UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM 20-F
|
¨
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
|
x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December
31, 2018
OR
|
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
|
¨
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
Date of event requiring this shell company
report ____________________
For the transition period
from __________ to __________.
Commission file number:
001-33765
AIRMEDIA
GROUP INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
15/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 100027
The People’s Republic of China
(Address of principal executive offices)
Xin Li
Chief Financial Officer
AirMedia Group Inc.
15/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 10027
The People’s Republic of China
Phone:+86 10 8460 8181
Email: lixin@ihangmei.com
(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Title of each class
|
|
Name of each exchange on which registered
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Ordinary shares, par value $0.001 per share*
|
|
The Nasdaq Stock Market LLC
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American Depositary Shares, each representing
ten ordinary shares
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|
(The Nasdaq Capital Market)
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|
*
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Not for trading, but only in connection with the listing
on the Nasdaq Global Market of American depositary shares, each representing ten ordinary shares.
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Securities registered or to be registered
pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As
of December 31, 2018, 125,664,777 ordinary shares, par value $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.
Note – Checking the box above will
not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
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 every Interactive Data File required to be submitted 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
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.
Large Accelerated Filer
¨
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Accelerated Filer
¨
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|
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Non-Accelerated Filer
x
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Emerging growth company
¨
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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
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International Financial Reporting Standards as issued by the International Accounting Standards Board
¨
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Other
¨
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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.
AIRMEDIA GROUP INC.
Annual Report on Form 20-F
TABLE OF CONTENTS
INTRODUCTION
Except as otherwise indicated by the context,
in this annual report:
|
·
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“ADS” refers to our American depositary shares, each of which represents ten ordinary
shares;
|
|
·
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“China” or “PRC” refers to the People’s Republic of China, excluding,
for the purpose of this annual report only, Hong Kong, Macau and Taiwan;
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|
·
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“ordinary shares” refers to our ordinary shares, par value $0.001 per share;
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·
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“RMB” or “Renminbi” refers to the legal currency of China;
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|
·
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“U.S. dollars”, “$”, “US$” or “dollars” refers
to the legal currency of the United States;
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·
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“VIEs” means our variable interest entities; and
|
|
·
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“we”, “us”, “our”, the “Company” or “AirMedia”
refers to the combined business of AirMedia Group Inc., its consolidated subsidiaries, its VIEs and VIEs’ subsidiaries.
|
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 RMB6.8755 to $1.00, the exchange rate set forth in the H.10 statistical release of the
Federal Reserve Board on December 31, 2018. We make no representation that any Renminbi or U.S. dollar amounts could have been,
or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, at the rate stated above, or
at all.
FORWARD-LOOKING INFORMATION
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:
|
·
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our future business development, results of operations and financial condition, including the products
and services combining in-flight connectivity and entertainment;
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|
·
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competition in the advertising industry and in particular, the travel advertising industry in China;
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·
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the expected growth in consumer spending, average income levels and advertising spending levels;
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·
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the growth of the air, train and long-haul bus travel sectors in China; and
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·
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PRC governmental policies relating to the advertising industry.
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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
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ITEM 1.
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not applicable.
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ITEM 2.
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not applicable.
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A.
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Selected Financial Data
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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, 2016,
2017 and 2018 and the consolidated balance sheet data as of December 31, 2017 and 2018 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, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014, 2015 and 2016,
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.
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Years Ended December 31,
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2014
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|
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2015
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2016
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|
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2017
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2018
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|
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(In thousands of U.S. Dollars, except share, per share and per ADS data)
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|
Consolidated Statements of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Air Travel Media Network
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|
$
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59,200
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|
|
$
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38,917
|
|
|
$
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12,178
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|
|
$
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18,702
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|
|
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22,212
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|
Gas Station Media Network
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|
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11,164
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|
|
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9,840
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|
|
|
4,009
|
|
|
|
4,093
|
|
|
|
413
|
|
Other Media
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|
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5,583
|
|
|
|
2,109
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|
|
|
410
|
|
|
|
1,533
|
|
|
|
2,151
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|
Total revenues
|
|
|
75,947
|
|
|
|
50,866
|
|
|
|
16,597
|
|
|
|
24,328
|
|
|
|
24,776
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|
Business tax and other sales tax
|
|
|
(1,254
|
)
|
|
|
(633
|
)
|
|
|
(84
|
)
|
|
|
(569
|
)
|
|
|
(230
|
)
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Net revenues
|
|
|
74,693
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|
|
|
50,233
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|
|
|
16,513
|
|
|
|
23,759
|
|
|
|
24,546
|
|
Cost of revenues
|
|
|
(96,608
|
)
|
|
|
(89,577
|
)
|
|
|
(49,042
|
)
|
|
|
(58,967
|
)
|
|
|
(32,630
|
)
|
Gross loss
|
|
|
(21,915
|
)
|
|
|
(39,344
|
)
|
|
|
(32,529
|
)
|
|
|
(35,208
|
)
|
|
|
(8,084
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(12,916
|
)
|
|
|
(9,611
|
)
|
|
|
(12,056
|
)
|
|
|
(12,747
|
)
|
|
|
(7,492
|
)
|
General and administrative
|
|
|
(20,620
|
)
|
|
|
(27,102
|
)
|
|
|
(44,401
|
)
|
|
|
(63,507
|
)
|
|
|
(32,612
|
)
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(826
|
)
|
|
|
(67,342
|
)
|
|
|
(564
|
)
|
Total operating expenses
|
|
|
(33,536
|
)
|
|
|
(36,713
|
)
|
|
|
(57,283
|
)
|
|
|
(143,596
|
)
|
|
|
(40,668
|
)
|
Loss from operations
|
|
|
(55,451
|
)
|
|
|
(76,057
|
)
|
|
|
(89,812
|
)
|
|
|
(178,804
|
)
|
|
|
(48,752
|
)
|
Interest income (expense)
|
|
|
1,058
|
|
|
|
472
|
|
|
|
843
|
|
|
|
2,645
|
|
|
|
(106
|
)
|
(Loss)/gain
and impairment on long-term investments
|
|
|
(212
|
)
|
|
|
2,352
|
|
|
|
(33
|
)
|
|
|
(2,603
|
)
|
|
|
(52,337
|
)
|
Other income, net
|
|
|
979
|
|
|
|
1,383
|
|
|
|
4,243
|
|
|
|
214
|
|
|
|
7,926
|
|
Loss before income taxes
|
|
|
(53,626
|
)
|
|
|
(71,850
|
)
|
|
|
(84,759
|
)
|
|
|
(178,548
|
)
|
|
|
(93,269
|
)
|
Income tax (benefits) / expenses
|
|
|
(1,512
|
)
|
|
|
6,421
|
|
|
|
4,483
|
|
|
|
633
|
|
|
|
150
|
|
Net loss from continuing operations
|
|
|
(52,114
|
)
|
|
|
(78,271
|
)
|
|
|
(89,242
|
)
|
|
|
(179,181
|
)
|
|
|
(93,419
|
)
|
Net income from discontinued operations, net of tax
|
|
|
20,288
|
|
|
|
221,183
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income
|
|
|
(31,826
|
)
|
|
|
142,912
|
|
|
|
(89,242
|
)
|
|
|
(179,181
|
)
|
|
|
(93,419
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(6,131
|
)
|
|
|
(6,735
|
)
|
|
|
(23,617
|
)
|
|
|
(22,705
|
)
|
|
|
(3,322
|
)
|
-Continuing operations
|
|
|
(6,808
|
)
|
|
|
(7,620
|
)
|
|
|
(23,617
|
)
|
|
|
(22,705
|
)
|
|
|
(3,322
|
)
|
-Discontinued operations
|
|
|
677
|
|
|
|
885
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders
|
|
|
(25,695
|
)
|
|
|
149,647
|
|
|
|
(65,625
|
)
|
|
|
(156,476
|
)
|
|
|
(90,097
|
)
|
-Continuing operations
|
|
|
(45,306
|
)
|
|
|
(70,651
|
)
|
|
|
(65,625
|
)
|
|
|
(156,476
|
)
|
|
|
(90,097
|
)
|
-Discontinued operations
|
|
|
19,611
|
|
|
|
220,298
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average shares outstanding used in computing net (loss) income per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
|
|
125,629,779
|
|
|
|
125,653,175
|
|
Discontinued operations
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
-diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
119,304,773
|
|
|
|
121,740,194
|
|
|
|
125,277,056
|
|
|
|
125,629,779
|
|
|
|
125,653,175
|
|
Discontinued operations
|
|
|
119,924,927
|
|
|
|
129,372,158
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ordinary share—basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.38
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(1.25
|
)
|
|
|
(0.72
|
)
|
Discontinued operations
|
|
|
0.16
|
|
|
|
1.81
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ordinary share—diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.38
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(1.25
|
)
|
|
|
(0.72
|
)
|
Discontinued operations
|
|
|
0.16
|
|
|
|
1.70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ADS—basic
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(3.80
|
)
|
|
$
|
(5.80
|
)
|
|
$
|
(5.24
|
)
|
|
$
|
(12.46
|
)
|
|
|
(7.17
|
)
|
Discontinued operations
|
|
|
1.60
|
|
|
|
18.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income attributable to AirMedia Group Inc.’s shareholders per ADS—diluted
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(3.80
|
)
|
|
$
|
(5.80
|
)
|
|
$
|
(5.24
|
)
|
|
$
|
(12.46
|
)
|
|
|
(7.17
|
)
|
Discontinued operations
|
|
|
1.60
|
|
|
|
17.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Each ADS represents ten ordinary shares effective on April 11, 2019, and per ADS information has been
retrospectively restated for all periods presented.
|
The following table presents a summary
of our consolidated balance sheet data as of December 31, 2014, 2015, 2016, 2017 and 2018:
|
|
As of December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
60,117
|
|
|
$
|
86,960
|
|
|
$
|
117,547
|
|
|
$
|
15,355
|
|
|
$
|
15,536
|
|
Total assets
|
|
|
395,597
|
|
|
|
531,601
|
|
|
|
381,190
|
|
|
|
225,002
|
|
|
|
129,816
|
|
Total liabilities
|
|
|
126,725
|
|
|
|
133,968
|
|
|
|
114,593
|
|
|
|
101,323
|
|
|
|
115,417
|
|
Total AirMedia Group Inc.’s shareholders’ equity
|
|
|
248,736
|
|
|
|
386,568
|
|
|
|
268,737
|
|
|
|
147,649
|
|
|
|
51,399
|
|
Noncontrolling interests
|
|
|
20,136
|
|
|
|
11,065
|
|
|
|
(2,140
|
)
|
|
|
(23,970
|
)
|
|
|
(37,000
|
)
|
Total equity
|
|
$
|
268,872
|
|
|
$
|
397,633
|
|
|
$
|
266,597
|
|
|
$
|
123,679
|
|
|
$
|
14,399
|
|
|
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.
In an effort to realign our business:
|
1.
|
We divested most of our airport travel advertising business in 2015;
|
|
2.
|
We terminated our advertising service at long-haul buses, gas stations completely and scaled down our on-train Wi-Fi business
significantly in 2018;
|
|
3.
|
We consolidated our efforts in providing in-flight contents of entertainment, advertising and digital multimedia in China;
and,
|
|
4.
|
We strengthened our efforts in launching and operating our in-flight connectivity business.
|
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. With respect
to our advertising service at gas station and our on-train Wi-Fi business, we no longer pay concession fees. With respect to providing
contents on flights, we have paid, and expect to continue to pay concession fees to secure time intervals to play advertising
contents. With respect to our in-flight connectivity 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. 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 generate 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.
Although we began our business operations
in August 2005, we started to explore our in-flight connectivity business in 2015, and operated our in-flight content business
in 2015 as well after divested our airport travel advertising business. As a result of our business realignment, our advertising service at long-haul buses and gas stations were terminated and on-train Wi-Fi business were scaled down significantly
in 2018. 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 business model because we do not have sufficient experience to
address the risks that we may encounter as we conduct our businesses. 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 us 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:
|
·
|
manage our relationships with relevant parties to retain existing concession rights and obtain
new concession rights on commercially advantageous terms or at all;
|
|
·
|
retain existing and acquire new advertisers and third party content providers;
|
|
·
|
secure a sufficient number of low-cost hardware for our business from our suppliers;
|
|
·
|
successfully launch new business and operate our existing business;
|
|
·
|
respond to competitive market conditions;
|
|
·
|
respond to changes in the PRC regulatory regime;
|
|
·
|
maintain adequate control of our costs and expenses; or
|
|
·
|
attract, train, motivate and retain qualified personnel.
|
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 in-flight business, our future results of operations and growth prospects may be materially
and adversely affected.
Driven by innovation, we gradually
reinvented ourselves and shaped our core competence in providing in-flight solutions to connectivity, entertainment and
digital multimedia in China
. We began to explore
the in-flight business in 2018 and are still in the investment and development stage. We collaborated with partners to
deliver in-flight connectivity solutions. In addition to our active endeavors in in-flight connectivity, we maintain a wide
range of in-flight entertainment and advertising contents. We may 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 business. If
we fail to do so, our considerable amounts of 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.
Approximately 89.7% of our revenues from continuing
operations in 2018 was 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 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 in-flight Wi-Fi contracts with private companies operating those vehicles or the
relevant advertising companies or agencies operated or hired by the relevant airline companies, and those companies are usually
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 operations in 2018 from seven airline companies in China. As of the date of this annual report, 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 2018. 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 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. To make our programs more attractive, we must continue to secure contracts with 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 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 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, for the years ended December 31, 2016, 2017 and 2018, nil, 1 and 2 individual customer
accounted for over 10% of total revenue, respectively.
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. A decrease in the demand for air travel
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. Other factors that may affect our results include:
|
·
|
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.
|
|
·
|
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.
|
If the demand for air travel 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:
|
·
|
the integration of new operations, services and personnel;
|
|
·
|
unforeseen or hidden liabilities;
|
|
·
|
the diversion of resources from our existing business and technology; or
|
|
·
|
failure to achieve the intended objectives of our acquisitions.
|
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, 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, 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. 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.
W
e
have identified material weaknesses in our internal control over financial reporting, if we fail to develop or maintain an effective
system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current
and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price
of our securities. In connection with the audit of our consolidated financial statements for the years ended December 31, 2018
and 2017, our management concluded that the Company had material weaknesses in its internal controls. Our management has concluded
that we had not maintained effective internal control over financial reporting and disclosure controls and procedures as of December
31, 2018. 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. After identifying the material weakness regarding lack of internal controls
over related party borrowings resulting in interest free loans lent to director for personal purpose for the year ended December
31, 2017, we have collected all the borrowings from directors and have standardized and improved the borrowing processes according
to the requirements of internal control. The material weaknesses as of December 31, 2018 were related to a) 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 team, internal control team, administration team and human resource team, and
b) lack of internal controls over risk assessments related to third party borrowings resulting in material losses from loans to
third parties. 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:
|
·
|
investors’ perception of, and demand for, securities of alternative advertising media companies;
|
|
·
|
conditions of the market;
|
|
·
|
our future results of operations, financial condition and cash flows; and
|
|
·
|
PRC governmental regulation of foreign investment in advertising services companies in China.
|
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 Group Co., Ltd.
(previously known as AirMedia Online Network Technology Co., Ltd.) or AM Online, Beijing Linghang Shengshi Advertising Co., Ltd.
(Formerly Beijing AirMedia Shengshi Advertising Co., Ltd.), or Linghang Shengshi (Formerly “AirMedia Shengshi”), Beijing
Wangfan Jiaming Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming Advertising Co., Ltd.), or Jiaming Advertising, Beijing
Yuehang Digital Media Advertising Co., Ltd., or Beijing Yuehang (Formerly “AM Yuehang”) and Guangzhou Meizheng Online
Network Technology Co., Ltd. (formerly known as Guangzhou Meizheng Advertising Co., Ltd.), or Guangzhou Meizheng. As the Foreign-invested
Advertising Enterprise Management Regulations, or the Foreign-invested Advertising Regulations, which became effective on October
1, 2008 and has been abolished on June 29, 2015, it currently permit 100% foreign ownership of companies that provide advertising
services, subject to approval by relevant PRC government authorities. In addition, the Special Administrative Measures for Access
of Foreign Investment (Negative List) (2018 Edition), which became effective on July 28, 2018, 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 Air Net (China) Limited (Formerly AirMedia (China) Limited) , or AN China
(Formerly “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 Yuehang Information Technology Co., Ltd. (Formerly Shenzhen AirMedia
Information Technology Co., Ltd.), or Shenzhen Yuehang (Formerly “Shenzhen AM”), to AN China to provide advertising
services in China directly. In July 2015, Shenzhen Yuehang obtained the approval to include advertising in its scope of business.
We therefore intent to gradually shift our advertising business to Shenzhen Yuehang 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 Yuehang Chuangyi Technology (Beijing)
Co., Ltd. (Formerly AirMedia Technology (Beijing) Co., Ltd.), or Chuangyi Technology (“Formerly “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, Linghang 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. In December 31, 2018, Yi Zhang has withdrawn all the 3.5% equity interest, we therefore can exert the same level of control over the 3.5% interests of the
VIEs owned by Yi Zhang.
Some of our VIE arrangements with Linghang
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 Chuangyi 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 Chuangyi 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, Chuangyi 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 December 2018, the National People’s
Congress of the PRC, or the NPC, released another draft of foreign investment law, or the Foreign Investment Law, for soliciting
public comments. On March 15, 2019, the Foreign Investment Law was enacted by the NPC and will become effective on January 1, 2020.
Although the Foreign Investment Law does not explicitly define the contractual arrangements with VIEs as a form of foreign investment,
it contains an ambiguous clause that covers other form stipulated in laws, administrative regulations or other methods prescribed
by the State Council within its definition of foreign investment. Therefore, uncertainties still exist about whether our contractual
arrangements with VIEs will be deemed to violate the market access requirements for foreign investment under the PRC laws. Additionally,
if the State Council or laws, administrative regulations require further actions regarding the existing contractual arrangements
with VIEs, we may not complete such actions in a timely manner, or at all, which may materially and adversely affect our business
operation and financial condition.
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, Linghang Shengshi, Jiaming Advertising, and
Beijing 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, 83.6% of Linghang 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, 12.50% of Linghang Shengshi and 0.21% of Jiaming Advertising. In addition, Mr. Guo
and Mr. Xu are each a director of Jiaming Advertising, Linghang Shengshi and AirMedia Group Co., Ltd. (“AM Advertising”),
Mr. Guo is the legal representative of each of Linghang Shengshi and Jiaming Advertising. For these directors and officers,
their fiduciary duties toward our company under Cayman Islands 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 Chuangyi 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 Chuangyi 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 Chuangyi 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, Linghang Shengshi, Jiaming Advertising and Beijing 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, Linghang 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 Chuangyi 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, Linghang 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 Chuangyi Technology’s
interests as pledgee will prevail over those of third parties. Chuangyi 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,
Linghang Shengshi and Jiaming Advertising. As a result, if AM Online, Linghang 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, Chuangyi 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 Chuangyi
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 Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi
Dinghong Information Technology Co., Ltd. (Formerly Xi’an AirMedia Chuangyi Technology Co., Ltd.), or Xi’an Shengshi
for our cash requirements, including the funds necessary to service any debt we may incur. If Chuangyi Technology, Shenzhen Yuehang
or Xi’an Shengshi 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 Chuangyi Technology currently has in place with our VIEs in a manner that
would materially and adversely affect Chuangyi Technology’s ability to pay dividends and other distributions to us.
Furthermore, relevant PRC laws and regulations
permit payments of dividends by Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi only out of their accumulated profits,
if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Chuangyi Technology,
Shenzhen Yuehang and Xi’an Shengshi 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 Chuangyi Technology,
Shenzhen Yuehang and Xi’an Shengshi is $45.0 million, $96.4 million (approximately RMB700 million) and $50.0 million, respectively.
Xi’an Shengshi has made the applicable annual appropriations required under PRC law. Chuangyi Technology and Shenzhen Yuehang
are not currently required to fund any statutory surplus reserve because Chuangyi Technology incurred loss this year and Shenzhen
Yuehang 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 Chuangyi Technology, Shenzhen
Yuehang or Xi’an Shengshi has any present plan to pay any cash dividends to us in the foreseeable future, any limitation
on the ability of Chuangyi Technology, Shenzhen Yuehang or Xi’an Shengshi 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
Beijing Yuehang Digital and AM Online, 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. Since October 1, 2016,
Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR),
along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, Renminbi has depreciated
significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign
exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in
the future announce further changes to the exchange rate system and there is no guarantee that Renminbi will not appreciate or
depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
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. Any significant appreciation or depreciation
of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends
payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for 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, Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi 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
9, 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 Chuangyi 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 took effect on June 1, 2015 and replaced SAFE Circular 142. On June
9, 2016, the SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies
on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, which revised some provisions of SAFE
Circular 19. SAFE Circular 19 and SAFE Circular 16 allow 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 and SAFE Circular 16, 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 or other investments than banks’ principal-secured products, for the granting
of loans to non-affiliated enterprises, except where it is expressly permitted in the business license, or for construction or
expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real estate enterprise. Nevertheless,
it is still not clear whether foreign-invested enterprises like our PRC subsidiaries are allowed to extend intercompany loans to
our VIEs.
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 Emplo
yee
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.
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 (revised in 2017), which became
effective on February 24, 2017, 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.
In September 2011, one of our PRC subsidiaries, Chuangyi Technology received the HNTE certificate, and, Chuangyi Technology successfully renewed its HNTE
status and obtained the renewed certificate issued by the competent governmental authority successively in October 2014 and December
2017. As a result, Chuangyi Technology was subject to an EIT rate of 15% from 2014 to 2017, and is subject to an EIT rate of 25%
from 2018.
Xi’an AirMedia Chuangyi
Technology Co., Ltd., one of our PRC subsidiaries, or Xi’an Shengshi, received the HNTE certificate jointly issued by
the competent governmental authorities in Shanxi Province in September 2014. As such, Xi’an Shengshi enjoyed
a preferential income tax rate of 15% from 2014 to 2016. Xi’an Shengshi is subject to EIT at a rate of 25% from 2017
afterwards.
Shenzhen AirMedia Information Technology Co., Ltd., one of our PRC subsidiaries, or Shenzhen Yuehang is subject to EIT at a rate of 25% from 2013 afterwards.
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 AN China, the 100% shareholder of Chuangyi
Technology, Shenzhen Yuehang and Xi’an Shengshi, 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. On February 3, 2018, SAT
issued Announcement of the State Administration of Taxation on Issues concerning “Beneficial Owners” in Tax Treaties,
or Circular 9, which became effective on April 1, 2018 and superseded Notice No. 601. In comparison with Notice No. 601, Circular
9 enlarging and further explaining the scope of beneficial owner, supplementing the applicants deemed as beneficial owners who
obtain proceeds from China as direct or indirect 100% shareholder, increasing the certainty of identifying beneficial owner.
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.
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. However, SAT issued Announcement of the
State Administration of Taxation on Matters concerning Withholding of Income Tax of Non-resident Enterprises at Source, or Circular
37, which became effective on December 1, 2017 and superseded Circular 698. In comparison with Circular 698, Circular 37 releases
the obligations of withholding agent, taxpayer by adopting straightforward procedures and simple calculation concerning withholding
income tax of non-resident enterprises at source.
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.
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 Circular 37 and Public Notice 7 and may be required to
expend valuable resources to comply with Circular 37 and Public Notice 7 or to establish that we should not be taxed under Circular
37 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, Circular 37 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. Although Circular 37 requires less scrutiny on withholding income tax of non-resident enterprises at source, we cannot
assure you that the PRC government will not take harsh measures in the future with respect to tax related regulations over acquisition
transactions.
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 auditor who is 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 (Deloitte), which acted as our independent registered public accounting firm until 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 Deloitte 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. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting
continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with
significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators
in recent years. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.
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 Deloitte’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 Deloitte’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 Deloitte.
If
additional remedial measures are imposed on the “Big Four” PRC-based accounting firms, including Deloitte, 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 Deloitte, 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 Deloitte. 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. Under the terms of the settlement, the underlying proceeding against
the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date,
which was February 6, 2019. We cannot predict if the SEC will further challenge the four PRC-based accounting firms’ compliance
with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result
in the SEC imposing penalties such as suspensions.
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
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.” On March 28, 2018, August 23, 2018 and November 2018, we entered into a memorandum
of understanding (MoU) and its supplemental agreement respectively, with, among others, Beijing Longde Wenchuang Investment Fund
Management Co., Ltd and Beijing Cultural Center Construction and Development Fund (Limited Partnership), under which, among other
things, Linghang Shengshi, Mr. Guo and Mr. Xu have agreed to pay or make available to AM Advertising on or prior to May 30, 2018
and further extended to September 30, 2018 and December 31, 2018 an aggregate of RMB304,553,900 to hedge the following amounts
(i) the RMB152,000,000 profits attributable to Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on
a third-party pro forma audit report on the Target Business; (ii) the loan of RMB88,000,000 in principal balance and RMB7,840,000
in interests; and (iii) the payment of RMB56,713,900 in cash after the sale of the 20.32% equity interests in AM Advertising, which
consisted of 20.18% equity interests hold by the Company and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf
of the Company, and following the completion of the foregoing arrangements, our obligations with respect to the profit target for
2015, the earnout provision for the first nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall
be deem completed. We are negotiating for further extension of deadline for payment under the MoU and its supplemental agreement.
We cannot assure you that the buyers will not bring up any claim with respect to the above arrangements and if there is any dispute
or legal proceedings initiated, our business and financial position may be adversely affected.
In November 2018, Linghang Shengshi, Mr.
Guo and Mr. Xu entered into an equity transfer agreement with Jiangsu Hongzhou Investment Co., Ltd., an independent third party
to sell all the remaining 20.32% equity interest of AM Advertising for an initial transfer price of RMB580 million in cash. We
have completed the equity interest transfer and have received the installment payment of RMB 200 million for the transfer pursuant
to this equity transfer agreement. However, under this equity transfer agreement, the buyer may require sellers to repurchase the
20.32% equity interest upon the occurrence of certain events.
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 2018, the trading prices of our ADSs on the Nasdaq Global
Select Market and Nasdaq Capital Market ranged from $0.9 to $7.5 per ADS, and the last reported trading price on April 29, 2019
was $1.83 per ADS. Effective on April 11, 2019, we adjusted the ratio of our ADSs to ordinary shares from one ADS representing
two ordinary shares to one ADS representing ten ordinary shares. The aforementioned trading prices have not been adjusted for the
ADS ratio change. 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 or respondent in legal proceedings 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 legal
proceedings described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal
Proceedings,” including any appeals of such legal proceedings 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 legal proceedings.
In the event that our initial defense of these legal proceedings is unsuccessful, there can be no assurance that we will prevail
in any appeal. Any adverse outcome of these cases, including any plaintiff’s or claimant’s appeal of a judgment in
these legal proceedings, 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 legal proceeding 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
amended and restated memorandum and articles of association, as amended and restated from time to time, and by the Companies Law
(2018 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors,
actions by minority shareholders and the fiduciary 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 March 31, 2019, our principal shareholder, Mr. Herman Man
Guo, along with his wife, Ms. Dan Shao, beneficially owned approximately 34.7% of our outstanding ordinar
y
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, 2018, 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, 2018, and we will likely be a PFIC for our current taxable year ending December 31, 2019 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 Linghang Shengshi, a consolidated variable interest entity of our principal
subsidiary, Chuangyi 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. Our ADSs, each representing ten of our ordinary shares effective on April 11, 2019,
has been transferred to The Nasdaq Capital Market in November 2018.
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
operated by 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 an equity
interest transfer agreement with Beijing Longde Wenchuang Investment Fund Management Co., Ltd. to sell 75% equity interest of 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 (which has merged into the State Administration
for Market Regulation, or the SAMR, in March 2018), in December 2015. We have ceased to consolidate the results of AM Advertising
after the sale. 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. On March 28, 2018, August 23, 2018 and November 2018, we entered into a memorandum of
understanding (MoU) and its supplemental agreement respectively, with, among others, Beijing Longde Wenchuang Investment Fund Management
Co., Ltd and Beijing Cultural Center Construction and Development Fund (Limited Partnership), under which, among other things,
Linghang Shengshi, Mr. Guo and Mr. Xu have agreed to pay or make available to AM Advertising on or prior to May 30, 2018 and further
extended to September 30, 2018 and December 31, 2018 an aggregate of RMB304,553,900 to hedge the following amounts (i) the
RMB152,000,000 profits attributable to Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on a third-party
pro forma audit report on the Target Business; (ii) the loan of RMB88,000,000 in principal balance and RMB7,840,000 in interests;
and (iii) the payment of RMB56,713,900 in cash after the sale of the 20.32% equity interests in AM Advertising, which consisted
of 20.18% equity interests hold by the Company and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the
Company, and following the completion of the foregoing arrangements, our obligations with respect to the profit target for 2015,
the earnout provision for the first nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall be deem
completed. As the primary rights and obligations of the MoU have been fulfilled including the transfer 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, and transfer of the trademark
to AM advertising, and the Company did not received any notice of cancellation of the MoU from Beijing Longde Wenchuang Investment
Fund Management Co., Ltd and Beijing Cultural Center Construction and Development Fund (Limited Partnership), the Company believes
the MoU is legally valid. The Company will make payment according to the MoU once the application for tax refund of AM Advertising
finishes as agreed in the MoU. And once the tax refund finishes, the net settlement amount may be reduced pursuant to the MoU.
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 $3.00 per Share (or $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. In 2016 and 2017, the parties entered into various
amendments to the Merger Agreement to extend this termination date and amend other terms of the Merger Agreement. The Merger Agreement
was terminated on December 27, 2017 in view that the going private transaction would not be completed by December 31, 2017.
In January 2017, we, through AM Online,
established Unicom AirNet (Beijing) Network Co., Ltd., or Unicom AirNet, 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 an aggregate of RMB117.9 million in Unicom AirNet. AM Online currently holds 39% of equity
interests in Unicom AirNet, and can designate three directors to its seven-member board. We and the other two shareholders
of Unicom AirNet 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.
In November 2018, Linghang Shengshi,
Mr. Guo and Mr. Xu entered into an equity transfer agreement with Jiangsu Hongzhou Investment Co., Ltd., an independent third
party to sell 20.32% equity interest of AM Advertising for an initial transfer price of RMB 580 million in cash. We have
completed the equity interest transfer and have received the installment payment of RMB 150 million for the year ended
December 31, 2018 and RMB 50 million in January 2019 for the transfer pursuant to this equity transfer agreement. However,
under this equity transfer agreement, the buyer may require sellers to repurchase the 20.32% equity interest upon the
occurrence of certain events, we do not expect to repurchase the 20.32% equity interest as of the date of this annual report,
and we have accrued impairment of RMB 332 million for the 20.32% equity investment as of December 31, 2018.
We are realigning our business by focusing
our crucial resources on the further development of the in-flight connectivity business. In conjunction with this realignment,
we proposed to convene an extraordinary general meeting on May 20, 2019 to change our name from "AirMedia Group Inc."
to "AirNet Technology Inc.".
Our principal executive offices are located
at 15/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
Driven by innovation, we gradually reinvented
ourselves and shaped our core competence in providing in-flight solutions to connectivity, entertainment and digital multimedia in
China. Collaborating with our partners, we provide Chinese airlines with seamless and immersive Internet connections through a
network of satellites and land-based beacons, furnish airline travelers with interactive entertainment and coverage of breaking
news, and provide corporate clients with advertisements tailored to the changing perceptions of the travelers.
Collaborating with China Unicom, we are
licensed to provide in-flight connectivity over the Internet. Furthermore, backed by Honeywell’s next-generation JetWave
TM
satellite communications hardware, we are able to provide airline travelers
with a seamless and immersive Internet connection delivering the same experience as it would’ve been otherwise on the ground.
Moreover, our strategic partnership with China Eastern Airlines Media Co., Ltd. enables us to deliver multimedia contents to travelers
on airplanes operated by China Eastern Airlines through a mobile app.
In addition to our active endeavors in
in-flight connectivity, we maintain a wide range of in-flight entertainment and advertising contents. As of March 31, 2019, we
have access to in-flight entertainment and advertising contents including exclusive in-flight copyrights to over 80% of movies
currently shown in domestic theaters, more than 800 archived films, and thousands of hours of multimedia programs of entertainment
nature covering a variety of topics such as sports, comedies, local attractions, reality shows, commentaries, documentaries. As
of March 31, 2019, we were engaged to provide copyrighted entertainment contents to more than 30 airlines. Furthermore, we are
engaged by hundreds of corporate clients to provide advertising contents across different in-flight entertainment systems. Built
upon our experiences, we are capable of developing entertainment contents independently and producing advertising contents tailored
to the needs of corporate clients.
Our entertainment contents usually show
as individual programs lasting from approximately 45 minutes to 120 minutes of which approximately 3 minutes to 15 minutes are
divided into slots sold to advertisers to show advertising contents of their choice. Our contents are usually showed on digital
TV screens that are highly visible to travelers or on mobile devices brought by travelers. We usually offer advertising time slots
to the advertisers at a fix duration, time and frequency of displaying advertisements. Payments of certain offering are subject
to the receipt of monitoring reports verified by the advertisers. We generally require a screening of the advertising contents
at least 10 working days for digital media or 14 working days for conventional media before the contents are to be aired. We reserve
the right to refuse providing the service shall the advertising content fail to meet the requirements under PRC laws and regulations.
Our products and services combine in-flight
connectivity and entertainment. To further grow our business, we are committed to take full advantage of our partnership with China
Unicom and Honeywell to improve travelers’ experience when they connect to the Internet en route of their travel. Meanwhile,
we are devoted to maintaining a versatile collection of entertainment contents covering a variety of aspects of lifestyles attracting
traveling consumers. We are also satisfying the advertising needs of corporate clients through our influence on travelling consumers.
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 2016, 2017 and 2018, advisors from one industry, which is automobiles, accounted
for more than 10% of our total revenues from continuing operations. Nil, 1 and 2 of our customers accounted for more than 10% of our total
revenues for 2016, 2017 and 2018, respectively.
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 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. 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 120 minutes 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 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 consists of basic display equipment that we install and maintain. In 2016 and 2017, 45 and 66 suppliers, respectively,
together supplied a majority of our gas station display equipment. In early 2018, the management assessed the operational underperformance
of our Wi-Fi services on trains, long-haul buses and gas station media service, which indicated that the underperformance could
be ascribed to i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing budget of some of
our advertisers. In order to prevent further losses while seizing the opportunities from other components such as air travel media
service, we gradually ceased our operations of Wi-Fi service on long-haul buses and our gas station media services, and scaled
down operations in providing Wi-Fi services on trains.
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 airlines, as well as trains 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.
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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. As of March 31, 2019, we have registered 23 major trademarks and one patent in China, including
“
往返
”, “
忘返
”
and “
众伴
”. 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 SAMR.
China’s Advertising Law was promulgated
in 1994, and was revised in 2015 and further revised in 2018. In addition, the State Council, SAIC (which has merged into the SAMR
in March 2018) 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, Linghang Shengshi,
Jiaming Advertising, Guangzhou Meizheng and Beijing Yuehang.
Our VIEs are the major companies through
which we provide advertising services in China. Our subsidiary, Chuangyi 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 Chuangyi
Technology and our consolidated VIEs do not violate existing PRC laws and regulations, and the contractual arrangements among Chuangyi
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 SAMR (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 on Foreign Investment
On March 15, 2019, the Foreign Investment
Law was enacted by the National People’s Congress and it will become effective on January 1, 2020. Upon its enactment, it
will replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise
Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize
its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the
corporate legal requirements for both foreign and domestic investments.
Unlike its first draft
which was published in 2015, the approved Foreign Investment Law does not explicitly define the contractual arrangements with VIEs
as a form of foreign investment. It contains an ambiguous clause that covers other form stipulated in laws, administrative regulations
or other methods prescribed by the State Council within its definition of foreign investment. Therefore, uncertainties still exist
about whether the contractual arrangements with VIEs will be deemed to violate the market access requirements for foreign investment
under the PRC laws.
Moreover, the Foreign
Investment Law establishes a foreign investment information reporting system. Foreign investors or foreign-funded enterprises
shall submit the investment information to competent authorities through the enterprise registration system and the enterprise
credit information publicity system. The contents and scope of foreign investment information to be reported shall be determined
by the principle of necessity. Where foreign-investors or foreign-invested enterprises are found to be non-compliant with these
information reporting obligations, competent commerce authority shall ask for corrections with a specified period; if such corrections
are not made in time, a penalty of not less than RMB100,000 yet not more than RMB500,000 shall be imposed. Other than reporting
foreign investment information, the Foreign Investment Law also establishes a security examination mechanism for foreign investment
and conducts security review of foreign investment that affects or may affect national security. The decision made upon the security
examination in accordance with the law shall be final.
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 SAMR 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 SAMR as required by existing PRC regulations.
Each of Beijing Yuehang Digital
and AM Online has valid business license as of the date of this annual report. The business scope of these two 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 SAMR 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, which became effective in 1996, and was further amended
in 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.
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 took effect on June 1, 2015. On June 9, 2016, the SAFE promulgated the Circular of the State Administration
of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or
SAFE Circular 16, which revised some provisions of SAFE Circular 19. SAFE Circular 19 and SAFE Circular 16 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 and SAFE Circular 16, 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 or other investments than banks’ principal-secured
products,, for the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license,
or for construction or expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real estate
enterprise. Moreover, on January 26, 2017, SAFE promulgated Circular of the State Administration of Foreign Exchange on Further
Advancing the Reform of Foreign Exchange Administration and Improving Examination of Authenticity and Compliance, or Circular 3.
The Circular 3 states several control measures with respect to the outbound remittance of any profit from domestic entities to
offshore entities, including (i) under the principle of genuine transaction, banks should review board resolutions, the original
version of tax filing records and audited financial statements before wiring the foreign exchange profit distribution of a foreign-invested
enterprise exceeding $50,000; and (ii) domestic entities should hold income to make up previous years’ losses before remitting
the profits to offshore entities. Meanwhile, verification on the genuineness and compliance of foreign direct investments in domestic
entities has also been tightened in accordance with Circular 3,
Pursuant to SAFE Circular 19, SAFE Circular
16 and SAFE Circular 3, foreign invested enterprises in China may convert part or all of the amount of the foreign currency in
its capital account, special account for foreign debt or special account for overseas listing into RMB at any time after going
through capitals review process with bank and supplement necessary supporting documents upon bank’s request for verification
on genuineness and compliance. Nevertheless, it is still not clear whether foreign-invested enterprises like our PRC subsidiaries
are allowed to extend intercompany loans to our VIEs.
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 and its
implementing rules, 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. AN China, the 100% shareholder of Chuangyi Technology, Shenzhen Yuehang
and Xi’an Shengshi, 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 October 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. On February 3, 2018, SAT issued Announcement of the State Administration
of Taxation on Issues concerning “Beneficial Owners” in Tax Treaties, or Circular 9, which became effective on April
1, 2018 and superseded Notice No. 601. In comparison with Notice No. 601, Circular 9 enlarging and further explaining the scope
of beneficial owner, supplementing the applicants deemed as beneficial owners who obtain proceeds from China as direct or indirect
100% shareholder, increasing the certainty of identifying beneficial owner. 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 Chuangyi Technology, Shenzhen Yuehang and Xi’an Shengshi 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, which was amended in 2013 and 2017 respectively. 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 Circular 7, which became effective as of November 1, 2005. SAFE Circular
7 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.
C. Organizational
Structure
The following diagram illustrates our principal
subsidiaries, VIEs and VIEs’ subsidiaries as of March 31, 2019:
Notes:
|
(1)
|
Several of our principal subsidiaries, VIEs and VIEs’ subsidiaries as of March 31, 2019 have
changed their names compared to as of December 31, 2017. Following is for the details.
Air Net International Limited (Formerly AirMedia International Limited (“Air Net International”)
Air Net (China) Limited (Formerly AirMedia (China) Limited) (“AN China”)
Yuehang Chuangyi Technology (Beijing) Co., Ltd. (Formerly AirMedia Technology (Beijing) Co., Ltd.) Shenzhen Yuehang Information
Technology Co., Ltd. (Formerly Shenzhen AirMedia Information Technology Co., Ltd.)
Xi’an Shengshi Dinghong Information Technology Co., Ltd. (Formerly Xi’an AirMedia Chuangyi Technology Co., Ltd.)
Beijing Linghang Shengshi Advertising Co., Ltd. (Formerly Beijing AirMedia Shengshi Advertising Co., Ltd.)
Beijing Wangfan Jiaming Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming Advertising Co., Ltd.)
AirMedia Online Network Technology Group Co., Ltd. (Formerly AirMedia Online Network Technology Co., Ltd.)
Beijing Airnet Pictures Co., Ltd. (Formerly Beijing AirMedia Film & TV Culture Co., Ltd.)
Beijing Zhihe Xianglong Advertising Co., Ltd. (Formerly Flying Dragon Media Advertising Co., Ltd.)
Wenzhou Yuehang Advertising Co., Ltd. (Wenzhou AirMedia Advertising Co., Ltd.)
Beijing Yuehang Tianyi Electronic Information Technology Co., Ltd.(Formerly Beijing AirMedia Tianyi Information Technology Co.,
Ltd.)
Wangfan Linghang Mobile Network Technology Co., Ltd. (Formerly AirMedia Mobile Network Technology Co., Ltd.)
Beijing Wangfan Jiaming Pictures Co., Ltd. (Formerly Beijing AirMedia Jiaming Film & TV Culture Co., Ltd.)
|
|
(2)
|
AirMedia Online Network Group 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. Yi Zhang
divested
all the 3.5% equity interest in AirMedia Online Network Group Technology Co., Ltd in 2018. However, the registration of
such alternation is in progress in the local administration for industry and commerce as of the date of this annual
report.
|
|
(3)
|
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.
|
|
(4)
|
Beijing AirMedia Jiaming Advertising Co., Ltd. is 1.0%, 0.2% and 98.8% owned by Herman Man
Guo, Qing Xu and Beijing Linghang Shengshi Advertising Co., Ltd., respectively.
|
|
(5)
|
Beijing Linghang Shengshi Advertising
Co., Ltd. is 83.6%, 12.5%, 3.8% and 0.1% owned by Herman Man Guo, Qing Xu , Yi Zhang and Xiao Ya Zhang, respectively. Yi Zhang
Yi divested all the 3.8% equity interest in Beijing Linghang Shengshi Advertising Co., Ltd in 2018. However, the registration
of such alternation is in progress in the local administration for industry and commerce as of the date of this annual report.
|
Substantially all of our operations are
conducted through contractual arrangements with our consolidated VIEs in China, Linghang Shengshi, Jiaming Advertising, Beijing
Yuehang, Guangzhou Meizheng 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 5,026 square meters of office space. Our branch offices lease approximately 3,671 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 ($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.”
Important
Factors Affecting the Results of Operations of Our Air Travel Advertising, Gas Station Media Business and Trains, Buses and Airline
Wi-Fi Busi
ness
In early 2018, the management assessed
the operational underperformance of our Wi-Fi services on long-haul buses and gas station media service, which indicated that the
underperformance could be ascribed to i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing
budget of some of our advertisers. In order to prevent further losses while seizing the opportunities from other components such
as air travel media service, we gradually ceased our operations of Wi-Fi service on long-haul buses and our gas station media services,
and scaled down operations in providing Wi-Fi services on trains.
The operating results of our air travel
advertising, gas station advertising business and trains,
and buses 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,
we gradually ceased the operations in early 2018.
The demand for our time slots
and locations on airline Wi-Fi systems is related 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 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 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.
The results of our Wi-Fi business can 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 airplanes within our Wi-Fi service network and the number of advertisement time slots and spaces available
on the system for each airplane. By increasing the number of 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 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 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.
The results of our Wi-Fi business are also
affected by the level of pricing for our services.
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 important for us to secure and maintain the coverage of our gas station network.
It is also important to our results of operations of our Wi-Fi business that we secure and retain these concession rights contracts
on commercially advantageous terms.
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.
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
|
Amount
|
|
|
% of
Total
Revenues
|
|
Air Travel Media Network
|
|
$
|
12,178
|
|
|
|
73.4
|
%
|
|
$
|
18,702
|
|
|
|
76.9
|
%
|
|
|
22,212
|
|
|
|
89.7
|
%
|
Gas station Media Network
|
|
|
4,009
|
|
|
|
24.2
|
%
|
|
|
4,093
|
|
|
|
16.8
|
%
|
|
|
413
|
|
|
|
1.6
|
%
|
Other Media
|
|
|
410
|
|
|
|
2.4
|
%
|
|
|
1,533
|
|
|
|
6.3
|
%
|
|
|
2,151
|
|
|
|
8.7
|
%
|
Total revenues
|
|
|
16,597
|
|
|
|
100
.0%
|
|
|
|
24,328
|
|
|
|
100.0
|
%
|
|
|
24,776
|
|
|
|
100.0
|
%
|
Business tax and other sales tax
|
|
|
(84
|
)
|
|
|
(0.5
|
)%
|
|
|
(569
|
)
|
|
|
(2.3
|
)%
|
|
|
(230
|
)
|
|
|
(0.9
|
)%
|
Net revenues
|
|
$
|
16,513
|
|
|
|
99.5
|
%
|
|
$
|
23,759
|
|
|
|
97.7
|
%
|
|
|
24,546
|
|
|
|
99.1
|
%
|
Revenues from Air Travel Media
Network and Other Media
Our air travel media network revenues from
operations in 2016, 2017 and 2018 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.
Revenues from our air travel media network
accounted for 73.4%, 76.9% and 89.7% of our total revenues for the years ended December 31, 2016, 2017, and 2018 respectively.
Our network consisted of six, seven and seven airlines as of December 31, 2016, 2017 and 2018.
Revenues from other media were primarily
revenues from
our trains Wi-Fi advertising promotion,
public account promotion, long-haul Wi-Fi advertising. In early 2018, we gradually ceased our operations of Wi-Fi service on long-halt
buses, and scaled down operations in providing Wi-Fi services on trains.
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 24.2%, 16.8% and 1.6% of our total revenues for the years ended
December 31, 2016, 2017 and 2018, respectively. In early 2018, the management assessed the operational underperformance of our gas station media service, which indicated that the underperformance could be ascribed to
i) the wide spread of 4G technology and affordable data plans; and ii) the depleting marketing budget of some of our advertisers.
In order to prevent further losses while seizing the opportunities from other components such as air travel media service, we
gradually ceased our operations of our gas station media services.
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 advertisement publishing fees, and other costs, including equipment 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)
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Net revenues
|
|
$
|
16,513
|
|
|
|
100.0
|
%
|
|
$
|
23,759
|
|
|
|
100.0
|
%
|
|
$
|
24,546
|
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concession fees
|
|
|
(23,470
|
)
|
|
|
(142.1
|
)%
|
|
|
(28,559
|
)
|
|
|
(120.2
|
)%
|
|
|
(20,976
|
)
|
|
|
(85.5
|
)%
|
Agency fees and advertisement publishing fees
|
|
|
(4,388
|
)
|
|
|
(26.6
|
)%
|
|
|
(4,675
|
)
|
|
|
(19.7
|
)%
|
|
|
(4,879
|
)
|
|
|
(19.9
|
)%
|
Others
|
|
|
(21,184
|
)
|
|
|
(128.3
|
)%
|
|
|
(25,733
|
)
|
|
|
(108.3
|
)%
|
|
|
(6,775
|
)
|
|
|
(27.6
|
)%
|
Total cost of revenues
|
|
$
|
(49,042
|
)
|
|
|
(297.0
|
)%
|
|
$
|
(58,967
|
)
|
|
|
(248.2
|
)%
|
|
$
|
(32,630
|
)
|
|
|
(133.0
|
)%
|
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.
We began to incur concession fees related
to our Wi-Fi business from 2013. We recorded these concession fees in the amount of $5.3 million, $9.5 million and $5.1 million
in 2016, 2017 and 2018, respectively. The concession fee related to Wi-Fi business decreased significantly in 2018 mainly due
to
we gradually ceased our operations of Wi-Fi service
on long-haul buses and scaled down operations in providing Wi-Fi services on trains in 2018.
The rest of our concession fees consisted
of those related to our non-Wi-Fi business and slightly increased from $18.2 million in 2016 and to $19.1 million in 2017 and decreased
to $15.9 million in 2018, the decreased in 2018 was mainly due to we ceased our
gas
station business in 2018.
Agency Fees and Advertisement Publishing Fees
From 2016 to 2018, we engaged third-party
advertising agencies to help source advertisers from time to time or to help advertise publishing. These third-party advertising
agencies assisted us in identifying and introducing advertisers to us or help us to publish
advertisement. In return, we paid fees to these third-party agencies if they generated advertising revenues or published
advertisement 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 by the third-party agencies and were paid when payments were received from the advertisers. We recorded
these agency fees and advertisement
publishing fees as cost of revenues ratably over
the period in which the related advertisements were displayed.
Others
Our other cost of revenues includes the
following:
|
·
|
Equipment
Depreciation
. Generally, we capitalized the cost
of our digital TV screens, light boxes, LED screens and billboards in the gas station media network and related Wi-Fi equipment
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, LED
screens in gas stations and Wi-Fi equipment and the unit cost and impairment for those equipment, as well as the remaining useful
life of the equipment. However, the depreciation costs decreased significantly in 2018 due to the impairment on equipment in 2017.
|
|
·
|
Equipment
Maintenance Cost
.
Our 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 media network. The primary factor affecting our
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 comedy clips, movie and TV series. 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. Our in-flight programs
typically range from approximately 45 to 120 minutes per flight, approximately 40 to
45 minutes of which consist of non-advertising content. The majority of the non-advertising
content broadcast on our network was provided by third-party content providers such as various local television stations and
television production companies. We pay a fixed price for some content. The
non-advertising content cost was $0.8 million for the year ended December 31,
2018.
|
As we gradually ceased our operation of
Wi-Fi service on long-haul buses and our gas station media services, scaled down operations in Wi-Fi service on trains in 2018,
our other cost of revenues decreased in 2018 significantly compared to the same for year 2017.
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, and as a percentage of net revenues for the periods indicated.
|
|
Fiscal Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Net revenues
|
|
$
|
16,513
|
|
|
|
100.0
|
%
|
|
$
|
23,759
|
|
|
|
100.0
|
%
|
|
$
|
24,546
|
|
|
|
100.0
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(44,401
|
)
|
|
|
(268.9
|
)%
|
|
|
(63,507
|
)
|
|
|
(267.3
|
)%
|
|
|
(32,612
|
)
|
|
|
(132.9
|
)%
|
Selling and marketing expenses
|
|
|
(12,056
|
)
|
|
|
(73.0
|
)%
|
|
|
(12,747
|
)
|
|
|
(53.7
|
)%
|
|
|
(7,492
|
)
|
|
|
(30.5
|
)%
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
|
|
|
(826
|
)
|
|
|
(5.0
|
)%
|
|
|
(67,342
|
)
|
|
|
(283.4
|
)%
|
|
|
(564
|
)
|
|
|
(2.3
|
)%
|
Total operating expenses
|
|
$
|
(57,283
|
)
|
|
|
(346.9
|
)%
|
|
$
|
(143,596
|
)
|
|
|
(604.4
|
)%
|
|
$
|
(40,668
|
)
|
|
|
(165.7
|
)%
|
General and Administrative Expenses
Our 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 other sales and marketing related expenses.
Impairment of fixed assets, prepaid
equipment cost and intangible assets
In the second half of 2017, the management was alerted of the trend of recording operational
losses continued in providing Wi-Fi services on trains and long-haul buses and media services on gas station. Meanwhile
the management noticed that the willingness to spend on marketing expenses targeting travelers by trains, buses and gas
station was projected strong and growing. Given the projected potential with exclusivity to provide such services, the
management concluded that operations in both business components should continue and be reviewed in the first quarter of
2018. Upon the scheduled review in the first quarter of 2018, a flag was risen when the operational loss was widened and the
willingness to spend on marketing was depleting and diminishing. Immediately, the management halted operations in providing
Wi-Fi services on long-haul buses and media services in gas station, scaled down operations in providing Wi-Fi services on
trains, and commissioned a comprehensive review on the sustainability of both business components. Upon completion of the
review, the management exercised prudently to record impairments in both business components in 2017. In addition, we accrued
a fully impairment loss for the leasehold improvement and the construction in progress equipment of Tianjin VR store for the
year ended December 31, 2018 because Tianjin VR store did not go into operation.
Taxation
Cayman Islands
. We are an exempted
company incorporated in the Cayman Islands. The Cayman Islands currently levies no taxes on Islands or corporations based upon
profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty.
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 have any assessable profits arising in or derived from Hong Kong for the years ended December 31,
2016, 2017 and 2018, and accordingly no provision for Hong Kong Profits Tax was made in these years. According to Tax (Amendment)
(No. 3) Ordinance 2018 published by Hong Kong government, form April 1, 2018, under the two-tiered profits tax rates regime, the
profits tax rate for the first $2 million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule
8 to the Inland Revenue Ordinance (IRO)) for corporations and 7.5% (half of the standard rate) for unincorporated businesses (mostly
partnerships and sole proprietorships). Assessable profits above $2 million will continue to be subject to the rate of 16.5% for
corporations and standard rate of 15% for unincorporated businesses. AN China is qualified to elect the tax rate of 8.25% as it
has no assessable profit in 2018.
PRC
. 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.
Chuangyi Technology was recognized as
a HNTE
and maintained the status that would allow for
a reduced 15% tax rate under EIT Law from year 2016 to 2017. Hence, Chuangyi Technology was subject to an EIT rate of 15%,
15% and 25% in 2016, 2017, and 2018, respectively.
Xi’an Shengshi received the HNTE
certificate jointly issued by the competent governmental authorities in Shaanxi Province in September 2014. As such, Xi’an
Shengshi was subject to a preferential income tax rate of 15% from 2014 to 2016, Xi’an Shengshi is subject to EIT at a rate
of 25% from 2017 afterwards.
Shenzhen Yuehang is subject to EIT at a
rate of 25% from 2013 afterwards.
Wangfan Linghang qualified for the HNTE
at the end of 2017 and entitled to an EIT rate of 15% for the years 2017, 2018 and 2019.
Beijing Yuehang Tianyi qualified for the HNTE in 2018 and entitled to an EIT rate of 15% for the years
2018, 2019 and 2020
.
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 Yuehang, is incorporated, does not have such a tax treaty with China. Air Media (China) Ltd, the 100% shareholder
of Chuangyi Technology Shenzhen Yuehang and Xi’an Shengshi, 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.
Revenue Recognition
On January 1, 2018, the Company adopted ASC
Topic 606, “Revenue from Contracts with Customers”, applying the modified retrospective method. The adoption did not
result in a material adjustment to the accumulated deficit as of January 1, 2018.
In accordance with ASC Topic 606, revenues
are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that
reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In determining when and
how much revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (1) identify
the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity
satisfies a performance obligation.
The Company’s contracts with customers
do not include multiple performance obligations, significant financing component and any variable consideration.
The Company is a principal as it controls
the specified good or service before that good or service is transferred to a customer.
The Company is primarily
responsible for fulfilling the promise to provide the specified good or service, has inventory risk before the specified good or
service has been transferred to a customer and has discretion in establishing the price for the specified good or service.
Generally, the Company recognizes revenue
under ASC Topic 606 for each type of its performance obligation either over time (generally, the transfer of a service) or at
a point in time (generally, the transfer of content) as follows:
The Company's revenues are derived from
selling advertising time slots on the Company's advertising networks. For the years ended December 31, 2016, 2017 and 2018, the
advertising revenues were generated from air travel media network including TV-attached digital frames in airports, digital TV
screens in airports, digital TV screens on airlines, gas station media network and other media network such as on-train and on
long-haul bus Wi-Fi.
Revenue by service categories:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars)
|
|
Revenues from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
$
|
12,178
|
|
|
$
|
18,702
|
|
|
$
|
22,212
|
|
Gas Station Media Network
|
|
|
4,009
|
|
|
|
4,093
|
|
|
|
413
|
|
Other Media
|
|
|
410
|
|
|
|
1,533
|
|
|
|
2,151
|
|
|
|
$
|
16,597
|
|
|
$
|
24,328
|
|
|
$
|
24,776
|
|
Air Travel Media Network:
Through
air travel media network, revenues were generated from digital frames in airports in the form of TV-attached digital frames, digital
TV screens in airports, digital TV screens on airplanes. There are also other revenues in air travel mainly include revenues from
the display of media contents in air travel. For the advertising business, the Company typically signs standard contracts with
its advertising clients, who require the Company to run the advertiser's advertisements on the Company's network in airports,
airlines for a period of time which is the only performance obligation for a fixed price agreed in the contracts without variable
considerations. The Company recognizes advertising revenues ratably over the service period for which the advertisements are displayed,
so long as collection remains probable.
Gas Station Media Network:
Through
gas station media network, the Company sells advertising time slots through digital TV screens in gas stations which is the only
performance obligation included in the contracts. The Company signs fixed fee contracts with the end customers or agencies for
a specified period. The revenue is recognized on a straight-line basis over the specified period. This business is ceased in 2018
and no continuing revenue will be generated from gas station in following years.
Other Media:
Through other media
network such as on-train and on long-haul bus Wi-Fi,
the
Company provides Wechat public account promotion through Wi-Fi network and advertising and promotion articles publishing on both
self-owned and third parties’ public accounts. Wechat public account is an application account applied by individual, business
or enterprise on the Wechat Public Platform through which communication and interaction with specific groups of words, pictures,
voice and video can be achieved. For the public account promotion business, the passengers in the trains could connect to Wi-Fi
for free via the Company's Wi-Fi equipment after registered as a member to that public account as a follower in WeChat. The Company
charges a fix rate per new member and collects service fee from the client who owns the public accounts. The Company typically
signs standard contracts with its clients, who require the Company to promote their public accounts which is the only performance
obligation defined in the contracts, and recognizes public account promotion revenue by the quantities of members over the performance
period multiplied by unit price defined in the contract. For the advertising and promotion articles publishing business, the Company
has developed a public accounts pool which have already accumulated hundreds of and thousands of registered users (there are both
self-owned and third parties’ public accounts). The Company typically signs standard contracts with its clients, who require
the Company to publish advertising articles on the public accounts to take advantage of the existing users and recognizes advertising
revenues by numbers of articles published on public accounts and the unit price that defined in the contract which differs on
the basis of user numbers of selected public accounts.
Deferred Revenue
Prepayments from customers for advertising
service are deferred when corresponding performance obligation is not satisfied and recognized as revenue when the advertising
services are rendered. The balance of deferred revenue as of December 31, 2018 is $2.0 million, the majority of which is $1.1
million for the unsatisfied performance obligation with two customers with contracts amount of $5.7 million.
Nonmonetary exchanges
The Company 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. There were no revenue
recognized for nonmonetary transactions were for the years ended December 31, 2016, 2017 and 2018. No direct costs are attributable
to the revenues.
Concession Fees
The Company enters concession right agreements
with vendors such as airlines, railway bureaus and petroleum companies, under which The Company obtains the right to use the spaces
or equipment of the vendors to display the advertisements.
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 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 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 companies 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. 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.
In 2018, we
ceased our long-haul
buses Wi-Fi service operations and gas station media services, and scaled down operations in providing Wi-Fi services on trains.
The concession fees due to the petroleum companies will be settled by providing equipment and future free service. Other prepaid
concession fees made to railway bureaus are returned or to be returned in the future.
Agency Fees and Advertisement
Publishing
Fees
The Company pays fees to advertising agencies
for identifying and introducing advertisers to us and assisting in advertisement publishing based on a certain percentage of revenues
made through the advertisement agencies upon receipt of payment from advertisers. The agency fees and advertisement publishing
fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the advertisement
is displayed. Prepaid and accrued agency fees and advertisement publishing fees are recorded as current assets and current liabilities
according to relative timing of payments made and advertising service provided.
Allowance for Doubtful Accounts
The Company conducts credit evaluations of clients and generally does not require collateral or other
security from clients. The Company 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 Company 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 Company continuously monitors outstanding receivables and adjusts allowances for accounts where collection
may be in doubt.
Impairment of long-lived assets
Long-lived assets held and used by us 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, we first compare 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.
We make 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 our business strategy and its forecasts for specific market expansion
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, the Company classifies the interest and penalties, if any, as a component of the income tax expense. According
to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due
to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years under
special circumstances, where the underpayment of taxes is more than RMB 100. In the case of transfer pricing issues, the statute
of limitation is ten years. There is no statute of limitation in the case of tax evasion. According to Hong Kong Inland Revenue
Department, the statute of limitation is six years if any company chargeable with tax has not been assessed or has been assessed
at less than the proper amount, the statute of limitation is extended to 10 years if the underpayment of taxes is due to fraud
or willful evasion. In 2018, the Company incurred penalties of $4.3 million related to underpayment or delayed payment for income
tax expense of previous years. The tax penalty of $2,664 is charged for one-year delay of income tax payment of 2015 rising from
the gain on transferring 75% equity of AM Advertising and the tax penalty of $1,660 is charged for the unpaid income tax expense
of 2016 for the deduction of bad debt allowance from taxable income before tax without chasing up for debt and filing a special
declaration of loss in asset. As of December 31, 2018, all the penalties have been paid off. For the transferring 20.32% equity
of AM Advertising of which the industrial and commercial registration procedure was completed in December 2018, the Company has
filed this equity transaction in the first quarter tax return filling in early 2019. For the deduction of bad allowance, the inspection
method has been changed from filing a declaration to reporting the loss by taxpayer. Hence, the Company did not have any material
outstanding interest or penalties associated with tax positions nor did the Company have any significant unrecognized tax positions
will materially change over the next 12 months. The Company is not currently under examination by an income tax authority, nor
has been notified that an examination is contemplated.
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
(In thousands of U.S. Dollars, except
share, per share and per ADS data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
|
12,178
|
|
|
|
18,702
|
|
|
|
22,212
|
|
Gas Station Media Network
|
|
|
4,009
|
|
|
|
4,093
|
|
|
|
413
|
|
Other Media
|
|
|
410
|
|
|
|
1,533
|
|
|
|
2,151
|
|
Total revenues
|
|
|
16,597
|
|
|
|
24,328
|
|
|
|
24,776
|
|
Business tax and other sales tax
|
|
|
(84
|
)
|
|
|
(569
|
)
|
|
|
(230
|
)
|
Net revenues
|
|
|
16,513
|
|
|
|
23,759
|
|
|
|
24,546
|
|
Cost of revenues
|
|
|
(49,042
|
)
|
|
|
(58,967
|
)
|
|
|
(32,630
|
)
|
Gross loss
|
|
|
(32,529
|
)
|
|
|
(35,208
|
)
|
|
|
(8,084
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
(12,056
|
)
|
|
|
(12,747
|
)
|
|
|
(7,492
|
)
|
General and administrative
|
|
|
(44,401
|
)
|
|
|
(63,507
|
)
|
|
|
(32,612
|
)
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
|
|
|
(826
|
)
|
|
|
(67,342
|
)
|
|
|
(564
|
)
|
Total operating expenses
|
|
|
(57,283
|
)
|
|
|
(143,596
|
)
|
|
|
(40,668
|
)
|
Loss from operations
|
|
|
(89,812
|
)
|
|
|
(178,804
|
)
|
|
|
(48,752
|
)
|
Interest income (expense), net
|
|
|
843
|
|
|
|
2,645
|
|
|
|
(106
|
)
|
Loss from and impairment on long-term investments
|
|
|
(33
|
)
|
|
|
(2,603
|
)
|
|
|
(52,337
|
)
|
Other income, net
|
|
|
4,243
|
|
|
|
214
|
|
|
|
7,926
|
|
Loss from operations before income taxes
|
|
|
(84,759
|
)
|
|
|
(178,548
|
)
|
|
|
(93,269
|
)
|
Income tax expenses
|
|
|
(4,483
|
)
|
|
|
(633
|
)
|
|
|
(150
|
)
|
Net loss
|
|
|
(89,242
|
)
|
|
|
(179,181
|
)
|
|
|
(93,419
|
)
|
Less: Net loss attributable to noncontrolling interests
|
|
|
(23,617
|
)
|
|
|
(22,705
|
)
|
|
|
(3,322
|
)
|
Net loss attributable to AirMedia Group Inc.’s shareholders
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,097
|
)
|
Year Ended December 31, 2018
Compared to Year Ended December 31, 2017
Net Revenues
. Our net revenues increased
by 3.3% to $24.5 million in 2018 from $23.8 million in 2017. The increase was primarily due to the increase in revenues from air
travel media network, which was offset by the decrease in gas station media network.
Revenues from air travel media network
:
Revenues from air travel media network increased by 18.8% from $18.7 million in 2017 to $22.2 million in 2018. Among our revenues
from air travel media network, revenues from digital TV screens on airplanes were $15.3 million and $20.9 million in 2017 and 2018,
respectively. The increase in revenues from digital TV screens on airplanes mainly resulted from a strong advertising market and
an increase in advertisers’ demand for digital TV screens.
Revenues from the gas station media
network
: Revenues from the gas station media network decreased by 89.9% from $4.1 million in 2017 to $0.4 million in 2018
because we gradually ceased our gas station media services in 2018.
Revenues from other media
: Revenues
from other media were primarily revenues from our trains Wi-Fi advertising promotion and public account promotion. Revenues from
other media increased by 40.3% year-over-year to $2.2 million in 2018 from $1.5 million in 2017, primarily due to an increase of
$0.34 million in revenues from trains Wi-Fi advertising promotion.
Cost of Revenues
.
Our
cost of revenues decreased by 44.7% to $32.6 million in 2018 from $59.0 million in 2017. Our cost of revenues as a percentage
of our net revenues decreased to 133.0% in 2018 from 248.2% in 2017. This decrease was mainly due to the significant decrease
in our depreciation costs and concession fee costs. Depreciation costs, as one of the major component in our cost of revenue,
decreased significantly by 99.6% to $44 thousand in 2018 from $10.1 million in 2017, resulting from the impairment of equipment
recorded in 2017. Concession fees decreased by 26.6% to $21.0 million in 2018 from $28.6 million in 2017. Concession fees as a
percentage of net revenues decreased to 85.5% in 2018 from 120.2% in 2017. The concession fees of long-haul buses, gas station
and trains decreased significantly because we ceased operation of Wi-Fi service on long-haul buses and our gas station media services,
and scaled down operations in providing Wi-Fi services on trains. The concession fees of airline increased by $0.6 million due
to the development of airline business with concession cost increase by $6 million, which is offset by the concession cost reduction
due to the refund received from one Airline company of $5.4 million.
Operating Expenses
. Our operating
expenses decreased by 71.7% to $40.7 million in 2018 from $143.6 million in 2017.
|
·
|
Selling and Marketing Expenses
. Our selling and marketing expenses decreased by 41.2% to
$7.5 million in 2018 from $12.7 million in 2017. Our selling and marketing expenses mainly consisted of $5.0 million and $8.4 million
staff expenses for the year ended December 31, 2018 and 2017, respectively. The selling expense decreased significantly primarily
due to the decrease of staff numbers, because we ceased operations of Wi-Fi service on long-haul buses and our gas station media
services, and scaled down operations in providing Wi-Fi services on trains in early 2018.
|
|
·
|
General and Administrative Expenses
. Our general and administrative expenses decreased
by 48.6% to $32.6 million in 2018 from $63.5 million in 2017. This decrease was mainly due to the significant decrease in our
bad debt expenses and staff expenses. Our bad debt expenses decreased to $11.9 million in 2018 from $37.3 million in 2017.
The staff expenses decreased to $11.3 million in 2018 from $12.5 million in 2017, because we ceased our
operations of Wi-Fi service on long-haul buses and gas station media services, and scaled down operations in providing
Wi-Fi services on trains in early 2018. The professional service fee decreased to $2.0 million in 2018 from $6.2 million in
2017 primarily due to (1) a $1.8 million financing costs paid in 2017; and (2) the decrease of business consulting fee in
2018.
|
|
·
|
Impairment
of fixed assets, prepaid equipment cost and intangible assets
.
Our impairment of fixed assets, prepaid equipment cost and intangible assets decreased
by 99.2% to $0.6 million in 2018 from $67.3 million in 2017, primarily resulting from
the impairment due to the unexpected operational underperformance from Wi-Fi services
on trains, long-haul buses and gas station media service in 2017 of $66.8 million.
|
Loss from Operations.
We recorded
a loss from operations of $48.8 million in 2018, as compared to a loss from operations of $178.8 million in 2017 as a cumulative
result of the above factors.
Year Ended December 31, 2017
Compared to Year Ended December 31, 2016
Net Revenues
. Our net revenues increased
by 43.9% to $23.8 million in 2017 from $16.5 million in 2016. The increase was primarily due to the increase in revenues from air
travel media network.
Revenues from air travel media network
:
Revenues from air travel media network increased by 53.6% from $12.2 million in 2016 to $18.7 million in 2017. Among our revenues
from air travel media network, revenues from digital TV screens on airplanes were $10.3 million and $15.3 million in 2016 and 2017,
respectively. The increase in revenues from digital TV screens on airplanes mainly resulted from a strong advertising market and
an increase in advertisers’ demand for digital TV screens.
Revenues from the gas station media
network
: Revenues from the gas station media network increased by 2.1% from $4.0 million in 2016 to $4.1 million in 2017 due
to a stable advertising market.
Revenues from other media
: Revenues
from other media were primarily revenues from our trains and buses Wi-Fi network and film distribution business. Revenues from
other media increased by 273.9% year-over-year to $1.5 million in 2017 from $0.4 million in 2016, primarily due to an increase
of $0.6 million and $0.4 million in advertising market through trains and buses Wi-Fi network, respectively.
Cost of Revenues
. Our cost of revenues
increased by 20.2% to $59.0 million in 2017 from $49.0 million in 2016. Our cost of revenues as a percentage of our net revenues
decreased to 248.2% in 2017 from 297% in 2016. This increase was mainly due to the significant increase in our revenues. Concession
fees, as one of the major component in our cost of revenue, increased by 21.7% to $28.6 million in 2017 from $23.5 million in 2016.
Concession fees as a percentage of net revenues decreased to 120.2% in 2017 from 142.1% in 2016. We continued to pay much of the
related concession fees in 2017 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.
Operating Expenses
. Our operating
expenses increased by 150.7% to $143.6 million in 2017 from $57.3 million in 2016. Our total operating expenses in 2016 included
share-based compensation expenses of $0.8 million while our total operating expenses in 2017 included share-based compensation
expenses of $0.3 million.
|
·
|
Selling and Marketing Expenses
. Our selling and marketing expenses increased by 5.7% to
$12.7 million in 2017 from $12.1 million in 2016. For 2017, our selling and marketing expenses mainly consisted of $8.4 million
staff expenses.
|
|
·
|
General and Administrative Expenses
. Our general and administrative expenses increased by
43.0% to $63.5 million (including $0.3 million of share-based compensation expenses) in 2017 from $44.4 million (including $0.8
million of share-based compensation expenses) in 2016, primarily due to approximately $37.2 million in bad debt expenses incurred
in 2017. During 2016, we incurred bad debt expenses of $12.7 million.
|
|
·
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
. Our impairment
of fixed assets, prepaid equipment cost and intangible assets increased by 8,052.8% to $67.3 million in 2017 from $0.8 million
in 2016, primarily due to the unexpected operational underperformance from Wi-Fi services on trains, long-haul buses and gas station
media service in 2017.
|
Loss from Operations.
We recorded
a loss from operations of $178.8 million in 2017, as compared to a loss from operations of $89.8 million in 2016 as a cumulative
result of the above factors.
Share-based
Compensatio
n
2012
Share incentive plan
On November 30, 2012, the Board of Directors
adopted 2012 Share Incentive Plan (the “2012 Option Plan”), which allows the Company 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
Company 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 Company
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 Company 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 Company 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 Company 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 Company 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 $0.8 million, $0.3 million and $0.1 million for the years ended December 31, 2016, 2017 and 2018, 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 2016, 2017 and 2018 was increase of 2.1%, 1.8%, and 1.9%, respectively.
Although it has not materially impacted
our results of operations in 2018, 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 cash equivalent, 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.
Recently
Issued Accounting Pronouncements
See Item. 17 of Part III, “Financial
Statements—Note 2—Summary of significant accounting policies—Recent issued accounting standard.”
|
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 Company incurred losses from operations
of $178.8 million and $48.8 million for the years ended December 31, 2017 and 2018. As of December 31, 2018, the Company had shareholders’
deficit of $262.4 million. The Company had negative cash flows from operating activities for the years ended December 31, 2017
and 2018 of $58.6 million and $19.8 million, respectively. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern.
The Company intends to meet the cash requirements
for the next 12 months from the issuance date of this report through a combination of bank loan, financing by way of private placements, friends,
family and business associates and management financial support. The Company will focus on the following activities:
|
·
|
The Company plans to strengthen the air Wi-Fi business to drive its revenues and bring in cash from operation;
|
|
·
|
The Company is focusing on improving operation efficiency and cost reduction to standardize operations, enhance internal controls,
and create synergy of the Company’s resources;
|
|
·
|
The Company has also acquired the financial support letter from Mr. Man Guo and Mr. Qing Xu, who have expressed the willingness
and intention to provide the necessary financial support to the Company, so as to enable the Company to meet its liabilities as
and when it falls due and to carry on its business without a significant curtailment of operations for the next 12 months from
the issuance date of this report.
|
As a result, management prepared the consolidated financial statements assuming the Company will continue
as a going concern.
As described above, the Company has
a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described above. However, there is no assurance that the measures above
can be achieved as planned. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
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, 2016, 2017
and 2018:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Net cash used in operating activities
|
|
|
(103,610
|
)
|
|
|
(58,570
|
)
|
|
|
(19,774
|
)
|
Net cash provided by (used in) investing activities
|
|
|
130,582
|
|
|
|
(47,166
|
)
|
|
|
20,096
|
|
Net cash provided by (used in) financing activities
|
|
|
11,130
|
|
|
|
874
|
|
|
|
(1,695
|
)
|
Effect of exchange rate changes
|
|
|
(7,515
|
)
|
|
|
5,787
|
|
|
|
(1,560
|
)
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
|
|
30,587
|
|
|
|
(99,075
|
)
|
|
|
(2,933
|
)
|
Cash, cash equivalents and restricted cash at the beginning of the year
|
|
|
86,960
|
|
|
|
117,547
|
|
|
|
18,472
|
|
Cash, cash equivalents and restricted cash at the end of the year
|
|
|
117,547
|
|
|
|
18,472
|
|
|
|
15,539
|
|
Operating Activities
Net cash used in operating activities was
$19.8 million for the year ended December 31, 2018. Net cash used in operating activities was primarily attributable to (1) a net
loss of $93.4 million adjusted by non-cash loss and impairment on long-term investment of $52.3 million and bad debt expenses of
$11.9 million, and (2) a decrease in accrued expenses and other current liabilities of $3.7 million, partially offset by (1) an
increase in accounts payable of $7.8 million, and (2) a decrease in prepaid concession fees of $5.1 million.
Net cash used in operating activities was
$58.6 million for the year ended December 31, 2017. Net cash used in operating activities was primarily attributable to (1) a net
loss of $179.2 million adjusted by non-cash loss and impairment of property and equipment, prepaid equipment cost and intangible
assets of $67.3 million, bad debt expenses of $37.3 million and depreciation and amortization of $12.0 million, and (2) a decrease
of other non-current assets of $1.3 million.
Net cash used in operating activities was
$103.6 million for the year ended December 31, 2016. Net cash used in operating activities was primarily attributable to (1) a
net loss of $89.2 million adjusted by non-cash bad debt expenses of $12.7 million and depreciation and amortization of $13.0 million,
(2) a decrease in income tax payable of $27.4 million and (3) a decrease due to related parties of $15.0 million.
Investing Activities
Net cash provided by investing activities
for the year ended December 31, 2018 amounted to $20.1 million. The amount of net cash provided by investing activities was
principally attributable to the disposal of long-term investment of $22.6 million, partially offset by the purchase of property
and equipment of $3.6 million.
Net cash used in investing activities for
the year ended December 31, 2017 amounted to $47.2 million. The amount of net cash provided by investing activities was principally
attributable to (1) loan to third parties of $22.6 million, (2) purchase of long term investment of $17.4 million and (3) purchase
of property and equipment of $7.2 million.
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 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.
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.
Our capital expenditures were $21.6 million
in 2016, $7.2 million in 2017, and $3.6 million in 2018, respectively.
Financing Activities
Net cash used in financing activities amounted to $1.7 million for the year ended December 31, 2018, consisting
of capital withdraw by non-controlling shareholder of $10.9 million, which was offset by cash received from short-term loans of
$6.3 million and cash received from long-term loans of $2.9 million.
Net cash provided by financing activities
amounted to $0.9 million for the year ended December 31, 2017, consisting of capital contribution from non-controlling interest
holders of $0.9 million.
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
of $9.8 million and proceeds received from stock option exercise of $1.3 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.
|
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 2021 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
2020 and are renewable upon negotiation. The following table sets forth our contractual obligations and commercial commitments
as of December 31, 2018:
|
|
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
|
|
$
|
2,339
|
|
|
$
|
1,085
|
|
|
$
|
1,254
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Concession rights contracts
|
|
|
24,946
|
|
|
|
13,227
|
|
|
|
11,719
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
27,285
|
|
|
$
|
14,312
|
|
|
$
|
12,973
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 March 31, 2019. Mr.
Richard Peidong Wu resigned as our Chief Financial Officer effective in December 2018 for personal reasons, and Mr. Herman Man
Guo was appointed to serve as the interim Chief Financial Officer until February 28, 2019. Mr. Xin Li was appointed as our Chief
Financial Officer effective in March 1, 2019. The resignation of Mr. Richard Peidong Wu was not due to any disagreement with the
management and the board of directors.
NAME
|
|
AGE
|
|
POSITION
|
Herman Man Guo
|
|
55
|
|
Chairman, Chief Executive Officer and Director
|
Xin Li
|
|
42
|
|
Chief Financial Officer
|
Qing Xu
|
|
58
|
|
Director and Executive President
|
Conor Chiahung Yang
|
|
56
|
|
Independent Director
|
Shichong Shan
|
|
88
|
|
Independent Director
|
Dong Wen
|
|
53
|
|
Independent Director
|
Songzuo Xiang
|
|
54
|
|
Independent Director
|
Hua Zhuo
|
|
49
|
|
Independent Director
|
Hong Zhou
|
|
46
|
|
Chief Operating Officer
|
Peng Zhou
|
|
39
|
|
Vice President
|
Rong Guo
|
|
50
|
|
Vice President
|
Juntao Zhen
|
|
44
|
|
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. Mr. Guo served as
our interim Chief Financial Officer in December 2018 to February 2019. 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. Xin Li
has served as our Chief
Financial Officer since March 2019. Mr. Li Xin has extensive experience in the management of companies and connections in the investment
sector. Prior to joining us, Mr. Li was an assistant to president and the CFO of Grass Green Group, where he led several investment
and M&A projects, both domestically and internationally. Before joining Grass Green Group, Mr. Li was a managing director of
CICFH Fund Management Co., Ltd. (the “CICFH”) and concurrently served as CFO of the fund’s portfolio company
in 2016 and 2017. Prior to joining CICFH, Mr. Li held senior professional positions in several large investment institutions. Mr.
Li received a MBA degree from Duke University in 2006 and a bachelor's degree in international finance and accounting from Tsinghua
University in 1999.
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 is the president and cofounder of Black Fish Group. Previously, Mr. Yang
was the chief financial officer of Tuniu Corporation from January 2013 to November 2017. 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 China Online Education Group. 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.
Hong Zhou
has served as our
Chief Operating Officer since May 2018. Previously, Mr. Zhou served as the head of a large-scale production and scientific consortium
of China Aerospace Science and Technology Group. Prior to that, Mr. Zhou served as deputy chief engineer and senior project director
of enterprise development department under aviation airborne communication division of China Satcom Group. Mr. Zhou received a
Doctor of Engineering degree from the school of aeronautical science and engineering, Beihang Universtiy.
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.
Ms.
Rong Guo
has served as our vice
president in charge of In-train Wi-Fi 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.
Mr.
Juntao Zhen
has served as our
vice president and the general manager of Wi-Fi business since 2017. Prior joining us, Mr. Zhen served as the as the chief architect
and chief architect team leader of NOKIA Beijing research and development center, he was responsible for the system architecture
of mobile communication equipment, software and hardware technology development and team management in NOKIA Beijing research and
development center.
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 Xin Li. 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. Xin Li has a fixed duration until February,
2022
and can be terminated by either us or Mr. Xin Li with a one-month prior notice
over the term of the duration. 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 2018, the aggregate cash compensation
to our executive officers was approximately $0.5 million and the aggregate cash compensation to our non-executive directors was
approximately $0.2 million. Our PRC subsidiaries and consolidated VIEs are required
by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical
insurance, housing fund, unemployment and other statutory benefits. Other than the above-mentioned pension insurance mandated by
applicable PRC law, we have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our
executive officers and directors. No executive officer is entitled to any severance benefits upon termination of his or her employment
with our company except as required under applicable PRC law.
Share
Options
In July 2007, we adopted the 2007 Option
Plan to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants,
and promote the success of our business. In December 2009, we amended the 2007 Option Plan by increasing the maximum aggregate
number of shares issuable under the plan from 12,000,000 to 17,000,000. In March 2011, our board of directors authorized the issuance
of 2,000,000 ordinary shares under the 2011 Option Plan with the same aim as the 2007 Option Plan. In 2012, our board of directors
adopted the 2012 Option Plan, under which we are authorized to grant restricted shares or options and other awards for a total
issuance of up to 6,000,000 ordinary shares. As of December 31, 2018, options to purchase 5,857,755 of our ordinary shares were
outsta
nding. The majority of these options will vest on a straight-line basis over a
three-year period, with one-twelfth of the options vesting each quarter from the date of grant.
The following table summarizes, as of December 31, 2018, the outstanding options granted to our executive
officers, directors and to other individuals as a group under our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option
Pla
n.
Name
|
|
Ordinary
Shares
Underlying
Options
|
|
|
Exercise
Price
($/Share)
(1)
|
|
|
Date of Grant
|
|
Expiration Date
|
Herman Man Guo
|
|
|
1,000,000
|
|
|
|
1.15
|
|
|
July 2, 2007
|
|
December 31, 2019
|
Richard Peidong Wu
|
|
|
1,276,620
|
|
|
|
1.025
|
|
|
June 1, 2014
|
|
December 31, 2019
|
Xin Li
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Qing Xu
|
|
|
*
|
|
|
|
1.15
|
|
|
March 22, 2011
|
|
March 23, 2021
|
Conor Chia-hung Yang
|
|
|
*
|
|
|
|
1.15
|
|
|
July 2, 2007
|
|
December 31, 2019
|
Conor Chia-hung Yang
|
|
|
*
|
|
|
|
1.15
|
|
|
November 29, 2007
|
|
December 31, 2019
|
Conor Chia-hung Yang
|
|
|
*
|
|
|
|
1.15
|
|
|
July 10, 2009
|
|
December 31, 2019
|
Shichong Shan
|
|
|
*
|
|
|
|
1.15
|
|
|
July 20, 2007
|
|
December 31, 2019
|
Dong Wen
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Songzuo Xiang
|
|
|
*
|
|
|
|
1.15
|
|
|
July 10, 2009
|
|
December 31, 2019
|
Hua Zhuo
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Peng Zhou
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Rong Guo
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Juntao Zhen
|
|
|
—
|
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
Other individuals as a group
|
|
|
600,000
|
|
|
|
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
owe fiduciary duties to our company, including a duty to act honestly, and a duty to act in what they consider in good faith to
be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our
company a duty to act with skills they actually possess and exercise such care and diligence that a reasonably prudent person would
exercise in comparable circumstances. 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 our company, our directors must ensure compliance with our
amended and restated memorandum and articles of association, as amended and restated from time to time, and the rights vested thereunder
in the holders of the shares. Our directors owe their fiduciary duties to our company and not to our company’s individual
shareholders, and it is our company which has the right to seek damages if a duty owed by our directors is breached. In limited
exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
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.
D. Employees
We had 1,052, 845 and 315 employees as
of December 31, 2016, 2017, and 2018 respectively. The following table sets forth the number of our employees by area of business
as of December 31, 2016, 2017 and 2018, respectively:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
|
Number of
Employees
|
|
|
% of Total
|
|
Sales and Marketing Department
|
|
|
387
|
|
|
|
36.8
|
|
|
|
242
|
|
|
|
28.6
|
|
|
|
59
|
|
|
|
18.7
|
|
Quality Control and Technology Department
|
|
|
317
|
|
|
|
30.1
|
|
|
|
253
|
|
|
|
29.9
|
|
|
|
85
|
|
|
|
27.0
|
|
Programming Department
|
|
|
124
|
|
|
|
11.8
|
|
|
|
129
|
|
|
|
15.4
|
|
|
|
84
|
|
|
|
26.7
|
|
Resources Development Department
|
|
|
15
|
|
|
|
1.4
|
|
|
|
13
|
|
|
|
1.5
|
|
|
|
2
|
|
|
|
0.6
|
|
General Administrative and Accounting
|
|
|
209
|
|
|
|
19.9
|
|
|
|
208
|
|
|
|
24.6
|
|
|
|
85
|
|
|
|
27.0
|
|
Total
|
|
|
1,052
|
|
|
|
100.0
|
|
|
|
845
|
|
|
|
100.0
|
|
|
|
315
|
|
|
|
100.0
|
|
The following table sets forth the breakdown
of employees by geographic location as of December 31, 2018:
City
|
|
Number of
Employees
|
|
|
% of Total
|
|
Beijing
|
|
|
218
|
|
|
|
69.2
|
|
Guangzhou
|
|
|
31
|
|
|
|
9.8
|
|
Shenyang
|
|
|
45
|
|
|
|
14.3
|
|
Others
|
|
|
21
|
|
|
|
6.7
|
|
Total
|
|
|
315
|
|
|
|
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 March 31, 2019, 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 125,664,777 ordinary shares outstanding as of March 31, 2019 (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 March 31, 2019, 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)
|
|
|
20,510,980
|
|
|
|
16.2
|
|
Xin Li
|
|
|
—
|
|
|
|
—
|
|
Qing Xu
(2)
|
|
|
1,950,000
|
|
|
|
1.5
|
|
Conor Chiahung Yang
(3)
|
|
|
1,348,913
|
|
|
|
1.1
|
|
Shichong Shan
|
|
|
*
|
|
|
|
*
|
|
Dong Wen
|
|
|
—
|
|
|
|
—
|
|
Songzuo Xiang
|
|
|
*
|
|
|
|
*
|
|
Hua Zhuo
|
|
|
—
|
|
|
|
—
|
|
Hong Zhou
|
|
|
*
|
|
|
|
*
|
|
Peng Zhou
|
|
|
*
|
|
|
|
*
|
|
Rong Guo
|
|
|
—
|
|
|
|
—
|
|
Juntao Zhen
|
|
|
—
|
|
|
|
—
|
|
All directors and executive officers
|
|
|
24,018,226
|
|
|
|
18.8
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Dan Shao
(4)
|
|
|
20,584,214
|
|
|
|
16.1
|
|
Wealthy Environment Limited
(5)
|
|
|
17,505,980
|
|
|
|
13.7
|
|
Bison Capital Media Limited
(6)
|
|
|
12,000,000
|
|
|
|
9.4
|
|
|
*
|
Aggregate beneficial ownership of our company by such
director or officer is less than 1% of our total outstanding ordinary shares.
|
|
**
|
The business address of our directors and executive officers is 15/F, Sky Plaza, No. 46 Dongzhimenwai
Street, Dongcheng District, Beijing 100027, The People’s Republic of China.
|
|
(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, (iii) 2,000,000 ordinary shares represented by American Depositary Shares held by Mr. Herman Man Guo, and (iv) 1,005,000
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, (ii) 600,000 ordinary shares represented by American Depositary Shares held by Mr. Qing Xu, and (iii) 350,000 ordinary
shares issuable upon exercise of options held by Mr. Xu that are exercisable within 60 days.
|
|
(3)
|
Includes (i) 965,942 ordinary shares represented by American Depositary Shares, and (ii) 382,971
ordinary shares issuable upon exercise of options held by Mr. Conor Chiahung Yang that are exercisable within 60 days.
|
|
(4)
|
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.
|
|
(5)
|
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.
|
|
(6)
|
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.
|
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 March 31, 2019, 127,697,055 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 March
31, 2019. 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
Arrang
ements
Our consolidated VIEs, Beijing Yuehang,
and Linghang 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 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. Chuangyi Technology has entered into contractual arrangements with our
VIEs, pursuant to which Chuangyi Technology provides exclusive technology support and service and technology development services
in exchange for payments from them. In addition, Chuangyi Technology has entered into agreements with our VIEs and each of their
individual shareholders (except Yi Zhang), which provide Chuangyi Technology with the substantial ability to control our VIEs.
These agreements are summarized in the following paragraphs.
|
·
|
Technology support and service agreements:
Chuangyi Technology provides exclusive
technology support and consulting services to our VIEs and in return, the VIEs are required to pay Chuangyi Technology service
fees. Except for AM Online, the VIEs pay to Chuangyi Technology annual service fees in the amount that guarantee that the VIEs
can achieve, after deducting such service fees payable to Chuangyi Technology, a net cost- plus rate of no less than 0.5% in the
case of Linghang Shengshi and Jiaming Advertising, or 1.0% in the case of Beijing Yuehang. It is at Chuangyi 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 Chuangyi Technology under AM Online’s
technology support and service agreement shall be determined by AM Online and Chuangyi Technology at the first month of such year
taking into account several factors. Those factors include the credential of the team of Chuangyi Technology that provides services
to AM Online, the number of service hours, the nature and value of the services provided by Chuangyi Technology, the extent to
which Chuangyi 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 Chuangyi Technology.
In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate
in good faith with Chuangyi 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 Chuangyi Technology
to provide technology development services. Chuangyi Technology owns the intellectual property rights developed in the performance
of these agreements. Except for AM Online, the VIEs pay to Chuangyi Technology annual service fees in the amount that guarantee
that the VIEs can achieve, after deducting such service fees payable to Chuangyi Technology, a net cost-plus rate of no less than
0.5% in the case of Linghang Shengshi and Jiaming Advertising, which final rate should be determined by Chuangyi Technology. It
is at Chuangyi 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 Chuangyi Technology under AM Online’s
technology development agreement shall be determined by AM Online and Chuangyi Technology at the first month of such year taking
into account several factors. Those factors include the credential of the team of Chuangyi Technology that provides services to
AM Online, the number of service hours, the nature and value of the services provided by Chuangyi Technology, the extent to which
Chuangyi 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 Chuangyi Technology. In the
event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in
good faith with Chuangyi 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
Chuangyi Technology to provide consultation services in relation to management, training, marketing and promotion. AM Online agrees
to pay to Chuangyi Technology the amount of annual service fees as determined by Chuangyi Technology. In the event Chuangyi Technology
finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi 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 Chuangyi Technology’s written confirmation prior to the expiration of the agreement term.
|
|
·
|
Call option agreements:
Under the call option agreements between Chuangyi Technology
and the individual shareholders (except Yi Zhang) of Linghang Shengshi, Beijing Yuehang and Jiaming Advertising, the shareholders
of those VIEs irrevocably granted Chuangyi 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
Chuangyi Technology and the shareholders of AM Online, the shareholders of AM Online (except Yi Zhang) irrevocably granted Chuangyi
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 Chuangyi Technology and the shareholders of AM Online), Chuangyi 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 Chuangyi 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 Chuangyi 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 Chuangyi Technology’s sole discretion. In January 2016, shareholders
of AM Online, Linghang 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 Chuangyi 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 Chuangyi 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 Chuangyi 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 Chuangyi 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,
Chuangyi 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, Linghang Shengshi and Jiaming
Advertising. In January 2016, shareholders of AM Online, Linghang 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 Chuangyi 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 Chuangyi Technology
or unless the call option agreement with respect to VIEs is terminated prior to its expiration.
|
Through the above contractual arrangements,
Chuangyi 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 Chuangyi Technology at its sole discretion. Accordingly, we have
consolidated the VIEs because we believe, through the contractual arrangements, (1) Chuangyi Technology could direct the activities
of the VIEs that most significantly affect its economic performance and (2) Chuangyi 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 Chuangyi Technology also serve in the VIEs as management or employees, certain operating
costs paid by Chuangyi Technology, such as payroll costs and office rental, were re-charged to the VIEs.
Chuangyi Technology also entered into loan
agreements with each shareholder of AM Online (except Yi Zhang), pursuant to which Chuangyi 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 Chuangyi
Technology objects. Chuangyi 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, Chuangyi 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, 2017, we had $1.0 million
due from Mr. Qing Xu, representing an advance to him on a short term basis for personal purpose needs, we also have $0.5 million
and $0.7 million due from AirMedia Holding Ltd. and AirMedia Merger Company Ltd., representing an advance to them on a short term
basis for operation purpose. All the balance has been collected in May 2018, there was no gain or loss upon settlement.
As of December 31, 2018, we had $16
thousand due from Mambo Fiesta Limited., an entity controlled by Mr. Qing Xu, representing an interest free advance to it on
a short term basis for operation purpose. We also have $1 thousand due from Shanghai Qingxuan Co., Ltd., an entity controlled
by Mr. Herman Man Guo, representing an interest free advance to it on a short term basis for operation purpose. In addition,
we have $1 thousand due from Global Earning Pacific Ltd., an entity controlled by Ms. Dan Shao, who is our principal
shareholder, representing an interest free advance to it on a short term basis for operation purpose.
Share
Options
See “Item 6. Directors, Senior Management
and Employees — B. Compensation — Share Options.”
|
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.
A majority of the digital frames and digital
TV screens in the Company'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 Company intends to obtain the requisite
approval of the SARFT for the Company's non-advertising content, but the Company cannot assure that the Company will obtain such
approval in compliance with this new SARFT Circular, or at all. In January 2014, the Company 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 travelers
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 Company will be able to renew the contract with CRION when they expire.
If the requisite approval is not obtained, the Company will be required to eliminate non-advertising content from the programs
included in the Company's digital frames and digital TV screens and advertisers may find the Company's network less attractive
and be unwilling to purchase advertising time slots on the Company's network. As of December 31, 2018, the Company 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 Company 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.
Linghang Shengshi had served a legal letter,
dated June 29, 2016 (the “Legal Letter”), on Longde Wenchuang to challenge the proposed transfers by Longde Wenchuang
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, Linghang 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 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 sought consent from Linghang 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, Linghang Shengshi challenges the validity of the Transfer on the ground that it violated the statutory right of first
refusal of Linghang 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 Company’s representative from Co-CEO position of AM Advertising.
On September 2, 2016, the Company received
notice (the “September 2, 2016 Notice”) from the China International Economic and Trade Arbitration Commission (the
“CIETAC”) that the Company, Chuangyi Technology, Linghang 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 Linghang 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 Company filed a notice against Culture
Center to CIETAC for their breach of contract.
As a result of the above disputes, the
Company 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 Company accounted its investment in AM Advertising using cost
method as of December 31, 2016, 2017 and 2018. AM Advertising and its subsidiaries are no longer related parties to the Company.
As of December 31, 2016, the Company treated the provision for earnout commitment of $23.5 million 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.
On March 28, 2018, August 23, 2018 and
November 2018, a MoU and its supplemental agreements respectively, with, among others, Longde Wenchuang and Beijing Cultural Center
Construction and Development Fund (Limited Partnership), under which, among other things, Linghang Shengshi and Mr. Guo have agreed
to pay or make available to AM Advertising on or prior to May 30, 2018 and further extended to September 30, 2018 and December
31, 2018 an aggregate of RMB304.6 million which was to be discounted by the following amounts (i) the RMB152 million profits attributable
to Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on a third-party pro forma audit report on AM
Advertising; (ii) the loan of RMB88.0 million in principal balance and RMB7.8 million in interests; and (iii) the payment of RMB56.7
million in cash after the sale of the 20.32% equity interests in AM Advertising, which consisted of 20.18% equity interests hold
by the Company and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the Company, and following the completion
of the foregoing arrangements, our obligations with respect to the profit target for 2015, the earnout provision for the first
nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall be deem completed. According to the aforesaid
MoU, after Linghang Shengshi, Mr. Guo and Mr. Xu transfer all the equity interest of AM Advertising, they will cease to be shareholders
of AM Advertising and will not be able to continuously assume the obligations in connection with the profit commitment and earn
out provision as a matter of fact.
As of December 31, 2018, the sale of the
20.32% equity interests in AM Advertising has been completed, while the cash payment of RMB56.7 million to Longde Wenchuang and
Beijing Cultural Center Construction and Development Fund (Limited Partnership) has not been paid yet by the Company. Upon the
effectiveness of MoU, the Company wrote off the contingency of provision for earnout provision, and recorded an actual payable
of earnout provision in the amount of RMB152.6 million, after the deduction loan of RMB88.0 million in principal balance and RMB7.8
million in interests.
On September 29,
2018, SINOPEC Shanghai Oil Products Company (the “SINOPEC Shanghai”) brought before
the district court of Huangpu, Shanghai a legal action against GreatView Media and AM Advertising. As plaintiff, SINOPEC Shanghai plead
to the court a) to dissolve the advertising service agreement and supplementary agreement signed between SINOPEC Shanghai
and GreatView Media; b) to support its claim to an overdue concession fee of RMB 24.4 million over the period starting from September
2009 to February 2018, which may be subject to change, payable by GreatView Media; c) to support its claim to an overdue electricity
bill of RMB 2.9 million over the period starting from September 2009 to February 2018, which may be subject to change, payable
by GreatView Media; d) to support its claim holding AM Advertising liable to both the overdue concession fee and electricity
bill; and e) to support its claim that the legal fees shall be borne by the defendants. As of December 31, 2018,
the
Company did not record a provision for this matter as the management believes the possibility of adverse outcome of the matter
is remote and the liability it may incur would not have a material adverse effect on its consolidated financial statements. In
February 2019, RMB 27.3 million has been paid to the court by Linghang Shengshi on behalf of GreatView Media as security of this
matter, which will be returned to the Company after the case closes if the Company wins the case. As of the date of this annual
report, the Company is not able to predict the ultimate outcome and the possible range of the potential impact of failure primarily
due to the legal action has just proceeded with the first court appearance and an exchange of evidence between the plaintiff and
the defendants
.
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 or respondent in legal proceedings 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.
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ITEM 9.
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THE OFFER AND LISTING
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A.
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Offer and Listing Details
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See “—C. Markets.”
Not applicable.
Our ADSs, each representing ten 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, each representing ten of our ordinary shares, has been transferred to The Nasdaq Capital Market in November
2018. Effective on April 11, 2019, we adjusted the ratio of our ADSs to ordinary shares from one ADS representing two ordinary
shares to one ADS representing ten ordinary shares.
Not applicable.
Not applicable.
Not applicable.
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ITEM 10.
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ADDITIONAL INFORMATION
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Not applicable.
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B.
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Memorandum and Articles of Association
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The following are summaries of material
terms and provisions of our amended and restated memorandum and articles of association and the Companies Law (2018 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
Our authorized share capital is US$1,000,000
consisting of 900,000,000 ordinary shares with a nominal or par value of US$0.001 each, and 100,000,000 preferred shares with
a nominal or par value of US$0.001 each. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our
ordinary shares are issued in registered form, and are issued when registered in our register of members. Our shareholders who
are non-residents of the Cayman Islands may freely hold and vote their ordinary shares. Under our amended and restated memorandum
and articles of association, our company may not issue bearer shares.
Dividend
Rights
The holders of our ordinary shares are
entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may by ordinary resolution
declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, our company may
declare and pay a dividend only out of funds legally available therefor, namely out of either profit or our share premium account,
provided that in no circumstances may we pay a dividend if this would result in our company being unable to pay its debts as they
fall due in the ordinary course of business.
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. Both an ordinary resolution and a special resolution may also be passed by a unanimous written resolution
signed by all the shareholders of our company, as permitted by the Companies Law and our amended and restated memorandum and articles
of association.
Appointment
and Removal of Directors
Our board of directors may, by the affirmative
vote of a simple majority of the directors present and voting at a board meeting, appoint any person as a director, to fill a casual
vacancy on the board or as an addition to the existing board. Directors may be removed by special resolution of our shareholders.
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.
Redemption,
Repurchase and Surrender of Shares
We may issue shares on terms that such
shares are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined
by our board of directors. Our company may also repurchase any of our shares provided that the manner and terms of such purchase
have been approved by ordinary resolution of our shareholders, or are otherwise authorized by our amended and restated memorandum
and articles of association. Under the Companies Law, the redemption or repurchase of any share may be paid out of our company’s
profits or out of the proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital
(including share premium account and capital redemption reserve) if the company can, immediately following such payment, pay its
debts as they fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or
repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares
outstanding, or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully
paid share for no consideration.
Liquidation
On a winding up of our company, the liquidator
may, with the sanction of an ordinary resolution of our shareholders, divide amongst the shareholders in species or in kind
the whole or any part of the assets of our company, and may for that purpose value any assets and determine how the division shall
be carried out as between our shareholders or different classes of shareholders.
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
If at any time, our share capital is divided
into different classes of shares, all or any of the special rights attached to any class of shares may 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 separate general meeting of the holders of shares of that class. The rights conferred upon the holders of the shares of any
class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of issue of the shares of
that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class
of shares.
Inspection
of Books and Records
Holders of our ordinary shares will have
no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However,
we will provide our shareholders with annual audited financial statements.
Changes
in Capital
Our shareholders may from time to time
by ordinary resolution:
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·
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increase our share capital by such sum, to be divided into shares of such classes and amount, as
the resolution shall prescribe;
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·
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consolidate and divide all or any of our share capital into shares of a larger amount than our
existing shares;
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·
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sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in
the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as
it was in case of the share from which the reduced share is derived; or
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·
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cancel any shares that, at the date of the passing of the resolution, have not been taken or agreed
to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled.
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Our shareholders may, by special resolution
and subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an order confirming such
reduction, reduce our share capital and any capital redemption reserve in any manner authorized by law.
Issuance
of Additional Shares
Our amended and restated memorandum and
articles of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of
directors shall determine, to the extent there are available authorized but unissued shares.
Our amended and restated memorandum and
articles of association authorizes our board of directors to establish from time to time one or more series of convertible redeemable
preferred shares and to determine, with respect to any series of convertible redeemable preferred shares, the terms and rights
of that series, including:
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·
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designation of the series;
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·
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the number of shares of the series;
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·
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the dividend rights, conversion rights and voting rights; and
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·
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the rights and terms of redemption and liquidation preferences.
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The issuance of convertible redeemable
preferred shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of these
shares may dilute the voting power of holders of ordinary shares.
Anti-Takeover
Provisions
Some provisions of our amended and restated
memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders
may consider favorable, including provisions that:
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·
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authorize our board of directors to issue preferred shares in one or more series and to designate
the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our
shareholders; and
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·
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limit the ability of shareholders to requisition and convene general meetings of shareholders.
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However, under Cayman Islands law, our
directors may only exercise the rights and powers granted to them under our amended and restated memorandum and articles of association
for a proper purpose and for what they believe in good faith to be in the best interests of our company.
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. Payments of dividends and capital in respect of the ordinary shares will not be subject
to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of
the ordinary shares, nor will gains derived from the disposal of the ordinary shares be subject to Cayman Islands income or corporation tax.
PRC
Taxation
Under the EIT Law and
its
implementation rules
, 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 stock (by vote or value), 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, investor required to accelerate the recognition of any
item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial
statement, 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, 2018, and we will very likely be classified as a PFIC
for our current taxable year ending December 31, 2019 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, 25 percent or more (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, 2018, and we will very likely be classified as a PFIC for our current taxable
year ending December 31, 2019. 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:
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such excess distribution or gain will be allocated ratably over the U.S. Holder’s holding
period for the ADSs or ordinary shares;
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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;
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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
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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.
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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 Capital 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 Capital 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, 2018, and we will very likely be classified as a PFIC for our current taxable year ending December 31, 2019. 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.
|
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 $0.1 million in our interest income for the year ended Decembe
r
31, 2018.
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 $0.2 million in the value of our U.S. dollar-denominated financial assets at December
31, 20
18. 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, 2018, we received nil from the depositary as reimbursement for our expenses incurred.
PART
II
|
ITEM 13.
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
None.
|
ITEM 14.
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS
|
See “Item 10. Additional Information”
for a description of the rights of securities holders, which remain unchanged.
The following “Use of Proceeds”
information relates to the registration statement on Form F-1 (File number: 333-146825) filed by us in connection with our initial
public offering. The registration statement was declared effective by the SEC on November 6, 2007. We received net proceeds of
approximately $187.0 million from our initial public offering.
As of December 31, 2018, the net proceeds
from our initial public offering have been used up as follows:
|
·
|
approximately $122.4 million for the purchase of digital displays and other equipment and the construction
of gas station media platforms;
|
|
·
|
approximately $24.8 million for share repurchases; and
|
|
·
|
approximately $10.1 million for the purchase of long-term investments.
|
|
·
|
approximately $29.7 million for business acquisition and the purchase of intangible assets.
|
|
ITEM 15.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
Our management, with the participation
of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report,
as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management,
with the participation of our chief executive officer and chief financial officer, has concluded that, due to the material weakness
described below, as of December 31, 2018, our disclosure controls and procedures were not effective in ensuring that the information
required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on
Internal Control over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance
with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations
of a company’s management and directors and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley
Act of 2002 and related rules promulgated by the Securities and Exchange Commission, our management, including our chief executive
officer and chief financial officer, assessed the effectiveness of internal control over financial reporting as of December 31,
2018 using the criteria set forth in the report “Internal Control — Integrated Framework (2013)” published by
the Committee of Sponsoring Organizations of the Treadway Commission (known as COSO).
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 following material weakness in internal
control over financial reporting has been identified as of December 31, 2018. The material weaknesses as of December 31, 2018
were related to a) 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 team, internal control team, administration
team and human resource team, and b) lack of internal controls over risk assessments related to third party borrowings resulting
in material losses from loans to third parties.
Because of the material weakness described
above, our management has concluded that we had not maintain effective internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Internal Control over Financial Reporting
This annual report does not include an
attestation report of our company’s registered public accounting firm as we are a non-accelerated filer as defined in Rule
12b-2 of the Exchange Act.
Changes in Internal Control over Financial
Reporting
In preparing our consolidated financial
statements, we identified a material weakness in our internal control over financial reporting as of December 31, 2018. As defined
in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis.
The material weakness identified was related
to a) 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 team, internal control team, administration team
and human resource team, and b) lack of internal controls over risk assessments related to third party borrowings resulting in
material losses from loans to third parties.
To remediate our identified material weakness,
significant deficiency and other control deficiencies in connection with preparation of our consolidated financial statements,
we plan to adopt several measures to improve our internal control over financial reporting. For example, during the reporting period,
we obtained support from an external consultant firm with experienced staff to assist us in the preparation of the financial statements
for the year ended December 31, 2018. The consultant firm is well-known in China and many staff hold the AICPA license with
a solid understanding of U.S. GAAP. In order to meet the requirements of internal audit, we outsourced this function department
to a professional consulting company with related industry experience and it delivered the work on time.
Other than as described above, no changes
in our internal controls over financial reporting occurred during the period covered by this annual report that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
|
ITEM 16A.
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our board of directors has determined that
each of Songzuo Xiang and Conor Chia-hung Yang, members of our audit committee, is an audit committee financial expert. Each of
Songzuo Xiang and Conor Chia-hung Yang is an independent director as defined by the rules and regulations of the Nasdaq Stock Market
LLC and under Rule 10A-3 under the Exchange Act.
Our board of directors has adopted a code
of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to
our chief executive officer, chief financial officer, chief operating officer, chief technology officer, presidents, vice presidents
and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit
to our registration statement on Form F-1 (No. 333-146825), as amended, initially filed on October 19, 2007.
|
ITEM 16C.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The following table sets forth the aggregate
fees by categories specified below in connection with certain professional services rendered by Marcum Bernstein & Pinchuk LLP,
our current principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods
indicate
d below.
|
|
Fiscal Year Ended December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Audit Fees
|
|
$
|
670,153
|
|
|
$
|
754,129
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
|
—
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
TOTAL
|
|
$
|
670,153
|
|
|
$
|
754,129
|
|
“Audit Fees” consisted of the
aggregate fees billed for professional services rendered for the audit of our annual financial statements or quarterly review services
that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit Related Fees” consisted
of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related
to the performance of the audit or review of our regulatory filings and were not otherwise included in Audit Fees.
“Tax Fees” consisted of the
aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax
Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.
“All Other Fees” consisted
of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or
Tax Fees.
The policy of our audit committee is to
pre-approve all audit and non-audit services provided by our external auditors, including audit services, audit-related services,
tax services and other services as described above, other than those for de minimus services which are approved by the audit committee
prior to the completion of the audit.
|
ITEM 16D.
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
We have not asked for, nor have we been
granted, an exemption from the applicable listing standards for our audit committee.
|
ITEM 16E.
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
We announced on March 28, 2018 and
further updated on September 28, 2018 that Mr. Herman Man Guo intended to purchase AirMedia’s ordinary shares in the
form of ADSs with an aggregate value of up to $5 million. As of the date of this annual report, Mr. Herman Man Guo acquired,
an aggregate of 344,984 ADSs, representing 3,449,844 ordinary shares of us.
|
ITEM 16F.
|
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
Effective from March 3, 2017, we engaged
Marcum Bernstein & Pinchuk LLP as our independent registered public accounting firm. We also dismissed Deloitte on the same
date. The decision was not made due to any disagreements with Deloitte. The change of our independent registered public accounting
firm was approved by the audit committee of our board on March 3, 2017.
Other than an adverse opinion on our internal
control over financial reporting due to a material weakness for the fiscal year ended December 31, 2015, Deloitte’s audit
reports on our consolidated financial statements as of December 31, 2015 and 2014 and for each of the years ended December 31,
2015, 2014 and 2013 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
During each of the years ended December
31, 2015, 2014 and 2013 and the subsequent interim period through March 3, 2017, there were (i) no disagreements between us and
Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any
of which, if not resolved to Deloitte’s satisfaction, would have caused Deloitte to make reference thereto in their reports,
and (ii) no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F
in connection with our annual report on Form 20-F.
We provided Deloitte with a copy of
the disclosures under this Item 16F and requested from Deloitte a letter addressed to the Securities and Exchange Commission
indicating whether it agrees with such disclosures. A copy of Deloitte’s letter dated April 30, 2019 is attached
as Exhibit 16.1.
During each of the years ended December
31, 2015, 2014 and 2013 and the subsequent interim period through March 3, 2017, neither we nor anyone on behalf of us has consulted
with Marcum Bernstein & Pinchuk LLP regarding (i) the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, and neither
a written report nor oral advice was provided to us that Marcum Bernstein & Pinchuk LLP concluded was an important factor
considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was
the subject of a disagreement pursuant to Item 16F(a)(1)(iv) of the instructions to Form 20-F, or (iii) any reportable event pursuant
to Item 16F(a)(1)(v) of the instructions to
Form 20-F.
|
ITEM 16G.
|
CORPORATE GOVERNANCE
|
The Nasdaq Stock Market rules require each
issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year end. They
also require each issuer to seek shareholder approval for any establishment of or material amendment to the issuer’s equity
compensation plans, including any amendment effecting a repricing of outstanding options or increasing the amount of shares authorized
under such plans. However, the rules permit foreign private issuers like us to follow “home country practice” in certain
corporate governance matters.
Maples and Calder (Hong Kong) LLP, our
Cayman Islands counsel, has provided a letter to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not
required to hold annual shareholder meetings. We held annual meetings in 2013. No annual meeting was held in 2014, 2015, 2016,
2017 and 2018. We may hold additional annual shareholder meetings in the future if there are significant issues that require shareholder
approval.
Maples and Calder (Hong Kong) LLP has also
provided letters to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not required to seek shareholder approval
for the establishment of or any material amendments to our equity compensation plans. In 2008, we followed home country practice
with respect to our 2007 Option Plan by amending it to permit repricings of options without seeking shareholder approval. In 2011,
we followed home country practice with respect to our 2011 Option Plan by establishing it without seeking shareholder approval.
We have relied on and intend to continue
to rely on the above home country practices under Cayman Islands law. Other than the above, we have followed and intend to continue
to follow the applicable corporate governance standards under the rules and regulations of the Nasdaq Stock Market.
|
ITEM 16H.
|
MINE SAFETY DISCLOSURE
|
Not applicable.
PART
III
|
ITEM 17.
|
FINANCIAL STATEMENTS
|
We have elected to provide financial statements
pursuant to Item 18.
|
ITEM 18.
|
FINANCIAL STATEMENTS
|
The full text of our audited consolidated
financial statements begins on page F-2 of this annual report.
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 99.3 to Form 6-K (File No. 001-33765) filed on December 10, 2009)
|
|
|
|
1.2
|
|
Amendment to Amended and Restated Memorandum and Articles of Association approved by the annual general shareholders meeting on July 18, 2013 (incorporated by reference to Exhibit 99.2 to Form 6-K (File No. 001-33765) filed on June 27, 2013)
|
|
|
|
2.1
|
|
Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
2.2
|
|
Form of Amended and Restated Deposit Agreement among the Company, the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 99-a to Post-effective Amendment No. 1 to the Registration Statement on Form F-6 (File No. 333- 146908), filed with the SEC on March 29, 2019)
|
|
|
|
2.3
|
|
Amended and Restated Shareholders’ Agreement originally dated as of June 7, 2007, as amended and restated on September 27, 2007, among the Company and Shareholders (incorporated by reference to Exhibit 4.4 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.1
|
|
Amended and Restated 2007 Share Incentive Plan (incorporated by reference to Exhibit 99.2 to Form 6-K filed on December 10, 2009)
|
|
|
|
4.2
|
|
2011 Share Incentive Plan (incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on April 30, 2012)
|
|
|
|
4.3
|
|
2012 Share Incentive Plan. (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 (File No. 333-187442) filed on March 22, 2013)
|
|
|
|
4.4
|
|
Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.5
|
|
Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.6
|
|
Investment Framework Agreement dated October 18, 2005, as amended on September 27, 2007, among Man Guo, Qing Xu and CDH China Management Company Limited (incorporated by reference to Exhibit 10.4 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.7
|
|
English Translation of Business Cooperation Agreement dated June 14, 2007 between Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and AirTV United Media & Culture Co., Ltd. (incorporated by reference to Exhibit 10.9 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.8
|
|
English Translation of Amended Power of Attorneys dated November 28, 2008 from each of the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 4.11 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.9
|
|
English Translation of Amended and Restated Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.12 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.10
|
|
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.1 to Annual Report on Form 20-F filed on April 30, 2008)
|
|
|
|
4.11
|
|
English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.13 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.12
|
|
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.2 to Annual Report on Form 20-F filed on April 30, 2008)
|
|
|
|
4.13
|
|
English Translation of Amended and Restated Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.14 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.14
|
|
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.17 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.15
|
|
English Translation of Amended and Restated Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.15 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.16
|
|
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.) and the shareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.19 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.17
|
|
English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.32 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.18
|
|
English Translation of Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.22 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.19
|
|
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.5 to Annual Report on Form 20-F filed on April 30, 2008)
|
|
|
|
4.20
|
|
English Translation of Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.23 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.21
|
|
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.6 to Annual Report on Form 20-F filed on April 30, 2008)
|
|
|
|
4.22
|
|
English Translation of Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 10.24 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.23
|
|
English Translation of Supplementary Agreement dated November 28, 2008 to the Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.38 to Annual Report on Form 20-F filed on April 28, 2009)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.24
|
|
English Translation of Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd.) (incorporated by reference to Exhibit 10.25 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
4.25
|
|
English Translation of Supplementary Agreement dated November 28, 2008 to the Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.40 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.26
|
|
English Translation of Supplementary Agreement No. 2 to Call Option Agreement dated May 27, 2010 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd.) (incorporated by reference to Exhibit 4.45 to Annual Report on Form 20-F filed on May 28, 2010)
|
|
|
|
4.27
|
|
English Translation of Supplementary Agreement dated October 31, 2008 among AirMedia Technology (Beijing) Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd.), supplementing the original Loan Agreement dated January 1, 2007 (incorporated by reference to Exhibit 4.41 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.28
|
|
English Translation of Supplementary Agreement No. 2 to the Equity Pledge Agreement dated May 27, 2010 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) (incorporated by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on May 28, 2010)
|
|
|
|
4.29
|
|
English Translation of Power of Attorneys dated April 1, 2008 from each of the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.42 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.30
|
|
English Translation of Technology Development Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.43 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.31
|
|
English Translation of Technology Support and Service Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.44 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.32
|
|
English Translation of Supplementary Agreement dated June 25, 2008 to the Technology Support and Service Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.45 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.33
|
|
English Translation of Equity Pledge Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on April 28, 2009)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.34
|
|
English Translation of Call Option Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.47 to Annual Report on Form 20-F filed on April 28, 2009)
|
|
|
|
4.35
|
|
English summary of Investment Agreement, dated May 12, 2013, by and among Elec-Tech International Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. (now known as Beijing AirMedia Jiaming Advertising Co., Ltd. ) and Beijing Zhongshi Aoyou Advertising Co., Ltd. (incorporated by reference to Exhibit 4.50 to Annual Report on Form 20-F filed on April 25, 2014)
|
|
|
|
4.36
|
|
English summary of Cooperation Agreement for the Establishment of Advertising Company, dated May 2013, by and between Beijing Shengshi Lianhe Advertising Co., Ltd. (now known as Beijing Linghang Shengshi Advertising Co., Ltd.), and Guangzhou Daozheng Advertising Co., Ltd. (incorporated by reference to Exhibit 4.51 to Annual Report on Form 20-F filed on April 25, 2014)
|
|
|
|
4.37
|
|
English summary of Equity Swap Agreement, dated September 29, 2013, by and between Beijing N-S Digital TV Co., Ltd. and AirMedia Group Co., Ltd. (incorporated by reference to Exhibit 4.52 to Annual Report on Form 20-F filed on April 25, 2014)
|
|
|
|
4.38
|
|
Agreement and Plan of Merger, dated as of September 29, 2015, by and among the Registrant, AirMedia Holdings Ltd. and AirMedia Merger Company Limited (incorporated herein by reference to Exhibit 99.2 of our current report on Form 6-K filed with the Commission on September 30, 2015).
|
|
|
|
4.39
|
|
English translation of Equity Interest Transfer Agreement in respect of AirMedia Group Co., Ltd., dated June 15, 2015, by and among AirMedia Group Inc., AirMedia Technology (Beijing) Co., Ltd, Beijing Linghang Shengshi Advertising Co., Ltd., Man Guo and Beijing Longde Wenchuang Investment Fund Management Company. (incorporated by reference to Exhibit 4.39 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.40
|
|
English translation of Supplement Agreement of Equity Transfer, dated November 30, 2015, by and among AirMedia Group Inc., AirMedia Technology (Beijing) Co., Ltd, Beijing Linghang Shengshi Advertising Co., Ltd., Man Guo and Beijing Longde Wenchuang Investment Fund Management Company. (incorporated by reference to Exhibit 4.40 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.41
|
|
English translation of Exclusive Technology Consulting and Service Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.41 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.42
|
|
English translation of Technology Development Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.42 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.43
|
|
English translation of Technology Support and Service Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd. and AirMedia Online Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.43 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.44
|
|
English translation of Loan Agreements, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd. and each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi Zhang) (incorporated by reference to Exhibit 4.44 to Annual Report on Form 20-F filed on May 16, 2016)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.45
|
|
English translation of Exclusive Call Option Agreement, dated June 5, 2015, by and between AirMedia Technology (Beijing) Co., Ltd., AirMedia Online Network Technology Co., Ltd. and each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi Zhang) (incorporated by reference to Exhibit 4.45 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.46
|
|
English translation of Power of Attorney, dated June 5, 2015, by each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi Zhang) (incorporated by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.47
|
|
English translation of Equity Pledge Agreements, dated June 5, 2015, by and among AirMedia Technology (Beijing) Co., Ltd., AirMedia Online Network Technology Co., Ltd. and each shareholder of AirMedia Online Network Technology Co., Ltd. (except Yi Zhang) (incorporated by reference to Exhibit 4.47 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.48
|
|
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of Beijing Linghang Shengshi Advertising Co., Ltd., dated January 21, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo and Qing Xu (incorporated by reference to Exhibit 4.48 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.49
|
|
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of Beijing AirMedia Jiaming Advertising Co., Ltd., dated January 21, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo and Qing Xu (incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.50
|
|
English translation of Supplement Agreement in respect of the Related Agreement Arrangement of AirMedia Online Network Technology Co., Ltd., dated March 15, 2016, by and among AirMedia Technology (Beijing) Co., Ltd., Man Guo, Qing Xu and Tao Hong (incorporated by reference to Exhibit 4.50 to Annual Report on Form 20-F filed on May 16, 2016)
|
|
|
|
4.51
|
|
English translation of Capital Contribution Agreement for the Establishment of Unicom AirNet (Beijing) Network Co. Ltd. by and among AirMedia Online Network Technology Co., Ltd., Unicom Boardband Online Co., Ltd. and Chengdu Haite Kairong Aeronautical Technology Co., Ltd. (incorporated by reference to Exhibit 4.51 to Annual Report on Form 20-F filed on June 28, 2017)
|
|
|
|
4.52
|
|
English translation of Memorandum on Subsequent Performance of AirMedia Group Co., Ltd. Equity Transfer Agreement and Supplementary Agreement, dated March 28, 2018, by and among AirMedia Group Inc., AirMedia Technology (Beijing) Co., Ltd., Beijing Linghang Shengshi Advertising Co., Ltd., Mr. Herman Man Guo, Mr. Qing Xu, Beijing Longde Wenchuang Investment Fund Management Co., Ltd., Beijing Cultural Center Construction and Development Fund (Limited Partnership) and AirMedia Group Co., Ltd. (incorporated by reference to Exhibit 99.1 to Form 6-K (File No. 001-33765) filed on March 29, 2018)
|
|
|
|
4.53
|
|
English translation of Supplementary Agreement for the Memorandum Regarding Continued Implementation of the Agreement on Equity Transfer of AirMedia Group Co., Ltd. and its Supplementary Agreement, dated August 23, 2018, by and among AirMedia Group Inc., Hangmei United Media Technology (Beijing) Co., Ltd., Beijing Hangmei Shengshi Advertising Co., Ltd., Mr. Herman Man Guo, Mr. Qing Xu, Beijing Longde Wenchuang Investment Fund Management Co., Ltd., Beijing Cultural Center Development Fund (Limited Partnership) and AirMedia Group Co., Ltd. (incorporated by reference to Exhibit 4.53 to Annual Report on Form 20-F filed on October 17, 2018)
|
Exhibit
No.
|
|
Description
|
|
|
|
4.54
|
|
English translation of equity transfer agreement in respect of Airmedia Group Co., Ltd., dated November 5, 2018, by and among Beijing Linghang Shengshi Advertising Co.,Ltd., Guo Man, Xu Qing, and Jiangsu Hongzhou Investment Co., Ltd. (incorporated by reference to Exhibit 99.2 to Form 6-K (File No. 001-33765) filed on November 7, 2018)
|
|
|
|
4.55*
|
|
English translation of Supplementary Agreement for the Memorandum Regarding Continued Implementation of
the Agreement on Equity Transfer of AirMedia Group Co., Ltd. and its Supplementary Agreement, dated November 2018, by and among
AirMedia Group Inc.,
Hangmei United Media Technology
(Beijing) Co., Ltd., Beijing Hangmei Shengshi Advertising Co., Ltd., Mr. Herman Man Guo, Mr. Qing Xu, Beijing Longde Wenchuang
Investment Fund Management Co., Ltd., Beijing Cultural Center Development Fund (Limited Partnership) and AirMedia Group Co., Ltd.
|
|
|
|
8.1*
|
|
List of the Registrant’s subsidiaries
|
|
|
|
11.1
|
|
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
|
|
|
|
12.1*
|
|
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
12.2*
|
|
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
13.1**
|
|
Certifications by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
13.2**
|
|
Certifications by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
15.1*
|
|
Consent of Marcum Bernstein & Pinchuk LLP
|
|
|
|
15.2*
|
|
Consent of Commerce & Finance Law Offices
|
|
|
|
15.3*
|
|
Consent of Maples and Calder (Hong Kong) LLP
|
|
|
|
16.1*
|
|
Letter from Deloitte Touche Tohmatsu Certified Public Accountants LLP to the Securities and Exchange Commission
|
|
|
|
101.INS*
|
|
XBRL Instance Document
|
|
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
**
|
Furnished with this annual report on Form 20-F
|
SIGNATURE
The registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
Date: April 30, 2019
|
AIRMEDIA GROUP INC.
|
|
|
|
/s/ Herman Man Guo
|
|
|
|
Herman Man Guo
|
|
Chairman and Chief Executive Officer
|
AIRMEDIA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
AirMedia Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of AirMedia Group Inc. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements
of operations, comprehensive loss, changes in equity and cash flows for each of the three years in the period ended December 31,
2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity
with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going
Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2(b),
the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to
meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also described in Note 2(b). The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Marcum Bernstein & Pinchuk
llp
Marcum Bernstein & Pinchuk
llp
We have served as the Company’s auditor since 2017
.
New York, New York
April 30, 2019
AIRMEDIA GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except
share and per share data)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,355
|
|
|
$
|
15,536
|
|
Restricted cash
|
|
|
3,117
|
|
|
|
3
|
|
Accounts receivable, net
|
|
|
10,980
|
|
|
|
7,938
|
|
Prepaid concession fees
|
|
|
7,064
|
|
|
|
1,813
|
|
Other current assets, net
|
|
|
59,825
|
|
|
|
41,057
|
|
Amount due from related parties
|
|
|
2,251
|
|
|
|
18
|
|
Total current assets
|
|
|
98,592
|
|
|
|
66,365
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
15,442
|
|
|
|
13,466
|
|
Prepaid equipment costs
|
|
|
290
|
|
|
|
2,364
|
|
Long-term investments
|
|
|
102,434
|
|
|
|
46,271
|
|
Long-term deposits
|
|
|
6,039
|
|
|
|
1,350
|
|
Other non-current assets
|
|
|
2,205
|
|
|
|
-
|
|
TOTAL ASSETS
|
|
$
|
225,002
|
|
|
$
|
129,816
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
-
|
|
|
$
|
6,109
|
|
Accounts payable
|
|
|
48,545
|
|
|
|
39,304
|
|
Accrued expenses and other current liabilities
|
|
|
12,236
|
|
|
|
9,758
|
|
Deferred revenue
|
|
|
1,337
|
|
|
|
1,995
|
|
Consideration received from buyer
|
|
|
-
|
|
|
|
21,817
|
|
Payable of earnout commitment
|
|
|
-
|
|
|
|
22,188
|
|
Income tax payable
|
|
|
13,677
|
|
|
|
11,483
|
|
Total current liabilities
|
|
|
75,795
|
|
|
|
112,654
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
-
|
|
|
|
2,763
|
|
Other non-current liabilities
|
|
|
398
|
|
|
|
-
|
|
Provision for earnout commitment
|
|
|
25,130
|
|
|
|
-
|
|
Total liabilities
|
|
|
101,323
|
|
|
|
115,417
|
|
AIRMEDIA GROUP INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(I n U.S. dollars in thousands, except
share and per share data)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.001 par value; 900,000,000 shares authorized in 2017 and 2018; 127,662,057 shares and 127,697,055 shares issued as of December 31, 2017 and 2018, respectively; 125,629,779 shares and 125,664,777 shares outstanding as of December 31, 2017 and 2018, respectively)
|
|
|
128
|
|
|
|
128
|
|
Additional paid-in capital
|
|
|
286,739
|
|
|
|
284,726
|
|
Treasury stock (2,032,278 and 2,032,278 shares as of December 31, 2017 and 2018, respectively)
|
|
|
(2,351
|
)
|
|
|
(2,351
|
)
|
Accumulated deficits
|
|
|
(172,318
|
)
|
|
|
(262,415
|
)
|
Accumulated other comprehensive income
|
|
|
35,451
|
|
|
|
31,311
|
|
Total AirMedia Group Inc.'s shareholders' equity
|
|
|
147,649
|
|
|
|
51,399
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
(23,970
|
)
|
|
|
(37,000
|
)
|
Total equity
|
|
|
123,679
|
|
|
|
14,399
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
225,002
|
|
|
$
|
129,816
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands, except
share and per share data)
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,597
|
|
|
$
|
24,328
|
|
|
$
|
24,776
|
|
Business tax and other sales tax
|
|
|
(84
|
)
|
|
|
(569
|
)
|
|
|
(230
|
)
|
Net revenues
|
|
|
16,513
|
|
|
|
23,759
|
|
|
|
24,546
|
|
Less: Cost of revenues
|
|
|
49,042
|
|
|
|
58,967
|
|
|
|
32,630
|
|
Gross loss
|
|
|
(32,529
|
)
|
|
|
(35,208
|
)
|
|
|
(8,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
12,056
|
|
|
|
12,747
|
|
|
|
7,492
|
|
General and administrative
|
|
|
44,401
|
|
|
|
63,507
|
|
|
|
32,612
|
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
|
|
|
826
|
|
|
|
67,342
|
|
|
|
564
|
|
Total operating expenses
|
|
|
57,283
|
|
|
|
143,596
|
|
|
|
40,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(89,812
|
)
|
|
|
(178,804
|
)
|
|
|
(48,752
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
843
|
|
|
|
2,645
|
|
|
|
(106
|
)
|
Loss from and impairment on long-term investments
|
|
|
(33
|
)
|
|
|
(2,603
|
)
|
|
|
(52,337
|
)
|
Other income, net
|
|
|
4,243
|
|
|
|
214
|
|
|
|
7,926
|
|
Total other income (expense)
|
|
|
5,053
|
|
|
|
256
|
|
|
|
(44,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(84,759
|
)
|
|
|
(178,548
|
)
|
|
|
(93,269
|
)
|
Income tax expense
|
|
|
4,483
|
|
|
|
633
|
|
|
|
150
|
|
Net loss
|
|
|
(89,242
|
)
|
|
|
(179,181
|
)
|
|
|
(93,419
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
|
(23,617
|
)
|
|
|
(22,705
|
)
|
|
|
(3,322
|
)
|
Net loss attributable to AirMedia Group Inc.'s shareholders
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.52
|
)
|
|
$
|
(1.25
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted.
|
|
$
|
(5.24
|
)
|
|
$
|
(12.46
|
)
|
|
$
|
(7.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net loss per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
125,277,056
|
|
|
|
125,629,779
|
|
|
|
125,653,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ADS used in calculating net loss
per ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
12,527,706
|
|
|
|
12,562,978
|
|
|
|
12,565,318
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(89,242
|
)
|
|
$
|
(179,181
|
)
|
|
$
|
(93,419
|
)
|
Other comprehensive loss, net of tax of nil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(24,140
|
)
|
|
|
35,716
|
|
|
|
(2,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(113,382
|
)
|
|
|
(143,465
|
)
|
|
|
(96,393
|
)
|
Less: comprehensive loss attributable to non-controlling interests
|
|
|
(24,537
|
)
|
|
|
(22,732
|
)
|
|
|
(2,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to AirMedia Group Inc.'s shareholders
|
|
$
|
(88,845
|
)
|
|
$
|
(120,733
|
)
|
|
$
|
(94,237
|
)
|
The accompanying notes are an integral part
of these consolidated financial statements.
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY
(In U.S. dollars in thousands, except
share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Ordinary
shares
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
other
|
|
|
AirMedia
Group
Inc.'s
|
|
|
Non-
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
Treasury
stock
|
|
|
Accumulated
deficits
|
|
|
comprehensive
income (loss)
|
|
|
shareholders'
equity
|
|
|
controlling
interests
|
|
|
Total
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
|
124,395,645
|
|
|
|
128
|
|
|
|
317,414
|
|
|
|
(3,778
|
)
|
|
|
49,876
|
|
|
|
22,928
|
|
|
|
386,568
|
|
|
|
11,065
|
|
|
|
397,633
|
|
Stock
option exercised
|
|
|
1,234,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,427
|
|
|
|
(93
|
)
|
|
|
-
|
|
|
|
1,334
|
|
|
|
-
|
|
|
|
1,334
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
773
|
|
|
|
-
|
|
|
|
773
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,220
|
)
|
|
|
(23,220
|
)
|
|
|
(920
|
)
|
|
|
(24,140
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65,625
|
)
|
|
|
-
|
|
|
|
(65,625
|
)
|
|
|
(23,617
|
)
|
|
|
(89,242
|
)
|
Acquisition
of equity interests from non-controlling shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,570
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,570
|
)
|
|
|
3,614
|
|
|
|
(30,956
|
)
|
Capital
contribution from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
3,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,477
|
|
|
|
7,718
|
|
|
|
11,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2016
|
|
|
125,629,779
|
|
|
|
128
|
|
|
|
287,094
|
|
|
|
(2,351
|
)
|
|
|
(15,842
|
)
|
|
|
(292
|
)
|
|
|
268,737
|
|
|
|
(2,140
|
)
|
|
|
266,597
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
343
|
|
|
|
-
|
|
|
|
343
|
|
Capital
contribution from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
716
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
716
|
|
|
|
1,147
|
|
|
|
1,863
|
|
Acquisition
of equity interests from non-controlling shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414
|
)
|
|
|
-
|
|
|
|
(1,414
|
)
|
Disposal
of Hainan Jinhui
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(245
|
)
|
|
|
(245
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,743
|
|
|
|
35,743
|
|
|
|
(27
|
)
|
|
|
35,716
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(156,476
|
)
|
|
|
-
|
|
|
|
(156,476
|
)
|
|
|
(22,705
|
)
|
|
|
(179,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2017
|
|
|
125,629,779
|
|
|
$
|
128
|
|
|
$
|
286,739
|
|
|
$
|
(2,351
|
)
|
|
$
|
(172,318
|
)
|
|
$
|
35,451
|
|
|
$
|
147,649
|
|
|
$
|
(23,970
|
)
|
|
$
|
123,679
|
|
Share
issued to Ascent Investor Relations LLC
|
|
|
34,998
|
|
|
|
0.03
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
Capital
withdraw from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,131
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,131
|
)
|
|
|
(9,055
|
)
|
|
|
(10,186
|
)
|
Subscription receivables from NCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969
|
)
|
|
|
(1,969
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,140
|
)
|
|
|
(4,140
|
)
|
|
|
1,166
|
|
|
|
(2,974
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(90,097
|
)
|
|
|
-
|
|
|
|
(90,097
|
)
|
|
|
(3,322
|
)
|
|
|
(93,419
|
)
|
Acquisition
of additional equity interest in a subsidiary from the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
|
|
150
|
|
|
|
(795
|
)
|
Balance
as of December 31, 2018
|
|
|
125,664,777
|
|
|
$
|
128
|
|
|
$
|
284,726
|
|
|
$
|
(2,351
|
)
|
|
$
|
(262,415
|
)
|
|
$
|
31,311
|
|
|
$
|
51,399
|
|
|
$
|
(37,000
|
)
|
|
$
|
14,399
|
|
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(89,242
|
)
|
|
$
|
(179,181
|
)
|
|
$
|
(93,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt provisions
|
|
|
12,697
|
|
|
|
37,255
|
|
|
|
11,912
|
|
Depreciation and amortization
|
|
|
12,971
|
|
|
|
12,048
|
|
|
|
1,560
|
|
Impairment of fixed assets, prepaid equipment cost and intangible assets
|
|
|
826
|
|
|
|
67,342
|
|
|
|
564
|
|
Share-based compensation
|
|
|
773
|
|
|
|
343
|
|
|
|
45
|
|
Loss and impairment on long-term investments
|
|
|
33
|
|
|
|
2,603
|
|
|
|
52,337
|
|
Loss on disposal of property and equipment
|
|
|
22
|
|
|
|
417
|
|
|
|
-
|
|
Impairment loss on inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
657
|
|
Gain on fair value change of earn-out provision
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,653
|
)
|
Other income on concession payable waived
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,318
|
)
|
Write off of long-term deposit not refundable
|
|
|
-
|
|
|
|
-
|
|
|
|
359
|
|
Deferred tax valuation allowance
|
|
|
4,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,250
|
)
|
|
|
(1,874
|
)
|
|
|
1,361
|
|
Prepaid concession fees
|
|
|
(3,043
|
)
|
|
|
1,656
|
|
|
|
5,056
|
|
Other current assets
|
|
|
(5,369
|
)
|
|
|
(821
|
)
|
|
|
4,541
|
|
Long-term deposits
|
|
|
(1,962
|
)
|
|
|
789
|
|
|
|
4,171
|
|
Other non-current assets
|
|
|
(781
|
)
|
|
|
1,304
|
|
|
|
1,210
|
|
Amount due from related parties
|
|
|
1,813
|
|
|
|
(1,310
|
)
|
|
|
934
|
|
Accounts payable
|
|
|
6,730
|
|
|
|
4,491
|
|
|
|
7,751
|
|
Accrued expenses and other current liabilities
|
|
|
2,030
|
|
|
|
(920
|
)
|
|
|
(3,693
|
)
|
Deferred revenue
|
|
|
517
|
|
|
|
(525
|
)
|
|
|
757
|
|
Amount due to related parties
|
|
|
(15,023
|
)
|
|
|
-
|
|
|
|
-
|
|
Income tax payable
|
|
|
(27,377
|
)
|
|
|
(1,712
|
)
|
|
|
(1,515
|
)
|
Other noncurrent liabilities
|
|
|
(303
|
)
|
|
|
(475
|
)
|
|
|
(391
|
)
|
Net cash used in operating activities
|
|
|
(103,610
|
)
|
|
|
(58,570
|
)
|
|
|
(19,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(21,558
|
)
|
|
|
(7,170
|
)
|
|
|
(3,616
|
)
|
Consideration receivable
|
|
|
195,915
|
|
|
|
-
|
|
|
|
-
|
|
Net amount received upon settlement of short-term investment
|
|
|
3,617
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition of equity interests from non-controlling shareholders
|
|
|
(32,838
|
)
|
|
|
(1,414
|
)
|
|
|
(302
|
)
|
Proceeds from disposal of equity investment
|
|
|
3,014
|
|
|
|
1,502
|
|
|
|
22,640
|
|
Loan to third parties
|
|
|
(17,249
|
)
|
|
|
(29,825
|
)
|
|
|
-
|
|
Collection of loan to third parties
|
|
|
156
|
|
|
|
7,190
|
|
|
|
1,374
|
|
Purchase of long-term investment
|
|
|
(475
|
)
|
|
|
(17,449
|
)
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
130,582
|
|
|
|
(47,166
|
)
|
|
|
20,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from short-term loan
|
|
|
-
|
|
|
|
-
|
|
|
|
6,339
|
|
Cash received from long-term loan
|
|
|
-
|
|
|
|
-
|
|
|
|
2,868
|
|
Capital contribution from non-controlling interest
|
|
|
9,796
|
|
|
|
874
|
|
|
|
-
|
|
Capital withdraw by non-controlling shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,902
|
)
|
Proceeds from options exercised
|
|
|
1,334
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
11,130
|
|
|
|
874
|
|
|
|
(1,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
(7,515
|
)
|
|
|
5,787
|
|
|
|
(1,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
30,587
|
|
|
|
(99,075
|
)
|
|
|
(2,933
|
)
|
Cash, cash equivalents and restricted cash, at beginning of year
|
|
|
86,960
|
|
|
|
117,547
|
|
|
|
18,472
|
|
Cash, cash equivalents and restricted cash, at end of year
|
|
$
|
117,547
|
|
|
$
|
18,472
|
|
|
$
|
15,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
27,712
|
|
|
$
|
1,601
|
|
|
$
|
1,665
|
|
Interests paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,443
|
|
Fair value of property, equipment and other assets acquired in exchange of advertising services rendered and subsidiary's equity transferred
|
|
$
|
541
|
|
|
$
|
169
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for purchase of property and equipment
|
|
$
|
-
|
|
|
$
|
3,569
|
|
|
$
|
103
|
|
Payable of acquisition of non-controlling interests
|
|
$
|
1,882
|
|
|
$
|
-
|
|
|
$
|
524
|
|
Receivable of capital contribution from non-controlling interest
|
|
$
|
1,399
|
|
|
$
|
989
|
|
|
$
|
-
|
|
Payable of capital withdraw from non-controlling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
758
|
|
The following table provides a reconciliation
of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same
such amounts shown in the consolidated statements of cash flows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
117,547
|
|
|
$
|
15,355
|
|
|
$
|
15,536
|
|
Restricted cash
|
|
|
-
|
|
|
|
3,117
|
|
|
|
3
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
117,547
|
|
|
$
|
18,472
|
|
|
$
|
15,539
|
|
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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").
The Group provides advertising
time slots in the form of TV-attached digital frames, digital TV screens in airports, digital TV screens on airplanes, and media
contents display in air travel. Collaborating with our partners, AirMedia serves airline travelers with interactive entertainment
and a coverage of breaking news, and furnishes corporate clients with advertisements tailored to the perceptions of the travelers.
The Group started gas station
media network and explored the on train and long-haul bus Wi-Fi business in 2009 and 2015, respectively. The Group obtained concession
rights to develop and operate an outdoor advertising network in Sinopec gas stations throughout China to play advertisements on
outdoor advertising platforms such as LED screens, billboards and light boxes at Sinopec gas stations and several concession rights
from railway administration bureaus, long-haul bus operators in China to install and operate our Wi-Fi systems to provide Wi-Fi
connections to passengers to improve travelers’ experience. In view of the underperformance of recent years ascribed to the
wide spread of affordable 4G or 5G technology, to achieve the resources realignment for the focused development of the in-flight
media and connectivity business, the Group ceased our operations of Wi-Fi service on long-haul buses and our gas station media
services, and scaled down operations in providing Wi-Fi services on trains in 2018. These disposals do not represent a strategic
shift on our advertising business which have no major effect on the Group’s results of operations respectively. Accordingly,
assets and liabilities, revenues and expenses, and cash flows related to the disposed entities is not required to be reclassified
in the accompanying consolidated financial statements as discontinued operations for all periods presented.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
Introduction of the Group
- continued
As of issuance date of this report,
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
|
%
|
|
|
|
|
|
|
|
|
|
Air
Net International Limited (Formerly AirMedia International Limited) ("Air Net International")
|
|
July 14, 2007
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Air
Net (China) Limited (Fomerly AirMedia (China) Limited) ("AN China")
|
|
August 5, 2005
|
|
Hong Kong
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yuehang
Chuangyi Technology (Beijing) Co., Ltd. (Formerly AirMedia Technology (Beijing) Co., Ltd.) ("Chuangyi Technology")
|
|
September 19, 2005
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Shenzhen
Yuehang Information Technology Co., Ltd. (Formerly Shenzhen AirMedia Information Technology Co., Ltd.) ("Shenzhen Yuehang")
|
|
June 6, 2006
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Xi'an
Shengshi Dinghong Information Technology Co., Ltd. (Formerly Xi'an AirMedia Chuangyi Technology Co., Ltd.) ("Xi'an Shengshi")
|
|
December 31, 2007
|
|
the PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Linghang Shengshi Advertising Co., Ltd. (Formerly Beijing AirMedia Shengshi Advertising Co., Ltd.) ("Linghang Shengshi ")
|
|
August 7, 2005
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wangfan
Tianxia Network Technology Co., Ltd.(“Iwanfan”)
|
|
May 6, 2016
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing
Yuehang Digital Media Advertising Co., Ltd. ("Beijing Yuehang")
|
|
January 16, 2008
|
|
the PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
AirMedia
Online Network Technology Group Co., Ltd. (Formerly 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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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
Airnet Pictures Co., Ltd. (Formerly Beijing AirMedia Film & TV Culture Co., Ltd.) ("Airnet Pictures")
|
|
September
13, 2007
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing
Zhihe Xianglong Advertising Co., Ltd. (Formerly Flying Dragon Media Advertising Co., Ltd.) ("Flying Dragon")
|
|
August
1, 2008
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wenzhou
Yuehang Advertising Co., Ltd. (Formerly Wenzhou AirMedia Advertising Co., Ltd.) ("Wenzhou Yuehang")
|
|
October
17, 2008
|
|
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 Online Network Technology Co., Ltd. (Formerly Guangzhou Meizheng Advertising Co., Ltd.) ("Guangzhou Meizheng")
|
|
May
17, 2013
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing
Yuehang Tianyi Electronic Information Technology Co., Ltd. (Formerly Beijing AirMedia Tianyi Information Technology Co.,
Ltd.) ("Yuehang Tianyi")
|
|
September
25, 2013
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wangfan
Linghang Mobile Network Technology Co., Ltd. (Formerly AirMedia Mobile Network Technology Co., Ltd. ("Linghang")
|
|
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
Wangfan Jiaming Pictures Co., Ltd. (Formerly Beijing AirMedia Jiaming Film & TV Culture Co., Ltd.) ("Wangfan Jiaming")
|
|
December
31, 2015
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Meizheng
Network Information Technology Co., Ltd. (“Meizheng Network”)
|
|
August
8, 2016
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing
Wangfan Jiaming Advertising Co.,Ltd. (Formerly Beijing AirMedia Jiaming Advertising Co., Ltd.) ("Jiaming Advertising")
|
|
January
1, 2007
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Shandong
Airmedia Cheweishi Network Technology Co., Ltd. (Formerly Shandong Airmedia Car Safety Technology Co.,Ltd.)
(“Shangdong Cheweishi”)
|
|
July
21, 2016
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Dingsheng
Ruizhi (Beiing) Investment Consulting Co., Ltd. (“Dingsheng Ruizhi”)
|
|
May
25, 2016
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Wangfan
Tongda Culture Development (Beijing) Co., Ltd. (“Tongda Culture”)
|
|
May
11, 2018
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Yuehang
Zhongying E-commerce Co., Ltd. (“Zhongying”)
|
|
May
17, 2018
|
|
the
PRC
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Beijing
Airport United Culture Media Co., Ltd. (“Airport United”)
|
|
June
19, 2018
|
|
the
PRC
|
|
|
N/A
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
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,
AN China, the 100% shareholder of Chuangyi Technology, Shenzhen Yuehang, and Xi’an Shengshi, has been engaged in the advertising
business in Hong Kong since September 2008.
The Group conducts substantially
all of its activities through VIEs, i.e. Linghang Shengshi, Beijing Yuehang and AM Online, and the VIEs' subsidiaries. The VIEs
have entered into the following series of agreements with Chuangyi Technology:
|
·
|
Technology support and service agreement:
Chuangyi Technology provides exclusive technology support and consulting services to the VIEs and in return, the VIEs are required to pay Chuangyi Technology service fees. The VIEs pay to Chuangyi Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to Chuangyi Technology, a net cost-plus rate of no less than 0.5% in the case of Linghang Shengshi, and Jiaming Advertising, or 1.0% in the case of Beijing Yuehang, which final rate should be determined by Chuangyi 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 Chuangyi Technology under AM Online’s technology support and service agreement shall be determined by AM Online and Chuangyi Technology at the first month of such year taking into account several factors. Those factors include the credential of the team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and value of the services provided by Chuangyi Technology, the extent to which Chuangyi 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 Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi 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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
The VIE arrangements
-
continued
|
·
|
Technology development agreement:
VIEs exclusively engaged Chuangyi Technology to provide technology development services. Chuangyi Technology owns the intellectual property rights developed in the performance of these agreements. Except for AM Online, the VIEs pay to Chuangyi Technology annual service fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to Chuangyi Technology, a net cost-plus rate of no less than 0.5% in the case of Linghang Shengshi, and Jiaming Advertising, which final rate should be determined by Chuangyi Technology. It is at Chuangyi 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 Chuangyi Technology under AM Online’s technology development agreement shall be determined by AM Online and Chuangyi Technology at the first month of such year taking into account several factors. Those factors include the credential of the team of Chuangyi Technology that provides services to AM Online, the number of service hours, the nature and value of the services provided by Chuangyi Technology, the extent to which Chuangyi 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 Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi 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 Chuangyi Technology to provide consultation services in relation to management, training, marketing and promotion. AM Online agrees to pay to Chuangyi Technology the amount of annual service fees as determined by Chuangyi Technology. In the event Chuangyi Technology finds it necessary to make subsequent adjustment to the amount of fees, AM Online shall negotiate in good faith with Chuangyi 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 Chuangyi 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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
The VIE arrangements
-
continued
|
·
|
Call option agreement
:
Under the call option agreements between Chuangyi Technology and the shareholders of Linghang Shengshi, Beijing Yuehang and Jiaming Advertising, the shareholders of those VIEs irrevocably granted Chuangyi 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 Chuangyi Technology and the shareholders of AM Online, the shareholders of AM Online irrevocably granted Chuangyi 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 Chuangyi Technology and the shareholders of AM Online), Chuangyi 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 Chuangyi 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 Chuangyi Technology as a guarantor of the VIEs' performance obligations. The absence of a written guarantee agreement, however, does not affect our conclusion that the Group is 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 Chuangyi Technology's sole discretion.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
The VIE arrangements
-
continued
|
·
|
Equity pledge agreement:
Under the equity pledge agreements between Chuangyi 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 Chuangyi 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 Chuangyi 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 Chuangyi 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, Chuangyi 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 Chuangyi 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 Chuangyi 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 Chuangyi Technology or the call option agreement with respect to AM Online is terminated prior to its expiration.
|
Through the above contractual
arrangements, Chuangyi 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 Chuangyi Technology at its sole discretion. Accordingly, the Group has consolidated
the VIEs because the Group believes, through the contractual arrangements, (1) Chuangyi Technology could direct the activities
of the VIEs that most significantly affect its economic performance and (2) Chuangyi 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 Chuangyi Technology also serve in the VIEs as management or employees, certain operating
costs paid by Chuangyi 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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES – continued
|
The VIE arrangements
-
continued
Chuangyi Technology also entered
into loan agreements with each shareholder of AM Online, pursuant to which Chuangyi Technology permits to make loans in an aggregate
amount of RMB 40,000 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 Chuangyi Technology
objects. Chuangyi 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, Chuangyi 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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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 Chuangyi 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, Chuangyi
Technology, or the VIEs.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
73,362
|
|
|
$
|
53,573
|
|
Total non-current assets
|
|
|
122,489
|
|
|
|
60,375
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
195,851
|
|
|
|
113,948
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
63,302
|
|
|
|
99,895
|
|
Total non-current liabilities
|
|
|
25,528
|
|
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
88,830
|
|
|
$
|
102,658
|
|
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
16,311
|
|
|
$
|
23,759
|
|
|
$
|
24,546
|
|
Net loss
|
|
|
(81,659
|
)
|
|
|
(173,516
|
)
|
|
|
(86,344
|
)
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
1.
|
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
|
Risks in relation to the VIE
structure
- continued
The VIEs contributed an aggregate
of 98.8%, 100.0% and 100.0% of the consolidated net revenues for the years ended December 31, 2016, 2017 and 2018, respectively.
As of December 31, 2017 and 2018, the VIEs accounted for an aggregate of 85.6% and 87.8%, respectively, of the consolidated total
assets, and 85.6% and 88.9%, 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.
On December 23, 2018, the State
Council submitted the draft version of the Foreign Investment Law to the Standing Committee of the National People’s Congress,
which was promulgated by the National People’s Congress on its official site on December 26, 2018 for public consultation
until February 24, 2019. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which On
December 23, 2018, the PRC State Council submitted the draft version of the Foreign Investment Law to the Standing Committee of
the National People’s Congress, which was promulgated by the National People’s Congress on its official site on December
26, 2018 for public consultation until February 24, 2019. On March 15, 2019, the National People’s Congress approved the
Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign
investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise
Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.
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 operating losses
and had negative operating cash flows and may continue to generate negative cash flows as the Group implements its business plan
for 2019. There can be no assurance that the continuing efforts to execute the business plan will be successful and that the Group
will be able to continue as a going concern.
The Group incurred losses from
operations of $178,804 and $48,752 for the years ended December 31, 2017 and 2018. As of December 31, 2018, the Group had accumulated
deficit of $262,415. The Group had negative cash flows from operating activities for the years ended December 31, 2017 and 2018,
the net cash used in operating activities was $58,570 and $19,774 for the years ended December 31, 2017 and 2018. These conditions
raise substantial doubt about the Group’s ability to continue as a going concern.
The Group intends to meet the cash
requirements for the next 12 months from the issuance date of this report through a combination of bank loan, financing by way
of private placements, friends, family and business associates and management financial support. The Group will focus on the
following activities:
1. The Company plans to strengthen
the air Wi-Fi business to drive its revenues and bring in cash from operation;
2. The Company is focusing on improving
operation efficiency and cost reduction to standardize operations, enhance internal controls, and create synergy of the Company’s
resources;
3. The Company has also acquired
the financial support letter from Mr. Man Guo and Mr. Qing Xu, who have expressed the willingness and intention to provide the
necessary financial support to the Company, so as to enable the Company to meet its liabilities as and when it falls due and to
carry on its business without a significant curtailment of operations for the next 12 months from the issuance date of this report.
As a result, management prepared the consolidated financial statements assuming the Company will continue
as a going concern. As described above, the Company has a significant working capital deficiency, has incurred significant losses
and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described above.
However, there is no assurance that the measures above can be achieved as planned. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(c)
|
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.
|
(d)
|
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. In 2018, the group ceased gas station media business and on long-haul bus Wi-Fi business, and scaled down the on-train
Wi-Fi business. As these three businesses individually or in aggregate have no major effect on the Group’s financial positions,
operation and financial result, the cease of these businesses does not qualify as discontinued operations.
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 and valuation allowance for deferred tax assets. Actual results could differ from those estimates.
|
(f)
|
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(h)
|
Fair value of financial instruments
|
The Group's financial instruments
include cash, accounts receivable, amount due from related parties, accounts payable and amount due to shareholders. 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, 2017 and 2018.
The Group's financial assets and
liabilities measured at fair value on a non-recurring basis include equity investment and long-lived asset based on level 2 or
3 inputs.
|
(i)
|
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 relates to amount
required by the bank as frozen accounts by Court mainly due to the litigation as disclosed in Note 23.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(k)
|
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
|
Gas station display network equipment
|
|
5 years
|
Wi-Fi
|
|
5 years
|
Furniture and fixture
|
|
5years
|
Computer and office equipment
|
|
3-5 years
|
Vehicle
|
|
5 years
|
Software
|
|
5 years
|
Buildings
|
|
40 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 that extend the useful life 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.
|
(l)
|
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued
|
|
(m)
|
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. 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 equity investments that do not have readily determinable fair values the Group measures the equity investment
at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the Group.
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
On January 1, 2018, the Group adopted
ASC Topic 606, “Revenue from Contracts with Customers”, applying the modified retrospective method. The adoption did
not result in a material adjustment to the accumulated deficit as of January 1, 2018.
In accordance with ASC Topic 606,
revenues are recognized when control of the promised goods or services is transferred to the Group’s customers, in an amount
that reflects the consideration the Group expects to be entitled to in exchange for those goods or services. In determining when
and how much revenue is recognized from contracts with customers, the Group performs the following five-step analysis: (1) identify
the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations in the contract; (5) recognize revenue when (or as) the entity
satisfies a performance obligation.
The Group’s contract with
customers do not include multiple performance obligations, significant financing component and any variable consideration.
The Group is a principal as it
controls the specified good or service before that good or service is transferred to a customer. The Group is primarily responsible for fulfilling the promise to provide the specified good or service,
has inventory risk before the specified good or service has been transferred to a customer and has discretion in establishing the
price for the specified good or service.
Generally, the Group
recognizes revenue under ASC Topic 606 for each type of its performance obligation either over time (generally, the transfer of
a service) or at a point in time (generally, the transfer of content) as follows:
The Group's revenues are derived
from selling advertising time slots on the Group's advertising networks. For the years ended December 31, 2016, 2017 and 2018,
the advertising revenues were generated from air travel media network including TV-attached digital frames in airports, digital
TV screens in airports, digital TV screens on airlines, gas station media network and other media network such as on-train and
on long-haul bus Wi-Fi.
Revenue by service categories
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Travel Media Network
|
|
$
|
12,178
|
|
|
$
|
18,702
|
|
|
$
|
22,212
|
|
Gas Station Media Network
|
|
|
4,009
|
|
|
|
4,093
|
|
|
|
413
|
|
Other Media
|
|
|
410
|
|
|
|
1,533
|
|
|
|
2,151
|
|
|
|
$
|
16,597
|
|
|
$
|
24,328
|
|
|
$
|
24,776
|
|
Air Travel Media Network:
Through
air travel media network, revenues were generated from digital frames in airports in the form of TV-attached digital frames, digital
TV screens in airports, digital TV screens on airplanes. There are also other revenues in air travel mainly include revenues from
the display of media contents in air travel. For the advertising business, the Group typically signs standard contracts with its
advertising clients, who require the Group to run the advertiser's advertisements on the Group's network in airports, airlines
for a period of time which is the only performance obligation for a fixed price agreed in the contracts without variable considerations.
The Group recognizes advertising revenues ratably over the service period for which the advertisements are displayed, so long as
collection remains probable. For the program display business, the Group typically signs standard contracts with the customer who
has the copyright of movies or TV programs and requires the Group to play the program on the Group's digital TV screens on airlines
for a period of time which is the only performance obligation for a fixed price agreed in the contract. The Group recognizes program
display revenues ratably over the performance period for which the program is played, so long as collection remains probable.
Gas Station Media Network:
Through gas station media network, the Group sells advertising time slots through digital TV screens in gas stations which is the
only performance obligation included in the contracts. The Group signs fixed fee contracts with the end customers or agencies for
a specified period. The revenue is recognized on a straight-line basis over the specified period. This business is ceased in 2018
and no revenue will be generated from gas station in following years.
Other Media:
Through other
media network such as on-train and on long-haul bus Wi-Fi, the Group provides Wechat public account promotion through Wi-Fi network
and advertising and promotion articles publishing on both self-owned and third parties’ public accounts. Wechat public account
is an application account applied by individual, business or enterprise on the Wechat Public Platform through which communication
and interaction with specific groups of words, pictures, voice and video can be achieved. For the public account promotion business,
the passengers in the trains could connect to Wi-Fi for free via the Group's Wi-Fi equipment after registered as a member to that
public account as a follower in WeChat. The Group charges a fix rate per new member and collects service fee from the client who
owns the public accounts. The Group typically signs standard contracts with its clients, who require the Group to promote their
public accounts which is the only performance obligation defined in the contracts, and recognizes public account promotion revenue
by the quantities of members over the performance period multiplied by unit price defined in the contract. For the advertising
and promotion articles publishing business, the group has developed a public accounts pool which have already accumulated hundreds
and thousands of registered users (there are both self-owned and third parties’ public accounts). The Group typically signs
standard contracts with its clients, who require the Group to publish advertising articles on the public accounts to take advantage
of the existing users and recognizes advertising revenues by numbers of articles published on public accounts and the unit price
that defined in the contract which differs on the basis of user numbers of selected public accounts.
Deferred revenue
Prepayments from customers for
advertising service are deferred when corresponding performance obligation is not satisfied and recognized as revenue when the
advertising services are rendered. The balance of deferred revenue as of December 31, 2018 is $1,995, the majority of which is
$1,139 for the unsatisfied performance obligation with two customers with contracts amount of $5,672.
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. There were no revenue recognized for nonmonetary transactions for the years ended December 31, 2016,
2017 and 2018. No direct costs are attributable to the revenues.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(o)
|
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.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
The Group enters concession right
agreements with vendors such as airlines, railway bureaus and petroleum companies, under which the Group obtains the right to
use the spaces or equipment of the vendors to display the advertisements.
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 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 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 companies 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. 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.
In
2018, the Group
ceased our long-haul buses Wi-Fi service operations and gas station media services, and scaled down operations
in providing Wi-Fi services on trains
. The concession fees due to the petroleum companies will be
settled by providing equipment and future free service. Other prepaid concession fees made to railway bureaus are returned or to
be returned in the future.
|
(q)
|
Agency fees and Advertisement Publishing Fees
|
The Group pays fees to advertising
agencies for identifying and introducing advertisers to the Group and assisting in advertisement publishing based on a certain
percentage of revenues made through the advertisement agencies upon receipt of payment from advertisers. The agency fees and advertisement
publishing fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which
the advertisement is displayed. Prepaid and accrued agency fees and advertisement publishing fees are recorded as current assets
and current liabilities according to relative timing of payments made and advertising service provided.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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 $720, $1,209 and $623 for the years ended December 31, 2016, 2017 and 2018,
respectively, and have been included as part of selling and marketing expenses.
|
(t)
|
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, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
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.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes
is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations is extended to five years
under special circumstances, where the underpayment of taxes is more than RMB 100. In the case of transfer pricing issues, the
statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. According to Hong Kong Inland
Revenue Department, the statute of limitation is six years if any company chargeable with tax has not been assessed or has been
assessed at less than the proper amount, the statute of limitation is extended to 10 years if the underpayment of taxes is due
to fraud or willful evasion. In 2018, the Group incurred penalties of $4,324 related to underpayment or delayed payment for income
tax expense of previous years. The tax penalty of $2,664 is charged for one-year delay of income tax payment of 2015 rising from
the gain on transferring 75% equity of AM Advertising and the tax penalty of $1,660 is charged for the unpaid income tax expense
of 2016 for the deduction of bad debt allowance from taxable income before tax without chasing up for debt and filing a special
declaration of loss in asset. As of December 31, 2018, all the penalties have been paid off. For the transferring 20.32% equity
of AM Advertising of which the industrial and commercial registration procedure was completed in December 2018, the Group has filed
this equity transaction in the first quarter tax return filling in early 2019. For the deduction of bad allowance, the inspection
method has been changed from filing a declaration to reporting the loss by taxpayer. Hence, the Group did not have any material
outstanding interest or penalties associated with tax positions nor did the Group have any significant unrecognized uncertain tax
positions. The Group does not expect that its assessment regarding unrecognized tax positions will materially change over the next
12 months. The Group is not currently under examination by an income tax authority, nor has been notified that an examination is
contemplated.
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 on the measurement date as of each reporting date, with
a corresponding impact reflected in additional paid-in capital.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
Comprehensive loss includes net
loss and foreign currency translation adjustments and is presented net of tax. The tax effect is nil for the three years ended
December 31, 2016, 2017 and 2018 in the consolidated statements of comprehensive loss.
|
(x)
|
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 amounts of receivables ultimately
not collected by the Group have 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.
|
(y)
|
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. There are two customers
accounting for 10% or more of total revenue as of December 31, 2018, and there is one customer accounting for 10% of total
revenue as of December 31, 2017. There is a customer accounting for 10% or more of total accounts receivables as of December
31, 2018, and there is no customer accounting for 10% or more of total accounts receivables as of December 31, 2017.
Basic net loss per share are computed
by dividing net loss attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during
the year. Diluted net loss 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, as their effect would be anti-dilutive.
|
(aa)
|
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 $86, nil
and $10 for the years ended December 31, 2016, 2017 and 2018, respectively.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(bb)
|
Recent issued accounting standards
|
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. In July 2018, the FASB issued ASU No. 2018-10 and No. 2018-11, Leases
(ASC 842). ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU
2018-11 provides entities with an option of an additional transition method, by allowing entities to initially apply the new leases
standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period
of adoption. It also provides lessors an option to not separate lease and non-lease components when certain criteria are met.
In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, which clarifies
the accounting by lessors for taxes collected from lessees, certain lessor costs either paid by lessees directly to third parties
or paid by the lessor and reimbursed by the lessee, and variable payments received by lessors for contracts with lease and non-lease
components. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies certain aspects of the
new lease standard. The Group adopted the amendments in these ASUs on January 1, 2019 using the additional modified retrospective
transition method provided by ASU No. 2018-11. The adoption did not result in a material adjustment to the Group’s accumulated
deficit as of January 1, 2019. Based on the Group’s current office space lease agreements as of December 31, 2018, the remaining
balances of the right-of-use asset and related lease payment liability are $2,772 and $2,766, respectively, under modified retrospective
approach review.
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. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses”, which among other things, clarifies that receivables arising from operating leases are not within the scope of Subtopic
326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842,
Leases. For public entities, the amendments in these ASU are effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. The Group is currently evaluating this statement and its impact on its results of operations
or financial position.
In February 2018, the FASB issued
ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220). The amendments in this Update allow a reclassification
from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve
the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification
of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax
laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain
disclosures about stranded tax effects. Public business entities should apply the amendments in ASU 2018-02 for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted,
including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements
have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been
made available for issuance. The Group has completed the assessment of the adoption of this guidance on its consolidated financial
statements, the adoption of this guidance will not have a material impact on its consolidated financial statements.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
|
|
(bb)
|
Recent issued accounting standards - continued
|
In February 2018, the FASB
issued guidance to address the income tax accounting treatment of the tax effects within other comprehensive income due to
the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). This guidance allows entities to elect to reclassify
the tax effects of the change in the income tax rates from other comprehensive income to retained earnings. The guidance is
effective for periods beginning after December 15, 2018 although early adoption is permitted. In March 2018, the FASB issued
ASU No. 2018-05, Income Tax (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.
This update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff
regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which
the Tax Act was signed into law. The Group has completed the assessment of the adoption of this guidance on its consolidated
financial statements, the adoption of this guidance will not have a material impact on its consolidated financial
statements.
In June, 2018, the FASB issued
ASU No. 2018-07 to provide guidance to reduce cost and complexity and to improve financial reporting for share-based payments issued
to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). The amendments in this ASU are effective
for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Group has completed the assessment of the adoption of this guidance on its consolidated financial statements,
the adoption of this guidance will not have a material impact on its consolidated financial statements.
In August 2018, the
FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement”. The amendments in this ASU eliminate, add and modify certain
disclosure requirements for fair value measurements. The amendments in this ASU, among other things, require public companies
to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value
measurements. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019, and entities are permitted to early adopt either the entire standard or only
the provisions that eliminate or modify the requirements. The Group does not expect the adoption of these amendments to have
a material impact on our consolidated financial position and results of operations.
In October 2018, the FASB issued
ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU
2018-17 expands the accounting alternative that allows private companies the election not to apply the variable interest entity
guidance to qualifying common control leasing arrangements. ASU 2018-17 broadens the scope of the private company alternative to
include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17 also eliminates
the requirement that entities consider indirect interests held through related parties under common control in their entirety when
assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests
on a proportionate basis. The amendments are effective for public business entities for fiscal years ending after December 15,
2019. Early adoption is permitted. The Group is currently assessing the timing and impact of adopting the updated provisions to
its consolidated financial statements.
Recently issued ASUs by the FASB,
except for the ones mentioned above, and are not expected to have a significant impact on the Group’s consolidated results
of operations or financial position.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
3.
|
SEGMENT INFORMATION AND REVENUE ANALYSIS
|
The Group is mainly engaged in
selling advertising time slots on their network, primarily air travel advertising network, gas station media 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.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
4.
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable, net, consists
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
$
|
15,571
|
|
|
$
|
13,424
|
|
Less: Allowance for doubtful accounts
|
|
|
(4,591
|
)
|
|
|
(5,486
|
)
|
Accounts receivable, net
|
|
$
|
10,980
|
|
|
$
|
7,938
|
|
Movement of allowance for doubtful
accounts is as follows:
|
|
Allowance for doubtful accounts
|
|
January 1, 2016
|
|
$
|
1,727
|
|
Addition
|
|
|
2,248
|
|
Write off
|
|
|
-
|
|
Exchange rate adjustment
|
|
|
(160
|
)
|
December 31, 2016
|
|
|
3,815
|
|
Addition
|
|
|
1,403
|
|
Write off
|
|
|
(883
|
)
|
Exchange rate adjustment
|
|
|
256
|
|
December 31, 2017
|
|
|
4,591
|
|
Addition
|
|
|
1,184
|
|
Write off
|
|
|
-
|
|
Exchange rate adjustment
|
|
|
(289
|
)
|
December 31, 2018
|
|
$
|
5,486
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
5.
|
OTHER CURRENT ASSETS, NET
|
Other current assets, net, consist
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
Gross
|
|
|
Allowance
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Input VAT receivable
|
|
$
|
20,670
|
|
|
$
|
-
|
|
|
$
|
20,670
|
|
|
$
|
17,540
|
|
|
$
|
-
|
|
|
$
|
17,540
|
|
Prepaid selling and marketing fees
|
|
|
1,708
|
|
|
|
-
|
|
|
|
1,708
|
|
|
|
308
|
|
|
|
-
|
|
|
|
308
|
|
Short-term deposits
|
|
|
129
|
|
|
|
-
|
|
|
|
129
|
|
|
|
711
|
|
|
|
-
|
|
|
|
711
|
|
Prepaid income tax
|
|
|
273
|
|
|
|
-
|
|
|
|
273
|
|
|
|
264
|
|
|
|
-
|
|
|
|
264
|
|
Prepaid individual income tax and other employee advances
|
|
|
435
|
|
|
|
-
|
|
|
|
435
|
|
|
|
224
|
|
|
|
-
|
|
|
|
224
|
|
Loans to third parties (i)
|
|
|
41,733
|
|
|
|
(40,748
|
)
|
|
|
985
|
|
|
|
38,242
|
|
|
|
(38,061
|
)
|
|
|
181
|
|
Receivable from third party (ii)
|
|
|
4,317
|
|
|
|
(257
|
)
|
|
|
4,060
|
|
|
|
4,463
|
|
|
|
(1,242
|
)
|
|
|
3,221
|
|
Receivable from non-controlling interest holders
|
|
|
3,170
|
|
|
|
-
|
|
|
|
3,170
|
|
|
|
1,178
|
|
|
|
-
|
|
|
|
1,178
|
|
Receivable from AM Advertising and its subsidiaries (iii)
|
|
|
26,160
|
|
|
|
(3,734
|
)
|
|
|
22,426
|
|
|
|
22,726
|
|
|
|
(8,787
|
)
|
|
|
13,939
|
|
Other prepaid expenses
|
|
|
7,346
|
|
|
|
(2,543
|
)
|
|
|
4,803
|
|
|
|
6,753
|
|
|
|
(3,988
|
)
|
|
|
2,765
|
|
Others
|
|
|
1,166
|
|
|
|
-
|
|
|
|
1,166
|
|
|
|
726
|
|
|
|
-
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,107
|
|
|
$
|
(47,282
|
)
|
|
$
|
59,825
|
|
|
$
|
93,135
|
|
|
$
|
(52,078
|
)
|
|
$
|
41,057
|
|
|
(i)
|
These third parties provide outdoor advertising services to their customers. Loans to third parties are in order to secure them to provide advertising services at prime locations to the Group. For the years ended December 31, 2017 and 2018, the Group entered into various loan agreements with third parties with aggregated amount of $41,733 and $38,242, respectively with the terms of one year. The interest rates were from 4.35% to 5% without any assets pledged for the years ended December 31, 2017 and 2018, respectively. As of December 31, 2017, the management conducted a review on the outstanding loans, and the review discovered that market conditions under which the third parties competed deteriorated unexpectedly in 2017, which imposed adverse constraints on their ability to repay the loans. As of December 31, 2017 and 2018, the bad debt allowance for loan to third parties amounted to $40,748 and $38,061, respectively.
|
|
(ii)
|
Receivable from third party mainly represented the concession fee deposits of Guangzhou Meizheng for the down-scaled
operations
in providing Wi-Fi services on trains that is expected to be refunded within one year. As of December 31, 2017 and 2018, the management
conducted a review on the outstanding balance and recorded bad debt provision on other current assets for which the collectability
is assessed to be remote.
As of December 31, 2017 and 2018, the bad debt allowance was $257 and $1,242, respectively.
|
|
(iii)
|
Receivable from AM Advertising
and its subsidiaries balance amounted to $26,160 and $22,726 as of December 31, 2017 and 2018, respectively. As of December 31,
2017 and 2018, $3,734 and $8,787 of bad debt allowance were made for the receivable balance, respectively. The net balance $13,939
as of December 31, 2018 represents the loan due form AM advertising to support its operations of RMB88,000 in principal balance
and RMB7,840 in interests.
On March 28, 2018, August 23,
2018 and November 2018, the Group entered into a MoU of transaction of 75% equity transfer of AM Advertising in 2015 and its supplemental
agreements with Longde Wenchuang and Beijing Cultural Center Construction and Development Fund (Limited Partnership), Beijing Linghang
Shengshi Advertising Co., Ltd. (“Linghang Shengshi”) and Mr. Guo have agreed to pay or make available to AM Advertising
on or prior to May 30, 2018 and further extended to September 30, 2018 and December 31, 2018 an aggregate of RMB304,554 which was
to be discounted by the following amounts (i) the RMB152,000 profits attributable to Linghang Shengshi for the first nine months
of 2015; (ii) the loan of RMB88,000 in principal balance and RMB7,840 in interests; and (iii) the payment of RMB56,714 in cash.
When the MoU is settled in future, the net balance of receivable from AM Advertising and its subsidiaries will be cleared off.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016,
2017 AND 2018
(In U.S. dollars in thousands, except
share and per share data)
6.
|
PREPAID CONCESSION FEES
|
The Group enters concession right
agreements with vendors such as airlines, railway bureaus and petroleum companies, under which the Group obtains the right to use
the spaces or equipment of the vendors to display the advertisements. The balance of prepaid concession fees for the years ended
December 31, 2017 and 2018 are $7,064 and $1,813, respectively. The decline of prepayment is due to amortization and the refund
of the prepaid concession fee during the year ended December 31, 2018. In addition, the scale down of on-train Wi-Fi business leads
to recollections and reduced prepayment made during the year and the balances expected to be collected in 2019 are reclassified
to other current assets.
7.
|
ACQUIRED INTANGIBLE ASSETS, NET
|
Acquired intangible assets, net,
consist of the following:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
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
|
|
$
|
213
|
|
|
$
|
(37
|
)
|
|
$
|
(176
|
)
|
|
$
|
-
|
|
|
$
|
218
|
|
|
$
|
(38
|
)
|
|
$
|
(180
|
)
|
|
$
|
-
|
|
Customer relationships
|
|
|
735
|
|
|
|
(735
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
751
|
|
|
|
(751
|
)
|
|
|
-
|
|
|
|
-
|
|
Contract backlog
|
|
|
1,536
|
|
|
|
(1,536
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,570
|
|
|
|
(1,570
|
)
|
|
|
-
|
|
|
|
-
|
|
Concession agreements
|
|
|
10,404
|
|
|
|
(8,529
|
)
|
|
|
(1,875
|
)
|
|
|
-
|
|
|
|
10,632
|
|
|
|
(8,716
|
)
|
|
|
(1,916
|
)
|
|
|
-
|
|
Non-compete agreements
|
|
|
182
|
|
|
|
(172
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
185
|
|
|
|
(175
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,070
|
|
|
$
|
(11,009
|
)
|
|
$
|
(2,061
|
)
|
|
|
-
|
|
|
$
|
13,356
|
|
|
$
|
(11,250
|
)
|
|
$
|
(2,106
|
)
|
|
|
-
|
|
The amortization expense for
the years ended December 31, 2016, 2017 and 2018 were $510, $501 and nil, respectively. Due to the continuing losses and significant
reduced revenue, the Group recognized an impairment loss of $1,228 for the year ended December 31, 2017, all the intangible assets
are fully impaired as of December 31, 2017.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
8.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment, net, consist
of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Digital display network equipment
|
|
$
|
6,548
|
|
|
$
|
6,183
|
|
Wi-Fi and network equipment
|
|
|
36,431
|
|
|
|
34,476
|
|
Gas station display network equipment
|
|
|
43,079
|
|
|
|
39,523
|
|
Software
|
|
|
9,764
|
|
|
|
9,241
|
|
Office property
|
|
|
11,506
|
|
|
|
10,888
|
|
Computer and office equipment
|
|
|
3,264
|
|
|
|
3,058
|
|
Vehicle
|
|
|
817
|
|
|
|
773
|
|
Leasehold improvement
|
|
|
2,262
|
|
|
|
2,783
|
|
Furniture and fixture
|
|
|
994
|
|
|
|
1,086
|
|
Total original costs
|
|
|
114,665
|
|
|
|
108,011
|
|
Less: impairment
|
|
|
(51,702
|
)
|
|
|
(48,885
|
)
|
Less: accumulated depreciation
|
|
|
(47,521
|
)
|
|
|
(45,660
|
)
|
Construction in progress
|
|
|
514
|
|
|
|
569
|
|
Less: impairment on construction in process
|
|
|
(514
|
)
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
15,442
|
|
|
$
|
13,466
|
|
Depreciation expense recorded for
the years ended December 31, 2016, 2017 and 2018 were $12,461, $11,547 and $1,560 respectively. Impairment loss recorded for the
years ended December 31, 2016, 2017 and 2018 were $826, $49,468 and $564 respectively.
|
9.
|
PREPAID EQUIPMENT COST
|
For the year ended December 31, 2017,
the Group recognized an impairment loss of $16,646 for the LED screens purchased from Elec-Tech International Co., Ltd. or its
subsidiaries as the ordered equipment was out of dated, and the prepaid equipment cost balance of $290 mainly represented the prepayment
made for the leasehold improvement. For the year ended December 31, 2018, the prepaid equipment cost balance represents prepayment
for airline Wi-Fi equipment of $2,364.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
10.
|
LONG-TERM INVESTMENTS
|
|
(a)
|
Equity method investments
|
The Group had the following equity method investments, other-than-temporary impairment of $1,993 and $2,408
were recognized as of December 31, 2017 and 2018, respectively:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of company
|
|
Percentage of
ownership
|
|
|
Amount
|
|
|
Percentage of
ownership
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
Equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Eastern Media Corporation Ltd. (“BEMC “) (1)
|
|
|
49
|
|
|
$
|
1,618
|
|
|
|
49
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Hezhong Chuangjin Investment Co., Ltd. ("Hezhong Chuangjin") (2)
|
|
|
15
|
|
|
|
1,993
|
|
|
|
15
|
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lanmeihangbiao Tiandi Internet Investment Management (Beijing) Co., Ltd. ("LMHB") (3)
|
|
|
40
|
|
|
|
223
|
|
|
|
40
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Yuyue Film Culture Co., Ltd (“Yuyue Film”) (4)
|
|
|
25
|
|
|
|
362
|
|
|
|
25
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unicom AirNet (Beijing) Network Co., Ltd. ("Unicom AirNet") (5)
|
|
|
39
|
|
|
|
17,422
|
|
|
|
39
|
|
|
|
15,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment on equity method investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hezhong Chuangjin (2)
|
|
|
|
|
|
|
(1,993
|
)
|
|
|
|
|
|
|
(1,886
|
)
|
LMHB (3)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(179
|
)
|
Yuyue Film (4)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments, net
|
|
|
|
|
|
$
|
19,625
|
|
|
|
|
|
|
$
|
17,182
|
|
|
(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. $198,
$57 and $247 gain on investment were picked up for the years ended December 31, 2016, 2017 and 2018, respectively.
|
|
(2)
|
In May 2015, the Group, together with several other third
party companies established Hezhong Chuangjin, which mainly focuses on internet financing. 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.
$59, $78 and nil loss on investment were picked up for the years ended December 31, 2016, 2017 and 2018, respectively. The operation
has been ceased from December 2017, the investment has been provided full impairment of $1,993 and $1,886 as of December 31, 2017
and 2018, respectively, with foreign currency translation adjustment.
|
|
(3)
|
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 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. $175, $48 and $33 loss on investment were
picked up for the years ended December 31, 2016, 2017 and 2018, respectively. The investment has been provided full impairment
loss of $185 for the year ended December 31, 2018.
|
|
(4)
|
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. Nil, $95 and nil loss on investment were pick up for the years ended December 31, 2016, 2017 and 2018, respectively. The
investment has been provided full impairment loss of $355 for the year ended December 31, 2018.
|
|
(5)
|
On February 22, 2017, AM Online established Unicom AirNet,
jointly with Unicom Broadband Online Co., Ltd. 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 RMB117,900 in Unicom AirNet. After this transaction, AM Online currently holds 39% of equity
interests in Unicom AirNet. 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 Unicom AirNet. $661 and $1,114 loss on investment was picked up for the
years ended December 31, 2017 and 2018, respectively.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
10.
|
LONG-TERM INVESTMENTS - continued
|
|
(b)
|
Cost method investments
|
The Group had the following cost method investments, other-than-temporary impairment of nil and $49,273 was
recognized as of December 31, 2017 and 2018, respectively:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of company
|
|
Percentage of
ownership
|
|
|
Amount
|
|
|
Percentage of
ownership
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
Zhangshangtong Air Service (Beijing) Co., Ltd. ("Zhangshangtong") (1)
|
|
|
20
|
|
|
$
|
415
|
|
|
|
20
|
|
|
$
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Zhongjiao Huineng Information Technology Co., Ltd (“Zhongjiao Huineng”) (2)
|
|
|
13
|
|
|
|
577
|
|
|
|
13
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AM Advertising (3)
|
|
|
20
|
|
|
|
81,817
|
|
|
|
20
|
|
|
|
77,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment on cost method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhangshangtong (1)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(392
|
)
|
Zhongjiao Huineng (2)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(546
|
)
|
AM Advertising (3)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(48,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost method investment, net
|
|
|
|
|
|
$
|
82,809
|
|
|
|
|
|
|
$
|
29,089
|
|
|
(1)
|
In June 2010, the Group acquired 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. In 2018, impairment loss of $407 has been recorded for this investment considering the carrying
value is not recoverable.
|
|
(2)
|
In January 2016, the Group acquired 13.3% equity interest
in Zhongjiao Huineng, a company established in the PRC that is mainly engaged in providing WIFI and GPS service to logistic industry.
In 2018, impairment loss of $567 has been recorded for this investment considering the carrying value is not recoverable.
|
|
(3)
|
The investment in AM Advertising was accounted for using
the cost method of accounting, as the Group does not have the ability to exercise significant influence to the operation from
2016. In December 2018, the Group transferred the 20.32% equity interests in AM Advertising but did not derecognized this long-term
investment considering the existence of continuing involvement and more than trivial benefit owned by the Group. Meanwhile the
Group determined the fair value of this investment in AM Advertising according to the transaction price, which became the new
basis of the investment. Hence, the investment impairment loss of nil and $50,159 in AM Advertising has been recorded for the
years ended December 31, 2017 and 2018, respectively.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
11.
|
OTHER NON-CURRENT ASSETS
|
Other non-current assets consist of
the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Investment in film and TV series (i)
|
|
$
|
1,407
|
|
|
$
|
1,407
|
|
Leasehold improvement fees (ii)
|
|
|
798
|
|
|
|
-
|
|
Less: Impairment on the investment in films and TV series
|
|
|
-
|
|
|
|
(1,407
|
)
|
Total other non-current assets, net
|
|
$
|
2,205
|
|
|
$
|
-
|
|
|
(i)
|
The Group enters into agreements with other investors to
invest together on certain films and TV series, which are produced by other third parties, and shares profit of the invested films
and TV series based on its percentage of the total investment for films or TV series. The investment has been provided full impairment
of $1,407 for the year ended December 31, 2018 as the investment is not expected to be recoverable.
|
|
(ii)
|
The balance of leasehold improvement fee was $798 as of
December 31, 2017, which has been amortized into expense for the year ended December 31, 2018.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
Long-term deposits consist of the following:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Concession fee deposits
|
|
$
|
5,516
|
|
|
$
|
920
|
|
Office rental deposits
|
|
|
523
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Total long-term deposits
|
|
$
|
6,039
|
|
|
$
|
1,350
|
|
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. As the Group ceased the gas station media and on-bus Wi-Fi
business and scaled down on-train Wi-Fi business, most of concession fee deposit has been refunded, reclassified into other current
assets or impaired according to assessment of recoverability.
The long-term deposits are not within
the scope of the ASC 310-10-25 regarding interests on receivables, 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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
13.
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities
consist of the follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accrued payroll and welfare
|
|
$
|
2,249
|
|
|
$
|
1,719
|
|
Other tax payable
|
|
|
1,314
|
|
|
|
350
|
|
Accrued staff disbursement
|
|
|
1,460
|
|
|
|
1,214
|
|
Deposit payable
|
|
|
613
|
|
|
|
247
|
|
Accrued professional fees
|
|
|
166
|
|
|
|
172
|
|
Other current liabilities (i)
|
|
|
868
|
|
|
|
2,500
|
|
Payable to AM Advertising and its subsidiaries (ii)
|
|
|
5,566
|
|
|
|
3,556
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,236
|
|
|
$
|
9,758
|
|
|
(i)
|
The other current liabilities represent other payable to
third parties of $1,265 and payable to capital withdraw of non-controlling shareholders of $1,235.
|
|
(ii)
|
The amounts due to AM Advertising and its subsidiaries
mainly represent the operation borrowings payable.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
AirMedia is a tax-exempted company incorporated
in the Cayman Islands.
Broad Cosmos is tax-exempted company
incorporated in the British Virgin Islands.
AN China did not have any assessable
profits arising in or derived from Hong Kong for the years ended December 31, 2016, 2017 and 2018, and accordingly no provision
for Hong Kong Profits Tax was made in these years. According to Tax (Amendment) (No. 3) Ordinance 2018 published by Hong Kong government,
form April 1, 2018, under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million of assessable
profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations
and 7.5% (half of the standard rate) for unincorporated businesses (mostly partnerships and sole proprietorships). Assessable profits
above $2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated
businesses. AN China is qualified to elect the tax rate of 8.25% as it has no assessable profit in 2018.
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.
Chuangyi Technology qualified for
the High and New-Tech Enterprise ("HNTE") and maintained the status that would allow for a reduced 15% tax rate under
EIT Law from year 2006 to 2017. Hence, Chuangyi Technology was subject to an EIT rate of 15%, 15% and 25% in 2016, 2017, and 2018,
respectively.
Xi’an Shengshi 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 Shengshi 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 Shengshi
qualified as HNTE and entitled to an EIT rate of 15% for the years 2014, 2015 and 2016, and Xi’an AM is subject to EIT at
a rate of 25% from 2017 afterwards.
Wangfan Linghang qualified for the
HNTE at the end of 2017 and entitled to an EIT rate of 15% for the years 2017, 2018 and 2019.
Beijing Yuehang Tianyi qualified
for the HNTE in 2018 and entitled to an EIT rate of 15% for the years 2018, 2019 and 2020.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
14.
|
INCOME TAXES - continued
|
Income tax expenses are as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
50
|
|
|
$
|
633
|
|
|
$
|
150
|
|
Deferred
|
|
|
4,433
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4,483
|
|
|
$
|
663
|
|
|
$
|
150
|
|
The principal components of the Group's
deferred income tax assets and liabilities are as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
12,270
|
|
|
$
|
14,173
|
|
Amortization of intangible assets
|
|
|
1,163
|
|
|
|
232
|
|
Net operating loss carry forwards
|
|
|
51,769
|
|
|
|
69,835
|
|
Excess marketing and advertising expense (15%)
|
|
|
-
|
|
|
|
12
|
|
Share transfer gain according to Tax Law
|
|
|
-
|
|
|
|
(1,934
|
)
|
Unrealized exchange gains
|
|
|
-
|
|
|
|
(378
|
)
|
Total deferred tax assets
|
|
|
65,202
|
|
|
|
81,940
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(65,202
|
)
|
|
|
(81,940
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
14.
|
INCOME TAXES - continued
|
The valuation allowance provided
as of December 31, 2016, 2017 and 2018 relates to the deferred tax assets generated by the Group’s VIEs. 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 $302,480 as of
December 31, 2018. The net operating loss carry forwards for the PRC subsidiaries will expire on various dates through year 2023.
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
$
|
(84,759
|
)
|
|
$
|
(178,548
|
)
|
|
$
|
(93,269
|
)
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax at statutory tax rate
|
|
|
(21,190
|
)
|
|
|
(44,637
|
)
|
|
|
(23,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for tax purpose
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment expenses exceeded the tax limit
|
|
|
158
|
|
|
|
91
|
|
|
|
132
|
|
Tax effect of impairment loss on property and equipment and intangible assets
|
|
|
-
|
|
|
|
12,539
|
|
|
|
302
|
|
Tax effect of other permanent differences
|
|
|
1,688
|
|
|
|
2,482
|
|
|
|
4,900
|
|
Changes in valuation allowance
|
|
|
22,200
|
|
|
|
28,815
|
|
|
|
16,738
|
|
Effect of preferential tax rates granted to PRC entities
|
|
|
642
|
|
|
|
670
|
|
|
|
689
|
|
Effect of income tax rate difference in other jurisdictions
|
|
|
984
|
|
|
|
673
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
$
|
4,482
|
|
|
$
|
633
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates
|
|
|
(5.3
|
)%
|
|
|
(0.4
|
)%
|
|
|
(0.2
|
)%
|
A valuation allowance was provided
against deferred tax assets in entities where it was determined, it was more likely than not that the benefits of the deferred
tax assets will not be realized. The Group had deferred tax assets which consisted of tax loss carry-forwards, accruals and reserves
which can be carried forward to offset future taxable income. Management determined it is more likely that deferred tax assets
could not be utilized, so a valuation allowance was provided as of December 31, 2017 and 2018. The net valuation allowance increased
by $22,200, $28,815 and $16,738 during the years ended December 31, 2016, 2017 and 2018, respectively.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
14.
|
INCOME TAXES - continued
|
The Group incurred penalties
of nil, nil and $4,324 related to underpayment or delayed payment for income tax expense for the years ended December 31, 2016,
2017 and 2018. The tax penalty of $2,664 is charged for one-year delay of income tax payment of 2015 rising from the gain on transferring
75% equity of AM Advertising and the tax penalty of $1,660 is charged for the unpaid income tax expense of 2016 for the deduction
of bad debt allowance from taxable income before tax without chasing up for debt and filing a special declaration of loss in asset.
As of December 31, 2018, all the penalties have been paid off. For the transferring 20.32% equity of AM Advertising of which the
industrial and commercial registration procedure was completed in December 2018, the Group has filed this equity transaction in
the first quarter tax return filling in early 2019. For the deduction of bad allowance, the inspection method has been changed
from filing a declaration to reporting the loss by taxpayer. Hence, the Group did not identify significant unrecognized tax benefits
for the years ended December 31, 2016, 2017 and 2018.
Since the commencement of operations
in August 2005, only Chuangyi Technology and Shenzhen Yuehang 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.
The Group is not currently under examination by any income taxing authority, nor has it been notified of an impending examination.
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 2018, 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, 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 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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
The calculation of the net loss per
share is as follows:
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to AirMedia Group Inc.'s ordinary shareholders
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing net loss per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
125,277,056
|
|
|
|
125,629,779
|
|
|
|
125,653,175
|
|
Weighted average shares used in calculating loss per ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
12,527,706
|
|
|
|
12,562,978
|
|
|
|
12,565,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.52
|
)
|
|
$
|
(1.25
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per ADS (i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(5.24
|
)
|
|
$
|
(12.46
|
)
|
|
$
|
(7.17
|
)
|
|
(i)
|
On March 29, 2019, Airmedia Group Inc., JPMorgan Chase Bank, as depositary, and all holders from time to time
of American Depositary Shares entered into Amended and Restated Deposit Agreement to combine original 5 ADSs to 1 ADSs. After the
agreement is executed, 1 ADS amounted to $0.01 par value represents 10 ordinary shares amounted to 0.001 per share par value. The
Group presents net loss
attributable to AirMedia Group
Inc.'s ordinary shareholders per ADS by retrospectively adjusting to all periods presented.
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
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 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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
16.
|
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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
16.
|
SHARE BASED PAYMENTS - continued
|
The following summary of stock option
activities under the 2007, 2011 and 2012 Share incentive plans as of December 31, 2018, reflective of all modifications is presented
below:
|
|
Outstanding Options
|
|
|
|
|
|
|
Weighted
average
exercise
|
|
|
Weighted
average
|
|
|
Weighted
average
remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
price
|
|
|
grant-date
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
options
|
|
|
per option
|
|
|
fair value
|
|
|
terms
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2018
|
|
|
5,868,528
|
|
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
|
0.75
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(2,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
5,857,755
|
|
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
|
-
|
|
|
$
|
-
|
|
Options vested and expected to vest as of December 31, 2018
|
|
|
5,857,755
|
|
|
|
1.15
|
|
|
|
1.05
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2018
|
|
|
5,857,755
|
|
|
$
|
1.15
|
|
|
$
|
1.05
|
|
|
|
-
|
|
|
$
|
-
|
|
The total intrinsic value of
options exercised during the years ended December 31, 2016, 2017 and 2018 were $1,928, nil and nil respectively. The Group
recorded share-based compensation of $773, $343 and $45 for the years ended December 31, 2016, 2017 and 2018, respectively. There
was $45 and nil of total unrecognized compensation expense related to unvested share options granted as of December 31, 2017 and
2018, respectively. The expense is expected to be recognized over a weighted-average period 0.75 and 0 years on a straight-line
basis as of December 31, 2017 and 2018, respectively.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
16.
|
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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
17.
|
FAIR VALUE MEASUREMENT
|
Measured on recurring basis
The Group measured its financial
assets and liabilities, including cash and cash equivalents, accounts receivable, amounts due from related parties, prepaid equipment
costs, accounts payable and amounts to from related parties on a recurring basis as of December 31, 2017 and 2018.
Cash and cash equivalents and restricted
cash 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, amounts due from related parties, prepaid equipment cost and accounts payable
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, undiscounted future cash
flows 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 $826, $67,342 and $564 impairment
charged for the years ended December 31, 2016, 2017 and 2018, respectively.
The Group measured its long-term
investment in AM Advertising at fair value on a nonrecurring basis as result of the disposal transaction. The fair value was determined
using the market approach (AM Advertising’s recent capital transaction announced to the public) with unobservable inputs
to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities (Level 2 inputs).
The impairment recorded was nil, nil and $48,335 as of December 31, 2016, 2017 and 2018, respectively.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
18.
|
SHARE REPURCHASE PLAN
|
On March 21, 2011, the Board of Directors
authorized the Company to repurchase up to $20,000 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 $40,000 of its own outstanding
ADS and to extend the termination date of the share repurchase program to March 20, 2014.
Up to December 31, 2018, the
Company had repurchased an aggregate of 1,306,486 ADSs from the open market for a total consideration of $17,400, of which 438,137
ADSs had been cancelled and 868,349 ADSs were recorded as treasury stock. As of December 31, 2017 and 2018, accumulated 665,121
and 665,121 ADS of treasury stock have been reissued. On April 11, 2019, upon the execution of Amended and Restated Deposit Agreement
which was agreed by Airmedia Group Inc. and JPMorgan Chase Bank, as depositary, 5 original ADSs is combined to 1 new ADS. The Group
presents the number of ADSs by retrospectively adjusting to all periods presented. There were no repurchase or cancel of ADSs during
the year ended December 31, 2018
|
19.
|
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 $4,029, $3,256 and $3,434 for the years ended December 31, 2016, 2017 and 2018, 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 no statutory reserves during the years ended December 31, 2016, 2017 and 2018. 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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
21.
|
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 paid-in-capital, additional paid-in-capital and statutory reserves 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, 2017, the
balance of restricted net assets was $376,835, of which $159,565 was attributed to the paid-in-capital, additional paid-in-capital
and statutory reserves of the VIEs and VIEs' subsidiaries, and $217,270 was attributed to the paid in capital, additional paid-in-capital
and statutory reserves of WFOE. As of December 31, 2018, the balance of restricted net assets was $351,978, of which $146,375 was
attributed to the paid-in-capital, additional paid-in-capital and statutory reserves of the VIEs and VIEs' subsidiaries, and $205,603
was attributed to the paid in capital, additional 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 2021 and are renewable upon negotiation.
Rental expenses under operating leases for the years ended December 31, 2016, 2017 and 2018 were $1,988, $2,854 and $2,076 respectively.
Future minimum rental lease payments under
non-cancellable operating leases agreements were as follows:
Year ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,085
|
|
2020
|
|
|
854
|
|
2021
|
|
|
400
|
|
2022
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
2,339
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
The Group has entered into concession
right agreements with vendors, such airlines, trains and petroleum companies. The contract terms of such concession rights are
usually three to five years. The concession rights expire through 2022 and are renewable upon negotiation. Concession fees charged
into statements of operations for the years ended December 31, 2016, 2017 and 2018 were $23,470, $28,559 and $20,976 respectively.
Future minimum concession fee payments
under non-cancellable concession right agreements were as follows:
Year ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
$
|
13,227
|
|
2020
|
|
|
11,436
|
|
2021
|
|
|
283
|
|
2022
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
24,946
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
23.
|
CONTINGENT LIABILITIES
|
|
(a)
|
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 travelers 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, 2018, 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, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
23.
|
CONTINGENT LIABILITIES - continued
|
|
(b)
|
AM Advertising Dispute
|
Linghang Shengshi had served a legal
letter, dated June 29, 2016 (the “Legal Letter”), on Longde Wenchuang to challenge the proposed transfers by Longde
Wenchuang 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,
Linghang 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 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 sought consent from Linghang 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, Linghang Shengshi challenges the validity of the Transfer on the ground that it violated the statutory right
of first refusal of Linghang Shengshi under the Company Law. Subsequent to the Group’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, Chuangyi Technology, Linghang 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 Group 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 Linghang 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
Group 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 Group believes the arbitration request is
without merit and intends to defend the actions vigorously. However, no assurances can be provided that the Group 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 10) as of December 31, 2016, 2017 and 2018. 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. On March 28, 2018, August 23, 2018 and November 2018, a MoU and its
supplemental agreements respectively, with, among others, Longde Wenchuang and Beijing Cultural Center Construction and
Development Fund (Limited Partnership), under which, among other things, Linghang Shengshi and Mr. Guo have agreed to pay or
make available to AM Advertising on or prior to May 30, 2018 and further extended to September 30, 2018 and December 31, 2018
an aggregate of RMB304,554 which was to be discounted by the following amounts (i) the RMB152,000 profits attributable to
Linghang Shengshi, Mr. Guo and Mr. Xu for the first nine months of 2015, based on a third-party pro forma audit report on AM
Advertising; (ii) the loan of RMB88,000 in principal balance and RMB7,840 in interests; and (iii) the payment of RMB56,714 in
cash after the sale of the 20.32% equity interests in AM Advertising, which consisted of 20.18% equity interests hold by the
Group and 0.14% equity interests hold by Mr. Man Guo and Mr. Qing Xu on behalf of the Group, and following the completion of
the foregoing arrangements, our obligations with respect to the profit target for 2015, the earnout provision for the first
nine months of 2015 and the loans between AM Advertising and Linghang Shengshi shall be deem completed. According to the
aforesaid MoU, after Linghang Shengshi, Mr. Guo and Mr. Xu transfer all the equity interest of AM Advertising, they
will cease to be shareholders of AM Advertising and will not be able to continuously assume the obligations in connection
with the profit commitment and earn out provision as a matter of fact.
As of December 31, 2018, the sale
of the 20.32% equity interests in AM Advertising has been completed, while the cash payment of RMB56,714 to Longde Wenchuang and
Beijing Cultural Center Construction and Development Fund (Limited Partnership) has not been paid yet by the Group. Upon the effectiveness
of MoU, the Group wrote off the contingency of provision for earnout provision, and recorded an actual payable of earnout provision
in the amount of RMB152,554, after the deduction loan of RMB88,000 in principal balance and RMB7,840 in interests.
|
(c)
|
GreatView
Media Dispute
|
On September 29, 2018, SINOPEC
Shanghai Oil Products Company (the “SINOPEC Shanghai”) brought before the district court of Huangpu, Shanghai a legal
action against GreatView Media and AM Advertising. As plaintiff, SINOPEC Shanghai plead to the court a) to dissolve the advertising
service agreement and supplementary agreement signed between SINOPEC Shanghai and GreatView Media; b) to support its claim to
an overdue concession fee of RMB 24,351 over the period starting from September 2009 to February 2018, which may be subject to
change, payable by GreatView Media; c) to support its claim to an overdue electricity bill of RMB 2,947 over the period starting
from September 2009 to February 2018, which may be subject to change, payable by GreatView Media; d) to support its claim holding
AM Advertising liable to both the overdue concession fee and electricity bill; and e) to support its claim that the legal fees
shall be borne by the defendants. As of December 31, 2018, The Group did not record a provision for this matter as the management
believes the possibility of adverse outcome of the matter is remote and the liability it may incur would not have a material adverse
effect on its consolidated financial statements. In February 2019, RMB 27,298 has been paid to the court by Linghang Shengshi
on behalf of GreatView Media as security of this matter, which will be returned to the Group after the case closes if the Group
wins the case. As of the date of this annual report, the Group is not able to predict the ultimate outcome and the possible range
of the potential impact of failure primarily due to the legal action has just proceeded with the first court appearance and an
exchange of evidence between the plaintiff and the defendants.
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
|
24.
|
RELATED PARTY TRANSACTIONS
|
|
(a)
|
Details of outstanding balances with the Group's related
parties as of December 31, 2017 and 2018 were as follows:
|
Amount due from related parties:
|
|
|
|
As of December 31,
|
|
Name of related parties
|
|
Relationship
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Mambo Fiesta Limited. (1)
|
|
Entity controlled by Mr. Xu Qing
|
|
$
|
-
|
|
|
$
|
16
|
|
Shanghai Qingxuan Co.,Ltd. (1)
|
|
Entity controlled by Mr. Guo
|
|
|
-
|
|
|
|
1
|
|
Global Earning Pacific Ltd. (1)
|
|
Shareholder of the Company
|
|
|
5
|
|
|
|
1
|
|
Mr. Qing Xu (2)
|
|
Shareholder of the Company
|
|
|
968
|
|
|
|
-
|
|
Mrs. Guo Rong (1)
|
|
Vice president of the Company
|
|
|
14
|
|
|
|
-
|
|
Mrs. Li Hong (1)
|
|
Vice president of the Company
|
|
|
5
|
|
|
|
-
|
|
Wealthy Environment Limited. (1)
|
|
Shareholder of the Company
|
|
|
54
|
|
|
|
-
|
|
AirMedia Holding Ltd. (1)
|
|
Entity controlled by Mr. Guo
|
|
|
540
|
|
|
|
-
|
|
AirMedia Merger Company Ltd. (1)
|
|
Entity controlled by Mr. Guo
|
|
|
665
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,251
|
|
|
$
|
18
|
|
|
(1)
|
The amounts represent interest free advances to the related
parties in a short-term basis for operation purpose.
|
|
(2)
|
The amounts due from Mr. Qing Xu represents interest free
advances to the related party for personal purpose, which violated Sarbanes-Oxley Act section 402 due to the lack of internal
control in term of related party borrowings, however, all the balance has been collected in May 2018, there was no gain or loss
upon settlement.
|
|
(b)
|
Details of transactions with the Group's related parties
for the years ended December 31, 2017 and 2018 were as follows:
|
|
|
For the year ended December 31,
|
|
Transactions
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales to Unicome AirNet.
|
|
$
|
-
|
|
|
$
|
78
|
|
Purchase from Beijing Eastern Airlines Media Co.,Ltd.
|
|
$
|
-
|
|
|
$
|
157
|
|
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- continued
FOR THE YEARS ENDED DECEMBER 31, 2016, 2017
AND 2018
(In U.S. dollars in thousands, except share
and per share data)
On April 2, 2018, the Group sent
a notification to Sinopec Sales Co., Ltd. ("Sinopec”) to terminate the cooperation on gas station media business in
advance as the Group decided to terminate the gas station advertising business, in which Sinopec confirmed the termination for
concession right since April 1, 2018.
On March 22, 2019, two parties signed
the settlement agreement and agreed that 1) the Group use all the gas station media network equipment to deduct the payables due
to Sinopec except Shanghai and Henan branch. The Group's payable to Sinopec is RMB 41,450 (including RMB 35,232 for rental, RMB
4,435 for utilities, and RMB 1,783 for interest penalty) in total and the evaluated fair value of the gas station media network
equipment is RMB 27,606; 2) the Group shall settle remaining RMB 13,844 by providing free advertising services to Sinopec in the
future as settlement.
On March 29, 2019, Airmedia Group
Inc. and JPMorgan Chase Bank, as depositary, and all holders from time to time of American Depositary Shares entered into Amended
and Restated Deposit Agreement to combine 5 original ADSs to 1 new ADS which is effective on April 11, 2019. After the agreement
is executed, 1 ADS amounted to $0.01 par value represents 10 ordinary shares amounted to 0.001 par value per share.
The Group announced on March
28, 2018 and further updated on September 28, 2018 that Mr. Herman Man Guo intended to purchase AirMedia’s ordinary shares
in the form of ADSs with an aggregate value of up to $5,000 As of the date of this annual report, Mr. Herman Man Guo acquired,
an aggregate of 344,984 ADSs, representing 3,449,844 ordinary shares of the Company.
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(In U.S. dollars in thousands, except share
and per share data)
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
89
|
|
|
$
|
5
|
|
Amount due from subsidiaries
|
|
|
145,850
|
|
|
|
51,226
|
|
Other current assets
|
|
|
1,919
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
147,858
|
|
|
|
53,126
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
147,858
|
|
|
$
|
53,126
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
209
|
|
|
$
|
1,727
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
209
|
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Ordinary Shares ($0.001 par value; 900,000,000 shares authorized in 2017 and 2018; 127,662,057 shares and 127,697,055 shares issued as of December 31, 2017 and 2018; 125,629,779 shares and 125,664,777 shares outstanding as of December 31, 2017 and 2018, respectively)
|
|
|
128
|
|
|
|
128
|
|
Additional paid-in capital
|
|
|
286,739
|
|
|
|
284,726
|
|
Treasury stock (2,032,278 and 2,032,278 shares as of December 31, 2017 and 2018, respectively)
|
|
|
(2,351
|
)
|
|
|
(2,351
|
)
|
Accumulated deficits
|
|
|
(172,318
|
)
|
|
|
(262,415
|
)
|
Accumulated other comprehensive income
|
|
|
35,451
|
|
|
|
31,311
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
147,649
|
|
|
|
51,399
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
147,858
|
|
|
$
|
53,126
|
|
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
(8
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
General and administrative
|
|
|
(2,356
|
)
|
|
|
(468
|
)
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(2,364
|
)
|
|
|
(468
|
)
|
|
|
(1,786
|
)
|
Other income (loss), net
|
|
|
548
|
|
|
|
(5
|
)
|
|
|
468
|
|
Investment loss in subsidiaries
|
|
|
(63,809
|
)
|
|
|
(156,003
|
)
|
|
|
(88,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of ordinary shares
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,097
|
)
|
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT
SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE LOSS
(In U.S. dollars in thousands)
|
|
For the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,097
|
)
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative foreign currency translation adjustment
|
|
|
(23,220
|
)
|
|
|
35,743
|
|
|
|
(4,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Parent Company
|
|
$
|
(88,845
|
)
|
|
$
|
(120,733
|
)
|
|
$
|
(94,237
|
)
|
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
and per share data)
|
|
Ordinary
shares
|
|
|
Additional
|
|
|
|
|
|
(Accumulated
deficits)
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
Treasury
stock
|
|
|
retained
earnings
|
|
|
comprehensive
Income
(loss)
|
|
|
Total
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
|
|
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 (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
343
|
|
Foreign currency translation
adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,743
|
|
|
|
35,743
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(156,476
|
)
|
|
|
-
|
|
|
|
(156,476
|
)
|
Acquisition of equity
interests from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,414
|
)
|
Capital
contribution from non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
716
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
716
|
|
Balance
as of December 31, 2017
|
|
|
125,629,779
|
|
|
$
|
128
|
|
|
$
|
286,739
|
|
|
$
|
(2,351
|
)
|
|
$
|
(172,318
|
)
|
|
$
|
35,451
|
|
|
$
|
147,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issued to Ascent
Investor Relations LLC
|
|
|
34,998
|
|
|
|
0.03
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,140
|
)
|
|
|
(4,140
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(90,097
|
)
|
|
|
-
|
|
|
|
(90,097
|
)
|
Capital withdraw from
non-controlling
|
|
|
|
|
|
|
|
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,131
|
)
|
Acquisition of additional
equity interest in the Flying Dragon from non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(945
|
)
|
Balance
as of December 31, 2018
|
|
|
125,664,777
|
|
|
$
|
128
|
|
|
$
|
284,726
|
|
|
$
|
(2,351
|
)
|
|
$
|
(262,415
|
)
|
|
$
|
31,311
|
|
|
$
|
51,399
|
|
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,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(65,625
|
)
|
|
$
|
(156,476
|
)
|
|
$
|
(90,097
|
)
|
Investment loss in subsidiaries
|
|
|
63,809
|
|
|
|
156,003
|
|
|
|
88,779
|
|
Share-based compensation
|
|
|
773
|
|
|
|
343
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES IN WORKING CAPITAL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
(2,456
|
)
|
|
|
1,907
|
|
|
|
24
|
|
Accrued expenses and other current liabilities
|
|
|
(47
|
)
|
|
|
3
|
|
|
|
1,518
|
|
Amount due from subsidiaries
|
|
|
2,019
|
|
|
|
(1,830
|
)
|
|
|
(353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,527
|
)
|
|
|
(50
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
1,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(193
|
)
|
|
|
(50
|
)
|
|
|
(84
|
)
|
Cash, at beginning of year
|
|
|
332
|
|
|
|
139
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, at end of year
|
|
$
|
139
|
|
|
$
|
89
|
|
|
$
|
5
|
|
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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