business in direct competition with our business; (ii) solicit or entice away
from us, or attempt to solicit or entice away from us, any person or entity who has been our customer, client or our representative
or agent or in the habit of dealing with us within two years prior to such executive officer’s termination of employment;
(iii) solicit or entice away from us, or attempt to solicit or entice away from us, any person or entity who has been our officer,
manager, consultant or employee within two years prior to such executive officer’s termination of employment; or (iv) use
a name including the word “AirMedia” or any other words used by us in our name or in the name of any of our products
or services, in such a way as to be capable of or likely to be confused with our name or the name of our products or services.
In 2016, the aggregate cash compensation to
our executive officers was approximately $0.3 million and the aggregate cash compensation to our non-executive directors was approximately
$0.2 million. Our PRC subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentages
of each employee’s salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory
benefits. Other than the above-mentioned pension insurance mandated by applicable PRC law, we have not set aside or accrued any
amount to provide pension, retirement or other similar benefits to our executive officers and directors. No executive officer is
entitled to any severance benefits upon termination of his or her employment with our company except as required under applicable
PRC law.
Share Options
In July 2007, we adopted the 2007 Option Plan
to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and
promote the success of our business. In December 2009, we amended the 2007 Option Plan by increasing the maximum aggregate number
of shares issuable under the plan from 12,000,000 to 17,000,000. In March 2011, our board of directors authorized the issuance
of 2,000,000 ordinary shares under the 2011 Option Plan with the same aim as the 2007 Option Plan. In 2012, our board of directors
adopted the 2012 Option Plan, under which we are authorized to grant restricted shares or options and other awards for a total
issuance of up to 6,000,000 ordinary shares. As of December 31, 2016, options to purchase 7,719,210 of our ordinary shares were
outstanding. The majority of these options will vest on a straight-line basis over a three-year period, with one-twelfth of the
options vesting each quarter from the date of grant.
The following table summarizes, as of December
31, 2016, the outstanding options granted to our executive officers, directors and to other individuals as a group under our 2007
Option Plan, as amended, 2011 Option Plan and 2012 Option Plan.
Name
|
|
Ordinary
Shares
Underlying
Options
|
|
|
Exercise
Price
(US$/Share)
(1)
|
|
|
Date of Grant
|
|
Expiration Date
|
Herman Man Guo
|
|
|
2,000,000
|
|
|
|
1.15
|
|
|
July 2, 2007
|
|
July 2, 2017
|
Richard Peidong Wu
|
|
|
1,276,620
|
|
|
|
1.025
|
|
|
June 1, 2014
|
|
June 1, 2019
|
Qing Xu
|
|
|
*
|
|
|
|
1.15
|
|
|
March 22, 2011
|
|
March 22, 2021
|
Conor Chia-hung Yang
|
|
|
245,942
|
|
|
|
1.15
|
|
|
July 2, 2007
|
|
July 2, 2017
|
|
|
|
220,000
|
|
|
|
1.15
|
|
|
November 29, 2007
|
|
December 31, 2017
|
|
|
|
500,000
|
|
|
|
1.15
|
|
|
July 10, 2009
|
|
December 31, 2017
|
Shichong Shan
|
|
|
*
|
|
|
|
1.15
|
|
|
July 20, 2007
|
|
July 20, 2017
|
Dong Wen
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Songzuo Xiang
|
|
|
*
|
|
|
|
1.15
|
|
|
July 10, 2009
|
|
December 31, 2017
|
Hua Zhuo
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Song Ye
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Bo Yang
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Peng Zhou
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Hong Li
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Rong Guo
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Other individuals as a group
|
|
|
200,000
|
|
|
|
1.57
|
|
|
July 20, 2007
|
|
July 20, 2017
|
Other individuals as a group
|
|
|
389,534
|
|
|
|
1.15
|
|
|
July 20, 2007
|
|
July 20, 2017
|
Other individuals as a group
|
|
|
165,000
|
|
|
|
1.15
|
|
|
November 29, 2007
|
|
January 1,2017
|
Other individuals as a group
|
|
|
206,000
|
|
|
|
1.15
|
|
|
July 10, 2009
|
|
December 31, 2017
|
Other individuals as a group
|
|
|
800,000
|
|
|
|
1.15
|
|
|
March 22, 2011
|
|
March 22, 2021
|
Other individuals as a group
|
|
|
200,000
|
|
|
|
1.025
|
|
|
June 1, 2014
|
|
June 1, 2019
|
Other individuals as a group
|
|
|
180,000
|
|
|
|
1.675
|
|
|
May 12, 2015
|
|
May 12, 2020
|
Other individuals as a group
|
|
|
40,000
|
|
|
|
1.045
|
|
|
August 1, 2014
|
|
August 1, 2019
|
|
*
|
Aggregate beneficial ownership of our company by such officer or director is less than 1% of our
total outstanding ordinary shares.
|
|
(1)
|
On August 23, 2011, in order to provide better incentive to our employees, our board of directors
approved an adjustment to the exercise price of a portion of the stock options previously granted to certain optionees on July
2, 2007, July 20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011. The exercise price for the adjusted portion of the
options is $1.15 per ordinary share and the exercise price for the unadjusted portion will remain the same at $1.57 per ordinary
share.
|
The following paragraphs summarize the terms
of our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan:
Plan Administration
. Our board of directors,
or a committee designated by our board or directors, will administer the plans. The committee or the full board of directors, as
appropriate, will determine the provisions and terms and conditions of each option grant.
Award Agreements
. Options and stock
purchase rights granted under our plans are evidenced by a stock option agreement or a stock purchase right agreement, as applicable,
that sets forth the terms, conditions and limitations for each grant. In addition, the stock option agreement and the stock purchase
right agreement also provide that securities granted are subject to a 180-day lock-up period following the effective date of a
registration statement filed by us under the Securities Act, if so requested by us or any representative of the underwriters in
connection with any registration of the offering of any of our securities.
Eligibility
. We may grant awards to
our employees, directors and consultants or any of our related entities, which include our subsidiaries or any entities in which
we hold a substantial ownership interest.
Acceleration of Options upon Corporate Transactions
.
The outstanding options will terminate and accelerate upon occurrence of a change-of-control corporate transaction where the successor
entity does not assume our outstanding options under the plans. In such event, each outstanding option will become fully vested
and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights
will terminate immediately before the date of the change-of-control transaction provided that the grantee’s continuous service
with us shall not be terminated before that date.
Exercise Price and Terms of the Options
.
The exercise price per share subject to an option may be amended or adjusted in the absolute discretion of the compensation committee,
the determination of which shall be final, binding and conclusive. To the extent not prohibited by applicable laws or exchange
rules, a re-pricing of options mentioned in the preceding sentence shall be effective without the approval of our shareholders
or the approval of the optionees. Notwithstanding the foregoing, the exercise price per share subject to an option may not be increased
without the approval of the affected optionees. If we grant an option to an individual who, at the date of grant, possesses more
than ten percent of the total combined voting power of all classes of our shares, the exercise price cannot be less than 110% of
the fair market value of our ordinary shares on the date of that grant. The compensation committee shall determine the time or
times at which an option may be exercised in whole or in part, including exercise prior to vesting, and shall determine any conditions,
if any, that must be satisfied before all or part of an option may be exercised. The term of each option grant shall be stated
in the stock option agreement, provided that the term shall not exceed 10 years from the date of the grant.
Vesting Schedule
. In general, the plan
administrator determines, or the stock option agreement specifies, the vesting schedule.
Transfer Restrictions
. Options to purchase
our ordinary shares may not be transferred in any manner by the optionee other than by will or the laws of succession and may be
exercised during the lifetime of the optionee only by the optionee.
Termination of the Plan
. Unless terminated
earlier, the 2007 Option Plan will expire and no further awards may be granted under it after July 2017, our 2011 Option Plan will
expire and no further awards may be granted under it after March 2021, and our 2012 Option Plan will expire and no further awards
may be granted under it after November 2022. Our board of directors has the authority to amend or terminate the plan subject to
shareholder approval to the extent necessary to comply with applicable law. However, no such action may impair the rights of any
optionee unless agreed by the optionee.
Our board of directors currently consists of
seven directors. A director is not required to hold any shares in our company by way of qualification. A director may vote with
respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the
powers of our company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities
whenever money is borrowed or as security for any obligation of our company or of any third party. The remuneration to be paid
to the directors is determined by the board of directors. There is no age limit requirement for directors.
Board Committees
We have established three committees under
the board of directors: an audit committee, a compensation committee, and a compliance committee. We currently do not plan to establish
a nominating committee. The independent directors of our company will select and recommend to the board for nomination by the board
such candidates as the independent directors, in the exercise of their judgment, have found to be well qualified and willing and
available to serve as our directors prior to each annual meeting of our shareholders at which our directors are to be elected or
reelected. In addition, our board of directors has resolved that director nominations be approved by a majority of the board as
well as a majority of the independent directors of the board. A majority of our board of directors are independent directors. We
have adopted a charter for each of the board committees. Each committee’s members and responsibilities are described below.
Audit Committee
. Our audit committee
consists of Messrs. Songzuo Xiang, Shichong Shan and Conor Chia-hung Yang. Mr. Yang is the chairperson. Our board of directors
has determined that all members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under
the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations of the NASDAQ Stock Market
LLC. We have determined that each of Songzuo Xiang and Conor Chia-hung Yang qualifies as an “audit committee financial expert.”
The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our
company. The audit committee is responsible for, among other things:
|
·
|
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
|
|
·
|
reviewing with the independent auditors any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related-party transactions on an ongoing basis;
|
|
·
|
discussing the annual audited financial statements with management and the independent auditors;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of material control deficiencies;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
other matters specifically delegated to our audit committee by our board of directors from time
to time;
|
|
·
|
meeting separately and periodically with management and the independent auditors; and
|
|
·
|
reporting regularly to the full board of directors.
|
Compensation Committee
. Our compensation
committee consists of Messrs. Hua Zhuo, Conor Chia-hung Yang and Shichong Shan. Conor Chia-hung Yang is the chairperson. Our board
of directors has determined that Messrs. Hua Zhuo, Conor Chia-hung Yang and Shichong Shan satisfy the “independence”
requirements of the rules and regulations of the NASDAQ Stock Market LLC. Our compensation committee assists the board in reviewing
and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for, among other things:
|
·
|
reviewing and recommending to the board with respect to the total compensation package for our
executive officers;
|
|
·
|
reviewing and making recommendations to the board with respect to the compensation of our directors;
and
|
|
·
|
reviewing periodically and approving any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
Compliance Committee
. Our compliance
committee consists of Messrs. Qing Xu, Songzuo Xiang and Hua Zhuo. Mr. Xu is the chairperson. Our compliance committee assists
the board in overseeing the Company’s compliance with the laws and regulations applicable to the Company’s business,
and compliance with the Company’s code of business conduct and ethics and related policies by employees, officers, directors
and other agents and associates of the Company. The compliance committee is responsible for, among other things:
|
·
|
establishing and revising project and purchase control policies;
|
|
·
|
establishing and revising administration and business supervision policies;
|
|
·
|
accepting, investigating, and settling any comments, complaints, and reports from employees;
|
|
·
|
investigating and settling any matters delegated from the board of directors; and
|
|
·
|
monitoring the status of implementation of company policies.
|
Duties of
Directors
Under Cayman Islands law, our directors have
a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also owe to our company a
duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties
a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth
courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to
be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum
and articles of association, as amended and restated from time to time.
Terms of Directors
and Officers
All directors hold office until the expiration
of their terms and until their successors have been elected and qualified. A director may be removed from office before the expiry
of his term by a special resolution passed by the shareholders. The directors shall be subject to retirement by rotation. Any director
shall serve a term of office which shall expire on the 31st day of July which is not less than one year nor more than two years
after the date of his appointment. Upon the expiry of each director’s term of office, he shall automatically retire and cease
to be a director, but shall be eligible for re-election by the board of directors. Any director who is so re-elected shall serve
an additional term which shall expire on the 31st day of July of the year which is two years after such re-election. There shall
be no limit on the number of times which a director may be re-elected or the number of additional terms which any such director
may serve. Every director is subject to retirement in accordance with our articles of association at least once every two years.
Our articles of association also provide that the office of a director shall be vacated in a limited number of circumstances, namely
if the director: (a) becomes bankrupt or makes any arrangement or composition with his creditors; (b) is found to be or becomes
of unsound mind; (c) resigns his office by notice in writing to our Company; or (d) without special leave of absence from the board
of directors, is absent from meetings of the board of directors for six consecutive months and the board of directors resolves
that his office be vacated. Officers are elected by and serve at the discretion of our board of directors.
In addition, our service agreements with our
directors do not provide benefits upon termination of their services.
We had 890, 415 and 410 employees as of December
31, 2014, 2015 and 2016, respectively. The decrease in our number of employees from 2014 to 2015 was mainly attributable to our
divestitures of several of our business lines in 2015. The following table sets forth the number of our employees by area of business
as of December 31, 2014, 2015 and 2016, respectively:
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
Sales and Marketing Department
|
|
|
369
|
|
|
|
41.5
|
|
|
|
57
|
|
|
|
13.7
|
|
|
|
387
|
|
|
|
36.8
|
|
Quality Control and Technology Department
|
|
|
200
|
|
|
|
22.5
|
|
|
|
175
|
|
|
|
42.2
|
|
|
|
317
|
|
|
|
30.1
|
|
Programming Department
|
|
|
74
|
|
|
|
8.3
|
|
|
|
19
|
|
|
|
4.6
|
|
|
|
124
|
|
|
|
11.8
|
|
Resources Development Department
|
|
|
81
|
|
|
|
9.1
|
|
|
|
15
|
|
|
|
3.6
|
|
|
|
15
|
|
|
|
1.4
|
|
General Administrative and Accounting
|
|
|
166
|
|
|
|
18.6
|
|
|
|
149
|
|
|
|
35.9
|
|
|
|
209
|
|
|
|
19.9
|
|
Total
|
|
|
890
|
|
|
|
100.0
|
|
|
|
415
|
|
|
|
100.0
|
|
|
|
1,052
|
|
|
|
100.0
|
|
The following table sets forth the breakdown
of employees by geographic location as of December 31, 2016:
City
|
|
Number of
Employees
|
|
|
% of Total
|
|
Beijing
|
|
|
617
|
|
|
|
58.6
|
|
Shanghai
|
|
|
20
|
|
|
|
1.9
|
|
Jinan
|
|
|
145
|
|
|
|
13.8
|
|
Guangzhou
|
|
|
237
|
|
|
|
22.5
|
|
Shenzhen
|
|
|
8
|
|
|
|
0.8
|
|
Wenzhou
|
|
|
10
|
|
|
|
1.0
|
|
Others
|
|
|
15
|
|
|
|
1.4
|
|
Total
|
|
|
1,052
|
|
|
|
100.0
|
|
Generally we enter into standard employment
contracts with our officers, managers and other employees. According to these contracts, all of our employees are prohibited from
engaging in any other employment during the period of their employment with us. The employment contracts with officers and managers
are subject to renewal every three years and the employment contracts with other employees are subject to renewal every year.
In addition, we enter into standard confidentiality
agreements with all of our employees including officers and managers that prohibit any employee from disclosing confidential information
obtained during their employment with us. Furthermore, the confidentiality agreements include a covenant that prohibits all employees
from engaging in any activities that compete with our business up to two years after their employment with us terminates.
Our employees are not covered by any collective
bargaining agreement. We consider our relations with our employees to be generally good.
The following table sets forth information
with respect to the beneficial ownership of our ordinary shares as of May 31, 2017, by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each principal shareholder, or person known to us to own beneficially more than 5.0% of our ordinary
shares.
|
The calculations in the shareholder table below
are based on 125,629,779 ordinary shares outstanding as of May 31, 2017 (excluding 2,032,278 ordinary shares and ordinary shares
represented by ADSs reserved for settlement upon exercise of our incentive share awards). Beneficial ownership is determined in
accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days after May
31, 2017, the most recent practicable date, including through the exercise of any option, or other right or the conversion of any
other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
|
|
Shares Beneficially Owned
|
|
|
|
Number
|
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Herman Man Guo
(1)
|
|
|
19,505,980
|
|
|
|
15.5
|
%
|
Richard Peidong Wu
|
|
|
*
|
|
|
|
*
|
|
Qing Xu
(2)
|
|
|
1,600,000
|
|
|
|
1.3
|
%
|
Conor Chiahung Yang
|
|
|
*
|
|
|
|
*
|
|
Shichong Shan
|
|
|
*
|
|
|
|
*
|
|
Dong Wen
|
|
|
—
|
|
|
|
—
|
|
Songzuo Xiang
|
|
|
*
|
|
|
|
*
|
|
Hua Zhuo
|
|
|
—
|
|
|
|
—
|
|
Song Ye
|
|
|
—
|
|
|
|
—
|
|
Bo Yang
|
|
|
—
|
|
|
|
—
|
|
Peng Zhou
|
|
|
—
|
|
|
|
—
|
|
Hong Li
|
|
|
—
|
|
|
|
—
|
|
Rong Guo
|
|
|
—
|
|
|
|
—
|
|
All directors and executive officers
|
|
|
34,916,661
|
|
|
|
27.8
|
%
|
|
|
|
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Dan Shao
(3)
|
|
|
20,584,214
|
|
|
|
16.4
|
%
|
Wealthy Environment Limited
(4)
|
|
|
17,505,980
|
|
|
|
13.9
|
%
|
Bison Capital Media Limited
(5)
|
|
|
12,000,000
|
|
|
|
9.6
|
%
|
First Manhattan Co.,
First Beijing Investment (Cayman) Limited,
First Beijing Investment Limited
(6)
|
|
|
7,569,912
|
|
|
|
6.0
|
%
|
|
*
|
Aggregate beneficial ownership of our company by such director or officer is less than 1% of our
total outstanding ordinary shares.
|
|
(1)
|
Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, a BVI company wholly
owned by Mr. Herman Man Guo, (ii) 1,400,000 ordinary shares represented by American Depositary Shares held by Wealthy Environment
Limited and (iii) 2,000,000 ordinary shares issuable upon exercise of options held by Mr. Guo that are exercisable within 60 days.
|
|
(2)
|
Includes (i) 1,000,000 ordinary shares held by Mambo Fiesta Limited, a BVI company wholly owned
by Mr. Qing Xu, and (ii) 600,000 ordinary shares issuable upon exercise of options held by Mr. Xu that are exercisable within 60
days.
|
|
(3)
|
Includes (i) 20,000,000 ordinary shares held by Global Earning Pacific Limited and (ii) 584,214
ordinary shares represented by ADSs that Ms. Dan Shao purchased in one or more open-market transactions. Global Earning Pacific
Limited, a company incorporated in BVI, is wholly owned and controlled by Ms. Dan Shao, Mr. Herman Man Guo’s wife. The registered
address of Global Earning Pacific Limited is OMC Chambers, Wickham Cay 1, Road Town Tortola, BVI.
|
|
(4)
|
Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, and (ii) 1,400,000
ordinary shares represented by American Depositary Shares held by Wealthy Environment Limited. Wealthy Environment Limited, a company
incorporated in BVI, is wholly owned and controlled by Herman Man Guo. The registered address of Wealthy Environment Limited is
P.O. Box 173, Kingston Chambers, Road Town Tortola, BVI.
|
|
(5)
|
The address of Bison Capital Media Limited is c/o Bison Capital Holding Company Limited, 609-610,
21st Century Tower, 40 Liangmaqiao Road, Chaoyang District, Beijing, People’s Republic of China, 100016. Bison Capital Media
Limited, a Cayman Islands company, is wholly-owned by Bison Capital Holding Company Limited, a Cayman Islands company, which is
in turn wholly owned by Ms. Fengyun Jiang, a citizen of Hong Kong Special Administrative Region. Ms. Jiang is the sole director
of both Bison Capital Media Limited and Bison Capital Holding Company Limited. Ms. Jiang possesses the power to direct the voting
and disposition of the shares owned by Bison Capital Media Limited and may be deemed to have beneficial ownership of such shares.
|
|
(6)
|
Based on Schedule 13G filed with the SEC on February 14, 2017 jointly by First Manhattan Co., a
New York limited partnership, First Beijing Investment (Cayman) Limited, a Cayman Islands company, and First Beijing Investment
Limited, a Hong Kong company. According to the Schedule 13G, as of December 31, 2016, First Manhattan Co., First Beijing Investment
(Cayman) Limited and First Beijing Investment Limited each had shared voting power and shared investment power with respect to
7,569,912 ordinary shares, or 6.1% of the 124,395,645 shares that the Company reported as outstanding as of December 31, 2015.
The business address of First Manhattan Co. is 399 Park Avenue, New York, NY 10022. The business address of First Beijing Investment
(Cayman) Limited is Scotia Centre, 4
th
Floor, P.O. Box 2804, George Town, Grand Cayman KY1-1112, Cayman Islands. The
business address of First Beijing Investment Limited is Level 15, Yardley Commercial Building, 1-6 Connaught Road, West Sheung
Wan, Hong Kong.
|
Other than as otherwise disclosed in this report,
we are not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural
or legal person severally or jointly. None of our major shareholders have different voting rights from other shareholders. We are
not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
As of May 31, 2017, 127,662,057 of our ordinary
shares were issued and outstanding, of which 2,032,278 ordinary shares are issued to our depositary bank reserved for future exercise
of vested options. To our knowledge, we had only one record shareholder in the United States, JPMorgan Chase Bank, N. A., which
is the depositary of our ADS program and held approximately 71% of our total outstanding ordinary shares as of May 31, 2017. The
number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our
ordinary shares in the United States.
For the options granted to our directors, officers
and employees, please refer to “— B. Compensation — Share Options.”
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to “Item 6. Directors, Senior
Management and Employees — E. Share Ownership.”
|
B.
|
Related Party Transactions
|
Contractual
Arrangements
Our consolidated VIEs, AM Yuehang, and AirMedia
Shengshi, together with their subsidiaries, directly operate our air travel advertising network, enter into related concession
rights contracts and sell advertising time slots and advertising locations to our advertisers. Our consolidated VIE, AM Online,
along with its subsidiaries, enters into concession rights contracts in relation to our Wi-Fi business and is expected to directly
operate this business and enter into related business contracts. We have been and expect to continue to be dependent on our VIEs
to operate our advertising business and Wi-Fi business. AM Technology has entered into contractual arrangements with our VIEs,
pursuant to which AM Technology provides exclusive technology support and service and technology development services in exchange
for payments from them. In addition, AM Technology has entered into agreements with our VIEs and each of their individual shareholders
(except Yi Zhang), which provide AM Technology with the substantial ability to control our VIEs. These agreements are summarized
in the following paragraphs.
|
·
|
Technology support and service agreements:
AM Technology provides exclusive technology
support and consulting services to our VIEs and in return, the VIEs are required to pay AM Technology service fees. Except for
AM Online, the VIEs pay to AM Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting
such service fees payable to AM Technology, a net cost- plus rate of no less than 0.5% in the case of AirMedia Shengshi and Jiaming
Advertising, or 1.0% in the case of AM Yuehang. It is at AM Technology’s sole discretion that the rate and amount of service
fees ultimately charged the VIEs under these agreements are determined. The “net cost-plus rate” refers to the operating
profit as a percentage of total costs and expenses of a certain entity. The technology support and service fees for each given
year payable by AM Online to AM Technology under AM Online’s technology support and service agreement shall be determined
by AM Online and AM Technology at the first month of such year taking into account several factors. Those factors include the credential
of the team of AM Technology that provides services to AM Online, the number of service hours, the nature and value of the services
provided by AM Technology, the extent to which AM Technology provides patent or other license to AM Online in its provision of
technology support and service and the correlation between AM Online’s results of operations and the technology support and
service provided by AM Technology. In the event AM Technology finds it necessary to make subsequent adjustment to the amount of
fees, AM Online shall negotiate in good faith with AM Technology to determine the new fee. The technology support and service agreements
are effective for ten years and such term is automatically renewed upon their expiration unless either party to an agreement informs
the other party of its intention not to extend at least twenty days prior to the expiration of these agreements.
|
|
·
|
Technology development agreements:
Our VIEs exclusively engage AM Technology to provide
technology development services. AM Technology owns the intellectual property rights developed in the performance of these agreements.
Except for AM Online, the VIEs pay to AM Technology annual service fees in the amount that guarantee that the VIEs can achieve,
after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5% in the case of AirMedia Shengshi
and Jiaming Advertising, which final rate should be determined by AM Technology. It is at AM Technology’s sole discretion
the rate and amount of fees ultimately charged the VIEs under these agreements are determined. The “net cost-plus rate”
refers to the operating profit as a percentage of total costs and expenses of a certain entity. The technology development fees
for each given year payable by AM Online to AM Technology under AM Online’s technology development agreement shall be determined
by AM Online and AM Technology at the first month of such year taking into account several factors. Those factors include the credential
of the team of AM Technology that provides services to AM Online, the number of service hours, the nature and value of the services
provided by AM Technology, the extent to which AM Technology provides patent or other license to AM Online in its provision of
technology development service and the correlation between AM Online’s results of operations and the technology development
service provided by AM Technology. In the event AM Technology finds it necessary to make subsequent adjustment to the amount of
fees, AM Online shall negotiate in good faith with AM Technology to determine the new fee. The technology development agreements
are effective for ten years and such term is automatically renewed upon their expiration unless either party informs the other
party of its intention not to extend at least twenty days prior to the expiration of these agreements.
|
|
·
|
Exclusive Technology Consultation and Service Agreement:
AM online exclusively engages
AM Technology to provide consultation services in relation to management, training, marketing and promotion. AM Online agrees to
pay to AM Technology the amount of annual service fees as determined by AM Technology. In the event AM Technology finds it necessary
to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with AM Technology to determine the
new fees. The exclusive technology consultation and service agreement remains effective for ten years and such term may be reviewed
by AM Technology’s written confirmation prior to the expiration of the agreement term.
|
|
·
|
Call option agreements:
Under the call option agreements between AM Technology and
the individual shareholders (except Yi Zhang) of AirMedia Shengshi, AM Yuehang and Jiaming Advertising, the shareholders of those
VIEs irrevocably granted AM Technology or its designated third party an exclusive option to purchase from the VIEs’ shareholders,
to the extent permitted under PRC law, all the equity interests in the VIEs, as the case may be, for the minimum amount of consideration
permitted by the applicable law without any other conditions. Under the call option agreements between AM Technology and the shareholders
of AM Online, the shareholders of AM Online (except Yi Zhang) irrevocably granted AM Technology or its designated third party an
exclusive option to purchase from the shareholders of AM Online, to the extent permitted under PRC law, all the equity interests
in AM Online, as the case may be. To the extent the applicable PRC law does not require the valuation of the subject equity interests
and does not otherwise restrict the purchase price for such equity interests, such purchase price shall equal the amount of actual
payment made by the respective shareholders of AM Online with respect to the equity interests whether in the form or share capital
injection or secondary purchase price. If and where the applicable PRC law requires the valuation of the subject equity interests
or otherwise has restrictions on the purchase price for such equity interests, such purchase price shall equal the minimum amount
of consideration permitted by the applicable law. In addition, under these agreements (except for the call option agreements between
AM Technology and the shareholders of AM Online), AM Technology has undertaken to act as guarantor of VIEs in all operations-related
contracts, agreements and transactions and commit to provide loans to support the business development needs of VIEs or if the
VIEs suffer operating difficulties, provided that the relevant VIE’s shareholders satisfy the terms and conditions in the
call option agreements. Under PRC laws, to provide an effective guarantee, a guarantor needs to execute a specific written agreement
with the beneficiary of the guarantee. As AM Technology has not entered into any written guarantee agreements with any third party
beneficiaries to guarantee the VIEs’ performance obligations to these third parties, none of these third parties can demand
performance from AM Technology as a guarantor of the VIEs’ performance obligations. The absence of a written guarantee agreement,
however, does not affect our conclusion that we are the primary beneficiary of the VIEs and in turn should consolidate the financials
of the VIEs. The term of each call option agreement is ten years and such terms can be renewed upon expiration at AM Technology’s
sole discretion. In January 2016, shareholders of AM Online, AirMedia Shengshi and Jiaming Advertising (except Yi Zhang) entered
into a supplement agreement to provide that, without respect to the changes in equity interest percentages of those shareholders
in the respective VIEs, the relevant provisions of the respective call option agreements shall continue to apply.
|
|
·
|
Equity pledge agreements:
Under the equity pledge agreements between AM Technology
and the individual shareholders of our VIEs other than AM Online, the individual shareholders of those VIEs (except Yi Zhang) pledged
all of their equity interests, including the right to receive declared dividends, in those VIEs to AM Technology to guarantee those
VIEs’ performance of their obligations under the technology support and service agreement and the technology development
agreement. Under the equity pledge agreements between AM Technology and the shareholders of AM Online, the shareholders of AM Online
(except Yi Zhang) pledged all of their equity interests, including the right to receive declared dividends, in AM Online to AM
Technology to guarantee the performance by AM Online of its obligations under its call option agreement and its exclusive technology
consultation and service agreement. If the VIEs fail to perform its obligations set forth in the applicable agreements, AM Technology
shall be entitled to exercise all the remedies and powers set forth in the provisions of the applicable equity pledge agreements.
Those agreements remain effective for as long as the technology support and service agreements and technology development agreement
are effective, or, in the case of AM Online, until two years after the term of the obligations under the call option agreement
and exclusive technology consultation and service agreement. Pursuant to the PRC Property Rights Law, an equity pledge is not perfected
as a security property right unless it is registered with the competent local administration for industry and commerce. We have
not yet registered the share pledges by shareholders of AM Online, AirMedia Shengshi and Jiaming Advertising. In January 2016,
shareholders of AM Online, AirMedia Shengshi and Jiaming Advertising (except Yi Zhang) entered into a supplement agreement to provide
that, without respect to the changes in equity interest percentages of those shareholders in the respective VIEs, the relevant
provisions of the respective equity pledge agreements shall continue to apply.
|
|
·
|
Authorization letters:
Each individual shareholder of the VIEs (except Yi Zhang)
has executed an authorization letter to authorize persons appointed by AM Technology to exercise certain of its rights, including
voting rights, the rights to enter into legal documents and the rights to transfer any or all of its equity interest in the VIEs.
The authorization letters by the shareholders of our VIEs will remain effective during the operating periods of the respective
VIEs and for so long as the respective parties remain shareholders of the VIEs unless terminated earlier by AM Technology or unless
the call option agreement with respect to VIEs is terminated prior to its expiration.
|
Through the above contractual arrangements,
AM Technology has obtained the voting interest in the VIEs of all their shareholders (except Yi Zhang), has the right to receive
substantially all dividends declared and paid by the VIEs and may receive substantially all of the net income of the VIEs through
the technical support and service fees as determined by AM Technology at its sole discretion. Accordingly, we have consolidated
the VIEs because we believe, through the contractual arrangements, (1) AM Technology could direct the activities of the VIEs that
most significantly affect its economic performance and (2) AM Technology could receive substantially all of the benefits that could
be potentially significant to the VIEs. Other than the contractual arrangements described above, because the management and certain
employees of AM Technology also serve in the VIEs as management or employees, certain operating costs paid by AM Technology, such
as payroll costs and office rental, were re-charged to the VIEs.
AM Technology also entered into loan agreements
with each shareholder of AM Online (except Yi Zhang), pursuant to which AM Technology agrees to make loans in an aggregate amount
of RMB50 million to the shareholders of AM Online solely for the incorporation and capitalization of AM Online. The loan is interest
free and the term of the loan is ten years and shall be automatically renewed on an annual basis unless AM Technology objects.
AM Technology can require the shareholders to repay all or a portion of the loan before the maturity date with a 15 days prior
written notice. Under such circumstances, AM Technology is entitled to, or designate a third party to, buy all or a portion of
the shareholders’ equity interests in AM Online on a pro rata basis based on the amount of the repaid principal of the loan.
As of the date of this annual report, no loan had been made and the capital of AM Online subscribed by shareholders other than
Yi Zhang was not injected.
Amounts due
from related parties
As of December 31, 2016, we had $0.8 million
due from Mr. Qing Xu, representing an advances to him on a short term basis for business needs.
Share Options
See “Item 6. Directors, Senior Management
and Employees — B. Compensation — Share Options.”
“Going-Private”
Transaction
On June 19, 2015, Mr. Herman Man Guo submitted
to the board of directors of the Company a preliminary non-binding proposal letter (the “Proposal Letter”) to acquire
the Company in a going private transaction for $3.00 in cash per Share (or $6.00 in cash per ADS) other than any ordinary shares
or ADSs of the Company beneficially held by Mr. Herman Man Guo, his affiliates or other management shareholders who may choose
to roll over their Shares in connection with the proposed acquisition (the “Proposal”). The proposed purchase price
represents a premium of approximately 70.5% to the closing trading price of our ADS on June 18, 2015, the last trading day prior
to the date of the going-private proposal. Our board of directors has formed a special committee consisting of three independent
directors, Messrs. Conor Chia-hung Yang (to serve as chairman of the committee), Shichong Shan and Songzuo Xiang, to consider the
Proposal.
On June 29, 2015, Mr. Guo, Mr. Qing Xu
and Mr. James Zhonghua Feng entered into a consortium agreement pursuant to which the consortium members agreed to, among other
things, form a consortium to work exclusively with one another to undertake the proposed transaction described in the Proposal
Letter. On September 18, 2015, upon signing and delivery of a withdrawal notice, Mr. Feng ceased to be a member of the buyer consortium.
Also on September 18, 2015, Mr. Guo and Mr. Xu entered into an amended and restated consortium agreement pursuant to which the
buyer consortium members agreed to, among other things, work exclusively with one another to undertake the proposed transaction
described in the Proposal Letter.
On September 29, 2015, we, AirMedia Holdings
Ltd. (“Parent”) and AirMedia Merger Company Limited (“Merger Sub”) executed and delivered the merger agreement
and the applicable parties executed the ancillary documents relating thereto as to which they respectively are a party. The Company
issued a press release announcing the execution of the merger agreement and the ancillary documents on September 30, 2015. Subject
to satisfaction of the terms and conditions under the merger agreement, at the effective time of the merger, the Merger Sub will
merge with and into our company, with our company continuing as the surviving corporation and a wholly-owned subsidiary of the
Parent. Each of our ordinary shares (including ordinary shares represented by ADSs) issued and outstanding immediately prior to
the effective time of the merger, other than (a) our ordinary shares (and the ordinary shares represented by ADSs) beneficially
owned by the rollover shareholders, but excluding the 1,000,000 ordinary shares of the Company (in the form of 500,000 ADSs) beneficially
owned by Mambo Fiesta Limited, a holding vehicle of Mr. Xu, (b) ordinary shares of the Company (including ordinary shares represented
by ADSs) owned by Parent, Merger Sub or the Company (as treasury shares, if any), or by any direct or indirect wholly-owned subsidiary
of Parent, Merger Sub or the Company, (c) ordinary shares (including ordinary shares represented by ADSs) reserved (but not yet
allocated) by the Company for settlement upon exercise of the Company’s incentive shares awards under any share incentive
plans of the Company, and (d) ordinary shares owned by shareholders who have validly exercised and have not effectively withdrawn
or lost their dissenters’ rights under the Cayman Islands Companies Law, will be cancelled in exchange for the right to receive
$3.00 in cash without interest.
Under the terms of the Merger Agreement,
either the Company or Parent could terminate the Merger Agreement if the merger contemplated by the Merger Agreement has not been
completed by the date of June 28, 2016. On June 27, 2016, the parties entered into Amendment No. 1 to the Merger
Agreement to extend this termination date to December 31, 2016. On December 19, 2016, the parties entered into Amendment No. 2
to the Merger Agreement to further extend the termination date to June 30, 2017.
The merger is subject to customary closing
conditions including the approval of the merger agreement by an affirmative vote of holders of shares representing at least two-thirds
of the voting power of the shares present and voting in person or by proxy at a meeting of our shareholders which will be convened
to consider the approval of the merger agreement and the merger.
The special committee (the "
Special
Committee
") of the Board of Directors (the “
Board
”) of the Company received a proposed amendment (the
“
Revised Proposal
”) to the Merger Agreement from Mr. Herman Man Guo, the Chief Executive Officer and Chairman
of the Board, and Mr. Qing Xu, the Executive President of the Company (collectively, the "
Buyer Group
") on May
23, 2017 to (a) acquire all of the outstanding shares of the Company not already owned by the Buyer Group for US$4.00 per American
Depositary Share or US$2.00 per ordinary share in cash, and (b) extend the Termination Date to December 31, 2017. The Special Committee
is evaluating the Revised Proposal with the assistance of its financial and legal advisors.
The Merger Agreement Amendment No. 3 extends
the Termination Date to July 31, 2017 so as to give the Special Committee sufficient time to consider the Revised Proposal.
The Special Committee cautions the Company's shareholders and others considering trading in the Company's securities that no decision
has been made by the Special Committee or the Board with respect to the Revised Proposal. There can be no assurance that
any definitive offer will be made, any agreement will be executed or that this or any other transaction will be approved or consummated.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information
|
Financial
Statements
We have appended consolidated financial
statements filed as part of this annual report. See “Item 18. Financial Statements”.
Legal
Proceedings
We may become subject to legal proceedings,
investigations and claims incidental to the conduct of our business from time to time.
The Company and two of its officers were
named as defendants in a putative securities class action filed on June 25, 2015 in the U.S. District Court for the Southern District
of New York:
Huang v. AirMedia Group Inc. et al.
, Civil Action No. 1:15-CV-04966-ALC (S.D.N.Y.). The complaint
in this putative class action alleges that certain of the defendants’ press releases, financial statements and other public
statements and disclosures contained misstatements or omissions, including with respect to the alleged sale of an equity interest
in the Company’s advertising subsidiary, in violation the U.S. securities laws. The complaint states that plaintiffs
seek to represent a class of persons who allegedly suffered damages as a result of their trading activities related to the Company’s
ADRs between April 15 and June 15, 2015, and alleges violations of Sections 10(b) and 20(a) of the U.S. Securities Exchange Act
of 1934, and Rule 10b-5 promulgated thereunder. On November 10, 2015, the court appointed China Xiayuan Transportation Co.
Ltd. as the lead plaintiff and appointed a lead counsel. On January 15, 2016, the lead plaintiff filed an amended complaint,
advancing similar allegations and claims as the previously filed complaint and seeking to represent a class of persons who allegedly
suffered damages as a result of their trading activities related to the Company’s ADRs between April 7 and June 15, 2015.
On February 5, 2016, the Company filed a letter pursuant to the judge’s individual practice rules, in which the Company identified
the bases for its anticipated motion to dismiss the amended complaint and requested a pre-motion conference. On February
10, 2016, the lead plaintiff filed a letter in response to the Company’s the February 5, 2016 letter. On February 11,
2016, the court denied the request for a pre-motion conference, and ordered a briefing schedule. Consistent with the court’s
briefing schedule, on March 10, 2016, the Company and one of its officers (the “Filing Defendants”) filed a motion
to dismiss the amended complaint. On April 7, 2016, the lead plaintiff filed its opposition to the motion to dismiss.
On April 21, 2016, the Filing Defendants filed a reply to the lead plaintiff’s opposition. On March 27, 2017, the court
granted the motion to dismiss and entered into a judgment dismissing the amended complaint with prejudice.
Beijing AirMedia Shengshi Advertising Co.,
Ltd., a variable interest entity of the Company (“AM Shengshi”), had served a legal letter dated June 29, 2016
(the “Legal Letter”) on Beijing Longde Wenchuang Equity Investment Fund (Limited Partnership) (“Longde Wenchuang”)
and Beijing Cultural Center Construction and Development Fund (Limited Partnership) (“Culture Center”) to challenge
the proposed transfers by Longde Wenchuang and Cultural Center of their equity interests in AM Advertising to Shanghai Golden Bridge
InfoTech Co., Ltd. (stock code: 603918), a PRC company with its shares listed on the Shanghai Stock Exchange (“Golden Bridge”).
As of the date of the Legal Letter, AM Shengshi held 24.84% of the equity interests in AM Advertising. Longde Wenchuang and Culture
Center held 28.57% and 46.43%, respectively, of the equity interests in AM Advertising. On June 14, 2016, Longde Wenchuang
and Culture Center entered into an equity interest transfer agreement with Golden Bridge to transfer 75% equity interests in AM
Advertising to Golden Bridge in consideration for shares in Golden Bridge (the “Transfer”). Neither of Longde Wenchuang
and Culture Center sought consent from AM Shengshi with respect to the Transfer in accordance with the provisions of the Company
Law of the People’s Republic of China (the “PRC Company Law”). In the Legal Letter, AM Shengshi challenges the
validity of the Transfer on the ground that it violated the statutory right of first refusal of AM Shengshi under the PRC Company
Law.
The Company received notice from the China
International Economic and Trade Arbitration Commission (the “CIETAC”) that the Company, AirMedia Technology (Beijing)
Co., Ltd., AM Shengshi and Mr. Herman Man Guo (collectively, the “Respondents”) were named as respondents by Culture
Center in an arbitration proceeding submitted by the Culture Center to the CIETAC in connection with the sale by the Company of
75% equity interests in AM Advertising to Culture Center and Longde Wenchuang in June 2015. Culture Center seeks specific performance
by the Respondents of certain obligations under the transaction documents, which include, among other things, (i) the pledge by
AM Shengshi and Mr. Guo of their respective equity interests in AM Advertising to Culture Center as security for their obligations
under the transaction documents, (ii) the use of best efforts by the Respondents to cooperate with the Culture Center and Longde
Wenchuang to procure the listing of AM Advertising in China and (iii) the performance by the Company and Mr. Guo of their respective
non-compete obligations to refrain from holding, operating, or otherwise participating in any business that is the same or substantially
the same as that of AM Advertising. The Company believes the arbitration request is without merit and intends to defend the actions
vigorously. However, no assurances can be provided that the Company will prevail in this arbitration proceeding. As of the date
of this annual report, this arbitration proceeding is still pending.
Mr. Xiaoya Zhang, a former shareholder
of AM Shengshi, had initiated legal proceedings against Mr. Qing Xu, a director and the executive president of the Company, with
respect to the transfers by Mr. Zhang of his equity interests in the company to Mr. Xu. In December 2015, AM Shengshi received
an equity interest transfer agreement (the “AM Shengshi SPA”), dated December 4, 2015, by and between Mr. Xiaoya Zhang
and Mr. Qing Xu, pursuant to which Mr. Zhang agrees to transfer 8.2% equity interests in AM Shengshi to Mr. Xu for RMB82,000 (the
“AM Shengshi Equity Transfer”). The AM Shengshi Equity Transfer was completed in December 2015. In February 2016, Mr.
Zhang initiated legal proceedings in a court in China against Mr. Xu, challenging the authenticity of his signatures to the AM
Shengshi SPA and consequently the validity of AM Shengshi Equity Transfer. On February 14, 2017, the court’s final decision
supported Mr. Xiaoya Zhang’s claim. The Group then further filed an arbitration against Mr.Xiaoya Zhang on April 21, 20117,
which is under the process. However, none of the Company or AM Shengshi is a party to the AM Shengshi SPA. As of the date of this
Report, none of the Company or AM Shengshi is named as a party in those legal proceedings. However, due to the uncertainty of the
outcome of these proceedings, there is no assurance that they will not result in material adverse effect on the Group, substantial
costs by the Group and/or the diversion of its resources and management attention. As of December 31, 2016, the Group did not record
a provision for this matter as management believes the possibility of adverse outcome of the matter is remote and any liability
it may incur would not have a material adverse effect on its consolidated financial statements.
For risks and uncertainties relating to
the pending cases against us, please see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We
have been named as a defendant in putative shareholder class action lawsuits that could have a material adverse impact on our business,
financial condition, results of operation, cash flows and reputation.”
We are not currently a party to, nor are
we aware of, any other legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material
adverse effect on our business, financial condition or results of operations.
Dividend
Policy
We have never declared or paid any dividends,
nor do we have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend
to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors has discretion in
deciding whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may
only pay dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid
if this would result in our company being unable to pay its debts due in the ordinary course of business. In addition, our shareholders
may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Even if our
board of directors decides to pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other
things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any,
received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our
board of directors.
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.
Except as disclosed elsewhere in this annual
report, we have not experienced any significant change since the date of our audited consolidated financial statements filed as
part of this annual report.
|
ITEM 9.
|
THE OFFER AND LISTING
|
|
A.
|
Offer and Listing Details
|
See “—C. Markets.”
Not applicable.
Our ADSs, each representing two of our
ordinary shares, were listed on the NASDAQ Global Market on November 7, 2007 and were subsequently transferred to the NASDAQ Global
Select Market. Our ADSs trade under the symbol “AMCN.” The following table provides the high and low trading prices
for our ADSs for the periods noted.
|
|
High
|
|
|
Low
|
|
Annual Market Prices
|
|
|
|
|
|
|
|
|
Year 2012
|
|
|
4.01
|
|
|
|
1.33
|
|
Year 2013
|
|
|
3.20
|
|
|
|
1.50
|
|
Year 2014
|
|
|
3.24
|
|
|
|
1.65
|
|
Year 2015
|
|
|
7.70
|
|
|
|
1.83
|
|
Year 2016
|
|
|
5.71
|
|
|
|
2.38
|
|
|
|
|
|
|
|
|
|
|
Quarterly Market Prices
|
|
|
|
|
|
|
|
|
First Quarter 2015
|
|
|
2.64
|
|
|
|
1.83
|
|
Second Quarter 2015
|
|
|
7.70
|
|
|
|
1.91
|
|
Third Quarter 2015
|
|
|
5.42
|
|
|
|
3.39
|
|
Fourth Quarter 2015
|
|
|
5.64
|
|
|
|
5.28
|
|
First Quarter 2016
|
|
|
5.71
|
|
|
|
5.05
|
|
Second Quarter 2016
|
|
|
5.66
|
|
|
|
3.18
|
|
Third Quarter 2016
|
|
|
3.78
|
|
|
|
2.57
|
|
Fourth Quarter 2016
|
|
|
3.47
|
|
|
|
2.38
|
|
First Quarter 2017
|
|
|
2.75
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
Monthly Market Prices
|
|
|
|
|
|
|
|
|
December 2016
|
|
|
2.79
|
|
|
|
2.38
|
|
January 2017
|
|
|
2.62
|
|
|
|
2.35
|
|
February 2017
|
|
|
2.60
|
|
|
|
2.38
|
|
March 2017
|
|
|
2.75
|
|
|
|
2.36
|
|
April 2017
|
|
|
3.17
|
|
|
|
2.63
|
|
May 2017
|
|
|
2.58
|
|
|
|
1.68
|
|
June 2017 (until June 27, 2017)
|
|
|
2.55
|
|
|
|
1.35
|
|
Not applicable.
Not applicable.
Not applicable.
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable.
|
B.
|
Memorandum and Articles of Association
|
The following are summaries of material
terms and provisions of our amended and restated memorandum and articles of association and the Companies Law (2016 Revision) of
the Cayman Islands, or the Companies Law, insofar as they relate to the material terms of our ordinary shares. This summary is
not complete, and you should read our amended and restated memorandum and articles of association, which has been filed as Exhibit
99.3 to our Form 6-K (File No. 001-33765) filed with the SEC on December 10, 2009, and the amendment thereto, which has been filed
as Exhibit 99.2 to our Form 6-K (File No. 001-33765) filed with the SEC on June 27, 2013. We subsequently amended our memorandum
and articles of association by shareholders’ resolutions passed on July 18, 2013, the results of which have been filed as
Exhibit 99.1 to our Form 6-K (File No. 001-33765) filed with the SEC on July 23, 2013.
Registered Office
and Objects
Our registered office in the Cayman Islands
is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands,
or at such other place as our board of directors may from time to time decide. The objects for which our company is established
are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from
time to time, or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management
and Employees — A. Directors and Senior Management.”
Ordinary Shares
General
All of our outstanding ordinary shares
are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders
who are non-residents of the Cayman Islands may freely hold and vote their shares.
Dividend
Rights
The holders of our ordinary shares are
entitled to such dividends as may be declared by our board of directors subject to the Companies Law.
Voting
Rights
Each ordinary share is entitled to one
vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands
unless a poll is demanded. A poll may be demanded by one or more shareholders holding together at least ten percent of the shares
given a right to vote at the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders
consists of shareholders holding not less than an aggregate of one-third of all voting share capital of the Company in issue present
in person or by proxy and entitled to vote. Shareholders’ meetings may be held annually and may be convened by our board
of directors on its own initiative or upon a request to the directors by shareholders holding in aggregate at least one-third of
our voting share capital. Advance notice of at least fourteen days is required for the convening of our annual general meeting
and other shareholders meetings.
An ordinary resolution to be passed by
the shareholders requires the affirmative vote of a simple majority of the votes attaching to the shares cast in a general meeting,
while a special resolution requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares
cast in a general meeting. A special resolution is required for important matters such as a change of name. Holders of the ordinary
shares may effect certain changes by ordinary resolution, including increasing the amount of our authorized share capital, consolidating
or dividing all or any of our share capital into shares of larger amount than our existing shares, and canceling any shares that
are authorized but unissued.
Transfer
of Shares
Subject to the restrictions of our articles
of association, as applicable, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer
in writing and executed by or on behalf of the transferor, accompanied by the certificates of such shares and such other evidence
as the Directors may reasonably require to show the right of the shareholder to make the transfer.
Repurchase
of Shares
Subject to the provisions of the Companies
Law and our articles of association, our board of directors may authorize repurchase of our shares in accordance with the manner
of purchase specified in our articles of association without seeking shareholder approval. Once the shares have been repurchased,
they may be cancelled or held in the name of the company as treasury shares.
Liquidation
On a return of capital on winding up or
otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders of
ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for
distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne
by our shareholders proportionately.
Redemption
of Shares
We may issue shares on terms that are subject
to redemption on such terms and in such manner as may, before the issue of such shares, be determined by our board of directors.
Calls
on Shares and Forfeiture of Shares
Our board of directors may from time to
time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least fourteen
calendar days prior to the specified time and place of payment. Shares that have been called upon and remain unpaid on the specified
time are subject to forfeiture.
Variations
of Rights of Shares
All or any of the special rights attached
to any class of shares may, subject to the provisions of our articles of association be varied either with the written consent
of the holders of a majority of the issued shares of that class or with the sanction of a special resolution passed at a general
meeting of the holders of the shares of that class.
Inspection
of Books and Records
Holders of our ordinary shares will have
no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However,
we will provide our shareholders with annual audited financial statements.
See “— H. Documents on Display.”
We have not entered into any material contracts
other than in the ordinary course of business and other than those described above, in “Item 4. Information on the Company”
or elsewhere in this annual report on Form 20-F.
There are no material exchange controls
restrictions on payment of dividends, interest or other payments to the holders of our ordinary shares or on the conduct of our
operations in the Cayman Islands, where we were incorporated. Cayman Islands law and our memorandum and articles of association
do not impose any material limitations on the right of nonresidents or foreign owners to hold or vote our ordinary shares.
See “Item 4. Information on the Company
— B. Business Overview — Regulation — Regulations on Foreign Exchange” for a description of PRC regulations
on foreign exchange.
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. No Cayman Islands stamp duty will be payable unless an instrument is executed in, or after execution,
brought to or produced before a court in the Cayman Islands.
The Cayman Islands is not party to any
double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or
currency restrictions in the Cayman Islands.
PRC Taxation
Under the EIT Law, foreign corporate shareholders
and corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or on any gains they realize from
the transfer of our shares or ADSs, if we are classified as a PRC resident enterprise and such income is regarded as income from
“sources within the PRC.” Given the fact that whether we would be regarded as “resident enterprise” is
not clear, it is uncertain whether foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax
upon the dividends payable by us or on any gains they realize from the transfer of our shares or ADSs. If we are required under
the PRC tax law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders or if
any gains of the transfer of their shares or ADSs are subject to PRC tax, such holders’ investment in our ADSs or ordinary
shares may be materially and adversely affected.
United
States Federal Income Taxation
The following is a summary of U.S. federal
income tax considerations generally applicable to the ownership and disposition of our ADSs or ordinary shares by a U.S. Holder
(as defined below) that holds our ADSs or ordinary shares as “capital assets” (generally, property held for investment)
under the U.S. Internal Revenue Code of 1986, as amended, or the Code, but it does not purport to be a complete analysis of all
potential tax consequences and considerations. This summary is based upon existing U.S. federal income tax law as of the date hereof,
which is subject to differing interpretations or change, possibly with retroactive effect. This summary does not discuss all aspects
of U.S. federal income taxation that may be important to particular holders in light of their individual circumstances, including
holders subject to special tax rules (for example, banks or other financial institutions, insurance companies, regulated investment
companies, real estate investment trusts, cooperatives, pension plans, broker-dealers, partnerships and their partners, and tax-exempt
organizations (including private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively)
10% or more of our voting stock, holders who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise
as compensation, holders that hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or
other integrated transaction for U.S. federal income tax purposes, traders in securities that have elected the mark-to-market method
of accounting for their securities or holders that have a functional currency other than the United States dollar, all of whom
may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any
alternative minimum tax, state, local, non-U.S. tax or non-income tax (such as the United States federal gift and estate tax) considerations
or the Medicare tax. Each U.S. Holder is urged to consult with its tax advisor regarding the U.S. federal, state, local, and non-U.S.
income and other tax considerations relating to the ownership and disposition of our ADSs or ordinary shares.
General
For purposes of this summary, a “U.S.
Holder” is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes, (i) an individual
who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal
income tax purposes) created in, or organized under the law of, the United States or any state thereof or the District of Columbia,
(iii) an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source,
or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one
or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise
elected to be treated as a United States person.
If a partnership (or other entity treated
as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment
of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships
holding our ADSs or ordinary shares and partners in such partnerships are urged to consult their tax advisors regarding their ownership
and disposition of our ADSs or ordinary shares.
It is generally expected that a U.S. Holder
of ADSs should be treated as the beneficial owner, for United States federal income tax purposes, of the underlying shares represented
by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly, deposits
or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Passive Foreign Investment
Company Considerations
Based on the market price of our ADSs and
the composition of our assets (in particular, the retention of a large amount of cash), we believe that we were a PFIC, for United
States federal income tax purposes, for the taxable year ended December 31, 2016, and we will very likely be classified as a PFIC
for our current taxable year ending December 31, 2017 unless the market price of our ADSs increases and/or we invest a substantial
amount of the cash and other passive assets we hold in assets that produce or are held for the production of non-passive income.
In general, we will be classified as a PFIC for any taxable year if either (i) 75 percent or more of our gross income for such
year is passive income or (ii) 50 percent or more of the average quarterly value of our assets (as generally determined on the
basis of fair market value) produce or are held for the production of passive income. For this purpose, cash and assets readily
convertible into cash are generally classified as passive and goodwill and other unbooked intangibles associated with active business
activities may generally be classified as non-passive. We will be treated as owning a proportionate share of the assets and earning
a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25 percent (by
value) of the stock. Although the law in this regard is unclear, we treat the VIEs (and their subsidiaries) as being owned by us
for U.S. federal income tax purposes, not only because we exercise effective control over the operations of such entities but also
because we are entitled to substantially all of the economic benefits associated with such entities, and, as a result, we consolidate
such entity’s’ operating results in our consolidated financial statements. Because there are uncertainties in the application
of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given with
respect to our PFIC status for any taxable year.
If we are classified as a PFIC for any
year during which a U.S. Holder holds ADSs or ordinary shares, a U.S. Holder will generally, as discussed below under “—Passive
Foreign Investment Company Rules,” be treated as holding an equity interest in a PFIC in the first taxable year of the U.S.
Holder’s holding period in which we are or become a PFIC and subsequent taxable years (“PFIC-Tainted Shares”)
even if, we in fact, cease to be a PFIC in subsequent taxable years.
Passive Foreign Investment
Company Rules
As mentioned above, we believe that we
were a PFIC for the taxable year ended December 31, 2016, and we will very likely be classified as a PFIC for our current taxable
year ending December 31, 2017. If we are classified as a PFIC for any taxable year during which a U.S. Holder holds ADSs or ordinary
shares, and unless a mark-to-market election (as described below) is made, a U.S. Holder will generally be subject to special tax
rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make (which
generally means any distribution received in a taxable year that is greater than 125 percent of the average annual distributions
received in the three preceding taxable years or such U.S. Holder’s holding period for the ADSs or ordinary shares, if shorter),
and (ii) any gain realized on the sale or other disposition, including a pledge, of our ADSs or ordinary shares. Under the PFIC
rules:
|
·
|
such excess distribution or gain will be allocated ratably over the U.S. Holder’s holding
period for the ADSs or ordinary shares;
|
|
·
|
such amount allocated to the current taxable year and any taxable year prior to the first taxable
year in which we are classified as a PFIC (a “pre-PFIC year”) will be taxable as ordinary income;
|
|
·
|
such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to
tax at the highest tax rate in effect applicable to such U.S. Holder for that year; and
|
|
·
|
an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable
to each prior taxable year, other than a pre-PFIC year.
|
If we are a PFIC for any taxable year during
which a U.S. Holder holds ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, such U.S. Holder
would be treated as owning a proportionate amount (by value) of the ADSs or ordinary shares of the lower-tier PFIC and would be
subject to the rules described above on certain distributions by a lower-tier PFIC and a disposition of ADSs or ordinary shares
of a lower-tier PFIC even though such U.S. Holder would not receive the proceeds of those distributions or dispositions.
As an alternative to the foregoing rules,
a holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock. Marketable
stock is stock that is regularly traded on a qualified exchange or other market as defined in applicable United States Treasury
Regulations. Our ADSs (but not our ordinary shares) are listed on the NASDAQ Global Select Market, which is a qualified exchange
or other market for these purposes. We anticipate that the ADSs will be considered regularly traded for so long as they continue
to be listed, but no assurance may be given in this regard. If a U.S. Holder makes this election, such holder will generally (i)
include in gross income for each taxable year the excess, if any, of the fair market value of the ADSs at the end of the taxable
year over the adjusted tax basis of the ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis
of the ADSs over the fair market value of the ADSs at the end of the taxable year, but only to the extent of the amount previously
included in income as a result of the mark-to-market election. The adjusted tax basis in the ADSs would be adjusted to reflect
any income or loss resulting from the mark-to-market election. If a mark-to-market election is made in respect of a corporation
classified as a PFIC and such corporation ceases to be classified as a PFIC, a U.S. Holder will generally not be required to take
into account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a mark-to-market
election is made, any gain recognized upon the sale or other disposition of ADSs will be treated as ordinary income and any loss
will be treated as ordinary loss, but such loss will only be treated as ordinary to the extent of the net amount previously included
in income as a result of the mark-to-market election. In the case of a U.S. Holder who has held ADSs during any taxable year in
which we are classified as PFIC and continues to hold such ADSs (or any portion thereof), and who is considering making a mark-to-market
election, special tax rules may apply relating to purging the PFIC taint of such ADSs. If a U.S. Holder makes a mark-to-market
election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions, except that
the reduced tax rate applicable to qualified dividend income (as discussed below in “ –Dividends”) would not
apply.
Because a mark-to-market election cannot
be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such
U.S. Holder’s indirect interest in any investment held by us that is treated as an equity interest in a PFIC for United States
federal income tax purposes.
We do not intend to provide the U.S. Holders
with the information necessary to permit U.S. Holders to make qualified electing fund elections, which, if available, would result
in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or ordinary
shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621. Each U.S. Holder is
urged to consult its tax advisor concerning the United States federal income tax consequences of holding and disposing ADSs or
ordinary shares if we are or become a PFIC, including the possibility of making a mark-to-market election, the “deemed sale”
and “deemed dividend” elections.
Dividends
Subject to the PFIC rules discussed above,
any cash distributions (including the amount of any taxes withheld) paid on our ADSs or ordinary shares out of our current or accumulated
earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income
of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary
shares, or by the depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis
of U.S. federal income tax principles, any distribution paid will generally be reported as a “dividend” for U.S. federal
income tax purposes. A non-corporate recipient of dividend income generally will be subject to tax on dividend income from a “qualified
foreign corporation” at a reduced U.S. federal tax rate rather than the marginal tax rates generally applicable to ordinary
income provided that certain holding period requirements are met.
A non-United States corporation (other
than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year)
generally will be considered to be a qualified foreign corporation with respect to any dividend it pays on stock (or ADSs in respect
of such stock) which is readily tradable on an established securities market in the United States or, in the event that the company
is deemed to be a PRC resident under the PRC Enterprise Income Tax Law, the company is eligible for the benefits of the United
States-PRC treaty. Dividends received on the ADSs or ordinary shares are not expected to be eligible for the dividends received
deduction allowed to corporations.
Although the ADSs are currently tradable
on the NASDAQ Global Select Market, which is an established securities market in the United States, and thus we anticipate they
will be considered readily tradable on an established securities market in the United States for purposes of the reduced tax rate,
no assurance may be given in this regard. Furthermore, as mentioned above, we believe that we were a PFIC for the taxable year
ended December 31, 2016, and we will very likely be classified as a PFIC for our current taxable year ending December 31, 2017.
Each U.S. Holder is advised to consult its tax advisor regarding the rate of tax that will apply to such holder with respect to,
dividend distributions, if any, received from us.
Dividends paid on our ADSs or ordinary
shares generally will be treated as income from foreign sources for United States foreign tax credit purposes and generally will
constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign
tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder
who does not elect to claim a foreign tax credit for foreign tax withheld, may instead claim a deduction, for U.S. federal income
tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign
income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised to consult its tax advisor regarding
the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of
ADSs or Ordinary Shares
Subject to the PFIC rules discussed above,
a U.S. Holder generally will recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary shares in an
amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such
ADSs or ordinary shares. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than
one year and will generally be United States source gain or loss for United States foreign tax credit purposes. The deductibility
of a capital loss is subject to limitations. Each U.S. Holder is advised to consult with its tax advisor 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.
Information Reporting
Certain U.S. Holders are required to report
information to the IRS relating to an interest in “specified foreign financial assets”, including shares issued by
a non-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000
(or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including an exception for shares held in custodial
accounts maintained with a United States financial institution). These rules also impose penalties if a U.S. Holder is required
to submit such information to the IRS and fails to timely do so.
In addition, U.S. Holders may be subject
to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our ADSs or
ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the United States information
reporting rules to their particular circumstances.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable.
We are subject to the periodic reporting
and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information
with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year.
Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates
at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C., 20549. The public
may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC
also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the
rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of
the Exchange Act.
We will furnish JPMorgan Chase Bank, N.
A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice
of a shareholders’ meeting received by the depositary from us.
In accordance with Nasdaq Stock Market
Rule 5250(d), we will post this annual report on Form 20-F on our website at
http://www.airmedia.net.cn
. In addition, we
will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
|
I.
|
Subsidiary Information
|
Not applicable.
|
ITEM 11.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
Rate Risk
Our exposure to interest rate risk primarily
relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used
derivative financial instruments in our investment portfolio. Interest-earning instruments carry a degree of interest rate risk.
We have not been exposed nor do we anticipate being exposed to material risks due to changes in market interest rates. However,
our future interest income may fall short of expectations due to changes in market interest rates. A hypothetical 1% decrease in
interest rates would have resulted in a decrease of approximately $0.2 million in our interest income for the year ended December
31, 2016.
Foreign
Exchange Risk
Our financial statements are expressed
in U.S. dollars, which is our reporting and functional currency. However, substantially all of the revenues and expenses of our
consolidated operating subsidiaries and affiliate entities are denominated in RMB. Substantially all of our sales contracts are
denominated in RMB and substantially all of our costs and expenses are denominated in RMB. We have not had any material foreign
exchange gains or losses. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment
in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of the business of our
operating subsidiaries and VIEs is effectively denominated in RMB, while the ADSs are traded in U.S. dollars.
The conversion of RMB into foreign currencies,
including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the RMB to appreciate
by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted
and the exchange rate between RMB and the U.S. dollar remained within a narrow band. As a consequence, the RMB fluctuated significantly
during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government
has allowed the RMB to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. We have not used any forward
contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
To the extent that we need to convert our
U.S. dollar-denominated assets into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse
effect on RMB amount we receive from the conversion. A hypothetical 10% decrease in the exchange rate of the U.S. dollar against
RMB would have resulted in a decrease of $1.1 million in the value of our U.S. dollar-denominated financial assets at December
31, 2016. Conversely, if we decide to convert our RMB-denominated cash amounts 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 RMB would
have a negative effect on the U.S. dollar amount available to us.
Inflation
Inflationary factors such as increases
in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
|
ITEM 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
Not applicable.
Not applicable.
|
D.
|
American Depositary Shares
|
Fees and
Charges Our ADS holders May Have to Pay
JPMorgan Chase Bank, 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. The depositary collects fees for making distributions
to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the
fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing
investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to
provide fee-attracting services until its fees for those services are paid.
Persons
depositing or withdrawing shares must pay:
|
|
For:
|
|
|
|
$5.00 per 100 ADSs (or portion of 100 ADSs)
|
|
Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
|
|
|
|
$0.05 (or less) per ADS
|
|
Any cash distribution to registered ADS holders
|
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs $0.05 (or less) per ADSs per calendar year (if the depositary has not collected any cash distribution fee during that year)
|
|
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to registered ADS holders Depositary services
|
|
|
|
Expenses of the depositary
|
|
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); converting foreign currency to U.S. dollars
|
|
|
|
Registration or transfer fees
|
|
Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
|
|
|
|
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
|
|
As necessary
|
|
|
|
Any charges incurred by the depositary or its agents for servicing the deposited securities
|
|
As necessary
|
Fees and
Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse
us annually for our expenses incurred in connection with investor relationship programs and any other program related to our ADS
facility and the travel expense of our key personnel in connection with such programs. The depositary has also agreed to provide
additional payments to us based on the applicable performance indicators relating to our ADS facility. There are limits on the
amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily
tied to the amount of fees the depositary collects from investors. We recognize the reimbursable amounts in other income on our
consolidated statements of operations on a straight-line basis over the contract term with the depositary. For the year ended December
31, 2016, we received nil from the depositary as reimbursement for our expenses incurred.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
AirMedia
GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(31,826
|
)
|
|
$
|
142,912
|
|
|
$
|
(89,242
|
)
|
Less: Net income from discontinued operations
|
|
|
20,288
|
|
|
|
221,183
|
|
|
|
-
|
|
Net loss from continuing operations
|
|
|
(52,114
|
)
|
|
|
(78,271
|
)
|
|
|
(89,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt provisions
|
|
|
3,212
|
|
|
|
(2,661
|
)
|
|
|
12,697
|
|
Depreciation and amortization
|
|
|
6,294
|
|
|
|
5,771
|
|
|
|
12,971
|
|
Deferred tax (recovery) provision
|
|
|
(2,288
|
)
|
|
|
4,681
|
|
|
|
4,328
|
|
Impairment of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
826
|
|
Share-based compensation
|
|
|
1,281
|
|
|
|
567
|
|
|
|
773
|
|
Loss (income) on equity method investments
|
|
|
212
|
|
|
|
(2,352
|
)
|
|
|
33
|
|
Loss on disposal of property and equipment
|
|
|
(11
|
)
|
|
|
(129
|
)
|
|
|
22
|
|
Gain on sale/maturity of short-term investments
|
|
|
(643
|
)
|
|
|
(347
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,371
|
|
|
|
13,742
|
|
|
|
(3,250
|
)
|
Notes receivable
|
|
|
(116
|
)
|
|
|
762
|
|
|
|
-
|
|
Prepaid concession fees
|
|
|
(997
|
)
|
|
|
7,302
|
|
|
|
(3,043
|
)
|
Other current assets
|
|
|
2,224
|
|
|
|
(16,045
|
)
|
|
|
(5,369
|
)
|
Long-term deposits
|
|
|
(108
|
)
|
|
|
3,632
|
|
|
|
(1,962
|
)
|
Other non-current assets
|
|
|
(5,095
|
)
|
|
|
2,778
|
|
|
|
(781
|
)
|
Amount due from related parties
|
|
|
(953
|
)
|
|
|
(4,873
|
)
|
|
|
1,813
|
|
Accounts payable
|
|
|
(1,723
|
)
|
|
|
(8,591
|
)
|
|
|
6,730
|
|
Accrued expenses and other current liabilities
|
|
|
(466
|
)
|
|
|
(6,762
|
)
|
|
|
2,030
|
|
Deferred revenue
|
|
|
(1,905
|
)
|
|
|
(2,643
|
)
|
|
|
517
|
|
Amount due to related parties
|
|
|
-
|
|
|
|
12,803
|
|
|
|
(15,023
|
)
|
Income tax payable
|
|
|
(68
|
)
|
|
|
42,600
|
|
|
|
(27,377
|
)
|
Other noncurrent liabilities
|
|
|
1,264
|
|
|
|
-
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(42,629
|
)
|
|
|
(28,036
|
)
|
|
|
(103,610
|
)
|
Net cash provided by (used in) discontinued operations
|
|
|
40,815
|
|
|
|
(41,026
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,814
|
)
|
|
|
(69,062
|
)
|
|
|
(103,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
195,915
|
|
Purchase of property and equipment
|
|
|
(4,306
|
)
|
|
|
(10,389
|
)
|
|
|
(21,558
|
)
|
Prepaid equipment costs
|
|
|
(11,224
|
)
|
|
|
-
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
18
|
|
|
|
978
|
|
|
|
-
|
|
Net amount received upon settlement of short-term investment
|
|
|
26,073
|
|
|
|
14,206
|
|
|
|
3,617
|
|
Dividend received from equity method investee
|
|
|
242
|
|
|
|
-
|
|
|
|
-
|
|
Restricted cash
|
|
|
(3,223
|
)
|
|
|
3,223
|
|
|
|
-
|
|
Acquisition of Guangzhou Xinyu
|
|
|
-
|
|
|
|
(4,808
|
)
|
|
|
-
|
|
Acquisition of AM Jiaming
|
|
|
-
|
|
|
|
325
|
|
|
|
-
|
|
Acquisition of non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,838
|
)
|
Acquisition of equity investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(475
|
)
|
Proceeds from disposal of equity investment
|
|
|
-
|
|
|
|
-
|
|
|
|
3,014
|
|
Disposal of controlling interest in a former subsidiary
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
Loan to third parties
|
|
|
-
|
|
|
|
(5,572
|
)
|
|
|
(17,093
|
)
|
Purchase of long term investment
|
|
|
(1,629
|
)
|
|
|
(3,033
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations
|
|
|
5,951
|
|
|
|
(5,084
|
)
|
|
|
130,582
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(12,108
|
)
|
|
|
93,226
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(6,157
|
)
|
|
|
88,142
|
|
|
|
130,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from short-term loan
|
|
|
3,000
|
|
|
|
-
|
|
|
|
-
|
|
Cash payment for a short-term loan
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
Capital contribution from non-controlling interest
|
|
|
11,241
|
|
|
|
-
|
|
|
|
9,796
|
|
Distribution of dividends to non-controlling interests
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
-
|
|
Proceeds from disposal of equity interests of AirMedia Lianhe
|
|
|
1,958
|
|
|
|
536
|
|
|
|
-
|
|
Proceeds from options exercised
|
|
|
624
|
|
|
|
4,826
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
16,823
|
|
|
|
2,141
|
|
|
|
11,130
|
|
Net cash used in discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16,823
|
|
|
|
2,141
|
|
|
|
11,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
(1,067
|
)
|
|
|
(1,698
|
)
|
|
|
(7,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
7,785
|
|
|
|
19,523
|
|
|
|
30,587
|
|
Cash and cash equivalents, at beginning of year
|
|
|
59,652
|
|
|
|
67,437
|
|
|
|
86,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
$
|
67,437
|
|
|
$
|
86,960
|
|
|
$
|
117,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
1,812
|
|
|
$
|
957
|
|
|
$
|
27,712
|
|
Interests paid for short-term loan
|
|
$
|
75
|
|
|
$
|
10
|
|
|
$
|
-
|
|
Fair value of property, equipment and other assets acquired in exchange of advertising services rendered and subsidiary's equity transferred
|
|
$
|
11,083
|
|
|
$
|
304
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for purchase of property and equipment
|
|
$
|
8,526
|
|
|
$
|
15,925
|
|
|
$
|
-
|
|
Acquisition of non-controlling interests
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,882
|
|
Capital contribution from non-controlling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,399
|
|
Dividend payable to non-controlling interests
|
|
$
|
73
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Receivable for disposal of equity interests of AM Film and AM Lianhe
|
|
$
|
1,118
|
|
|
$
|
233
|
|
|
$
|
-
|
|
Receivable for disposal of 51% equity in AM Jiaming
|
|
$
|
53
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consideration receivable
|
|
$
|
-
|
|
|
$
|
200,685
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars in thousands, except
share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES
|
Introduction of the Group
AirMedia Group Inc. ("AirMedia" or the "Company")
was incorporated in the Cayman Islands on April 12, 2007.
AirMedia, its subsidiaries, its variable interest
entities ("VIEs") and VIEs' subsidiaries (collectively the "Group") operate its out-of-home advertising network,
primarily air travel advertising network, in the People's Republic of China (the "PRC").
In June 2015, the Company, AM
Technology, AirMedia Shengshi, which is the Company’s VIE in China as well as the controlling shareholder of AirMedia Group
Co., Ltd. (“AM Advertising,”), and Mr. Herman Guo, who is registered shareholder of AM Advertising under PRC law entered
into a definitive agreement with Beijing Longde Wenchuang Fund Management Co., Ltd. (“Longde Wenchuang” or the “Buyer”)
to sell 75% equity interest of AM Advertising for a consideration of RMB2.1 billion (equivalent to $302.4) in cash. As part of
the transaction, the Company effected an internal business reorganization and transferred all its media business in airports (excluding
digital TV screens in airports and TV-attached digital frames) and all billboard and LED media business outside of airports (excluding
gas station media network and digital TV screens on airplanes) to AM Advertising to form the target business to be sold (the "Target
Business") and transferred its other business out of AM Advertising. To effectuate the sale, the Company rem. Whatoved the
VIE structure with respect to AM Advertising. The change in the equity ownership of AM Advertising was registered with the local
branch of the State Administration for Industry and Commerce, or the SAIC, in December 2015. Since then, there have been other
investors invested in AM Advertising, the Company now holds approximately 20.18% equity interest in AM Advertising and has ceased
to consolidate the results of AM Advertising since December 2015.
In December 2015, Longde Wenchuang
transferred 46.43% equity interest of AM Advertising to Beijing Culture Center Construction Development Fund (LLP) ("Culture
Center ", together with Longde Wenchuang, the "Buyers"). Longde Wenchuang retained 28.57% equity interest of AM
Advertising.
This disposal represents a strategic
shift on our advertising business from air travel media to gas station media and Wi-Fi service and has a major effect on the Group’s
results of operations. Accordingly, assets and liabilities, revenues and expenses, and cash flows related to the disposed entities
have been reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented.
On June 19, 2015, Mr. Herman Man Guo submitted to
the Board of Directors of the Company a preliminary non-binding proposal letter (the “Proposal Letter”) to acquire
the Company in a going private transaction for $3.00 in cash per share (or $6.00 in cash per ADS) other than any ordinary shares
or ADSs of the Company beneficially held by Mr. Herman Man Guo, his affiliates or other management shareholders who may choose
to roll over their shares in connection with the proposed acquisition (the “Proposal”). The Board of Directors
has formed a special committee consisting of three independent directors to consider the Proposal. On September 30, 2015, the Company
entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”)
with AirMedia Holdings Ltd. (“Parent”) and AirMedia Merger Company Limited (“Merger Sub”), a wholly owned
subsidiary of Parent, pursuant to which Parent will acquire AirMedia (the “Transaction”) for US$3.00 per ordinary share
of the Company (a “Share”) or US$6.00 per American depositary share, each representing two Shares (an “ADS”).
This amount represents a premium of 70.5% over the Company’s closing price of US$3.52 per ADS on June 18, 2015, the
last trading day prior to June 19, 2015, the date that the Company announced that it had received a “going-private”
proposal.
Under the terms of the Merger Agreement, either the Company or Parent could terminate the Merger Agreement if
the merger contemplated by the Merger Agreement (the “Merger”) has not been completed by June 28, 2016 (the “Termination
Date”). On June 27, 2016 and December 19, 2016, the Company entered into Amendment NO.1 and Amendment NO.2 to the Agreement
and Plan of Merger Agreement. As a result, the Termination Date was further extended to June 30, 2017.
The special committee received a proposed amendment to the Merger Agreement from the buyer group, comprised of Mr. Guo, Ms.
Dan Shao and Mr. Qing Xu, on May 23, 2017 to (a) acquire all of the outstanding shares not already owned by the buyer group
for US$4.00 per ADS or US$2.00 per ordinary share in cash, and (b) extend the Termination Date to December 31, 2017. The special
committee is evaluating the proposed amendment with the assistance of its financial and legal advisors. On June 28, 2017,
the parties entered into Amendment No. 3 to the Merger Agreement to further extend the termination date to July 31, 2017 so
as to give the special committee sufficient time to consider the proposed amendment.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars in thousands, except
share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
Introduction of the Group
- continued
As of December 31, 2016, details of the Company's
subsidiaries, VIEs and VIEs' subsidiaries are as follows:
|
|
Date of
|
|
|
|
Percentage
|
|
|
|
incorporation/
|
|
Place of
|
|
of legal
|
|
Name
|
|
acquisition
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
Intermediate Holding Company:
|
|
|
|
|
|
|
|
|
Broad Cosmos Enterprises Ltd. (“Broad Cosmos”)
|
|
June 26, 2006
|
|
British Virgin Islands ("BVI")
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
AirMedia International Limited ("AM International")
|
|
July 14, 2007
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
AirMedia (China) Limited ("AM China")
|
|
August 5, 2005
|
|
Hong Kong
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
AirMedia Technology (Beijing) Co., Ltd. ("AM Technology")
|
|
September 19, 2005
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Shenzhen AirMedia Information Technology Co., Ltd. ("Shenzhen AM")
|
|
June 6, 2006
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Xi'an AirMedia Chuangyi Technology Co., Ltd. ("Xi'an AM")
|
|
December 31, 2007
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
VIEs:
|
|
|
|
|
|
|
|
|
Beijing AirMedia Shengshi Advertising Co., Ltd.
|
|
|
|
|
|
|
|
|
(Formerly Beijing Shengshi Lianhe Advertising Co., Ltd.)
|
|
|
|
|
|
|
|
|
("AirMedia Shengshi")
|
|
August 7, 2005
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Jiaming Advertising Co., Ltd.
|
|
|
|
|
|
|
|
|
(Formerly Beijing AirMedia UC Advertising Co., Ltd.)
|
|
|
|
|
|
|
|
|
("Jiaming Advertising")
|
|
January 1, 2007
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing Yuehang Digital Media Advertising Co., Ltd. ("AM Yuehang")
|
|
January 16, 2008
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
AirMedia Online Network Technology Co., Ltd. ("AM Online")
|
|
April 30, 2015
|
|
the PRC
|
|
|
N/A
|
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
Introduction of the Group
- continued
|
|
Date of
|
|
|
|
Percentage
|
|
|
|
incorporation/
|
|
Place of
|
|
of legal
|
|
Name
|
|
acquisition
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
VIEs' subsidiaries:
|
|
|
|
|
|
|
|
|
Beijing AirMedia Film & TV Culture Co., Ltd. ("AM Film")
|
|
September 13, 2007
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Flying Dragon Media Advertising Co., Ltd. ("Flying Dragon")
|
|
August 1, 2008
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wenzhou AirMedia Advertising Co., Ltd. ("AM Wenzhou")
|
|
October 17, 2008
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Hainan Jinhui Guangming Media Advertising Co., Ltd. ("Hainan Jinhui")
|
|
June 23, 2009
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing Dongding Gongyi Advertising Co., Ltd. ("Dongding")
|
|
February 1, 2010
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing GreatView Media Advertising Co., Ltd.
|
|
|
|
|
|
|
|
|
(Formerly Beijing Weimei Shengjing Media
|
|
|
|
|
|
|
|
|
Advertising Co., Ltd.) ("GreatView Media")
|
|
April 28, 2011
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Meizheng Advertising Co., Ltd. ("Guangzhou Meizheng")
|
|
May 17, 2013
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Tianyi Information Technology Co., Ltd. ("AM Tianyi")
|
|
September 25, 2013
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Xinyu Advertising Co., Ltd.
("Guangzhou Xinyu")
|
|
February 2, 2015
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
AirMedia Mobile Network Technology Co., Ltd. ("AM Mobile")
|
|
April 23, 2015
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Meizheng Information Technology Co., Ltd. ("Guangzhou Tech")
|
|
June 18, 2015
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
AirMedia Henglong Mobile Network Technology Co., Ltd. ("AMHL Mobile")
|
|
April 27, 2015
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. ("AM Jiaming")
|
|
December 31, 2015
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Meizheng Network Information Technology Co., Ltd. (“Meizheng Network”)
|
|
August 8, 2016
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Airmedia Network Technology Co., Ltd. (“AM Network”)
|
|
August 18, 2016
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wangfan Network Technology Co.,Ltd. (“Iwangfan”)
|
|
May 6, 2016
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Shandong Airmedia Car Safety Technology Co.,Ltd.(“Shangdong Car Safe”)
|
|
July 21, 2016
|
|
the PRC
|
|
|
N/A
|
|
Dingsheng Ruizhi (Beiing) Investment Consulting Co., Ltd. (“Dingsheng Ruizhi”)
|
|
May 25, 2016
|
|
the PRC
|
|
|
N/A
|
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
For the years ended December 31, 2015 and 2016,
the Group acquired additional equity interests of 18% and 20% in Guangzhou Meizheng and AM Film, respectively, which were VIEs
consolidated in the Group prior to these acquisitions, from non-controlling shareholders for an aggregated amount of $8,518 and
$30,956, respectively. For the year ended December 31, 2015 and 2016, non-controlling shareholders contributed paid in capital
to the Group’s VIEs for an aggregated amount of $1,313 and $11,195, respectively.
The VIE arrangements
Chinese regulations currently limit foreign ownership
of companies that provide advertising services, including out-of-home television advertising services. Since December 30, 2005,
foreign investors have been permitted to own directly 100% interest in PRC advertising companies if the foreign investor has at
least three years of direct operations of advertising business outside of the PRC.
One of the Company's subsidiary, AM China, the 100%
shareholder of AM Technology, Shenzhen AM, and Xi'an AM, has been engaged in the advertising business in Hong Kong since September
2008. Since it has operated as an advertising business for more than three years, AM China and its subsidiaries may apply for the
required licenses to provide advertising services in China.
The Group conducts substantially all of its activities
through VIEs, i.e. AirMedia Shengshi, AM Yuehang and AM Online, and the VIEs' subsidiaries. The VIEs have entered into the following
series of agreements with AM Technology:
|
¨
|
Technology support
and service agreement:
AM Technology provides exclusive technology support and consulting services to the VIEs and in
return, the VIEs are required to pay AM Technology service fees. The VIEs pay to AM Technology annual service fees in the amount
that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of
no less than 0.5% in the case of AirMedia Shengshi, and Jiaming Advertising, or 1.0% in the case of AM Yuehang, which final rate
should be determined by AM Technology. The "net cost-plus rate" refers to the operating profit as a percentage of total
costs and expenses of a certain entity. The technology support and service fees for each given year payable by AM Online to AM
Technology under AM Online’s technology support and service agreement shall be determined by AM Online and AM Technology
at the first month of such year taking into account several factors. Those factors include the credential of the team of AM Technology
that provides services to AM Online, the number of service hours, the nature and value of the services provided by AM Technology,
the extent to which AM Technology provides patent or other license to AM Online in its provision of technology support and service
and the correlation between AM Online’s results of operations and the technology support and service provided by AM Technology.
In the event AM Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in
good faith with AM Technology to determine the new fee. The technology support and service agreements are effective for ten years
and such term is automatically renewed upon its expiry unless either party informs the other party of its intention of no extension
at least twenty days prior to the expiration of the agreements.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
The VIE arrangements
- continued
|
¨
|
Technology development agreement:
VIEs exclusively engaged AM Technology to provide technology development services. AM Technology owns the intellectual property rights developed in the performance of these agreements. Except for AM Online, the VIEs pay to AM Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5% in the case of AirMedia Shengshi, and Jiaming Advertising, which final rate should be determined by AM Technology. It is at AM Technology's sole discretion that the rate and amount of fees ultimately charged the VIEs under these agreements are determined. The "net cost-plus rate" refers to the operating profit as a percentage of total costs and expenses of a certain entity. The technology development fees for each given year payable by AM Online to AM Technology under AM Online’s technology development agreement shall be determined by AM Online and AM Technology at the first month of such year taking into account several factors. Those factors include the credential of the team of AM Technology that provides services to AM Online, the number of service hours, the nature and value of the services provided by AM Technology, the extent to which AM Technology provides patent or other license to AM Online in its provision of technology development service and the correlation between AM Online’s results of operations and the technology development service provided by AM Technology. In the event AM Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with AM Technology to determine the new fee. The technology development agreements are effective for ten years and such terms is automatically renewed upon its expiry unless either party informs the other party of its intention of no extension at least twenty days prior to the expiration of the agreements.
|
|
¨
|
Exclusive Technology Consultation and Service Agreement
: AM online exclusively engages AM Technology to provide consultation services in relation to management, training, marketing and promotion. AM Online agrees to pay to AM Technology the amount of annual service fees as determined by AM Technology. In the event AM Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with AM Technology to determine the new fees. The exclusive technology consultation and service agreement remains effective for ten years and such term may be reviewed by AM Technology’s written confirmation prior to the expiration of the agreement term.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
The VIE arrangements
- continued
|
¨
|
Call option agreement:
Under the call option agreements between AM Technology and the shareholders of AirMedia Shengshi, AM Yuehang and Jiaming Advertising, the shareholders of those VIEs irrevocably granted AM Technology or its designated third party an exclusive option to purchase from the VIEs' shareholders, to the extent permitted under PRC law, all the equity interests in the VIEs, as the case may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. Under the call option agreements between AM Technology and the shareholders of AM Online, the shareholders of AM Online irrevocably granted AM Technology or its designated third party an exclusive option to purchase from the shareholders of AM Online, to the extent permitted under PRC law, all the equity interests in AM Online, as the case may be. To the extent the applicable PRC law does not require the valuation of the subject equity interests and does not otherwise restrict the purchase price for such equity interests, such purchase price shall equal the amount of actual payment made by the respective shareholders of AM Online with respect to the equity interests whether in the form or share capital injection or secondary purchase price. If and where the applicable PRC law requires the valuation of the subject equity interests or otherwise has restrictions on the purchase price for such equity interests, such purchase price shall equal the minimum amount of consideration permitted by the applicable law. In addition, under these agreements (except for the call option agreements between AM Technology and the shareholders of AM Online), AM Technology has undertaken to act as guarantor of VIEs in all operations-related contracts, agreements and transactions and commit to provide loans to support the business development needs of VIEs or if the VIEs suffer operating difficulties, provided that the relevant VIE's shareholders satisfy the terms and conditions in the call option agreements. Under PRC laws, to provide an effective guarantee, a guarantor needs to execute a specific written agreement with the beneficiary of the guarantee. As AM Technology has not entered into any written guarantee agreements with any third party beneficiaries to guarantee the VIEs' performance obligations to these third parties, none of these third parties can demand performance from AM Technology as a guarantor of the VIEs' performance obligations. The absence of a written guarantee agreement, however, does not affect our conclusion that we are the primary beneficiary of the VIEs and in turn should consolidate the financials of the VIEs. The term of each call option agreement is ten years and such terms can be renewed upon expiration at AM Technology's sole discretion.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
The VIE arrangements
- continued
|
¨
|
Equity pledge agreement:
Under the equity pledge agreements between AM Technology and the shareholders of our VIEs other than AM Online, the shareholders of those VIEs pledged all of their equity interests, including the right to receive declared dividends, in those VIEs to AM Technology to guarantee those VIEs' performance of their obligations under the technology support and service agreement and the technology development agreement. Under the equity pledge agreements between AM Technology and the shareholders of AM Online, the shareholders of AM Online pledged all of their equity interests, including the right to receive declared dividends, in AM Online to AM Technology to guarantee the performance by AM Online of its obligations under its call option agreement and its exclusive technology consultation and service agreement. If the VIEs fail to perform their obligations set forth in the applicable agreements, AM Technology shall be entitled to exercise all the remedies and powers set forth in the provisions of the applicable equity pledge agreements. Those agreements remain effective for as long as the technology support and service agreements and technology development agreement are effective, or, in the case of AM Online, until two years after the term of the obligations under the call option agreement and exclusive technology consultation and service agreement.
|
|
¨
|
Authorization letter:
Each shareholder of the VIEs has executed an authorization letter to authorize AM Technology to exercise certain of its rights, including voting rights, the rights to enter into legal documents and the rights to transfer any or all of its equity interest in the VIEs. The authorization letters by the shareholders of our VIEs other than AM Online will remain effective during the operating periods of the respective VIEs. Such authorization is effective for ten years and such term is renewed upon its expiry at AM Technology's sole discretion. The authorization letters by the shareholders of AM Online will remain effective for as long as the respective parties remain shareholders of AM Online unless terminated earlier by AM Technology or the call option agreement with respect to AM Online is terminated prior to its expiration.
|
Through the above contractual arrangements, AM Technology
has obtained 100% of shareholders' voting interest in the VIEs, has the right to receive all dividends declared and paid by the
VIEs and may receive substantially all of the net income of the VIEs through the technical support and service fees as determined
by AM Technology at its sole discretion. Accordingly, we have consolidated the VIEs because we believe, through the contractual
arrangements, (1) AM Technology could direct the activities of the VIEs that most significantly affect its economic performance
and (2) AM Technology could receive substantially all of the benefits that could be potentially significant to the VIEs. Other
than the contractual arrangements described above, because the management and certain employees of AM Technology also serve in
the VIEs as management or employees, certain operating costs paid by AM Technology, such as payroll costs and office rental, were
re-charged to the VIEs.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
The VIE arrangements
- continued
AM Technology also entered into loan agreements
with each shareholder of AM Online, pursuant to which AM Technology permits to make loans in an aggregate amount of RMB 40 million
to the shareholders of AM Online solely for the incorporation and capitalization of AM Online. The loan is interest free and the
term of the loan is ten years and shall be automatically renewed on an annual basis unless AM Technology objects. AM Technology
can require the shareholders to repay all or a portion of the loan before the maturity date with a 15 days prior written notice.
Under such circumstances, AM Technology is entitled to, or designate a third party to, buy all or a portion of the shareholders'
equity interests in AM Online on a pro rata basis based on the amount of the repaid principal of the loan.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
Risks in relation to the VIE structure
The Group believes that the VIE arrangements are in
compliance with PRC law and are legally enforceable. The shareholders of the VIEs are also shareholders of the Group and therefore
have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in the PRC legal system
could limit the Group's ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their
interest in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they
would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required
to do so.
The Group's ability to control the VIEs also depends
on the authorization letters that AM Technology has to vote on all matters requiring shareholder approval in the VIEs. As noted
above, the Group believes the rights granted by the authorization letters is legally enforceable but may not be as effective as
direct equity ownership.
In addition, if the legal structure and contractual
arrangements were found to be in violation of any existing PRC laws and regulations, the PRC government could:
|
¨
|
revoke the business and operating
licenses of the Group's PRC subsidiaries and affiliates;
|
|
¨
|
discontinue or restricting the Group's PRC subsidiaries' and affiliates' operations;
|
|
¨
|
impose conditions or requirements with which the Group or its PRC subsidiaries and affiliates may not be able to comply; or
|
|
¨
|
require the Group or its PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations;
|
The imposition of any of these penalties may result
in a material and adverse effect on the Group's ability to conduct the Group's business. In addition, if the imposition of any
of these penalties causes the Group to lose the rights to direct the activities of the VIEs and its subsidiaries or the right to
receive their economic benefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any
penalties imposed or actions taken by the PRC Government would result in the liquidation of the Group, AM Technology, or the VIEs.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES – continued
|
Risks in relation to the VIE structure
- continued
Certain shareholders of VIEs are also beneficial owners
or directors of the Company. In addition, certain beneficial owners and directors of the Company are also directors or officers
of VIEs. Their interests as beneficial owners of VIEs may differ from the interests of the Company as a whole. The Company cannot
be certain that if conflicts of interest arise, these parties will act in the best interests of the Company or that conflicts of
interests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential
conflicts of interest these parties may encounter in their capacity as beneficial owners of VIEs, on the one hand, and as beneficial
owners of the Company, on the other hand. The Company believes the shareholders of VIEs will not act contrary to any of the contractual
arrangements and the exclusive purchase right contract provides the Company with a mechanism to remove them as shareholders of
VIEs should they act to the detriment of the Company. If any conflict of interest or dispute between the Company and the shareholders
of VIEs arises and the Company is unable to resolve it, the Company would have to rely on legal proceedings in the PRC. Such legal
proceedings could result in disruption of its business; moreover, there is substantial uncertainty as to the ultimate outcome of
any such legal proceedings.
The following financial statement information for
AirMedia's VIEs were included in the accompanying consolidated financial statements, presented net of intercompany eliminations,
as of and for the years ended December 31:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
316,268
|
|
|
$
|
177,425
|
|
Total non-current assets
|
|
|
190,684
|
|
|
|
127,486
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
506,952
|
|
|
|
304,911
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
101,197
|
|
|
|
71,535
|
|
Total non-current liabilities
|
|
|
26,536
|
|
|
|
24,384
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
127,733
|
|
|
$
|
95,919
|
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
74,689
|
|
|
$
|
46,237
|
|
|
$
|
16,311
|
|
Net loss
|
|
|
(47,119
|
)
|
|
|
(60,117
|
)
|
|
|
(81,659
|
)
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
1.
|
ORGANIZATION AND PRINCIPAL
ACTIVITIES - continued
|
Risks in relation to the VIE structure
- continued
The VIEs contributed an aggregate of 100%, 98.0% and
98.8% of the consolidated net revenues for the years ended December 31, 2014, 2015 and 2016, respectively. As of December 31, 2016,
the VIEs accounted for an aggregate of 95.4% and 80.0%, respectively, of the consolidated total assets, and 95.3% and 83.7%, respectively,
of the consolidated total liabilities.
There are no consolidated VIEs'
assets that are collateral for the VIEs' obligations and can only be used to settle the VIEs' obligations. There are no creditors
(or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated
subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests, which
require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support,
the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support
to its VIEs through loans to the shareholder of the VIEs or entrustment loans to the VIEs.
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
(a)
|
Basis of presentation
|
The consolidated financial statements of the Group have
been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
The Group incurred losses from operations of US$76.1
million and US$89.8 million for the years ended December 31, 2015 and 2016. As of December 31, 2016, the Group had shareholders’
deficit of US$15.8 million. The Group had negative cash flows from operating activities for the years ended December 31, 2015 and
2016, the net cash used in operating activities was US$69.1 million and US$103.6 million for the years ended December 31, 2015
and 2016. As of December 31, 2016, the Group had cash and cash equivalents of US$117.5 million and working capital of $115.0 million.
From 2017 and onwards, the Group will focus on improving operation efficiency and cost reduction, and enhancing marketing function
to attract more users. The Group regularly monitors its current and expected liquidity requirements to ensure that it maintains
sufficient cash balances and accessible credit to meet its liquidity requirements in the short and long term. Based on the existing
cash and cash equivalents, working capital condition and forecast for future operations, the Group believes that it will be able
to meet its payment obligations and other commitments for at least through the following twelve months from the date of filing.
|
(b)
|
Basis of consolidation
|
The consolidated financial statements include the financial
statements of the Company, its subsidiaries, its VIEs and its VIEs' subsidiaries. All inter-company transactions and balances have
been eliminated upon consolidation.
|
(c)
|
Discontinued operations
|
A disposal of a component of an entity or a group of
components of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that has (or
will have) a major effect on an entity’s operations. Classification as a discontinued operation occurs upon disposal or when
the operation meets the criteria to be classified as held for sale, if earlier. Where an operation is classified as discontinued,
a single amount is presented on the face of the consolidated statements of operations. The amount of total current assets, total
non-current assets, total current liabilities and total non-current liabilities are presented separately on the consolidated balance
sheets.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – continued
|
The preparation of financial statements in conformity
with US GAAP requires to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period and accompanying notes, including allowance for doubtful accounts, the useful lives of property and
equipment and intangible assets, impairment of long-term investments, impairment of long-lived assets, share-based compensation,
provision for earnout commitment and valuation allowance for deferred tax assets. Actual results could differ from those estimates.
|
(e)
|
Significant risks and uncertainties
|
The Group participates in a dynamic industry and believes
that changes in any of the following areas could have a material adverse effect on the Group's future financial position, results
of operations, or cash flows: net losses in the past and futures; failure in launching new business; a significant or prolonged
economic downturn; contraction in the air travel advertising industry in China; competition from other competitors; regulatory
or other PRC related factors; fluctuations in the demand for air travel; past and future acquisitions; failure to maintain an effective
system of internal control over financial reporting and effective disclosure controls and procedures; risks associated with the
Group's ability to attract and retain employees necessary to support its growth; risks associated with the Group's growth strategies;
and general risks associated with the industry.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
Fair value is the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
under current market conditions. When determining the fair value measurements for assets and liabilities required or permitted
to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers
assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy
which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy
within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the
fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there
are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there
are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices
for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable
or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there
are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or
liabilities.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(g)
|
Fair value of financial instruments
|
The Group's financial instruments include cash, accounts
receivable, short-term investment, consideration receivable, accounts payable, and provision for
earnout commitment. The Group did not have any other financial assets and liabilities or nonfinancial
assets and liabilities that are measured at fair value on recurring basis as of December 31, 2015 and 2016.
The Group's financial assets and liabilities measured
at fair value on a non-recurring basis include certain assets in connection with an equity share exchange transaction based on
level 2 inputs and acquired assets and liabilities based on level 3 inputs in connection with business combinations.
|
(h)
|
Cash and cash equivalents
|
Cash and cash equivalents consist of cash on hand and
highly liquid deposits which are unrestricted as to withdrawal or use, and which have original maturities of three months or less
when purchased.
Restricted cash represents the bank deposits in escrow
accounts as the performance security for certain concession right agreements.
|
(j)
|
Short-term investment
|
Short-term investments comprise marketable debt securities,
which are classified as held-to-maturity as the Group has the positive intent and ability to hold the securities to maturity. All
of the Group's held-to-maturity securities are stated at their amortized costs and classified as short-term investments on the
consolidated balance sheets based on their contractual maturity dates which are less than one year.
The Group reviews its short-term investments for other-than-temporary
impairment (“OTTI”) based on the specific identification method. The Group considers available quantitative and qualitative
evidence in evaluating potential impairment of its short-term investments. If the cost of an investment exceeds the investment's
fair value, the Group considers, among other factors, general market conditions, government economic plans, the duration and the
extent to which the fair value of the investment is less than the cost, and the Group's intent and ability to hold the investment,
in determining if impairment is needed. OTTI is recognized as a loss in the income statement. The short-term investments held by
the Group as of December 31, 2016 were Nil.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
The Group considers assets to be held for sale when
all of the following criteria are met: i) a formal commitment to a plan to sell a property was made and exercised; ii) the property
is available for sale in its present condition; iii) actions required to complete the sale of the property have been initiated;
iv) sale of the property is probable and the Group expects the completed sale will occur within one year; v) the property is actively
being marketed for sale at a price that is reasonable given its current market value; and vi) 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. Upon designation
as assets held for sale, the Group records each property at the lower of its carrying value or its estimated fair value, less estimated
costs to sell, and the Group ceases depreciation.
|
(l)
|
Property and equipment
,
net
|
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
Digital display network equipment
|
|
5 years
|
WIFI and network equipment
|
|
5 years
|
Gas station display network equipment
|
|
5 years
|
Office property
|
|
40 years
|
Furniture and fixture
|
|
5 years
|
Computer and office equipment
|
|
3-5 years
|
Vehicle
|
|
5 years
|
Software
|
|
5 years
|
Leasehold improvement
|
|
Shorter of the term of the lease
|
|
|
or the estimated useful lives of the assets
|
Costs of repairs
and maintenance are expensed as incurred and asset improvements are capitalized. The gain or loss on disposal of property and equipment
is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated
income statement.
When property and equipment are retired or otherwise disposed of the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.
|
(m)
|
Impairment of long-lived assets
|
Long-lived assets held and used
by the Group are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets
may not be fully recoverable. It is possible that these assets could become impaired as a result of technology, economy or other
industry changes. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Group first
compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value
of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the
extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including
discounted cash flow models, relief from royalty income approach, quoted market values and third-party independent appraisals,
as considered necessary.
The Group makes various assumptions
and estimates regarding estimated future cash flows and other factors in determining the fair values of the respective assets.
The assumptions and estimates used to determine future values and remaining useful lives of long-lived assets are complex and subjective.
They can be affected by various factors, including external factors such as industry and economic trends, and internal factors
such as the Group’s business strategy and its forecasts for specific market expansion.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – continued
|
|
(n)
|
Long-term investments
|
Equity method investments
Investee companies over which the Group has the ability
to exercise significant influence, but does not have a controlling interest are accounted for using the equity method. Significant
influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between
20% and 50%, and other factors, such as representation on the investee's Board of Directors, voting rights and the impact of commercial
arrangements, are considered in determining whether the equity method of accounting is appropriate.
Cost method investments
For investments in an investee over which the Group
does not have significant influence, the Group carries the investment at cost and recognizes income as any dividends declared from
distribution of investee's earnings. The Group reviews the cost method investments for impairment whenever events or changes in
circumstances indicate that the carrying value may no longer be recoverable. An impairment loss is recognized in earnings equal
to the difference between the investment's carrying amount and its fair value at the balance sheet date of the reporting period
for which the assessment is made. The fair value of the investment would then become the new cost basis of the investment.
Impairment
for long-term investments
The Group assesses its long-term
investments for other-than-temporary impairment by considering factors including, but not limited to, current economic and market
conditions, operating performance of the companies, including current earnings trends and undiscounted cash flows, and other company-specific
information. The fair value determination, particularly for investments in privately-held companies, requires significant judgment
to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of
the fair value of the investments and determination of whether any identified impairment is other-than-temporary. Other-than-temporary
impairment loss is recognized in the consolidated statements of comprehensive income equal to the excess of the investment’s
carrying value over its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair
value would then become the new cost basis of such investment.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(o)
|
Acquired intangible assets
|
Acquired intangible assets with definite lives are carried
at cost less accumulated amortization. Customer relationships intangible assets are amortized using the estimated attrition pattern
of the acquired customers. Amortization of other definite-lived intangible assets is computed using the straight-line method over
the following estimated economic lives:
Audio-vision programming & broadcasting qualification
|
19.5 years
|
Customer relationships
|
3-3.4 years
|
Contract backlog
|
1.2-3 years
|
Concession agreements
|
3.8-10 years
|
Non-compete agreements
|
4.4 years
|
The Group's revenues are derived from selling advertising
time slots on the Group's advertising networks. For the years ended December 31, 2014, 2015 and 2016, the advertising revenues
were generated from TV-attached digital frames in airports, digital TV screens in airports, digital TV screens on airlines, gas
station media network and other media.
The Group typically signs standard contracts with its
advertising customers, who require the Group to run the advertiser's advertisements on the Group's network in specified locations
for a period of time. The Group recognizes advertising revenues ratably over the performance period for which the advertisements
are displayed, so long as collection of the fees remains probable.
The Group also wholesales the advertising platforms
such as scrolling light boxes and billboards in the gas stations located in some major cities, with the exception of Beijing, Shanghai
and Shenzhen, to advertising agents, and signs fixed fee contracts with the agents for a specified period. The revenue is recognized
on a straight-line basis over the specified period.
Deferred revenue
Prepayments from customers for advertising service are
deferred and recognized as revenue when the advertising services are rendered.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(p)
|
Revenue recognition
- continued
|
Nonmonetary exchanges
The Group occasionally exchanges
advertising time slots and locations with other entities for assets or services, such as equipment and other assets. The amount
of assets and revenue recognized is based on the fair value of the advertising provided or the fair value of the transferred assets,
whichever is more readily determinable. The amounts of revenues recognized for nonmonetary transactions were $209, $473 and nil
for the years ended December 31, 2014, 2015 and 2016, respectively. No direct costs are attributable to the revenues.
|
(q)
|
Value Added Tax ("VAT")
|
The Company's PRC subsidiaries are subject to value-added
taxes at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases. The net VAT balance
between input VAT and output VAT is reflected in the account as input VAT receivable or other taxes payable.
In July 2012, the Ministry of
Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business
tax in certain areas and industries in the PRC, including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei
between September and December 2012. Also a circular issued in May 2013 provided that such VAT pilot program is rolled out nationwide
since August 2013. Since then, certain subsidiaries and VIEs became subject to VAT at the rates of 6% or 3%, on certain service
revenues which were previously subject to business tax. The Company’s gross revenue is presented net of VAT.
|
(r)
|
Business tax and other sale related taxes
|
The Group's PRC subsidiaries and VIEs are subject to
business tax and other sale related taxes at the rate of 8.5% on revenues other than those subject to VAT after deduction of certain
costs of revenues permitted by the PRC tax laws.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
The Group enters concession right
agreements with vendors such as airports, airlines, railway bureaus and a petroleum company, under which the Group obtains the
right to use the spaces or equipment of the vendors to display the advertisements. The concession right agreements are treated
as operating lease arrangements.
Fees under concession right agreements
are usually due every three, six or twelve months. Payments made are recorded as current assets and current liabilities according
to the respective payment terms. Most of the concession fees with airports, airlines and railway bureaus are fixed with escalation,
which means a fixed increase over each year of the agreements. The total concession fee under the concession right agreements with
airports and airlines is charged to the consolidated statements of operations on a straight-line basis over the agreement periods,
which is generally between three to five years.
The fee structure of the concession
right agreement with the petroleum company is based on the actual number of developed gas stations and associated standard annual
concession fee for each developed gas station. Each gas station has its specific lease term starting from the time when it is actually
put into operation. The calculation of rental payments is based on how many months the gas stations are actually put into operation
during the year and the standard annual concession fee determined based on the location of the gas station. Accordingly, each gas
station is treated as a separate lease and rental payments are recognized on a straight-line basis over its lease term. The amount
of annual concession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum payment, if any, based
on negotiation with the petroleum company.
The Group pays fees to advertising
agencies based on a certain percentage of revenues made through the advertising agencies upon receipt of payment from advertisers.
The agency fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the
advertising is displayed. Prepaid and accrued agency fees are recorded as current assets and current liabilities according to relative
timing of payments made and advertising service provided. From time to time, the Group and certain advertising agencies may renegotiate
and mutually agree, as permitted by applicable laws, to reduce existing agency fee liabilities as calculated under the terms of
existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in the period the renegotiations
are finalized.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
Leases where substantially all the rewards and risks
of ownership of assets remain with the leasing company are accounted for as operating lease. Payments made under operating leases
are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
The Group expenses advertising costs as incurred. Total
advertising expenses were $1,785, $350 and $720 for the years ended December 31, 2014, 2015 and 2016, respectively, and have been
included as part of selling and marketing expenses.
|
(w)
|
Foreign currency translation
|
The functional and reporting currency
of the Company and the Company's subsidiaries domiciled in BVI and Hong Kong are the United States dollar ("U.S. dollar").
The financial records of the Company's other subsidiaries, VIEs and VIEs' subsidiaries located in the PRC are maintained in their
local currency, the Renminbi ("RMB"), which are the functional currency of these entities.
Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange
ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into
functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses
are recognized in the statements of operations.
The Group's entities with functional
currency of RMB translate their operating results and financial position into the U.S. dollar, the Company's reporting currency.
Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and
losses are translated using the average rate for the year. Retained earnings and equity are translated using the historical rate.
Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive
income.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
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 loss carry
forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to the
Group as enacted by the relevant tax authorities.
The impact of an uncertain income
tax position on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained upon
audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. Additionally, the Group classifies the interest and penalties, if any, as a component of the income tax expense.
For years ended December 31, 2016, 2015, and 2014, the Group did not
have any material interest
or penalties associated with tax positions nor did the Group have any significant unrecognized uncertain tax positions.
Share-based payment transactions with employees are
measured based on the grant date fair value of the equity instrument issued, and recognized as compensation expenses over the requisite
service periods based on a straight-line method, with a corresponding impact reflected in additional paid-in capital.
Share-based payment transactions with non-employees
are measured based on the fair value of the options as of each reporting date through the measurement date, with a corresponding
impact reflected in additional paid-in capital.
|
(z)
|
Comprehensive (loss) income
|
Comprehensive (loss) income includes net (loss) income
and foreign currency translation adjustments and is presented net of tax. The tax effect is nil for the three years ended December
31, 2014, 2015 and 2016 in the consolidated statements of comprehensive (loss) income.
|
(aa)
|
Allowance of doubtful accounts
|
The Group conducts credit evaluations
of clients and generally does not require collateral or other security from clients. The Group establishes an allowance for doubtful
accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific clients and utilizes
both specific identification and a general reserve to calculate allowance for doubtful accounts. The amount of receivables ultimately
not collected by the Group has generally been consistent with expectations and the allowance established for doubtful accounts.
If the frequency and amount of customer defaults change due to the clients' financial condition or general economic conditions,
the allowance for uncollectible accounts may require adjustment. As a result, the Group continuously monitors outstanding receivables
and adjusts allowances for accounts where collection may be in doubt.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(bb)
|
Concentration of credit risk
|
Financial instruments that potentially
expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable. The Group places their cash
with financial institutions with high-credit rating and quality in China. For the years ended December 31, 2014, 2015 and 2016,
no individual customer accounted for over 10% of total revenue. There is no customer accounting for 10% or more of total accounts
receivables as of December 31, 2015 and 2016.
|
(cc)
|
Net (loss) income per share
|
Basic net (loss) income per share are computed by dividing
net (loss) income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during
the year. Diluted net (loss) income reflects the potential dilution that could occur if securities or other contracts to issue
ordinary shares were exercised or converted into ordinary shares. Potential common shares in the diluted net loss per share computation
are excluded in periods of losses from continuing operations, as their effect would be anti-dilutive.
|
(dd)
|
Government subsidies
|
The Group primarily receives tax
refund and development supporting bonus from tax bureau and local government without any condition or restriction. The government
subsidies are recorded in other income on the consolidated statements of operations in the period in which the amounts of such
subsidies are received without future performance requirement. The recognized government subsidies as other income are $491, $513
and $86 for the years ended December 31, 2014, 2015 and 2016, respectively.
|
(ee)
|
Recent issued accounting standards
|
In November 2015, the FASB issued ASU 2015-17, Income
Taxes-Balance Sheet Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred income
taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial
position. The amendments in ASU 2015-17 are effective for fiscal years beginning after December 15, 2016 including interim periods
within those fiscal years. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting
period. The Group adopted this ASU 2015-17 for the year ended December 31, 2016, as a result, the current portion of deferred tax
assets of $41 as of December 31, 2015 was reclassified and included in the non-current deferred tax assets.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(ee)
|
Recent issued accounting standards
|
In May 2017, the FASB issued ASU
No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”, which amends
the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to
the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically,
an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the
same immediately before and after the modification. The amendments in this Update are effective for all entities for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments
in this Update should be applied prospectively to an award modified on or after the adoption date. The Group is currently evaluating
the impact of this new standard on its consolidated financial statements.
In January 2017, the FASB issued
ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". The amendments in this
ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. Basically these amendments provide a screen to
determine when a set is not a business. If the screen is not met, the amendments in this ASU first, require that to be considered
a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the
ability to create output and second, remove the evaluation of whether a market participant could replace missing elements. These
amendments take effect for public businesses for fiscal years beginning after December 15, 2017 and interim periods within those
periods, and all other entities should apply these amendments for fiscal years beginning after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019. The Group does not expect that the adoption of this guidance will have
a material impact on its consolidated financial statements.
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally
Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition
method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”
(“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning January 1, 2018. In March
2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU
2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition
standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU
2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the
operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability,
noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”),
which makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current
accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation
issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying
the new revenue standard. These amendments have the same effective date as the new revenue standard. Preliminarily, we plan to
adopt Topic 606 in the first quarter of our fiscal 2018 using the retrospective transition method, and are continuing to evaluate
the impact our pending adoption of Topic 606 will have on our consolidated financial statements.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(ee)
|
Recent issued accounting standards - continued
|
The Company’s current revenue
recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments
to input measures are not expected to be pervasive to the majority of the Company’s contracts. While no significant impact
is expected upon adoption of the new guidance, the Group will not be able to make that determination until the time of adoption
based upon outstanding contracts at that time.
In November 2016, the FASB issued
ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash". The amendments address diversity in practice that exists
in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendment is effective
for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Group is currently evaluating the impact of this new standard on its consolidated financial statements.
In October 2016, the FASB issued
ASU No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control, to provide guidance
on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending how a reporting entity, that is
a single decision maker of a VIE, treats indirect interests in that entity held through related parties that are under common control.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December
31, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption
in an interim period. The Group does not expect the adoption of the ASU to have any impact on its consolidated financial statements.
In October 2016, the FASB issued
ASU No. 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory.” This amendment
is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In
accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other
than inventory when the transfer occurs. The ASU is effective for the Company beginning in fiscal 2019. Early adoption is permitted
in fiscal 2018 with modified retrospective application. The Company is continuing to evaluate the impact of the adoption of this
guidance on its consolidated financial statements.
In August 2016, the FASB issued
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance
on the presentation and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance
specifically addresses cash flow issues with the objective of reducing the diversity in practice. The guidance will be effective
for the Company in fiscal year 2018, but early adoption is permitted. The Group is currently evaluating the impact of this new
standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU
No. 2016-13, “Financial Instruments – Credit Losses”, which will require the measurement of all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within
those fiscal years. The Company is currently evaluating this statement and its impact on its results of operations or financial
position.
In May 2016, the FASB issued ASU
No. 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of Accounting
Standards Updates 2014-09 and 2014-16. Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which is rescinding certain
SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil
and Gas, effective upon adoption of Topic 606. The Group does not expect the adoption of the ASU to have any impact on its
consolidated financial statements.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - continued
|
|
(ee)
|
Recent issued accounting standards - continued
|
In April 2016, the FASB released
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes
multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the
cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income,
EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based
payment activities. The ASU is effective for public companies in annual periods beginning after December 31, 2016, and interim
periods within those years. The Group does not expect that the adoption of this guidance will have a material impact on its consolidated
financial statements.
In March 2016, the FASB issued
ASU 2016-07, Equity Method and Joint Ventures (Topic 323). The guidance eliminates the requirement that an investor retrospectively
apply equity method accounting when an investment that it had accounted for by another method initially qualifies for use of the
equity method. The guidance also requires an investor that has an available-for-sale security that subsequently qualifies for the
equity method to recognize in net income the unrealized holding gains or losses in accumulated other comprehensive income related
to that security when it begins applying the equity method. The guidance is effective for all entities for fiscal years beginning
after December 31, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period. The
guidance will be adopted on a prospective basis. The Group does not expect that the adoption of this guidance will have a material
impact on its consolidated financial statements.
In February 2016, the FASB issued
ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being
that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially
measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted
to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The Group is in the process of evaluating the impact that this guidance
will have on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued
ASU 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities" This guidance revises the accounting related to the classification and measurement of investments in equity securities
as well as the presentation for certain fair value changes in financial liabilities measured at fair value, and amends certain
disclosure requirements. The guidance requires that all equity investments, except those accounted for under the equity method
of accounting or those resulting in the consolidation of the investee, be accounted for at fair value with all fair value changes
recognized in income. For financial liabilities measured using the fair value option, the guidance requires that any change in
fair value caused by a change in instrument-specific credit risk be presented separately in other comprehensive income until the
liability is settled or reaches maturity. The guidance is effective for interim and annual reporting periods in fiscal years beginning
after December 15, 2017, with early adoption permitted for certain provisions. A reporting entity would generally record a cumulative-effect
adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The
Group is in the process of evaluating the impact that this guidance will have on its consolidated financial statements and related
disclosures.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
3.
|
DISCOUNTINUED OPERATION
|
The disposal of Target Business
described in Note 1 was completed in December 2015.
According to the Equity Interest
Transfer Agreement, the Buyers may require the Company to repurchase the equity interest of AM Advertising upon the occurrence
of certain events. As these events are considered improbable, no fair value was allocated to the associated put option.
The Equity Interest Transfer
Agreement also contains an earnout structure, in the event that the net profit (before or after adjustment for non-recurring gains
and losses, whichever is less) of restructured AM Advertising in each of the fiscal years of 2015, 2016, 2017, and 2018 (collectively,
the “Covered Period”) is less than the profit target of RMB1.0592 billion (the “Profit Target”) (being
RMB200 million, RMB240 million, RMB288 million and RMB331.2 million, equivalent to $30,875, $37,050, $44,459 and $51,128, for the
fiscal years of 2015, 2016, 2017, and 2018 respectively), other shareholders of AM Advertising, excluding the Buyers, will be obligated
to compensate the Buyers for the deficiency by transferring their equity interest in AM Advertising to the Buyers for nil consideration
and/or by cash, based on a pre-determined formula with such compensations in aggregate being subject to a cap equal to the amount
of the consideration. The earnout commitment was recorded at fair value and amounted to $25,240 as of December 31, 2015. As of
December 31, 2016, the Group treated the provision for earnout commitment of $23,549 as contingent liability (Note 25-d).
The disposal represents a strategic
shift and has a major effect on the Group’s results of operations. The disposed entities are accounted as discontinued operations
in the consolidated financial statements for the years ended December 31, 2015. A gain of $244,164 was recognized on the disposal,
which is determined based on the total consideration of $324,183, the fair value of the remaining 25% equity interest in AM Advertising
of $79,718 that continues to be held by the Group, the net book value of the Target Business of $134,497 and the fair value of
the earnout commitment of $25,240. Upon the Group’s disposal of its 75% interest in AM Advertising, the Group continues to
hold 25% of the equity of AM Advertising, which is accounted for as an equity method investment. The Group’s share of earnings
for the fiscal year ended December 31, 2015 amounted to $2,491 and was recorded within the (loss) income on equity method investments
within the Consolidated Statements of Operations.
The financial results of the disposed business lines are set out below.
|
|
For the years
ended December
31,
|
|
|
|
2015
|
|
|
|
|
|
Net revenues
|
|
$
|
166,843
|
|
Cost of revenues
|
|
|
(126,745
|
)
|
|
|
|
|
|
Gross profit
|
|
|
40,098
|
|
|
|
|
|
|
Operating expenses
|
|
|
(13,239
|
)
|
|
|
|
|
|
Income from operations
|
|
|
26,859
|
|
|
|
|
|
|
Gain from disposal of 75% equity interest in AM Advertising
|
|
|
244,164
|
|
Interest income
|
|
|
298
|
|
Other income, net
|
|
|
1,293
|
|
Income on equity method investments
|
|
|
265
|
|
|
|
|
|
|
Net income before income tax
|
|
|
272,879
|
|
Income taxes benefit/(expense)
|
|
|
(51,696
|
)
|
|
|
|
|
|
Income from discontinued operations attributable to owners of the Company
|
|
$
|
221,183
|
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars in thousands,
except share data or otherwise noted)
|
3.
|
DISCOUNTINUED OPERATION
- continued
|
Details of related party transactions for the years
ended December 31, 2014 and 2015 were as follows:
Concession cost purchased from:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
2014
|
|
|
2015
|
|
Guangxi Dingyuan (1)
|
|
Equity method investee
|
|
$
|
233
|
|
|
$
|
1,107
|
|
Qingdao AM
(2)
|
|
Equity method investee
|
|
|
-
|
|
|
|
1,230
|
|
|
|
|
|
$
|
233
|
|
|
$
|
2,337
|
|
Loan to a related party:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
|
2014
|
|
|
|
2015
|
|
AM Jiaming (3)
|
|
Equity method investee
|
|
$
|
1,612
|
|
|
$
|
-
|
|
|
|
|
|
$
|
1,612
|
|
|
$
|
-
|
|
Equity transaction with a related party:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
2014
|
|
|
2015
|
|
Beijing Dayun Culture Communication Co., Ltd. ("Dayun Culture") (4)
|
|
Invested by management of the Group
|
|
$
|
-
|
|
|
$
|
8,605
|
|
Dingsheng Ruizhi (5)
|
|
Invested by management of the Group
|
|
|
322
|
|
|
|
-
|
|
|
|
|
|
$
|
322
|
|
|
$
|
8,605
|
|
|
(1)
|
The Group purchased stand-alone
digital frames, LED and lightbox concession in Nanning airport from Guangxi Dingyuan amounting to $1,107 for the years ended December
31, 2015.
|
|
(2)
|
The Group purchased stand-alone digital frames concession in Qingdao airport from Qingdao AM amounting to $1,230 for the year ended December 31, 2015.
|
|
(3)
|
In May 2014 and June 2014, the Group provided two loans to AM Jiaming, with amount of $806 and $806, respectively, at an annual interest rate equal to the bank lending rate over the same period, i.e. 6% for 2014. The loans will be due five days after the issuance of a written notice from the Group.
|
|
(4)
|
In November 2015, AM Advertising purchased 20% equity interest in Beijing AirMedia Lianhe Advertising Co., Ltd. (“AirMedia Lianhe”) from Dayun Culture with consideration of $8,605. After the transaction, AM Advertising held 100% equity interest in AirMedia Lianhe.
|
|
(5)
|
In June 2014, AM Advertising sold 20% equity interests in AM Film, a wholly-owned subsidiary, to Dingsheng Ruizhi with consideration of $322.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars in thousands,
except share data or otherwise noted)
|
4.
|
SEGMENT INFORMATION AND
REVENUE ANALYSIS
|
The Group is mainly engaged in selling advertising
time slots on their network, primarily air travel advertising network, throughout PRC.
The Group chief operating decision maker has been
identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and
assessing performance of the Group; hence, the Group has only one operating segment.
Geographic information
The Group primarily operates in the PRC and substantially
all of the Group's long-lived assets are located in the PRC.
Revenue by service categories
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Revenues from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
$
|
59,200
|
|
|
$
|
38,917
|
|
|
$
|
12,178
|
|
Gas Station Media Network
|
|
|
11,164
|
|
|
|
9,840
|
|
|
|
4,009
|
|
Other Media
|
|
|
5,583
|
|
|
|
2,109
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,947
|
|
|
$
|
50,866
|
|
|
$
|
16,597
|
|
|
5.
|
SHORT-TERM INVESTMENTS
|
Short-term investments consist of various fixed-income
financial products purchased from Chinese banks and trusts and are classified as held-to-maturity securities and carried at amortized
costs. The maturity dates range from three months to less than one year, with interest rates ranging from 4% to 8.2%. The held-to-maturity
securities are subject to penalty for early withdrawal before their maturity. The carrying amount of the held-to-maturity securities
of $3,705 and Nil as of December 31, 2015 and 2016, respectively, approximated their fair values due to their credit ratings and
their short-term nature.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
(a)
|
Equity method investments
|
The Group had the following equity method investments:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of company
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
Equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Eastern Media Corporation Ltd. (“BEMC “) (1)
|
|
|
49
|
|
|
$
|
1,363
|
|
|
|
49
|
|
|
$
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhejiang AirMedia Guangying Film Production Co., Ltd. ("AM Guangying") (2)
|
|
|
47.6
|
|
|
|
3,081
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Hezhong Chuangjin Investment Co., Ltd. ("Hezhong Chuangjin") (3)
|
|
|
15
|
|
|
|
2,144
|
|
|
|
15
|
|
|
|
1,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lanmeihangbiao Tiandi Internet Investment Management (Beijing) Co., Ltd. ("LMHB") (4)
|
|
|
40
|
|
|
|
456
|
|
|
|
40
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Yuyue Film Culture Co., Ltd (“Yuyue Film”) (5)
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Yunxing Chuangrong Investment Fund Management Co., Ltd (“Yunxing”) (6)
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Advertising (7)
|
|
|
25
|
|
|
|
82,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89,221
|
|
|
|
|
|
|
$
|
6,176
|
|
|
(1)
|
In March 2008, the Group
entered into a definitive agreement with China Eastern Media Corporation, Ltd., a subsidiary of China Eastern Group and China
Eastern Airlines Corporation Limited operating the media resources of China Eastern Group, to establish a joint venture, BEMC.
BEMC was incorporated on March 18, 2008 in the PRC with China Eastern Media Corporation and the Group holding 51% and 49% equity
interest, respectively. BEMC obtained concession rights of certain media resources from China Eastern Group, including the digital
TV screens on airplanes of China Eastern Airlines, and paid concession fees to its shareholders as consideration. The investment
was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the
operation of BEMC.
|
|
(2)
|
In December 2013, the Group entered into an agreement with Zhejiang Tianguang Diying Production Co., Ltd. to establish AM Guangying. AM Guangying was incorporated on December 25, 2013. AM Guangying is mainly engaged in film production. The Group sold its interest in AM Guangying for the year ended December 31, 2016. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation of AM Guangying. The Group disposed this investment for the year ended December 31, 2016 with proceeds of $3,014 and loss of $6.
|
|
(3)
|
In May 2015, AM Advertising, Beijing Financial Technology Investment Management Center (limited partnership), Beijing Hongdeshengzheng Investment Co., Ltd., and Beijing Hongyuan Zhixin Enterprise Management Consulting Co. Ltd. established Hezhong Chuangjin, which mainly focuses on internet financing. In July 2015, AM Advertising transferred its investment in Hezhong Chuangjin to AM Online, a subsidiary of the Group at carrying value. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation of Hezhong Chuangjin.
|
|
(4)
|
In September 2015, AM Online entered into an agreement with BlueFocus wireless Internet (Beijing) Investment Management Co., Ltd. and two individual investors to establish a joint venture, LMHB. LMHB was incorporated on September 25, 2015. LMHB is mainly engaged in investment management of Wi-Fi platform marketing and other mobile internet industries. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation of LMHB.
|
|
(5)
|
In June 2016, AM Film entered into an agreement with two individual investors to establish a joint venture, Yuyue Film. Yuyue Film is mainly engaged in investment management of film investment and marketing. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation of Yuyue Film.
|
|
(6)
|
In February 2016, AM Online entered into an agreement with Haihang Wenhua Holding Group to invest in Yunxing. Yunxing was incorporated on December 17, 2013. Yunxing is mainly engaged in information technology investments in the Hainan Airline. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence to the operation of Yunxing.
|
|
(7)
|
On June 15, 2015, AirMedia entered into a definitive equity
interest transfer agreement with Longde Wenchuang to sell 75% equity interest of AM Advertising for a cash consideration of
$324,183 as disclosed in Note 1. The transaction was completed on December 7, 2015. Due to various disputes incurred post-closing
of the transaction (refer to Note 25- d), the Group is no long able to have
significant influence in operational and strategic decisions of the AM Advertising and cannot access to its financial information
in fiscal 2016. As a result, the Group started to account its equity interest in AM advertising using cost method in fiscal
2016. During fiscal 2015, the Group accounted its investment in AM advertising using Equity method as the Group had the ability
to exercise significant influence over the operation of AM Advertising at that time.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
6.
|
LONG-TERM INVESTMENTS
- continued
|
|
(a)
|
Equity method
investments
– continued
|
The summarized financial information of the equity
method investees were as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Total current assets
|
|
$
|
277,634
|
|
|
$
|
24,633
|
|
Total assets
|
|
|
319,797
|
|
|
|
25,209
|
|
Total current liabilities
|
|
|
135,190
|
|
|
|
3,402
|
|
Total liabilities
|
|
|
135,342
|
|
|
|
3,402
|
|
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Total net revenues
|
|
$
|
11,486
|
|
|
$
|
35,866
|
|
|
$
|
1,809
|
|
Total gross profits
|
|
|
567
|
|
|
|
15,341
|
|
|
|
1,241
|
|
Total net income
|
|
|
164
|
|
|
|
9,136
|
|
|
|
(733
|
)
|
|
(b)
|
Cost method investment
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of company
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
Zhangshangtong Air Service (Beijing) Co., Ltd. ("Zhangshangtong") (1)
|
|
|
20
|
|
|
$
|
367
|
|
|
|
20
|
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingdao Jinshi Zhixing Investment Centre LLP (“Qingdao Jinshi”) (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Zhongjiao Huineng Information Technology Co., Ltd (“Zhongjiao Huineng”) (3)
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Advertising ( Refer to Note 25-d)
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
76,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
367
|
|
|
|
|
|
|
$
|
77,685
|
|
|
(1)
|
In June 2010, the Group invested $388 for 20% equity interest
in Zhangshangtong Air Service (Beijing) Co., Ltd. ("Zhangshangtong"), a company established in the PRC that is mainly
engaged in air tickets agency services.
|
|
(2)
|
In January 2016, the Group invested $22 for 3.35% equity
interest in Qingdao Jinshi Zhixing Investment Centre LLP. ("Qingdao Jinshi "), a limited partnership established in
the PRC that is mainly engaged in fund management and investment.
|
|
(3)
|
In January 2016, the Group invested $541 for 13.3% equity
interest in Beijing Zhongjiao Huineng Information Technology Co., Ltd (“Zhongjiao Huineng”), a company established
in the PRC that is mainly engaged in providing WIFI and GPS service to logistic industry.
|
The investment in AM Advertising was accounted for using
the cost method of accounting in 2016, as the Group does not have the ability to exercise significant influence to the operation.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
7.
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable, net, consists of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
$
|
11,184
|
|
|
$
|
13,596
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,727
|
)
|
|
|
(3,815
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
9,457
|
|
|
$
|
9,781
|
|
Movement of allowance for doubtful accounts is as
follows:
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
beginning
|
|
|
Charge to
|
|
|
|
|
|
Exchange
|
|
|
end of the
|
|
|
|
of the year
|
|
|
expenses
|
|
|
Write off
|
|
|
adjustment
|
|
|
year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
1,433
|
|
|
|
3,212
|
|
|
|
(7
|
)
|
|
|
(180
|
)
|
|
|
4,458
|
|
2015
|
|
|
4,458
|
|
|
|
(2,661
|
)
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
1,727
|
|
2016
|
|
|
1,727
|
|
|
|
2,248
|
|
|
|
-
|
|
|
|
(160
|
)
|
|
|
3,815
|
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
8.
|
OTHER CURRENT ASSETS
,NET
|
Other current assets, net, consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Input VAT receivable
|
|
$
|
13,604
|
|
|
$
|
16,249
|
|
Prepaid selling and marketing fees
|
|
|
773
|
|
|
|
368
|
|
Short-term deposits
|
|
|
150
|
|
|
|
74
|
|
Prepaid income tax
|
|
|
447
|
|
|
|
417
|
|
Prepaid individual income tax and other employee advances
|
|
|
433
|
|
|
|
290
|
|
Loans to third parties
(i)
|
|
|
5,403
|
|
|
|
17,080
|
|
Receivable from third party
(ii)
|
|
|
4,110
|
|
|
|
11,635
|
|
Receivable from a non-controlling interest holders
|
|
|
1,313
|
|
|
|
6,377
|
|
Receivable from AM Advertising and its subsidiaries
(iii)
|
|
|
-
|
|
|
|
19,021
|
|
Receivables from ADS depositary
|
|
|
468
|
|
|
|
468
|
|
Other prepaid expenses
|
|
|
4,203
|
|
|
|
2,732
|
|
|
|
|
30,904
|
|
|
|
74,711
|
|
Allowance for doubtful amounts
|
|
|
-
|
|
|
|
(5,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,904
|
|
|
$
|
68,850
|
|
|
(i)
|
For the years ended December 31, 2015 and 2016, the Group
entered into various loan agreements with third parties amounting with aggregated amount of $5,403 and $17,080, respectively with
the terms of one year. The weighted average interest rates were 5.10% and 3.19% without any assets pledged for the years ended
December 31, 2015 and 2016, respectively. As of December 31, 2015 and 2016, the bad debt allowance for loan to third parties amounted
to Nil and $864, respectively.
|
|
(ii)
|
Receivable from third party represented the working capital
provided by the Group to support the third party's daily operations. As of December 31, 2015 and 2016, the bad debt allowance
was Nil and $4,530, respectively.
|
|
(iii)
|
Receivable from AM Advertising and its subsidiaries balance amounted to $19,021 as of December
31, 2016 and the payable to AM Advertising and its subsidiaries balance amounted to $25,956 (See Note 15) as of December 31, 2016.
No provision was made for the receivable balance. The receivable balance was still outstanding as of the date of issuance of the
financial statement.
|
|
9.
|
CONSIDERATION RECEIVABLE
|
As of December 31, 2015, consideration receivable
of $200,685 represents the second installment of the total consideration for the sale of 75% equity interest in AM Advertising
to the Buyers. The transaction is disclosed in Note 1. The first installment of RMB 0.8 billion ($123,498) was received in July
2015 and the second installment of RMB1.3 billion ($200,685) was subsequently received in January 2016.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
10.
|
OTHER NON-CURRENT ASSETS
|
Other non-current assets consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Investment in film and TV series
(i)
|
|
$
|
4,781
|
|
|
$
|
1,854
|
|
Prepaid office space and leasehold improvement fees
(ii)
|
|
|
6,831
|
|
|
|
4,917
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,612
|
|
|
$
|
6,771
|
|
|
(i)
|
The Group invests in films
and TV series, which are produced by other third parties, and shares profit of the invested films and TV series based on its investment
as a percentage of the total investment for a film or TV series.
|
The Group enters into agreements with other investors
to invest together on certain film or TV series, which are produced by third parties, and shares the profit of the invested films
and TV series proportionally based on their investments.
|
(ii)
|
As the office spaces legal title had not been transferred to the Group, the prepaid amounts were recognized as other non-current assets as of December 31, 2015 and 2016.
|
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
Long-term deposits consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Concession fee deposits
|
|
$
|
4,527
|
|
|
$
|
5,547
|
|
Office rental deposits
|
|
|
352
|
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,879
|
|
|
$
|
6,427
|
|
Concession fee deposits normally have terms of three
to five years and are refundable at the end of the concession terms. Office rental deposits normally have terms of one to three
years and are refundable at the end of the lease term.
The long term deposits are not within the scope of
the accounting guidance regarding interests on receivables and payables, because they are intended to provide security for the
counterparty to the concession rights or office rental agreements. Therefore, the deposits are recorded at cost.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
12.
|
ACQUIRED INTANGIBLE ASSETS,
NET
|
Acquired intangible assets, net, consist of the following:
|
|
As of December
31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
amount
|
|
|
amortization
|
|
|
impairment
|
|
|
amount
|
|
|
amount
|
|
|
amortization
|
|
|
impairment
|
|
|
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audio-vision
programming and broadcasting qualification
|
|
$
|
214
|
|
|
$
|
(37
|
)
|
|
$
|
(177
|
)
|
|
$
|
-
|
|
|
$
|
200
|
|
|
$
|
(35
|
)
|
|
$
|
(165
|
)
|
|
$
|
-
|
|
Customer relationships
|
|
|
739
|
|
|
|
(739
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
689
|
|
|
|
(689
|
)
|
|
|
-
|
|
|
|
-
|
|
Contract backlog
|
|
|
1,544
|
|
|
|
(1544
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,441
|
|
|
|
(1,441
|
)
|
|
|
-
|
|
|
|
-
|
|
Concession agreements
|
|
|
10,459
|
|
|
|
(7,531
|
)
|
|
|
(603
|
)
|
|
|
2,325
|
|
|
|
9,758
|
|
|
|
(7,513
|
)
|
|
|
(563
|
)
|
|
|
1,682
|
|
Non-compete agreements
|
|
|
182
|
|
|
|
(172
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
170
|
|
|
|
(161
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,138
|
|
|
$
|
(10,023
|
)
|
|
$
|
(790
|
)
|
|
$
|
2,325
|
|
|
$
|
12,258
|
|
|
$
|
(9,839
|
)
|
|
$
|
(737
|
)
|
|
|
1,682
|
|
The amortization expense for the years ended December
31, 2014, 2015 and 2016 were $462, $505 and $510, respectively. During fiscal years 2017, 2018, 2019 and 2020, the Group expects
to record amortization expenses for definite-lived intangible assets of $510, $455, $360 and $358, respectively.
|
13.
|
PROPERTY AND EQUIPMENT,
NET
|
Property and equipment, net, consist of the following:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Digital display network equipment
|
|
$
|
8,341
|
|
|
$
|
6,314
|
|
WIFI and network equipment
|
|
|
17,708
|
|
|
|
27,719
|
|
Gas station display network equipment
|
|
|
33,412
|
|
|
|
38,615
|
|
Software
|
|
|
9,959
|
|
|
|
9,174
|
|
Office property
|
|
|
-
|
|
|
|
5,805
|
|
Computer and office equipment
|
|
|
3,140
|
|
|
|
2,828
|
|
Vehicle
|
|
|
774
|
|
|
|
938
|
|
Leasehold improvement
|
|
|
218
|
|
|
|
607
|
|
Construction in progress
|
|
|
-
|
|
|
|
1,422
|
|
Furniture and fixture
|
|
|
1,092
|
|
|
|
1,123
|
|
|
|
|
74,644
|
|
|
|
94,545
|
|
Less: accumulated depreciation and impairment
|
|
|
(26,305
|
)
|
|
|
(33,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,339
|
|
|
$
|
61,005
|
|
Depreciation expense recorded for the years ended
December 31, 2014, 2015 and 2016 were $5,832, $5,266 and $12,461, respectively. Due to the continuing losses and significant reduced
revenue from operations, the Group recognized an impairment loss of nil, nil and $826 on gas station related equipment for the
year ended December 31, 2014, 2015 and 2016.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
14.
|
PREPAID EQUIPMENT COST
|
On May 12, 2013, the Group entered into an agreement
with Elec-Tech International Co., Ltd. ("Elec-Tech") to exchange the equity interests of GreatView Media, one of the
VIE's subsidiary, with LED screens from Elec-Tech, pursuant to which Elec-Tech would invest $104.0 million in total (equivalent
to RMB640 million) to purchase approximately 21.27% of the equity interest of GreatView Media. In exchange, GreatView Media undertook
to exclusively use the equal amounts of such injections to purchase LED screens from Elec-Tech or its subsidiaries. The Group would
not recognize any gain or loss from this transaction. As of December 31, 2015 and 2016, the prepaid equipment cost amounting to
$27,708 and $16,200, respectively.
|
15.
|
ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist
of the follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll and welfare
|
|
$
|
1,860
|
|
|
$
|
2,848
|
|
Other tax payable
|
|
|
1,462
|
|
|
|
1,366
|
|
Accrued staff disbursement
|
|
|
1,166
|
|
|
|
1,447
|
|
Deposit payable
|
|
|
665
|
|
|
|
266
|
|
Accrued professional fees
|
|
|
4,382
|
|
|
|
290
|
|
Other current liabilities
|
|
|
1,209
|
|
|
|
1,288
|
|
Payable to non-controlling interest holders
|
|
|
-
|
|
|
|
135
|
|
Payable to AM Advertising and its subsidiaries
(1)
|
|
|
-
|
|
|
|
25,956
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,744
|
|
|
$
|
33,596
|
|
(1)
The payable to AM Advertising
and its subsidiaries was $15,389 as of December 31, 2015 and included in amounts due to related parties. However , due to disputes
with AM Advertising as described in Note 25-d, the Group no long considers AM Advertising and its subsidiaries as related party
in fiscal 2016, as a result, the Payable balance to AM Advertising and its subsidiaries of $25,956 was included in other current
liabilities as of December 31, 2016.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
AirMedia is a tax-exempted company incorporated in
the Cayman Islands.
Broad Cosmos is tax-exempted company incorporated
in the British Virgin Islands.
AM China did not have any assessable profits arising
in or derived from Hong Kong for the years ended December 31, 2014, 2015 and 2016, and accordingly no provision for Hong Kong Profits
Tax was made in these years.
The Group's subsidiaries in the PRC are all subject
to PRC Enterprise Income Tax ("EIT") on the taxable income in accordance with the relevant PRC income tax laws and regulations.
The EIT rate for the Group's operating in PRC was 25% with the following exceptions.
AM Technology qualified for the High and New-Tech
Enterprise ("HNTE") status that would allow for a reduced 15% tax rate under EIT Law since year 2006. AM Technology was
subject to an EIT rate of 15% in 2014, 2015 and 2016, and is expected to be subject to an EIT rate of 15% as long as it maintains
its status as a HNTE.
Xi'an AM qualified as a "Software Enterprise"
in August 2008 by Technology Information Bureau of Shaanxi province, and therefore is entitled to a two-year exemption from the
EIT commencing from its first profitable year and a 50% deduction of 25% EIT rate for the succeeding three years, with approval
by the relevant tax authorities. As Xi'an AM first made profit in 2009, it was exempted from EIT in 2009 and 2010, and enjoyed
the preferential income tax rate of 12.5% from 2011 to 2013. In 2014, Xi'an AM qualified as HNTE and entitled to an EIT rate of
15% for the years 2014, 2015 and 2016, and is expected to be subject to an EIT rate of 15% as long as it maintains its status as
a HNTE.
AirMedia
GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
16.
|
INCOME
TAXES
- continued
|
Income tax benefit / (expenses) are as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits /(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(988
|
)
|
|
$
|
(480
|
)
|
|
$
|
(50
|
)
|
Deferred
|
|
|
2,500
|
|
|
|
(5,941
|
)
|
|
|
(4,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,512
|
|
|
|
(6,421
|
)
|
|
|
(4,483
|
)
|
The principal components of the Group's deferred income
tax assets and liabilities are as follows:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
899
|
|
|
$
|
4,083
|
|
Employee education fee excess
|
|
|
6
|
|
|
|
-
|
|
Depreciation of property and equipment
|
|
|
127
|
|
|
|
-
|
|
Amortization of intangible assets and concession fees
|
|
|
2,274
|
|
|
|
1,606
|
|
Net operating loss carry forwards
|
|
|
15,404
|
|
|
|
30,697
|
|
Valuation allowance
|
|
|
(14,186
|
)
|
|
|
(36,386
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,524
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Acquired intangible assets
|
|
|
91
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
91
|
|
|
$
|
-
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
16.
|
INCOME
TAXES
- continued
|
The valuation allowance provided
as of December 31, 2016 and 2015 relates to the deferred tax assets generated by the Group’s VIE. The Group periodically
evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets
by a valuation allowance to the extent it believes that either it is more likely than not that the deferred tax assets for these
entities will not be realized as it does not expect to generate sufficient taxable income in future, or the amount involved is
not significant. The Group's subsidiaries in the PRC had total net operating loss carry forwards approximately of $137,040 million
as of December 31, 2016, respectively. The net operating loss carry forwards for the PRC subsidiaries will expire on various dates
through year 2021.
Reconciliation between the provision
for income taxes computed by applying the PRC EIT rate of 25% to income before income taxes and the actual provision of income
taxes is as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
$
|
(53,414
|
)
|
|
$
|
(74,202
|
)
|
|
$
|
(84,726
|
)
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax at statutory tax rate
|
|
|
(13,354
|
)
|
|
|
(18,551
|
)
|
|
|
(21,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for tax purpose
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment expenses exceeded the tax limit
|
|
|
217
|
|
|
|
300
|
|
|
|
158
|
|
Tax effect of tax losses not recognized
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
Tax effect of other permanent differences
|
|
|
360
|
|
|
|
330
|
|
|
|
1,681
|
|
Changes in valuation allowance
|
|
|
2,748
|
|
|
|
9,276
|
|
|
|
22,200
|
|
Effect of preferential tax rates granted to PRC entities
|
|
|
7,912
|
|
|
|
14,404
|
|
|
|
642
|
|
Effect of income tax rate difference in other jurisdictions
|
|
|
595
|
|
|
|
662
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses/ (benefits)
|
|
$
|
(1,512
|
)
|
|
$
|
6,421
|
|
|
$
|
4,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
2.8
|
%
|
|
|
(8.7
|
)%
|
|
|
(5.3
|
)%
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
16.
|
INCOME
TAXES
- continued
|
The Group did not identify significant unrecognized
tax benefits for the years ended December 31, 2014, 2015 and 2016. The Group did not incur any interest and penalties related to
potential underpaid income tax expenses for the years ended December 31, 2014, 2015 and 2016.
Since the commencement of operations in August 2005,
only AM Technology and Shenzhen AM have been subjected to a tax examination by the relevant PRC tax authorities. The Group's subsidiaries,
VIEs and VIEs' subsidiaries remain subject to tax examinations at the tax authority's discretion.
Uncertainties exist with respect
to how the current income tax law in the PRC applies to the Group's overall operations, and more specifically, with regard to tax
residency status. New EIT Law includes a provision specifying that legal entities organized outside of China will be considered
residents for Chinese income tax purposes if the place of effective management or control is within China. The Implementation Rules
to the new EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management
and control over the manufacturing and business operations, personnel, accounting, properties, etc., occurs within China. Additional
guidance is expected to be released by the Chinese government in the near future that may clarify how to apply this standard to
tax payers. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe
that its legal entities organized outside of China should be treated as residents for new EIT Law purposes. If the PRC tax authorities
subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed resident enterprises,
the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%.
However, the Company's subsidiaries
located in the PRC were in a loss position and had accumulated deficit as of December 2016, and the tax basis for the investment
was greater than the carrying value of this investment. A deferred tax asset should be recognized for this temporary difference
only if it is apparent that the temporary difference will reverse in the foreseeable future. Absent of evidence of a reversal in
the foreseeable future, no deferred tax asset for such temporary difference was recorded. The Company did not record any tax on
any of the undistributed earnings because the relevant subsidiaries do not intend to declare dividends and the Company intends
to permanently reinvest it within the PRC. Additionally, no deferred tax liability was recorded for taxable temporary differences
attributable to the undistributed earnings of VIEs because the Company believes the undistributed earnings can be distributed in
a manner that would not be subject to income tax.
Aggregate undistributed earnings of the Company's
subsidiaries located in the PRC that are available for distribution to the Company are considered to be indefinitely reinvested
and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution
of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of pre January 1,
2008 retained earnings will not be subject to the withholding tax.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
17.
|
NET (LOSS) INCOME PER
SHARE
|
The calculation of the net loss per share is as follows:
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to AirMedia Group Inc.'s ordinary shareholders
|
|
$
|
(25,695
|
)
|
|
$
|
149,647
|
|
|
$
|
(65,625
|
)
|
- Continuing operations
|
|
|
(45,306
|
)
|
|
|
(70,651
|
)
|
|
|
(65,625
|
)
|
- Discontinued operations
|
|
|
19,611
|
|
|
|
220,298
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing net (loss) income per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
- diluted
|
|
|
119,304,773
|
|
|
|
129,372,158
|
|
|
|
125,277,056
|
|
Weighted average shares used in calculating (loss) income per ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
Discontinued operations
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
-
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations (i)
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
Discontinued operations (ii)
|
|
|
119,924,927
|
|
|
|
129,372,158
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
$
|
(0.22
|
)
|
|
$
|
1.23
|
|
|
$
|
(0.52
|
)
|
-diluted
|
|
|
(0.22
|
)
|
|
|
1.16
|
|
|
|
(0.52
|
)
|
Net (loss) income per ordinary share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
$
|
(0.38
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
-diluted
|
|
|
(0.38
|
)
|
|
|
(0.58
|
)
|
|
|
(0.52
|
)
|
Net income per ordinary share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
$
|
0.16
|
|
|
$
|
1.81
|
|
|
$
|
-
|
|
-diluted
|
|
|
0.16
|
|
|
|
1.70
|
|
|
|
-
|
|
|
(i)
|
The effect of options was
excluded from the computation of diluted loss per share from continuing operations for the years ended December 31, 2014, 2015
and 2016, respectively, as the effect would be anti-dilutive.
|
|
(ii)
|
An incremental weighted average number of 620,154, 7,631,964 and Nil ordinary shares from assumed exercise of share option
were included in computing the diluted income per share for the discontinued operations for the years ended December 31, 2014,
2015 and 2016, respectively.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
2007 Share incentive plan
On July 2, 2007, the Board of Directors adopted the
2007 share incentive plan (the "2007 Option Plan"), which allows the Group to grant options to its employees and directors
to purchase up to 12,000,000 ordinary shares of the Company subject to vesting requirement.
On December 29, 2008, the Board of Directors amended
2007 Option Plan to allow the Group to grant options to its employees and directors to purchase up to 17,000,000 ordinary shares.
On September 1, 2012, the Board of Directors approved
to grant options to the employees under 2007 Share Incentive Plan to purchase an aggregate of 1,857,538 ordinary shares of the
Company, at an exercise price of $0.72 per ordinary share. One twelfth of the options will vest each quarter from September 4,
2012. The expiration date will be 5 years from the grant date.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS-
continued
|
2007 Share incentive plan
-
continued
On April 15, 2014, the Board of Directors approved
to extend the expiration dates of the options granted on November 29, 2007 and July 10, 2009 from April 28, 2014 to April 28, 2016.
Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options, which was
$0.21 and $0.21 per share, respectively, as of the modification dates, was estimated using the Black-Scholes model. The incremental
compensation cost of the modified award were $4 and $4, respectively, which were recognized as share-based compensation expense
for the year ended December 31, 2014.
On May 31, 2014, the former CFO resigned and the Board
of Directors approved the amendment of his share option agreement. On the date of resignation, 575,440 unvested options were cancelled
and the expiration date of 1,282,098 vested options was modified from September 3, 2017 to May 31, 2016. The fair value of the
stock options, which was $0.43 per share as of the modification date, was estimated using the Black-Scholes model. The incremental
compensation cost of the modified award was $201, which was recognized as share-based compensation expense for the year ended December
31, 2014.
On June 9, 2014, the Board of Directors approved to
extend the expiration date of the options granted on July 10, 2009 from July 11, 2014 to July 11, 2016. Modified awards are viewed
as an exchange of the original award for a new award. The fair value were $0.22 and $0.12 per share for the stock options whose
exercise price were $1.15 and $1.57 per share, respectively, as of the modification date, was estimated using the Black-Scholes
model. The incremental compensation costs of the modified award were $686 and $5, respectively, which were recognized as share-based
compensation expense for the year ended December 31, 2014.
On June 9, 2014, Board of Directors of the Group approved
to extend the expiration date of the options granted on November 1, 2012 from November 11, 2014 to November 11, 2016. Modified
award is viewed as an exchange of the original award for a new award. The fair value of the stock options, which was $0.25 per
share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified
award was $4, which was recognized as share-based compensation expense for the year ended December 31, 2014.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS -
continued
|
2011 Share incentive plan
On March 18, 2011, the Board
of Directors adopted 2011 Share Incentive Plan (the "2011 Option Plan"), which allows the Group to grant options to its
employees and directors to purchase up to 2,000,000 ordinary shares of the Company subject to vesting requirement.
On March 22, 2011, the Board
of Directors granted options to Group's employees to purchase an aggregate of 2,180,000 ordinary shares of the Company under 2007
Option Plan and 2011 Option Plan, at an exercise price of $2.3 per share. The contractual term of the options was 5 or 10 years.
One twelfth of these options will vest each quarter through March 22, 2014. Subsequently on June 7, 2011, the Board of Directors
approved to modify the exercise price of these stock options to $1.57 per share. The fair value of these options at the modification
date was estimated to be $0.75 per option. The incremental share based compensation costs of the re-priced options was $314 to
be recognized over the remaining service period through March 22, 2014.
On August 23, 2011, the Board
of Directors approved the adjustment of the exercise price of certain stock options that were granted on July 2, 2007, July 20,
2007, November 29, 2007, July 10, 2009 and March 22, 2011, which were subsequently modified from $1.57 per share to $1.15 per share.
The fair value of the options on the modification date was $0.21, $0.22, $0.26, $0.39 and $0.53 per share, respectively, calculated
using the Black-Scholes model. The incremental compensation cost of the re-priced options was $1,259, of which $950 was recognized
on the modification date, and the remainder to be recognized over the remaining service period.
In September 2012, the former
CFO of the Group resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vested through her date of resignation.
In conjunction with her resignation, she signed a supplementary agreement with the Group that granted her 100,000 immediately exercisable
options and 200,000 options that would vest through September 22, 2013. During the vesting period, she would provide consulting
service as a consultant. For the 100,000 immediately exercisable options, a measurement date was reached upon grant and the Group
immediately recognized $35 share-based compensation expenses. For the 200,000 options that vested through September 22, 2013, the
Group recognized expense by year ended December 31, 2013.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS -
continued
|
2012 Share incentive plan
On November 30, 2012, the Board of Directors adopted
2012 Share Incentive Plan (the "2012 Option Plan"), which allows the Group to grant options to its employees and directors
to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement.
On November 1 and November 30, 2012, the Group granted
20,000 options to a consultant under the 2007 Option Plan and 60,000 options under the 2012 Option Plan to purchase the Company's
ordinary shares at an exercise price of $1.11 per share. 20,000 share options were vested immediately and one-third of the 60,000
share options vested on February 1, May 1 and August 1, 2013, respectively.
On June 1 and August 1, 2014, the Group granted 2,376,620
options and 140,000 options to its employees under the 2012 Option Plan to purchase the Company’s ordinary shares at an exercise
price of $1.025 and $1.045 per share, respectively. One twelfth of these options will vest each quarter through June 1, 2017 and
August 1, 2017, respectively. The expiration date will be 5 years from the grant dates.
On October 13, 2014, an employee terminated his
employment with the Group but continued to provide service as a nonemployee consultant. 50,000 options granted to him on August
1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2014 was not material. On October 31, 2015, the consultant service contract
terminated. Of the 50,000 options granted to him, 20,830 were vested through the service period end and the expiration date of
the vested options was modified from August 1, 2019 to January 31, 2016. The rest 29,170 unvested options were cancelled at the
service period end.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS -
continued
|
2012 Share incentive plan - continued
On May 12, 2015, the Group granted 660,000 options
its employees under the 2012 Option Plan to purchase the Company’s ordinary shares at an exercise price of $1.675 per share.
One twelfth of these options will vest each quarter through May 12, 2018. The expiration date will be 5 years from the grant date.
On June 15, 2015, an employee
terminated his employment with the Group but continued to provide service as a nonemployee consultant. 200,000 options granted
to him on June 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn
the award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental
share-based compensation expense for the year ended December 31, 2015 was not material.
On October 31, 2015, an employee
terminated his employment with the Group but continued to provide service as a nonemployee consultant. 100,000 options granted
to him on May 12, 2015 were not modified in connection with the change in status, but future service is still necessary to earn
the award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental
share-based compensation expense for the year ended December 31, 2015 was not material.
On December 31, 2015, two consultants
resigned. Of the 200,000 options granted to one of them on May 12, 2015, 3,332 were vested through her date of resignation. The
expiration date of the vested options was modified from May 12, 2020 to May 31, 2016. For the rest 166,668 unvested options, one
twelfth of the total granted options will still vest on February 12, 2016 following the original vesting schedule and the rest
150,002 options were cancelled on the date of resignation. The fair value of the stock options, which was $1.12 per share as of
the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified award was
immaterial for the year ended December 31, 2015. Of the 100,000 options granted to the other consultant on May 12, 2015, 16,664
were vested through her date of resignation. The expiration date of the vested options was modified from May 12, 2020 to January
31, 2016, and the 83,336 unvested options were cancelled on the date of resignation.
On March 10, 2016, Board of Directors
approved to extend the expiration dates of the 685,000 options from various original expiration dates in March and April 2016 to
December 31, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock
options of $1.67 as of the modification dates, was estimated using the Black-Scholes model. The incremental share-based compensation
expense for the year ended December 31, 2016 was not material.
On July 10, 2016, Board of Directors
approved to extend the expiration dates of the 2,139,918 options from original expiration date of July 11, 2016 to December 31,
2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options of $0.38
as of the modification dates, was estimated using the Black-Scholes model. The incremental share-based compensation expense of
$79 was recognized for the year ended December 31, 2016.
For the year ended December 31,
2016, four employees terminated their employments with the Group, but continued to provide service as nonemployee consultant. The
options were not modified in connection with the change in status, but future service is still necessary to earn the award. The
compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense of $179 was recognized for the year ended December 31, 2016.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS -
continued
|
The following summary of stock option activities under
the 2007, 2011 and 2012 Share incentive plans as of December 31, 2016, reflective of all modifications is presented below:
|
|
Outstanding Options
|
|
|
|
|
|
|
Weighted average
|
|
|
Weighted average
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
grant-date
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
options
|
|
|
per option
|
|
|
fair value
|
|
|
contractual terms
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2016
|
|
|
10,438,840
|
|
|
$
|
1.14
|
|
|
$
|
1.07
|
|
|
|
2.16
|
|
|
$
|
17,236
|
|
Exercised
|
|
|
(1,234,134
|
)
|
|
|
1.08
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,494,530
|
)
|
|
|
1.17
|
|
|
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
7,710,176
|
|
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
|
1.57
|
|
|
$
|
1,552
|
|
Options vested and expected to vest as of December 31, 2016
|
|
|
7,680,203
|
|
|
|
1.15
|
|
|
|
1.05
|
|
|
|
1.57
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2016
|
|
|
7,373,036
|
|
|
$
|
1.15
|
|
|
$
|
1.12
|
|
|
|
1.52
|
|
|
$
|
1,447
|
|
The total intrinsic value of options exercised during
the years ended December 31, 2014, 2015 and 2016 were $442, $7,039 and $1,928, respectively. The total fair value of options
vested during the years ended December 31, 2014, 2015 and 2016 were $357, $649 and $694, respectively. The Group recorded share-based
compensation of $1,281, $567 and $773 for the years ended December 31, 2014, 2015 and 2016, respectively. There was $843 and $390
of total unrecognized compensation expense related to unvested share options granted as of December 31, 2015 and 2016, respectively.
The expense is expected to be recognized over a weighted-average period of 1.67 and 0.5 years on a straight-line basis as of December
31, 2015 and 2016, respectively.
The fair value of each option granted was estimated
on the date of grant/modification using the Black-Scholes option pricing model with the following assumptions used during the applicable
period.
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate of return
|
|
|
0.10% - 1.07
%
|
|
|
|
0.00%-1.24%
|
|
|
|
0.14%-0.80%
|
|
Expected term
|
|
|
1.00
- 3.32 years
|
|
|
|
0.04-2.93years
|
|
|
|
0.04-2.48
years
|
|
Volatility
|
|
|
63.10% - 67.06%
|
|
|
|
7.19%-126.63%
|
|
|
|
9%-74.8%
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
18.
|
SHARE BASED PAYMENTS –
continued
|
The volatility of the underlying ordinary shares during
the life of the options was estimated based on the historical stock price volatility of the Company's ordinary shares and listed
shares of comparable companies over a period comparable to the expected term of the options. From March 2011, the volatility was
estimated based on the historical volatility of the Company's share price as the Company has accumulated sufficient history of
stock price for a period comparable to the expected term of the options.
Risk-free rate is based on yield of US Treasury bill
as of valuation date with maturity date close to the expected term of the options.
The expected term is estimated based on a consideration
of factors including the original contractual term and the vesting term.
The dividend yield was estimated by the Group based
on its expected dividend policy over the expected term of the options. The Group has no plan to pay any dividend in the foreseeable
future. Therefore, the Group considers the dividend yield to be zero.
The exercise price of the options was determined by
the Group's Board of Directors.
|
(6)
|
Fair value of underlying ordinary shares
|
The closing market price of the ordinary shares of the
Company as of the grant/modification date was used as the fair value of the ordinary shares on that date.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
19.
|
FAIR VALUE MEASUREMENT
|
Measured on recurring basis
The Group measured its financial
assets and liabilities, including cash, accounts receivable, short-term investment, amounts due from related parties, consideration
receivable, accounts payable and amounts due to related parties on a recurring basis as of December 31, 2015 and 2016.
Cash and short-term investment
are classified within Level 1 of the fair value hierarchy because they are valued based on the quoted market price in an active
market. The carrying amounts of accounts receivable, consideration receivable, amounts due from related parties, accounts payable
and amounts due to related parties approximate their fair values due to their short-term maturity.
Measured on non-recurring
basis
The Group measured intangible
assets and property and equipment at fair value on a nonrecurring basis. The fair value was determined using models with significant
unobservable inputs (Level 3 inputs). This was based on a number of key assumptions, including, but not limited to, a discount
rate of 18% and the annual net revenue projections based on the projected levels of advertising activities during the forecast
periods, all of which were classified as Level 3 in the fair value hierarchy. As a result, the Group recorded Nil, Nil and $826
impairment charge for the year ended December 31, 2014, 2015 and 2016, respectively.
The Group measured its long-term
investment in AM Advertising at fair value on a nonrecurring basis as result of the disposal transaction of Target Business as
set forth in Note 1. The fair value was determined using the market approach (AM Advertising’s recent capital transaction
announced to the public) with quoted price for the assets in active markets (Level 1 inputs). No impairment was recorded for the
years ended December 31, 2015 and 2016.
The Group measured the provision
for earnout commitment at fair value on a nonrecurring basis as result of the disposal transaction of Target Business as of December
31, 2015. The fair value was determined using the Monte Carlo method with significant unobservable inputs (Level 3 inputs) which
primarily included forecast adjusted net income over the contingent consideration period and the risk-adjusted discount rate of
7.5%. As of December 31, 2016, due to disputes, the Company considered the provision for earnout commitment as contingent liability
and disclosed in Note 25.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
20.
|
SHARE REPURCHASE PLAN
|
On March 21, 2011, the Board of Directors authorized
the Company to repurchase up to $20 million of its own outstanding ADSs within two years from March 21, 2011. On September 26,
2012, the Board of Directors approved to increase the amount of the share repurchase program to $40 million of its own outstanding
ADS and to extend the termination date of the share repurchase program to March 20, 2014.
Up to December 31, 2016, the Company had repurchased
an aggregate of 6,532,429 ADSs from the open market for a total consideration of $17.4 million, of which 2,190,685 ADSs had been
cancelled and 4,341,744 ADSs were recorded as treasury stock. As of December 31, 2015 and 2016, 2,708,538 and 617,067 ADS of treasury
stock has been reissued.
|
21.
|
MAINLAND CHINA CONTRIBUTION
PLAN
|
Full time employees of the Group in the PRC participate
in a government-mandated multiemployer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Group
to accrue for these benefits based on certain percentages of the employees' income. The total contribution for such employee benefits
were $2,717, $2,202 and $4,029 for the years ended December 31, 2014, 2015 and 2016, respectively.
As stipulated by the relevant law and regulations
in the PRC, the Group's subsidiaries, VIEs and VIEs' subsidiaries in the PRC are required to maintain non-distributable statutory
surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of profit after taxes
as reported in the subsidiaries' statutory financial statements prepared under the PRC GAAP. Once appropriated, these amounts are
not available for future distribution to owners or shareholders. Once the general reserve is accumulated to 50% of the subsidiaries'
registered capital, the subsidiaries can choose not to provide more reserves. The statutory reserve may be applied against prior
year losses, if any, and may be used for general business expansion and production and increase in registered capital of the subsidiaries.
The Group allocated $413, $17,542 and $Nil to statutory reserves during the years ended December 31, 2014, 2015 and 2016, respectively.
The statutory reserves cannot be transferred to the Company in the form of loans or advances and are not distributable as cash
dividends except in the event of liquidation.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
23.
|
RESTRICTED NET ASSETS
|
Relevant PRC laws and regulations restrict the WFOEs,
VIEs and VIEs' subsidiaries from transferring a portion of their net assets, equivalent to the balance of their statutory reserves
and their paid-in-capital, to the Group in the form of loans, advances or cash dividends. Relevant PRC statutory laws and regulations
restrict the payments of dividends by the Group's PRC subsidiaries and VIEs and VIEs' subsidiaries from their respective retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations.
As of December 31, 2015, the balance of restricted
net assets was $313,780, of which $114,695 was attributed to the paid-in-capital and statutory reserves of the VIEs and VIEs' subsidiaries,
and $199,085 was attributed to the paid in capital and statutory reserves of WFOE. As of December 31, 2016, the balance of restricted
net assets was $342,860, of which $138,496 was attributed to the paid-in-capital and statutory reserves of the VIEs and VIEs' subsidiaries,
and $204,364 was attributed to the paid in capital and statutory reserves of WFOE. Under applicable PRC laws, loans from PRC companies
to their offshore affiliated entities require governmental approval, and advances by PRC companies to their offshore affiliated
entities must be supported by bona fide business transactions.
The Group has entered into operating lease agreements
principally for its office spaces in the PRC. These leases expire through 2018 and are renewable upon negotiation. Rental expenses
under operating leases for the years ended December 31, 2014, 2015 and 2016 were $1,316, $1,507 and $1,988, respectively.
Future minimum rental lease payments under non-cancellable
operating leases agreements were as follows:
Year
|
|
|
|
|
|
|
|
2017
|
|
$
|
2,364
|
|
2018
|
|
|
2,067
|
|
2019
|
|
|
96
|
|
|
|
|
|
|
|
|
$
|
4,527
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
The Group has entered into concession right agreements
with vendors, such as airports, airlines, trains and a petroleum company. The contract terms of such concession rights are usually
three to five years. The concession rights expire through 2029 and are renewable upon negotiation. Concession fees charged into
statements of operations for the years ended December 31, 2014, 2015 and 2016 were $71,533, $64,752 and $17,264 respectively.
Future minimum concession fee payments under non-cancellable
concession right agreements were as follows:
Year
|
|
|
|
|
|
|
|
2017
|
|
$
|
29,621
|
|
2018
|
|
|
22,426
|
|
2019
|
|
|
19,061
|
|
2020
|
|
|
17,193
|
|
2021
|
|
|
864
|
|
thereafter
|
|
|
6,049
|
|
|
|
|
|
|
|
|
$
|
95,214
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
25.
|
CONTINGENT LIABILITIES
|
|
(a)
|
Outdoor advertisement registration
certificate
|
On May 22, 2006, the State Administration
for Industry and Commerce, or the SAIC, a governmental authority in the PRC, amended the Provisions on the Registration Administration
of Outdoor Advertisements, or the new outdoor advertisement provisions. Pursuant to the amended outdoor advertisement provisions,
advertisements placed inside or outside of the "departure halls" of airports are treated as outdoor advertisements and
must be registered in accordance with the local SAIC by "advertising distributors". To ensure that the Group's airport
operations comply with the applicable PRC laws and regulations, the Group is in the process of making inquiries with the local
SAICs in the cities in which the Group has operations or intends to operate with respect to the application for an advertising
registration certificate. However, the local SAICs with whom the Group consulted have expressed different views on whether the
advertisements shown on the Group's digital TV screens should be regarded as outdoor advertisements and how to register those advertisements.
As of the date of these consolidated financial statements, the Group has registered and received outdoor advertising licenses for
our advertisements in Beijing Capital International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport,
and Shenyang Taoxian International Airport, and Changchun Longjia International Airport, and registrations have been approved by
the SAIC offices in four other cities and provinces where the Group has operations for advertisements in the airports of those
regions. Some local SAICs need more time to consider the implementation of the new outdoor advertising provisions and some SAICs
do not require the Group to register. The Group intends to register with the relevant SAICs if the Group is required to do so,
but the Group cannot assure that the Group will obtain the registration certificate in compliance with the new outdoor advertisement
provisions due to the uncertainty in the implementation and enforcement of the regulations promulgated by the SAIC. If the requisite
registration is not obtained, the relevant local SAICs may require the Group to forfeit advertising income earned, impose administrative
fines of up to $5. They may also require the Group to discontinue advertisements at airports where the requisite advertising registration
is not obtained, which may result in a breach of one or more of the Group's agreements with the Group's advertising clients and
materially and adversely affect the Group's business and results of operations. As of December 31, 2016, the Group did not record
a provision for this matter as management believes the possibility of an adverse outcome of the matter is remote and any liability
it may incur would not have a material adverse effect on its consolidated financial statements. However, it is not possible for
the Group to predict the ultimate outcome and the possible range of the potential impact of failure to obtain such disclosed registrations
and approvals primarily due to the lack of relevant data and information in the market in this industry in the past.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
25.
|
CONTINGENT LIABILITIES
- continued
|
|
(b)
|
Approval for non-advertising content
|
A majority of the digital frames
and digital TV screens in the Group's network include programs that consist of both advertising content and non-advertising content.
On December 6, 2007, the State Administration of Radio, Film or Television, or the SARFT, a governmental authority in the PRC,
issued the Circular regarding Strengthening the Management of Public Audio-Video in Automobiles, Buildings and Other Public Areas,
or the SARFT Circular. According to the SARFT Circular, displaying audio-video programs such as television news, films and television
shows, sports, technology and entertainment through public audio-video systems located in automobiles, buildings, airports, bus
or train stations, shops, banks and hospitals and other outdoor public systems must be approved by the SARFT. The Group intends
to obtain the requisite approval of the SARFT for the Group's non-advertising content, but the Group cannot assure that the Group
will obtain such approval in compliance with this new SARFT Circular, or at all. In January 2014, the Group entered into a strategic
alliance with China Radio International Oriental Network (Beijing) Co., Ltd ("CRION"), which manages the internet TV
business of China International Broadcasting Network, to operate the CIBN-AirMedia channel for broadcast network TV programs to
air travellers in China. According to the terms of the cooperation arrangement with CRION, during the cooperation period from March
28, 2014 to March 27, 2024, CRION shall obtain and, from time to time, be responsible for obtaining any approval, license and consent
regarding the regulation of broadcasting and television from relevant authorities.
There is no assurance that CRION
will be able to obtain or maintain the requisite approval or the Group will be able to renew the contract with CRION when they
expire. If the requisite approval is not obtained, the Group will be required to eliminate non-advertising content from the programs
included in the Group's digital frames and digital TV screens and advertisers may find the Group's network less attractive and
be unwilling to purchase advertising time slots on the Group's network. As of December 31, 2016, the Group did not record a provision
for this matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur
would not have a material adverse effect on its consolidated financial statements. However, it is not possible for the Group to
predict the ultimate outcome and the possible range of the potential impact of failure to obtain such disclosed registrations and
approvals primarily due to the lack of relevant data and information in the market in this industry in the past.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
25.
|
CONTINGENT LIABILITIES
- continued
|
The Company
and two of its officers were named as defendants in a putative securities class action filed on June 25, 2015 in the U.S. District
Court for the Southern District of New York: Huang v. AirMedia Group Inc. et al., Civil Action No. 1:15-CV-04966-ALC (S.D.N.Y.).
The complaint in this putative class action alleges that certain of the defendants' financial statements and other public statements
and disclosures contained misstatements or omissions, including with respect to the alleged sale of an equity interest in the Company's
advertising subsidiary, in violation the U.S. securities laws. The complaint states that plaintiffs seek to represent a class of
persons who allegedly suffered damages as a result of their trading activities related to the Company's ADRs between April 15 and
June 15, 2015, and alleges violations of Sections 10(b) and 20(a) of the U.S. Securities Exchange Act of 1934, and Rule 10b-5 promulgated
thereunder. On November 10, 2015, the Court appointed China Xiayuan Transportation Co. Ltd. as the lead plaintiff and appointed
a lead counsel. On January 15, 2016, the lead plaintiff filed an amended complaint, advancing similar allegations and claims as
the previously filed complaint and seeking to represent a class of persons who allegedly suffered damages as a result of their
trading activities related to the Company's ADRs between April 7 and June 15, 2015. On February 5, 2016, the Company filed a letter
pursuant to the judge's individual practice rules, in which the Company identified the bases for its anticipated motion to dismiss
the amended complaint and requested a pre-motion conference. On February 10, 2016, the lead plaintiff filed a letter in response
to the Company's February 5, 2016 letter. On February 11, 2016, the court denied the request for a pre-motion conference, and ordered
the following briefing schedule: the Company should file its motion to dismiss by March 10, 2016, with the plaintiffs' opposition
due by April 7, 2016, and the Company's reply due by April 21, 2016. On March 10, 2016, the Company and one of its officers filed
a motion to dismiss the Amended Complaint. On April 21, 2016, the Filing Defendants filed a reply to the lead plaintiff’s
opposition. On March 27, 2017, the Court granted the motion to dismiss and entered a judgment dismissing the Amended Complaint
with prejudice. As of December 31, 2016, the Group did not record a provision for this matter as management believes the possibility
of adverse outcome of the matter is remote and any liability it may incur would not have a material adverse effect on its consolidated
financial statements.
|
(d)
|
AM Advertising Dispute
|
AM Shengshi
had served a legal letter, dated June 29, 2016 (the “Legal Letter”), on Longde Wenchuang and Culture Center to challenge
the proposed transfers by Longde Wenchuang and Cultural Center of their equity interests in AM Advertising to Shanghai Golden Bridge
InfoTech Co., Ltd. (stock code: 603918), a PRC company with its shares listed on the Shanghai Stock Exchange (“Golden Bridge”).
As of the date of the Legal Letter, AM Shengshi held 24.84% of the equity interests in AM Advertising. Longde Wenchuang and Culture
Center held 28.57% and 46.43%, respectively, of the equity interests in AM Advertising. On June 14, 2016, Longde Wenchuang and
Culture Center entered into an equity interest transfer agreement with Golden Bridge to transfer 75% equity interests in AM Advertising
to Golden Bridge in consideration for shares in Golden Bridge (the “Transfer”). Neither of Longde Wenchuang and Culture
Center sought consent from AM Shengshi with respect to the Transfer in accordance with the provisions of the Company Law of the
People’s Republic of China (the “Company Law”). In the Legal Letter, AM Shengshi challenges the validity of the
Transfer on the ground that it violated the statutory right of first refusal of AM Shengshi under the Company Law. Subsequent to
the Company’s legal letter, Golden Bridge ceased acquisition of 75% equity interest of AM Advertising from Longde Wenchuang
and Culture Center. Longde Wenchuang and Culture Center further dismissed the Group’s representative from Co-CEO position
of AM Advertising.
On September
2, 2016, the Group received notice (the “September 2, 2016 Notice”) from the China International Economic and Trade
Arbitration Commission (the “CIETAC”) that the Company, AM Technology, AM Shengshi and Mr. Herman Man Guo (collectively,
the “Respondents”) were named as respondents by the Culture Center in an arbitration proceeding submitted by the Culture
Center to the CIETAC in connection with the sale by the Company of 75% equity interests in AM Advertising to Culture Center and
Longde Wenchuang in June 2015. Culture Center seeks specific performance by the Respondents of certain obligations under the
transaction documents, which include, among other things, (i) the pledge by AM Shengshi and Mr. Guo of their respective equity
interests in AM Advertising to Culture Center as security for their obligations under the transaction documents, (ii) the use of
best efforts by the Respondents to cooperate with the Culture Center and Longde Wenchuang to procure the listing of AM Advertising
in China and (iii) the performance by the Company and Mr. Guo of their respective non-compete obligations to refrain from holding,
operating, or otherwise participating in any business that is the same or substantially the same as that of AM Advertising. The
Company believes the arbitration request is without merit and intends to defend the actions vigorously. However, no assurances
can be provided that the Company will prevail in this arbitration proceeding.In response to the September 2, 2016 Notice, the Group
filed a notice against Culture Center to CIETAC for their breach of contract.
As a result
of the above disputes, the Group is no longer able to exercise significant influence in operating and strategic decision of AM
Advertising and cannot access to AM Advertising’s financial information. Accordingly, the Group accounted its investment
in AM Advertising using cost method (see Note 6) for the year ended December 31, 2016. AM Advertising and its subsidiaries are
no longer related parties to the Group. As of December 31, 2016, the Group treated the provision for earnout commitment of $23,549
as contingent liability and did not record any additional provision for this matter as management believes the possibility of adverse
outcome of the matter is remote and any liability it may incur would not have a material adverse effect on its consolidated financial
statements.
|
(e)
|
AM Shengshi Equity Transfer
|
Mr. Xiaoya
Zhang, a former shareholder of AM Shengshi, had initiated legal proceedings against Mr. Qing Xu, a director and the executive
president of the Company, with respect to the transfers by Mr. Zhang of his equity interests in the company to Mr. Xu.
In December 2015, AM Shengshi received an equity interest transfer agreement (the “
AM Shengshi SPA
”), dated
December 4, 2015, by and between Mr. Xiaoya Zhang and Mr. Qing Xu, pursuant to which Mr. Zhang agrees to transfer
8.2% equity interests in AM Shengshi to Mr. Xu for RMB82,000 (the “
AM Shengshi Equity Transfer
”). The AM
Shengshi Equity Transfer was completed in December 2015. In February 2016, Mr. Zhang initiated legal proceedings in a court
in China against Mr. Xu, challenging the authenticity of his signatures to the AM Shengshi SPA and consequently the validity
of AM Shengshi Equity Transfer. On February 14, 2017, the court’s final decision supported Mr. Xiaoya Zhang’s claim.
The Group then further filed an arbitration against Mr.Xiaoya Zhang on April 21, 20117, which is under the process. However, none
of the Company or AM Shengshi is a party to the AM Shengshi SPA. As of the date of this Report, none of the Company or AM Shengshi
is named as a party in those legal proceedings. However, due to the uncertainty of the outcome of these proceedings, there is no
assurance that they will not result in material adverse effect on the Group, substantial costs by the Group and/or the diversion
of its resources and management attention.
As of December 31, 2016, the Group did not record a provision for this matter
as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur would not have
a material adverse effect on its consolidated financial statements.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
26.
|
RELATED PARTY TRANSACTIONS
|
|
(a)
|
Details of outstanding balances with the Group's related parties as of December 31, 2015 and 2016 were as follows:
|
Amount due from related parties:
|
|
|
|
As of December 31,
|
|
Name of related parties
|
|
Relationship
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beijing Dayun Culture Communication Co., Ltd. ("Dayun Culture") (1)
|
|
Invested by management members of the Group
|
|
$
|
233
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Xu Qing (2)
|
|
Shareholder of the Company
|
|
|
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Advertising Co., Ltd. ("AM Jinshi") (3)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
1,182
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Lianhe Advertising Co., Ltd. ("AirMedia Lianhe") (3)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
615
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
AirMedia City (Beijing) Outdoor Advertising Co., Ltd. ("AM Outdoor") (3)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
360
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing AirMedia Jinshi Advertising Co., Ltd. ("TianJin Jinshi") (3)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
362
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,752
|
|
|
$
|
835
|
|
|
(1)
|
The
amounts due from Dayun Culture represent the unreceived consideration of $233 and Nil for selling 20% of equity interests in AirMedia
Lianhe as of December 31, 2015 and 2016.
|
|
(2)
|
The amounts due from Mr.
Xu Qing represents interest free advances to the related party in a short term basis for general business purpose.
|
|
(3)
|
The amounts due from AM Jinshi, AirMedia Lianhe, AM Outdoor
and TianJin Jinshi represents the amount of concession using fees receivable as of December 31, 2015. These entities are subsidiaries
of AM Advertising. The Group owns approximately 25% of equity interest of AM Advertising and accounted the investment in AM Advertising
using equity method for the year ended December 31, 2015. Accordingly, the subsidiaries of AM Advertising were considered as related
parties of the Group for the year ended December 31, 2015.
Due to various disputes incurred in fiscal 2016, management
is no longer able to have significant influence in operating and strategic decision of AM Advertising and cannot access to AM Advertising’s
financial information. Accordingly, the Group accounted its investment in AM Advertising using cost method (see Note 25) for the
year ended December 31, 2016. AM Advertising and its subsidiaries are no longer related parties to the Group. As of December 31,
2016, all the balance related to AM Advertising and its subsidiaries are included in the other current asset (See Note 8) and accrued
expenses and other current liabilities (See Note 15).
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
26.
|
RELATED PARTY TRANSACTIONS
- continued
|
|
(b)
|
Details of outstanding balances
with the Group's related parties as of December 31, 2015 and 2016 were as follows:
|
Amount due to related parties:
|
|
|
|
As of December 31,
|
|
Name of related parties
|
|
Relationship
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
AirTV United (1)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
$
|
296
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Advertising (2)
|
|
Long term investment
|
|
|
15,093
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,389
|
|
|
$
|
-
|
|
|
(1)
|
The amounts due to AirTV United raised from the restructuring
before the disposal. AirTV United is a subsidiary of AM Advertising. The Group owns approximately 25% of equity interest of AM
Advertising and accounted the investment in AM Advertising using equity method for the year ended December 31, 2015. Accordingly,
AirTV United were considered as related parties of the Group for the year ended December 31, 2015.
Due to various disputes incurred in fiscal 2016, management
is no longer able to have significant influence in operating and strategic decision of AM Advertising and cannot access to AM Advertising’s
financial information. Accordingly, the Group accounted its investment in AM Advertising using cost method (see Note 25) for the
year ended December 31, 2016. AM Advertising and its subsidiaries are no longer related parties to the Group. As of December 31,
2016, all the balance related to AM Advertising and its subsidiaries are included in the other current asset (See Note 8) and accrued
expenses and other current liabilities (See Note 15).
|
|
(2)
|
The amounts due to AM Advertising mainly represent the concession fee payables for using concessions owned by AM Advertising, unpaid loans incurred before the disposal and related interests due to AM Advertising as of December 31, 2015. As of December 31, 2016, all the balance related to AM Advertising and its subsidiaries are included in other current asset (See Note 8) and accrued expenses and other current liabilities (See Note 15).
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
|
26.
|
RELATED PARTY TRANSACTIONS
- continued
|
|
(c)
|
Details of related party
transactions occurred, for the years ended December 31, 2014, 2015 and 2016 were as follows - continued:
|
Revenues earned from:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Jinshi
(1)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
AM Advertising
(1)
|
|
Long term investment
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
280
|
|
|
$
|
-
|
|
Concession cost purchased from:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Jinshi
(1)
|
|
Wholly-owned subsidiary of AM Advertising
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
AM Advertising
(1)
|
|
Long term investment
|
|
|
-
|
|
|
|
142
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
144
|
|
|
$
|
-
|
|
Equity transaction with related parties:
|
|
|
|
For the years ended December 31
|
|
Name of related parties
|
|
Relationship
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dayyun Culture
(2)
|
|
Invested by management members of the Group
|
|
$
|
2,766
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,766
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Entities in continuing operations
sold some concession in certain airports to discontinued operation. Also continuing operations purchased some concession in certain
airports from discontinued operation after the disposal.
|
|
(2)
|
In August 2014, the Group sold 20% equity interest in AirMedia Lianhe, a wholly-owned subsidiary, to Dayun Culture, with a consideration of $2,766.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2014,
2015 AND 2016
(In U.S. dollars
in thousands, except share data or otherwise noted)
On April 7, 2017, the
Group
announced that it, through AM Online, established Unicom AirMedia (Beijing) Network Co., Ltd., or Unicom AirMedia, jointly with
Unicom Broadband Online Co., Ltd., a wholly owned subsidiary of China Unicom, and Chengdu Haite Kairong Aeronautical Technology
Co., Ltd., a wholly owned subsidiary of a listed company providing aeronautical technical services. Pursuant to a capital contribution
agreement entered into by the relevant parties, AM Online invested approximately RMB120 million in Unicom AirMedia. After
this transaction, AM Online currently holds 39% of equity interests in Unicom AirMedia, and has the right to appoint three directors
to its seven-member board. Unicom AirMedia is expected to build a global network for aeronautical communication and provide in-flight internet
and provide other value-added services.
The special committee received
a proposed amendment to the Merger Agreement from the buyer group, comprised of Mr. Guo, Ms. Dan Shao and Mr. Qing
Xu, on May 23, 2017 to (a) acquire all of the outstanding shares not already owned by the buyer group for US$4.00 per ADS or US$2.00
per ordinary share in cash, and (b) extend the Termination Date to December 31, 2017. The special committee is evaluating the
proposed amendment with the assistance of its financial and legal advisors. On June 28, 2017, the parties entered into Amendment
No. 3 to the Merger Agreement to further extend the termination date to July 31, 2017 so as to give the special committee sufficient
time to consider the proposed amendment.
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(In U.S. dollars in thousands, except
share related data or otherwise noted)
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
332
|
|
|
$
|
139
|
|
Amount due from subsidiaries
|
|
|
179,619
|
|
|
|
178,083
|
|
Other current assets
|
|
|
1,369
|
|
|
|
3,825
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
181,320
|
|
|
|
182,047
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
205,501
|
|
|
|
86,896
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
386,821
|
|
|
|
268,943
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
253
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
253
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Ordinary Shares ($0.001 par value; 900,000,000 shares authorized in 2015 and 2016; 127,662,057 shares issued as of December 31, 2015 and 2016; 124,395,645 shares and 125,629,779 shares outstanding as of December 31, 2015 and 2016, respectively)
|
|
|
128
|
|
|
|
128
|
|
Additional paid-in capital
|
|
|
317,414
|
|
|
|
287,094
|
|
Treasury stock (3,266,412 and 2,032,278 shares as of December 31, 2015 and 2016, respectively)
|
|
|
(3,778
|
)
|
|
|
(2,351
|
)
|
Retained earnings (accumulated deficits)
|
|
|
49,876
|
|
|
|
(15,842
|
)
|
Accumulated other comprehensive income
|
|
|
22,928
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
386,568
|
|
|
|
268,737
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
386,821
|
|
|
$
|
268,943
|
|
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
(144
|
)
|
|
$
|
-
|
|
|
$
|
(8
|
)
|
General and administrative
|
|
|
(1,676
|
)
|
|
|
(2,070
|
)
|
|
|
(2,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(1,820
|
)
|
|
|
(2,070
|
)
|
|
|
(2,364
|
)
|
Other income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
548
|
|
Investment (loss) income in subsidiaries
|
|
|
(23,875
|
)
|
|
|
151,717
|
|
|
|
(63, 809)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to holders of ordinary shares
|
|
$
|
(25,695
|
)
|
|
$
|
149,647
|
|
|
$
|
(65,625
|
)
|
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(25,695
|
)
|
|
$
|
149,647
|
|
|
$
|
(65,625
|
)
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative foreign currency translation adjustment
|
|
|
(6,414
|
)
|
|
|
(10,887
|
)
|
|
|
(23,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to Parent Company
|
|
$
|
(32,109
|
)
|
|
$
|
138,760
|
|
|
$
|
(88,845
|
)
|
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except
share related data or otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Ordinary shares
|
|
|
Additional
|
|
|
Treasury
|
|
|
(Accumulated deficits)
|
|
|
comprehensive
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
stock
|
|
|
retained earnings
|
|
|
Income (loss)
|
|
|
equity
|
|
Balance as of January 1, 2014
|
|
|
119,134,135
|
|
|
$
|
128
|
|
|
$
|
313,912
|
|
|
$
|
(9,860
|
)
|
|
$
|
(73,443
|
)
|
|
$
|
40,229
|
|
|
$
|
270,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for share based compensation
|
|
|
808,278
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
624
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,359
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,414
|
)
|
|
|
(6,414
|
)
|
Capital contribution from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
6,463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,463
|
|
Disposal of equity interests of AM Film and AirMedia Lianhe
|
|
|
-
|
|
|
|
-
|
|
|
|
1,433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,433
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,695
|
)
|
|
|
-
|
|
|
|
(25,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
119,942,413
|
|
|
$
|
128
|
|
|
$
|
323,167
|
|
|
$
|
(9,236
|
)
|
|
$
|
(99,138
|
)
|
|
$
|
33,815
|
|
|
$
|
248,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for share based compensation
|
|
|
4,453,232
|
|
|
|
-
|
|
|
|
|
|
|
|
5,458
|
|
|
|
(663
|
)
|
|
|
-
|
|
|
|
4,825
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
598
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,887
|
)
|
|
|
(10,887
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,647
|
|
|
|
-
|
|
|
|
149,647
|
|
Capital contribution from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
271
|
|
Capital contribution to Guangzhou Meizheng
|
|
|
-
|
|
|
|
-
|
|
|
|
(459
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(459
|
)
|
Acquisition of non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,163
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
124,395,645
|
|
|
$
|
128
|
|
|
|
317,414
|
|
|
|
(3,778
|
)
|
|
|
49,876
|
|
|
|
22,928
|
|
|
|
386,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercised
|
|
|
1,234,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,427
|
|
|
|
(93
|
)
|
|
|
-
|
|
|
|
1,334
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
773
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,220
|
)
|
|
|
(23,220
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,625
|
)
|
|
|
-
|
|
|
|
(65,625
|
)
|
Acquisition of equity interests from non-controlling shareholders
|
|
|
|
|
|
|
|
|
|
|
(34,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,570
|
)
|
Capital contribution from non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
125,629,779
|
|
|
$
|
128
|
|
|
$
|
287,094
|
|
|
$
|
(2,351
|
)
|
|
$
|
(15,842
|
)
|
|
$
|
(292
|
)
|
|
$
|
268,737
|
|
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(25,695
|
)
|
|
$
|
149,647
|
|
|
$
|
(65,625
|
)
|
Investment loss (income) in subsidiaries
|
|
|
23,875
|
|
|
|
(151,717
|
)
|
|
|
63,809
|
|
Share-based compensation
|
|
|
1,359
|
|
|
|
598
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES IN WORKING CAPITAL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
(221
|
)
|
|
|
(813
|
)
|
|
|
(2,456
|
)
|
Accrued expenses and other current liabilities
|
|
|
(308
|
)
|
|
|
169
|
|
|
|
(47
|
)
|
Amount due to subsidiaries
|
|
|
(517
|
)
|
|
|
(3,135
|
)
|
|
|
483
|
|
Amount due from subsidiaries
|
|
|
2,898
|
|
|
|
(1,272
|
)
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,391
|
|
|
|
(6,523
|
)
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
624
|
|
|
|
4,826
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities.
|
|
|
624
|
|
|
|
4,826
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,015
|
|
|
|
(1,697
|
)
|
|
|
(193
|
)
|
Cash, at beginning of year
|
|
|
14
|
|
|
|
2,029
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, at end of year
|
|
$
|
2,029
|
|
|
$
|
332
|
|
|
$
|
139
|
|
AIRMEDIA GROUP INC.
NOTES TO ADDITIONAL INFORMATION-FINANCIAL
STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
(In U.S. dollars in thousands)
Notes:
The condensed financial information of the parent
company, AirMedia Group Inc., only has been prepared using the same accounting policies as set out in the Group's consolidated
financial statements except that the parent company has used equity method to account for its investment in its subsidiaries.
|
2.
|
INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
|
The Company, its subsidiaries, its VIEs and VIEs'
subsidiaries are included in the consolidated financial statements where the inter-company balances and transactions are eliminated
upon consolidation. For the purpose of the Company's stand-alone financial statements, its investments in subsidiaries, VIEs and
VIEs' subsidiaries are reported using the equity method of accounting. The Company's share of income and losses from its subsidiaries,
VIEs and VIEs' subsidiaries is reported as earnings from subsidiaries, VIEs and VIEs' subsidiaries in the accompanying condensed
financial information of parent company.
The Company is a tax exempted company incorporated
in the Cayman Islands.
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