AirNet Technology Inc.
Annual Report 2013

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549 FORM 20-F (Mark One) ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) 17/F, Sky PlazaNo. 46 Dongzhimenwai StreetDongcheng District, Beijing 100027The People’s Republic of China(Address of principal executive offices) Henry Hin-hung HoChief Financial OfficerAirMedia Group Inc.17/F, Sky PlazaNo. 46 Dongzhimenwai StreetDongcheng District, Beijing 10027The People’s Republic of ChinaPhone:+86 10 8460 8181Email: henry.ho@airmedia.net.cn(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 classOrdinary shares, par value $0.001 per share*American Depositary Shares, each representing two ordinary sharesName of each exchange on which registered The NASDAQ Stock Market LLC (The NASDAQ Global SelectMarket) * Not for trading, but only in connection with the listing on the NASDAQ Global Market of American depositary shares, each representing two ordinaryshares. 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:127,662,057 shares issued, with 119,134,135 shares outstanding and 8,527,922 shares in treasury stock, par value $0.001 per share, as of December 31,2013. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x 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 theSecurities Exchange Act of 1934. Yes ¨ No x 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 duringthe 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 requirementsfor the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes ¨ No x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer ¨Accelerated Filer xNon-Accelerated Filer ¨ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other ¨ If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 ¨ Item 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x (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 ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨ AIRMEDIA GROUP INC. Annual Report on Form 20-F TABLE OF CONTENTS Page PART I ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS4ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE4ITEM 3.KEY INFORMATION4ITEM 4.INFORMATION ON THE COMPANY34ITEM 4A.UNRESOLVED STAFF COMMENTS53ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS53ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES78ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS87ITEM 8.FINANCIAL INFORMATION89ITEM 9.THE OFFER AND LISTING90ITEM 10.ADDITIONAL INFORMATION91ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK99ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES100 PART II ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES101ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS101ITEM 15.CONTROLS AND PROCEDURES101ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT103ITEM 16B.CODE OF ETHICS103ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES103ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES104ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS104ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT105ITEM 16G.CORPORATE GOVERNANCE105ITEM 16H.MINE SAFETY DISCLOSURE105 PART III ITEM 17.FINANCIAL STATEMENTS106ITEM 18.FINANCIAL STATEMENTS106ITEM 19.EXHIBITS106 USE OF CERTAIN DEFINED TERMS Except as otherwise indicated by the context, in this annual report: ·“ADS” refers to our American depositary shares, each of which represents two ordinary shares; ·“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; ·“ordinary shares” refers to our ordinary shares, par value US$0.001 per share; ·“RMB” or “Renminbi” refers to the legal currency of China; ·“U.S. dollars”, “$ ”, “US$ ”or “dollars” refers to the legal currency of the United States; ·"VIEs" means our variable interest entities; and ·“we”, “us”, “our”, the “Company” or “AirMedia” refers to the combined business of AirMedia Group Inc., its consolidated subsidiaries, its VIEsand VIEs’ subsidiaries. Although AirMedia does not directly or indirectly own any equity interests in its consolidated VIEs or their subsidiaries, AirMedia is the primary beneficiaryof and effectively controls these entities through a series of contractual arrangements with these entities and their record owners. We have consolidated thefinancial results of these VIEs and their subsidiaries in our consolidated financial statements in accordance with the Generally Accepted Accounting Principlesof the U.S., or U.S. GAAP. See “Item 4. Information on the Company—C. Organizational Structure,” “Item 7. Major Shareholders and Related PartyTransactions—B. Related Party Transactions” and “Item 3. Key Information—D. Risk Factors” for further information on our contractual arrangements withthese parties. 2 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 aboutfuture events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Theseforward-looking statements include but are not limited to: ·our growth strategies; ·our future business development, results of operations and financial condition; ·our plans to expand our air travel advertising network into additional locations, airports and airlines; ·our plans to expand our advertising network into other out-of-home advertising platforms such as billboards, light boxes and LED screens located atgas stations, large LED screens at selected airports and in-flight internet platforms; ·competition in the advertising industry and the air travel advertising industry in China; ·the expected growth in consumer spending, average income levels and advertising spending levels; ·the growth of the air travel sector in China; and ·PRC governmental policies relating to the advertising industry. 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 thedocuments that we referred and filed as exhibits to this report in their entirety and with the understanding that our actual future results may be materiallydifferent from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasonsactual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. 3 PART I ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3.KEY INFORMATION A.Selected Financial Data Selected Consolidated Financial Data The following table represents our selected consolidated financial information. The selected consolidated statements of operations data for the years endedDecember 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our auditedconsolidated financial statements, which are included in this annual report. The selected consolidated statements of operations data for the years endedDecember 31, 2009 and 2010 have been derived from our audited financial statements for the relevant periods, which are not included in this annual report.The selected consolidated balance sheet data as of December 31, 2009, 2010 and 2011 have been derived from our audited financial statements for the relevantperiods, 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 consolidatedfinancial statements and related notes included elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects” below. Ourhistorical results do not necessarily indicate results expected for any future periods. Years Ended December 31, 2009 2010 2011 2012 2013 (In thousands of U.S. Dollars, except share, per share and perADS data) Consolidated Statements of Operations Data: Revenues: Air Travel Media Network Digital frames in airports $66,255 $113,196 $126,539 $137,342 $152,346 Digital TV screens in airports 37,260 28,905 21,937 13,731 14,110 Digital TV screens on airplanes 17,082 27,564 26,734 26,612 16,160 Traditional media in airports 27,192 48,418 73,535 83,478 64,845 Other revenues in air travel 4,639 4,063 6,416 7,346 9,183 Gas Station Media Network 102 3,664 12,873 14,217 12,726 Other Media — 10,650 9,787 10,239 7,146 Total revenues 152,530 236,460 277,821 292,965 276,516 Business tax and other sales tax (3,102) (5,955) (7,197) (6,223) (4,250)Net revenues 149,428 230,505 270,624 286,742 272,266 Cost of revenues (147,541) (197,908) (244,470) (250,606) (244,673)Gross profit 1,887 32,597 26,154 36,136 27,593 Operating expenses: Selling and marketing (including share-based compensation of$1,158, $1,540, $2,424, $1,422, $859 and nil in 2008,2009, 2010, 2011, 2012 and 2013, respectively) (13,439) (18,112) (18,238) (17,995) (20,069)General and administrative (including share-based compensationof $3,805, $4,226, $5,547, $3,192, $2,643 and $1,251 in2008, 2009, 2010, 2011, 2012 and 2013, respectively) (34,936) (24,646) (22,004) (21,842) (25,723)Impairment of goodwill — — (1,003) (20,611) — Impairment of intangible assets — (1,000) (656) (9,583) — Total operating expenses (48,375) (43,758) (41,901) (70,031) (45,792)Loss from operations (46,488) (11,161) (15,747) (33,895) (18,199)Interest income 2,025 694 1,242 1,355 1,213 Gain on remeasurement of fair value of cost and equity methodinvestments (net) — 919 — — — Other income, net 1,239 940 1,848 2,770 3,822 Loss before income taxes (43,224) (8,608) (12,657) (29,770) (13,164)Income tax benefits (expenses) 6,032 735 (266) (2,493) 1,713 Loss before share of income/(loss) on equity method investments (37,192) (7,873) (12,923) (32,263) (11,451) Share of income/(loss) on equity method investments 164 290 243 22 (69)Net loss (37,028) (7,583) (12,680) (32,241) (11,520)Less: Net income/(loss) attributable to noncontrolling interests 211 (2,666) (3,084) 487 (894)Net loss attributable to AirMedia Group Inc.’s shareholders $(37,239) $(4,917) $(9,596) (32,728) (10,626)Net loss attributable to AirMedia Group Inc.’s shareholders perordinary share—basic $(0.28) $(0.04) $(0.07) $(0.26) $(0.09)Net loss attributable to AirMedia Group Inc.’s shareholders perordinary share—diluted $(0.28) $(0.04) $(0.07) $(0.26) $(0.09)Net loss attributable to AirMedia Group Inc.’s shareholders perADS—basic(1) $(0.57) $(0.07) $(0.15) $(0.53) $(0.18)Net loss attributable to AirMedia Group Inc.’s shareholders perADS—diluted(1) $(0.57) $(0.07) $(0.15) $(0.53) $(0.18)Weighted average shares used in calculating net loss per ordinaryshare—basic 131,320,730 131,252,115 129,537,955 124,269,245 120,386,635 Weighted average shares used in calculating net loss per ordinaryshare—diluted 131,320,730 131,252,115 129,537,955 124,269,245 120,386,635 (1)Each ADS represents two ordinary shares. 4 The following table presents a summary of our consolidated balance sheet data as of December 31, 2009, 2010, 2011, 2012 and 2013: As of December 31, (In thousands of U.S. Dollars) 2009 2010 2011 2012 2013 Balance Sheet Data: Cash $123,754 $106,505 $112,734 $73,634 $59,652 Total assets 316,651 347,186 361,468 343,867 402,791 Total liabilities 50,372 70,470 91,410 104,432 111,448 Total AirMedia Group Inc.’s shareholders’ equity 263,042 275,668 272,148 241,876 270,966 Noncontrolling interests 3,237 1,048 (2,090) (2,441) 20,377 Total equity $266,279 $276,716 $270,058 $239,435 $291,343 Exchange Rate Information Our reporting and financial statements are expressed in the U.S. dollar, which is the reporting and functional currency of our Cayman Islands parentcompany. However, substantially all of the revenues and expenses of our consolidated operating subsidiaries and VIEs are denominated in RMB. Theconversion of RMB into U.S. dollars in this annual report is based on the noon buying rate in The City of New York for cable transfers of RMB as certifiedfor customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars toRMB in this annual report were made at a rate of RMB6.0537 to US$1.00, the noon buying rate in effect as of December 31, 2013. We make no representationthat any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case maybe, at any particular rate, the ratesstated below, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMBinto foreign exchange. On April 18, 2014, the noon buying rate was RMB6.2240 to US$1.00. The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are providedsolely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports orany other information to be provided to you. 5 Noon Buying Rate (1) Period-End Average (2) Low High Period (RMB per US$1.00) 2009 6.8259 6.8307 6.8470 6.8176 2010 6.6000 6.7603 6.8330 6.6000 2011 6.2939 6.4475 6.6364 6.2939 2012 6.2301 6.2990 6.3879 6.2221 2013 6.0537 6.1412 6.2438 6.0537 October 6.0943 6.1032 6.1209 6.0815 November 6.0922 6.0929 6.0993 6.0903 December 6.0537 6.0738 6.0927 6.0537 2014 January 6.0590 6.0509 6.0600 6.0402 February 6.1448 6.0816 6.1448 6.0591 March 6.2164 6.1729 6.2273 6.1183 April (through April 18, 2014) 6.2240 6.2121 6.2240 6.1966 (1)The exchange rates reflect the noon buying rates as set forth in the H.10 statistical release of the Federal Reserve Board. (2)Annual averages are calculated from the average of the exchange rates on the last day of each month during the period. B.Capitalization and Indebtedness Not applicable. C.Reasons for the Offer and Use of Proceeds Not applicable. D.Risk Factors An investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together with all ofthe other information included in this annual report, before making an investment decision. If any of the following risks actually occurs, ourbusiness, financial condition or results of operations could suffer. In that case, the trading price of our capital stock could decline, and you maylose all or part of your investment. RISKS RELATED TO OUR BUSINESS We have incurred net losses in the past and may incur losses in the future. We have incurred net losses for certain periods in the past. We pay concession fees to airports for placing and operating our digital displays, to airlines forplacing our programs on their digital TV screens, and to airports and gas stations for placing and operating our advertisements on traditional media platformssuch as light boxes and billboards. These fees constitute a significant part of our cost of revenues and are mostly fixed under the concession rights contractswith an escalation clause; payments are usually due three or six months in advance. However, our revenues may fluctuate significantly from period to periodfor various reasons. For instance, when new concession rights contracts are signed during a period, additional concession fees are incurred immediately, but itmay take some time for us to create revenues from these concession rights contracts because it takes time to find advertisers for the time slots and locationsmade available under these new contracts. If our revenues decrease in a given period, we may be unable to reduce our cost of revenues as a significant part ofour cost of revenues is fixed, which could materially and adversely affect our business and results of operations and lead to a net loss for that period. We have a limited operating history, which may make it difficult for you to evaluate our business and prospects. We began our business operations in August 2005. 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 air travel advertising network because we do not have sufficientexperience to address the risks frequently encountered by early stage companies using new forms of advertising media and entering new and rapidly evolvingmarkets. Certain members of our senior management team have worked together for only a relatively short period of time and it may be difficult for you toevaluate their effectiveness, on an individual or collective basis, and their ability to address future challenges to our business. Because of our limited operatinghistory, we may not be able to: 6 ·preserve our market position in the air travel advertising market in China; ·manage our relationships with airports and airlines to retain existing concession rights contracts and obtain new concession rights contracts oncommercially advantageous terms or at all; ·retain existing and acquire new advertisers and third party content providers; ·secure a sufficient number of low-cost digital frames and digital TV screens from our suppliers; ·manage our expanding operations, including effectively integrating acquired businesses; ·successfully expand into other advertising media platforms, including traditional media platforms in airports, interactive platform on TV-attacheddigital frames, gas station media platforms, outdoor media platforms and in-flight media platforms; ·successfully expand into other non-advertising business, including in-flight internet 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 generatesufficient cash flow from our operating activities and our business and results of operations could be materially and adversely affected. The market for air travel advertising network in China is relatively new and its potential is uncertain. We compete for advertising spending with many formsof more established advertising media such as television, print media, Internet and other types of out-of-home advertising. Our success depends on theacceptance of our air travel advertising network, including our in-flight media platforms, by advertisers and their interest in this medium as a part of theiradvertising strategies. In this annual report, the term “advertisers” refer to the ultimate brand-owners whose brands and products are being publicized by ouradvertisements, 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 sufficientlyeffective advertising medium. If consumers find our network to be disruptive or intrusive, airports and airplane companies may refuse to allow us to operateour air travel advertising network in airports or to place our programs on airplanes, and our advertisers may reduce spending on our network. Air travel advertising is a relatively new concept in China and in the advertising industry generally. If we are not able to adequately track air traveler responsesto our programs, in particular track the demographics of air travelers most receptive to air travel advertising, we will not be able to provide sufficient feedbackand data to existing and potential advertisers to help us generate demand and determine pricing. Without improved market research, advertisers may reducetheir use of air travel advertising and instead turn to more traditional forms of advertising that have more established and proven methods of tracking theeffectiveness of advertisements. Demand for our advertising services and the resulting advertising spending by our advertisers may fluctuate from time to time, and our advertisers mayreduce 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 onour 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 generatesufficient revenues and cash flow to operate our business, and our business and results of operations could be materially and adversely affected. 7 We may be adversely affected by a significant or prolonged economic downturn in the level of consumer spending in the industries andmarkets served by our customers. Our business is affected by the demand for our advertising time slots from our customers, which is determined by the level of business activity and economiccondition of our customers. The level of business activity of our customers is in turn determined by the level of consumer spending in the markets ourcustomers serve. Therefore, our businesses and earnings are affected by general business and economic conditions in China and abroad. In 2013, the top three industries that advertise on our network were automobile, finance, and food and beverages. based on revenues derived from advertisersin these industries. Any significant or prolonged slowdown or decline of the economy of China, countries like Japan or the overall global economy will affectconsumers’ disposable income and consumer spending in these industries, and lead to a decrease in demand for our services. Furthermore, the campaignlaunched 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 adverselyaffect demand for our services. In 2012, the tension between China and Japan—arising from territorial disputes over a group of islands in the East China Sea—caused a round of anti-Japanese demonstration in China. The demonstrations led to a dramatic decrease in the sales of Japanese products in China in September 2012, especiallyJapan's automobiles, which consequently led to a drop in demand for relevant advertising in China and negatively impacted our revenues generated from theJapanese automobile advertising. Although the decline in the revenues of Japanese automobile advertising in 2012 was offset by the increase in the revenuesfrom other sectors, we cannot assure you that there will not be more anti-Japanese activities in China in the future, which could materially and adversely affectour business, results of operations and overall performance. In 2013, China grew at a lower rate than in earlier years. This had a negative impact on the overall media industry in China, and made it more difficult formiddle and small sized companies to maintain their profit levels in the future. Globally, the financial crisis in Europe and the United States and its resultingeffects had a negative impact on our stock prices from 2011 to 2013. We derive a significant portion of our revenues from the provision of air travel advertising services. A contraction in the air travel advertisingindustry in China may materially and adversely affect our business and results of operations. Substantially all of our historical revenues have been and a significant portion of our expected future revenues will be generated from the provision of air traveladvertising services, in particular through the display of advertisements on digital frames located in airports and digital TV screens located in airports and onairplanes. Most of our traditional advertising media platforms, such as billboards and painted advertisements on gate bridges and light boxes, and otherdisplays, such as logo displays, are located in or near airports. A contraction in air travel advertising industry in China could have a material adverse effecton 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 rightscontracts or to obtain new concession rights contracts on commercially advantageous terms, we may be unable to maintain or expand ournetwork coverage and our costs may increase significantly in the future. Our ability to generate revenues from advertising sales depends largely upon our ability to provide a large air travel advertising network for the display ofadvertisements. However, we cannot assure you that we will be able to carry out our operations as specified in our concession rights contracts, and any failureto perform may damage our relationships with advertisers and advertising agencies and materially and negatively affect our business. 8 We may also be unable to retain or renew concession rights contracts when they expire. Most of our concession rights contracts to operate advertising media inairports and on airplanes typically have terms ranging from one to five years, with no automatic renewal provisions. As of December 31, 2013, we had in totalapproximately 38 concession rights contracts to be renewed in the next twelve months, with aggregated concession fees of approximately $51.1 million. Wecannot assure you that we will be able to renew any or all of these contracts when they expire, and the terms of any renewal may not be commerciallyadvantageous to us. The concession fees that we incur under our concession rights contracts comprise a significant portion of our cost of revenues, butairports and airlines tend to increase concession fees overtime, so as some of our concession rights contracts terminate, we may experience a significantincrease in our costs of revenues when we renew these contracts. If we cannot pass increased concession costs onto our advertisers through rate increases, ourearnings and our results of operations could be materially and adversely affected. In addition, many of our concession rights contracts to operate in airportsand on airplanes contain provisions granting us certain exclusive concession rights. We cannot assure you that we will be able to retain these exclusivityprovisions when we renew these contracts. If we were to lose exclusivity, our advertisers may decide to advertise with our competitors or otherwise reduce theirspending on our network and we may lose market share. Certain concession rights contracts allow the airports to terminate the contracts unilaterally without any compensation in certain circumstances. We cannotassure you that our concession rights contracts will not be terminated, whether with or without justification. In addition, most of our concession rightscontracts were entered into with the advertising companies operated by or advertising agencies hired by airports or airline companies, and not with the airportsor airline companies directly. Although these advertising companies and agents have generally assured us in writing that they have the rights to operateadvertising media in airports or on airplanes and all of them have performed their contractual obligations, we cannot assure you that airports or airlinecompanies will not challenge or revoke the contractual concession rights granted to us by their advertising companies or agents; if such challenges orrevocations occur, our revenues and results of operations could be materially and adversely affected. If we fail to perform under existing concession rights contracts, retain existing concession rights contracts or obtain new concession rights contracts oncommercially 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 the six largest airports and three largest airlines in China. If any of theseairports or airlines experiences a material business disruption or if there are changes in our arrangements with these airports or airlines, we mayincur substantial losses of revenues. We derived a significant portion of our total revenues in 2013 from the six largest airports in China: Beijing Capital International Airport, Guangzhou BaiyunInternational Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport, Chengdu Shuangliu International Airport, and Shenzhen BaoanInternational Airport. A material business disruption, major construction or renovation or natural disaster affecting any of the airports in our network couldnegatively affect our advertising media in such airport or materially limit where we can place our advertising media. In addition, we derived a significant portion of our advertising revenues in 2013 from the three largest domestic airlines in China: Air China, China SouthernAirlines, and China Eastern Airlines. If we are not able to renew concession rights contract with these or other airlines, or if any of the airlines in our networkloses market share and we are not able to add other airlines or increase the revenues generated from existing airlines in our network, our advertisers may decideto spend less on our advertising network. We expect these abovementioned airports and airlines to continue to contribute a significant portion of our revenues in the foreseeable future. If there were amaterial business disruption in any of these airports or airlines, 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 materiallyand adversely affect our business and results of operations. The programs on the majority of our digital TV screens include both advertising and non-advertising content. Third-party content providers such as TravelChannel, Jiangsu TV, Enlight Media, and Youku Tudou and various other television stations and television production companies have contracts with us toprovide the majority of the non-advertising content played over our network, particularly on TV screens on aircrafts. For example, in January 2014, weformed a strategic partnership with an affiliate of China Radio International to obtain internet TV contents from China International Broadcasting Network tobe broadcasted on our airport digital TV screens. There is no assurance that we will be able to renew these contracts, enter into substitute contracts to obtainsimilar contents or obtain non-advertising content on satisfactory terms, or at all. In addition, some of the third-party content providers that currently do notcharge us for their content may do so in the future. To make our programs more attractive, we must continue to secure contracts with these and other third-party content providers. If we fail to obtain a sufficient amount of high-quality content on a cost-effective basis, advertisers may find advertising on ournetwork unattractive and may not wish to purchase advertising time slots or locations on our network, which would materially and adversely affect ourbusiness and results of operations. 9 One or more of 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 andintroducing advertisers to us. In return, we pay fees to these advertising agencies if they generate advertising revenues for us. Fees that we paid 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 paidwhen payments are received from the advertisers. Our contractual arrangements with these advertising agencies do not provide us with control or oversight overtheir everyday business activities, and one or more of these agencies may engage in activities that violate PRC laws and regulations governing the advertisingindustry and related non-advertising content, or other laws and regulations. If our agencies violate PRC advertising or other laws or regulations, it could harmour reputation in the industry and have detrimental effects on our business operations. If we are unable to attract advertisers to purchase advertising time on our advertising network, we will be unable to maintain or increase ouradvertising fees, which could materially and adversely affect our ability to grow our profits. We believe our advertisers choose to advertise on our network in part based on the size of our network, the desirability of the locations where we have placedour digital frames, digital TV screens, light boxes and billboards and the attractiveness of our network content. The fees we charge for advertisements on ournetwork depend on the size and quality of our network and advertiser demand. If we fail to maintain or increase the number of our displays, solidify ourbrand name and reputation as a quality air travel advertising provider, or obtain high-quality non-advertising content at commercially reasonable prices,advertisers may be unwilling to purchase time on our network or to pay the levels of advertising fees we require to grow our profits. When our current advertising network of digital frames, digital TV screens, mega-size LEDs, light boxes and LED screens becomes saturatedin the major airports, airlines, gas stations and other locations where we operate, we may be unable to offer additional time slots or locations tosatisfy 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 frames, digital TV screens, mega-size LEDs, light boxes and LED screens becomes saturated in any particular airport, airline,gas stations and other locations 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 airports, 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, theutilization rates of our advertising time slots and locations in the six largest airports and on the three largest airlines in China are higher than those in othernetwork airports or on other airlines, and saturation or oversaturation of digital frames and digital TV screens in these airports or airlines could have amaterial adverse effect on our growth prospects. Our strategy of expanding our advertising network by building new air travel media platforms and expanding into traditional media may notsucceed, and our failure to do so could materially reduce the attractiveness of our network and harm our business, reputation and results ofoperations. Our air travel advertising network primarily consists of standard digital frames, digital TV screens, and traditional media. Our growth strategy includesbroadening our service offerings by continuing to increase our digital media network coverage and expanding our traditional media to become a comprehensiveair travel advertising provider in China. 10 In addition, we intend to build a nationwide advertising platform of mega-size LEDs in selected airports in China, which may require capital expenditures onequipment and installations if we choose to purchase new LEDs with cash prepayments. As part of our strategic efforts to become a one-stop provider foradvertising, we may continue to expand in the traditional media area as opportunities present themselves and we could also incur significant costs in installingnew light boxes or maintaining existing ones. A large amount of our concession rights contracts contain exclusive concession rights that grant us exclusivity with respect to digital frames, digital TVscreens and mega-size LEDs. By entering and expanding into traditional advertising media platforms inside airports, we may face competition from othercompanies that are already in these areas. We also have limited experience working in these areas. It is uncertain how these businesses will perform. Our failureto expand our air travel advertising network to introduce new platforms and into new areas could materially reduce the attractiveness of our network andmaterially and adversely affect our business and results of operations. If we do not succeed in our expansion into the business of outdoor media advertising, our future results of operations and growth prospectsmay be materially and adversely affected. Our growth strategy also includes expansion into other media outside of airports. For example, in May 2013, we entered into an investment agreement withElec-Tech International Co., Ltd., or Elec-Tech, pursuant to which Elec-Tech agreed to invest RMB640 million (US$104 million) to purchase ordinary sharesrepresenting approximately 21.27% of the equity interest of GreatView Media. The then-existing shareholders of GreatView Media agreed to cause GreatViewMedia to utilize Elec-Tech's contribution for the sole purpose of purchasing LED screens from Elec-Tech or its subsidiaries. We intend to install more LEDscreens in gas stations to further develop our existing gas station media network utilizing Elec-Tech's investment to purchase LED screens from Elec-Tech orits subsidiaries. On August 1, 2013, we extended our exclusive concession rights contract with Sinopec which allows us to operate media platforms in Sinopecgas stations throughout China through the end of 2020. Our VIE, AM Advertising, now holds 100% of AM Outdoor which operates out-of-home advertisingmedia in urban locations in Beijing. As we are still in the developing stage in the gas station media advertising and outdoor media advertising market, it may take us an extended period of time toramp up revenues from these businesses. However, under all of our existing concession rights agreements regarding our gas station and outdoor mediadisplays, we are required to pay periodic, fixed concession fees for the media platforms regardless of revenues. We may also incur significant costs inmaintaining and upgrading our gas station and outdoor traditional media platforms such as billboards, which are more vulnerable to weather and otheraccidental damages than indoor displays. For the gas station media platforms that are covered under the Sinopec concession rights contract, there are approvals required from various levels of localgovernments for the operation of each outdoor media format. However, there are significant uncertainties regarding which local government agencies or whichsets of local laws and regulations govern our gas station media platforms in specific locations. There have been incidents when some local government agenciesattempted to exercise their authority that caused disruption in advertisement placements. Although most of these incidents were subsequently resolved withoutsignificant delays, despite the lack of consistency of government administrative procedures from location to location, some remain outstanding and others mayarise from time to time in the future. Although we are using best efforts to comply with all relevant laws and regulations and to obtain all necessary certificates, registrations and approvals for theadvertising media platforms we operate, including actively consulting with every relevant local government authority in every city in which we operate toascertain the legal requirements for our business operations in the area and continually monitoring local government announcements for any relevant updates insuch requirements, due to the complexity of local laws and regulations across China governing outdoor media advertising platforms, there can be no assurancethat we will be able to obtain or have all of the necessary approvals which we do not currently hold in a timely manner, or at all. Any delay or failure inobtaining the necessary approvals may materially and adversely affect our expansion into the business of outdoor media advertising. 11 Our concession rights contract with Sinopec also sets forth a schedule which states that we must develop and begin operating a number of gas station mediaplatforms by the end of 2017, subject to various exemptions. We cannot assure you that we can fulfill this schedule as anticipated under this concession rightsagreement, and failure to fulfill the schedule may lead to termination of the relevant concession rights agreement by the other party. We began to implement changes in the sales management team for our gas station advertising business in mid-year 2011. We also began to implement changesin the operational model and structure of our gas station advertising business in the second half of 2011 with the intention of accelerating growth andprofitability. We may experience significant obstacles and challenges as we move forward with our strategy. Our gas station advertising business achievedsignificant revenues growth in the second half of 2011, 2012 and 2013, but we can make no assurance that such growth is indicative of future results. For each new business into which we enter, we may face competition from existing leading providers in that business; the same applies in the cases of gasstation media advertising and outdoor media advertising markets. If we cannot successfully address the foregoing new challenges and compete effectivelyagainst the existing leading players in the field of gas station and outdoor media advertising, 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 our future results ofoperations and growth prospects may be materially and adversely affected. If advertising registration certificates are not obtained for our airport advertising operations where such registration certificates are deemedto be required, we may be subject to administrative sanctions, including the discontinuation of our advertisements at airports where the requiredadvertising registration is not obtained. Applicable PRC regulations promulgated by the State Administration for Industry and Commerce, or the SAIC, specify that advertisements placed inside oroutside of the “departure halls” of airports are considered outdoor advertisements and must be registered with local SAIC offices by “advertising distributors.”According to the Outdoor Advertising Registration Administrative Regulations, or the Outdoor Regulations, which were issued by the SAIC and becameeffective on July 1, 2006, if we fail to comply with such requirements, we may be ordered by the local SAIC office to (1) forfeit the relevant advertisingincome, (2) pay an administrative fines of up to RMB30,000 and (3) register the advertisements within a set period. If we fail to register these advertisementswithin the required timeframe, the relevant local SAIC office may require us to discontinue the relevant advertisements where the required advertisingregistration has not been obtained. We understand that these Outdoor Regulations apply to our operations, and intend to register with the relevant local SAICoffices if requested by the local SAIC offices or any specific airport authorities; so far we have registered and received outdoor advertising licenses for ouradvertisements in Beijing Capital International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport and Shenyang TaoxianInternational Airport, and our registrations have been approved by the SAIC offices in three other cities and provinces where we have operations for ouradvertisements in the airports of those regions. However, we cannot assure you that we will obtain all applicable registration certificates in compliance with theoutdoor advertisement provisions due to the uncertainty in the implementation and enforcement of the regulations promulgated by the SAIC. If we are found tobe in violation of the Outdoor Regulations, we may be subject to any or all of the penalties set forth above, including forfeiture of relevant income and thepayment of administrative fines. If we fail to obtain approvals for the inclusion of non-advertising content in our programs broadcast in digital TV screens in airlines, we maybe unable to continue to include such non-advertising content in our programs, which may cause our revenues to decline and our business andprospects to deteriorate. Most of the digital TV screens in our network include programs that consist of both advertising content and non-advertising content. The State Administrationof Radio, Film and Television, or the SARFT, issued a circular which stated that displaying audio-video programs such as television news, films andtelevision shows, sports, technology and entertainment through public audio-video systems located in automobiles, buildings, airports, bus or train stations,shops and other outdoor public systems must be approved by the SARFT. 12 The relevant authority in China has not promulgated any implementation rules on the procedure of applying for the requisite approval pursuant to thiscircular. We intend to obtain such approval for our non-advertising content, but we cannot assure you that we will be able to obtain such approval incompliance with this circular, or at all. In January 2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co.,Ltd, or CRION, which manages the internet TV business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcastnetwork TV programs to air travelers in China. According to the terms of the cooperation arrangement with CRION, during the cooperation period from March28, 2014 to March 27, 2024, CRION shall obtain and, from time to time, be responsible for obtaining any approval, license and consent regarding theregulation of broadcasting and television from relevant authorities. We believe that CRION has obtained the necessary approvals, licenses and consents.However, there is no assurance that CRION will be able to maintain the requisite approval or we will be able to renew the contract with CRION when it expires.If the requisite approval is not obtained, we will be required to eliminate non-advertising content from the programs displayed on our digital TV screens andadvertisers may find our network less attractive and be unwilling to purchase advertising time slots and locations on our network, which may in turn causeour revenues to decline and our business and prospects to deteriorate. 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 adverselyaffected. 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 advertisingagencies, 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-partyadvertising agencies or to attract additional advertising agencies, we may not be able to retain existing advertisers or attract new advertisers or advertisingagencies, 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 materiallyand adversely affected. A limited number of advertisers have historically accounted for a significant portion of our revenues and this dependence may reoccur in thefuture, 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. Our top five advertisers collectively accounted forapproximately 20.3%, 32.7% and 26.0% of our total revenues in the years ended December 31, 2011, 2012 and 2013, respectively. Our largest advertisershave changed from year to year primarily because of our limited operating history and rapid growth, broadened advertiser base and increased sales. However,given our limited operating history and the rapid growth of our competition, we cannot assure you that we will not be dependent on a small number ofadvertisers in the future. 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 topurchase additional advertising time on our network, or cancels some or all of its purchase orders with us, our revenues could decline and our operatingresults 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 istypically 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 andrevenues grow, we have experienced and may continue to experience an increase in our accounts receivable. If any of our major advertisers are significantlydelinquent with its payments, our liquidity and financial conditions may be materially and adversely affected. If we are unable to adapt to changing advertising trends and the technology needs of advertisers and consumers, we will not be able tocompete effectively and we will be unable to increase or maintain our revenues, which may materially and adversely affect our business andresults of operations. The market for air travel advertising requires us to continuously identify new advertising trends and the technological needs of both advertisers andconsumers, which may require us to develop new formats, features and enhancements for our advertising network. We currently play advertisements ondigital frames through wireless networks, on digital TV screens in our network airports through closed-circuit television systems and on digital TV screens onour network airplanes mostly through video tapes. We may be required to incur development and acquisition costs to keep pace with new technology needs,but we may not have the financial resources necessary to fund and implement future technological innovations or to replace obsolete technology. We may alsofail to respond to changing technology needs altogether. 13 We must be able to quickly and cost-effectively expand into additional advertising media and platforms beyond digital frames and digital TV screens ifadvertisers find these additional media and platforms to be more attractive and cost-effective. In addition, as the advertising industry is highly competitive andfragmented with many advertising agencies existing and emerging from time to time, we must closely monitor the trends in the advertising agency community.We must maintain strong relationships with leading advertising agencies to ensure that we are reaching the leading advertisers and are responsive to the needsof both the advertising agencies and the advertisers. If we fail to define, develop and introduce new formats, features and technologies on a timely and cost-effective basis, advertising demand for our advertisingnetwork may decrease and we may not be able to compete effectively or attract advertisers, which may materially and adversely affect our business and resultsof operations. 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. We face significant competition in the PRC advertising industry. We compete for advertisers primarily on the basis of network size and coverage, location,price, program quality, the range of services offered and brand recognition. We compete for advertising dollars spent in the air travel advertising industry. Wealso compete for overall advertising spending with other alternative advertising media, such as Internet, street facilities, billboard and public transportadvertising, and with traditional advertising media such as newspapers, television, magazines and radio. While we enjoy a large share of the market of thedigital frames and digital TV screens located in airports and on airplanes, we compete and will continue to compete with other media advertising platforms forwhich we do not have exclusivity, including billboards and light boxes. We may also face competition from new entrants into air travel advertising in thefuture. Significant competition could reduce our operating margins and profitability and lead to a loss of market share. Some of our existing and potential competitorsmay 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 largeradvertising networks than we do, which gives them an ability to reach a larger number of overall potential consumers and which may make them lesssusceptible than we are to downturns in particular advertising sectors, such as air travel. Moreover, significant competition will provide advertisers with awider range of media and advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits focus. Wecannot assure you that we will be able to successfully compete against new or existing competitors, and failure to compete may reduce for existing market shareand profits. Our results of operations are subject to fluctuations in the demand for air travel. A decrease in the demand for air travel may make it difficultfor us to sell our advertising time slots and locations. Our results of operations are directly linked to the demand for air travel, which fluctuates greatly from period to period, and is subject to seasonality due toholiday travel and weather conditions as well as many other factors, including the following: ·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 economicgrowth and decrease in times of economic slowdown. A decrease in air passengers in China could lead to lower advertiser spending on our air traveladvertising network. ·Terrorist attacks or fear of such attacks. The terrorist attacks of September 11, 2001 in the United States. involving commercial aircraft severelyand adversely affected the air travel industry throughout the world. Additional terrorist attacks or fear of such attacks, even if not made directly onthe air travel industry, may negatively affect the air travel industry and reduce the demand for air travel. 14 ·Additional security measures regarding air travel. Terrorist attacks have led to significantly increased security costs and associated passengerinconvenience. Since September 11, 2001, relevant authorities in the United States, China and other countries have implemented numerous securitymeasures that affect airport and airline operations and costs. These increasingly stringent security measures have led to higher costs for airports andairlines and may cause some air travelers to consider other travel options, which may in turn lead to higher concession fees and reduced advertisingdemand for us. ·Plane crashes or other accidents. An aircraft crash or other accident could create a public perception that air travel is not safe or reliable, whichcould result in air travelers being reluctant to fly. Significant aircraft delays due to capacity constraints, weather conditions or mechanical problemscould also reduce demand for air travel, especially for shorter domestic flights. If the demand for air travel decreases for any of these or other reasons, advertisers may be reluctant to advertise on our network and we may be unable to sellour advertising time slots or locations or charge premium prices. If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our expansion strategies ormeet the demands of our advertisers. We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management personnel, systemsand resources. We must continue to expand our operations to meet the demands of advertisers for broader and more diverse network coverage. To accommodateour growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, includingthe improvement of our accounting and other internal management systems, all of which require substantial management efforts. We will also need to continue to expand, train, manage and motivate our workforce as well as manage our relationships with airports, airlines, gas stations andother locations where we have concession rights to displays and third-party non-advertising content providers. We must add sales and marketing offices andpersonnel to service relationships with new airports, gas stations and other locations that we aim to add as part of our network. As we add new digital frames,digital TV screens and other media platforms, we will incur greater maintenance costs to maintain our equipment. All of these endeavors will require substantial managerial efforts and skill, and incur additional expenditures. We cannot assure you that we will be able tomanage our growth effectively, and we may not be able to take advantage of market opportunities, execute our expansion strategies or meet the demands of ouradvertisers. 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 advertisingnetwork 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. 15 Our acquisition strategy also depends on our ability to obtain necessary government approvals. See “– Risks Related to Doing Business in China – The M&ARule 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 fromperiod 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 basedon the seasonality of air travel, consumer spending and corresponding advertising trends in China. Air travel and advertising spending in China generally tendto 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 isalso affected by certain special events and related government measures. As a result, you may not be able to rely on period-to-period comparisons of ouroperating results as an indication of our future performance. Other factors that may cause our operating results to fluctuate include a deterioration of economicconditions in China and potential changes to the regulation of the advertising industry in China. If our revenues for a particular quarter are lower than weexpect, 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 forthat 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 beseverely 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, theirexperience in business operations and sales and marketing, and their working relationships with our advertisers, airports and airlines, and relevantgovernment 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 replacethem 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 uswhich contains non-competition provisions. However, if any dispute arises between any of our executive officers and other key employees and us, we cannotassure 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, inlight of the uncertainties with China’s legal system. See “—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal systemcould limit the legal protections available to you and us.” Failure to maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures couldhave 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 theSarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financialreporting in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal control over financialreporting. In addition, an independent registered public accounting firm must attest to the effectiveness of the company’s internal control over financialreporting. SEC rules also require every public company to include a management report containing management’s assessment of the effectiveness of suchcompany’s disclosure controls and procedures in its annual report. Our management has concluded that our internal control over financial reporting and disclosure controls and procedures were effective as of December 31,2013. Our independent registered public accounting firm has issued an audit report stating that we maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2013. However, if we fail to maintain effective internal control over financial reporting in the future, ourmanagement and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting.This could negatively affect the reliability of our financial information and reduce investors' confidence in our reported financial information, which in turncould 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 aneffort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements of the Sarbanes-Oxley Act. 16 We may need additional capital which, if obtained, could result in dilution or significant debt service obligations. We may not be able to obtainadditional 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. If our current resources are insufficient to satisfyour cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of convertible debt securities or additionalequity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations andcould 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 favorableterms could have a material adverse effect on our liquidity and financial condition. Compliance with PRC advertising laws and regulations may be difficult and could be costly, and failure to comply could subject us togovernment sanctions. As an air travel advertising service provider, we are obligated under PRC laws and regulations to monitor the advertising content shown on our network forcompliance with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to ceasedissemination of the offending advertisements and orders to publish advertisements correcting the misleading information. In case of serious violations, thePRC authorities may revoke our license for advertising business operations. In general, the advertisements shown on our network have previously beenbroadcast over public television networks and have been subjected to internal review and verification by such networks, but we are still required toindependently review and verify these advertisements for content compliance before displaying them. In addition, if a special government review is required forcertain product advertisements before they are shown to the public, we are required to confirm that such review has been performed and approval obtained. Foradvertising content related to certain types of products and services, such as food products, alcohol, cosmetics, pharmaceuticals and medical procedures, weare required to confirm that the advertisers have obtained requisite government approvals, including review of operating qualifications, proof of qualityinspection 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 youthat each advertisement that an advertiser provides to us and which we include in our network programs is in full compliance with all relevant PRCadvertising laws and regulations or that such supporting documentation and government approvals provided to us are complete. Although we employ qualifiedadvertising inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations, the content standards in the PRCare 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 toproperly review all advertising content to comply with the PRC standards imposed on us with certainty. 17 We may be subject to, and may expend significant resources in defending against government actions and civil suits based on the content weprovide 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 inChina 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 contentdisplayed on our network to be offensive, airports, airlines or gas stations where we have our media may seek to hold us responsible for any consumer claimsor 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 censuredespite our efforts to ensure the security of our content management system. Any such event may also damage our reputation. If our advertising viewers do notbelieve 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 placeadvertisements on our network. We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determinedadversely 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 assureyou 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. Ifwe are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, incur licensing fees or beforced to develop alternatives. In addition, we may incur substantial expenses and diversion of management time in defending against these third-partyinfringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, whichmay materially and adversely affect our business. 18 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 PRCgovernmental restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our business could bematerially and adversely affected. Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China: AirMedia Group Co., Ltd, or AMAdvertising, Beijing Shengshi Lianhe Advertising Co., Ltd., or Shengshi Lianhe, Beijing AirMedia UC Advertising Co., Ltd., or AirMedia UC, and BeijingYuehang Digital Media Advertising Co., Ltd., or AM Yuehang. Although the Foreign-invested Advertising Enterprise Management Regulations, or the Foreign-invested Advertising Regulations, which became effective on October 1, 2008, currently permit 100% foreign ownership of companies that provide advertisingservices, subject to approval by relevant PRC government authorities, these regulations also require any foreign entities that establish a wholly ownedadvertising company must have at least three years of direct operations in the advertising industry outside of China. In addition, the Foreign InvestmentIndustrial Guidance Catalogue, which became effective on December 24, 2011, stated that non-advertising television program production and operationcompanies fall into the category of a prohibited foreign investment industry. We believe that these regulations apply to our business and are therefore carryingout the portions of our business that involve the production of non-advertising content through our VIEs. Our wholly owned Hong Kong subsidiary AMChina, the 100% shareholder of AM Technology and Xi’an AM, has been operating an advertising business in Hong Kong since 2008, and thus it is allowedto directly invest in advertising business in China. We are in the process of establishing a wholly-owned subsidiary of AM China to provide advertisingservices in China directly, as AM China has operated outside of China for more than three years and is now qualified to directly invest in advertising businessin China. However, the establishment of this subsidiary is subject to review and approval by SAIC or its authorized local branch, and we can make noassurance as to the specific time when this wholly-owned subsidiary will be established. Once this subsidiary commences operation, we intend to graduallyshift our advertising business to this subsidiary, and thus to gradually reduce our reliance on the current VIE structure. Our advertising business is currentlyprimarily provided through our contractual arrangements with our four consolidated VIEs in China. These entities directly operate our advertising network,enter into concession rights contracts and sell advertising time slots and locations to our advertisers. We have contractual arrangements with these VIEspursuant to which we, through AM Technology, provide technical support and consulting services to these entities. We also have agreements with our VIEsand each of their shareholders that provide us with the substantial ability to control these entities. For a description of these contractual arrangements, see Item4, “Information on the Company—Organizational Structure” and Item 7, “Major Shareholders and Related Party Transactions—Related Party Transactions—Contractual Arrangements.” We believe that the VIE arrangements are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limitthe Company’s ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their interest in the Company, their interestsmay diverge from that of the Company and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example byinfluencing the VIEs not to pay the service fees when required to do so. The Company’s ability to control the VIEs also depends on the power of attorney AM Technology has to vote on all matters requiring shareholder approval inthe 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 theadvertising industry and in the operating of non-advertising content, or if the legal structure and contractual arrangements were found to be in violation of anyother existing PRC laws and regulations, the PRC government could: ·revoke the business and operating licenses of the Company’s PRC subsidiaries and affiliates; ·discontinue or restrict the Company’s PRC subsidiaries’ and affiliates’ operations; ·impose conditions or requirements with which the Company or its PRC subsidiaries and affiliates may not be able to comply; or 19 ·require the Company or its PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations. While the Company does not believe that any penalties imposed or actions taken by the PRC government would result in the liquidation of the Company, AMTechnology, or the VIEs, the imposition of any of these penalties may result in a material and adverse effect on the Company’s ability to conduct theCompany’s business. In addition, if the imposition of any of these penalties causes the Company to lose the power to direct the activities of the VIEs (andVIEs’ subsidiaries) that most significantly impact the VIEs (and VIEs’ subsidiaries) economic performance or the right to receive substantially all of thebenefits from the VIEs (and VIEs’ subsidiaries), the Company would no longer be able to consolidate the VIEs (and VIEs’ subsidiaries). Because some of the shareholders of our VIEs in China are our directors and officers, their fiduciary duties to us may conflict with theirrespective roles in the VIEs, and their interest may not be aligned with the interests of our unaffiliated public security holders. If any of theshareholders of our VIEs fails to act in the best interests of our company or our shareholders, our business and results of operations may bematerially and adversely affected. Certain of our directors and officers are shareholders in the VIEs, AM Advertising, Shengshi Lianhe, AirMedia UC, and AM Yuehang. Mr. Herman ManGuo, our chairman and chief executive officer, in addition to holding 16.09% in our company, also directly and indirectly holds approximately 80.10% of AMAdvertising, 79.86% of Shengshi Lianhe and 80.14% of AirMedia UC. Mr. Qing Xu, our director and executive president, in addition to holding 2.34% ofour company, also directly and indirectly holds approximately 11.79% of AM Advertising, 11.94% of Shengshi Lianhe and 11.87% of AirMedia UC. Mr.James Zhonghua Feng, our director and president, in addition to holding 3.87% of our company, also holds 80% of AM Yuehang. In addition, Mr. Guo andMr. Xu are each a director of AirMedia UC, Shengshi Lianhe and AM Advertising, Mr. Guo is the legal representative of each of Shengshi Lianhe andAirMedia UC and Mr. Feng is the sole director and legal representative of AM Yuehang. For these directors and officers, their fiduciary duties toward ourcompany under Cayman law—to act honestly, in good faith and with a view to our best interests—may conflict with their roles in the VIEs, as what is in thebest 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 securityholders of our company. Although our independent directors or disinterested officers may take measures to prevent the parties with dual roles from makingdecisions that may favor themselves as shareholders of the VIEs, we cannot assure you that these measures would be effective in all instances. If the partieswith 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 bematerially and adversely affected. Certain provisions in the contractual agreements between AM Technology and our VIEs do impose limits on the rights of the shareholders of the VIEs. Forexample, each of the shareholders of the VIEs has signed an irrevocable power of attorney authorizing the person designated by AM Technology to exercise itsrights 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, wecannot 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 conflictsof 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 theVIEs fail to perform under their contracts with AM Technology. In any such event, we would have to rely on legal remedies under PRC law, which may not beeffective. See “—We rely on contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of ourChina operations, which may not be as effective as direct ownership in providing operational control” and Item 7, “Major Shareholders and Related PartyTransactions—Related Party Transactions—Contractual Arrangements.” 20 We rely on contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of ourChina operations, which may not be as effective as direct ownership in providing operational control. We rely on contractual arrangements with AM Advertising, Shengshi Lianhe, AirMedia UC and AM Yuehang to operate our advertising business. For adescription of these arrangements, see Item 4, “Information on the Company— Organizational Structure” and Item 7, “Major Shareholders and Related PartyTransactions—Related Party Transactions—Contractual Arrangements.” These contractual arrangements may not be as effective as direct ownership inproviding control over our VIEs. Under these contractual arrangements, if our VIEs or their shareholders fail to perform their respective obligations, we mayhave to incur substantial costs and resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performanceor 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 legalenvironment 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 limitour ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our VIEs, and our ability to conduct ourbusiness 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 relevantconsolidated affiliated entities before the pledge is registered. The shareholders of our VIEs, each a consolidated affiliated entity of ours, have pledged all of their equity interests, including the right to receive declareddividends, in the relevant VIEs to AM Technology, our wholly-owned subsidiary. An equity pledge agreement becomes effective among the parties uponexecution, 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 relevantlocal administration for industry and commerce. We have registered all these pledges except for two pledges entered into by Mr. Xiaoya Zhang, a nomineeshareholder of Shengshi Lianhe and AM Advertising. We are in the process of assembling the necessary documents for application to the relevant PRCauthorities to register these pledges, and we believe that the registration will be completed in due course; however, as the registration of these pledges has not yetbeen completed so far, the pledges, as property rights, have not yet become effective under the PRC Property Rights Law. Before the registration procedures arecompleted, we cannot assure you that the effectiveness of these pledges will be recognized by PRC courts if disputes arise with respect to certain pledged equityinterests or that AM Technology's interests as pledgee will prevail over those of third parties. AM Technology may not be able to successfully enforce thesepledges against any third parties who have acquired property right interests in good faith in the equity interests in Shengshi Lianhe or AM Advertising. As aresult, if Shengshi Lianhe or AM Advertising breaches their respective obligations under the various agreements described above, and there are third partieswho have acquired equity interests in good faith, AM Technology would need to resort to legal proceedings to enforce its contractual rights under the equitypledge agreements, or the underlying agreements secured by the pledges. We do not have agreements that pledge the assets of the VIEs and their respectivesubsidiaries 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 PRCtax authorities and a finding that we owe additional taxes could substantially increase our taxes owed and reduce our net income and the value ofyour investment. Under PRC law, arrangements and transactions among related parties may be audited or challenged by the PRC tax authorities. If any transactions we haveentered into among AM Technology and our VIEs are found not to be on an arm’s length basis, or to result in an unreasonable reduction in tax under PRC law,the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities and assess late paymentinterest and penalties. A finding by the PRC tax authorities that we are ineligible for the tax savings we achieved would substantially increase our taxes owedand reduce our net income and the value of your investment. 21 We may rely principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash andfinancing requirements we may have, and any limitation on the ability of our operating subsidiaries to pay dividends to us could have a materialadverse effect on our ability to conduct our business. We are a holding company, and we may rely principally on dividends and other distributions on equity paid by AM Technology, Shenzhen AM and Xi’anAM for our cash requirements, including the funds necessary to service any debt we may incur. If AM Technology, Shenzhen AM or Xi’an AM incurs debton its own behalf in the future, the instruments governing the debt may restrict the ability of these entities to pay dividends or make other distributions to us.In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements AM Technology currently has in placewith our VIEs in a manner that would materially and adversely affect AM Technology’s ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by AM Technology, Shenzhen AM and Xi’an AM only out of theiraccumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, AM Technology,Shenzhen AM and Xi’an AM are also required to set aside at least 10% of after-tax income based on PRC accounting standards each year to their generalreserves until the accumulative amount of such reserves reaches 50% of their respective registered capital. The registered capital of AM Technology, Shenzhen AM and Xi’an AM is $45.0 million, $96.4 million (approximately RMB700 million) and $50.0 million,respectively. AM Technology and Xi’an AM have made the applicable annual appropriations required under PRC law. Shenzhen AM is not currently requiredto fund any statutory surplus reserve because it still has accumulated losses. Any direct or indirect limitation on the ability of our PRC subsidiaries todistribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions at the holding companylevel, pay dividends or otherwise fund and conduct our business. Although none of Shenzhen AM, Xi’an AM or AM Technology has any present plan to pay any cash dividends to us in the foreseeable future, any limitationon the ability of AM Technology, Shenzhen AM or Xi’an AM to pay dividends or make other distributions to us could materially and adversely limit ourability 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 economicgrowth 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 Chineseeconomy differs from the economies of most developed countries in many respects, including the level of government involvement and the level and growth rateof economic development. While the Chinese economy has experienced significant growth in the past decades, growth has been uneven both geographically and among various sectors ofthe economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of thesemeasures may benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of political or economicreforms or the effects such measures may have on our business, financial position or results of operations. Any adverse change in the political or economicconditions 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 theoverall economic growth of China and in the air travel advertising industry. Such developments could have a material adverse effect on our business, lead to areduction in demand for our services and materially and adversely affect our competitive position. 22 Uncertainties with respect to the PRC legal system could limit the legal protections available to us or result in substantial costs and thediversion of resources and management attention. We conduct our business primarily through AM Technology, Shenzhen AM and Xi’an AM, which are subject to PRC laws and regulations applicable toforeign investment in China and, in particular, laws applicable to wholly-foreign owned companies. The PRC legal system is based on written statutes. Priorcourt decisions may be cited for reference but have limited precedential value. PRC legislation and regulations afford significant protections to various forms offoreign investments in China, but since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretationsof many laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involve uncertainties, which may limitthe legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources andmanagement attention. Fluctuations in the value of the Renminbi may have a material adverse effect on your investment. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economicconditions and China’s foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollar, is based on rates set by thePeople’s Bank of China. The PRC government allowed the Renminbi 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 was halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrowband. As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. SinceJune 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, though there have been periods recently when theU.S. dollar has appreciated against the Renminbi. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange ratebetween the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a substantialliberalization of its currency policy, which could result in further appreciation in the value of the Renminbi against the U.S. dollar. The reporting and functional currency of our Cayman Islands parent company is the U.S. dollar. However, substantially all of the revenues and expenses ofour consolidated operating subsidiaries and affiliate entities are denominated in Renminbi. Substantially all of our sales contracts are denominated in Renminbiand substantially all of our costs and expenses are denominated in Renminbi. To the extent that we need to convert U.S. dollars into Renminbi for ouroperations, 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 theU.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 therelative 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-denominatedinvestments 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 hedgingtransactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, theavailability 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 currencyexchange 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 meetour foreign currency obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China’sexisting foreign exchange regulations, AM Technology, Shenzhen AM and Xi’an AM are able to pay dividends in foreign currencies, without prior approvalfrom the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, we cannot assure you that thePRC government will not take measures in the future to restrict access to foreign currencies for current account transactions. 23 Foreign exchange transactions by our subsidiaries and VIEs in China under capital accounts continue to be subject to significant foreign exchange controls andrequire the approval of, or registration with, PRC governmental authorities. In particular, if we or other foreign lenders make foreign currency loans to oursubsidiaries or VIEs in China, these loans must be registered with the SAFE, and if we finance them by means of additional capital contributions, thesecapital contributions must be approved by or registered with certain government authorities including the SAFE, the Ministry of Commerce or their localcounterparts. These limitations could affect the ability of our subsidiaries in China to exchange the foreign currencies obtained through debt or equityfinancing, 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 andSettlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise offoreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital convertedfrom foreign currency registered capital of a foreign-invested enterprise may only be used within the purpose within the business scope approved by theapplicable government authority and unless otherwise provided by law, such RMB capital may not be used for equity investments within the PRC. Inaddition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-investedcompany. 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 loansif the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On November 16, 2011,SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues Relating to Further Clarification and Regulation of Certain CapitalAccount Items under Foreign Exchange Control (“Circular 45”) to further strengthen and clarify its existing regulations on foreign exchange control underSAFE Circular 142. Circular 45 expressly prohibits foreign invested entities, including wholly foreign owned enterprises such as AM Technology, fromconverting registered capital in foreign exchange into RMB for the purpose of equity investment, granting certain loans, repayment of inter-company loans, andrepayment of bank loans which have been transferred to a third party. Further, Circular 45 generally prohibits a foreign invested entity from convertingregistered 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 whollyforeign-owned enterprises in the future and we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability tofund the VIEs’ operations will be subject to statutory limits and restrictions, including those described above. PRC regulations relating to the establishment of offshore special purpose companies by PRC residents and registration requirements foremployee stock ownership plans or share option plans may subject our PRC resident beneficial owners or the plan participants to personalliability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distributeprofits 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 theirdirect or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshoreacquisitions that we make in the future. On February 15, 2012, the SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic IndividualsParticipating in an Employee Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, “Application Procedure of ForeignExchange 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 incentiveplan of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. All such participants need to retain aPRC agent through a PRC subsidiary to register with SAFE and handle foreign exchange matters such as opening accounts, transferring and settlement of therelevant proceeds. The New Share Incentive Rule further requires that an offshore agent should also be designated to handle matters in connection with theexercise or sale of share options and proceeds transferring for the share incentive plan participants. 24 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 theregistration and procedures which the New Share Incentive Rule requires, but the application documents are subject to the review and approval of SAFE, andwe 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 ShareIncentive 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 workingin China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employeestock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail topay 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 toregister those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update theregistration with the local branch of the SAFE, with respect to that offshore company, any material change involving its round-trip investment and capitalvariation. The PRC subsidiaries of that offshore company are required to urge the PRC resident shareholders to make such updates. If any PRC shareholderfails to make the required SAFE registration or file or update the registration, the PRC subsidiaries of that offshore parent company may be prohibited fromdistributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshoreparent company may also be prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFEregistration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions, such as restrictionson distributing dividend to our offshore entities or monetary penalties against us. We cannot assure you that all of our shareholders who are PRC residents willmake or obtain any applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders tocomply with these SAFE registration procedures may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRCsubsidiaries’ 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 orfuture strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such asremittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. Inaddition, 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 toobtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implementour 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 exchangetransactions by PRC individuals under either the current account or the capital account. Implementing rules for these measures were promulgated by the SAFEwhich, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employeestock ownership plans or stock option plans of an overseas publicly-listed company. The SAFE also promulgated rules under which PRC citizens who aregranted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listedcompany, to register with the SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options are subject tothese rules, and we are in the process of completing the required registration and procedures, but the application documents are subject to the review andapproval 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 complywith these regulations, we or our PRC optionees may be subject to fines and legal sanctions. See “Item 4. Information on the Company—B. Business Overview—Regulation— SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options.” 25 The M&A Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursuegrowth through acquisitions. The PRC Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, sets forth complex procedures andrequirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Part of our growth strategy includesacquiring 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 andwere 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 onour operations in the PRC, limit our operating privileges in the PRC, or take other actions that could materially and adversely affect our business and resultsof operations. Changes in laws and regulations governing air travel advertising or otherwise affecting our business in China may result in substantial costsand 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 theimplementation of new laws and regulations governing the content of air travel advertising and our business licenses or otherwise affecting our business inChina may result in substantial costs and diversion of resources and may materially and adversely affect our business prospects and results of operations. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we maypursue 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, onApril 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 EquityTransfer, 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 interestsin a PRC resident enterprise by a non-resident enterprise. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to makeadjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. If we areconsidered a “non-resident enterprise” under the EIT Law and if the PRC tax authorities make adjustments under Circular 59 or Circular 698, our income taxcosts associated with such potential acquisitions will be increased. The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our resultsof operations. The Labor Contract Law, which came into effect January 1, 2008 and was amended in July 1, 2013, established more restrictions and increased costs foremployers to dismiss employees under certain circumstances, including specific provisions relating to fixed-term employment contracts, non-fixed-termemployment 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 LaborContract 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 employercontinues to hire the employee after the expiration of two consecutive fixed-term labor contracts, or if the employee has worked for the employer for 10consecutive 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 withless favorable terms. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees whohave 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 ofemployment. Employees who waive such vacation at the request of employers are entitled to compensation that equals to three times their regular daily salaryfor each waived vacation day. As a result of these new labor protection measures, our labor costs are expected to increase, which may adversely affect ourbusiness and our results of operations. It is also possible that the PRC government may enact additional labor-related legislations in the future, which wouldfurther increase our labor costs and affect our operations. 26 We have limited insurance coverage in China, and any business disruption or litigation we experience may result in our incurring substantialcosts 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 businessdisruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficultiesassociated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, except for ourliability 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. If one or more of our PRC subsidiaries fails to maintain or obtain qualifications to receive PRC preferential tax treatments, we will berequired to pay more taxes, which may have a material adverse effect on our result of operations. The EIT Law, which became effective on January 1, 2008, imposes a uniform income tax rate of 25% on most domestic enterprises and foreign investmententerprises. Under this law, entities that qualify as “high and new technology enterprises strongly supported by the state,” or HNTE, are entitled to thepreferential 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 orderto continue to enjoy the preferential EIT rate. In addition, according to relevant guidelines, “new software enterprises” can enjoy an income tax exemption fortwo years beginning with their first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years. AirMedia Technology (Beijing) Co., Ltd., one of our PRC subsidiaries, or AM Technology, was recognized as a HNTE under the new rules and therefore, it isentitled to enjoy a preferential EIT rate of 15%. It was also eligible for a 50% tax reduction from 2009 to 2010 under the applicable tax laws and regulationsthat were in effect before January 1, 2008, the date the EIT Law came into effect. As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and2010. In September 2011, AM Technology received a new HNTE certificate. As a result, AM Technology was subject to an EIT rate of 15% in 2011, 2012and 2013 and is expected to be subject to an EIT rate of 15% as long as it maintains its status as a HNTE. Xi’an AirMedia Chuangyi Technology Co., Ltd., one of our PRC subsidiaries, or Xi’an AM, qualified as a “new software enterprise” in August 2008 by theTechnology Information Bureau of Shaanxi Province and has received a written approval from Xi’an local tax bureau that it is granted a two-year exemptionfrom EIT commencing on its first profitable year and a 50% reduction of the 25% EIT rate for the succeeding three years. As Xi'an AM first made profit in2009, it was exempted from EIT in 2009 and 2010, and enjoyed the preferential income tax rate of 12.5% from 2011 to 2013. Shenzhen AirMedia Information Technology Co., Ltd., one of our PRC subsidiaries, or Shenzhen AM, was subject to a 15% preferential EIT rate in 2007 asit is located in Shenzhen and then was subject to EIT on its taxable income from 2008 at the gradual rate as set out in Notice of the State Council ConcerningImplementation of Transitional Rules for Enterprise Income Tax Incentives, or “Circular 39.” Since Shenzhen AM is also qualified as a “manufacturingforeign-invested enterprise” incorporated prior to the effectiveness of the EIT Law, it is further entitled to a two-year exemption from EIT for the years 2008 and2009 and preferential rates of 11%, 12% and 12.5% for the years 2010, 2011 and 2012, respectively. Shenzhen AM is subject to EIT at a rate of 25% from2013 onwards. Hainan Jinhui Guangming Media Advertising Co., Ltd., or Hainan Jinhui, one of our VIEs’ PRC subsidiaries, is subject to EIT on the taxable income at thegradual rate, which was 22% in 2010, 24% in 2011, 25% in 2012, 25% in 2013 and will be 25% in 2014 at the gradual rate as set out in Circular 39. 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 berequired 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 businessand results of operations. 27 Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRCtaxation 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-residententerprises 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 adifferent withholding arrangement. The British Virgin Islands, or BVI, where Broad Cosmos Enterprises Ltd., or Broad Cosmos, our wholly-ownedsubsidiary and the 100% shareholder of Shenzhen AM, is incorporated, does not have such a tax treaty with China. Air Media (China) Limited, or AMChina, the 100% shareholder of AM Technology and Xi’an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong SpecialAdministrative 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 theforeign investor owns directly at least 25% of the shares of the foreign-invested enterprise). However, under recently implemented PRC regulations, now ourHong Kong subsidiary must obtain approval from the competent local branch of the State Administration of Taxation in accordance with the double-taxationagreement among the PRC and Hong Kong in order to enjoy the 5% preferential withholding tax rate. In February 2009, the State Administration of Taxationissued 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 enterprisequalifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The taxauthority in charge has the right to make adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under taxtreaties as a result of such transaction or arrangement. In October 2009, the State Administration of Taxation issued another notice on this matter, or NoticeNo. 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 ofobtaining 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 substantialbusiness activities and own and have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company willnot 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 implementthem 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 Kongsubsidiary. If the relevant tax authority determines that our Hong Kong subsidiary is a conduit company and does not qualify as the “beneficial owner” of thedividend income it receives from our PRC subsidiaries, the higher 10% withholding tax rate may apply to such dividends. Under the EIT Law and EIT Implementation Rules, an enterprise established outside of the PRC with “de facto management bodies” within the PRC isconsidered 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 “defacto 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 IncorporatedEnterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located inChina. 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 beSeptember 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent taxauthorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshoreincorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinesecontrolled 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 clarificationmade 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 residencystatus of offshore enterprises and the administration measures that should be implemented, regardless of whether they are controlled by PRC enterprises orPRC individuals. 28 After consulting with our PRC counsel, we do not believe that our holding company and other overseas subsidiaries should be deemed PRC residententerprises as, among other things, certain of our company’s key assets and records, including register of members, board resolutions and shareholderresolutions, 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 interpretationand implementation of the EIT Law and EIT Implementation Rules, it is uncertain whether we will be deemed a PRC resident enterprise. If the PRC authoritieswere 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% EITon 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 andcould 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 withholdingtax, since such income is exempt under the EIT Law and the EIT Implementation Rules to the extent such dividends are deemed “dividends among qualifiedPRC resident enterprises.” If we are considered a resident enterprise for enterprise income tax purposes, dividends we pay with respect to our ADSs or ordinaryshares may be considered income derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC shareholders maybe 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 thatwe 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 weare 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 incomeother 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 orother 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 ondisposition 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 paymentswill reduce the returns of your investment. If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have toexpend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation andcould result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably. Recently, U.S. public companies that have substantially all of their operations in China, particularly companies which have completed so-called reversemerger 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 ofeffective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations offraud. For example, in December 2012, the SEC initiated administrative proceedings against the China affiliates of the Big Four public accounting firms forallegedly refusing to produce audit work papers and other documents related to certain China-based companies under investigation by the SEC for potentialaccounting fraud against U.S. investors. Although we were not and are not subject to any ongoing SEC investigations, many U.S. listed Chinese companiesare now subject to, or may become subject to, shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations intothe allegations. As a result of this proceeding and the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinesecompanies has sharply decreased in value and, in some cases, has become virtually worthless. It is not clear what effect this sector-wide scrutiny, criticismand negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether suchallegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. Thissituation will be costly and time consuming and distract our management from growing our company. 29 The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting OversightBoard and, as such, you are deprived of the benefits of such inspection Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the United States Securities andExchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company AccountingOversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess itscompliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples’ Republic of China, a jurisdictionwhere the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by thePCAOB. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality controlprocedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents thePCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOBinspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit proceduresor quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reportedfinancial information and procedures and the quality of our financial statements. Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm,could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, asamended, or the Exchange Act In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 againstthe Chinese affiliates of the ‘‘big four’’ accounting firms,(including our auditors) and also against Dahua (the former BDO affiliate in China). The Rule 102(e)proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SECpursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly tothe SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission. The issues raised by theproceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed inthe United States. In January 2014, the administrative judge reached an Initial Decision that the "big four" accounting firms should be barred from practicing before theCommission for six months. However, it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a Petitionfor Review of the Initial Decision and pending that review the effect of the Initial Decision is suspended. The SEC Commissioners will review the InitialDecision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on these audit firms. Once such an orderwas made, the accounting firms would have a further right to appeal to the US Federal courts, and the effect of the order might be further stayed pending theoutcome of that appeal. Depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors inrespect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of theSecurities Exchange Act of 1934, as amended, or the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings againstthese audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adverselyaffected. 30 RISKS RELATED TO THE MARKET FOR OUR ADSs 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 2013, the trading prices of our ADSs on theNASDAQ Global Select Market ranged from $3.20 to $1.50 per ADS and the closing sale price on April 24, 2014 was $2.16 per ADS. The price of ourADSs may fluctuate in response to a number of events and factors including, changes in the economic performance or market valuations of other advertisingcompanies, 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 ofparticular 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 todecline. 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 toexercise 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 sharesevidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the votingrights 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 thatyou, 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 receivecash 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 inthe 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 theSecurities Act, or an exemption from the registration requirements is available. Under the deposit agreement, the depositary bank will not make rights availableto you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt fromregistration 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 tocause 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 otherdeposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSsrepresent. 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 distributionsmay 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 itdeems 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, orat 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 anyprovision of the deposit agreement, or for any other reason. 31 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 andofficers 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 directorsand 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 foryou 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 yourrights 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 CaymanIslands 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 statutoryrecognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstancesrecognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law(2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minorityshareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The rights of ourshareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes orjudicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and providessignificantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivativeaction 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 ourcontrolling 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 ourordinary 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 companyand deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking toobtain 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 achange of control of our company: ·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 todetermine, with respect to any series of preferred shares, the terms and rights of that series, including the designation of the series, the number ofshares of the series, the dividend rights, dividend rates, conversion rights, voting rights, and the rights and terms of redemption and liquidationpreferences. ·Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares or rights to acquire ordinary shareswithout action by our shareholders to the extent of available authorized but unissued shares. 32 Our corporate actions are substantially controlled by our principal shareholders who could exert significant influence over importantcorporate 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, 2014, our principalshareholder, Mr. Herman Man Guo, along with his wife, Ms. Dan Shao, beneficially owned approximately 33.07% of our outstanding ordinary shares. Mr.Guo and other principal shareholders of our company could exert substantial influence over matters such as electing directors and approving material mergers,acquisitions or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of ourcompany, 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 ourcompany 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 than those of U.S. domestic reporting companies so youshould 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. Forexample, 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 ourannual report within four months of our fiscal year end. We are not required to disclose certain detailed information regarding executive compensation that isrequired from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the SecuritiesAct. We are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are notprivy 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 than those required by other U.S. domesticreporting companies, our shareholders should not expect to receive information about us in the same amount and at the same time as information is receivedfrom, 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 aforeign private issuer. Violations of these rules could affect our business, results of operations and financial condition. We may be classified as a passive foreign investment company, which could result in significant adverse U.S. federal income tax consequencesto U.S. Holders. Although we do not believe that we were classified as a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxableyear ended December 31, 2013, there is a significant risk that we will be a PFIC for our taxable year ending December 31, 2014 and future taxable years unlessour share value 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 productionof 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 yearconsists 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 marketvalue) during such year produce or are held for the production of passive income. Although the law in this regard is unclear, we treat the VIEs as being owned by us for U.S. federal income tax purposes, not only because we exercise effectivecontrol 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 aresult, we consolidate such entities' operating results in our consolidated financial statements. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in Item 10, "Additional Information — Taxation – United States FederalIncome Taxation") may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinaryshares 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 theU.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. EachU.S. Holder is urged to consult its tax advisor concerning the U.S. federal income tax consequences of an investment in our ADSs or ordinary shares if we aretreated as a PFIC for our current taxable year ending 2014 or any future taxable year, including the possibility of making a "mark-to-market" election. Formore information, see "Item 10. Additional Information – E. Taxation – United States Federal Income Taxation". 33 ITEM 4.INFORMATION ON THE COMPANY A.History and Development of the Company We were incorporated in the Cayman Islands on April 12, 2007 and conducted our operations in China through our subsidiaries, consolidated VIEs and theVIEs’ subsidiaries. We commenced operations in August 2005 in China through Shengshi Lianhe, a consolidated variable interest entity of our principalsubsidiary, AM Technology. Later, we established additional PRC consolidated VIEs to conduct our operations in China. Substantially all of our currentoperations 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 theinitial public offering of 17,250,000 ADSs, representing 34,500,000 of our ordinary shares, on November 13, 2007. Our ADSs were subsequently transferredto the NASDAQ Global Select Market. In 2008, we acquired an airport gate bridge advertising business through two concurrent acquisitions: one of our VIEs, AM Advertising, purchased 80%equity interest in Flying Dragon Media Advertising Co., Ltd., or Flying Dragon, a PRC company which operates an airport gate bridge advertising businessesin mainland China, and we directly acquired all of the equity interest in Excel Lead International Limited, or Excel Lead, a BVI company that is an affiliate ofFlying Dragon. In 2009 and 2010, we added various additional media resources to our advertising network, including outdoors media in gas stations and urban locations.During 2009, we directly acquired 100% equity interests in Dominant City Ltd., a BVI company, and concurrently, AM Advertising acquired 100% equityinterest in Beijing Youtong Hezhong Advertising Media Co. Ltd., a PRC company which operates media resources in a number of airports includingGuangzhou and Hangzhou airports. In 2009, AM Advertising, which is majority-owned by our VIE, AirMedia UC, entered into an exclusive concessionrights contract in which it undertook to develop and operate outdoor advertising platforms such as billboards at Sinopec gas stations. In January 2010, weacquired 100% of the equity interest in Easy Shop Ltd., a BVI company, and concurrently, AM Advertising acquired 90% of the equity interest in AMOutdoor on top of the 10% of AM Outdoor it already owned prior to the transaction. The total consideration for both transactions was $13.9 million. As aresult of these transactions, AM Advertising now holds 100% equity interest in AM Outdoor and operates unipole signs and other outdoor media in China. InFebruary 2010, AirMedia UC acquired 45% equity interest in Beijing Dongding Gongyi Advertising Co., Ltd., or Dongding, which has exclusive rights tobuild and operate billboards that display both public service content and commercial advertising throughout Beijing in locations such as shopping malls andparking lots. AirMedia UC held 30% equity interest in Dongding prior to the transaction, and now holds 75% equity interest in Dongding. In April 2011, we formed Beijing GreatView Media Advertising Co., Ltd., (formerly known as Beijing Weimei Shengjing Advertising Co., Ltd.), or GreatViewMedia, a PRC company, as a wholly-owned subsidiary of AirMedia UC, with a registered capital of RMB1.0 million. GreatView Media is currently theprimary operating entity of our gas station media network. In the same month, we also formed Beijing AirMedia Jinsheng Advertising Co., Ltd., a PRCcompany, as a wholly-owned subsidiary of Beijing AirMedia Media Advertising Co., Ltd., a PRC company and a majority-owned subsidiary of AirMediaUC, with a registered capital of RMB5.0 million. We also changed the name of Beijing Union of Friendship Advertising Media Co. Ltd., a subsidiary of AMAdvertising, to Beijing Youtong Hezhong Advertising Media Co., Ltd. and subsequently to Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. and thename of AM Advertising itself as described above. In November 2012, our board of directors approved a share capital increase for GreatView Media and ashare purchase by the senior management of GreatView Media; GreatView Media increased its share capital by issuing new registered capital to AirMedia UCfor RMB38.0 million in cash and to Beijing Zhongshi Aoyou Advertising Co., Ltd., or Zhongshi Aoyou, for RMB15.0 million in cash. After this share capitalincrease, AirMedia UC and Zhongshi Aoyou held 78% and 22% equity interest in GreatView Media, respectively. Certain members of the management ofGreatView Media purchased all equity interests of Zhongshi Aoyou on February 25, 2013 for a cash consideration of approximately RMB15 million, whichwas equal to the fair value of the equity interests purchased. 34 In May 2013, several entities affiliated with AirMedia, including GreatView Media, the primary operating entity of our gas station media network, and its then-existing shareholders, entered into an investment agreement with Elec-Tech International Co., Ltd., or Elec-Tech. Pursuant to the investment agreement, Elec-Tech agreed to invest RMB640 million (US$104 million) to purchase ordinary shares representing approximately 21.27% of the equity interest of GreatViewMedia. After the completion of the transaction, AirMedia controls 61.41% of the equity interest of GreatView Media and the senior management team ofGreatView Media indirectly holds 17.32% equity interest in GreatView Media through Zhongshi Aoyou, which is wholly owned by the management team.Pursuant to this agreement, the then-existing shareholders of GreatView Media agreed to cause GreatView Media to utilize Elec-Tech's contribution for the solepurpose of purchasing LED screens from Elec-Tech or its subsidiaries. As of December 31, 2013, GreatView Media purchased 1,000 sets of LED screens intotal from Elec-Tech for our gas station media business in the amount of approximately US$57 million. In February and March 2012, we and Beijing N-S Digital TV Co., Ltd., or N-S Digital, established two joint ventures: Beijing Xinghe Union Media Co.,Ltd, or Beijing Xinghe, and Beijing Shibo Movie Technology Co., Ltd., or Beijing Shibo, respectively. Our company and N-S Digital each contributedRMB5.0 million in cash for 50% of the equity interest in each of Beijing Xinghe and Beijing Shibo. In September 2013, we entered into an equity swapagreement with N-S Digital, under which we exchanged our 50% holding in Beijing Shibo for the 50% equity interest in Beijing Xinghe held by N-S Digital.The two joint venture agreements were terminated at the same time. In April 2012, we entered into an agreement with Guangxi Civil Aviation Development Co., Ltd., a wholly owned subsidiary of Guangxi Airport ManagementGroup Co., Ltd., and Beijing Asiaray Advertising Media Ltd. to form a joint venture that operates various media resources in four airports in China’s Guangxiprovince that are owned and operated by Guangxi Airport Management Group Co., Ltd. These four airports are Nanning Wuxu International Airport, GuilinLiangjiang International Airport, Liuzhou Bailian Airport and Beihai Fucheng Airport. The joint venture, Guangxi Dingyuan Advertising Co., Ltd., has a 30-year operating term and began operations from July 2012. We wound up and deregistered Beijing Shengshi Lixin Culture & Media Co., Ltd. in April 2013 and are in the process of unwinding and deregistering TianjinAirMedia Advertising Co., Ltd.; both of these companies are 100% owned subsidiaries of our VIE, AM Advertising. We are in the process of establishing a wholly-owned subsidiary for our wholly owned Hong Kong subsidiary, AM China, which has been operating anadvertising business in Hong Kong since 2008. We intend to gradually shift our advertising business to this subsidiary once it is set up, and thus to graduallyreduce the reliance on our current VIE structure. In May 2013, Shengshi Lianhe entered into a joint venture agreement with Guangzhou Daozheng Advertising Co., Ltd. to establish a joint venture, GuangzhouMeizheng Advertising Co., Ltd., to operate tablet device advertisements on board the high speed trains on the Wuhan-Guangzhou and Guangzhou-Shenzhen-Hong Kong lines. Guangzhou Daozheng transferred to the joint venture the concession rights to operate such advertisement businesses for the period fromSeptember 1, 2012 to August 31, 2018. Shengshi Lianhe holds 54% while Guangzhou Daozheng Advertising Co., Ltd. holds 46% of the equity interest in thejoint venture. The joint venture has a term of 30 years. In October 2013, we entered into a strategic alliance agreement with HNA Culture Holding Group Co., Ltd., or HNA Culture, to jointly develop in-flightinternet coverage on HNA Group's planes. Pursuant to this agreement, HNA Culture is responsible for obtaining exclusive rights to develop and operate in-flight internet service and in-air multimedia platform from member airlines of HNA Group. The joint development will be carried out through a fund to bemanaged by a fund management company, Beijing Yunxing Chuangrong Investment Fund Management, Co., Ltd., jointly owned by us and HNA Culture.As of March 31, 2014, we had contributed RMB15 million to the joint fund management company. Our principal executive offices are located at 17/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027, People’s Republic ofChina. 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 isat 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 capitalexpenditures. 35 Business Overview General We are a leading operator of out-of-home advertising platforms in China targeting mid-to-high-end consumers. As of December 31, 2013, we operated digitalframes and digital TV screens in 31 airports in China, including the six largest airports in China: Beijing Capital International Airport, Guangzhou BaiyunInternational Airport, Shanghai Pudong International Airport, Shanghai Hongqiao International Airport, Shenzhen Baoan International Airport and ChengduShuangliu International Airport. In addition, we had contractual concession rights to sell advertisements on digital TV screens on the airplanes operated byseven airlines, including leading airlines in China such as China Southern Airlines, Air China, China Eastern Airlines, Hainan Airlines and ShanghaiAirlines. We started operating advertising media platforms at gas stations owned by Sinopec in 2009. In 2011, we established GreatView Media. And from 2012onwards, GreatView Media began to exclusively operate our gas station media business. In the same year, we decided to increase GreatView Media’s capitaland align the interests of its senior management team with the interests of the company by allowing them to indirectly hold equity right in GreatView Media.From 2012 onwards, we intend to put more efforts into developing our gas station network, expand locations in top tier cities and strengthen our existingadvantages by installing LED screens. In 2013, Elec-Tech agreed to invest RMB640 million (US$104 million) to purchase ordinary shares representingapproximately 21.27% of the equity interest of GreatView Media. See "Item 4.A—Information on the Company—History and Development of the Company."On August 1, 2013, we extended our exclusive concession rights contract with Sinopec which allows us to operate media platforms in Sinopec gas stationsthroughout China through the end of 2020. In addition, we also hold concession rights to operate various traditional advertising media including billboards, light boxes and other media platforms outsidethe air travel sector, such as unipole signs and other outdoor media. Air travel advertising in China has grown significantly in recent years because of growth in China’s advertising market and air travel sector. By focusing onair travel advertising, we enable our advertisers to target air travelers in China, whom we believe are an attractive demographic for advertisers due to the factthat they have higher-than-average disposable income compared to the rest of China’s population. We strategically place our digital frames, digital TV screensand traditional media displays in high-traffic locations inside airports, particularly in areas where there tend to be significant waiting time, such as departurehalls, security check areas, boarding gates, baggage claim areas and arrival halls. The digital TV screens on our network airplanes are located in highlyvisible locations in passenger compartments and on the backs of passenger seats. We also provide in-flight advertising and non-advertising contents. Ourcombined coverage in airports and on airplanes enables our programs to attract air travelers at multiple points during their travel experience, from check-in,boarding, flight time, to arrival. We combine advertising content with non-advertising content, such as weather, sports and comedy clips, in our digital TV screen programs. We havecontracts with many Chinese TV stations such as Dragon TV, the Travel Channel and CCTV-5, to show video clips of their programs in airports and onairplanes. We also obtain TV programs such as documentaries and “hidden camera” type reality shows from other third-party content providers. In January2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which manages the internet TV business ofChina International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air travelers in China. We believenon-advertising program content make air travelers more receptive to the advertisements included in our programs and ultimately make our programs moreeffective for our advertisers. Starting in 2010, our standard programs in airports typically include 20 minutes of advertising content during each hour ofprogramming and are shown for approximately 16 hours per day. The length of our in-flight programs typically ranges from approximately 45 minutes to anhour per flight, approximately five to 15 minutes of which consist of advertising content. We derive revenues principally by selling advertising time slots and locations on our network to our advertisers, including both direct advertisers andadvertising agencies. In the short term, we will focus on selling our current media resources and improve the utilization rates of our existing product lines.Before we obtain a higher level of profitability in our operations, we expect that we would not obtain significantly more media resources either inside or outsidethe air travel advertising sector. In the long term, however, we will continue to acquire new media platforms to provide a broader range of advertising servicesfor our advertisers and to become a one-stop provider for air travel as well as other forms of advertising. 36 Advertising Network and Services We primarily generate revenues from advertising services at the following platforms: digital frames in airports, which include mega-size LEDs, digital TVscreens in airports and on airplanes, traditional media in airports such as light boxes, billboards and painted advertisements and gas station media displaysand other outdoor media displays outside of the air travel advertising sector. Digital Frames in Airports We operate a network of digital frames, strategically placed in areas of airports such as departure halls, terminals and arrival halls, where most of the airtravelers congregate and spend significant amounts of time waiting. Our digital frames are high-definition liquid crystal display, or LCD, screens thattypically change digital picture displays approximately every 6 or 12 seconds, with certain exceptions of 5 to 10 seconds in certain large airports. Our digitalframes include standalone digital frames, TV-attached digital frames and mega-size LEDs. Standalone digital frames display advertisements on vertical orhorizontal display panels ranging in size from 52 to 108 inches. TV-attached digital frames consist of a vertical digital frame beneath a digital TV screen andare typically in sizes ranging from 47 to 55 inches. In response to advertiser advertising needs, we also own and operate digital frames of a larger size, up to108 inches and 106 inches, in the airports of Beijing and Guangzhou and the airport of Haikou, respectively. In both international and domestic arrival hallsof Terminals 2 and 3 of the Beijing International Airport, we operate 44 sets of 108-inch LCD screens that measure four square meters (or 43.1 square feet)each; we also operate 11 sets of 108-inch LCD screens in departure halls, security checkpoints, luggage pickup and subway entrance areas inside GuangzhouBaiyun International Airport. In addition, as of March 31, 2014, we were operating mega-size LED screens in eleven airports, including, Beijing Airport,Changsha Huanghua International Airport, Chengdu Shuangliu International Airport, Dalian Zhoushuizi International Airport, Guangzhou BaiyunInternational Airport, Hangzhou Xiaoshan International Airport, Hohhot Baita International Airport, Jinan Yaoqiang International Airport, Nanjing LukouInternational Airport, Shenyang Taoxian International Airpot and Xi’an Xianyang International Airport. As of March 1, 2014, we operated approximately3,180 digital frames in 31 airports, 1,183 of which were standalone digital frames, including 108-inch LCD display screens and mega-size LED screens,1,705 of which were TV-attached digital frames, and 292 of which were frames displayed in groups. These 31 airports accounted for more than 77% of thetotal air travelers in China in 2013, according to the General Administration of Civil Aviation of China. Our digital frames play advertising content repeatedlymainly in five-minute - and ten- minute cycles, and we also offer two-minute and three-minute cycles to our advertisers. In 2013, we started experimenting withan interactive platform with a lucky draw system on our TV-attached digital frames. The interactive platform is built on our TV-attached digital frames andwill integrate with our digital TV screens in airports in the future. By sending a text message or scanning a QR code through mobile devices, air passengerscan attend lucky draws to win attractive prizes. Through the interactive platform, clients can continuously reach and engage air passengers not only at airportsbut elsewhere in their daily lives through mobile devices. We believe that this interactive platform will not only increase the media value of our products byattracting greater viewer attention, but also enable us to charge clients an effectiveness based performance fee in addition to the regular display fee. We believe digital frames provide an effective advertising platform to our advertisers. We sell our advertisements on digital frames in one-week units whichaffords scheduling flexibility and cost-effectiveness to our advertisers. In addition, as our digital frames are located in both domestic and internationalterminals in a number of airports, in certain of the major airports we cover, our advertisers can choose to place their advertisements in domestic terminalsonly, international terminals only or a mix of domestic and international terminals. This flexibility in terms of location selection provides our advertisers withthe ability to tailor their advertisement packages to effectively attract their target audiences. We also continue to diversify the arrangement and placement of ourdigital frames to offer enhanced visual effects. For example, in Guangzhou Baiyun International Airport, we have some digital frames in sets of two or threescreens together as a group, in Shenyang Airport we present four groups of digital frames with 20 combined LED screens each and in Xi'an Airport we presentthree screens as a group. An advertisement can be displayed in one picture on multiple screens to better attract air travelers’ attention. Digital TV Screens in Airports We strategically place our digital TV screens in high-traffic areas of airports such as departure halls, security check areas, boarding gates, baggage claimareas and arrival halls, where there tend to be significant waiting time. A majority of our standard digital TV screens are 42-inch plasma display panels orLCDs. As of March 1, 2014, we operated approximately 2,343 digital TV screens in 30 airports in China under various concession rights contracts. These 30airports accounted for approximately 72% of the total air travelers in China in 2013, according to the General Administration of Civil Aviation of China. 37 Our airport programs consist of advertising and non-advertising content and are played for approximately 16 hours per day. Our non-advertising content isplayed in two-hour cycles, during which our advertising content is repeated hourly. During each hour, 20 minutes of the program consists of advertisingcontent provided to us by our advertisers and the rest of the program consists of non-advertising content such as sports and entertainment content provided bythird-party content providers. In addition to separate advertising messages or videos, which are updated weekly, we promote the brand names of ouradvertisers by naming our programs after their brand names. The non-advertising content consists of humor clips such as hidden camera shows and funnyhome videos, sports clips such as soccer, snooker and extreme sports, movie previews and interviews with celebrities, as well as the latest world fashionshows. These programs are updated weekly in most of the major airports including Beijing, Shanghai and Guangzhou, etc., but monthly in six airportsincluding Nanchang, Ningbo and Zhangjiajie, etc. Digital TV Screens on Airplanes As of March 1, 2014, our programs were placed on digital TV screens on planes operated by seven airlines. The displays on our network airplanes, whichhave been installed by aircraft manufacturers, are located at the top of passenger compartments and on the back of passenger seats. The digital TV screens atthe top of passenger compartments typically range from 9 to 15 inches in size, while the display screens on the back of passenger seats typically range from 7to 9 inches in size. There are approximately 10 to 280 on an airplane. The TV system installed on each plane differs from one another according to therequirements of each specific airline. For instance, if the airline chooses to implement audio-video on demand, or AVOD, systems and personal TV, or PTV,systems, then it would have to install TV screens on the back of each and every seat on the airplane. Our airplane display programs are played once for approximately 45 minutes to an hour per flight. Approximately 4.5 to 15 minutes of each program consistof advertising content provided to us by our advertisers and the rest of the program consists of non-advertising content. The non-advertising content on theseplanes includes travel shows, documentaries, sports and other content similar to that shown on our airport programs. We also promote brand names of ouradvertisers through our programs by naming our programs after their brand names or displaying their logos on the corner of the screens during the programs.We have obtained rights to play popular films on airplanes in our network. As most of the airplanes on which our programs are played use video tape or DVDplayers to play video messages and most of these airplanes only have one video tape or DVD player, passengers are not typically given a selection of channelsand thus viewership of our programs is generally high. Traditional Media in Airports Our traditional media in airports currently includes light boxes and billboards in airports. As of March 1, 2014, we operated approximately 437 light boxesand billboards mainly in six airports, such as Beijing Capital International Airport and Wenzhou Yongqiang International Airport. Light box advertisements are static poster advertisements illuminated with back lighting and billboard advertisements are only static poster advertisements. Other Media in Air Travel We have logos for various display equipment in airports prominently displayed on this equipment, for which logos we charge advertising fees. Gas Station Media Network In April 2009, we entered into an exclusive contract with Sinopec under which we obtained the concession right to develop and operate outdoor advertisingplatforms at all Sinopec gas stations located throughout China until December 31, 2014, with limited exceptions. In August 2013, we extended the concessionperiod with Sinopec to December 31, 2020. This network consists of outdoor advertising platforms strategically placed in Sinopec gas stations where there ishigh visibility and significant waiting time. These outdoor advertising platforms consist of LED screens as well as traditional advertising formats such aslight boxes and billboards, and display advertising content in month-long slots. 38 Other Media Network We currently operate approximately 23 unipole signs and other outdoor media in locations throughout Beijing and 5,500 tablets on high-speed trains in China. We believe our recently developed outdoor media network and our tablets on high-speed trains provide alternative advertising platforms to our advertisers inaddition to our existing air travel media network. The terms of our concession right contracts of high-speed train platforms range from three to six years, andwe generally sell advertisements on those platforms in units ranging from one month to one year long. We currently plan to focus on improving the utilizationrates of our existing outdoor media network resources and to expand our presence of tablet advertising on more high-speed trains. Our Sales Contracts We typically offer advertisers 6-second and 12-second time slots for advertising on our digital frames, though, in some airports, we occasionally offer timeslots of 5, 7.5 and 10 seconds. With respect to our digital TV screens, we offer advertising time slots of 5, 15 and 30 seconds. Sales are made pursuant towritten contracts with commitments ranging from one week to two years. These digital frames and digital TV screens sales contracts typically fix the duration,time and frequency of advertisements. For billboards and light boxes, we offer advertisers spaces on a monthly basis or a year-long basis; sales are madepursuant to written contracts with commitments ranging from one month to one year. These billboards and light boxes sales contracts typically fix thecommencement date and duration of such advertisements. Payments under certain sales contracts are subject to our advertisers’ receipt of monitoring reports which verify the proper display of the advertisements andpayment terms mutually agreed by both parties. We generally require our advertisers to submit advertising content at least 10 working days for digital mediaand 14 working days for traditional media prior to the campaign start date, and reserve the right to refuse to display advertisements not in compliance withcontent requirements under PRC laws and regulations. Our Concession Rights Contracts Airports As of December 31, 2013, our major concession rights contracts that will expire and need to be renewed in the next 12 months include LED screens, digitalTV screens and digital TV screens media assets in Beijing Capital International Airport and digital TV screens and digital TV screens media assets inGuangzhou Baiyun International Airport, among others. As of March 31, 2014, we had 100 concession rights contracts to operate our digital frames, digital TV screens, other displays in our air travel network andtraditional media network. Many of these concession rights contracts contained provisions granting us exclusive concession rights. The scope of theexclusivity, however, varies from contract to contract. Most of these exclusivity provisions limit the exclusivity to certain areas of an airport. For example, ourcontract with Guangzhou Baiyun International Airport granted us the exclusive right to operate all the closed-circuit displays located in the domestic andinternational arrival and departure areas. 39 From March 2009, we have had a concession rights contract with Beijing Capital International Airport to operate traditional advertising formats includingbillboards, light boxes and other formats at Terminals 1, 2, and 3 of Beijing Capital International Airport. We renewed these concession rights, which nowexpire on March 31, 2015. We began operating these traditional media on April 1, 2009. In addition, in February 2012, we obtained a concession rightscontract to operate 58 digital frames, 54 digital TV screens, and two large LED screens at the newly built Terminal 2 of Chengdu Shuangliu InternationalAirport, or Chengdu Airport, from April 1, 2012 to March 31, 2017. We also obtained concession rights to operate six light boxes at the departure aisle andone other traditional advertising format at Terminal 2 of Chengdu Airport from April 1, 2012 to March 31, 2015. Chengdu Airport surpassed ShenzhenBaoan International Airport in 2011 in terms of air traveler volume to become the fifth largest airport in mainland China. As of March 31, 2014, we obtainedconcession rights to install and operate various mega-size LED screens in Beijing Capital International Airport, Hangzhou Xiaoshan International Airport inZhejiang province, Changchun Longjia International Airport in Jilin province, Xi’an Xianyang International Airport in Shaanxi province, Chengdu ShuangliuInternational Airport in Sichuan province, Sanya Fenghuang International Airport in Hainan province, and Hohhot Baita International Airport in InnerMongolia province. These contracts have durations of two to five years. Most concession fees are fixed under our concession rights contracts with escalationclauses attached, meaning the fees undergo fixed levels of increases over each year of the agreement. Payments under concession rights contracts are usuallydue three months in advance, but payments under a few material concession rights contracts are due six months or one year in advance. The concession feesthat we pay for our networks in each airport vary by each airport’s passenger volume and depend on the city where the airport is located. A majority of ourconcession rights contracts for our digital frames, digital TV screens and traditional media in airports have terms ranging from three to five years without anyautomatic renewal provisions. However, we can opt to renew the agreements three or five months before the expiration of certain concession rights contracts, onthe condition that if another third party offers to enter into concession rights contracts in relation to the same media platforms, we shall have first right ofrefusal to renew our existing concession rights contracts on similar terms as those proposed by such third party. As of March 1, 2014, 31 out of our 100concession rights contracts to operate in airports would be subject to renewal by the end of 2014. The number of displays and placement locations areexplicitly specified in the majority of our concession rights contracts. Airlines As of December 31, 2013, our programs were placed on digital TV screens located on routes operated by the following airlines: ·Air China; ·China Southern Airlines; ·China Eastern Airlines; ·Hainan Airlines; ·Shanghai Airlines; ·Shenzhen Airlines; ·Okay Airways. As of December 31, 2013, we had seven concession rights contracts to place our programs on these network airlines, three of which contained provisionsgranting us exclusive concession rights. The scope of the exclusivity, however, varies from contract to contract. Most of these exclusivity provisions limit theexclusivity to certain types of programs played on airplanes. Most of the concession fees are fixed by escalation clauses under the relevant concession rightscontracts, and their amounts vary by the number of routes and airplanes, type of aircraft and the departure and destination cities. Some of the concession rights contracts set forth the number and model of airplanes on which our programs can be played. In 2013, in order to control ourconcession cost, we changed our business cooperation model with Air China so that instead of holding the exclusive concession rights for Air China, we nowpurchase advertising time and space slots from a third party with greater flexibility. See "Item 3. Key Information—D. Risk Factors—Risks Related to OurBusiness—A significant portion of our revenues has been derived from the six largest airports and three largest airlines in China. If any of these airports orairlines experiences a material business disruption or if there are changes in our arrangements with these airports or airlines, we may incur substantial lossesof revenues." 40 We hold 49% of the equity interests in a joint venture, Beijing Eastern Media Corporation, Ltd., or BEMC. BEMC is formed in partnership with ChinaEastern Media Corporation, Ltd., a subsidiary of China Eastern Group and China Eastern Airlines Corporation Limited operating the media resources ofChina Eastern Group, which holds 51% equity interests in BEMC. BEMC obtained concession rights of certain media resources from its shareholders,including the digital TV screens on airplanes of China Eastern Airlines, and paid concession fees to its shareholders as consideration. We believe thisinnovative strategic partnership further strengthened our relationship with China Eastern Group and we renewed our concession rights contract on February20, 2010 with China Eastern Airlines to operate digital TV screens on China Eastern Airlines on an exclusive basis until December 31, 2020. As of December31, 2013, BEMC also obtained media resources other than digital TV screens, including other existing media resources of China Eastern Airlines and newmedia resources to be developed through cooperative efforts by China Eastern Airlines and us. Gas Station Media In April 2009, we entered into a concession rights agreement with Sinopec under which we hold the right to exclusively operate all of the outdoor advertisingmedia at Sinopec gas stations throughout China until December 31, 2014, except for those stations in a limited number of cities whose media platforms havepreviously been leased by Sinopec to third parties. In August 2013, we extended the concession period with Sinopec to December 31, 2020. For stations withexisting media platform lease agreements with third parties, Sinopec will not renew the contracts with third parties when the contracts expire, and will deliverthese media platforms to us within a reasonable period. 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. Manyadvertisers negotiate the terms of the advertising purchase agreements directly with us, however we also rely on advertising agencies for a significant portion ofour sales. We have a broad base of international and domestic advertisers in various industries. In 2011, the top three industries that advertised on our network wereautomobile, finance and high-end food and beverage, based on revenues derived from advertisers in these industries. Advertising revenues from automobile,finance and high-end food and beverage industries accounted for approximately 34.6%, 18.1% and 8.3% of our total revenues in 2011, respectively. In 2012,the top three industries that advertised on our network were automobile, finance, and electronic and home appliances, which accounted for approximately33.2%, 16.1% and 9.3% of our total revenues, respectively. In 2013, the top three industries that advertised on our network were automobile, finance and foodand beverages, which accounted for approximately 33.1%, 11.4% and 9.1% of our total revenues, respectively. One customer accounted for more than 10% ofour total revenues for 2012, and none of customers accounted for more than 10% of our total revenues for 2011 and 2013. Sales and Marketing We provide a number of services in connection with each advertiser’s advertising campaign. We rely on our experienced sales team to assist advertisers instructuring advertising campaigns by analyzing advertisers’ target audiences and the form and contents of the advertisement they may be interested in, as wellas consumer products and services. We conduct market research, consumer surveys, demographic analysis and other advertising industry research forinternal use to help our advertisers to create effective advertisements. We also use third-party market research firms from time to time to obtain the relevantmarket 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 networkfor 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 27 cities as of December 31, 2013. We provide in-house educationand training to our sales force to ensure they provide our current and prospective advertisers with comprehensive information about our services, theadvantages of using our air travel 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 servicesby displaying our name and logo on all of our digital frames, digital TV screens, light boxes and billboards in airports and gas stations and by placingadvertisements on third-party media from time to time, including China Central Television. We also engage third-party advertising agencies to help sourceadvertisers. 41 Pricing The listing prices of our air travel advertising services depend on the traffic flow of each airport, the gross domestic product, or GDP, average income level,average commercial advertising budgets of major companies in the city in which each airport is located, the customer flow of each airline, the needs of eachairport and airline, the number of time slots and display locations purchased, the cost of the relevant media assets, our costs for the relevant concession rights,and competition. The listing prices of our advertising network in Sinopec gas stations depend on economic conditions, GDP, average discretionary income,average income levels and advertising trends in the cities in which the gas stations are located, taking into account the mainstream media advertising pricingand costs (including local news stations, newspapers, bus stop light boxes and outdoor signs) in each city as well as our own display equipment and resourcecosts for setting up such advertising network. Similar considerations apply to our outdoor media platforms. Going forward, we intend to review our listingprices 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 listingprices. Programming Most of our digital frames in airports play advertising content repeatedly in five- and ten-minute cycles throughout the day. We compile each cycle fromadvertisements that are provided to us by advertisers. We generally update the advertisements displayed on our digital frames on a weekly basis. BeginningApril 6, 2012, to improve the attractiveness of our digital frames, we changed our sales method for stand-alone digital frames in the airports for second-tierand third-tier cities in China by changing the length of advertising time slot from 12 seconds to six seconds per time slot and shortening the cycle time ofadvertisements from 10 minutes to five minutes. These changes increased the frequency of exposure for advertisements and had no impact on the time slotsavailable for sale of our digital frames. In addition, advertisers now have the choice to purchase time slots on our stand-alone digital frames at departure hallsor arrival halls separately or as a whole in the airports for second-tier and third-tier cities. A majority of our digital TV screens in airports play programs in a one-hour cycle repeatedly throughout the day and our digital TV screens on our networkairplanes play programs ranging from 45 minutes to one hour once per flight. We compile each cycle from advertisements of 5-, 15- or 30-seconds in lengthprovided by advertisers to us and from non-advertising content generated by our VIEs in China or provided by third-party content providers. We generallycreate a programming list on a weekly and monthly basis for programs played in airports and on airplanes, respectively. We create this list by first fixing theschedule for advertising content according to the respective sales contracts with our advertisers to guarantee the agreed duration, time and frequency ofadvertisements 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 isreviewed by us to ensure compliance with PRC laws and regulations. See “Regulation—Regulation of Advertising Services—Advertising Content.” We updateadvertising content for our programs played on the digital frames and digital TV screens in our network airports and airplanes on a weekly and monthlybasis, respectively. A majority of the non-advertising content played on our network is provided by third-party content providers such as Dragon TV, theTravel Channel and various satellite and cable television stations and television production companies. In January 2014, we entered into a strategic partnershipwith 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 programminglist and pre-recorded program is carefully reviewed to ensure the accuracy of the order, duration and frequency as well as the appropriateness of theprogramming content. 42 Display Equipment Supplies and Maintenance The primary hardware required for the operation of our network are the digital frames and digital TV screens that we use in our media network. Our digitalframes are flat-panel LCD displays and mega-size LED screens. 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. The top suppliers of our digital frames in2013 were Sharp, Vewell and Samsung, which collectively provided 100% of our total digital frames. The top five suppliers of our digital TV screens in 2013were TCL, AUO and NEC, which collectively provided approximately 100% of our total digital TV screens. Our digital frame suppliers typically provide uswith one- to two-year warranties while our TV screen suppliers typically provide us with one-year warranties. Our service team cleans, maintains and monitors digital frames, digital TV screens and other displays in our network airports on a daily basis. We typicallyengage two to four skilled maintenance staff for each network airport to make five scheduled inspections on our displays every day. They report any technicalproblems that they cannot solve on-site to our technicians in Beijing who strive to remotely analyze and fix problems within 12 hours. For our traditional media platforms in airports, the primary hardware was already established when we purchased the traditional media from airports, and wedo not incur significant maintenance costs in relation to these platforms. For our gas stations media network and outdoors media network, where the primaryhardware consist of basic display equipment such as light boxes and billboards, such hardware will generally be established upon the time of our entering intothe relevant concession rights agreements; we may incur construction and maintenance costs in relation to this equipment. Customer Service Our customer service team is responsible for contacting third-party research firms to compile evaluation reports based on selective sampling of the status ofadvertising on our network and providing advertisers with monthly monitoring reports once the relevant advertising campaign is launched on our network. Atthe same time, we also provide our advertisers with monthly reports prepared by third parties that verify the proper functioning of our displays and the properdissemination of the advertisement when required by our advertisers; such reports are done through online survey to analyze the effectiveness of and publicreaction to the advertisements. In addition, our network airports and airlines as well as gas stations are also actively involved in the monitoring process. Competition We compete primarily with several different groups of competitors: ·advertising companies that operate airport advertising networks, such as JC Decaux; ·in-house advertising companies of airports and airlines that may operate their own advertising networks; and ·other advertising media companies for advertising budgets, such as Internet, street facility displays, billboard and public transport advertisingcompanies, and with traditional advertising media, such as newspapers, television, magazines and radio, some of which may advertise in theairports in which we have exclusive contract rights to operate digital TV screens and some of which may advertise in the gas stations and other areaswhere we have our displays. We compete for advertisers primarily on the basis of network size and coverage, location, price, program quality, range of services offered and brandrecognition. See Item 3, “Key Information — D. Risk Factors — Risks Related to Our Business — We face significant competition in the PRC advertisingindustry, 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 ouremployees, sales agents, contractors and others. We have registered 18 major trademarks in China, including "", "", “”,“AIRMEDIA”, “AirMedia” and “AirTV.” We cannot be certain that our efforts to protect our intellectual property rights will be adequate or that third partieswill not infringe or misappropriate these rights. 43 We have registered our domain name www.AirMedia.net.cn with the Internet Corporation for Assigned Names and Numbers. We were granted one patentrelating to the design of our TV-attached digital frame, each of which consists of a LCD TV screen placed above a digital frame and which allowssimultaneous display of advertisement on both the LCD TV screen and the digital frame. The patent was granted in April 2009 and will expire in December2017. We have registered 31 computer software copyrights with the national copyright administration of China. 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 NationalPeople’s Congress, and several ministries and agencies under its authority including the SAIC. China’s Advertising Law was promulgated in 1994. In addition, the State Council, SAIC and other ministries and agencies have issued regulations thatregulate 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 ForeignInvestment Industrial Guidance Catalogue. The foreign investment projects that do not fall into the categories of encouraged, restricted or prohibited projects areconsidered permitted foreign investment projects and are not listed in the Foreign Investment Industrial Guidance Catalogue. Applicable regulations andapproval requirements vary based on the different categories. Investments in the PRC by foreign investors through wholly foreign-owned enterprises must be incompliance with the applicable regulations, and such foreign investors must obtain governmental approvals as required by these regulations. Since theadvertising industry is not listed in the Foreign Investment Industrial Guidance Catalogue, it falls into the permitted foreign investment category. The Foreign-invested Advertising Regulations require foreign entities that establish a wholly owned advertising company must have at least three years of directoperations in the advertising industry outside of China. Since December 10, 2005, foreign investors have been permitted to directly own a 100% interest inadvertising companies in China, but such foreign investors are required to be a company with advertising as its main business and to have at least three yearsof direct operations in the advertising industry outside of 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 equityinterests of our VIEs under the rules allowing for complete foreign ownership, our VIEs would continue to hold the required advertising licenses consistentwith current regulatory requirements. Currently, our advertising business is mainly conducted through contractual arrangements with our consolidated VIEs in China, including AM Advertising,Shengshi Lianhe, AirMedia UC and AM Yuehang. Our VIEs are the major companies through which we provide advertising services in China. Our subsidiary, AM Technology, has entered into a series ofcontractual arrangements with our PRC operating affiliates and their respective subsidiaries and shareholders under which: ·we are able to exert effective control over our PRC operating affiliates and their respective subsidiaries; ·a substantial portion of the economic benefits of our PRC operating affiliates and their respective subsidiaries are transferred to us; and ·we have an exclusive option to purchase all of the equity interests in our PRC operating affiliates in each case when and to the extent permitted byPRC law. 44 See Item 4, “Information on the Company—Organizational Structure” and Item 7, “Major Shareholders and Related Party Transactions—Related PartyTransactions—Contractual Arrangements.” In the opinion of Commerce & Finance Law Offices, our PRC legal counsel: the respective ownership structures of AM Technology and our consolidated VIEsare in compliance with existing PRC laws and regulations, and the contractual arrangements among AM Technology and our consolidated VIEs, in each casegoverned by PRC law, are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. We have been advised by our PRC legal counsel, however, that there are some uncertainties regarding the interpretation and application of current and futurePRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAIC (which regulates advertisingcompanies), 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 thatif the PRC government determines that the agreements establishing the structure for operating our PRC advertising business do not comply with PRCgovernment restrictions on foreign investment in the advertising industry, we could be subject to severe penalties. See Item 3, “Key Information—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 donot comply with PRC governmental restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our businesscould be materially and adversely affected.” Regulation of Advertising Services Business License for Advertising Companies Under applicable regulations governing advertising businesses in China, companies that engage in advertising activities must obtain from the SAIC or its localbranches a business license which specifically includes within its scope the operation of an advertising business. Companies conducting advertising activitieswithout such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. Thebusiness 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 anyrelevant law or regulation. We do not expect to encounter any difficulties in maintaining our business licenses. Each of our VIEs has obtained such a businesslicense from the local branches of the SAIC as required by existing PRC regulations. Each of Shenzhen AM, AM Technology and Xi’an AM has valid business license as of the date of this report. The business scope of these three entities as setforth 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 infringementof the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. The dissemination of tobacco advertisements viamedia is also prohibited as well as the display of tobacco advertisements in public areas. There are also specific restrictions and requirements regardingadvertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol andcosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised throughany 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 containingcontent subject to restriction or censorship comprise a material portion of the advertisements displayed on our network. 45 Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of theadvertisements they prepare or distribute are true and in full compliance with applicable law. In providing advertising services, advertising operators andadvertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of theadvertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain items which are subject togovernment censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has beenobtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of theadvertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or itslocal branches may revoke violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertisingdistributors 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: ·utilize traffic safety facilities and traffic signs; ·impede the use of public facilities, traffic safety facilities and traffic signs; ·obstruct commercial and public activities or create an unpleasant sight in urban areas; ·be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; or ·be placed in areas prohibited by the local governments at or above county level from having outdoor advertisements. In addition to the Advertising Law, the SAIC promulgated the Outdoor Advertising Registration Administrative Regulations to govern the outdoor advertisingindustry in China. Outdoor advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required tosubmit an application form and other supporting documents for registration. After review and examination, if an application complies with the requirements,the local SAIC will issue a certificate approving such advertisement. The content, format, specifications, periods and locations of dissemination of the outdooradvertisement must be filed with the local SAIC. See Item 3, “Key Information—Risk Factors—Risks Related to Our Business—If advertising registrationcertificates are not obtained for our airport advertising operations where such registration certificates are deemed to be required, we may be subject toadministrative sanctions, including the discontinuation of our advertisements at airports where the required advertising registration is not obtained.” In addition, according to a relevant SARFT circular, displaying audio-video programs such as television news, films and television shows, sports, technologyand entertainment through public audio-video systems located in automobiles, buildings, airports, bus or train stations, shops, banks and hospitals and otheroutdoor public systems must be approved by the SARFT. The relevant authority in China has not promulgated any implementation rules on the procedure ofapplying for the requisite approval pursuant to the SARFT circular. See Item 3, “Key Information—Risk Factors—Risks Related to Our Business—If we failto obtain approvals for including non-advertising content in our programs, we may be unable to continue to include such non-advertising content in ourprograms, which may cause our revenues to decline and our business and prospects to deteriorate.” Regulations on Foreign Exchange The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended (2008). Under theseRules, RMB is freely convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital account items,such as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration with, SAFE or its local counterparts(as the case may be) is obtained. Pursuant to the Foreign Currency Administration Rules, foreign invested enterprises, or FIEs, in China may purchase foreign currency without the approval ofSAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retainforeign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires acompany in China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability ofFIEs to purchase and retain foreign currencies in the future. They may also conduct examination of past foreign exchange transactions. In addition, foreignexchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from, and/orregistration with, SAFE. 46 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 inaccordance with PRC accounting standards and regulations. Additionally, these wholly foreign-owned companies are required to set aside at least 10% of theirrespective 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 accountingstandards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends except in the eventof liquidation and cannot be used for working capital purposes. In addition, under the EIT Law, dividends generated after January 1, 2008 and payable by a FIE in China to its foreign investors who are non-residententerprises will be subject to a 10% withholding tax unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that providesfor a different withholding arrangement. BVI, where Broad Cosmos, our wholly owned subsidiary and the 100% shareholder of Shenzhen AM, isincorporated, does not have such a tax treaty with China. AM China, the 100% shareholder of AM Technology and Xi’an AM, is incorporated in Hong Kong.According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreedbetween 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 besubject to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). In August 2009,the State Administration of Taxation released the Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), whichtook effect on October 1, 2009. Under these measures, our Hong Kong subsidiary needs to obtain approval from the competent local branch of the StateAdministration of Taxation in order to enjoy the preferential withholding tax rate of 5% in accordance with the Double Taxation Arrangement. In February2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the preferential treatment on dividendwithholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to enjoy preferential treatmentpursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is toobtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the applicable tax rates, if it determines that anytaxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In October 2009, the State Administration ofTaxation 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 taxauthorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review. Notice 601specifies that a beneficial owner should generally carry out substantial business activities and own and have control over the income, the assets or other rightsgenerating 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 fordividends distributed by our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary is aconduit company and does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries, the higher 10% withholding taxrate 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 theImplementation Regulations of the EIT Law, the qualified dividend and profit distribution from equity investment between resident enterprises shall refer toinvestment income derived by a resident enterprise from its direct investment in other resident enterprises, except the investment income from circulatingstocks issued publicly by resident enterprises and traded on stock exchanges where the holding period is less than 12 months. As the term “residententerprises” needs further clarification and interpretation, we cannot assure you that the dividends distributed by AM Technology, Shenzhen AM and Xi’anAM to their direct shareholders would be regarded as dividends distributed between qualified resident enterprises and be exempted from the withholding tax. 47 Under the EIT Law and related regulations, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered aPRC 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 managementbodies” 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 Enterprisesas PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certainspecific criteria for determining whether the “de facto management body” of a Chinese-controlled overseas-incorporated enterprise is located in China. Inaddition, 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 beSeptember 1, 2011. The bulletin provided clarification in the areas of resident status determination, post-determination administration, as well as competenttax authorities. It also specifies that when provided with a copy of a Chinese tax resident determination certificate from a resident Chinese controlled offshoreincorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinesecontrolled 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 clarificationmade 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 residencystatus of offshore enterprises and the administration measures that should be implemented, regardless of whether they are controlled by PRC enterprises orPRC 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 ADSholders 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 subsidiariesmay 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 besubject to 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 ofDomestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005. SAFE Notice75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by the SAFE. SAFE Notice 75 states that PRC residents,whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established forthe purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “PRC legal person residents” as used in SAFENotice 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC naturalperson residents” as used in SAFE Notice 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRCfor economic benefit. The SAFE implementation notice of November 24, 2005 further clarifies that the term “PRC natural person residents” as used underSAFE Notice 75 refers to those “PRC natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests indomestic entities that are classified as “domestic-funding” interests. 48 PRC residents are required to complete amended registrations with the local SAFE branch upon: (i) injection of equity interests or assets of an onshoreenterprise to the offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amendedregistrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changesin share capital, share transfers, long-term equity or debt investments, and granting security interests. PRC residents who have already incorporated or gainedcontrol of offshore entities that have made onshore investment in the PRC before SAFE Notice 75 was promulgated must register their shareholding in theoffshore entities with the local SAFE branch on or before March 31, 2006. On May 20, 2011, the SAFE promulgated the Implementation Guidelines for Foreign Exchange Administration of Financings and Return Investment byOnshore Residents Utilizing Offshore Special Purpose Companies (or the Guidelines), which took active on July 1, 2011, clarifying certain implementationquestions of SAFE Notice 75. Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from theirshareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures underSAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inboundinvestments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity saleproceeds, or the return of funds upon a capital reduction. In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOCRegulation, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capitalaccount. In January 2007, the SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval requirements forcertain 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 DomesticIndividuals Participating in an Employee Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, “Application Procedure ofForeign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-ListedCompany” promulgated on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens who participate in a shareincentive plan of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. All such participants need toretain a PRC agent through a PRC subsidiary to register with SAFE and handle foreign exchange matters such as opening accounts and transferring andsettlement of the relevant proceeds. The New Share Incentive Rule further requires that an offshore agent should also be designated to handle matters inconnection 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 requiredregistration and the procedures for the New Share Incentive Rule under PRC laws, but the application documents are subject to the review and approval of theSAFE, 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 NewShare 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 workingin China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employeestock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail topay 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 newmarket opportunities or new product introductions. C.Organizational Structure The following diagram illustrates our corporate structure as of March 31, 2014: 49 50 51 Offshore VIE Onshore Equity Interest Contractual arrangements. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” (1) Wealthy Environment Limited is 100% owned by Mr. Herman Man Guo, our chairman and chief executive officer. (2) Mambo Fiesta Limited is 100% owned by Mr. Qing Xu, our director and executive president. (3) Beijing Shengshi Lianhe Advertising Co., Ltd., or Shengshi Lianhe, is 79.86% owned by Mr. Herman Man Guo, our chairmanand chief executive officer, 11.94% owned by Mr. Qing Xu, our director and executive president, and 8.20% owned by Mr. XiaoyaZhang, former president and chief financial officer of AirMedia Group Inc. and AirMedia Group Co., Ltd. (4) Beijing AirMedia UC Advertising Co., Ltd. is 98.75% owned by AirMedia Group Co., Ltd., 1.035% owned by Mr. Herman ManGuo, our chairman and chief executive officer, 0.215% owned by Mr. Qing Xu, our director and executive president. (5) Beijing Yuehang Digital Media Advertising Co., Ltd. is 80% owned by Mr. James Zhonghua Feng, our president and director, and20% owned by Mr. Tao Hong, senior administrative director of AirMedia Group Co., Ltd. (6) AirMedia Group Co., Ltd. is 2.833% owned by Mr. Herman Man Guo, our chairman and chief executive officer, 0.241% owned byMr. Qing Xu, our director and executive president, 0.166% owned by Mr. Xiaoya Zhang, former president and chief financialofficer of AirMedia Group Inc. and AirMedia Group Co., Ltd., and 96.76% owned by Shengshi Lianhe. (7) Beijing GreatView Media Advertising Co., Ltd. is formerly known as Beijing Weimei Shengjing Media Advertising Co., Ltd.Beijing GreatView Media Advertising Co., Ltd. is 21.27% owned by Elec-Tech International Co., Ltd. and 17.32% owned byBeijing Zhongshi Aoyou Advertising Co., Ltd. Elec-Tech International Co., Ltd. had contributed RMB6,755,000 out of itssubscribed registered capital of RMB13,510,000 as of March 31, 2014 and is obligated to complete its duty of contribution beforeJune 28, 2015. (8) Beijing AirMedia Media Advertising Co., Ltd. changed into its current corporate name in March 2014 and was formerly known asBeijing AirMedia Jinshi Advertising Co., Ltd. Beijing AirMedia Media Advertising Co., Ltd. is 20% owned by AirMedia GroupCo., Ltd. (9) Beijing Dongding Gongyi Advertising Co., Ltd. is 25% owned by Mr. Jin Li, director and deputy general manager of BeijingDongding Gongyi Advertising Co., Ltd. (10) Beijing Eastern Media Co., Ltd. is 51% owned by Shanghai Eastern Media Co., Ltd. (11) AirTV United Media & Culture Co., Ltd. is 25% owned by Beijing Dalu Culture Media Co., Ltd. (12) Flying Dragon Media Advertising Co., Ltd. is 16% owned by Ms. Mingfang Zhang, president of Flying Dragon Media AdvertisingCo., Ltd., and 4% owned by Mr. Hulin Zhang, general manager of Flying Dragon Media Advertising Co., Ltd. (13) Zhejiang AirMedia Guangying Film & TV Production Co., Ltd. is 52.4% owned by Zhejiang Tianguangdiying Film & TVProduction Co., Ltd. (14) As of the date of this annual report, Tianjin AirMedia Advertising Co., Ltd. is in the process of deregistration and is expected to bederegistered in 2014. (15) Zhangshangtong Air Service (Beijing) Co., Ltd. is 61.4% owned by Beijing Zhangshangtong Network Technology Co., Ltd. and18.6% owned by 16 individuals. (16) Guangxi Dingyuan Advertising Co., Ltd. is 20% owned by Guangxi Civil Aviation Development Co., Ltd. and 40% owned byBeijing Asiaray Advertising Co., Ltd. 52 (17) Guangzhou Meizheng Advertising Co., Ltd. is 46% owned by Guangzhou Daozheng Advertising Co., Ltd. (18) Beijing Xinghe Union Media Co., Ltd. is 50% owned by N-S Digital. (19) Beijing Yunxing Chuangrong Investment Fund Management, Co., Ltd. is 50% owned by HNA Xinhua Culture Holding GroupCo., Ltd.. Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China, AM Advertising, Shengshi Lianhe,AirMedia UC and AM Yuehang. We do not have any equity interests in our VIEs, but instead enjoy the economic benefits derived from them through a seriesof contractual arrangements. See Item 7, “Major Shareholders and Related Party Transactions—Related Party Transactions—Contractual Arrangements” for adescription of these arrangements. D.Property, Plants and Equipment Our headquarters are located in Beijing, China, where we lease approximately 4,393 square meters (approximately 47,281 square feet) of office space. Ourbranch offices lease approximately 4,757 square meters (approximately 51,209 square feet) of office space in approximately 35 other locations. In addition, we own approximately 841 square meters (approximately 9,051square feet) of office space in China. 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 consolidatedfinancial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-lookingstatements. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, includingthose set forth under Item 3, “Key Information — D. Risk Factors” or in other parts of this annual report on Form 20-F. See “Forward-lookingInformation.” A.Operating Results Important Factors Affecting Our Results of Operations Our operating results 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 the demand for air travel and advertisingspending in China. The demand for air travel was in turn affected by general economic conditions, the affordability of air travel in China and certain specialevents that may attract air travelers into and within China. Advertising spending was also particularly sensitive to changes in general economic conditions.The increase or decrease in demand for air travel and advertising spending could affect the attractiveness of our network to advertisers, our ability to fill ouradvertising time slots and locations and the price we charge for our advertising time slots and locations. 53 Service Offerings During each of the past three fiscal years, our advertising network primarily consisted of standard digital frames, traditional media in airports such asbillboards and light boxes, digital screens on airplanes, digital TV screens in airports, mega-size LED screens in airports, unipole signs, tablets displays onhigh speed trains and other outdoor media, and various traditional advertising formats in gas stations. We believe our broad range of service offerings providedour advertisers with diverse choices in selecting and combining different air travel and other advertising platforms that best suit their advertising needs andpreferences, maximized the consumer reach of the advertisements shown on our network and allowed us to cross-sell different advertising services. Ultimately,we believe our broad range of service offerings will increase and diversify the sources of revenues we can generate from our advertising network. Number of Our Advertising Time Slots and Locations Available for Sale The number of time slots available for our digital frames and digital TV screens in airports during the period presented is calculated by multiplying the timeslots per week in a given airport by the number of weeks during the period presented when we had operations in such airport and then calculating the sum ofall the time slots available for each of our network airports. The number of time slots available for our digital TV screens on airplanes during the periodpresented is calculated by multiplying the time slots per month for a given airline by the number of months during the period presented when we hadoperations 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 intraditional media in airports is defined as the sum of (a) the number of light boxes and billboards in Beijing, Shenzhen, Wenzhou and certain other airportsand (b) the number of gate bridges in airports where we have concession rights to place advertisements on gate bridges. The number of locations available forsale for our light boxes and billboards in gas stations and other outdoor locations is defined as the number of light boxes and billboards we operated in Sinopecgas stations and in various outdoor locations throughout Beijing. By increasing the number of airports, airlines and gas stations in our network, we can increase the number of advertising time slots and locations that we haveavailable to sell. In addition, the length of our advertising cycle for our digital frames and digital TV screens can potentially be extended to longer durationsdepending on demand in each airport or airline. However, advertisers may be unwilling to accept placement of their advertisements on a longer time cyclewhich decreases the frequencies of their advertisements displayed each day. Also, beginning April 6, 2012, in an effort to improve the attractiveness of ourdigital frames, we changed our sales method for stand-alone digital frames in the airports for second-tier and third-tier cities in China. The length ofadvertising time slot was changed from 12 seconds to six seconds per time slot. The cycle time of advertisements was changed from 10 minutes to fiveminutes. These changes increased the frequency of exposure for advertisements and had no impact on the time slots available for sale of our digital frames. Inaddition, advertisers now have the choice to purchase time slots on our stand-alone digital frames at departure halls or arrival halls separately or as a whole inthe airports for second-tier and third-tier cities. For more details, see “Item 4. Information on the Company—A. History and Development of the Company—Business Overview—Programming.” In addition, by increasing the number of light boxes, billboards and gate bridges in our network, we can increase thenumber of advertising spaces and locations that we have available to sell. See Item 3, “Key Information — D. Risk Factors — Risks Related to our Business— When our current advertising network of digital frames, digital TV screens, light boxes, billboards and gate bridges becomes saturated in the majorairports, airlines and other locations 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.” 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 6-and 12-second equivalent advertising time slots for digital frames in airports and 30-second equivalent advertising time slots for digital TV screens in airportsand on airplanes sold during that period. The average selling price for our traditional media spaces and locations in airports is calculated by dividing therevenues derived from all the locations sold by the number of locations sold during the period presented, and we use a similar method to calculate averageselling price for our gas station and outdoor media locations. The primary factors that affect the effective price we charge advertisers for time slots andlocations on our network and our utilization rate include the attractiveness of our network to advertisers, which depends on the number of displays andlocations, the number and scale of airports and airplanes in our network, the level of demand for time slots and locations, and the perceived effectiveness byadvertisers of their advertising campaigns placed on our network. We may increase the selling prices of our advertising time slots and locations from time totime depending on the demand for our advertising time slots, spaces and locations. For example, starting from October 23, 2012, after approximately 40-dayoperation, we completed the upward adjustment of the listing price of our mega-size LED screens at Terminals 2 of Chengdu Shuangliu International Airportby approximately 75%; the price adjustment was due to strong demand from advertisers. 54 During the past three fiscal years, a significant percentage of the programs played on our digital TV screens in airports and 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 eithergenerated such content through our VIEs or obtained such content from third party content providers. We believe that the combination of non-advertisingcontent 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 optimizeour ability to generate revenues for each program cycle. Utilization Rate The utilization rate of our advertising time slots is the total time slots sold as a percentage of total time slots available during the relevant period. In order toprovide meaningful comparisons of the utilization rate of our advertising time slots, we generally normalize our time slots into 12- second units for digitalframes in different airports and 30-second units for digital TV screens in airports and on airplanes, which we can then compare across network airports,airlines and periods to chart the normalized utilization rate of our network by airports and airlines and over time. The utilization rate of our advertisinglocations for traditional media in airports, gas stations and outdoor media is the total number of locations sold as a percentage of the total number of locationsavailable during the relevant period. Our overall utilization rate was primarily affected by the demand for our advertising time slots and locations and ourability to increase the sales of our advertising time slots and locations, especially those advertising time slots and locations on our network airports. We plan tostrengthen 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 andultimately improve our utilization rate. Network Coverage and Concession Fees During the past three fiscal years, the demand for our advertising time slots and locations and the effective price we charged advertisers for time slots andlocations on our network depended on the attractiveness and effectiveness of our network as viewed by our advertisers which, in turn, was related to thebreadth of our network coverage, including significant coverage in major airports and airlines that advertisers wish to reach. As a result, it has been, and willcontinue to be, important for us to secure and retain concession rights contracts to operate our digital frames, digital TV screens and traditional media in majorairports and to place our programs on major airlines and to increase the number of displays which we operate in those airports and programs we place on thoseairlines. In addition, our future results of operations will also be affected by our network coverage beyond airports and airlines, including gas stations. Concession fees constituted a significant portion of our cost of revenues. Concession fees tend to increase over time, and a significant increase in concessionfees 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 secureand retain these concession rights contracts on commercially advantageous terms. 55 Revenues We 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, 2011 2012 2013 Amount % ofTotalRevenues Amount % ofTotalRevenues Amount % ofTotalRevenues Air Travel Media Network Digital frames in airports $126,539 45.5% $137,342 46.9% $152,346 55.1%Digital TV screens in airports 21,937 7.9% 13,731 4.7% 14,110 5.1%Digital TV screens on airplanes 26,734 9.6% 26,612 9.1% 16,160 5.8%Traditional media in airports 73,535 26.5% 83,478 28.5% 64,845 23.5%Other revenues in air travel 6,416 2.4% 7,346 2.4% 9,183 3.3%Gas station Media Network 12,873 4.6% 14,217 4.9% 12,726 4.6%Other Media 9,787 3.5% 10,239 3.5% 7,146 2.6%Total revenues 277,821 100.0% 292,965 100.0% 276,516 100.0%Business tax and other sales tax (7,197) (2.6)% (6,223) (2.1)% (4,250) (1.5)%Net revenues $270,624 97.4% $286,742 97.9% $272,266 98.5% Revenues from Air Travel Media Network Revenues from our digital frames in airports accounted for 45.5%, 46.9% and 55.1% of our total revenues for the years ended December 31, 2011, 2012 and2013, respectively. We operated a total of 3,092 digital frames in 34 airports, 3,403 digital frames in 34 airports and 3,380 digital frames in 31 airports as ofDecember 31, 2011, 2012 and 2013, respectively. Revenues from digital frames in airports for fiscal year 2013 increased by 10.9% to $152.3 million in 2013 from $137.3 million in 2012 mainly due to therapid growth of our mega-size LED screens advertisement business and our continued sales efforts. The number of digital frames advertising time slots soldincreased 13.0% from 49,558 in 2012 to 56,010 in 2013, and the average selling price decreased slightly from $2,771 in 2012 to $2,720 in 2013. Revenues from digital frames in airports for fiscal year 2012 increased by 8.5% to $137.3 million in 2012 from $126.5 million in 2011 mainly due to ourcontinued sales efforts and the rapid growth of our mega-size LED screens. The number of digital frames advertising time slots sold increased 6.8% from46,399 in 2011 to 49,558 in 2012, and the average selling price increased slightly from $2,727 in 2011 to $2,771 in 2012. Revenues from our digital TV screens in airports accounted for 7.9%, 4.7% and 5.1% of our total revenues for the years ended December 31, 2011, 2012 and2013, respectively. We operated 2,104 digital TV screens in 36 airports, 2,579 digital TV screens in 34 airports and 2,969 digital TV screens in 31 airportsas of December 31, 2011, 2012 and 2013, respectively. The increase in the number of digital TV screens from 2012 to 2013 was due to the commencement ofoperations of digital TV screens in certain new terminals and airports. Revenues from digital TV screens in airports for fiscal year 2013 increased by 2.8% to $14.1 million in 2013 from $13.7 million in 2012 due to our continuedsales efforts. Meanwhile, there was a 23.5% upward adjustment in the average selling price of our digital TV screens in airports to $725 in 2013 from $587in 2012 and a 16.8% decrease in the number of digital TV advertising time slots sold to 19,452 in 2013 from 23,385 in 2012. Revenues from digital TV screens in airports for fiscal year 2012 decreased by 37.4% to $13.7 million in 2012 from $21.9 million in 2011 due to a drop indemand from advertisers resulting from competition from our other product lines and the fact that, with the rapid development of mobile internet, more peopleuse their cell phones for entertainment and do not pay attention to our digital TV screens in airports. Meanwhile, there was a 61.4% downward adjustment inthe average selling price of our digital TV screens in airports to $587 in 2012 from $1,519 in 2011 and a 62.0% increase in the number of digital TVadvertising time slots sold to 23,385 in 2012 from 14,439 in 2011. Revenues from our digital TV screens on airplanes accounted for 9.6%, 9.1% and 5.8% of our total revenues for the years ended December 31, 2011, 2012and 2013, respectively. Our network operating digital TV screens consisted of nine airlines as of December 31, 2011 and 2012 and seven airlines as ofDecember 31, 2013. Revenues from digital TV screens on airplanes decreased by 39.3% to $16.2 million in 2013 from $26.6 million in 2012 due to a decrease in revenues fromdigital TV screens on Air China’s airplanes. We did not renew the concession rights contract with Air China, which expired on December 31, 2012, butregained some advertising time on Air China’s airplanes on August 1, 2013 through an arrangement with an intermediary advertising agent. Additionally, thenumber of time slots sold decreased by 32.5% to 527 from 781 in 2012 and there was a 10.0% decrease in the average selling price of digital TV screens onairplanes to $30,662 in 2013 from $34,074 in 2012. Revenues from digital TV screens on airplanes remained unchanged from 2011 to 2012 at the same amount of $26.7 million. However, the number of timeslots sold decreased by 12.8% to 781 in 2012 from 896 in 2011, offset in part by a 14.2% increase in the average selling price of digital TV screens on airplanes to $34,074 in 2012 from $29,837 in 2011. 56 Revenues from traditional media in airports, consisting of billboards and light boxes in airports and billboards and painted advertisements on gate bridges,accounted for 26.5%, 28.5% and 23.5% of our total revenues for the years ended December 31, 2011, 2012 and 2013, respectively. We have offered light boxdisplays since the commencement of our operations. Revenues from traditional media in airports decreased by 22.3% to $64.8 million in 2013 from $83.5 million in 2012. The decrease was primarily due to ourtermination of certain unprofitable or low-margin contracts so as to focus our resources on the more profitable ones. There was a 17.5% decrease in the averageselling price of traditional media in airports to $27,999 in 2013 from $33,920 in 2012 and a 5.9% decrease in the number of locations sold to 2,316locations in 2013 from 2,461 locations in 2012. Revenues from traditional media in airports increased by 13.5% to $83.5 million in 2012 from $73.5 million in 2011. The increase was primarily due to ourcontinued sales efforts and an increase in the listing prices of many of our traditional media locations in 2012. There was an 18.0% increase in the averageselling price of traditional media in airports to $33,920 in 2012 from $28,736 in 2011, offset in part by a 3.8% decrease in the number of locations sold to2,461 locations in 2012 from 2,559 locations in 2011. Other revenues in air travel, generated from advertising equipment such as digital TV screens and light boxes, accounted for 2.4%, 2.4% and 3.3% of our totalrevenues for the years ended December 31, 2011, 2012 and 2013, respectively. Revenues from Gas Station Media Network Our gas station media network was started during 2009, when we gained concession rights to develop and operate an outdoor advertising network in Sinopecgas stations throughout China. Revenues from our gas station media network, consisting of outdoor advertising platforms such as LED screens, billboardsand light boxes at Sinopec gas stations in China, accounted for 4.6%, 4.9% and 4.6% of our total revenues for the years ended December 31, 2011, 2012 and2013 respectively. Due to our growing coverage of LED screens in gas stations and the growing acceptance of our gas stations media network, we expect therevenues from gas station media network to continue to grow in 2014. Revenues from Other Media Revenues from other media were primarily revenues from AM Outdoor, a company our variable interest entity AM Advertising acquired in January 2010,which operates unipole signs and other outdoor media. Revenues from our other media amounted to $7.1 million in 2013 and accounted for 3.5%, 3.5% and2.6% of our total revenues for the years ended December 31, 2011, 2012 and 2013 respectively. Business Tax, Value-added Tax (“VAT”) and Other Sales Related Tax Prior to 2012, our PRC subsidiaries and consolidated VIEs were subject to PRC business tax and other sales related taxes at the rate of 8.5% on total revenuesafter deduction of certain costs of revenues permitted by the PRC tax laws. For purposes of calculating the amount of business and other sales tax, concessionfees were permitted to be deducted from total revenues under applicable PRC tax law. In 2011, the PRC Ministry of Finance and the State Administration of Taxation jointly issued two circulars setting out the details of the pilot VAT reformprogram, which changed the charge of sales tax from business tax to VAT for certain pilot industries. The pilot VAT reform program initially applied only tothe pilot industries in Shanghai starting from January 1, 2012, and has been gradually implemented in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin,Zhejiang, and Hubei between September and December 2012. The pilot program has also been applied to the pilot industries and expanded nationwide sinceAugust 1, 2013. The majority of our PRC subsidiaries and consolidated VIEs fall within the scope of the pilot program and have been recognized as VAT taxpayers in 2012. 57 From the applicable effective time onwards, these entities are required to pay VAT instead of business tax at a rate of 6%. In addition, cultural businessconstruction fee is imposed at a rate of 3%. Same as before, for the purpose of calculating the amount of VAT and certain other taxes, input VAT obtained forconcession fees and purchase of fixed assets are permitted to be deducted from output VAT under applicable PRC tax law. We deducted these business taxes and other sales taxes from revenues to arrive at net revenues. 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 other taxes payable. Starting from August 2013, certain of our subsidiaries and VIEs became subject to VAT at the rates of 6% or 3% on certain service revenues which werepreviously subject to business tax. The amount of VAT included as a deduction to revenue amounted to $21.5 million for the year ended December 31, 2013. Cost of Revenues During the periods covered by this report, our cost of revenues consisted primarily of concession fees, agency fees and other costs, including digital framesand digital TV screen depreciation costs, operating costs and non-advertising content costs. The following table sets forth the major components of our cost ofrevenues, both in absolute amounts and as percentages of net revenues for the periods indicated. Fiscal Years Ended December 31, 2011 2012 2013 (All amounts are in thousands of U.S. Dollars, except percentages) Amount % Amount % Amount % Net revenues $270,624 100.0% $286,742 100.0% $272,266 100.0%Cost of revenues Concession fees (160,199) (59.2)% (177,996) (62.1)% (180,990) (66.5)%Agency fees (54,824) (20.2)% (45,778) (16.0)% (37,413) (13.7)%Others (29,447) (10.9)% (26,832) (9.4)% (26,270) (9.6)%Total cost of revenues $(244,470) (90.3)% $(250,606) (87.4)% $(244,673) (89.9)% Concession Fees We incurred concession fees to airports for placing and/or operating our digital frames, digital TV screens and other traditional media displays, to airlines forplacing our programs on their digital TV screens and to gas stations for operating our traditional media displays such as light boxes and billboards. These feesconstitute a significant portion of our cost of revenues and equaled approximately 59.2%, 62.1% and 66.5% of our net revenues and were $160.2 million,$178.0 million and $181.0 million in the years ended December 31, 2011, 2012 and 2013, respectively. Most of the concession fees paid to airports andairlines were fixed under the relevant concession rights contracts with escalation clauses, which required fixed fee increases over each year of the relevantcontract, and payments were usually due three or six months in advance. For gas stations, the actual concession fees paid to Sinopec were RMB 38 million(approximately $6.0 million) for the year ended December 31, 2011. From 2012 onwards, the concession fees paid to Sinopec were based on the actualnumber of developed gas stations with our operating LEDs and associated standard annual concession fees for each developed gas station or a fixed minimumpayment if any base on negotiation with the petroleum company. Concession fees increased significantly from 2011 to 2013 because we significantly expanded our media resources with an additional number of concessionrights contracts entered into over the years and, while concession fee payments under these additional concession rights contracts began almost immediatelyafter signing and were paid on a fixed schedule, it took a while for us to ramp up sales of advertising time slots and locations and build up revenues fromthese newly signed concession rights contracts. The concession fees that we incur under concession rights contracts for our digital frames and digital TVscreens in airports vary depending on the airport’s passenger flow, the city where the airport is located and the profiles of air passengers. The concession feesthat we incur under concession rights contracts for our programs on airlines vary depending on the number of routes and airplanes, types of aircrafts and thedeparture and destination cities. 58 Concession fees tend to increase over time as growth in passenger volume increases demand for air travel advertising among advertisers. Our concession feeshave increased significantly due to the new concession rights contracts that we have entered into during the period from 2011 to 2013, including the ones withbillboard and painted advertisements on interior or exterior walls of gate bridges at Terminal 3 of Beijing Capital International Airport, mega-size LED screensin several airports, and new media resources in newly opened terminals. As some of our concession rights contracts are subject to renewal in the next fewyears, we may experience an increase in our concession fees in order to retain these concession rights contracts. Agency Fees We engaged third-party advertising agencies to help source advertisers from time to time. These third-party advertising agencies assisted us in identifying andintroducing advertisers to us. In return, we paid fees to these advertisers if they generated advertising revenues for us. Fees that we paid to these third-partyagencies were calculated based on a pre-set percentage of revenues generated from the advertisers introduced to us by the third-party agencies and were paidwhen payments were received from the advertisers. We recorded these agency fees as cost of revenues ratably over the period in which the relatedadvertisements were displayed. Agency fees were equal to 20.2%, 16.0% and 13.7% of our net revenues for the years ended December 31, 2011, 2012 and2013, respectively. We expect to continue using these third-party advertising agencies in the near future. From time to time, we and certain advertising agencies may renegotiate and mutually agree, as permitted by applicable laws, to reduce the existing agency feeliabilities as calculated under the terms of existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in theperiod in which the renegotiations are finalized. During the years ended December 31, 2011, 2012 and 2013, reversals in cost of sales as a result ofrenegotiated agency fees amounted to nil, $6.4 million and $3.3 million, respectively. Others Our other cost of revenues represented 10.9%, 9.4% and 9.6% of our net revenues for the years ended December 31, 2011, 2012 and 2013, respectively, andincluded the following: ·Display Equipment Depreciation. Generally, we capitalized the cost of our digital frames, digital TV screens, light boxes, LED screens andbillboards and related equipment in the gas station media network and recognized depreciation costs on a straight-line basis over the term of theiruseful lives, which we estimate to be five years. The primary factors affecting our depreciation costs were the number of digital frames, digital TVscreens and mega-size LED screens in airports and LED screens in gas stations and the unit cost for those displays, as well as the remaining usefullife of the displays. ·Display Equipment Maintenance Cost. Our display maintenance cost consisted of salaries for our network maintenance staff, travel expenses inrelation to on-site visits and monitoring and costs for materials and maintenance in connection with the upkeep of our advertising network. Theprimary factor affecting our display equipment maintenance cost was the size of our network maintenance staff. As we add new digital frames digitalTV screens and other media platforms, we expect that our network maintenance staff, and associated costs, will increase. ·Non-advertising Content Cost. The programs on the majority of our digital TV screens combine advertising content with non-advertising content,such as weather, sports and comedy clips. Our standard programs in airports currently include 40 minutes of non-advertising content during eachhour of programming and are shown for approximately 16 hours per day. The length of our in-flight programs typically ranges from approximately45 to 60 minutes per flight, approximately 40 to 45 minutes of which consist of non- advertising content. We believe that the non-advertising programcontent makes air travelers more receptive to the advertisements included in our programs and ultimately make our program more effective for ouradvertisers. This in turn allows us to charge a higher price for each advertising time slot. We also promoted the brand names of our advertisersthrough our program content by naming our programs after their brand names or displaying their logos on the corner of the digital TV screens duringthe programs. We produced some of the non-advertising content shown on our network through our VIEs. The majority of the non-advertising contentbroadcast on our network was provided by third-party content providers such as Shanghai Media Group and various local television stations andtelevision 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 tobroadcast network TV programs to air travelers in China. We pay a fixed price for some content. Other content is provided free to us and the providerof the content benefits by having its logo shown on the content in addition to experiencing greater exposure to a wider audience. These providers of freecontent receive no benefit from us and do not place advertising with us. We do not directly generate revenues from these non-exchange transactions.Some of the third-party content providers that currently do not charge us for their content may do so in the future and other third-party contentproviders may increase the prices for their programs over time. This may increase our cost of revenues in the future. 59 Operating Expenses During the periods covered by this report, our operating expenses consisted of general and administrative expenses and selling and marketing expenses. Thefollowing table sets forth the two components of our operating expenses, both in absolute amount and as a percentage of net revenues for the periods indicated. Fiscal Years Ended December 31, 2011 2012 2013 (All amounts are in thousands of U.S. Dollars, except percentages) Amount % Amount % Amount % Net revenues $270,624 100.0% $286,742 100.0% $272,266 100.0%Operating expenses General and administrative expenses (22,004) (8.1)% (21,842) (7.6)% (25,723) (9.5)%Selling and marketing expenses (18,238) (6.7)% (17,995) (6.3)% (20,069) (7.4)%Impairment of goodwill (1,003) (0.4)% (20,611) (7.2)% - - Impairment of intangible assets (656) (0.2)% (9,583) (3.3)% - - Total operating expenses $(41,901) (15.4)% $(70,031) (24.4)% $(45,792) (16.8)% We expect that our operating expenses will further increase in the future as we expand our network and operations and enhance our sales and markingactivities. General and Administrative Expenses General and administrative expenses were equal to 8.1%, 7.6% and 9.5% of our net revenues for the years ended December 31, 2011, 2012 and 2013,respectively. Our general and administrative expenses included share-based compensation expenses of $3.2 million, $2.6 million and $1.3 million in the fiscalyears ended December 31, 2011, 2012 and 2013, respectively. General and administrative expenses consisted primarily of office and utility expenses, salariesand benefits for general management, finance and administrative personnel, bad debt provisions, depreciation of office equipment, public relations relatedexpenses and other administration related expenses. Selling and Marketing Expenses Selling and marketing expenses accounted for 6.7%, 6.3% and 7.4% of our net revenues for the years ended December 31, 2011, 2012 and 2013, respectively.Our selling and marketing expenses consisted primarily of salaries and benefits for our sales and marketing personnel, office and utility expenses related toour selling and marketing activities, travel expenses incurred by our sales personnel, expenses for the promotion, advertisement and sponsorship of mediaevents, and other sales and marketing related expenses. Impairment of Goodwill For purposes of evaluating goodwill impairment, we have four reporting units: the advertising media in air travel areas, the advertising media in gas station,the outdoor advertising media and the fire station advertising media, and have determined to perform the annual impairment tests on December 31 of each year.We recognized $1.0 million, $20.6 million and nil for impairment of goodwill for the years ended December 31, 2011, 2012 and 2013, respectively. Impairment of Intangible Assets We evaluate the recoverability of our long-lived assets, including intangible assets with definite life, whenever events or changes in circumstances indicate thatthe carrying amount of an asset may no longer be recoverable and have determined to perform the annual impairment tests on December 31 of each year. Werecognized $0.7 million, $9.6 million and nil for impairment of intangible assets for the years ended December 31, 2011, 2012 and 2013, respectively. 60 Taxation Cayman Islands. We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gainstax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands. Hong Kong. We did not record any Hong Kong profits tax for the years ended December 31, 2011 and 2012 on the basis that our Hong Kong subsidiaries didnot have any assessable profits arising in or derived from Hong Kong for 2011 and 2012. One of our Hong Kong subsidiaries, Glorious Star InvestmentsLtd, did not record any Hong Kong profits tax for the year ended December 31, 2013 on the basis that it did not have any assessable profits arising in orderived from Hong Kong for 2013. Our other Hong Kong subsidiary, Air Media (China) Ltd, did not record any Hong Kong profits tax for the year endedDecember 31, 2013 on the basis that its assessable profits arising in or derived from Hong Kong for 2013 were offset by the losses carried forward fromprevious years. Dividends from our Hong Kong subsidiaries to us are exempt from withholding tax. No dividend from our Hong Kong subsidiaries wasdeclared for the years ended December 31, 2011, 2012 and 2013. PRC. Prior to the effective date of the new EIT Law on January 1, 2008, enterprises in China were generally subject to EIT at a statutory rate of 33% unlessthey qualified for certain preferential treatment. Effective as of January 1, 2008, the EIT Law applies a uniform EIT rate of 25% to all domestic enterprisesand foreign-invested enterprises and defines new tax incentives for qualifying entities. Under the EIT Law, entities that qualify as HNTE are entitled to thepreferential 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 inorder to continue to enjoy the preferential income tax rate. In addition, according to the Administrative Regulations on the Recognition of High and NewTechnology Enterprises, the Guidelines for Recognition of High and New Technology Enterprises and the Notice of Favorable Enterprise Income Tax Policiesjointly issued by the PRC Ministry of Science and Technology, the PRC Ministry of Finance and the PRC State Administration of Taxation in April 2008,July 2008 and February 2008, respectively, “new software enterprises” can enjoy an income tax exemption for two years beginning with their first profitableyear and a 50% tax reduction to a rate of 12.5% for the subsequent three years. On December 26, 2007, the PRC State Council issued Circular 39. Based on Circular 39, certain enterprises established before March 16, 2007 that wereeligible for tax exemptions or reductions according to the then-effective tax laws and regulations can continue to enjoy such exemption or reduction until itexpires. Furthermore, according to Circular 39, enterprises that were eligible for preferential tax rates according to the then-effective tax laws and regulationsmay be eligible for a gradual rate increase to 25% over the 5-year period beginning from January 1, 2008. Specifically, the applicable rates under such anarrangement for such enterprises that enjoyed a 15% tax rate prior to the effectiveness of the EIT Law are 18% in 2008, 20% in 2009, 22% in 2010, 24% in2011 and 25% in 2012. However, according to the Notice on Prepayment of EIT issued by the State Administration of Taxation on January 30, 2008, thegradually increased EIT rate during the transition period is not applicable to entities that qualified for preferential rates as high and new technology enterprisesalone and they would be subject to EIT at 25% from January 2008 if they cannot qualify as high and new technology enterprises under the EIT Law andrelated regulations. AM Technology was recognized as a HNTE under the new rules and therefore, it is entitled to enjoy a preferential EIT rate of 15%. It was also eligible for a50% tax reduction from 2009 to 2010 under the applicable tax laws and regulations that were in effect before January 1, 2008, the date the EIT Law came intoeffect. As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and 2010. In September 14, 2011, AM Technology received a new HNTEcertificate. As a result, AM Technology was subject to an EIT rate of 15% in 2011, 2012 and 2013 and is expected to be subject to an EIT rate of 15% as longas it maintains its tax status as a HNTE. Xi’an AM was designated as a “new software enterprise” in August 2008 by the Technology Information Bureau of Shaanxi Province and has received thewritten notice from Xi’an local tax bureau that it will be granted a two-year exemption from EIT commencing on its first profitable year and a 50% deductionof the 25% EIT rate for the succeeding three years. As Xi'an AM first made profit in 2009, it was exempted from EIT in 2009 and 2010, and enjoys thepreferential income tax rate of 12.5% from 2011 to 2013. 61 Shenzhen AM was subject to a 15% preferential EIT rate in 2007 as it is located in Shenzhen and then was subject to EIT on its taxable income from 2008 atthe gradual rate as set out in Circular 39. Since Shenzhen AM is also qualified as a “manufacturing foreign-invested enterprise” incorporated prior to theeffectiveness of the EIT Law, it is further entitled to a two-year exemption from EIT for years 2008 and 2009 and preferential rates of 12% and 12.5% for theyears 2011 and 2012, respectively. Shenzhen AM is subject to EIT at a rate of 25% from 2013 onwards. Hainan Jinhui is subject to EIT on the taxable income at the gradual rate, which is 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012 onwards,respectively, according to Circular 39. Furthermore, under the EIT Law, a “resident enterprise,” which includes an enterprise established outside of China with “de facto management bodies” locatedin China, is subject to PRC income tax. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises asPRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certainspecific 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 beSeptember 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent taxauthorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshoreincorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinesecontrolled 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 clarificationmade 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 residencystatus of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRCindividuals. We do not believe we and our subsidiaries established outside of the PRC are PRC resident enterprises. However, if the PRC tax authorities subsequentlydetermine that we and our subsidiaries established outside of China should be deemed as a resident enterprise, we and our subsidiaries established outside ofChina 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 a 10% withholding tax, unless any such foreign investor’sjurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The BVI, where Broad Cosmos, our whollyowned subsidiary and the 100% shareholder of Shenzhen AM, is incorporated, does not have such a tax treaty with China. AM China, the 100% shareholderof AM Technology and Xi’an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement onAvoiding Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in August 2006, dividends paid by a foreign-investedenterprise 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 least25% 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 itby its PRC subsidiaries under a tax notice promulgated on October 27, 2009, such dividends would be subject to withholding tax at a rate of 10%. See “Item3. Key Information — D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-owned operating subsidiaries may besubject 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 toPRC 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, amongother things, assets and liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and assumptions basedon the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since ourfinancial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from our expectations. This is especiallytrue with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to becritical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment. Business combination Business combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any noncontrolling interestof the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the totalconsideration transferred plus the fair value of any non-controlling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiablenet assets acquired. Where the consideration in an acquisition includes contingent consideration, the payment of which depends on the achievement of certain specified conditionspost-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it issubsequently carried at fair value with changes in fair value reflected in earnings. 62 Revenue Recognition Our revenues are derived from selling advertising time slots on our advertising networks, primarily air travel advertising network. For the years endedDecember 31, 2011, 2012 and 2013, the advertising revenues were generated from digital frames in airports, digital TV screens in airports, digital TV screenson airlines, traditional media in airports, gas station media network and other media. We typically sign standard contracts with our advertising customers, who require our company to run the advertiser’s advertisements on our network inspecified locations for a period of time. We recognize advertising revenues ratably over the performance period for which the advertisements are displayed, solong as collection of the fees remains probable. We also wholesale the advertising platforms such as scrolling light boxes and billboards in the gas stations located in some major cities, except Beijing,Shanghai and Shenzhen, to advertising agents, and sign fixed fee contracts with the agents for a specified period. The revenue is recognized on a straight-linebasis over the specified period. Deferred Revenue Prepayments from customers for advertising service are deferred and recognized as revenue when the advertising services are rendered. Non-monetary Exchanges We occasionally exchange advertising time slots and locations with other entities for assets or services, such as equipment and other assets. The amount ofassets and revenue recognized is based on the fair value of the advertising provided or the fair value of the transferred assets, whichever is more readilydeterminable. The amounts of revenues recognized for nonmonetary transactions were $2.8 million, $1.3 million and $0.7 million for the years endedDecember 31, 2011, 2012 and 2013, respectively. No direct costs are attributable to the revenues. Concession Fees We enter concession right agreements with vendors such as airports, airlines and a petroleum company, under which we obtain the right to use the spaces orequipment of the vendors to display the advertisements. The concession right agreements are treated as operating lease arrangements. Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets and current liabilitiesaccording to the respective payment terms. Most of the concession fees with airports and airlines are fixed with escalation, which means fixed increase overeach year of the agreements. The total concession fee under the concession right agreements with airports and airlines is charged to the consolidated statementsof operations on a straight-line basis over the agreement periods, which is generally between three and five years. The fee structure of the concession right agreement with the petroleum company is based on the actual number of developed gas stations and associatedstandard 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 intooperation. The calculation of rental payments is based on how many months the gas stations are actually put into operation during the year and the standardannual concession fee determined based on the location of the gas station. Accordingly, each gas station is treated as a separate lease and rental payments arerecognized on a straight-line basis over its lease term. The amount of annual concession fee to-be-paid is determined by an actual incurred concession fee or afixed minimum payment, if any, based on negotiation with the petroleum company. 63 Agency Fees We pay fees to advertising agencies based on certain percentage of revenues made through the advertising agencies upon receipt of payment from advertisers.The agency fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the advertising is displayed.Prepaid and accrued agency fees are recorded as current assets and current liabilities according to relative timing of payments made and advertising serviceprovided. From time to time, we and certain advertising agencies may renegotiate and mutually agree, as permitted by applicable laws, to reduce existing agency feeliabilities as calculated under the terms of existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in theperiod the renegotiations are finalized. During the years ended December 31, 2011, 2012 and 2013, reversals in cost of sales as a result of renegotiated agencyfees amounted to nil, $6.4 million and $3.3 million, respectively. Allowance for Doubtful Accounts We conduct credit evaluations of clients and generally do not require collateral or other security from clients. We establish an allowance for doubtful accountsbased upon estimates, historical experience and other factors surrounding the credit risk of specific clients, and utilize both specific identification and ageneral reserve to calculate allowance for doubtful accounts. The amount of receivables ultimately not collected by us has generally been consistent withexpectations and the allowance established for doubtful accounts. If the frequency and amount of customer defaults change due to the clients' financialcondition or general economic conditions, the allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstandingreceivables and adjust allowances for accounts where collection may be in doubt. Impairment of Goodwill We annually, or more frequently if we believe indicators of impairment exist, review the carrying value of goodwill to determine whether impairment may exist. Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount,including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will notbe required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit'sgoodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combinationwith the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of thereporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess inthe carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with theprimary technique being a discounted cash flow. We have four reporting units: the advertising media in air travel areas, the advertising media in gas station, the outdoor advertising media and the fire stationadvertising media. We perform the annual impairment tests on December 31 of each year. We incurred impairment loss on goodwill of $1.0 million, $20.6 million and nil for the years ended December 31, 2011, 2012 and 2013, respectively. As aresult, we do not have any goodwill left for any reporting until now and will not incur any more impairment loss on goodwill in the future. Impairment of Long-lived Assets and Intangible Assets with Definite Life We evaluate the recoverability of our long-lived assets, including intangible assets with definite life, whenever events or changes in circumstances indicate thatthe carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of theexpected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of carryingamount over the fair value of the assets. 64 We have determined to perform the annual impairment tests on December 31 of each year. We did not recognize an impairment loss of intangible assets for theyear ended December 31, 2013. Income Taxes Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financialstatements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced bya 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 sustainedupon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.Additionally, we classify the interest and penalties, if any, as a component of the income tax position. Value-added Tax ("VAT") Our PRC subsidiaries are subject to value-added tax at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases.The net VAT balance between input VAT and output VAT is reflected in the account under 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 businesstax in certain areas and industries in the PRC. Such VAT pilot program was gradually implemented in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin,Zhejiang, and Hubei between September and December 2012. Also, a circular issued in May 2013 provided that such VAT pilot program was rolled outnationwide in August 1, 2013. Since then, certain of our subsidiaries and VIEs became subject to VAT at the rates of 6% or 3% on certain service revenueswhich were previously subject to business tax. The amount of VAT included as a deduction to revenue amounted to $8.8 million and $21.5 million for theyears ended December 31, 2012 and 2013, respectively. Share-based Compensation Share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument issued, and recognized ascompensation expenses over the requisite service periods based on a straight-line method, with a corresponding impact reflected in additional paid-in capital. Share-based payment transactions with non-employees are measured based on the fair value of the options as of each reporting date through the measurementdate, with a corresponding impact reflected in additional paid-in capital. Comprehensive Income/(loss) Comprehensive income/(loss) includes net income/(loss) and foreign currency translation adjustments and is presented net of tax, the amount of which is nilfor the three years ended December 31, 2013. 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 ourconsolidated financial statements, including the related notes that appear elsewhere in this annual report. Our limited operating history makes it difficult topredict our future operating results. Therefore, our historical consolidated results of operations are not necessarily indicative of our results of operations youmay expect for any future period. 65 The following table presents selected operating data for the years ended December 31, 2011, 2012 and 2013, respectively. Years Ended December 31, 2011 2012 2013 Selected Operating Data: Digital frames in airports Number of airports in operation 34 34 31 Number of digital frames in our network airports as of year end 3,092 3,403 3,380 Number of time slots available for sale(1) 139,252 131,060 141,922 Number of time slots sold(2) 46,399 49,558 56,010 Utilization rate(3) 33.3% 37.8% 39.5%Average advertising revenue per time slot sold(4) $2,727 $2,771 $2,720 Digital TV screens in airports Number of airports in operation 36 34 31 Number of screens in our network airports as of year end 2,104 2,579 2,969 Number of time slots available for sale(5) 74,028 67,592 66,994 Number of time slots sold(2) 14,439 23,385 19,452 Utilization rate(3) 19.5% 34.6% 29%Average advertising revenue per time slot sold(4) $1,519 $587 $725 Digital TV screens on airplanes Number of airlines in operation 9 9 7 Number of time slots available for sale(5) 1,656 1,776 1,486 Number of time slots sold(2) 896 781 527 Utilization rate(3) 54.1% 44.0% 35.5%Average advertising revenue per time slot sold(4) $29,837 $34,074 $30,662 Traditional media in airports Numbers of locations available for sale(6) 3,621 3,751 3,849 Numbers of locations sold(7) 2,559 2,461 2,316 Utilization rate(8) 70.7% 65.6% 60.2%Average advertising revenue per location(9) $28,736 $33,920 $27,999 (1)We define a time slot for digital frames as a 12-second equivalent advertising time unit for digital frames in airports, which is shown during eachstandard advertising cycle on a weekly basis in a given airport. Our standard airport advertising programs are shown repeatedly on a daily basis during agiven week in 10-minute cycles, which allows us to sell a maximum of 50 time slots per week. (2)The length of time slot and advertising program cycle of some digital frames in several airports are different from the standard ones. The number of timeslots available for our digital frames in airports during the period presented is calculated by multiplying the number of time slots per week per airport bythe number of weeks during the period presented when we had operations in each airport and then calculating the sum of all the time slots available foreach of our network airports. (3)Number of time slots for digital frames, digital TV screens in airports or digital TV screens on airplanes sold refers to the number of 12-secondequivalent advertising time units for digital frames in airports or 30-second equivalent advertising time units for digital TV screens in airports and digitalTV screens on airplanes sold during the period presented. (4)Utilization rate refers to total time slots for digital frames in airports, digital TV screens in airports and digital TV screens on airplanes sold as apercentage of total time slots available for sale during the relevant period. (5)Average advertising revenue per time slot sold for digital TV screens in airports, digital TV screens on airplanes and digital frames in airports iscalculated by dividing our revenues derived from digital frames in airports, digital TV screens in airports and digital TV screens on airplanes by its ownnumber of time slots sold, respectively. (6)We define a time slot for digital TV screens as a 30-second equivalent advertising time unit for digital TV screens in airports and digital TV screens onairplanes, which is shown during each advertising cycle on a weekly basis in a given airport or on a monthly basis on the routes of a given airline,respectively. Our airport advertising programs are shown repeatedly on a daily basis during a given week in one -hour cycles and each hour ofprogramming includes 25 minutes of advertising content, which allows us to sell a maximum of 50 time slots per week. The number of time slotsavailable for our digital TV screens in airports during the period presented is calculated by multiplying the number of time slots per week per airport bythe number of weeks during the period presented when we had operations in each airport and then calculating the sum of all the time slots available foreach of our network airports. The length of our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximatelyfive to 13 minutes of which consist of advertising content. The number of time slots available for our digital TV screens on airplanes during the periodpresented is calculated by multiplying the time slots per airline per month by the number of months during the period presented when we had operationson each airline and then calculating the sum of all the time slots for each of our network airlines. (7)We define the number of locations available for sale in traditional media as the sum of (1) the number of light boxes and billboards in Beijing, Shenzhen,Wenzhou and certain other airports, and (2) the number of gate bridges in airports where we have concession rights to place advertisements on gatebridges. 66 (8)Number of locations sold is defined as the sum of (1) the number of light boxes and billboards sold and (2) the number of gate bridges sold. To calculatethe number of light boxes and billboards sold in a given airport, we first calculate the "utilization rates of light boxes and billboards" in such airport bydividing the "total value of light boxes and billboards sold" in such airport by the "total value of light boxes and billboards" in such airport. The "totalvalue of light boxes and billboards sold" in a given airport is calculated as the respective daily listing prices of light boxes and billboards sold multipliedby their respective number of days sold during the period presented. The "total value of light boxes and billboards" in a given airport is calculated as thesum of listing prices of all the light boxes and billboards during the period presented. The number of light boxes and billboards sold in a given airport isthen calculated as the number of light boxes and billboards available for sale in such airport multiplied by the utilization rates of light boxes andbillboards in such airport. The number of gate bridges sold in a given airport is counted based on the contracts. (9)Utilization rate for traditional media in airports refers to total locations sold as a percentage of total locations available for sale during the period presented. (10)Average advertising revenue per location sold is calculated by dividing the revenues derived from all the locations sold by the number of locations soldduring the period presented. Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Net Revenues. Our net revenues decreased by 5.0% from $286.7 million in 2012 to $272.3 million in 2013. The decrease was primarily due to the decrease inrevenues from traditional media in airports, digital TV screens on airplanes, other media, and gas station media network, which were partially offset byincreases in revenues from digital frames in airports, other revenues in air travel, and digital TV screens in airports. Revenues from digital frames in airports: Revenues from digital frames in airports for fiscal year 2013 increased by 10.9% from $137.3 million in 2012 to$152.3 million in 2013 due to the additional revenues from the rapidly growing product line of mega-size LED screens and our continued sales efforts. We operated our digital frames in 31 airports as of December 31, 2013 which decreased from 34 airports as of December 31, 2012. However, the number ofdigital frames advertising time slots available for sale in airports increased by 8.3% from 131,060 in 2012 to 141,922 in 2013, while the number of time slotssold increased by 13.0% from 49,558 in 2012 to 56,010 in 2013. Our utilization rate for digital frames in airports increased from 37.8% in 2012 to 39.5% in2013 due to the increase in the number of time slots sold, which was partially offset by the increase in the number of time slots available for sale. The averageadvertising revenue of digital frames decreased by 1.8% from $2,771 in 2012 to $2,720 in 2013 due to higher discounts offered in 2013 than in 2012. Revenues from digital TV screens in airports: Revenues from digital TV screens in airports increased by 2.8% to $14.1 million in 2013 from $13.7 million in2012 due to our continued sales efforts. The number of time slots sold for 2013 decreased by 16.8% year-over-year to 19,452 time slots primarily due to a drop in demand from advertisers. Thenumber of time slots available for sale for 2013 decreased by 0.9% year-over-year to 66,994 time slots in 2013 primarily due to the termination of operationsof digital TV screens in certain airports. Utilization rate of digital TV screens in airports for fiscal year 2013 decreased to 29% from 34.6% in 2012 primarilydue to the increase in the number of time slots sold and the decrease in the time slots available for sale. The average selling price of digital TV screens inairports increased by 23.5% to $725 in 2013 from $587 in 2012 primarily due to the fact that revenues from the top tier airports accounted for a higherpercentage, which had higher than average selling prices. Revenues from digital TV screens on airplanes: Revenues from digital TV screens on airplanes decreased by 39.3% to $16.2 million in 2013 from $26.6million in 2012. 67 The number of time slots sold decreased by 32.5% to 527 time slots in 2013 from 781 time slots in 2012 primarily due to a decrease in time slots sold ofdigital TV screens on Air China's airplanes. We did not renew our concession rights contract with Air China, which expired on December 31, 2012, butregained some advertising time on Air China's airplanes on August 1, 2013. The number of time slots available for sale decreased by 16.3% to 1,486 timeslots in 2013 from 1,776 time slots in 2012. Utilization rate decreased to 35.5% in 2013 from 44.0% in 2012 primarily due to the decrease in the number oftime slots sold. The average selling price of digital TV screens on airplanes decreased by 10% to $30,662 in 2013 from $34,074 in 2012 primarily due tohigher discounts offered in 2013 than in 2012. Revenues from traditional media in airports: Revenues from traditional media in airports decreased by 22.3% to $64.8 million in 2013 from $83.5 million in2012. The decrease was primarily due to our decision not to renew certain unprofitable or low-margin contracts after expiration. The number of locations sold decreased by 5.9% to 2,316 locations in 2013 from 2,461 in 2012. The number of locations available increased by 2.6% to3,849 locations in 2013 from 3,751 in 2012, primarily due to the full year operations of some additional airports. The utilization rate of traditional mediadecreased by 5.4% to 60.2% in 2013 from 65.6% in 2012 due to the decrease in the number of locations sold and the increase in the number of locationsavailable for sale. The average selling price of traditional media in airports decreased by 17.5% to $27,999 in 2013 from $33,920 in 2012 primarily wechose not to renew some traditional media contracts, which had higher listing prices. Revenues from the gas station media network: Revenues from the gas station media network decreased by 10.5% to $12.7 million from $14.2 million in 2012due to the temporary service suspension caused by the gap between the retirement of old scrolling light boxes and the full operation of the replacing new LEDscreen in gas stations across many cities. Revenues from other media: Revenues from other media were primarily revenues from AM Outdoor which was acquired by our variable interest entity, AMAdvertising, in January 2011, which operates unipole signs and other outdoor media across Beijing. Revenues from other media for fiscal year 2013 decreasedby 30.2% year-over-year to $7.2 million in 2013 from $10.2 million in 2012, primarily due to the expiration of the contracts for some locations in Novemberand December 2012. Cost of Revenues. Our cost of revenues decreased by 2.4% from $250.6 million in 2012 to $244.7 million in 2013, primarily due to a decrease in agency feesfor third-party advertising agencies. The year-over-year decrease in agency fees was primarily due to a partial reversal of certain previously accrued agency feesof $3.3 million that were waived by the related agents. Our cost of revenues as a percentage of our net revenues increased from 87.4% in 2012 to 89.9% in2013. Concession fees increased 1.7% from $178.0 million in 2012 to $181.0 million in 2013, primarily due to the number of new concession rights contractsand renewals entered into in 2013, which were partially offset by the number of expired contracts that we decided not to renew. Concession fees as a percentageof net revenues increased from 62.1% in 2012 to 66.5% in 2013. Operating Expenses. Our operating expenses decreased by 34.6% from $70.0 million in 2012 to $45.8 million in 2013. Our total operating expenses in 2012included share-based compensation expenses of $3.5 million while our total operating expenses in 2013 included share-based compensation expenses of $1.3million. ·Selling and Marketing Expenses. Our selling and marketing expenses increased by 11.5% from $18.0 million in 2012 (including $0.9 million ofshare-based compensation expenses) to $20.1 million in 2013 (including nil of share-based compensation expenses) mainly due to higher expensesrelated to our direct sales force, higher service fees, higher expenses of office and equipment, and higher travel expenses. ·General and Administrative Expenses. Our general and administrative expenses increased by 17.9% from $21.8 million (including $2.6 million ofshare-based compensation expenses) in 2012 to $25.7 million (including $1.3 million of share-based compensation expenses) in 2013, primarily dueto higher salary expenses associated with more headcount for new businesses, higher bad-debt provisions, higher expenses of office and equipmentand higher professional fee. ·Impairment of goodwill. We perform the annual impairment tests on December 31 of each year. All the goodwill was impaired in 2012, thus noimpairment for goodwill was recorded in 2013. ·Impairment of intangible assets. We perform the annual impairment tests on December 31 of each year. Due to the fact that actual sales and profitsfor air travel areas and outdoor advertising media were below forecast in the year ended December 31, 2012, the future undiscounted cash flow thatthe finite-lived intangible assets were expected to generate were less than the carrying amount as of December 31, 2012, the impairment loss of $9.6million on intangible assets was recognized for the year ended December 31, 2012, and no impairment loss was recognized for the year endedDecember 31, 2013. Loss from Operations. We recorded a net loss from operations of $18.2 million in 2013, as compared to a net loss from operations of $33.9 million in 2012as a cumulative result of the above factors. Other income, net. We recorded $3.8 million of other income net in 2013 as compared to $2.8 million in 2012. The increase was primarily due to increase inthe investment income from short-term investments. 68 Income Taxes. We recorded $1.7 million of income tax benefit in 2013 as compared to income tax expenses of $2.5 million in 2012. Our effective income taxrate changed to positive 13% in 2013 from negative 8.4% in 2012. Net Loss Attributable to Noncontrolling Interests. We recorded $0.9 million in net loss attributable to noncontrolling interests in 2013, as compared to $0.5million in net income attributable to noncontrolling interests in 2012. The non-controlling interest primarily refers to other shareholders’ minority equityinterests in Konggang, Flying Dragon, GreatView Media, Meizheng and Dongding, each majority owned by one of our VIEs. Net Loss Attributable to AirMedia’s Shareholders. As a result of the foregoing, we had net loss attributable to our shareholders of $10.6 million in 2013, ascompared to $32.7 million in 2012. Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net Revenues. Our net revenues increased by 6.0% from $270.6 million in 2011 to $286.7 million in 2012. The increase was primarily due to an increase inrevenue from several our business sections, including digital frames in airports, traditional media in airports, gas station media network and other media. Revenues from digital frames in airports: Revenues from digital frames in airports for fiscal year 2012 increased by 8.5% from $126.5 million in 2011 to$137.3 million in 2012 due to an increase in revenues from the rapidly growing product line of mega-size LED screens and our continued sales efforts. We operated our digital frames in 34 airports as of December 31, 2012 which remained unchanged during fiscal year 2012. However, the number of digitalframes advertising time slots available for sale in airports decreased by 5.9% from 139,252 in 2011 to 131,060 in 2012, while the number of time slots soldincreased by 6.8% from 46,399 in 2011 to 49,558 in 2012. Our utilization rate for digital frames in airports increased from 33.3% in 2011 to 37.8% in 2012due to the increase in the number of time slots sold and the decrease in the number of time slots available for sale. The average advertising revenue of digitalframes increased by 1.6% from $2,727 in 2011 to $2,771 in 2012 due to lower discounts offered in 2012 than in 2011. Revenues from digital TV screens in airports: Revenues from digital TV screens in airports decreased by 37.4% to $13.7 million in 2012 from $21.9 millionin 2011 due to a decline in demand from advertisers as a result of competition from our other product lines and the fact that, with the rapid development ofmobile internet, people pay more attention to their cell phones instead of digital TV screens. The number of time slots sold for 2012 increased by 62.0% year-over-year to 23,385 time slots primarily due to a decrease in the average selling prices ofdigital TV screens in airports. The number of time slots available for sale for 2012 decreased by 8.7% year-over-year to 67,592 time slots in 2012 primarilydue to the termination of operations of digital TV screens in certain airports. Utilization rate of digital TV screens in airports for fiscal year 2012 increased to34.6% from 19.5% in 2011 primarily due to the increase in the number of time slots sold and the decrease in the time slots available for sale. The averageselling price of digital TV screens in airports decreased by 61.4% to $587 in 2012 from $1,519 in 2011 primarily due to higher discounts offered in 2012than in 2011. Revenues from digital TV screens on airplanes: Revenues from digital TV screens on airplanes decreased by 0.5% to $26.6 million in 2012 from $26.7million in 2011. The number of time slots sold decreased by 12.8% to 781 time slots in 2012 from 896 time slots in 2011 due to a drop in demand caused by an increase inthe average selling price of digital TV screens on airplanes in fiscal year 2012 than in fiscal year 2011. The number of time slots available for sale increasedby 7.2% to 1,776 time slots in 2012 from 1,656 time slots in 2011. Utilization rate decreased to 44.0% in 2012 from 54.1% in 2011 primarily due to thedecrease in the number of time slots sold and the increase in the number of time slots available for sale. The average selling price of digital TV screens onairplanes increased by 14.2% to $34,074 in 2012 from $29,837 in 2011 primarily due to lower discounts offered in 2012 than in 2011. Revenues from traditional media in airports: Revenues from traditional media in airports increased by 13.5% to $83.5 million in 2012 from $73.5 million in2011. The increase was primarily due to our continued sales efforts and an increase in listing prices of many locations in 2012. 69 The number of locations sold decreased by 3.8% to 2,461 locations in 2012 from 2,559 in 2011. The number of locations available increased by 3.6% to3,751 locations in 2012 from 3,621 in 2011, primarily due to the commencement of operations in additional airports. The utilization rate of traditional mediadecreased by 5.1% to 65.6% in 2012 from 70.7% in 2011 due to the decrease in the number of locations sold and the increase in the number of locationsavailable for sale. The average selling price of traditional media in airports increased by 18.0% to $33,920 in 2012 from $28,736 in 2011 primarily due to anincrease in the listing prices of some traditional media in 2012, lower discounts offered in 2012 than in 2011, and more locations with higher listing pricessold in 2012 than in 2011 Revenues from the gas station media network: Revenues from the gas station media network increased by 10.4% to $14.2 million from $12.9 million in 2011due to our continued sales efforts and advertisers' continually growing acceptance of our gas station media network. Revenues from other media: Revenues from other media were primarily revenues from AM Outdoor which was acquired by our variable interest entity, AMAdvertising, in January 2011, which operates unipole signs and other outdoor media across Beijing. Revenues from other media for fiscal year 2012 increasedby 4.6% year-over-year to $10.2 million in 2012 from $9.8 million in 2011, primarily due to our continued sales efforts. Cost of Revenues. Our cost of revenues increased by 2.5% from $244.5 million in 2011 to $250.6 million in 2012, primarily due to the increased concessionfees partially offset by lower agency fees for third-party advertising agencies. The year-over-year decrease in agency fees was primarily due to a partial reversalof certain previously accrued agency fees of $6.4 million that were waived by the related agents. Our cost of revenues as a percentage of our net revenuesdecreased from 90.3% in 2011 to 87.4% in 2012. Concession fees increased 11.1% from $160.2 million in 2011 to $178.0 million in 2012, primarily due tonewly signed and renewed concession contracts entered into in 2012. Concession fees as a percentage of net revenues increased from 59.2% in 2011 to 62.1%in 2012. Operating Expenses. Our operating expenses increased by 67.1% from $41.9 million in 2011 to $70.0 million in 2012. Our total operating expenses in 2011included share-based compensation expenses of $4.6 million while our total operating expenses in 2012 included share-based compensation expenses of $3.5million. ·Selling and Marketing Expenses. Our selling and marketing expenses decreased by 1.3% from $18.2 million in 2011 (including $1.4 million ofshare-based compensation expenses) to $18.0 million in 2012 (including $0.9 million of share-based compensation expenses) mainly due to thedecrease in the share-based compensation expenses. ·General and Administrative Expenses. Our general and administrative expenses decreased by 0.7% from $22.0 million (including $3.2 million ofshare-based compensation expenses) in 2011 to $21.8 million (including $2.6 million of share-based compensation expenses) in 2012, primarily dueto a decrease in share-based compensation expenses of $0.6 million. ·Impairment for goodwill. We perform the annual impairment tests on December 31 of each year. Applying discounted cash flows for our 2012annual impairment test, the estimated fair value of the air travel areas and outdoor advertising media was below the carrying amount if its net assets.We impaired all goodwill related to air travel areas reporting unit and outdoor media advertising media reporting unit and incurred an impairment lossof $20.6 million. ·Impairment of intangible assets. We perform the annual impairment tests on December 31 of each year. Due to the fact that actual sales and profitsfor air travel areas and outdoor advertising media were below forecast in the year ended December 31, 2012, the future undiscounted cash flow thatthe finite-lived intangible assets were expected to generate were less than the carrying amount as of December 31, 2012 and $9.6 million impairmentloss was recognized for the year ended December 31, 2012. Loss from Operations. We recorded a net loss from operations of $33.9 million in 2012, as compared to a net loss from operations of $15.7 million in 2011as a cumulative result of the above factors. Other income, net. We recorded $2.8 million of other income net in 2012 as compared to $1.8 million in 2011. The increase was primarily due to increase inthe investment income from short-term investments. 70 Income Taxes. We recorded $2.5 million of income tax expenses in 2012 as compared to income tax expenses of $266,000 in 2011. Our effective income taxrate changed to negative 8.4% in 2012 from negative 2.1% in 2011. Net Loss Attributable to Noncontrolling Interests. We recorded $0.5 million in net income attributable to noncontrolling interests in 2012, as compared to$3.1 million in net loss attributable to noncontrolling interests in 2011. The non-controlling interest primarily refers to other shareholders’ minority equityinterests in Konggang, Flying Dragon, Beijing AirMedia Media Advertising Co., Ltd., and Dongding, each majority owned by one of our VIEs. Net Loss Attributable to AirMedia’s Shareholders. As a result of the foregoing, we had net loss attributable to our shareholders of $32.7 million in 2012, ascompared to $9.6 million in 2011. Share-based Compensation On March 18, 2011, the Board of Directors adopted a new share incentive plan, the AirMedia Group Inc. 2011 Share Incentive Plan (the “2011 Option Plan”),which allows the Company to grant up to 2,000,000 restricted shares or options and other awards to purchase up to 2,000,000 ordinary shares of the Companyto its employees and directors subject to vesting requirements. On March 22, 2011, the Board of Directors granted options to non-employee directors, employees and consultants to purchase an aggregate of 2,180,000ordinary shares of the Company, at an exercise price of $2.30 per share. The contractual term of the option is of 5 or 10 years. One twelfth of the Options willvest each quarter until March 22, 2014. On June 7, 2011, the Board of Directors voted to adjust the exercise price of the stock options which were granted on March 22, 2011 from $2.30 per share to$1.57 per share. The fair value of the options on June 7, 2011, the modification date, was $0.75 per option, calculated using the Black-Scholes model basedon the closing market price of the ordinary shares of the Company on that date. The incremental compensation cost of the re-priced options was $0.3 million,with $0.1 million recognized as compensation cost during 2011 and $0.2 million to be recognized as expense over the remaining vesting period. On August 23, 2011, the Board of Directors voted to adjust the exercise price of certain stock options which were granted on July 2, 2007, July 20, 2007,November 29, 2007, July 10, 2009 and March 22, 2011 from $1.57 per share respectively to $1.15 per share. The fair value of the options on August 23,2011, the modification date, was $0.21, $0.22, $0.26, $0.39 and $0.53 per option, respectively, calculated using the Black-Scholes model based on theclosing market price of the ordinary shares of the Company on the date. The incremental compensation cost of the re-priced options was $1.3 million, withtotaling $1.1 million recognized as compensation cost during 2011, and $0.2 million to be recognized as expense over the remaining vesting period. On September 1, 2012, the Board of Directors approved to grant options to an employee of our company, under the 2011 Share Incentive Plan, to purchase anaggregate of 1,857,538 ordinary shares of our company, at an exercise price of $0.72 per ordinary share. One twelfth of the options will vest each quarterstarting from September 4, 2012. The expiration date will be 5 years from the grant date. In September 2012, the former chief financial officer of our company resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vestedthrough her date of resignation. In conjunction with her resignation, she signed a supplementary agreement with us, pursuant to which the Company grantedher 100,000 options that are immediately exercisable and 200,000 options that would vest through September 22, 2013. During the vesting period, she wouldprovide consulting service as a consultant. For the 100,000 immediately exercisable options, a measurement date was reached upon grant and we immediatelyrecognized $35,000 into expense, which is equal to the fair value of the options as of September 30, 2012. For the 200,000 options that will vest throughSeptember 22, 2013, we recognized expense based on the fair value of the options as of each reporting date through the measurement date. For the year endedDecember 31, 2013, we recognized $59,000 expense for these options. 71 On October 10, 2012, the Board of Directors approved the Company to extend the expiration date of the options granted on July 2, 2007, November 29, 2007and July 10, 2009 to November 29, 2015. Modified awards are viewed as an exchange of the original award for a new award. As a result, an incremental fair-value-based measure of the modified award was recorded as compensation cost on the date of modification for vested awards. The fair value of the stockoptions, which was $0.33 per share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of themodified award was approximately $449,000, which was immediately recognized as a one-time expense on the modification date. On November 30, 2012, the Board of Directors adopted the 2012 Share Incentive Plan (the "2012 Option Plan"), which allows the Company to grant optionsfor the issuance of up to 6,000,000 ordinary shares of the Company subject to vesting requirements. On November 1 and November 30, 2012, and in exchange for film industry strategy advisory services, the Company granted options to a consultant underthe 2007 Option Plan and the 2012 Option Plan to purchase 20,000 and 60,000 ordinary shares of the Company at an exercise price of $1.11 per ordinaryshare. The 20,000 share options vests immediately and one-third of the 60,000 share options will vest on February 1, May 1 and August 1, 2013, respectively. 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 $4.6 million, $3.5 million and $1.3 million for the years ended December 31, 2011, 2012 and 2013, respectively. Inflation Historically inflation has not had a significant effect on our business. According to the National Bureau of Statistics of China, the change in the ConsumerPrice Index in China was 5.4%, 2.6% and 3.0% in the years 2011, 2012 and 2013, respectively. In 2013, China’s inflation has been regarded as relativelyhigh. The higher inflation in 2013 has caused an increase in our operation expenses due to an increase in employee salaries and benefits. Although it has notmaterially impacted our results of operations in 2013, we can provide no assurance that we will not be affected in the future by potentially higher rates ofinflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase as a resultof higher inflation. Additionally, because a substantial portion of our assets consists of cash and short-term investments, high inflation could significantlyreduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China. B. Liquidity and Capital Resources To date, we have financed our operations primarily through internally generated cash, the sale of preferred shares in private placements and the proceeds wereceived from our initial public offering. As of December 31, 2013, we had approximately $59.7 million in cash. We generally deposit our excess cash ininterest bearing bank accounts. Although we consolidate the results of our VIEs in our consolidated financial statements, we can only receive cash paymentsfrom them pursuant to our contractual arrangements with them and their shareholders. See Item 4, “Information on the Company — C. OrganizationalStructure.” Our principal uses of cash primarily include capital expenditures, contractual concession fees, business acquisitions, share repurchases, andother investments and, to a lesser extent, salaries and benefits for our employees and other operating expenses. We expect that these will remain our principaluses 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 31,2011, 2012 and 2013: Year Ended December 31, 2011 2012 2013 Net cash provided by operating activities 17,932 20,230 537 Net cash used in investing activities (5,192) (57,006) (70,466)Net cash (used in) provided by financing activities (10,919) (3,260) 54,311 Effect of exchange rate changes 4,408 936 1,636 Net increase/(decrease) in cash 6,229 (39,100) (13,982)Cash at the beginning of the year 106,505 112,734 73,634 Cash at the end of the year 112,734 73,634 59,652 72 Operating Activities Net cash provided by operating activities was $0.5 million for the year ended December 31, 2013. This was primarily attributable to (1) certain non-cashexpenses that did not result in cash outflow, principally depreciation and amortization of $21.9 million, impairment loss of loan receivable from third party of$1.6 million, loss on disposal of property and equipment of $1.0 million, allowance for doubtful accounts of $2.4 million and share-based compensation of$1.3 million and (2) an increase of $12.1 million in accounts payable. The foregoing was partly offset by (1) an increase of $11.0 million in accountsreceivable and notes receivable, (2) an increase of $7.8 million in prepaid concession fee (3) an increase of $3.9 million in other current assets, (4) a decreaseof $4.0 million in deferred tax assets (liability) and (5) a decrease of $ 2.7 million in deferred revenue. Net cash provided by operating activities was 20.2 million for the year ended December 31, 2012. This was primarily attributable to (1) certain non-cashexpenses that did not result in cash outflow, principally depreciation and amortization of $24.0 million, impairment loss of goodwill of $20.6 million,impairment loss of intangible assets of $9.6 million, loss on disposal of property and equipment of $1.2 million, allowance for doubtful accounts of $1.2million and share-based compensation of $3.5 million, (2) an increase of $8.3 million in accounts payable, and (3) an increase of $6.9 million in deferredrevenues. The foregoing was partly offset by (1) an increase of $8.6 million in accounts receivable and (2) an increase of $7.0 million in long-term deposits. Net cash provided by operating activities was $17.9 million for the year ended December 31, 2011. This was primarily attributable to (1) certain non-cashexpenses that did not result in cash outflow, principally depreciation and amortization of $25.1 million, loss on disposal of property and equipment of $4.4million, allowance for doubtful accounts of $2.0 million and share-based compensation of $4.6 million, (2) an increase of $18.7 million in accounts payable,and (3) a decrease of $10.2 million in prepaid concession fees. The foregoing was partly offset by (1) an increase of $28.7 million in accounts receivable and(2) an increase of $3.7 million in other current assets. Accounts Receivable Our gross accounts receivable balance increased by $8.9 million, or approximately 8%, from $105.8 million as of December 31, 2012 to $114.7 million asof December 31, 2013. Our allowance for doubtful accounts increased from $4.6 million as of December 31, 2012 to $7.2 million as of December 31, 2013.The net effect of these changes resulted in an increase of net accounts receivable of $6.3 million or approximately 6%, from $101.2 million for the year endedDecember 31, 2012 to $107.5 million for the year ended December 31, 2013. Our revenues decreased by $16.5 million, or approximately 6%, from $293.0million in 2012 to $276.5 million in 2013. The reason for an increase in net accounts receivables with a decrease in revenues is that in 2013, due to theeconomic downturn in China, we extended the credit period of some of our long-term customers with large scale, good reputation in the industry and with goodhistorical collection records. As of December 31, 2013, our net accounts receivable balance aged less than and greater than six months was $89.4 million and$18.1 million, respectively. To the extent we need to convert our Renminbi assets and liabilities into U.S. dollars, depreciation of the Renminbi against the U.S. dollar will have an impacton our financial statements. The spot rate decreased from 6.23 Renminbi against 1 U.S. dollar to 6.05, or a depreciation of approximately 2.83%, fromDecember 31, 2012 to 2013. This change in Renminbi exchange rate contributed to a $3.2 million increase in the value of our accounts receivable as ofDecember 31, 2013. Our gross accounts receivable balance increased by $9.7 million, or approximately 10.1%, from $96.1 million as of December 31, 2011 to $105.8 million asof December 31, 2012. Our allowance for doubtful accounts increased from $3.3 million as of December 31, 2011 to $4.6 million as of December 31, 2012.The net effect of these changes resulted in an increase of net accounts receivable of $8.4 million, or approximately 9.0%, from $92.8 million for the yearended December 31, 2011 to $101.2 million for the year ended December 31, 2012. Our revenues increased by $15.2 million, or approximately 5.5%, from$277.8 million in 2011 to $293.0 million in 2012. The rate of increase for net accounts receivables (9.0%) is slightly higher than the rate of increase for netrevenues (6.0%), mainly because traditional media increased from $73.5 million to $83.5 million and the credit term for traditional media is six to twelvemonths and longer than the average credit term. As of December 31, 2012, our net accounts receivable balance aged less than and greater than six months was$84.7 million and $16.5 million, respectively. In general, our accounts receivable increased as a direct result of the increase in our revenues. 73 Our revenues have fluctuated and may continue to fluctuate significantly from period to period, primarily due to the seasonality of air travel, consumerspending and corresponding advertising trends in China. Air travel and advertising spending in China generally tend to increase during the second half of theyear and tend to decrease during the first quarter of each year. As a result of the earthquakes and tsunamis Japan experienced in the first quarter of 2011, many of our major automobile manufacturer customerstemporarily suspended their advertising activities until the latter half of 2011. Revenues recognized during the third and fourth quarters increased by $26.5million, or approximately 20.2%, to $157.9 million from $131.4 million for the fiscal years 2011 and 2010, respectively. The average credit term we provideto our digital media customers is approximately six months. The credit terms we provide to our traditional media and other customers range from six totwelvemonths. In other words, as of December 31, 2011, the accounts receivable balance consists mainly of sales recognized in the second half of 2011. As ofDecember 31, 2011, our net accounts receivable balance aged less than and greater than six months was $79.4 million and $13.4 million, respectively. To the extent we need to convert our Renminbi assets and liabilities into U.S. dollars, depreciation of the Renminbi against the U.S. dollar would have animpact on our financial statements. The spot rate decreased from 6.29 to 6.23 Renminbi against 1 U.S. dollar, or a depreciation of approximately 1.01%,from December 31, 2011 to 2012. This strengthening of the Renminbi contributed to a $1.1 million increase in the value of our accounts receivable as ofDecember 31, 2012. Allowance for Doubtful Accounts Our policy for the allowance for doubtful accounts is discussed in our Critical Accounting Policies on page F-24. Our allowance for doubtful accounts increased from $3.3 million as of December 31, 2011 to $4.6 million as of December 31, 2012 and further to $7.2million as of December 31, 2013, as we charged approximately $1.2 million in 2012 and $2.4 million in 2013 to expenses based on continuous monitoringand our best estimate of the uncollectible accounts. Investing Activities Net cash used in investing activities for the year ended December 31, 2013 amounted to $70.5 million, mainly as a result of our purchase of property andequipment for $13.1 million, a payment of $57.0 million of prepaid equipment cost, a payment of $4.1 million of long term investment and a payment of$2.1 million restricted cash, offset by proceeds from short term investment of $4.8 million. Net cash used in investing activities for the year ended December 31, 2012 amounted to $57.0 million, mainly as a result of our purchase of $42.5 million ofheld-to-maturity securities, purchase of property and equipment for $11.3 million, a payment of $2.2 million for equity investments in Xinghe Union, ShiboMovie, and Guangxi Dingyuan Advertising Co., Ltd., and an increase in loans from a third party of $1.6 million, which was partially offset by $0.1 millionin proceeds from the disposal of property and equipment. Net cash used in investing activities for the year ended December 31, 2011 amounted to $5.2 million, mainly as a result of our purchase of property andequipment for $4.2 million and a payment of $3.0 million for contingent consideration in connection with a business combination, which was partially offsetby (1) $0.7 million contributed from the restricted cash, (2) proceeds from short-term investments of $1.0 million, and (3) $0.2 million of proceeds fromdisposal of property and equipment. Prepaid Equipment Costs In 2013, we recorded approximately $57.0 million for the prepaid equipment cost primarily as a result of our purchase of 1,000 sets of gas station LEDs.Since these equipment were under installation but still in the process of acceptance, the amount we incurred for the purchase was recorded as prepaidequipment costs. This purchase was funded entirely with the proceeds we received from Elec-Tech as part of their investment in GreatView Media. As ofDecember 31, 2013, Elec-Tech contributed $57.2 million to the share capital of GreatView Media, $56.1 million of which was recorded as additional paid-incapital. 74 Capital Expenditures Our capital expenditures were made primarily to purchase digital TV screens, digital frames and associated equipment for our network, including networkconstruction for our gas station media network. We also exchange advertising time slots with other entities for digital TV screens and other equipment throughbarter transactions. Our capital expenditures were $4.2 million in 2011, $9.3 million in 2012 and $70.1 million in 2013, respectively. We believe that our current cash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs forworking capital and capital expenditures for the next 12 months. We may, however, require additional cash due to changing business conditions or otherfuture developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we mayseek to sell additional equity securities, debt securities or borrow from lending institutions. Financing Activities Net cash provided in financing activities amounted to $54.3 million for the year ended December 31, 2013, as a result of $59.4 million provided by capitalcontribution from non-controlling interests and $0.7 million dividend paid to former shareholders of subsidiaries, $2.8 million used to repurchase shares astreasury stock and a payment of $1.6 million for acquisition of non-controlling interests. Net cash used in financing activities amounted to $3.3 million for the year ended December 31, 2012, as a result of $3.4 million used for repurchased shares,which was offset by $0.1 million in proceeds from stock option exercises. Net cash used in financing activities amounted to $10.9 million for the year ended December 31, 2011, as a result of $11.1 million used for repurchasedshares, which was offset by $0.2 million in proceeds from stock option exercises. 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 theeffect 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 onour worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax law.,” “Item 3. KeyInformation — D. Risk Factors — Risks Related to our Corporate Structure — We may rely principally on dividends and other distributions on equity paidby our wholly-owned operating subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our operatingsubsidiaries 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 financingeffectively.,” “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to the establishment ofoffshore special purpose companies by PRC residents and registration requirements for employee stock ownership plans or share option plans may subject ourPRC 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. Historyand Development of the Company — Regulations on Dividend Distribution,” “Item 4. Information on the Company — A. History and Development of theCompany — Business Overview — Regulation — SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options”. None ofthese regulations have had a material effect on our ability to meet our cash obligations. Recently Issued Accounting Pronouncements Recently adopted accounting pronouncements In February 2013, the FASB issued an authoritative pronouncement related to reporting of amounts reclassified out of accumulated other comprehensiveincome, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded fromnet income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. Theamendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of theinformation that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. 75 The new amendments will require an organization to: • Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significantamounts reclassified out of accumulated other comprehensive income—but only if the item reclassified is required under U.S. GAAP to be reclassified to netincome in its entirety in the same reporting period. • Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) tobe reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out ofaccumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly toincome or expense. The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply withthese amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, forpublic companies. Early adoption is permitted. We adopted this pronouncement on January 1, 2013 which did not have a significant impact on itsconsolidated financial statements. Recently issued accounting pronouncements not yet adopted In March 2013, the FASB issued an authoritative pronouncement related to parent's accounting for the cumulative translation adjustment upon derecognition ofcertain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to have acontrolling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate orconveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income.Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantiallycomplete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translationadjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatment does not apply to an equitymethod investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial salerepresents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the amendments in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events that result in the loss ofa controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that result in an acquirer obtaining control of anacquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, theaccumulative translation adjustment should be released into net income upon the occurrence of those events. The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted.Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption.We do not expect the adoption of this guidance will have a significant effect on our consolidated financial statements. 76 In July 2013, the FASB issued a pronouncement which provides guidance on financial statement presentation of an unrecognized tax benefits when a netoperating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing this Accounting Standards Updates("ASU") is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statementsas a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a netoperating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdictionto settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require theentity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financialstatements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforwardexists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15,2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date.Retrospective application is permitted. We do not expect the adoption of this guidance will have a significant effect on its consolidated financial statements. C.Research and Development, Patents and Licenses, Etc. Research and Development We have been developing certain technologies for broadcasting purposes. However, our financial commitment to development of these technologies has beenlimited. During the past three years, we have not incurred a significant amount of research and development expense. While we are interested in and mayexperiment with new technologies from time to time, we do not intend to materially increase our research and development spending in the foreseeable future. D.Trend Information Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonablylikely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would causereported 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 anyderivative 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 risksupport to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to usor 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 2015 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 2015 and arerenewable upon negotiation. The following table sets forth our contractual obligations and commercial commitments as of December 31, 2013: 77 Payments Due by Period Total 2014 2015-2016 2017-2018 2019 and thereafter (in thousands of U.S. Dollars) Operating lease agreements $5,363 $3,522 $1,825 $16 $- Concession rights contracts 448,997 182,500 173,455 50,769 42,273 Purchase obligations 52,736 52,440 296 - - Total $507,096 $238,462 $175,576 $50,785 $42,273 G.Safe Harbor 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, 2014. NAME AGE POSITIONHerman Man Guo 50 Chairman and Chief Executive OfficerJames Zhonghua Feng 43 Director and PresidentHenry Hin-hung Ho 57 Chief Financial OfficerQing Xu 53 Director and Executive PresidentPeixin Xu 43 DirectorConor Chia-hung Yang 51 Independent DirectorShichong Shan 83 Independent DirectorJunjie Ding 50 Independent DirectorSongzuo Xiang 49 Independent DirectorJack Qunyao Gao 55 Independent DirectorBailing Zeng 54 Vice PresidentYunfeng Yu 42 Vice PresidentTong Wu 45 Chief Strategy OfficerMina Deng 32 Vice PresidentWei He 39 Chief Public Relations Officer and Vice President Mr. Herman Man Guo is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception. He was thegeneral manager of Beijing Sunshine Media Co., Ltd. from 1997 to 2004. From 1991 to 1996, Mr. Guo served as the deputy general manager of BeijingTrade & Technology Development Company. Prior to that, he worked in China Civil Aviation Development Service Company from 1988 to 1990. Mr. Guoreceived his bachelor’s degree in applied mathematics from People’s Liberation Army Information Engineering University in China in 1983 and an ExecutiveMBA degree from Peking University in China in 2011. Mr. James Zhonghua Feng has served as our president and director since May 2011. Prior to that, he served as chief operating officer since our inceptionand with respect to certain of our pre-existing affiliated entities since October 2005. Before joining us in 2005, he served as the general manager of NewChang’an Media Advertising Company from 2004 to 2005. From 2002 to 2004, Mr. Feng served as the deputy general manager of Beijing Tianzhi CreativeAdvertising Company. Prior to that, he was the general manager of the Beijing and Shanghai branches of Shenzhen Nantong Umbrella Industry Group Co.,Ltd. Mr. Feng received his bachelor’s degree in Chinese literature from Sichuan Normal University in China in 1993 and an Executive MBA degree fromPeking University in China in 2009. Mr. Henry Hin-hung Ho has served as our chief financial officer since September 2012. Prior to joining AirMedia, Mr. Ho was a senior partner atCornerstone Fund Management, a private equity fund management company based in Tianjin. He served as a director of several Hong Kong and Shanghailisted companies, including Tasly Pharmaceutical Group Co. Ltd. (stock code: 600535.SH) from March 2009 to August 2012, an independent non-executivedirector of Larry Jewelry Limited (stock code: 8351.HK) from February 2011 to November 2012, and a non-executive director and an executive director ofMongolia Investment Group Limited (stock code: 402.HK) from April 2011 to June 2012 and from March 2010 to March 2011, respectively. From 2001 to2008, Mr. Ho worked for several international investment banks as China strategist and/or head of China equity research, including Morgan Stanley, MerrillLynch, UBS and Lehman Brothers. From 1999 to late 2000, Mr. Ho was a founding partner and a managing director of Atlantis Investment Management(Asia). From 1994 to 1999, Mr. Ho was a director at Baring Asset Management (Asia), and headed its Greater China investment team and served as a part-time member of the Central Policy Unit of the Government of the Hong Kong Special Administrative Region. Mr. Ho holds a degree of Master of Arts inAccounting and Finance from the University of Lancaster, United Kingdom. Mr. Ho is a fellow of the Hong Kong Institute of Certified Public Accountants. 78 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. Xuserved 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 InvestmentGuarantee 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 ofBeijing Trade & Technology Development Company from 1991 to 1997. Mr. Xu was a secretary at the PRC State Council Secretary Bureau from 1984 to1991. Mr. Xu received his associate’s degree in business and economics management from Beijing Normal University in 1996. Mr. Peixin Xu has served as our director since January 2014. Mr. Xu is the founder of Bison Capital. Mr. Xu is also chairman of Huasheng Taitong MediaInvestment Co., Ltd., a TV production company and a researcher at Peking University. He was founder and chairman of Beijing Redbaby Info-Tech Co.,Ltd., a B2C e-commerce company mainly focusing on the maternal and infant products, and a partner of New Enterprise Associates, a venture capital fund.Prior to that, Mr. Xu was a manager for new business at Beijing Northstar Industrial Group, a state-owned comprehensive real estate development and servicesbusiness group. Mr. Xu received a bachelor of arts degree in business administration from the Tianjin University of Commerce. Mr. Xu has also served as anindependent director and chairman of strategy committee of Bona Film Group Limited, a Nasdaq listed public company, since November 2011. Mr. Conor Chia-hung Yang has served as our independent director since March 2013. Mr. Yang currently serves as the chief financial officer of tuniu.com, aleading online leisure travel company in China. Previously, Mr. Yang was the chief financial officer of E-Commerce China Dangdang Inc., an NYSE-listed e-commerce company, from March 2010 to July 2012, the chief financial officer of our company, from March 2007 to March 2010, and the chief executiveofficer 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 regionfor CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from 1997 to 1999. Previously, Mr. Yang was a vicepresident of Lehman Brothers Asia Limited from 1994 to 1996 and an associate at Morgan Stanley Asia Limited from 1992 to 1994. Mr. Yang currentlyserves as an independent director and the chairman of the audit committee of IFM Investments Limited, an NYSE-listed real estate services provider. Mr. Yangreceived 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 numberof senior executive positions in various government agencies and other organizations in the aviation industry in China, including the General Administration ofCivil Aviation of China. Mr. Shan attended the college program at the Eastern China Military and Politics Institute in China. Dr. Junjie Ding has served as our independent director since November 2008. Dr. Ding is also an independent director of SinoMedia Holding Limited, amedia advertising operator in China that is listed on the Hong Kong Stock Exchange and has served as an independent director of a China-based privatecompay since December 2013. Dr. Ding is a vice president of the Communication University of China and the deputy officer of the China AdvertisingAssociation of Commerce. With nearly 20 years of experience in the media and advertisement industry, Dr. Ding is the editor of various periodicals, such asInternational Advertising and the Annual Book of Chinese Advertising Works. He received his Ph.D. degree in communications in 2003 from theCommunication University of 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 July2009, Dr. Xiang served as chief executive officer and director, respectively, of Ku6 Media Co., Ltd., a NASDAQ-listed company. He previously served as theDeputy 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 October1998 to May 1999. Dr. Xiang received his bachelor’s degree in engineering in Huazhong University of Science and Technology in 1986, his master’s degreein international affairs from Columbia University in 1999, his master’s degree in management science in 1993 and his Ph.D. degree in economics in 1993from Renmin University in China. 79 Dr. Jack Q. Gao has served as our independent director since January 2014. He currently serves as a board member of Tianji Media Group, Beijing VantoneHolding Co., Global Financial Technology, Digu.com and Bona Film Group and as a senior vice president of News Corporation, the chief executive officer ofNews Corporation China Investments and the chief representative of News Corporation Beijing Representative Office. Prior to joining News Corporation in2006, Dr. Gao was corporate vice president and president of Emerging Markets at Autodesk, where he oversaw the company’s emerging markets businesswith a focus on Greater China and India. Prior to Autodesk, he was president and general manager of Microsoft (China) Ltd. Co., where he was responsiblefor operations, sales and marketing, government relations and business developments. Additionally, he has been a general partner of Walden International, aventure capital fund, and Asia business manager at MSC Software. Dr. Gao received his PhD, master's and bachelor's degrees in engineering from HarbinInstitute of Technology and University of California, Los Angeles. Dr. Bailing Zeng has served as our vice president since January 2010 in charge of AirMedia City (Beijing) Outdoor Advertising Co., Ltd., a company that weacquired in January 2010. Prior to joining AirMedia, Dr. Zeng founded and served as the chief executive officer of AirMedia City (Beijing) Outdoor AdvertisingCo., Ltd. since 2005. Prior to that, Dr. Zeng served as an executive vice president and chief editor of China Youth & Children Audio-Visual Publishing Housefrom 2001 to 2005. During the same period, he was also an assistant to the president of the China Youth Magazine. From 1997 to 2001, Dr. Zeng served asthe head of the rights and benefits department of the central committee of the communist youth league of China. Dr. Zeng received his doctorate degree in lawfrom the Party School of the Central Committee of the Communist Party of China in 2009, his master's degree in law from China University of PoliticalScience and Law in 1991 and his bachelor's degree in law from Southwest University of Political Science and Law in 1988. Mr. Yunfeng Yu has served as our vice president since July 2010. Mr. Yu joined us as special assistant to executive president in February 2009. Prior to that,Mr. Yu was marketing and sales department manager at Beijing Capital Airport Advertising Co. Ltd. Mr. Yu received his bachelor’s degree in economicmanagement from the Party School of the Central Committee of the Communist Party of China in September 2000. Mr. Tong Wu has served as our chief strategy officer since March 2013. Prior to that, he was an outdoor media director of Beijing Dentsu Advertising Co.,Ltd. for more than 6 years and was responsible for Dentsu Beijing’s nationwide outdoor advertising business in China as well as the outdoor advertisingbusiness commissioned by Dentsu’s headquarters in Japan. He was the outdoor director of the sole advertising agent of the Beijing 2008 Olympic GameOrganization Committee for the 29th Olympic Games in charge of outdoor integration and sponsors management. Prior to that, Mr. Wu served variouspositions in advertising industry, including being a managing director of Beijing Dongjizhicheng International Advertising Co., Ltd. from 1998 to 2003, amedia manager of Beijing Beiao Advertising Corporation and a managing director of Beijing Osinche Technology Development Co., Ltd. from 1992 to 1997,an advertising officer of the Beijing 2000 Olympic Games Bid Committee Advertising Department from 1991 to 1992, and an officer of OrganizationCommittee of XI Asian Games Organization Committee in 1990. Ms. Mina Deng, also known as Liang Mi, has served as our vice president in charge of business development since October 2013. Ms. Deng has also been asoloist with Beijing Dance Drama & Opera Co., Ltd. since December 2005 and with Art Troupe of the General Political Department of the People's LiberationArmy Air Force of China from July 2000 to December 2005. Ms. Deng attended the music education department of China Conservatory from July 2001 to July2003 and the school of music of People's Liberation Army Academy of Art from July 1998 to July 2000. Ms. Wei He has served as our chief public relations officer since our inception in April 2007 and for certain of our pre-existing affiliated entities since April2006. Prior to joining our company, she worked as the deputy general manager of Taixiang Investment Consulting Co. Ltd. from 2003 to 2006. Prior to this,she served as the director of the liaison department of Kelon Electrical Holdings Company Ltd. from 2000 to 2002. She served as the account manager of HongKong Pengli Group from 1999 to 2000. She received her bachelor’s degree from Qufu Normal University in China in 1998 and her MBA degree from theCity University of Washington in 2006. Ms. He enrolled in the EMBA program in Cheung Kong Graduate School of Business in year 2012 and expects toreceive her degree in 2014. 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 all of our senior executive officers, namely Herman Man Guo, Henry Hin-hung Ho and James ZhonghuaFeng. Under these employment agreements, each of our executive officers is employed for a specified time period, unless either we or the executive officer givesa one-month prior notice to terminate such employment. We have also entered into employment agreements with our other executive officers. Each of thecontract 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 ofthe 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 theagreed-to duties after a reasonable opportunity to cure the failure. Furthermore, either we or an executive officer may terminate the employment at any timewithout cause upon advance written notice to the other party. These agreements do not provide for any special termination benefits, nor do we have otherarrangements with these executive officers for special termination benefits. 80 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 ourcompany or the confidential information of any third party, including our VIEs and our subsidiaries, received by us. In addition, each executive officer hasagreed to be bound by non-competition restrictions set forth in his or her employment agreement. Specifically, each executive officer has agreed not to, for aperiod ranging from one to two years following the termination or expiration of the employment agreement, (i) carry on or be engaged or interested, directly orindirectly, as shareholder, director, employee, partner, agent or otherwise carry on any business in direct competition with our business; (ii) solicit or enticeaway 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 habitof 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 orentice away from us, any person or entity who has been our officer, manager, consultant or employee within two years prior to such executive officer’stermination 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 ourproducts 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. B.Compensation In 2013, the aggregate cash compensation to our executive officers was approximately $790,992 and the aggregate cash compensation to our non-executivedirectors was approximately $141,592. Our PRC subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentagesof each employee’s salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. Other than theabove-mentioned pension insurance mandated by applicable PRC law, we have not set aside or accrued any amount to provide pension, retirement or othersimilar benefits to our executive officers and directors. No executive officer is entitled to any severance benefits upon termination of his or her employment withour company except as required under applicable PRC law. Share Options In July 2007, we adopted the 2007 Option Plan to attract and retain the best available personnel, provide additional incentives to employees, directors andconsultants, and promote the success of our business. In December 2009, we amended the 2007 Option Plan by increasing the maximum aggregate number ofshares issuable under the plan from 12,000,000 to 17,000,000. In March 2011, our board of directors authorized the issuance of 2,000,000 ordinary sharesunder the 2011 Option Plan with the same aim as the 2007 Option Plan. In 2012, our board of directors adopted the 2012 Option Plan, under which we areauthorized to grant restricted shares or options and other awards for a total issuance of up to 6,000,000 ordinary shares. As of December 31, 2013, options topurchase 14,655,530 of our ordinary shares were outstanding. The majority of these options will vest on a straight-line basis over a three-year period, withone-twelfth of the options vesting each quarter from the date of grant. The following table summarizes, as of December 31, 2013, the outstanding options granted to our executive officers, directors and to other individuals as agroup under our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan. Name OrdinarySharesUnderlyingOptions ExercisePrice(US$/Share)(1) Date ofGrant ExpirationDate Herman Man Guo 2,000,000 1.15 July 2, 2007 July 2, 2017 Qing Xu * 1.15 March 22, 2011 March 22, 2021 Henry Hin-hung Ho 1,857,538 0.72 September 4, 2012 September 4, 2017 Shichong Shan * 1.15 July 20, 2007 July 20, 2017 Junjie Ding * 1.15 July 10, 2009 July 10, 2014 Songzuo Xiang * 1.15 July 10, 2009 July 10, 2014 James Zhonghua Feng 625,514 1.15 July 2, 2007 July 2, 2017 150,000 1.15 July 20, 2007 July 20, 2017 840,000 1.15 July 10, 2009 July 10, 2014 110,000 1.15 November 29, 2007 November 29, 2015 Conor Chia-hung Yang * 1.15 July 2, 2007 July 2, 2017 * 1.15 November 29, 2007 November 29, 2015 * 1.15 July 10, 2009 July 10, 2014 Wei He * 1.15 July 20, 2007 July 20, 2017 * 1.15 July 10, 2009 July 10, 2014 * 1.15 March 22, 2011 March 22, 2016 Tong Wu — — — — Bailing Zeng * 1.15 March 22, 2011 March 22, 2021 Yunfeng Yu * 1.15 July 10, 2009 July 10, 2014 * 1.15 March 22, 2011 March 22, 2016 Liang Mi — — — — Other individuals as a group 366,000 1.57 July 20, 2007 July 20, 2017 Other individuals as a group 1,590,616 1.15 July 20, 2007 July 20, 2017 Other individuals as a group 830,000 1.57 November 29, 2007 November 29, 2015 Other individuals as a group 330,418 1.15 November 29, 2007 November 29, 2015 Other individuals as a group 483,000 1.57 July 10, 2009 July 10, 2014 Other individuals as a group 1,787,336 1.15 July 10, 2009 July 10, 2014 Other individuals as a group 581,600 1.15 March 22, 2011 September 1, 2017 Other individuals as a group 120,000 1.15 March 22, 2011 March 22, 2016 Other individuals as a group 20,000 1.11 November 1, 2012 November 1, 2014 Other individuals as a group 60,000 1.11 November 30, 2012 November 1, 2014 81 * 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 ofthe stock options previously granted to certain optionees on July 2, 2007, July 20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011. Theexercise 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 $1.57per 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 boardof 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 rightagreement, as applicable, that sets forth the terms, conditions and limitations for each grant. In addition, the stock option agreement and the stock purchaseright 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 usunder 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 oursecurities. Eligibility. We may grant awards to our employees, directors and consultants or any of our related entities, which include our subsidiaries or any entities inwhich 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-controlcorporate transaction where the successor entity does not assume our outstanding options under the plans. In such event, each outstanding option will becomefully vested and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights will terminateimmediately 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 thecompensation 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 grantan 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 exerciseprice 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 timeor 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 besatisfied 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 termshall 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. 82 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 ofsuccession 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 2011Option 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 begranted under it after November 2022. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extentnecessary to comply with applicable law. However, no such action may impair the rights of any optionee unless agreed by the optionee. C.Board Practices Our board of directors currently consists of nine directors. A director is not required to hold any shares in the company by way of qualification. A directormay vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of thecompany to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed oras security for any obligation of the company or of any third party. The remuneration to be paid to the directors is determined by the board of directors. Thereis 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 currentlydo not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination by theboard 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 ourdirectors 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 resolvedthat 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 ofdirectors are independent directors. We have adopted a charter for each of the board committees. Each committee’s members and responsibilities are describedbelow. Audit Committee. Our audit committee consists of Messrs. Songzuo Xiang, Shichong Shan and Conor Chia-hung Yang. Mr. Yang is the chairperson. Ourboard of directors has determined that all members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations of the NASDAQ Stock Market LLC. The audit committee overseesour accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, amongother 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. 83 Compensation Committee. Our compensation committee consists of Messrs. Junjie Ding, Conor Chia-hung Yang and Shichong Shan. Our board of directorshas determined that Messrs. Junjie Ding, Conor Chia-hung Yang and Shichong Shan satisfy the “independence” requirements of the rules and regulations ofthe NASDAQ Stock Market LLC. Our compensation committee assists the board in reviewing and approving the compensation structure of our directors andexecutive officers, including all forms of compensation to be provided to our directors and executive officers. Our chief executive officer may not be present atany 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 four most senior executives; ·approving and overseeing the total compensation package for our executives other than the four most senior executives; ·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 Junjie Ding. Mr. Xu is the chairperson. Ourcompliance committee assists the board in overseeing the Company’s compliance with the laws and regulations applicable to the Company’s business, andcompliance with the Company’s code of business conduct and ethics and related policies by employees, officers, directors and other agents and associates ofthe Company. The compliance committee is responsible for, among other things: ·establishing and revising project and purchase control policies; ·establishing and revising administration and business supervision policies; ·accepting, investigating, and settling any comments, complaints, and reports from employees; ·investigating and settling any matters delegated from the board of directors; and ·monitoring the status of implementation of company policies. Duties of Directors Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also owe toour company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree ofskill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards anobjective 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 careto us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time. Terms of Directors and Officers All directors hold office until the expiration of their terms and until their successors have been elected and qualified. A director may be removed from officebefore the expiry of his term by a special resolution passed by the shareholders. Every director who does not retire by rotation at the annual general meetingheld in 2013 shall serve a term of office which shall expire on 31 July 2014. Any director who is newly appointed shall serve a term of office which shall expireon the 31st day of July which is not less than one year nor more than two years after the date of such appointment. Upon the expiry of each director's term ofoffice, 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-electedshall serve an additional term which shall expire on 31 July of the year which is two years after such re-election. There shall be no limit on the number of timeswhich a director may be re-elected or the number of additional terms which any such director may serve. The articles of association also provide that the officeof a director shall also be vacated in a limited number of circumstances, namely if the director: (a) becomes bankrupt or makes any arrangement orcomposition with his creditors; (b) is found to be or becomes of unsound mind; (c) resigns his office by notice in writing to the Company; or (d) withoutspecial 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 directorsresolves that his office be vacated. Officers are elected by and serve at the discretion of the board of directors. 84 In addition, our service agreements with our directors do not provide benefits upon termination of their services. D.Employees We had 723, 795 and 887 employees as of December 31, 2011, 2012 and 2013, respectively. The following table sets forth the number of our employees byarea of business as of December 31, 2011, 2012 and 2013: As of December 31, 2011 2012 2013 Number ofEmployees % of Total Number ofEmployees % of Total Number ofEmployees % of Total Sales and Marketing Department 319 44.1 352 44.3 370 41.7 Quality Control and TechnologyDepartment 173 23.9 215 27.0 244 27.5 Programming Department 31 4.3 32 4.1 52 5.9 Resources DevelopmentDepartment 57 7.9 44 5.5 57 6.4 General Administrative andAccounting 143 19.8 152 19.1 164 18.5 Total 723 100.0 795 100.0 887 100.0 The following table sets forth the breakdown of employees by geographic location as of December 31, 2013: City Number of Employees % of Total Beijing 554 62.5%Shanghai 82 9.2%Guangzhou 43 4.8%Shenzhen 35 3.9%Chengdu 25 2.8%Wenzhou 16 1.8%Others 132 14.9%Total 887 100.0% Generally we enter into standard employment contracts with our officers, managers and other employees. According to these contracts, all of our employees areprohibited from engaging in any other employment during the period of their employment with us. The employment contracts with officers and managers aresubject 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 fromdisclosing confidential information obtained during their employment with us. Furthermore, the confidentiality agreements include a covenant that prohibits allemployees 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. E.Share Ownership The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2014, 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. 85 The calculations in the shareholder table below are based on 119,235,841 ordinary shares outstanding as of March 31, 2014. Beneficial ownership isdetermined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentageownership of that person, we have included shares that the person has the right to acquire within 60 days after March 31, 2014, the most recent practicabledate, including through the exercise of any option, or other right or the conversion of any other security. These shares, however, are not included in thecomputation of the percentage ownership of any other person. Shares Beneficially Owned Number % Directors and Executive Officers: Herman Man Guo(1) 40,090,194 33.07%James Zhonghua Feng(2) 4,682,324 3.87%Henry Hin-hung Ho * * Qing Xu(3) 2,800,000 2.34%Peixin Xu(6) 16,040,000 13.45%Conor Chiahung Yang * * Shichong Shan * * Junjie Ding * * Songzuo Xiang * * Jack Qunyao Gao — — Bailing Zeng * * Yunfeng Yu * * Tong Wu — — Mina Deng — — Wei He * * Principal Shareholders: Wealthy Environment Limited(4) 17,505,980 14.68%Dan Shao (5) 20,584,214 17.26%Bison Capital Media Limited (6) 16,040,000 13.45% * Aggregate beneficial ownership of our company by such director or officer is less than 1% of our total outstanding ordinary shares. (1)Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, a BVI company wholly owned by Mr. Herman Man Guo, (ii) 1,400,000ordinary shares represented by American Depositary Shares held by Wealthy Environment Limited, (iii) 2,000,000 ordinary shares issuable upon exerciseof options held by Mr. Guo that are exercisable within 60 days, (iv) 20,000,000 ordinary shares held by Global Earnings Pacific Limited, a BVI companywholly owned and controlled by Ms. Dan Shao, Mr. Guo’s wife, and (v) 584,214 ordinary shares represented by American Depositary Shares held byMs. Dan Shao. Mr. Guo disclaims beneficial ownership of the ordinary shares held by Global Earnings Pacific Limited and by Ms. Dan Shao. (2)Includes (i) 1,725,514 ordinary shares issuable upon exercise of options held by Mr. James Zhonghua Feng that are exercisable within 60 days, and (ii)2,956,810 ordinary shares held by Leader Smart Capital Limited, a Hong Kong company wholly owned by Mr. James Zhonghua Feng. The registeredaddress of Leader Smart Capital Limited is 13/F, Shum Tower, 268 Des Voeux Road, Central, Hong Kong. (3)Includes (i) 2,000,000 ordinary shares held by Mambo Fiesta Limited, a BVI company wholly owned by Mr. Qing Xu, (ii) 200,000 ordinary sharesrepresented by American Depositary Shares held by Mr. Qing Xu, and (iii) 600,000 ordinary shares issuable upon exercise of options held by Mr. Xu thatare exercisable within 60 days. (4)Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, and (ii) 1,400,000 ordinary shares represented by American DepositaryShares held by Wealthy Environment Limited. Wealthy Environment Limited, a company incorporated in BVI, is wholly owned and controlled byHerman Man Guo. The registered address of Wealthy Environment Limited is P.O. Box 173, Kingston Chambers, Road Town Tortola, BVI. (5)Includes (i) 20,000,000 ordinary shares held by Global Earning Pacific Limited and (ii) 584,214 ordinary shares represented by ADSs that Ms. DanShao purchased in one or more open-market transactions. Global Earning Pacific Limited, a company incorporated in BVI, is wholly owned andcontrolled by Ms. Dan Shao, Mr. Herman Man Guo’s wife. The registered address of Global Earning Pacific Limited is OMC Chambers, Wickham Cay1, 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 BisonCapital Holding Company Limited, a Cayman Islands company, which is in turn wholly owned by Ms. Fengyun Jiang, a citizen of Hong Kong SpecialAdministrative Region. Ms. Jiang is the sole director of both Bison Capital Media Limited and Bison Capital Holding Company Limited. Ms. Jiangpossesses the power to direct the voting and disposition of the shares owned by Bison Capital Media Limited and may be deemed to have beneficialownership of such shares. Mr. Peixin Xu is the husband of Ms. Jiang and, as such, Mr. Xu may be deemed to beneficially own the 16,040,000 ordinaryshares directly held by Bison Capital Media Limited. 86 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 byany other natural or legal person severally or jointly. None of our major shareholders have different voting rights from other shareholders. We are not aware ofany arrangement that may, at a subsequent date, result in a change of control of our company. As of March 31, 2014, 127,662,057 of our ordinary shares were issued, with 119,235,841 shares outstanding and 8,426,216 shares in Treasury Stock.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 andheld approximately 65.39% of our total outstanding ordinary shares as of March 31, 2014. The number of beneficial owners of our ADSs in the United Statesis 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 A.Major Shareholders Please refer to Item 6, “Directors, Senior Management and Employees — E. Share Ownership.” B.Related Party Transactions Contractual Arrangements Since December 10, 2005, foreign investors have been permitted to own directly a 100% interest in PRC advertising companies with at least three years ofdirect operations outside of China. Prior to 2011, although AM China, our subsidiary and the 100% shareholder of AM Technology and Xi’an AM, has beenoperating its advertising business in Hong Kong since 2008, its operation experience was less than three years and was not qualified under the PRC regulationsto own a PRC advertising company. Accordingly, our domestic PRC subsidiaries, AM Technology, Shenzhen AM and Xi’an AM, which are consideredforeign-invested enterprises, were ineligible to operate a business with advertising as a part of their business scope in China. Our advertising business iscurrently provided through contractual arrangements with our consolidated VIEs in China, principally AM Advertising, certain of its subsidiaries, ShengshiLianhe, AirMedia UC and AM Yuehang. Since the beginning of 2012, AM China has been in operation for more than three years and as a result, AM China isnow allowed to directly invest in advertising business in China. We are in the process of establishing a wholly-owned subsidiary to provide advertisingservices in China through it directly. However, we can make no assurance as to the specific time when this wholly-owned subsidiary shall be established.Once this subsidiary is put into operation, we intend to gradually shift our advertising business to this subsidiary, and thus to gradually reduce the relianceon the current VIE structure. Our consolidated VIEs directly operate our advertising network, enter into concession rights contracts and sell advertising timeslots and advertising locations to our advertisers. We have been and expect to continue to be dependent on our VIEs to operate our advertising business until wequalify for direct ownership of an advertising business in China under the PRC laws and regulations and acquire our VIEs as our direct, wholly-ownedsubsidiaries. AM Technology has entered into contractual arrangements with our VIEs, pursuant to which AM Technology provides exclusive technologysupport and service and technology development services in exchange for payments from them. In addition, AM Technology has entered into agreements withour VIEs and each of their shareholders, which provide AM Technology with the substantial ability to control our VIEs. These agreements are summarized inthe following paragraphs. ·Technology support and service agreements: AM Technology provides exclusive technology support and consulting services to our VIEs and inreturn, the VIEs are required to pay AM Technology service fees. The VIEs pay to AM Technology annual service fees in the amount that guaranteethat the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost- plus rate of no less than 0.5% in the case of AMAdvertising, Shengshi Lianhe and AirMedia UC, or 1.0% in the case of AM Yuehang. It is at AM Technology's sole discretion that the rate andamount of service fees ultimately charged the VIEs under these agreements are determined. The “net cost-plus rate” refers to the operating profit as apercentage of total costs and expenses of a certain entity. The technology support and service agreements are effective for ten years and such term isautomatically renewed upon their expiration unless either party to an agreement informs the other party of its intention not to extend at least twentydays prior to the expiration of these agreements. 87 ·Technology development agreements: Our VIEs exclusively engage AM Technology to provide technology development services. AM Technologyowns the intellectual property rights developed in the performance of these agreements. The VIEs pay to AM Technology annual service fees in theamount that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than0.5% in the case of AM Advertising, Shengshi Lianhe and AirMedia UC, which final rate should be determined by AM Technology. It is at AMTechnology'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 agreements are effective for tenyears and such term is automatically renewed upon their expiration unless either party informs the other party of its intention not to extend at leasttwenty days prior to the expiration of these agreements. ·Call option agreements: Under the call option agreements, the shareholders of our VIEs irrevocably granted AM Technology or its designated thirdparty an exclusive option to purchase from the VIEs’ shareholders, to the extent permitted under PRC law, all the equity interests in the VIEs, as thecase may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. In addition, under theseagreements, AM Technology has undertaken to act as guarantor of VIEs in all operations- related contracts, agreements and transactions and committo provide loans to support the business development needs of VIEs or if the VIEs suffer operating difficulties, provided that the relevant VIE’sshareholders satisfy the terms and conditions in the call option agreements. Under PRC laws, to provide an effective guarantee, a guarantor needs toexecute a specific written agreement with the beneficiary of the guarantee. As AM Technology has not entered into any written guarantee agreementswith any third party beneficiaries to guarantee the VIEs’ performance obligations to these third parties, none of these third parties can demandperformance from AM Technology as a guarantor of the VIEs’ performance obligations. The absence of a written guarantee agreement, however, doesnot 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 eachcall option agreement is ten years and such terms can be renewed upon expiration at AM Technology's sole discretion. ·Equity pledge agreements: Under the equity pledge agreements, the shareholders of the VIEs pledged all of their equity interests, including the rightto receive declared dividends, in the VIEs to AM Technology to guarantee VIEs’ performance of their obligations under the technology support andservice agreement and the technology development agreement. If the VIEs fail to perform its obligations set forth in the technology support and serviceagreement, AM Technology shall be entitled to exercise all the remedies and powers set forth in the provisions of the equity pledge agreement. Theagreement is effective for as long as the technology support and service agreements and technology development agreement are effective. ·Authorization letters: Each shareholder of the VIEs has executed an authorization letter to authorize AM Technology to exercise certain of its rights,including voting rights, the rights to enter into legal documents and the rights to transfer any or all of its equity interest in the VIEs. Suchauthorization letters will remain effective during the operating periods of the VIEs. The authorization is effective for ten years and such term isrenewed upon its expiry at AM Technology’s sole discretion. Through the above contractual arrangements, AM Technology has obtained 100% of shareholders’ voting interest in the VIEs, has the right to receive alldividends 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 asdetermined by AM Technology at its sole discretion. Accordingly, we have consolidated the VIEs because we believe, through the contractual arrangements, (1)AM Technology could direct the activities of the VIEs that most significantly affect its economic performance and (2) AM Technology could receivesubstantially all of the benefits that could be potentially significant to the VIEs. Other than the contractual arrangements described above, because themanagement and certain employees of AM Technology also serve in the VIEs as management or employees, certain operating costs paid by AM Technology,such as payroll costs and office rental, were re-charged to the VIEs. 88 Shenzhen AM has signed contractual agreements with one of our VIEs in China, AM Yuehang, pursuant to which Shenzhen AM provides exclusivetechnology support services including the research and development of technologies related to AM Yuehang’s business operation, the maintenance andmonitoring of displays and programming systems, research on the solution of technical problems, and other related technical support and services in exchangefor payments from AM Yuehang, which constitute Shenzhen AM’s primary source of revenue. Xi’an AM is a software company which primarily derives revenues from selling software it developed to AM Technology. AM Technology uses the software itpurchases from Xi’an AM to provide technology development and support services to other companies. Amounts Due to BEMC We assigned concession rights of certain media resources to BEMC, our joint venture with China Eastern Media Corporation, Ltd. As of December 31, 2013,we did not have amount due to BEMC as the deposits received for publishing advertisement. Amounts Due from BEMC As of December 31, 2013, we had $0.19 million due from BEMC as the uncollected advertising revenue earned from BEMC. Transactions with BEMC In 2013, we earned $0.68 million of advertising revenue from BEMC. 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 are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have amaterial adverse effect on our business, financial condition or results of operations. We may become subject to legal proceedings, investigations and claimsincidental to the conduct of our business from time to time. 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 applicable laws. Even if our board of directors decides to paydividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, ourcapital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictionsand other factors deemed relevant by our board of directors. 89 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. B.Significant Changes Except as disclosed elsewhere in this annual report, we have not experienced any significant change since the date of our audited consolidated financialstatements filed as part of this annual report. ITEM 9.THE OFFER AND LISTING A.Offer and Listing Details Our ADSs, each representing two of our ordinary shares, were listed on the NASDAQ Global Market on November 7, 2007 and were subsequentlytransferred to the NASDAQ Global Select Market. Our ADSs trade under the symbol “AMCN.” The following table provides the high and low trading pricesfor our ADSs for the periods noted. Annual Market Prices High Low Year 2009 9.26 3.80 Year 2010 8.90 2.83 Year 2011 7.60 2.10 Year 2012 4.01 1.33 Year 2013 3.20 1.50 Quarterly Market Prices Second Quarter 2013 2.06 1.50 Third Quarter 2013 1.89 1.68 Fourth Quarter 2013 3.20 1.55 First Quarter 2014 2.47 1.70 Monthly Market Prices October 2013 3.20 1.66 November 2013 1.89 1.58 December 2013 2.23 1.55 January 2014 2.93 1.92 February 2014 2.66 1.90 March 2014 3.24 1.96 April 2014 (until April 24, 2014) 2.46 1.96 B.Plan of Distribution Not applicable. C.Markets See our disclosures above under “Offer and Listing Details.” D.Selling Shareholders Not applicable. E.Dilution Not applicable. F.Expenses of the Issue Not applicable. 90 ITEM 10.ADDITIONAL INFORMATION A.Share Capital Not applicable. B.Memorandum and Articles of Association The following are summaries of material terms and provisions of our amended and restated memorandum and articles of association and the Companies Law(2013 Revision) of the Cayman Islands, or the Companies Law, insofar as they relate to the material terms of our ordinary shares. This summary is notcomplete, 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 (FileNo. 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. 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 establishedare 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 anyother law of the Cayman Islands. Board of Directors See “Item 6. Directors, Senior Management and Employees — C. Board Practices—Board of Directors.” Ordinary Shares General All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Ourshareholders who are non-residents of the Cayman Islands may freely hold and vote their shares. Dividend Rights The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law. Voting Rights Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by showof 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 tovote 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 theCompany 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 ofdirectors 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. Advancenotice 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 generalmeeting, 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 ordinaryresolution, including increasing the amount of our authorized share capital, consolidating or dividing all or any of our share capital into shares of largeramount than our existing shares, and canceling any shares that are authorized but unissued. 91 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 oftransfer 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 mayreasonably require to show the right of the shareholder to make the transfer. Repurchase of Shares Subject to the provisions of the Companies Law and our articles of association, our board of directors may authorize repurchase of our shares in accordancewith the manner of purchase specified in our articles of association without seeking shareholder approval. Once the shares have been repurchased, they maybe cancelled or held in the name of the company as treasury shares. Liquidation On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among theholders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution areinsufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately. Redemption of Shares We may issue shares on terms that are subject to redemption on such terms and in such manner as may, before the issue of such shares, be determinedby our board of directors. Calls on Shares and Forfeiture of Shares Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders atleast 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 aresubject to forfeiture. Variations of Rights of Shares All or any of the special rights attached to any class of shares may, subject to the provisions of our articles of association be varied either with the writtenconsent of the holders of a majority of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders ofthe shares of that class. Inspection of Books and Records Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporaterecords. However, we will provide our shareholders with annual audited financial statements. See “— H. Documents on Display.” C.Material Contracts In May 2013, several entities affiliated with AirMedia, including Beijing GreatView Media Advertising Co., Ltd. or GreatView Media, the primary operatingentity of our gas station media network, and its current shareholders, entered into an investment agreement with Elec-Tech International Co., Ltd., or Elec-Tech. Pursuant to the investment agreement, Elec-Tech agreed to invest RMB640 million (US$104 million) to purchase ordinary shares representingapproximately 21.27% of the equity interest of GreatView Media. After the completion of the transaction, AirMedia controls 61.41% of the equity interest ofGreatView Media. As of December 31, 2013, GreatView Media purchased 1,000 sets of LED screens from Elec-Tech. As of March 31, 2014, we have installedmore than 300 LED screens in six cities. We intend to install more screens to further develop our existing gas station media network. 92 In May 2013, Shengshi Lianhe entered into a joint venture agreement with Guangzhou Daozheng Advertising Co., Ltd. to establish a joint venture, GuangzhouMeizheng Advertising Co., Ltd. to operate tablet device advertisements on board the high speed trains on the Wuhan-Guangzhou and Guangzhou-Shenzhen-Hong Kong lines. Guangzhou Daozheng Advertising Co., Ltd. transferred to the joint venture the concession rights to operate such advertisement businessesfor the period from September 1, 2012 to August 31, 2018. Shengshi Lianhe holds 54% while Guangzhou Daozheng Advertising Co., Ltd. holds 46% of theequity interest in the joint venture. The joint venture was set to exist for 30 years. In September 2013, we entered into an equity swap agreement with N-S Digital, under which we exchanged our 50% holding in Beijing Shibo for the 50%equity interest in Beijing Xinghe held by N-S Digital. The two joint venture agreements that were entered into in February and March 2012 to establish BeijingShibo and Beijing Xinghe were terminated at the same time. In October 2013, AirMedia Group Co., Ltd., or AM Advertising, one of our consolidated affiliated entities, entered into a strategic alliance agreement withHNA Xinhua Culture Holding Group Co., Ltd., or HNA Culture, a subsidiary of HNA Group, to form an industry development fund of in-flight internet, orthe Fund, to explore the opportunity of in-flight internet service and in-air multimedia platform. Such arrangement will include the establishment of a fundmanagement company, or the Joint Fund Management Company, by AM Advertising and HNA Culture each holding 50% of the equity interest therein. TheJoint Fund Management Company will act as the general partner for the Fund. HNA Culture will be responsible for obtaining exclusive rights to develop andoperate in-flight internet service and in-air multimedia platform from member airlines of HNA Group. In a power of attorney, HNA Group authorized HNACulture to act as the exclusive general coordinator for HNA Group’s in-flight connectivity project, with full authority to coordinate with all member airlines ofHNA Group, HNA Technik, equipment providers and satellite service providers in setting up in-flight internet connectivity for HNA Group-operatedairplanes. HNA Group recognizes the documents executed by HNA Culture on behalf of HNA Group in relation to the Fund and the Joint Fund ManagementCompany, including the strategic alliance agreement, as within the scope of such authorization. AM Advertising will act as a limited partner, primarily in charge of fundraising and capital contribution for the Fund. The Fund has a planned fund raisingtarget of approximately RMB1,000 million, to be adjusted according to the Fund’s operational needs. AM Advertising alone commits to invest no less than 40%of the total targeted fund size in the Fund and to provide the remaining portion of the total targeted fund size if it cannot secure other limited partners. The firstround of fund raising for the Fund was originally expected to be RMB400 million, and AM Advertising commits to invest no less than 60% in the first round.Due to changes in business needs since the entering into of the strategic alliance agreement, the parties are currently under discussion to adjust the size andtimetable of the fundraising. 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 onthe Company” or elsewhere in this annual report on Form 20-F. D.Exchange Controls 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 conductof our operations in the Cayman Islands, where we were incorporated. Cayman Islands law and our memorandum and articles of association do not imposeany 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 regulationson foreign exchange. 93 E.Taxation The following is a general summary of certain material Cayman Islands and U.S. federal income tax considerations. This summary does not deal withall possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other taxlaws. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective shareholder. The discussionis based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations,possibly with retroactive effect. 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 thenature of inheritance tax or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to or produced before acourt 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 controlregulations or currency restrictions in the Cayman Islands. PRC Taxation Under the EIT Law, foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or onany 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 corporateshareholders 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 transferof 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 shareholdersand 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 maybe materially and adversely affected. 94 United States Federal Income Taxation The following is a summary of the material U.S. federal income tax considerations relating to the acquisition, ownership and disposition of our ADSs orordinary shares by a U.S. Holder (as defined below) that will acquire our ADSs or ordinary shares and will hold our ADSs or ordinary shares as "capitalassets" (generally, property held for investment) under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This summary is based uponexisting U.S. federal tax law as of the date hereof, which is subject to differing interpretations or change, possibly with retroactive effect. This summary doesnot discuss all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual investment circumstances,including investors subject to special tax rules (for example, financial institutions, insurance companies, regulated investment companies, real estateinvestment trusts, broker-dealers, partnerships and their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S.Holders, holders who own (directly, indirectly or constructively) 10% or more of our voting stock, holders who acquire their ADSs or ordinary sharespursuant to any employee share option or otherwise as compensation, investors that will hold their ADSs or ordinary shares as part of a straddle, hedge,conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, traders in securities that have elected the mark-to-marketmethod of accounting for their securities or investors that have a functional currency other than the United States dollar, all of whom may be subject to taxrules that differ significantly from those summarized below. In addition, this summary does not discuss any alternative minimum tax, state, local or non-U.S.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. incomeand other tax considerations of an investment in 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) anindividual 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 ingross 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 supervisionof 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) thathas 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 taxtreatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding ourADSs or ordinary shares and partners in such partnerships are urged to consult their tax advisors regarding an investment in our ADSs or ordinary shares. For U.S. federal income tax purposes, a U.S. Holder of ADSs will be treated as the beneficial owner of the underlying ADSs or ordinary shares represented bythe ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to U.S. federal income tax. 95 Passive Foreign Investment Company Considerations Although we do not believe that we were classified as a PFIC, for U.S. federal income tax purposes, for the taxable year ended December 31, 2013, there is asignificant risk that we will become a PFIC for our current taxable year ending December 31, 2014 and future taxable years unless our share value increasesand/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) 50percent 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 ofpassive income. For this purpose, cash and assets readily convertible into cash are generally classified as passive and goodwill and other unbookedintangibles associated with active business activities may generally be classified as non-passive. We will be treated as owning a proportionate share of theassets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25 percent (by value) of thestock. Although the law in this regard is unclear, we treat the VIEs as being owned by us for U.S. federal income tax purposes, not only because we exerciseeffective 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 therelevant 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 anytaxable 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 belowunder "—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 holdingperiod 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 taxableyears. Accordingly, a U.S. Holder, who acquires our ADSs should consider making a mark-to-market election, as discussed below under "—Passive ForeignInvestment Company Rules," in the first taxable year of such holder's holding period in which are a PFIC in order to avoid owning PFIC-Tainted Shares. Passive Foreign Investment Company Rules 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 (asdescribed 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 averageannual distributions received in the three preceding taxable years or such U.S. Holder's holding period for the ADSs or ordinary shares, if shorter), and(ii) any gain realized on the sale or other disposition, including a pledge, of our ADSs or ordinary shares. Under the PFIC rules: ·such excess distribution or gain will be allocated ratably over the U.S. Holder's holding period for the ADSs or ordinary shares; ·such amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we are classified as a PFIC (a “pre-PFICyear”) will be taxable as ordinary income; ·such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to suchU.S. Holder for that year; and ·an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFICyear. 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 aPFIC, 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 besubject 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 thoughsuch U.S. Holder would not receive the proceeds of those distributions or dispositions. 96 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. Marketablestock is stock that is traded in other than de minimus quantities on at least 15 days during each calendar quarter ("regularly traded") on a qualified exchangeor other market as defined in applicable United States Treasury Regulations. Our ADSs are listed on the NASDAQ Global Select Market, which is a qualifiedexchange or market for these purposes. No assurance, however, can be given that the ADSs will be readily tradable on an established securities market in theUnited States. 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 fairmarket 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 theadjusted 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 inincome 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 aPFIC. 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 losswill 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 themark-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 holdsuch 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 taintof 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 todistributions, 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 withrespect 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 taxpurposes. 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, ifavailable, 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. EachU.S. Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of purchasing, holding and disposing ADSs orordinary 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 ofour current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of aU.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 thecase 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 willgenerally 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 ondividend income from a "qualified foreign corporation" at a reduced U.S. federal tax rate rather than the marginal tax rates generally applicable to ordinaryincome 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 taxableyear) 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) whichis 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 PRCEnterprise 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 notexpected to be eligible for the dividends received deduction allowed to corporations. 97 Although the ADSs are currently tradable on the NASDAQ Global Select Market, which is an established securities market in the United States, noassurance may be given that the ADSs will be readily tradable on an established securities market in the United States for purposes of the reduced tax rate.Since we do not expect that our ordinary shares will be listed on an established securities market in the United States, it is unclear whether dividends that wepay on our ordinary ADSs or ordinary shares that are not backed by ADSs meet the conditions required for the reduced tax rate. Each U.S. Holder is advisedto 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 andgenerally 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 inrespect 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 foreigntax 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 yearin 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 advisedto 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 ordinaryshares 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 ordinaryshares. 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 Statessource 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 toconsult with its tax advisor regarding the tax consequences if a foreign withholding tax is imposed on a disposition of our ADSs or ordinary shares, includingthe availability of the foreign tax credit under their particular circumstances. Information Reporting and Backup Withholding Certain U.S. Holders are required to report information to the IRS relating to an interest in “specified foreign financial assets,” including shares issued by anon-United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000 (or a higher dollar amountprescribed by the IRS), subject to certain exceptions (including an exception for shares held in custodial accounts maintained with a United States financialinstitution). These rules also impose penalties if a U.S. Holder is required to submit such information to the IRS and fails to do so. In addition, U.S. Holders may be subject to backup withholding and information reporting to the IRS with respect to dividends on and proceeds from the saleor other disposition of our ADSs or ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the United Statesinformation reporting rules to their particular circumstances. F.Dividends and Paying Agents Not applicable. G.Statement by Expert Not applicable. H.Documents on Display 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 andother 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 ofreports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilitiesmaintained 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 andinformation statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign privateissuer, 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. 98 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 annualaudited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports andcommunications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available toholders 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 bythe 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. Inaddition, 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. Wehave not used derivative financial instruments in our investment portfolio. Interest-earning instruments carry a degree of interest rate risk. We have not beenexposed nor do we anticipate being exposed to material risks due to changes in market interest rates. However, our future interest income may fall short ofexpectations due to changes in market interest rates. A hypothetical 1% decrease in interest rates would have resulted in a decrease of approximately $0.7million in our interest income for the year ended December 31, 2013. 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 andexpenses of our consolidated operating subsidiaries and affiliate entities are denominated in RMB. Substantially all of our sales contracts are denominated inRMB and substantially all of our costs and expenses are denominated in RMB. We have not had any material foreign exchange gains or losses. Although ingeneral, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange ratebetween U.S. dollars and RMB because the value of the business of our operating subsidiaries and VIEs is effectively denominated in RMB, while the ADSsare 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 theRMB 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 haltedand the exchange rate between RMB and the U.S. dollar remained within a narrow band. As a consequence, the RMB fluctuated significantly during thatperiod against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the RMB to appreciate slowlyagainst 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 RMBand 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 wouldhave 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 RMBwould have resulted in a decrease of $0.05 million in the value of our U.S. dollar-denominated financial assets at December 31, 2013. Conversely, if we decideto 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 forother business purposes, appreciation of the U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to us. 99 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 thatinflation 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 onour 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 ourproducts do not increase with these increased costs. ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A.Debt Securities Not applicable. B.Warrants and Rights Not applicable. C.Other Securities Not applicable. D.American Depositary Shares Fees 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 depositingshares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions toinvestors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect itsannual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts ofparticipants 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 ofshares or rights or other property; cancellation of ADSs for the purpose ofwithdrawal, including if the deposit agreement terminates$0.05 (or less) per ADS Any cash distribution to registered ADS holdersA fee equivalent to the fee that would be payable if securities distributed hadbeen 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 anycash distribution fee during that year) Distribution of securities distributed to holders of deposited securities whichare distributed by the depositary to registered ADS holders DepositaryservicesExpenses of the depositary Cable, telex and facsimile transmissions (when expressly provided in thedeposit agreement); converting foreign currency to U.S. dollarsRegistration or transfer fees Transfer and registration of shares on our share register to or from the nameof the depositary or its agent when you deposit or withdraw sharesTaxes and other governmental charges the depositary or the custodian have topay on any ADS or share underlying an ADS, for example, stock transfertaxes, stamp duty or withholding taxes As necessaryAny charges incurred by the depositary or its agents for servicing thedeposited 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 relatedto our ADS facility and the travel expense of our key personnel in connection with such programs. The depositary has also agreed to provide additionalpayments to us based on the applicable performance indicators relating to our ADS facility. There are limits on the amount of expenses for which thedepositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects frominvestors. We recognize the reimbursable amounts in other income on our consolidated statements of operations on a straight-line basis over the contract termwith the depositary. 100 For the year ended December 31, 2013, we received $285,761 from the depositary as reimbursement for our expenses incurred and recognized $539,000 asother income in our consolidated statements of operations, and the depositary waived an estimated nil in servicing fees for ongoing program maintenance. 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 ourinitial public offering. The registration statement was declared effective by the SEC on November 6, 2007. We received net proceeds of approximately $187.0million from our initial public offering. As of December 31, 2013, the net proceeds from our initial public offering have been used as follows: ·approximately $106.1 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 $8.4 million for the purchase of long-term investments. ·approximately $29.7 million for business acquisition and the purchase of intangible assets. In 2014, we expect to use the net proceeds received from our initial public offering as follows: ·approximately $3.4 million to fund capital expenditure. ITEM 15.CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under theSecurities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the specified time periods andaccumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisionsregarding required disclosure. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) at December 31, 2013. Based on that evaluation, our chiefexecutive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures required by paragraph (b) of Rules 13a-15or 15d-15 were effective. 101 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 assuranceregarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accountingprinciples in the United States of America (“U.S. GAAP”). Internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’smanagement and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of acompany’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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. Our management, including our chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting as ofDecember 31, 2013. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework (1992) issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, our management has concluded that our internal control over financial reporting was effective at December 31, 2013. Report of the Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of AirMedia Group Inc.: We have audited the internal control over financial reporting of AirMedia Group Inc. (the “Company”), its subsidiaries, its variable interest entity (“VIEs”)and its VIEs' subsidiaries (collectively, the “Group”) as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in theaccompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internalcontrol over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principalfinancial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements. 102 Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteriaestablished in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),the consolidated financialstatements and financial statement schedule as of and for the year ended December 31, 2013 of the Group and our report dated April 25, 2014 expressed anunqualified opinion on those consolidated financial statements and financial statement schedule. /s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP Beijing, the People’s Republic of China April 25, 2014 Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2013 that have materially affected, orare reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Conor Chia-hung Yang, a member of our audit committee, is an audit committee financial expert. Conor Chia-hungYang 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. ITEM 16B.CODE OF ETHICS Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specificallyapply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, presidents, vice presidents and any other personswho 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 Deloitte ToucheTohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors duringthe periods indicated below. Fiscal Year Ended December 31, 2012 2013 Audit Fees $1,331,890 $1,288,775 Audit-Related Fees — — Tax Fees — — All Other Fees 51,215 71,994 TOTAL $1,383,105 $1,360,769 “Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements or quarterly reviewservices that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. 103 “Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related tothe 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 Feeswere 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 TaxFees. The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP,including audit services, audit-related services, tax services and other services as described above, other than those for de minimus services which areapproved 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 On March 21, 2011, our board of directors authorized the repurchase of up to $20 million of our outstanding ADSs within two years from March 21, 2011.Subsequently, our board of directors approved to increase the size of our share repurchase program to $40 million from $20 million and to extend the date ofthe share repurchase program to March 20, 2014. The following tables set forth information about our repurchases made under this share repurchase programin the year ended December 31, 2013. Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased asPart of Publicly Announced Plans orPrograms Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under thePlans or Programs January 1, 2013 to January 31, 2013 396,242 1.17 10,464,350 24,966,114 February 1, 2013 to February 28, 2013 42,336 1.15 10,506,686 24,917,409 March 1, 2013 to March 31, 2013 180,000 0.93 10,686,686 24,749,559 April 1, 2013 to April 30, 2013 656,858 0.92 11,343,544 24,142,118 May 1, 2013 to May 31, 2013 301,812 0.95 11,645,356 23,856,362 June 1, 2013 to June 30, 2013 681,624 0.92 12,326,980 23,231,558 July 1, 2013 to July 31, 2013 159,378 0.92 12,486,358 23,084,658 104 Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased asPart of Publicly Announced Plans orPrograms Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under thePlans or Programs August 1, 2013 to August 31, 2013 - - 12,486,358 23,084,658 September 1, 2013 to September 30, 2013 - - 12,486,358 23,084,658 October 1, 2013 to October 31, 2013 - - 12,486,358 23,084,658 November 1, 2013 to November 30, 2013 155,100 2.03 12,641,458 22,769,646 December 1, 2013 to December 31, 2013 423,400 0.44 13,064,858 22,584,659 ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT None. 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 yearend. 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 rulespermit foreign private issuers like us to follow “home country practice” in certain corporate governance matters. Maples and Calder, our Cayman Islands counsel, has provided a letter to the NASDAQ Stock Market certifying that under Cayman Islands law, we are notrequired to hold annual shareholder meetings. We held annual meetings in 2013. No annual meeting was held in 2011 or 2012. We may hold additional annualshareholder meetings in the future if there are significant issues that require shareholder approval. Maples and Calder has also provided letters to the NASDAQ Stock Market certifying that under Cayman Islands law, we are not required to seek shareholderapproval for the establishment of or any material amendments to our equity compensation plans. In 2008, we followed home country practice with respect toour 2007 Option Plan by amending it to permit repricings of options without seeking shareholder approval. In 2011, we followed home country practice withrespect 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 andintend to continue to follow the applicable corporate governance standards under the rules and regulations of the NASDAQ Stock Market. We will post this annual report on Form 20-F on our company website www.airmedia.net.cn. In addition, we will provide hard copies of our annual report freeof charge to shareholders and ADS holders upon request. ITEM 16H.MINE SAFETY DISCLOSURE Not applicable. 105 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-1 of this annual report. ITEM 19.EXHIBITS 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 meetingon 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 Deposit Agreement among the Company, the depositary and holder of the American Depositary Receipts (incorporated byreference to Exhibit 4.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 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 2012 Share Incentive Plan. (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 (File No. 333-187442) filed onMarch 22, 2013) 4.3 Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit10.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 4.4 Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit10.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 4.5 Investment Framework Agreement dated October 18, 2005, as amended on September 27, 2007, among Man Guo, Qing Xu and CDHChina 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) 4.6 English Translation of Business Cooperation Agreement dated June 14, 2007 between Beijing Shengshi Lianhe 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) 4.7 English Translation of Amended Power of Attorneys dated November 28, 2008 from each of the shareholders of Beijing ShengshiLianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.11 to Annual Report on Form 20-F filed on April 28, 2009) 4.8 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. (incorporated by reference to Exhibit 10.12 to RegistrationStatement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 4.9 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology DevelopmentAgreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd.(incorporated by reference to Exhibit 10.1 to Annual Report on Form 20-F filed on April 30, 2008) 4.10 English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMediaTechnology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.13 toRegistration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 106 Exhibit No. Description 4.11 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support andService Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co.,Ltd. (incorporated by reference to Exhibit 10.2 to Annual Report on Form 20-F filed on April 30, 2008) 4.12 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. 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 onOctober 19, 2007) 4.13 English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Equity Pledge Agreementdated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. and theshareholders of Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.17 to Annual Report on Form 20-Ffiled on April 28, 2009) 4.14 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. 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 onOctober 19, 2007) 4.15 English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Call Option Agreement datedJune 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. and the shareholders ofBeijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.19 to Annual Report on Form 20-F filed on April28, 2009) 4.16 English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia AdvertisingCo., Ltd. (Beijing AirMedia Advertising Co., Ltd. has undergone a corporate name change and is now known as AirMedia Group Co.,Ltd.) (incorporated by reference to Exhibit 4.20 to Annual Report on Form 20-F filed on April 28, 2009) 4.17 English Translation of Amended and Restated Technology Development Agreement dated June 14, 2007 between AirMedia Technology(Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 10.17 to Registration Statement onForm F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 4.18 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology DevelopmentAgreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd.(incorporated by reference to Exhibit 10.3 to Annual Report on Form 20-F filed on April 30, 2008) 4.19 English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMediaTechnology (Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 10.18 to RegistrationStatement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007) 4.20 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support andService Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd.(incorporated by reference to Exhibit 10.4 to Annual Report on Form 20-F filed on April 30, 2008) 4.21 English Translation of Amended and Restated Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co.,Ltd., Beijing AirMedia Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising Co., Ltd. (incorporated by referenceto Exhibit 10.19 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007) 4.22 English Translation of Supplementary Agreement No. 1 dated June 19, 2008 to the Amended and Restated Equity Pledge Agreementdated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. and the shareholders ofBeijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.26 to Annual Report on Form 20-F filed on April 28,2009) 4.23 English Translation of Supplementary Agreement No. 2 dated November 28, 2008 to the Amended and Restated Equity PledgeAgreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. and theshareholders of Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.27 to Annual Report on Form 20-F filedon April 28, 2009) 4.24 English Translation of Amended and Restated Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co.,Ltd., Beijing AirMedia Advertising Co., Ltd. and the shareholders of Beijing AirMedia Advertising Co., Ltd. (incorporated by referenceto Exhibit 10.20 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 No. 1 dated June 19, 2008 to the Amended and Restated Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. and the shareholders of BeijingAirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.29 to Annual Report on Form 20-F filed on April 28, 2009) 107 Exhibit No. Description 4.26 English Translation of Supplementary Agreement No. 2 dated November 28, 2008 to the Amended and Restated Call Option Agreementdated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. and the shareholders ofBeijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.30 to Annual Report on Form 20-F filed on April 28,2009) 4.27 English Translation of Supplementary Agreement dated November 28, 2008 to the Loan Agreement dated June 14, 2007 amongAirMedia Technology (Beijing) Co., Ltd. and Guo Man, a shareholder of Beijing AirMedia Advertising Co., Ltd. (incorporated byreference to Exhibit 4.31 to Annual Report on Form 20-F filed on April 28, 2009) 4.28 English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia UCAdvertising Co., Ltd. (incorporated by reference to Exhibit 4.32 to Annual Report on Form 20-F filed on April 28, 2009) 4.29 English Translation of Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. andBeijing AirMedia UC 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) 4.30 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology DevelopmentAgreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd.(incorporated by reference to Exhibit 10.5 to Annual Report on Form 20-F filed on April 30, 2008) 4.31 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. (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) 4.32 English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support andService Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co.,Ltd. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 20-F filed on April 30, 2008) 4.33 English Translation of Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMediaUC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit10.24 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007) 4.34 English Translation of Supplementary Agreement dated November 28, 2008 to the Equity Pledge Agreement dated June 14, 2007 amongAirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UCAdvertising Co., Ltd. (incorporated by reference to Exhibit 4.38 to Annual Report on Form 20-F filed on April 28, 2009) 4.35 English Translation of Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMediaUC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit10.25 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007) 4.36 English Translation of Supplementary Agreement dated November 28, 2008 to the Call Option Agreement dated June 14, 2007 amongAirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UCAdvertising Co., Ltd. (incorporated by reference to Exhibit 4.40 to Annual Report on Form 20-F filed on April 28, 2009) 4.37 English Translation of Supplementary Agreement dated October 31, 2008 among AirMedia Technology (Beijing) Co., Ltd. and theshareholders of Beijing AirMedia UC 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) 4.38 English Translation of Power of Attorneys dated April 1, 2008 from each of the shareholders of Beijing Yuehang Digital MediaAdvertising Co., Ltd. (incorporated by reference to Exhibit 4.42 to Annual Report on Form 20-F filed on April 28, 2009) 4.39 English Translation of Technology Development Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. andBeijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.43 to Annual Report on Form 20-F filed onApril 28, 2009) 4.40 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-Ffiled on April 28, 2009) 4.41 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 byreference to Exhibit 4.45 to Annual Report on Form 20-F filed on April 28, 2009) 108 Exhibit No. Description 4.42 English Translation of Equity Pledge Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing YuehangDigital Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated byreference to Exhibit 4.46 to Annual Report on Form 20-F filed on April 28, 2009) 4.43 English Translation of Call Option Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing YuehangDigital Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated byreference to Exhibit 4.47 to Annual Report on Form 20-F filed on April 28, 2009) 4.44 Share Purchase Agreement dated July 4, 2008 among the Registrant, First Reach Holdings Limited and Excel Lead International Limited(incorporated by reference to Exhibit 4.48 to Annual Report on Form 20- F filed on April 28, 2009) 4.45 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.(incorporated by reference to Exhibit 4.45 to Annual Report on Form 20-F filed on May 28, 2010) 4.46 English Translation of Supplementary Agreement No. 2 to the Equity Pledge Agreement dated May 27, 2010 among AirMediaTechnology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC AdvertisingCo., Ltd. (incorporated by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on May 28, 2010) 4.47 Framework Cooperation Agreement (English summary), by and between AirMedia Group Co., Ltd. and Beijing Super TV Co., Ltd(incorporated by reference to Exhibit 4.47 to Annual Report on Form 20-F filed on April 30, 2012) 4.48 Supplementary Agreement to Framework Cooperation Agreement (English summary), by and among AirMedia Group Co., Ltd., BeijingSuper TV Co., Ltd and Beijing N-S Digital TV Co., Ltd. (incorporated by reference to Exhibit 4.48 to Annual Report on Form 20-F filedon April 30, 2012) 4.49 2011 Share Incentive Plan (incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on April 30, 2012) 4.50* English summary of Investment Agreement, dated May 12, 2013, by and among Elec-Tech International Co., Ltd., Beijing AirMediaUC Advertising Co., Ltd. and Beijing Zhongshi Aoyou Advertising Co., Ltd. 4.51* English summary of Cooperation Agreement for the Establishment of Advertising Company, dated May 2013, by and between BeijingShengshi Lianhe Advertising Co., Ltd., and Guangzhou Daozheng Advertising Co., Ltd. 4.52* English summary of Equity Swap Agreement, dated September 29, 2013, by and between Beijing N-S Digital TV Co., Ltd. andAirMedia Group Co., Ltd. 4.53* English summary of Strategic Alliance Agreement, dated October 28, 2013, by and between HNA Xinhua Culture Holding Group Co.,Ltd. and AirMedia Group Co., Ltd. 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) 8.1* List of the Registrant’s subsidiaries 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 Deloitte Touche Tohmatsu Certified Public Accountants LLP 15.2* Consent of Commerce & Finance Law Offices 15.3* Consent of Maples and Calder 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 *Filed herewith**Furnished with this annual report on Form 20-F 109 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 undersignedto sign this annual report on its behalf. Date: April 25, 2014AIRMEDIA GROUP INC. /s/ Herman Man Guo Herman Man Guo Chairman and Chief Executive Officer 110 AIRMEDIA GROUP INC. Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements For the years ended December 31, 2011, 2012 and 2013 AIRMEDIA GROUP INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONTENTS PAGE(S) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2013 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013 F-3 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013 F-4 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013 F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7~F-52 ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I F-53~F-58 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF AIRMEDIA GROUP INC. We have audited the accompanying consolidated balance sheets of AirMedia Group Inc. (the "Company"), its subsidiaries, its variable interest entities (the"VIEs") and its VIEs' subsidiaries (collectively the "Group") as of December 31, 2012 and 2013 and the related consolidated statements of operations,comprehensive income/(loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2013 and related financialstatement schedule included in Schedule I. These consolidated financial statements and financial statement schedule are the responsibility of the Group'smanagement. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December31, 2012 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, inconformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group's internal control overfinancial reporting as of December 31, 2013, based on the criteria established Internal Control—Integrated Framework (1992) issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated April 25, 2014 expressed an unqualified opinion on the Group's internal controlover financial reporting. Deloitte Touche Tohmatsu Certified Public Accountants LLPBeijing, the People's Republic of ChinaApril 25, 2014 F-1 AIRMEDIA GROUP INC. CONSOLIDATED BALANCE SHEETS(In U.S. dollars in thousands, except share related data) As of December 31, 2012 2013 Assets Current assets: Cash $73,634 $59,652 Restricted cash 8,026 10,366 Short-term investment 44,622 42,949 Accounts receivable, net of allowance for doubtful accounts of $4,609 and $7,221 as of December 31, 2012 and2013, respectively 101,222 107,529 Notes receivable - 1,901 Prepaid concession fees 20,759 29,307 Other current assets 9,788 20,437 Amount due from related parties 1,310 187 Deferred tax assets - current 2,064 2,776 Total current assets 261,425 275,104 Property and equipment, net 45,930 36,084 Prepaid equipment costs - 49,415 Long-term investments 4,337 7,829 Long-term deposits 22,307 20,497 Deferred tax assets - non-current 8,347 11,755 Acquired intangible assets, net 1,521 1,446 Other non-current assets - 661 TOTAL ASSETS 343,867 402,791 Liabilities Current liabilities: Accounts payable (including accounts payable of the consolidated variable interest entities without recourse toAirMedia Group Inc. $71,045 and $75,182 as of December 31, 2012 and 2013, respectively) 72,895 81,157 Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of theconsolidated variable interest entities without recourse to AirMedia Group Inc. $8,716 and $8,016 as ofDecember 31, 2012 and 2013, respectively) 10,999 10,883 Deferred revenue (including deferred revenue of the consolidated variable interest entities without recourse toAirMedia Group Inc. $18,596 and $17,374 as of December 31, 2012 and 2013, respectively) 18,602 17,380 Income tax payable (including income tax payable of the consolidated variable interest entities without recourse toAirMedia Group Inc. $169 and $455 as of December 31, 2012 and 2013, respectively) 1,109 1,667 Amounts due to related parties (including amounts due to related parties of the consolidated variable interestentities without recourse to AirMedia Group Inc. $447 and nil as of December 31, 2012 and 2013, respectively) 447 - Total current liabilities 104,052 111,087 Non-current liabilities: Deferred tax liabilities - non-current (including deferred tax liabilities - non-current of the consolidated variableinterest entities without recourse to AirMedia Group Inc. $380 and $361 as of December 31, 2012 and 2013,respectively) 380 361 Total liabilities 104,432 111,448 Commitments and contingencies (Note 22 and Note 23) Equity Ordinary shares ($0.001 par value; 900,000,000 shares authorized in 2012 and 2013; 127,662,057 shares and127,662,057 shares issued as of December 31, 2012 and 2013, respectively; 122,112,485 shares and119,134,135 shares outstanding as of December 31, 2012 and 2013, respectively) 128 128 Additional paid-in capital 278,652 313,912 Treasury stock (5,549,572 and 8,527,922 shares as of December 31, 2012 and 2013, respectively) (7,035) (9,860)Statutory reserves 10,144 10,968 Accumulated deficits (72,961) (84,411)Accumulated other comprehensive income 32,948 40,229 Total AirMedia Group Inc.'s shareholders' equity 241,876 270,966 Non-controlling interests (2,441) 20,377 Total equity 239,435 291,343 TOTAL LIABILITIES AND EQUITY $343,867 $402,791 The accompanying notes are an integral part of these consolidated financial statements. F-2 AIRMEDIA GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS(In U.S. dollars in thousands, except share related data) For the years ended December 31, 2011 2012 2013 Revenues $277,821 $292,965 $276,516 Business tax and other sales tax (7,197) (6,223) (4,250) Net revenues 270,624 286,742 272,266 Cost of revenues 244,470 250,606 244,673 Gross profit 26,154 36,136 27,593 Operating expenses: Selling and marketing (including share-based compensation of $1,422, $859 and nil in2011, 2012 and 2013, respectively) 18,238 17,995 20,069 General and administrative (including share-based compensation of $3,192, $2,643 and$1,251 in 2011, 2012 and 2013, respectively) 22,004 21,842 25,723 Impairment of intangible assets 656 9,583 - Impairment of goodwill 1,003 20,611 - Total operating expenses 41,901 70,031 45,792 Loss from operations (15,747) (33,895) (18,199)Interest income 1,242 1,355 1,213 Other income, net 1,848 2,770 3,822 Loss before income taxes and share of loss on equity method investments (12,657) (29,770) (13,164)Income tax (expenses)/benefits (266) (2,493) 1,713 Loss before share of loss on equity method investments (12,923) (32,263) (11,451)Share of income/(loss) on equity method investments 243 22 (69)Net loss (12,680) (32,241) (11,520)Less: Net (loss)/income attributable to non-controlling interests (3,084) 487 (894)Net loss attributable to AirMedia Group Inc.'s shareholders (9,596) (32,728) (10,626)Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share - basic $(0.07) $(0.26) $(0.09)Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share - diluted $(0.07) $(0.26) $(0.09)Weighted average shares used in calculating net loss per ordinary share - basic 129,537,955 124,269,245 120,386,635 Weighted average shares used in calculating net loss per ordinary share - diluted 129,537,955 124,269,245 120,386,635 The accompanying notes are an integral part of these consolidated financial statements. F-3 AIRMEDIA GROUP INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)(In U.S. dollars in thousands) For the years ended December 31, 2011 2012 2013 Net loss $(12,680) $(32,241) $(11,520)Other comprehensive income, net of tax: Change in cumulative foreign currency translation adjustment 12,327 2,144 7,582 Comprehensive loss (353) (30,097) (3,938)Less: comprehensive (loss)/income attributable to non-controlling interest (3,138) 417 (593) Comprehensive income/(loss) attributable to AirMedia Group Inc.'s shareholders $2,785 $(30,514) $(3,345) The accompanying notes are an integral part of these consolidated financial statements. F-4 AIRMEDIA GROUP INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(In U.S. dollars in thousands, except share data) AirMedia Group Inc.'s shareholder's equity Accumulated Total other AirMedia Group Ordinary shares Additional Treasury Statutory Accumulated comprehensive Inc.'s shareholders' Non-controlling Total Shares Amount paid-in capital stock reserves deficits income equity interests equity Balance as of January 1, 2011 131,905,011 $132 $277,676 $- $7,671 $(28,164) $18,353 $275,668 $1,048 $276,716 Ordinary shares issued for share basedcompensation 138,416 - 229 - - - - 229 - 229 Share repurchase (4,381,370) (4) (7,369) - - - - (7,373) - (7,373)Share repurchase as treasury stock (2,414,460) - - (3,775) - - - (3,775) - (3,775)Provision for statutory reserve - - - - 378 (378) - - - - Share-based compensation - - 4,614 - - - - 4,614 - 4,614 Foreign currency translation adjustment - - - - - - 12,381 12,381 (54) 12,327 Net loss - - - - - (9,596) - (9,596) (3,084) (12,680) Balance as of December 31, 2011 125,247,597 $128 $275,150 $(3,775) $8,049 $(38,138) $30,734 $272,148 $(2,090) $270,058 Ordinary shares issued for share basedcompensation 137,166 - - 161 - - - 161 - 161 Share repurchase as treasury stock (3,272,278) - - (3,421) - - - (3,421) - (3,421)Provision for statutory reserve - - - - 2,095 (2,095) - - - - Share-based compensation - - 3,502 - - - - 3,502 - 3,502 Foreign currency translation adjustment - - - - - - 2,214 2,214 (70) 2,144 Net loss - - - - - (32,728) - (32,728) 487 (32,241)Dividends payable to minority shareholders ofFlying Dragon - - - - - - - - (768) (768) Balance as of December 31, 2012 122,112,485 $128 $278,652 $(7,035) $10,144 $(72,961) $32,948 $241,876 $(2,441) $239,435 Ordinary shares issued for share basedcompensation 18,400 - - 21 - - - 21 - 21 Share repurchase as treasury stock (2,996,750) - - (2,846) - - - (2,846) - (2,846)Provision for statutory reserve - - - - 824 (824) - - - - Share-based compensation - - 1,251 - - - - 1,251 - 1,251 Foreign currency translation adjustment - - - - - - 7,281 7,281 301 7,582 Net loss - - - - - (10,626) - (10,626) (894) (11,520)Capital contribution from non-controlling interests - - 39,825 - - - - 39,825 20,384 60,209 Acquisition of non-controlling interests - - (5,816) - - - - (5,816) 3,027 (2,789) Balance as of December 31, 2013 119,134,135 $128 $313,912 $(9,860) $10,968 $(84,411) $40,229 $270,966 $20,377 $291,343 The accompanying notes are an integral part of these consolidated financial statements. F-5 AIRMEDIA GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(In U.S. dollars in thousands) For the years ended December 31, 2011 2012 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(12,680) $(32,241) $(11,520)Adjustments to reconcile net loss to net cash provided by operating activities: Allowance for doubtful accounts 2,044 1,242 2,439 Depreciation and amortization 25,138 24,033 21,862 Share-based compensation 4,614 3,502 1,251 Share of (loss)/income on equity method investments (243) (22) 69 Loss on disposal of property and equipment 4,380 1,192 964 Impairment loss of loan receivable from a third party - - 1,562 Gain on sale/maturity of short-term investments (1,040) (2,023) (1,888)Impairment of intangible assets 656 9,583 - Impairment of goodwill 1,003 20,611 - Changes in assets and liabilities Accounts receivable (28,728) (8,609) (9,147)Notes receivable - - (1,874)Prepaid concession fees 10,178 2,358 (7,830)Other current assets (3,705) (3,147) (3,945)Long-term deposits (499) (7,033) 2,425 Other non-current assets - - (651)Amount due from related parties 169 (1,148) 1,144 Accounts payable 18,734 8,269 12,083 Accrued expenses and other current liabilities 1,555 (1,397) 217 Deferred revenue (1,805) 6,586 (2,716)Amount due to related parties - - (454)Deferred tax assets (liabilities), net (1,319) (1,831) (3,972)Income tax payable (520) 305 518 Net cash provided by operating activities 17,932 20,230 537 CASH FLOWS FROM INVESTING ACTIVITIES: Payment for contingent consideration in connection with a business combination (2,966) - - Purchase of property and equipment (4,186) (9,287) (13,096)Prepaid equipment costs - - (56,996)Proceeds from disposal of property and equipment 172 127 30 Net amount received (paid) upon settlement of short-term investment 1,040 (42,464) 4,769 Dividend received from equity method investee - - 686 Restricted cash 748 (1,580) (2,076)Purchase of long-term investments - (2,223) (4,112)Loan receivable from a third party - (1,579) 329 Net cash used in investing activities (5,192) (57,006) (70,466) CASH FLOWS FROM FINANCING ACTIVITIES: Share repurchase (7,373) - - Cash paid for treasury stock (3,775) (3,421) (2,846)Capital contribution from non-controlling interests - - 59,438 Acquisition of non-controlling interests - - (1,627)Dividend paid to non-controlling interests - - (675)Proceeds from options exercised 229 161 21 Net cash (used in) provided by financing activities (10,919) (3,260) 54,311 Effect of exchange rate changes 4,408 936 1,636 Net increase/(decrease) in cash 6,229 (39,100) (13,982)Cash, at beginning of year 106,505 112,734 73,634 Cash, at end of year $112,734 $73,634 $59,652 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income tax paid $2,105 $4,016 $2,728 Fair value of property, equipment and other assets acquired in exchange of advertising servicesrendered and subsidiary's equity transferred $2,823 $1,987 $50,305 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Payable for purchase of property and equipment $5,251 $5,679 $3,561 Dividend payable to non-controlling interests $- $663 $- The accompanying notes are an integral part of these consolidated financial statements. F-6 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except 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 advertisingnetwork, primarily air travel advertising network, in the People's Republic of China (the "PRC"). As of December 31, 2013, details of the Company's subsidiaries, VIEs and VIEs' subsidiaries are as follows: Date of Percentage of incorporation/ Place of legal Name acquisition incorporation ownership Intermediate Holding Company: Broad Cosmos Enterprises Ltd. June 26, 2006 British Virgin Islands("BVI") 100% AirMedia International Limited ("AM International") July 14, 2007 BVI 100% AirMedia (China) Limited ("AM China") August 5, 2005 Hong Kong 100% Excel Lead International Limited ("Excel Lead") August 1, 2008 BVI 100% Dominant City Ltd. ("Dominant City") July 1, 2009 BVI 100% Easy Shop Ltd. ("Easy Shop") January 1, 2010 BVI 100% Glorious Star Investment Limited ("Glorious Star") August 1, 2008 Hong Kong 100% Subsidiaries: AirMedia Technology (Beijing) Co., Ltd. ("AM Technology") September 19, 2005 the PRC 100% Shenzhen AirMedia Information Technology Co., Ltd. ("Shenzhen AM") June 6, 2006 the PRC 100% Xi'an AirMedia Chuangyi Technology Co., Ltd. ("Xi'an AM") December 31, 2007 the PRC 100% VIEs: Beijing Shengshi Lianhe Advertising Co., Ltd. ("Shengshi Lianhe") August 7, 2005 the PRC N/A AirMedia Group Co., Ltd. (Formerly Beijing AirMedia Advertising Co.,Ltd.) ("AM Advertising") November 22, 2005 the PRC N/A Beijing AirMedia UC Advertising Co., Ltd. ("AirMedia UC") January 1, 2007 the PRC N/A Beijing Yuehang Digital Media Advertising Co., Ltd. ("AM Yuehang") January 16, 2008 the PRC N/A F-7 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued Introduction of the Group - continued Date of Percentage of incorporation/ Place of legal Name acquisition incorporation ownership VIEs’ subsidiaries: AirTV United Media & Culture Co., Ltd. ("AirTV United") October 10, 2006 the PRC N/A Beijing AirMedia Film & TV Culture Co., Ltd. ("AM Film") September 13, 2007 the PRC N/A Flying Dragon Media Advertising Co., Ltd. ("Flying Dragon") August 1, 2008 the PRC N/A Wenzhou AirMedia Advertising Co., Ltd. ("AM Wenzhou") October 17, 2008 the PRC N/A Beijing Weimei Lianhe Advertising Co., Ltd. ("Weimei Lianhe") March 10, 2009 the PRC N/A Hainan Jinhui Guangming Media Advertising Co., Ltd. ("Hainan Jinhui") June 23, 2009 the PRC N/A Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. (Formerly BeijingYoutong Hezhong Advertising Media Co., Ltd.) ("AM Jiaming") July 1, 2009 the PRC N/A Beijing AirMedia Advertising Co., Ltd. (Formly Beijing AirMedia JinshiAdvertising Co., Ltd.) ("AM Jinshi") July 7, 2009 the PRC N/A Tianjin AirMedia Jinshi Advertising Co., Ltd. ("TJ Jinshi") September 8, 2009 the PRC N/A Tianjin AirMedia Advertising Co., Ltd. ("TJ AM") September 21, 2009 the PRC N/A AirMedia City (Beijing) Outdoor Advertising Co., Ltd. ("AM Outdoor") January 1, 2010 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 WeimeiShengjing Media Advertising Co., Ltd.) ("GreatView Media") April 28, 2011 the PRC N/A Beijing AirMedia Jinsheng Advertising Co., Ltd. ("AM Jinsheng") April 28, 2011 the PRC N/A Guangzhou Meizheng Advertising Co., Ltd. ("Guangzhou Meizheng") May 17, 2013 the PRC N/A Beijing AirMedia Tianyi Advertising Co., Ltd. ("AM Tianyi") September 25, 2013 the PRC N/A F-8 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except 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 advertisingservices. Since December 30, 2005, foreign investors have been permitted to own directly 100% interest in PRC advertising companies if the foreigninvestor has at least three years of direct operations of advertising business outside of the PRC. One of the Company's subsidiary, AM China, the 100% shareholder of AM Technology and Xi'an AM, has been engaged in the advertising businessin Hong Kong since September 2008. Since it has operated as an advertising business for more than three years, AM China and its subsidiaries mayapply for the required licenses to provide advertising services in China. The Group conducts substantially all of its activities through VIEs, i.e. Shengshi Lianhe, AM Advertising, AirMedia UC and AM Yuehang, and theVIEs' subsidiaries. The VIEs have entered into the following series of agreements with AM Technology: ·Technology support and service agreement: AM Technology provides exclusive technology support and consulting services to the VIEsand in return, the VIEs are required to pay AM Technology service fees. The VIEs pay to AM Technology annual service fees in the amountthat guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than0.5% in the case of AM Advertising, Shengshi Lianhe and AirMedia UC, or 1.0% in the case of AM Yuehang, which final rate should bedetermined by AM Technology. The "net cost-plus rate" refers to the operating profit as a percentage of total costs and expenses of a certainentity. The technology support and service agreements are effective for ten years and such term is automatically renewed upon its expiryunless either party informs the other party of its intention of no extension at least twenty days prior to the expiration of the agreements. ·Technology development agreement: VIEs exclusively engaged AM Technology to provide technology development services. AMTechnology owns the intellectual property rights developed in the performance of these agreements. The VIEs pay to AM Technology annualservice fees in the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5% in the case of AM Advertising, Shengshi Lianhe and AirMedia UC, which final rate should be determined byAM Technology. The "net cost-plus rate" refers to the operating profit as a percentage of total costs and expenses of a certain entity. Thetechnology development agreements are effective for ten years and such terms is automatically renewed upon its expiry unless either partyinforms the other party of its intention of no extension at least twenty days prior to the expiration of the agreements. F-9 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued The VIE arrangements - continued ·Call option agreement: Under the call option agreements, the shareholders of VIEs irrevocably grant AM Technology, or its designatedthird party, an exclusive option to purchase from the VIEs' shareholders, to the extent permitted under PRC law, all the equity interests inthe VIEs, as the case may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. Inaddition, AM Technology will act as guarantor of VIEs in all operation related contracts, agreements and transactions and commit toprovide loans to support the business development needs of VIEs or when the VIEs are suffering operating difficulties provided that therelevant VIEs' shareholders satisfy the terms and conditions in the call option agreements. Based on PRC law to provide an effectiveguarantee, a guarantor needs to execute a specific written agreement with the beneficiary of the guarantee. As AM Technology has not enteredinto any written guarantee agreements with any third party beneficiaries to guarantee the VIEs' performance obligations to these third parties,none of these third parties can demand performance from AM Technology as a guarantor of the VIEs' performance obligations. The absenceof the written guarantee agreement did not obviate the Group's conclusion that it is the primary beneficiary of the VIEs and in turn shouldconsolidate the VIEs. The term of call option agreement shall be terminated after AM Technology exercises the call option over all VIEs'equity pursuant to the provisions of the agreements. ·Equity pledge agreement: Under the equity pledge agreements, the shareholders of the VIEs pledged all of their equity interests, includingthe right to receive declared dividends, in the VIEs to AM Technology to guarantee VIEs' performance of its obligations under the technologysupport and service agreement and the technology development agreement. The agreement is effective for as long as the technology supportand service agreements and technology development agreement are effective. ·Authorization letter: Each shareholder of the VIEs has executed an authorization letter to authorize AM Technology to exercise certain of itsrights, 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.Such authorization letters will remain effective during the operating periods of the VIEs. The authorization is effective unless the relevantcall option agreements which the VIEs entered into terminated. Through the above contractual arrangements, AM Technology has obtained 100% of shareholders' voting interest in the VIEs, has the right to receiveall dividends declared and paid by the VIEs and can receive substantially all of the net income of the VIEs through the technical support and servicefees. Accordingly, the Group has consolidated the VIEs because, through AM Technology, it has (1) the power to direct the activities of the VIEs thatmost significantly affect its economic performance and (2) the right to receive substantially all of the benefits that could be potentially significant tothe VIEs. F-10 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except 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 alsoshareholders of the Group and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties inthe PRC legal system could limit the Group's ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce theirinterest in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they would seek to actcontrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so. The Group's ability to control the VIEs also depends on the authorization letters that AM Technology has to vote on all matters requiring shareholderapproval in the VIEs. As noted above, the Group believes the rights granted by the authorization letters is legally enforceable but may not be aseffective 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 PRCgovernment could: ·revoking the business and operating licenses of the Group's PRC subsidiaries and affiliates;·discontinuing or restricting the Group's PRC subsidiaries' and affiliates' operations;·imposing conditions or requirements with which the Group or its PRC subsidiaries and affiliates may not be able to comply; or·requiring 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. Inaddition, 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 theright to receive their economic benefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any penaltiesimposed or actions taken by the PRC Government would result in the liquidation of the Group, AM Technology, or the VIEs. F-11 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except 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 theCompany are also directors or officers of VIEs. Their interests as beneficial owners of VIEs may differ from the interests of the Company as awhole. 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 ofinterests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts ofinterest these parties may encounter in their capacity as beneficial owners of VIEs, on the one hand, and as beneficial owners of the Company, on theother hand. The Company believes the shareholders of VIEs will not act contrary to any of the contractual arrangements and the exclusive purchaseright contract provides the Company with a mechanism to remove them as shareholders of VIEs should they act to the detriment of the Company. Ifany conflict of interest or dispute between the Company and the shareholders of VIEs arises and the Company is unable to resolve it, the Companywould have to rely on legal proceedings in the PRC. Such legal proceedings could result in disruption of its business; moreover, there is substantialuncertainty 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, presentednet of intercompany eliminations, as of and for the years ended December 31: As of December 31, 2012 2013 Total current assets $201,088 $208,255 Total non-current assets 27,499 108,677 Total assets 228,587 316,932 Total current liabilities 98,973 101,027 Total non-current liabilities 380 361 Total liabilities $99,353 $101,388 For the years ended December 31, 2011 2012 2013 Net revenues $268,866 $286,641 $271,536 Net loss (2,543) (31,771) (13,552)Net cash provided by (used in) operating activities 5,251 (8,587) 8,132 Net cash used in investing activities (538) (7,700) (70,653)Net cash provided by financing activities - - 58,763 F-12 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued Risks in relation to the VIE structure - continued The following financial statement information for AirMedia's non - 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, 2012 2013 Total current assets $60,337 $66,849 Total non-current assets 54,943 19,010 Total assets 115,280 85,859 Total current liabilities 5,079 10,060 Total liabilities $5,079 $10,060 For the years ended December 31, 2011 2012 2013 Net revenues $1,758 $101 $730 Net (loss)/income (10,137) (470) 2,032 Net cash provided by (used in) operating activities 12,681 28,817 (15,877)Net cash (used in) provided by investing activities (4,654) (49,306) 6,842 Net cash used in financing activities (10,919) (3,260) (2,825) The VIEs contributed an aggregate of 99.4%, 100% and 99.7% of the consolidated net revenues for the years ended December 31, 2011, 2012 and2013, respectively. As of December 31, 2012 and 2013, the VIEs accounted for an aggregate of 66.5% and 78.7%, respectively, of the consolidatedtotal assets, and 95.1% and 91.0%, respectively, of the consolidated total liabilities. The assets not associated with the VIEs primarily consist ofcash and cash equivalent, short-term investments and property and equipment. 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 nocreditors (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 itssubsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at itsoption and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholder of the VIEs orentrustment loans to the VIEs. F-13 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a)Basis of presentation The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted inthe United States of America ("US GAAP"). (b)Basis of consolidation The consolidated financial statements include the financial statements of the Company, its subsidiaries, its VIEs and its VIEs'subsidiaries. All inter-company transactions and balances have been eliminated upon consolidation. (c)Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and revenue and expenses in the financial statements and accompanying notes, includingallowance for doubtful accounts, the useful lives of property and equipment and intangible assets, impairment of long-term investments,impairment of goodwill, impairment of long-lived assets, stock-based compensation, and valuation allowance for deferred tax assets. Actualresults could differ from those estimates. (d)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 effecton the Group's future financial position, results of operations, or cash flows: the Group's limited operating history; advances and trends innew technologies and industry standards; competition from other competitors; regulatory or other PRC related factors; risks associated withthe Group's ability to attract and retain employees necessary to support its growth; risks associated with the Group's growth strategies; andgeneral risks associated with the advertising industry. F-14 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (e)Fair value Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to berecorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considersassumptions 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 intothree broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level ofinput 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 theasset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities inmarkets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputsare 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 themeasurement of the fair value of the assets or liabilities. F-15 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (f)Fair value of financial instruments The Group's financial instruments include cash, restricted cash, accounts receivable, notes receivable, short-term investment, amounts duefrom related parties, accounts payable, and amounts due to related parties. The Group did not have any other financial assets and liabilitiesor nonfinancial assets and liabilities that are measured at fair value on recurring basis as of December 31, 2012 and 2013. The Group's financial assets and liabilities measured at fair value on a non-recurring basis include assets based on level 2 inputs inconnection with equity share exchange transaction and acquired assets and liabilities based on level 3 inputs in connection with businesscombinations. (g)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 whichhave original maturities of three months or less when purchased. (h)Restricted cash Restricted cash represents the bank deposits in escrow accounts as the performance security for certain concession right agreements. (i)Short-term investment Short-term investments comprise marketable debt securities, which are classified as held-to-maturity as the Group has the positive intentand ability to hold the securities to maturity. All of the Group's held-to-maturity securities are stated at their amortized costs and classifiedas short-term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year. The Group reviews its short-term investments for other-than-temporary impairment based on the specific identification method. The Groupconsiders available quantitative and qualitative evidence in evaluating potential impairment of its short-term investments. If the cost of aninvestment exceeds the investment's fair value, the Group considers, among other factors, general market conditions, government economicplans, the duration and the extent to which the fair value of the investment is less than the cost, and the Group's intent and ability to holdthe investment, in determining if impairment is needed. F-16 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (j)Property and equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated ona straight-line basis over the following estimated useful lives: Digital display network equipment5 yearsGas station display network equipment5 yearsFurniture and fixture5 yearsComputer and office equipment3-5 yearsVehicle5 yearsSoftware5 yearsProperty50 yearsLeasehold improvementShorter of the term of the lease or the estimated useful lives of the assets (k)Impairment of long-lived assets and intangible assets with definite life The Group evaluates the recoverability of its long-lived assets, including intangible assets with definite life, whenever events or changes incircumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measuresimpairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result fromthe use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount ofthe assets, the Group would recognize an impairment loss based on the excess of carrying amount over the fair value of the assets. (l)Impairment of goodwill The Group annually, or more frequently if the Group believes indicators of impairment exist, reviews the carrying value of goodwill todetermine whether impairment may exist. Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to itscarrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to beimpaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step comparesthe implied fair value of the affected reporting unit's goodwill to the carrying value of that goodwill. The implied fair value of goodwill isdetermined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in thefirst step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to theassets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwillover the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primarytechnique being a discounted cash flow. F-17 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (l)Impairment of goodwill - continued The Group has four reporting units: the advertising media in air travel areas, the advertising media in gas station, the outdoor advertisingmedia and the fire station advertising media. The Group performs its annual impairment tests on December 31 of each year. (m)Long-term investments Equity method investments Investee companies over which the Company has the ability to exercise significant influence, but does not have a controlling interest areaccounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interestin 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 isappropriate. Cost method investments For investments in an investee over which the Group does not have significant influence, the Group carries the investment at cost andrecognizes income as any dividends declared from distribution of investee's earnings. The Group reviews the cost method investments forimpairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. An impairment lossis recognized in earnings equal to the difference between the investment's carrying amount and its fair value at the balance sheet date of thereporting period for which the assessment is made. The fair value of the investment would then become the new cost basis of theinvestment. F-18 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (n)Business combinations Business combinations are recorded using the acquisition method of accounting. The assets acquired, the liabilities assumed, and any non-controlling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized andmeasured as the excess of the total consideration transferred plus the fair value of any non-controlling interest of the acquiree, if any, at theacquisition date over the fair values of the identifiable net assets acquired. Where the consideration in an acquisition includes contingent consideration, the payment of which depends on the achievement of certainspecified conditions post-acquisition, the contingent consideration is recognized and measured at its fair value at the acquisition date and ifrecorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings. (o)Acquired intangible assets Acquired intangible assets with finite lives are carried at cost less accumulated amortization. Customer relationships intangible asset isamortized using the estimated attrition pattern of the acquired customers. Amortization of other finite-lived intangible assets is computedusing the straight-line method over the following estimated economic lives: TV program license20 yearsAudio-vision programming & broadcasting qualification19.5 yearsCustomer relationships3-3.4 yearsContract backlog1.2-3 yearsConcession agreements3.8-10 yearsNon-compete agreements4.4 years F-19 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (p)Revenue recognition The Group's revenues are derived from selling advertising time slots on the Group's advertising networks, primarily air travel advertisingnetwork. For the years ended December 31, 2011, 2012 and 2013, the advertising revenues were generated from digital frames in airports,digital TV screens in airports, digital TV screens on airlines, traditional media in airports, gas station media network and other media. The Group typically signs standard contracts with its advertising customers, who require the Group to run the advertiser's advertisementson the Group's network in specified locations for a period of time. The Group recognizes advertising revenues ratably over the performanceperiod for which the advertisements are displayed, so long as collection of the fees remains probable. The Group also wholesales the advertising platforms such as scrolling light boxes and billboards in the gas stations located in some majorcities, except Beijing, Shanghai and Shenzhen, to advertising agents, and signs fixed fee contracts with the agents for a specified period.The revenue is recognized on a straight-line basis over the specified period. Deferred revenue Prepayments from customers for advertising service are deferred and recognized as revenue when the advertising services are rendered. Nonmonetary exchanges The Group occasionally exchanges advertising time slots and locations with other entities for assets or services, such as equipment andother assets. The amount of assets and revenue recognized is based on the fair value of the advertising provided or the fair value of thetransferred assets, whichever is more readily determinable. The amounts of revenues recognized for nonmonetary transactions were$2,823, $1,287 and $656 for the years ended December 31, 2011, 2012 and 2013, respectively. No direct costs are attributable to therevenues. (q)Value Added Tax ("VAT") The Company's PRC subsidiaries are subject to value-added tax at a rate of 6% on revenues from advertising services and paid afterdeducting input VAT on purchases. The net VAT balance between input VAT and output VAT is reflected in the account under other taxespayable. F-20 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (q)Value Added Tax ("VAT")-continued In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VATin lieu of business tax in certain areas and industries in the PRC. Such VAT pilot program is to be phased in Beijing, Jiangsu, Anhui,Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and December 2012. Also a circular issued in May 2013 providedthat such VAT pilot program is rolled out nationwide since August 2013. Since then, certain subsidiaries and VIEs became subject to VATat the rates of 6% or 3%, on certain service revenues which were previously subject to business tax. For the years ended December 31, 2012and 2013, gross revenue is presented net of $8,785 and $21,524 of VAT, respectively. (r)Business tax and other sale related taxes The Group's PRC subsidiaries and VIEs are subject to business tax and other sale related taxes at the rate of 8.5% on revenues other thanthose subject to VAT after deduction of certain costs of revenues permitted by the PRC tax laws. (s)Concession fees The Group enters concession right agreements with vendors such as airports, airlines and a petroleum company, under which the Groupobtains the right to use the spaces or equipment of the vendors to display the advertisements. The concession right agreements are treated asoperating lease arrangements. Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets andcurrent liabilities according to the respective payment terms. Most of the concession fees with airports and airlines are fixed with escalation,which means fixed increase over each year of the agreements. The total concession fee under the concession right agreements with airportsand airlines is charged to the consolidated statements of operations on a straight-line basis over the agreement periods, which is generallybetween three and five years. The fee structure of the concession right agreement with the petroleum company is based on the actual number of developed gas stations andassociated standard annual concession fee for each developed gas station. Each gas station has its specific lease term starting from the timewhen it is actually put into operation. The calculation of rental payments is based on how many months the gas stations are actually putinto operation during the year and the standard annual concession fee determined based on the location of the gas station. Accordingly, eachgas station is treated as a separate lease and rental payments are recognized on a straight-line basis over its lease term. The amount of annualconcession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum payment if any base on negotiation withthe petroleum company. F-21 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (t)Agency fees The Group pays fees to advertising agencies based on certain percentage of revenues made through the advertising agencies upon receipt ofpayment from advertisers. The agency fees are charged to cost of revenues in the consolidated statements of operations ratably over theperiod in which the advertising is displayed. Prepaid and accrued agency fees are recorded as current assets and current liabilities accordingto relative timing of payments made and advertising service provided. From time to time, the Group and certain advertising agencies mayrenegotiate and mutually agree, as permitted by applicable laws, to reduce existing agency fee liabilities as calculated under the terms ofexisting contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in the period the renegotiations arefinalized. During the years ended December 31, 2011, 2012 and 2013, reversals in cost of sales as a result of renegotiated agency feesamounted to nil, $6,407, and $3,329, respectively. (u)Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operatinglease. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the leaseperiods. (v)Advertising costs The Group expenses advertising costs as incurred. Total advertising expenses were $288, $767 and $1,039 for the years ended December31, 2011, 2012 and 2013, respectively, and have been included as part of selling and marketing expenses. (w)Foreign currency translation The functional and reporting currency of the Company and the Company's subsidiaries domiciled in BVI and Hong Kong are the UnitedStates dollar ("U.S. dollar"). The financial records of the Company's other subsidiaries, VIEs and VIEs' subsidiaries located in the PRCare 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 atthe rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year areconverted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains andlosses are recognized in the statements of operations. F-22 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (w)Foreign currency translation-continued The Group's entities with functional currency of RMB translate their operating results and financial position into the U.S. dollar, theCompany'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 historicalrate. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of othercomprehensive income. (x)Income taxes Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts inthe 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 orall of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulationsapplicable 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-thannot to be sustained upon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a50% likelihood of being sustained. Additionally, the Group classifies the interest and penalties, if any, as a component of the income taxposition. (y)Share-based payments Share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument issued, andrecognized as compensation expenses over the requisite service periods based on a straight-line method, with a corresponding impactreflected in additional paid-in capital. Share-based payment transactions with non-employees are measured based on the fair value of the options as of each reporting date throughthe measurement date, with a corresponding impact reflected in additional paid-in capital. (z)Comprehensive income/(loss) Comprehensive income/(loss) includes net income/(loss) and foreign currency translation adjustments and is presented net of tax, theamount of which is nil for the three years ended December 31, 2013 in the consolidated statements of comprehensive income/(loss). F-23 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (aa)Allowance of doubtful accounts The Group conducts credit evaluations of clients and generally do not require collateral or other security from clients. The Groupestablishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk ofspecific clients and utilizes both specific identification and a general reserve to calculate allowance for doubtful accounts. The amount ofreceivables ultimately not collected by the Group has generally been consistent with expectations and the allowance established for doubtfulaccounts. 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 andadjusts allowances for accounts where collection may be in doubt. (bb)Concentration of credit risk Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable.The Group places their cash with financial institutions with high-credit rating and quality. The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers. TheGroup establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determiningthe credit risk of specific customers. The amount of receivables ultimately not collected by the Group has generally been consistent withmanagement's expectations and the allowance established for doubtful accounts. Details of the customers accounting for 10% or more of total revenues are as follow: Customer For the years ended December 31, 2011 2012 2013 A 6.9% 11.2% 6.7% Details of the customers accounting for 10% or more of accounts receivable are as follow: Customer As of December 31, 2012 2013 B 7.9% 10.4%C 15.3% 5.4% F-24 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (cc)Net loss per share Basic net loss per share are computed by dividing net loss attributable to holders of ordinary shares by the weighted average number ofordinary shares outstanding during the year. Diluted net loss reflects the potential dilution that could occur if securities or other contracts toissue ordinary shares (common stock options and warrants and their equivalents using the treasury stock method) were exercised orconverted into ordinary shares. Potential common shares in the diluted net loss per share computation are excluded in periods of losses fromcontinuing operations, as their effect would be anti-dilutive. (dd)Government subsidies The Group primarily receives tax refund and development supporting bonus from tax bureau and local government without any conditionor restriction. The government subsidies are recorded in other income on the consolidated statements of operations in the period in which theamounts of such subsidies are received. The recognized government subsidies as other income are $268, $210 and $1,395 for the yearsended December 31, 2011, 2012 and 2013, respectively. (ee)Recent issued accounting standards adopted In February 2013, the FASB issued an authoritative pronouncement related to reporting of amounts reclassified out of accumulated othercomprehensive income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains andlosses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulatedother comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net incomeor other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosedelsewhere in the financial statements under US GAAP. The new amendments will require an organization to: •Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net incomeof significant amounts reclassified out of accumulated other comprehensive income—but only if the item reclassified is requiredunder US GAAP to be reclassified to net income in its entirety in the same reporting period.•Cross-reference to other disclosures currently required under US GAAP for other reclassification items (that are not required underUS GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when aportion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account(e.g., inventory for pension-related amounts) instead of directly to income or expense. F-25 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (ee)Recent issued accounting standards adopted-continued The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are requiredto comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periodsbeginning after December 15, 2012, for public companies. Early adoption is permitted. The Group adopted this pronouncement on January1, 2013 which did not have a significant impact on its consolidated financial statements. (ff)Recent issued accounting standards not yet adopted In March 2013, the FASB issued an authoritative pronouncement related to parent's accounting for the cumulative translation adjustmentupon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When areporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or abusiness (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent isrequired to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment shouldbe released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity inwhich the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulativetranslation adjustment should be released into net income upon a partial sale of such an equity method investment. However, this treatmentdoes not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment isreleased into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that containsthe equity method investment. Additionally, the amendments in this pronouncement clarify that the sale of an investment in a foreign entity includes both: (1) events thatresult in the loss of a controlling financial interest in a foreign entity (i.e., irrespective of any retained investment); and (2) events that resultin an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes alsoreferred to as a step acquisition). Accordingly, the accumulative translation adjustment should be released into net income upon theoccurrence of those events. The amendments in this pronouncement are effective prospectively for fiscal years (and interim reporting periods within those years)beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effectivedate. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should applythem as of the beginning of the entity's fiscal year of adoption. The Group does not expect the adoption of this guidance will have asignificant effect on its consolidated financial statements. F-26 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued (ff)Recent issued accounting standards not yet adopted - continued In July 2013, the FASB issued a pronouncement which provides guidance on financial statement presentation of an unrecognized taxbenefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB's objective in issuing thisAccounting Standards Updates ("ASU") is to eliminate diversity in practice resulting from a lack of guidance on this topic in current USGAAP. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in thefinancial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax creditcarryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is notavailable at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from thedisallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend touse, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability andshould not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a taxcredit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within thoseyears, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to allunrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Group does not expect the adoption ofthis guidance will have a significant effect on its consolidated financial statements. F-27 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except 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, throughout PRC. The Group chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when makingdecisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment. The Group hasinternal reporting that does not distinguish between markets or segments. Geographic information The Group primarily operates in the PRC and substantially all of the Group's long-lived assets are located in the PRC. Revenue by service categories For the years ended December 31, 2011 2012 2013 Revenues: Air Travel Media Network: Digital frames in airports $126,539 $137,342 $152,346 Digital TV screens in airports 21,937 13,731 14,110 Digital TV screens on airplanes 26,734 26,612 16,160 Traditional media in airports 73,535 83,478 64,845 Other revenues in air travel 6,416 7,346 9,183 Gas Station Media Network 12,873 14,217 12,726 Other Media 9,787 10,239 7,146 $277,821 $292,965 $276,516 F-28 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 4.SHORT-TERM INVESTMENTS Short-term investments consist of various fixed-income financial products purchased from Chinese banks and trusts and are classified as held-to-maturity securities and carried at amortized costs. The maturity dates range from 7 days to less than one year, with interest rates ranging from 2.0%to 6.0%. The held-to-maturity securities are not allowed to be redeemed early before its maturity. The repayment of these financial products isguaranteed by the issuing bank. The carrying amount of the held-to-maturity securities of $ 42,949 approximated their fair values due to its creditratings and its short-term nature, all of which have a maturity date within one-year. 5.LONG-TERM INVESTMENTS (a)Equity method investments The Group had the following equity method investments: As of December 31, 2012 2013 Carrying Carrying Name of company Percentage value Percentage value % % Beijing Eastern Media Corporation, Ltd. ("BEMC") (1) 49 $2,063 49 $1,743 Beijing Shibo Movie Technology Co., Ltd. ("Shibo Movie") (2) 50 $612 50 455 Beijing Xinghe Union Media Co., Ltd. ("Xinghe Union") (2) 50 $604 50 370 Guangxi Dingyuan Meida Ltd. ("Guangxi Dingyuan") (3) 40 $658 40 718 Zhejiang AirMedia Guangying Film & TV Production Co.,Ltd. ("AM Guangying") (4) - - 48 1,652 Beijing Yunxing Chuangrong Investment Fund ManagementCo., Ltd. ("Yunxing Chuangrong") (5) - - 50 2,478 $3,937 $7,416 (1)In March 2008, the Group entered into a definitive agreement with China Eastern Media Corporation, Ltd., a subsidiary of ChinaEastern Group and China Eastern Airlines Corporation Limited operating the media resources of China Eastern Group, toestablish a joint venture, BEMC. BEMC was incorporated on March 18, 2008 in the PRC with China Eastern Media Corporationand the Group holding 51% and 49% equity interest, respectively. BEMC obtained concession rights of certain media resourcesfrom China Eastern Group, including the digital TV screens on airplanes of China Eastern Airlines, and paid concession fees toits shareholders as consideration. The total paid-in capital of BEMC was $2,119, which was contributed by both partiesproportionately. In September 2013, BEMC distributed dividend of $1,401, in which $686 was distributed and paid to theGroup. F-29 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 5.LONG-TERM INVESTMENTS - continued (a)Equity method investments - continued The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significantinfluence to the operation of BEMC. (2)On February 15, 2012 and March 13, 2012, the Group and Beijing N-S Digital TV Co., Ltd. (“N-S Digital TV”) establishedtwo joint ventures, Shibo Movie and Xinghe Union, respectively. The registered capital of Shibo Movie and Xinghe Union was$1,558 each. The Group and N-S Digital TV each contributed $794, representing 50% of the equity interest in each ShiboMovie and Xinghe Union. Shibo Movie is engaged in movie technology development and consulting services, and Xinghe Unionis engaged in movie and TV series investment and publishing, advertisement design and production. These joint ventures wereestablished pursuant to a framework agreement entered into with Beijing Super TV Co., Ltd. ("Super TV") in June 2011 and thesupplemental agreement entered into with Super TV and N-S Digital TV in January 2012. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significantinfluence to the operation of Shibo Movie and Xinghe Union. (3)In April 2012, The Group entered into an agreement with Asiaray Advertising Media Ltd. (“Asiaray”) and Guangxi Civil AviationDevelopment Co., Ltd. (“Guangxi Civil Aviation”) to establish a joint venture, Guangxi Dingyuan. Guangxi Dingyuan wasincorporated on April 18, 2012 with total contributed capital of $1,605, of which 20%, 40% and 40% of that amount wascontributed by Guangxi Civil Aviation, Asiaray and the Group, respectively. Guangxi Dingyuan exclusively operates variousmedia resources in four airports in China's Guangxi province. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significantinfluence to the operation of Guangxi Dingyuan. (4)In December 2013, the Group entered into an agreement with Zhejiang Tianguang Diying Production Co., Ltd. to establish a jointventure, AM Guangying. AM Guangying was incorporated on December 25, 2013 with total contributed capital of $1,871, ofwhich 52% and 48% of that amount was contributed by Zhejiang Tianguang Diying Production Co., Ltd. and the Group,respectively. AM Guangying is mainly engaged in film production. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significantinfluence to the operation of AM Guangying. F-30 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 5.LONG-TERM INVESTMENTS - continued (a)Equity method investments - continued (5)In December 2013, the Group entered into an agreement with Hainan Airlines Culture Co., Ltd. ("Hainan Airlines") to establish ajoint venture, Yunxing Chuangrong. Yunxing Chuangrong was registered on December 17, 2013 with total contributed capital of$4,956. The Group and Hainan Airlines each contributed $2,478, representing 50% of the equity interest. Yunxing Chuangrongis established for fund raising as to in-flight internet business. The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significantinfluence to the operation of Yunxing Chuangrong. (b)Cost method investment In June 2010, the Group invested in $367 for 20% of 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. F-31 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 6.ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consists of the following: As of December 31, 2012 2013 Billed receivable $61,760 $64,031 Unbilled receivable 44,071 50,719 Accounts receivable, gross 105,831 114,750 Less: Allowance for doubtful accounts (4,609) (7,221)Accounts receivable, net $101,222 $107,529 Unbilled receivable represents amounts earned under the advertising contracts in progress but not billable at the respective balance sheet dates. Theseamounts become billable according to the contract term. The Group anticipates that the majority of such unbilled amounts will be billed and collectedwithin twelve months of the balance sheet date. Movement of allowance for doubtful accounts is as follows: Balance at Balance at beginning Charge to Exchange end of the of the year expenses Write off adjustment year 2011 $17,646 2,044 (17,279) 877 $3,288 2012 $3,288 1,242 34 45 $4,609 2013 $4,609 2,439 - 173 $7,221 F-32 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 7.OTHER CURRENT ASSETS Other current assets consist of the following: As of December 31, 2012 2013 Input VAT receivable $1,955 $12,800 Investment in films and TV Series (i) - 3,634 Prepaid income tax - 684 Prepaid agency fees 262 538 Advances to employees 418 428 Short-term deposits 1,588 449 Other assets from nonmonetary transactions (ii) 1,736 182 Interest receivable 438 422 Loan receivable from a third party (iii) 1,732 - Other prepaid expenses 1,659 1,300 $9,788 $20,437 (i)Investment in films and TV Series represents the amounts invested in films and TV Series produced by other companies. The Groupshares profit of the invested films and TV Series based on its investment as a percentage of the total investment for a film or TV series.Amounts related to the films and TV Series that are expected to release within one year from December 31, 2013 are recorded as currentassets. Amounts related to films and TV Series that are expected to release after one year from December 31, 2013 are recorded as other non-current assets. (ii)Other assets from nonmonetary transactions primarily consist of exchanged golf club membership cards and vehicles, etc. for the year2012 and 2013, respectively. (iii)Loan receivable is related to amounts lent to a third party company for corporation on a TV series with stated term of one year and annualinterest rate of 15%, which have been received with amounts of $329 and impaired the remaining amounts by December 31, 2013. F-33 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 8.LONG-TERM DEPOSITS Long term deposits consist of the following: As of December 31, 2012 2013 Concession fee deposits $21,633 $19,780 Office rental deposits 674 717 $22,307 $20,497 Concession fee deposits normally have terms of three to five years and are refundable at the end of the concession terms. Office rental depositsnormally have terms of two to three years and are refundable at the end of the lease term. The long term deposits are not within the scope of the accounting guidance regarding interests on receivables and payables, because they are intendedto provide security for the counterparty to the concession rights or office rental agreements. Therefore, the deposits are recorded at costs. F-34 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 9.ACQUIRED INTANGIBLE ASSETS, NET Acquired intangible assets, net, consist of the following: As of December 31, 2012 2013 Gross Net Gross Net carrying Accumulated Accumulated carrying carrying Accumulated Accumulated carrying amount amortization Impairment(1) amount amount amortization Impairment(1) amount TV program license $6,192 $(1,850) $(4,342) $- $6,372 $(1,903) $(4,469) $- Audio-vision programming andbroadcasting qualification 223 (38) (185) - 229 (39) (190) - Customer relationships 1,509 (1,447) (62) - 1,553 (1,490) (63) - Contract backlog 1,977 (1,946) (31) - 2,035 (2,003) (32) - Concession agreements 16,138 (9,508) (5,109) 1,521 17,337 (10,633) (5,258) 1,446 Non-compete agreements 189 (179) (10) - 194 (184) (10) - $26,228 $(14,968) $(9,739) $1,521 $27,720 $(16,252) $(10,022) $1,446 (1)The Group incurred impairment losses of $656, $9,583 and nil on finite-lived intangible assets the years ended December 31, 2011,2012 and 2013, respectively. As the actual and expected sales and profits were below previously forecasted figures for fire station, air traveland outdoor advertising media, the carrying amounts of the finite-lived intangible assets exceeded the estimated future discounted cashflows associated with such assets. Accordingly, the amount of impairment expense recognized is equal to this excess. The amortization expenses for the years ended December 31, 2011, 2012 and 2013 were $3,791, $2,635 and $836, respectively. Duringfiscal years 2014, 2015, 2016, 2017 and 2018, the Group expects to record amortization expenses for finite-lived intangible assets of$619, $292, $292, $146 and $97, respectively. 10.GOODWILL The movement of the goodwill for the years ended December 31, 2012 and 2013 is as follows: Balance as of January 1, 2012 $20,734 Impairment of goodwill in relation to Flying Dragon (8,131)Impairment of goodwill in relation to AM Outdoor (7,753)Impairment of goodwill in relation to AM Jiaming (4,727)Exchange differences (123) Balance as of December 31, 2012 $- Balance as of December 31, 2013 $- F-35 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 10.GOODWILL - continued The Group has four reporting units: the advertising media in air travel areas, the advertising media in gas station, the outdoor advertising media andthe fire station advertising media. Applying discounted cash flows for its 2011 annual impairment test, the estimated fair value of the fire stationreporting unit was below the carrying amount of its net assets. Accordingly, the Group impaired all goodwill related to the fire station reporting unitand incurred an impairment loss of $1,003 for the year ended December 31, 2011. Similarly, the fair value of the air travel areas and outdooradvertising media reporting unit, as estimated using the income approach applying a discounted cash flows for its 2012 annual impairment test, wasbelow the carrying amount of its net assets, and as such, the Group impaired all goodwill related to air travel areas reporting unit and outdoor mediaadvertising media reporting unit and recorded an impairment loss of $20,611 for the year ended December 31, 2012. 11.PROPERTY AND EQUIPMENT, NET Property and equipment, net, consist of the following: As of December 31, 2012 2013 Digital display network equipment $89,327 $90,053 Gas station display network equipment 14,802 10,686 Furniture and fixture 847 882 Computer and office equipment 2,626 2,999 Vehicle 1,219 1,406 Software 10,355 10,656 Property 4,244 4,368 Leasehold improvement 1,351 1,365 124,771 122,415 Less: accumulated depreciation and amortization (78,841) (86,331) $45,930 $36,084 Depreciation and amortization expenses recorded for the years ended December 31, 2011, 2012 and 2013 were $21,347, $21,398 and $21,026,respectively. F-36 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 12.PREPAID EQUIPMENT COST On May 12, 2013, the Group entered into an agreement with Elec-Tech International Co., Ltd. (“Elec-Tech”) to exchange the equity interests ofGreatView Media, one of the VIE's subsidiaries, with LED screens from Elec-Tech, pursuant to which Elec-Tech would totally invest $104,000(equivalent to RMB640 million) to purchase approximately 21.27% of the equity interest of GreatView Media, in exchange, GreatView Mediaundertook to exclusively use the equal amounts of such injections to purchase LED screens from Elec-Tech or its subsidiaries. Therefore, the Groupconsidered this transaction as a nonmonetary transaction. The Group measured the fair value of equity interests surrendered based on the fair valueof LED screens received, which is more clearly determinable. The details of fair value measurement are disclosed in Note 17. The Group would notrecognize any gain or loss from this transaction. As of December 31, 2013, Elec-Tech had injected total $57,217 into GreatView Media, of which $56,113 was recorded as additional paid-incapital, and the Group has purchased 1,000 sets of LED screens in total from Elec-Tech, amounting to $49,415 for its gas station media business.As of December 31, 2013, all purchased equipment were still in the process of installment, therefore, were recognized as prepaid equipment costs. Asof March 31, 2014, the Group has installed more than 300 LED screens. 13.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the follows: As of December 31, 2012 2013 Accrued payroll and welfare $4,766 $4,469 Deposit payable 698 1,203 Other tax payable 2,802 2,942 Deferred income from ADS depositary 364 112 Accrued staff disbursement 824 1,103 Accrued professional fees 213 388 Accrued dividends to non-controlling shareholders of Flying Dragon 663 - Other liabilities 669 666 $10,999 $10,883 F-37 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 14.INCOME TAXES AirMedia is a tax-exempted company incorporated in the Cayman Islands. Broad Cosmos and Excel Lead are tax-exempted company incorporated in the British Virgin Islands. AM China and Glorious Star did not have any assessable profits arising in or derived from Hong Kong for the years ended December 31, 2011,2012 and 2013, and accordingly no provision for Hong Kong Profits Tax was made in these years. The Group's subsidiaries in the PRC are all subject to PRC Enterprise Income Tax ("EIT") on the taxable income in accordance with the relevant PRCincome tax laws and regulations. The EIT rate for the Group's operating in PRC was 25% with the following exceptions. AM Technology qualified for the High and New -Tech Enterprise ("HNTE") status that would allow for a reduced 15% tax rate under EIT Lawsince year 2006. AM Technology was subject to an EIT rate of 15% in 2011, 2012 and 2013, and is expected to be subject to an EIT rate of 15% aslong as it maintains its status as a HNTE. Shenzhen AM is subject to EIT on the taxable income at the gradual rate, which is 24% in 2011, and 25% in 2012 and thereafter, according totransitional rules of the New EIT Law. Since Shenzhen AM is also qualified as a "manufacturing foreign-invested enterprise" incorporated prior tothe effectiveness of the New EIT Law, it is further entitled to the EIT rates of 12%, 12.5% and 25% for the year 2011, 2012 and 2013, respectively. Hainan Jinhui is subject to EIT on the taxable income at the gradual rate, which is 24% in 2011, and 25% in 2012 and thereafter, according totransitional rules of the New EIT Law. Xi'an AM qualified as a "Software Enterprise" in August 2008 by Technology Information Bureau of Shaanxi province, and therefore is entitled to atwo-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 approved by the relevant tax authorities. As Xi'an AM first made profit in 2009, it was exempted from EIT in 2009 and 2010, and enjoys thepreferential income tax rate of 12.5% from 2011 to 2013. F-38 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 14.INCOME TAXES - continued Income tax benefits/(expenses) are as follows: For the years ended December 31, 2011 2012 2013 Income tax (expenses)/benefits: Current $(1,585) $(4,324) $(2,250)Deferred 1,319 1,831 3,963 Total $(266) $(2,493) $1,713 The principal components of the Group's deferred income tax assets and liabilities are as follows: As of December 31, 2012 2013 Deferred tax assets: Current Allowance for doubtful accounts $1,338 $2,003 Accrued payroll 1,107 1,046 Employee education fee excess - 24 Valuation allowance (381) (297)Deferred tax assets - current 2,064 2,776 Non-current Depreciation of property and equipment 689 622 Amortization of intangible assets and concession fees 4,440 5,476 Taxable loss arising from a disposal of an equity method investment 217 - Net operating loss carry forwards 11,063 13,231 Valuation allowance (8,062) (7,575)Deferred tax assets - non-current 8,347 11,754 Deferred tax liabilities: Non-current Acquired intangible assets 380 361 Total deferred tax liabilities $380 $361 F-39 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 14.INCOME TAXES - continued The valuation allowance provided as of December 31, 2013 relates to the deferred tax assets generated by Shenzhen AM, AirTV United, AM Jinshi,AM Jiaming, AM Wenzhou, TJ Jinshi and Dongding, and was recognized based on the Group's estimates of the future taxable income of theseentities, because the Group believes that either it is more likely than not that the deferred tax assets for these entities will not be realized as it does notexpect to generate sufficient taxable income in future, or the amount involved is not significant. The Group's subsidiaries in the PRC had total netoperating loss carry forwards of $52,175 as of December 31, 2013. The net operating loss carry forwards for the PRC subsidiaries will expire onvarious dates through 2018. Reconciliation between the provision for income taxes computed by applying the PRC EIT rate of 25% to income before income taxes and the actualprovision of income taxes is as follows: For the years ended December 31, 2011 2012 2013 Net loss before provision for income taxes $(12,657) $(29,770) $(13,164)PRC statutory tax rate 25% 25% 25%Income tax at statutory tax rate (3,164) (7,443) (3,291) Expenses not deductible for tax purposes: Entertainment expenses exceeded the tax limit 180 315 321 Goodwill impairment - 5,153 - Tax effect of tax losses not recognized - 2,791 346 Tax effect of deductible temporary difference not recognized - 1,425 1,972 Changes in valuation allowance 3,213 (471) (571)Effect of preferential tax rates granted to PRC entities (819) (675) (1,079)Effect of income tax rate difference in other jurisdictions 856 1,398 589 Income tax expenses/(benefits) $266 $2,493 $(1,713)Effective tax rates (2.1)% (8.4)% 13.0% If the Group's subsidiaries, VIEs and VIEs' subsidiaries in the PRC were not in a tax holiday period in the years ended December 31, 2011, 2012and 2013, the impact to net loss per share amounts would be as follows: For the years ended December 31, 2011 2012 2013 Increase in income tax expenses $819 $675 $1,079 Decrease in net loss per ordinary share-basic 0.01 0.01 0.01 Decrease in net loss per ordinary share-diluted 0.01 0.01 0.01 F-40 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 14.INCOME TAXES - continued The Group did not identify significant unrecognized tax benefits for the years ended December 31, 2011, 2012 and 2013. The Group did not incurany interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2011, 2012 and 2013. Since the commencement of operations in August 2005, only AM Technology and Shenzhen AM have been subjected to a tax examination by therelevant PRC tax authorities. The Group's subsidiaries, VIEs and VIEs' subsidiaries remain subject to tax examinations at the tax authority'sdiscretion. Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group's overall operations, and more specifically, withregard to tax residency status. New EIT Law includes a provision specifying that legal entities organized outside of China will be consideredresidents for Chinese income tax purposes if the place of effective management or control is within China. The Implementation Rules to the New EITLaw provide that non-resident legal entities will be considered China residents if substantial and overall management and control over themanufacturing and business operations, personnel, accounting, properties, etc., occurs within China. Additional guidance is expected to be releasedby the Chinese government in the near future that may clarify how to apply this standard to tax payers. Despite the present uncertainties resultingfrom the limited PRC tax guidance on the issue, the Group does not believe that its legal entities organized outside of China should be treated asresidents for New EIT Law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside thePRC should be deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at arate of 25%. Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess offinancial report over tax basis, including those differences attributable to a more than 50% interest in a subsidiary. However, the Company'ssubsidiaries located in the PRC had been in loss position and had accumulated deficit as of December 31, 2011, 2012 and 2013, and the tax basisfor the investment was greater than the carrying value of this investment. A deferred tax asset should be recognized for this temporary difference onlyif it is apparent that the temporary difference will reverse in the foreseeable future. Absent of evidence of a reversal in the foreseeable future, nodeferred tax asset for such temporary difference was recorded. Aggregate undistributed earnings of the Company's subsidiaries located in the PRC that are available for distribution to the Company are consideredto be indefinitely reinvested and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon thedistribution of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of pre January 1, 2008retained earnings will not be subject to the withholding tax. F-41 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 15.NET LOSS PER SHARE The calculation of the net loss per share is as follows: For the years ended December 31, 2011 2012 2013 Net loss attributable to AirMedia Group Inc.'s ordinary shareholders (numerator) $(9,596) $(32,728) $(10,626)Shares (denominator): Weighted average ordinary shares outstanding used in computing net loss per ordinaryshare - basic 129,537,955 124,269,245 120,386,635 Weighted average ordinary shares outstanding used in computing net loss per ordinaryshare - diluted (i) 129,537,955 124,269,245 120,386,635 Net loss per ordinary share-basic $(0.07) $(0.26) $(0.09)Net loss per ordinary share-diluted (0.07) (0.26) (0.09) (i)The Group had securities outstanding which could potentially dilute basic net loss per share, but which were excluded from thecomputation of diluted net loss per share for the years ended December 31, 2011, 2012 and 2013, as their effects would have been anti-dilutive. For the year 2011, 2012 and 2013, such outstanding securities consisted of weighted average share options of 15,269,198,15,747,929 and 15,694,086, respectively. 16.SHARE BASED PAYMENTS 2007 Share incentive plan On July 2, 2007, the Board of Directors adopted the 2007 share incentive plan (the "2007 Option Plan"), which allows the Group to grant options toits employees and directors to purchase up to 12,000,000 ordinary shares of the Company subject to vesting requirement. On December 29, 2008, the Board of Directors amended 2007 Option Plan to allow the Group to grant options to its employees and directors topurchase up to 17,000,000 ordinary shares. On September 1, 2012, the Board of Directors approved to grant options to the employees under 2007 Share Incentive Plan to purchase an aggregateof 1,857,538 ordinary shares of the Company, at an exercise price of $0.72 per ordinary share. One twelfth of the options will vest each quarterfrom September 4, 2012. The expiration date will be 5 years from the grant date. On October 10, 2012, the Board of Directors approved the Company to extend the expiration date of the options granted on July 2, 2007, November29, 2007 and July 10, 2009 to November 29, 2015. Modified awards are viewed as an exchange of the original award for a new award. The fairvalue of the stock options, which was $0.33 per share as of the modification date, was estimated using the Black-Scholes model. The incrementalcompensation cost of the modified award was $449, which was recognized as share-based compensation expenses for the year ended December 31,2012. F-42 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 16.SHARE BASED PAYMENTS - continued 2011 Share incentive plan On March 18, 2011, the Board of Directors adopted 2011 Share Incentive Plan (the "2011 Option Plan"), which allows the Group to grant options toits employees and directors to purchase up to 2,000,000 ordinary shares of the Company subject to vesting requirement. On March 22, 2011, the Board of Directors granted options to Group's employees to purchase an aggregate of 2,180,000 ordinary shares of theCompany under 2007 Option Plan and 2011 Option Plan, at an exercise price of $2.3 per share. The contractual term of the options was 5 or 10years. One twelfth of these options will vest each quarter through March 22, 2014. Subsequently on June 7, 2011, the Board of Directors approvedto modify the exercise price of these stock options to $1.57 per share. The fair value of these options at the modification date was estimated to be$0.75 per option. The incremental share based compensation costs of the re-priced options was $314, of which will be recognized over the remainingservice period through March 22, 2014. On August 23, 2011, the Board of Directors approved the adjustment of the exercise price of certain stock options that were granted on July 2, 2007,July 20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011, which were subsequently modified from $1.57 per share to $1.15 pershare. The fair value of the options on the modification date was $0.21, $0.22, $0.26, $0.39 and $0.53 per share, respectively, calculated using theBlack-Scholes model. The incremental compensation cost of the re-priced options was $1,259, of which $950 was recognized on the modificationdate, and the remainder recognized over the remaining service period. In September 2012, the former CFO of the Group resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vested throughher date of resignation. In conjunction with her resignation, she signed a supplementary agreement with the Group that granted her 100,000immediately exercisable options and 200,000 options that would vest through September 22, 2013. During the vesting period, she would provideconsulting service as a consultant. For the 100,000 immediately exercisable options, a measurement date was reached upon grant and the Groupimmediately recognized $35 share-based compensation expenses. For the 200,000 options that vested through September 22, 2013, the Grouprecognized expense based on the fair value of the options as of each reporting date through the measurement date. For the year ended December 31,2011, 2012 and 2013, the Group recognized $1,046, $19 and $59 share-based compensation expense for these options, respectively. F-43 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 16.SHARE BASED PAYMENTS - continued 2012 Share incentive plan On November 30, 2012, the Board of Directors adopted 2012 Share Incentive Plan (the "2012 Option Plan"), which allows the Group to grantoptions to its employees and directors to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement. On November 1 and November 30, 2012, the Group granted 20,000 options to a consultant under the 2007 Option Plan and 60,000 options under the2012 Option Plan to purchase the Company's ordinary shares at an exercise price of $1.11 per share. The 20,000 share options vested immediatelyand one-third of the 60,000 share options vested on February 1, May 1 and August 1, 2013, respectively. The following summary of stock option activity under the 2007, 2011 and 2012 Share Incentive Plan as of December 31, 2012 and 2013, reflectiveof all modifications is presented below: Outstanding Options Weighted average Weighted average Weighted average Aggregate Number of exercise price grant-date remaining intrinsic options per option fair value contractual terms value Outstanding at January 1, 2013 16,721,266 $1.19 $1.27 Exercised (18,400) 1.15 1.40 Forfeited (2,047,336) 1.55 1.19 Outstanding at December 31, 2013 14,655,530 1.14 1.27 2.85 557 Options vested and expected to vest as of December 31,2013 14,654,776 $1.14 $1.23 2.79 557 Options exercisable as of December 31, 2013 13,701,628 $1.17 $1.29 2.85 279 The total intrinsic value of options exercised during the years ended December 31, 2011, 2012 and 2013 was $54, $66 and $3, respectively. Thetotal fair value of options vested during the years ended December 31, 2011, 2012 and 2013 was $3,664, $3,503 and $1,476, respectively. The Group recorded share-based compensation of $4,614, $3,502 and $1,251 for the years ended December 31, 2011, 2012 and 2013,respectively. There was $427 of total unrecognized compensation expense related to unvested share options granted as of December 31, 2013. Theexpense is expected to be recognized over a weighted-average period of 1.39 years on a straight-line basis. F-44 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 16.SHARE BASED PAYMENTS - continued 2012 Share incentive plan - continued The fair value of each option granted was estimated on the date of grant/modification using the Black-Scholes option pricing model with the followingassumptions used for grants during the applicable period. For the years ended December 31, 2011 2012 2013 Risk-free interest rate of return 0.00%-0.79% 0.12%-0.34% 0.12%-1.10% Expected term 0.4-3.1 years 0.07-3.19 years 0.33-4.42 years Volatility 70.64%-70.74% 67.57%-94.43% 64.75%-94.43% Dividend yield - - - (1)Volatility The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility ofthe 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 hasaccumulated sufficient history of stock price for a period comparable to the expected term of the options. (2)Risk-free rate 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. (3)Expected term The expected term is estimated based on a consideration of factors including the original contractual term and the vesting term. (4)Dividend yield The dividend yield was estimated by the Group based on its expected dividend policy over the expected term of the options. The Group hasno plan to pay any dividend in the foreseeable future. Therefore, the Group considers the dividend yield to be zero. (5)Exercise price 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 ordinaryshares on that date. F-45 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 17.FAIR VALUE MEASUREMENT Measured on recurring basis The Group measured its financial assets and liabilities, including cash, restricted cash, accounts receivable, short-term investment, amounts duefrom related parties, accounts payable, and amounts due to related parties on a recurring basis as of December 31, 2012 and 2013. Cash, restricted cash and short-term investment are classified within Level 1 of the fair value hierarchy because they are valued based on the quotedmarket price in an active market. The carrying amounts of accounts receivable, amounts due from related parties, accounts payable and amountsdue to related parties approximate their fair values due to their short-term maturity. Measured on non-recurring basis The Group measured the intangible assets at fair value on a nonrecurring basis as results of the impairment loss of $9,583 recognized in 2012, asset forth in Note 9. The fair value was determined using models with significant unobservable inputs (Level 3 inputs), primarily the managementprojection on the discounted future cash flow and the discount rate. The Group measured the goodwill at fair value on a nonrecurring basis when it is annually evaluated or whenever events or changes in circumstancesindicate that carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments (Note 10). The fair value wasdetermined using models with significant unobservable inputs (Level 3 inputs), primarily the management projection on the discounted future cashflow and the discount rate. The impairment loss of $20,611 was recognized for the year ended December 31, 2012. The Group measured the prepaid equipment cost exchanged with Elec-tech at fair value on a nonrecurring basis as result of the unit price of eachLED screen of $58 as set forth in Note 12. The Group engaged a third party appraiser to evaluate the fair value of the LED screens. The fair valuewas determined using market approach (sales comparison method) with quoted price for similar assets in active market (Level 2 inputs). 18.SHARE REPURCHASE PLAN On March 21, 2011, the Board of Directors authorized the Group to repurchase up to $20 million of its own outstanding ADSs within two yearsfrom March 21, 2011. On September 26, 2012, the Board of Directors approved to increase the amount of the share repurchase program to $40million of its own outstanding ADS and to extend the termination date of the share repurchase program to March 20, 2014. As of December 31, 2013, the Group had repurchased an aggregate of 6,532,429 ADSs on the open market for a total consideration of $17.4million. As of December 31, 2013, 2,190,685 ADSs had been cancelled and 4,341,744 ADSs were recorded as treasury stock. F-46 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 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 whichcertain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRClabour regulations require the Group to accrue for these benefits based on certain percentages of the employees' income. The total contribution for suchemployee benefits were $2,955, $3,425 and $4,412 for the years ended December 31, 2011, 2012 and 2013, respectively. 20.STATUTORY RESERVES As stipulated by the relevant law and regulations in the PRC, the Group's subsidiaries, VIEs and VIEs' subsidiaries in the PRC are required tomaintain non-distributable statutory surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% ofprofit after taxes as reported in the subsidiaries' statutory financial statements prepared under the PRC GAAP. Once appropriated, these amounts arenot 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 forgeneral business expansion and production and increase in registered capital of the subsidiaries. The Group allocated $2,095 and $824 to statutoryreserves during the years ended December 31, 2012 and 2013, respectively. The statutory reserves cannot be transferred to the Company in the formof loans or advances and are not distributable as cash dividends except in the event of liquidation. 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 thebalance of their statutory reserves and their paid-in-capital, to the Group in the form of loans, advances or cash dividends. Relevant PRC statutorylaws and regulations restrict the payments of dividends by the Group's PRC subsidiaries and VIEs and VIEs' subsidiaries from their respectiveretained earnings, if any, as determined in accordance with PRC accounting standards and regulations. As of December 31, 2013, the balance of restricted net assets was $358,417, of which $159,658 was attributed to the paid-in-capital and statutoryreserves of the VIEs and VIEs' subsidiaries, and $198,759 was attributed to the paid in capital and statutory reserves of WFOE, respectively.Under applicable PRC laws, loans from PRC companies to their offshore affiliated entities require governmental approval, and advances by PRCcompanies to their offshore affiliated entities must be supported by bona fide business transactions. F-47 AIRMEDIA GROUP INC. FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 22.COMMITMENTS (a)Rental leases The Group has entered into operating lease agreements principally for its office spaces in the PRC. These leases expire through 2018 and arerenewable upon negotiation. Rental expenses under operating leases for the years ended December 31, 2011, 2012 and 2013 were $2,528,$2,668 and $3,312, respectively. Future minimum rental lease payments under non-cancellable operating leases agreements were as follows: Year 2014 $3,522 2015 1,776 2016 49 2017 10 2018 6 $5,363 (b)Concession fees The Group has entered into concession right agreements with vendors, such as airports, airlines and a petroleum company. The contractterms of such concession rights are usually three to five years. The concession rights expire through 2019 and are renewable uponnegotiation. Concession fees charged into statements of operations for the years ended December 31, 2011, 2012 and 2013 were $160,199,$177,996 and $180,990, respectively. Future minimum concession fee payments under non-cancellable concession right agreements were as follows: Year 2014 $182,500 2015 120,557 2016 52,898 2017 30,007 2018 20,762 2019 42,273 $448,997 F-48 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 22.COMMITMENTS - continued (c)Capital commitments The Group has entered into purchase agreements with vendors for media equipment in airports and gas stations. The minimum purchasepayments under non-cancellable purchase agreements were $52,440 and $296 for the year ending December 31, 2014 and 2015,respectively. 23.CONTINGENT LIABILITIES (a)Outdoor advertisement registration certificate On May 22, 2006, the State Administration for Industry and Commerce, or the SAIC, a governmental authority in the PRC, amended theProvisions on the Registration Administration of Outdoor Advertisements, or the new outdoor advertisement provisions. Pursuant to theamended outdoor advertisement provisions, advertisements placed inside or outside of the "departure halls" of airports are treated asoutdoor advertisements and must be registered in accordance with the local SAIC by "advertising distributors". To ensure that the Group'sairport operations comply with the applicable PRC laws and regulations, the Group is in the process of making inquiries with the localSAICs in the cities in which the Group has operations or intends to operate with respect to the application for an advertising registrationcertificate. However, the local SAICs with whom the Group consulted have expressed different views on whether the advertisements shownon the Group's digital TV screens should be regarded as outdoor advertisements and how to register those advertisements. As of the date ofthese consolidated financial statements, the Group has registered and received outdoor advertising licenses for advertisements in BeijingCapital International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport and Shenyang Taoxian InternationalAirport, and registrations have been approved by the SAIC offices in six other cities and provinces where the Group has operations foradvertisements in the airports of those regions. Some local SAICs need more time to consider the implementation of the new outdooradvertising provisions and some SAICs do not require the Group to register. The Group intends to register with the relevant SAICs if theGroup is required to do so, but the Group cannot assure that the Group will obtain the registration certificate in compliance with the newoutdoor advertisement provisions due to the uncertainty in the implementation and enforcement of the regulations promulgated by the SAIC.If the requisite registration is not obtained, the relevant local SAICs may require the Group to forfeit advertising income earned, imposeadministrative fines of up to $5. They may also require the Group to discontinue advertisements at airports where the requisite advertisingregistration is not obtained, which may result in a breach of one or more of the Group's agreements with the Group's advertising clients andmaterially and adversely affect the Group's business and results of operations. As of December 31, 2013, the Group did not record aprovision for this matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incurwould not have a material adverse effect on its consolidated financial statements. However, it is not possible for the Group to predict theultimate outcome and the possible range of the potential impact of failure to obtain such disclosed registrations and approvals primarily dueto the lack of relevant data and information in the market in this industry in the past. F-49 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 23.CONTINGENT LIABILITIES - continued (b)Approval for non-advertising content A majority of the digital frames and digital TV screens in the Group's network include programs that consist of both advertising contentand non-advertising content. On December 6, 2007, the State Administration of Radio, Film or Television, or the SARFT, a governmentalauthority in the PRC, issued the Circular regarding Strengthening the Management of Public Audio-Video in Automobiles, Buildings andOther 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 Groupintends to obtain the requisite approval of the SARFT for the Group's non-advertising content, but the Group cannot assure that the Groupwill obtain such approval in compliance with this new SARFT Circular, or at all. In January 2014, the Group entered into a strategicpartnership with China Radio International Oriental Network (Beijing) Co., Ltd ("CRION"), which manages the internet TV business ofChina International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air travellers inChina. According to the terms of the cooperation arrangement with CRION, during the cooperation period from March 28, 2014 to March27, 2024, CRION shall obtain and, from time to time, be responsible for obtaining any approval, license and consent regarding theregulation 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 contractwith CRION when they expire. If the requisite approval is not obtained, the Group will be required to eliminate non-advertising content fromthe programs included in the Group's digital frames and digital TV screens and advertisers may find the Group's network less attractiveand be unwilling to purchase advertising time slots on the Group's network. As of December 31, 2013, the Group did not record a provisionfor this matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur would nothave a material adverse effect on its consolidated financial statements. However, it is not possible for the Group to predict the ultimateoutcome and the possible range of the potential impact of failure to obtain such disclosed registrations and approvals primarily due to thelack of relevant data and information in the market in this industry in the past. F-50 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 24.RELATED PARTY TRANSACTIONS (a)Details of outstanding balances with the Group's related parties as of December 31, 2012 and 2013 were as follows: Amount due from related parties-trading: As of December 31, Name of related parties Relationship 2012 2013 BEMC Equity method investment of the Group $1,310 $187 $1,310 $187 The amount due from BEMC represents the uncollected advertising revenues earned from BEMC as of December 31, 2012 and 2013,respectively. Amount due to related parties-trading: As of December 31, Name of related parties Relationship 2012 2013 BEMC Equity method investment of the Group $447 $- $447 $- The amount due to BEMC represents the deposits received for publishing advertisement, which has been paid back as of December 31,2013. F-51 AIRMEDIA GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continuedFOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013(In U.S. dollars in thousands, except share data) 24.RELATED PARTY TRANSACTIONS - continued (b)Details of related party transactions occurred for the years ended December 31, 2011, 2012 and 2013 were as follows: Advertising revenues earned from: For the years ended December 31 Name of related parties Relationship 2011 2012 2013 BEMC Equity method investment of the Group $179 $1,852 $681 Zhangshangtong Cost method investment of the Group 27 - - $206 $1,852 $681 F-52 AIRMEDIA GROUP INC. ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANYBALANCE SHEETS(In U.S. dollars in thousands, except share related data) As of December 31, 2012 2013 Assets Current assets Cash and cash equivalents $196 $14 Investment in subsidiaries 60,514 93,416 Amount due from subsidiaries 181,204 181,245 Other current assets 778 335 TOTAL ASSETS 242,692 275,010 Liabilities Current liabilities Amount due to subsidiaries 421 3,652 Accrued expenses and other current liabilities 395 392 Total liabilities 816 4,044 Equity Ordinary Shares ($0.001 par value; 900,000,000 shares authorized in 2012 and 2013; 127,662,057 shares and127,662,057 shares issued as of December 31, 2012 and 2013, respectively; 122,112,485 shares and119,134,135 shares outstanding as of December 31, 2012 and 2013, respectively) 128 128 Additional paid in capital 278,652 313,912 Treasury stock (5,549,572 and 8,527,922 shares as of December 31, 2012 and 2013, respectively) (7,035) (9,860)Accumulated deficits (62,817) (73,443)Accumulated other comprehensive income 32,948 40,229 Total equity 241,876 270,966 TOTAL LIABILITIES AND EQUITY $242,692 $275,010 F-53 AIRMEDIA GROUP INC. ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANYSTATEMENTS OF OPERATIONS(In U.S. dollars in thousands) For the years ended December 31, 2011 2012 2013 Operating expenses Selling and marketing $(1,421) $(859) $- General and administrative (3,471) (3,282) (2,239)Total operating expenses (4,892) (4,141) (2,239)Investment loss in subsidiaries (4,795) (28,587) (8,387)Interest income 91 - - Net loss attributable to holders of ordinary shares $(9,596) $(32,728) $(10,626) F-54 AIRMEDIA GROUP INC. ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANYSTATEMENTS OF COMPREHENSIVE INCOME/(LOSS)(In U.S. dollars in thousands) For the years ended December 31, 2011 2012 2013 Net loss $(9,596) $(32,728) $(10,626)Other comprehensive income, net of tax: Change in cumulative foreign currency translation adjustment 12,381 2,214 7,281 Comprehensive income/ (loss) attributable to Parent Company $2,785 $(30,514) $(3,345) F-55 AIRMEDIA GROUP INC. ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANYSTATEMENTS OF CHANGES IN EQUITY(In U.S. dollars in thousands, except share related data) Accumulated other Ordinary shares Additional Treasury Accumulated comprehensive Total Shares Amount paid in capital stock deficits income equity Balance as of January 1, 2011 131,905,011 132 277,676 - (20,493) 18,353 275,668 Ordinary shares issued for share based compensation 138,416 - 229 - - - 229 Share repurchase (4,381,370) (4) (7,369) - - - (7,373)Treasury stock (2,414,460) - - (3,775) - - (3,775)Share-based compensation - - 4,614 - - - 4,614 Foreign currency translation adjustment - - - - - 12,381 12,381 Net loss - - - - (9,596) - (9,596) Balance as of December 31, 2011 125,247,597 $128 $275,150 $(3,775) $(30,089) $30,734 $272,148 Ordinary shares issued for share based compensation 137,166 - - 161 - - 161 Share repurchase as treasury stock (3,272,278) - - (3,421) - - (3,421)Share-based compensation - - 3,502 - - - 3,502 Foreign currency translation adjustment - - - - - 2,214 2,214 Net loss - - - - (32,728) - (32,728) Balance as of December 31, 2012 122,112,485 $128 $278,652 $(7,035) $(62,817) $32,948 $241,876 Ordinary shares issued for share based compensation 18,400 - - 21 - - 21 Share repurchase as treasury stock (2,996,750) - - (2,846) - - (2,846)Share-based compensation - - 1,251 - - - 1,251 Foreign currency translation adjustment - - - - - 7,281 7,281 Capital contribution from non-controlling interests - - 39,825 - - - 39,825 Acquisition of non-controlling interests - - (5,816) - - - (5,816)Net loss - - - - (10,626) - (10,626) Balance as of December 31, 2013 119,134,135 $128 $313,912 $(9,860) $(73,443) $40,229 $270,966 F-56 AIRMEDIA GROUP INC. ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANYSTATEMENTS OF CASH FLOWS(In U.S. dollars in thousands) For the years ended December 31, 2011 2012 2013 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(9,596) $(32,728) $(10,626)Investment loss in subsidiaries 4,795 28,587 8,387 Share-based compensation 4,614 3,502 1,251 CHANGES IN WORKING CAPITAL ACCOUNTS Other current assets 16 (597) 444 Accounts payable 36 (40) - Accrued expenses and other current liabilities (697) (421) (3)Amount due to subsidiaries 25 265 3,231 Amount due from subsidiaries 482 2,497 (41) Net cash (used in) provided by operating activities (325) 1,065 2,643 CASH FLOWS FROM INVESTING ACTIVITIES Payment for contingent consideration in connection with a business combination (2,966) - - Net cash used in investing activities (2,966) - - CASH FLOWS FROM FINANCING ACTIVITIES Share repurchase (7,373) - - Cash paid for treasury stock (3,775) (3,421) (2,846)Proceeds from exercises of stock options 229 161 21 Net cash used in financing activities. (10,919) (3,260) (2,825) Net decrease in cash (14,210) (2,195) (182)Cash, at beginning of year 16,601 2,391 196 Cash, at end of year $2,391 $196 $14 F-57 AIRMEDIA GROUP INC. NOTES TO ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE IFINANCIAL INFORMATION OF PARENT COMPANY(In U.S. dollars in thousands) Notes: 1.BASIS FOR PREPARATION The condensed financial information of the parent company, AirMedia Group Inc., only has been prepared using the same accounting policies as setout in the Group's consolidated financial statements except that the parent company has used equity method to account for its investment in itssubsidiaries, AM Technology, Shenzhen AM, Xi'an AM and Glorious Star, and its VIEs, Shengshi Lianhe, AM Advertising, AirMedia UC and AMYuehang, and VIEs' subsidiaries, AirTV United, AM Film, Flying Dragon, AM Wenzhou, Weimei Lianhe, Hainan Jinhui, AM Jiaming, AM Jinshi,TJ Jinshi, TJ AM, Dongding, AM Outdoor, GreatView Media, AM Jinsheng, GZ Meizheng and AM Tianyi. 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-companybalances and transactions are eliminated upon consolidation. For the purpose of the Company's stand-alone financial statements, its investments insubsidiaries, VIEs and VIEs' subsidiaries are reported using the equity method of accounting. The Company's share of income and losses from itssubsidiaries, VIEs and VIEs' subsidiaries is reported as earnings from subsidiaries, VIEs and VIEs' subsidiaries in the accompanying condensedfinancial information of parent company. 3.INCOME TAXES The Company is a tax exempted company incorporated in the Cayman Islands. F-58 Investment AgreementamongElec-Tech International Co., Ltd.,Beijing AirMedia UC Advertising Co., Ltd.andBeijing Zhongshi Aoyou Advertising Co., Ltd. This Agreement is executed by the following parties in Zhuhai on May 12th, 2013: Investor:Party A: Elec-Tech International Co., Ltd.Address: No.1, Jinfeng Road, Tangjiawan County, Xiang Zhou Qu, Zhuhai, Guangdong, 519085Legal Representative: Wang Donglei The Original Shareholders:Party B: Beijing AirMedia UC Advertising Co., Ltd.Address: Room 130, Heping Road No.16, Yangsong County, Huairou District, Beijing, China, 101499Legal Representative: Guo Man Party C: Beijing Zhongshi Aoyou Advertising Co., Ltd.Address: Room 2509, West Wing, 25th Floor, Guangqumenwai Street No.8, Chaoyang District, Beijng, China, 100022Legal Representative: Feng Zhonghua The Target Company:Party D: Beijing Great View Advertising Co., Ltd.Adress: No.10, Jiachuang Road, Opto-Mechatronics Industrial Base, Tongzhou Park, Zhongguancun Technology Park, Tongzhou District, Beijing, China,101111Legal Representative: Feng Zhonghua Whereas, Beijing Great View Advertising Co., Ltd. (hereinafter referred to as the “Company” or the “Target Company”) is a company incorporated, in April2009, and existing under the law of the People’s Republic of China with registered capital RMB50 million and currently the original shareholders are Party B,holding 78% of its registered capital, and Party C, holding 22% of its registered capital. Party B and Party C agree to introduce Party A as one of the investorsof the Target Company and Party A agrees to invest RMB640 million into the Company and become a new shareholder. I.Definition II.Investment Prerequisite2.1The Parties hereby acknowledge that the investment obligation of the Investor shall be based on the following conditions: 2.1.1The original shareholders and the Company have disclosed, in writing, to the Investor true, complete and full information of the Company in allmaterial respects, including but not limited to the information concerning the assets, liabilities, equity, external guarantees etc;2.1.2During the transitional period, the Company does not go under any material adverse change; and without the written consent of the Investor, theCompany or any of its holding subsidiaries shall not reach any joint venture, cooperation, partnership contract with the Company or itscontrolled subsidiaries as a party or directly set up wholly-owned sub-company, and there shall be no distribution of profits;2.1.3During the transitional period, the original shareholders shall not transfer part or all of their equity interest in the Company to a third party otherthan the shareholders of the Company;2.1.4During the transitional period, the Company, as an entity with continued operation, does not involve and shall not have any material illegalactivities, and except the assets disposal or liabilities in the ordinary course of business, the company has not disposed of its material assets orset guarantees or assumed any significant debt (including contingent liabilities), otherwise, the Investor shall be promptly notified;2.1.5The original shareholders and the Company warrant the actual existence of the relevant Chinese Sinopec gas station advertising screen contracts,and their contractual rights and interests belong to the Company.2.2If the original shareholders or the Company breach the investment prerequisite terms of this Agreement, Party A is entitled to unilaterally terminate thisAgreement and recover the investment funds and requires the original shareholders to bear joint and several liability. III.Investment Program3.1The Parties agree that the Investor invests into the Company RMB640 million in total (the "Investment") by installments and the first contribution shallbe not less than 20% of the Investment, and acquires 21.27% of the equity interest in the Company in total. The latest date to complete the Investmentshall be March 31, 2014.3.2Prior to the investment, the shareholding structure of the Company was:1)Beijing AirMedia UC Advertising Co., Ltd. invested RMB39 million, holding 78% equity interest of the Target Company;2)Beijing Zhongshi Aoyou Advertising Co., Ltd. invested RMB11 million, holding 22% equity interest of the Target Company.3.3After the Investment is completed, the shareholding structure of the Company will be:1)Beijing AirMedia UC Advertising Co., Ltd. invested RMB39 million, holding 61.41% equity interest of the Target Company;2)Beijing Zhongshi Aoyou Advertising Co., Ltd. invested RMB11 million, holding 17.32% equity interest of the Target Company;3)Elec Co., Ltd. invested RMB13.51 million, holding 21.27% equity interest of the Target Company.3.4The Parties hereby agree, upon the satisfaction of the investment prerequisite under Section 2.1 of this Agreement, the Investor shall inject the Investmentby installments to the bank account designated by the Company in accordance with Section 3.1 of this Agreement. 3.5The Parties hereby agree, the Investor’s obligation of contribution under this Agreement shall be deemed completed should the Investor have paid theInvestment in accordance with Section 3.4 of this Agreement.3.6The original shareholders hereby warrant that the Investor's entire Investment shall be utilized for the sole purpose of purchasing LED screens from theInvestor or its subsidiaries, and the purchase contracts shall be executed together with this Agreement, with the purchase price and the time of paymentcorresponding to the Investment and time of payment under this Agreement. The purchase price shall be paid to the Investor/supplier in ten (10) businessdays as of the completion of the capital verification of the Investment or in other term otherwise agreed by the Investor/supplier.3.7In the event that on or before June 30, 2014, the Company incurs operating losses, such losses shall be borne by the original shareholders, instead of theParty and for any earnings incurred, it shall be distributed to the original shareholders and the Investor in proportion to their respective ownership in theCompany. From July 1, 2014 onward, the operating results shall be proportionately shared by the shareholders in accordance with their respectiveownership in the Company.3.8In the event that any bad debt incurred prior to the date of registration of the first round Investment with the State Administration of Industry andCommerce that has been injected by the Investor according to the term as agreed under this Agreement shall be borne by the original shareholders. IV.Handling of the Relevant Formalities V.Corporate Governance5.1The original shareholders agree and warrant that after the investment is completed, the company's board of directors shall consist of five members,including two directors delegated by Party B, two directors delegated by Party C (one of which shall be nominated by Party B, and the other directorshall be nominated by the Investor), and one director delegated by Party A, and the chairman of the board shall be one of directors appointed by Party B.5.2The original shareholders hereby agree that the following issues shall be approved by shareholders representing three-fourth or more of the voting rights:(1) to decide on the operational policy and investment plan of the company; (2) to elect or replace directors and supervisors who are not representatives ofthe staff and workers, and to decide on matters concerning the remuneration of the directors and supervisors; (3) to examine and approve reports of theboard of directors; (4) to examine and approve reports of the board of supervisors or the supervisors; (5) to examine and approve the annual financialbudget plan and final accounts plan of the company; (6) to examine and approve the company’s plans for profit distribution and for making up losses;(7) to adopt resolutions on the increase or reduction of the registered capital of the company; (8) to adopt resolutions on the issue of corporate bonds; (9)to adopt resolutions on the merger, division, dissolution, liquidation or transformation of the company; (10) to amend the articles of association of thecompany. 5.3The following issues shall be approved by two-third or more of the directors, which shall include the director assumed by the representative of theInvestor: (1) to purchase significant assets (excluding equipment procurement), to dispose significant assets, to incur bank loans and to provide externalguarantees; (2) to draw up the budget plan and final accounts plan, plans for the increase or reduction of the registered capital, plans for profitdistribution, plans for the merger, division, dissolution and transformation of the company and plans for dissolution and liquidation of the company;(4) to decide on the operational plans and investment plans of the company; (5) to decide on the appointment or dismissal of the senior management(deputy general manager or above); (6) to execute, amend or terminate material contracts in excess of RMB 10 million, excluding the contracts concludedduring the course of daily operation (including contracts on equipment procurement, sales of advertising and resources contracts).5.4Party A shall be entitled to appoint a deputy general manager to be in charge of the equipment management and understanding of the company’s entireoperation; Party A shall be entitled to appoint a financial manager to be responsible for the overall understanding of the company's financial operationsand significant expenditures (RMB1 million and above). VI.Notice and Service VII.Breach of Contract and Liabilities VIII.Amendment and Termination of the Contract IX.Disputes Settlement9.1The validity, interpretation and performance of this contract shall be governed by the laws of the People’s Republic of China.9.2Any dispute arising from or related to this contract shall be first resolved through friendly consultation. In case the dispute cannot be resolved throughthe foregoing measure, the dispute shall be submitted to the courts with jurisdiction at where the defendant located. X.Supplementary Provisions Party A: Elec-Tech International Co., Ltd.Authorized representative: /s/ Elec-Tech International Co., Ltd. Party B: Beijing AirMedia UC Advertising Co., Ltd.Authorized representative: /s/ Beijing AirMedia UC Advertising Co., Ltd. Party C Beijing Zhongshi Aoyou Advertising Co., Ltd.:Authorized representative: /s/ Beijing Zhongshi Aoyou Advertising Co., Ltd. Party D: Beijing GreatView Media Advertising Co., Ltd.Authorized representative: /s/ Beijing GreatView Media Advertising Co., Ltd. Cooperation Agreement for the Establishment of Advertising CompanybetweenBeijing Shengshi Lianhe Advertising Co., Ltd.,andGuangzhou Daozheng Advertising Co., Ltd.May 2012 Party A: Beijing Shengshi Lianhe Advertising Co., Ltd.Address: Room 1-0363, 1/F, Builiding 22, Xuanwumen East Street, Xuanwu District, Beijing, China, 100051Legal Representative: Guo Man Party B: Guangzhou Daozheng Advertising Co., Ltd.Address: Room 2005, No.232, Zhongshan Sixth Road, Yuexiu District, Guangzhou, Guangdong, China, 510180Legal Representative: Guo Rong I.General ProvisionsCooperation Objectives: jointly establish Guangzhou Meizheng Advertising Co., Ltd. (hereinafter referred to as “Guangzhou Meizheng”) to operate thePAD advertising in the carriages of Wuhan-Guangzhou high-speed rail lines under operation of Guangzhou Railway Group and strive to obtain theadvertising concession for Wi-Fi entertainment platform.II.Cooperation Basis and Cooperation Model 1.Basis and Conditions for the Establishment of Joint Venture: 1)Party B warrants that it has signed Advertising Contract with Guangzhou Railway Group Cultural Advertising Corporation (hereinafterreferred to as " GRG ") on August 23, 2012, and GRG authorizes the PAD advertising concession in the trains of Wuhan-Guangzhou,Guangzhou-Shenzhen-Hong Kong high-speed rail lines (hereinafter referred to as the "Concession") to Party B, and Party B has lawfullyobtained the exclusive operating right of platform advertising for the period from September 1, 2012 to August 31, 2018.2)Party A warrants that it has an extensive resources and experiences in advertising business, a wide range of customer resources and it islicensed as an agent to release advertisements for domestic and foreign clients.3)Party B warrants that after the establishment of Guangzhou Meizheng, it will transfer its overall concession rights under the AdvertisingContract with GRG to Guangzhou Meizheng. 2.Cooperation Model and ProcedureTo achieve the ultimate objectives of cooperation, both parties agree to complete the project in four stages:1)Party A agrees to pay RMB697, 550 in advance for the purchasing of tablet devices; Party A provides RMB2, 000,000 as start-up capital ofthe cooperation projects.2)Party A solely contributes to set up Guangzhou Meizheng Advertising Co., Ltd. with registered capital RMB10,000,000.3)Guangzhou Meizheng and Party B, GRG shall enter into an agreement to transfer all Party B’s rights and obligations under the AdvertisingContract to Guangzhou Meizheng. Meanwhile, Party A and Party B shall enter into an Equity Transfer Agreement which stipulates that PartyA transfers 46% equity interest of Guangzhou Meizheng to Party B.4)After Guangzhou Meizheng obtain all the exclusivity on operating advertising business on GRG trails, both parties, as shareholders ofGuangzhou Meizheng, will increase the registered capital of Guangzhou Meizheng to RMB25 million with equity ratio unchanged. TheRMB15 million of the increased capital (monetary, physical or property rights) will be provided by Party A.III.Operation Principals and Business Scope1.Name: Guangzhou Meizheng Advertising Co., Ltd.2.Address: Guangzhou, Guangdong Province3.Registered Capital: RMB10 million, then increase to RMB 25 million;4.Type of Organization: Limited Liability CompanyIV.Rights and Obligations of both Parties1.Rights of Both Partiesa)Right to information during establishing of Guangzhou Meizheng;b)Right to sign the relevant legal documentation;c)Audit expense during establishment;d)As shareholders, require Guangzhou Meizheng to provide investment certificates;e)Enjoy rights and undertake obligations as shareholders.2.Obligations of Both Partiesa)Apply to establish Guangzhou Meizheng;b)Prepare relevant legal documentation;c)Party A shall contribute capital, transfer ownership and increase capital as scheduled;d)In case of one party fails to fulfill its obligation, then fail to remedy after 15 days of receiving written notice from its counterpart, theobservant party has the right to terminate this agreement and all damage and loss incurred shall be paid by the default party.V.Term of Operation and Incorporation1. Operating Period: 30 years;2. After established, Guangzhou Meizheng bears the expense of establishing;3. Party A shall not terminate or dissolve Guangzhou Meizheng without legitimate reason before Party B is introduced as a shareholder; 4. 6 months before the operating period expires, shareholders will negotiate extension or liquidation.VI.Statement and Warranty1. Good Standing of Party A2. Good Standing of Party B3. Party B lawfully obtained the exclusive operating right;4. All the document provided to the SAIC, SAT and each other are true, accurate and valid.VII.Rights and Obligations of Shareholders1.Rights of Shareholdersa)Dividend;b)Vote;c)Appoint director and supervisor;d)Right to information and inquiry;e)Annual auditf)Increase capital;g)Investment return after liquidationh)Amend Article of Associationi)Other right stipulated by law, regulation and Article of Association.2.Obligations of Shareholdersa)Capital contribution;b)No surreptitious withdrawing the contributed capitalc)Assumption of debtsd)Undertake the liability of breaching in case of fail to contribute capital as scheduled;e)Follow Article of Associationf)No abusing shareholder rightsg)Other obligations stipulated by law, regulation and Article of AssociationVIII.Constrained Activities1. That shareholder of Guangzhou Meizheng exercise its voting right shall not result a decision in harmful way towards neither the interest of the company northe interest of other shareholders.2. Shareholder is obligated to perform its fiduciary duty and shall not utilize approaches such as Corporate Restructure to harm the interest of the company orthe interest of other shareholders.3. The important decisions shall be made in accordance with the Article of Association and by Board of Directors or Shareholder Committee; Shareholder shallnot interfere directly or indirectly to company’s decision or its daily operation.4. Guangzhou Meizheng is an independent legal entity and assumes its own liabilities and risks.5. Shareholders shall respect the financial independence of Guangzhou Meizheng, and shall not interfere directly or indirectly to its accounting activities.6. Shareholder shall be held liable for the damage and loss actual incurred in case of violation of this clause is made. IX.Corporate Governance Arrangement of Guangzhou Meizheng1.Shareholders’ committee is the highest authority of Guangzhou Meizheng. Guangzhou Meizheng will have a board of directors as the policy-makingbody. The board consists of five members with three appointed by Party A, two appointed by Party B, and the chairman will be appointed byParty A.2.Guangzhou Meizheng shall have a supervisor appointed by Party B.X.Finance, Accounting System of Guangzhou MeizhengXI.Notice and ServiceXII.Amendment and Termination of AgreementThis agreement may be amended or terminated only by mutual consent in writing between both parties.XIII.Force Majeure and ConfidentialityXIV.Contract Breaching LiabilityXV.Disputes SettlementDuring the performance of this Agreement, any dispute between the parties shall be resolved through negotiation; in case such negotiation fails, eitherparty may bring a suit to the people's court at where this Agreement is signed.This agreement is signed in Dongcheng district, Beijing, China.XVI.Validity of AgreementXVII.MiscellaneousIn case of conflict between content in this agreement and the Article of Association, the Article of Association prevails. Equity Swap Agreement Party A: Beijing N-S Digital TV Co., Ltd.Address: 4/F, Building B, Jingmeng High-tech Tower, No. 5, Shangdi East Road, Haidian District, Beijing, People’s Republich of China, 100085Legal Representative: Zhu Jianhua Party B: AirMedia Group Co., Ltd.Address: 15/F, Sky Plaza, No.46 of Dongzhimenwai Street, Dongcheng District, Beijing 100027, ChinaLegal Representative: Guo Man Whereas, Party A and Party B entered into a Cooperation Framework Agreement in June 2011, and then in December 2011,both parties signed aSupplementary Agreement attached the aforesaid Cooperation Framework Agreement. In accordance with the Cooperation FrameworkAgreement and its Supplementary Agreement, (hereinafter referred as “Original Agreement”) Party A and Party B jointly established Beijing XingheUnion Film & TV Co., Ltd. (hereinafter referred as “Beijing Xinghe”) and Beijing Shibo Movie Technology Co., Ltd. ((hereinafter referred as “BeijingShibo”). Party A holds 50% equity interest in both of the aforementioned companies respectively; Party B also holds 50% equity interest in both of theaforementioned companies respectively.Through the negotiation on equal footing, on the subjects of equity swap between Party A and Party B and the terminations of the Original Agreementboth parties agree as follows:I.Equity Swap1.Party A transfers its 50% equity interest of Xinghe Union to Party B or a company designated by Party B; Party B transfers its 50% equity interestof Beijing Shibo to Party A or a company designated by Party A.2.Both parties agree: the transfer of equity interest of both Beijing Xinghe and Beijing Shibo will be completed through equity swap, regardless of thevalues of the net asset and equity interest of the two companies swapped. The tax (such as Business Tax or Income Tax) and other expenses, if any,incurred by the aforesaid transactions are burdened to the receiving parties respectively.3.Both parties agree to complete the deliveries of aforesaid equity interest before September 30th, 2013. To ensure the swap and delivery of shares beforethe aforesaid deadline, both parties shall provide Share Purchase Agreement, Board (or Shareholder) Resolutions affixed with signatures and seals inaccordance with State Administration of Industry and Commerce (hereinafter referred as SAIC) requirements.II.Rights and Obligations of the Parties1.Both parties shall cooperate actively and provide documentation SAIC required to assist its counterpart. 2.Both parties warrant that other than this agreement, there is no any other agreement or any other form of statement that contains sale or transfer ofequity interest of the aforesaid companies; Both parties warrant that there is no undisclosed collateral, guarantees, or other options on the equityinterest under this Agreement that will lead to the failure of share transfer; Both parties warrant that there is no lawsuit or other form of disputesinvolving the aforesaid companies; Either party which makes false warranty will be held liable to the damage, loss and any other consequenceincurred.3.Both parties recognize the assets, operating status and financial statement data of the two companies. During the time period from the effective date ofthis agreement to the delivery date of the shares, other than continuous operating cost, both parties shall not inflate expenses nor conceal revenues.Either Party which conducts the above mentioned activities will be held liable to the damage, loss and any other consequence incurred.4.Party A warranty that the documentation of Beijing Shibo provided to Party B will be complete and there will be no undisclosed debt, lawsuit or anyother matter which might result in substantial change of Beijing Shibo’ asset; Party B warranty that the documentation of Beijing Xinghe provided toParty A will be complete and there will be no undisclosed debt, lawsuit or any other matter which might result in substantial change of BeijingXinghe’s asset; Party which provides incomplete documentation will be held liable to the damage, loss and any other consequence incurred.III.Termination of Original Agreement1.Both parties agree to terminate the Original Agreement , and set the September 1, 2013 as the termination date. After the termination, the equity swapwill proceed accordingly.2.For the purpose of subsequent affair arrangements and future collaboration, Party A entrust its affiliate “Beijing AirMedia Film and TV culture Co.,Ltd.” to negotiate and enter into new agreement with Party B’s affiliate Beijing Shibo regards to the continuation of existing business, subsequentaffair arrangements and new model of cooperation. The new agreement once entered will contain clauses which stipulate the termination of theOriginal Agreement and subsequent affair arrangements after; such clauses are binding on Party A and Party B.3.Both parties agree that the termination of the Original Agreement is not a Breach of Contract, and there is no dispute of any form. IV.ConfidentialityEach party shall treat the existence and contents of this agreement as confidential, shall not disclose such information in any way unless is requiredto be disclosed in accordance with applicable laws, regulations or government orders. V.Breach of ContractBoth parties shall conduct themselves strictly in accordance with this agreement once entered; Party which fails to perform its responsibility will beheld liable to the damage, loss and any other consequence incurred. VI.Amendment and TerminationAny amendment shall be done through negotiation and in writing; no amendment is valid unless both parties reach a mutual understanding orotherwise the agreement shall continue to be in full force and effect. VII.Dispute SettlementAny dispute relating to this Agreement shall be resolved through consultation; and in case the negotiation fails, either party shall be entitled to submitthe dispute to Beijing Arbitration Commission for arbitration. VIII.Miscellaneous1.This agreement may be supplemented only by mutual consent in writing between both parties. The supplement and this agreement are equally valid.2.In case of the content of the documentation provided by both parties to the SAIC for the purpose of registration differs from this agreement, thisagreement shall prevail.3.This agreement is effective once signed and sealed by authorized representatives of both parties.4.This agreement is signed and sealed in 2 originals, with each copy equally binding, and parties shall each keep 1 original. PARTY A : Authorized Representative: Date: PARTY B : Authorized Representative: Date: Strategic Alliance AgreementbetweenHNA Culture Holding Group Co., Ltd.andAirMedia Group Co., Ltd. September 2013 Party A: HNA Culture Holding Group Co., Ltd. Party B: AirMedia Group Co., Ltd. Whereas, Party A, HNA Culture Holding Group Co., Ltd. (hereinafter referred to as “HNA Culture”), is a key enterprise under HNA Group Co., Ltd., one ofthe top five hundred enterprises in China. It has been developing in the fields of airport and aviation media business, cultural and creative industrial parkconstruction, film and television drama production and distribution, traditional culture extension, international cultural exchange, new media operation andgradually becomes an integrated cultural enterprise group. Whereas, Party B, AirMedia Group Co., Ltd. (hereinafter referred to as “AirMedia”), is the most influential provider of middle to high end outdoor mediaservice in China. The company has taken over 90% share of the digital air media market, and held up to the resources of traditional airport media marketabove all the others. The company’s air media network has covered major airports in cities such as Beijing, Shanghai and Guangzhou, and more than 2,300routes of airliners. Both Parties agree as follows: I.Cooperation ObjectivesBoth parties give play to their respective advantages in the field of aviation, airport, outdoor media platform, video production and development, newmedia development and operation, etc., and by complementary advantages, resource sharing, collaborative development, enable Party A to achieve acomprehensive and all-media culture enterprise group and deepening the aviation media service capability of Party B and achieve win-win situation formutual benefits. II.Cooperation ContentWhereas, two parties have been in productive cooperation in many fields previously, now the Parties agree on setting up a fund to develop aviationinternet platform through cooperation and to achieve the following cooperation intentions:1.The development of the in-flight internet platform is based on two kinds of resources, namely in-flight resources and funding. 2.Party A is responsible for obtaining in-flight advertising channels, coordinating HNA Group's airlines associated with these projects, obtaining thedevelopment and exclusive right to operate air internet platform and coordinating to complete the corresponding airplane hardware upgrade. Party Ashall transfer the aforesaid exclusive in-flight internet platform operation rights to the project company invested by the proposed industry fund asagreed in this Agreement.3.Party B is responsible for funding with the specific ways as follows:3.1The two Parties contribute to jointly establish a fund management company, and each party holds 50% of the equity interests of themanagement company. Party A recommends three members and Party B recommends 2 members to constitute an investment managementcommittee, which will act as the General Partner (or GP) to operate and manage the Industry Development Fund of In-flight Internet (hereinafterreferred to as the “Fund”), which is made to target on the in-flight internet industry.3.2The target fund size of the Fund is set to RMB 1 billion; the aforementioned objectives can be adjusted according to the amount of moneyactually needed for the development of HNA Airlines Group's internet platform project under this Agreement. Party B agrees to act as a LimitedPartner (or LP), primarily in charge of fundraising and capital contribution for the Fund. Party B alone commits to invest no less than 40% ofthe total targeted fund size and to provide the remaining portion in case it unable to secure other limited partners.3.3The amount of the first round of fund raising is RMB 400 million, and Party B commits to invest no less than 60% in the first round. Thefund raised is limited to invest on equipment purchase and installment of HNA Airlines Group's in-flight internet platform project (hereinafterreferred to as the “Project”);4.Party A shall contribute in-flight advertising channels to the Project and the Fund shall provide funds to the Project, and the specific implementationof the Project shall be conducted by the company designated by both parties. Party A and Party B hold the shares of the project company as agreedand collect earnings accordingly.5.Both parties agreed to form a strategic alliance based on this Agreement, and enter project related business negotiation with any third parties as aunion. III.Cooperation ProgressIn order to ensure the smooth progress of cooperation, the two parties agreed to the following schedule, and cooperate actively to promote relevant work:1.Before October 15, 2013, completing the establishment of the joint fund management company;2.Before November 30, 2013, completing the first round of fund raising and subscription;3.Before January 31, 2014, forming an operating company responsible for developing HNA Airlines Group's in-flight internet platform project andpursuant to the agreement stipulating the exclusive operating rights and the corresponding upgrade plan of the Project which Party A entered with theairline company affiliated to HNA Airlines Group, the Fund will invest the fund raised in the first round to the operating company for the purposeof equipment purchasing and upgrade works. The detailed purchase and implementation of the aforesaid equipment will be completed by theoperating company;4.Before February 28, 2014, initiating HNA Airlines Group's in-flight internet platform upgrade and business operations in flights of the airlinecompany affiliated to HNA Airlines Group; 5.In case of Party B fails to accomplish its obligations on schedule as agreed above, and the delay lasts over 30 days; or other form of omission ofParty B results in the failure of the cooperation objective, Party A has the right to terminate this agreement and Party B shall be liable to pay Party A1% of the amount of the first round fund rising target. IV.Confidentiality and External DisclosureEach party shall treat the existence and contents of this agreement as confidential, shall not disclose such information in any way unless is required to bedisclosed in accordance with applicable laws, regulations or government orders. V.Supplementary Provisions1.From the date of effectiveness, both parties shall actively promote all the items agreed in this agreement, and continuously explore new opportunitiesfor cooperation.2.For matters not mentioned herein, the parties hereto may revise or supplement through negotiation.3.This agreement may be supplemented only by mutual consent in writing between both parties. The supplement and this agreement are equally valid.4.This agreement shall become effective as of the date of signature and seal by the authorized representatives of both parties. This agreement is signedand sealed in four (4) original copies, and the parties shall each keep two (2) original copies, with each of equally binding force. Party A: HNA Culture Holding Group Co., Ltd. Authorized representative: /s/ HNA Culture Holding Group Co., Ltd. Party B: AirMedia Group Co., Ltd. Authorized representative: /s/ AirMedia Group Co., Ltd. Date: October 28, 2013 Exhibit 8.1 List of Subsidiaries and Affiliated Entities Wholly-Owned Subsidiaries Place of Incorporation1. Broad Cosmos Enterprises Ltd.British Virgin Islands2. Air Media International Ltd.British Virgin Islands3. Excel Lead International LimitedBritish Virgin Islands4. Dominant City Ltd.British Virgin Islands5. Easy Shop LimitedBritish Virgin Islands6. Air Media (China) LimitedHong Kong7. Glorious Star Investment LimitedHong Kong8. AirMedia Technology (Beijing) Co., Ltd.PRC9. Shenzhen AirMedia Information Technology Co., Ltd.PRC10. Xi’an AirMedia Chuangyi Technology Co., Ltd.PRC Affiliated Entities Consolidated in the Registrant’s Financial Statements Place of Incorporation11. Beijing AirMedia Jinsheng Advertising Co., Ltd.PRC12. Beijing Shengshi Lianhe Advertising Co., Ltd.PRC13. AirMedia Group Co., Ltd.PRC14. Beijing AirMedia UC Advertising Co., Ltd.PRC15. Beijing Yuehang Digital Media Advertising Co., Ltd.PRC16. Wenzhou AirMedia Advertising Co., Ltd.PRC17. AirTV United Media & Culture Co., Ltd.PRC18. Beijing AirMedia Film & TV Culture Co., Ltd.PRC19. Flying Dragon Media Advertising Co., Ltd.PRC20. Beijing GreatView Media Advertising Co., Ltd. (formerly known as Beijing Weimei Shengjing Advertising Co.,Ltd.)PRC21. Beijing Weimei Lianhe Advertising Co., Ltd.PRC23. Hainan Jinhui Guangming Media Advertising Co., Ltd.PRC24. Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. (formerly known as Beijing Youtong Hezhong AdvertisingPRC Media Co., Ltd.) 25. Beijing AirMedia Media Advertising Co., Ltd. (formerly known as Beijing AirMedia Jinshi Advertising Co., Ltd.)PRC26. Tianjin AirMedia Jinshi Advertising Co., Ltd.PRC27. Tianjin AirMedia Advertising Co., Ltd.PRC28. AirMedia City (Beijing) Outdoor Advertising Co., Ltd.PRC29. Beijing Dongding Gongyi Advertising Co., Ltd.PRC30. Guangzhou Meizheng Advertising Co., Ltd.PRC31. Beijing AirMedia Tianyi Advertising Co., Ltd.PRC Exhibit 12.1 Certification by the Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Herman Man Guo, certify that: 1. I have reviewed this annual report on Form 20-F of AirMedia Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for thecompany and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by theannual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internalcontrol over financial reporting. Date: April 25, 2014 By:/s/ Herman Man Guo Name:Herman Man Guo Title:Chief Executive Officer Exhibit 12.2 Certification by the Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Henry Hin-hung Ho, certify that: 1. I have reviewed this annual report on Form 20-F of AirMedia Group Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for thecompany and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by theannual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financialreporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to thecompany’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internalcontrol over financial reporting. Date: April 25, 2014 By:/s/ Henry Hin-hung Ho Name:Henry Hin-hung Ho Title:Chief Financial Officer Exhibit 13.1 Certification by the Principal Executive OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of AirMedia Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2013 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Herman Man Guo, Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 25, 2014 By:/s/ Herman Man Guo Name:Herman Man Guo Title:Chief Executive Officer Exhibit 13.2 Certification by the Principal Financial OfficerPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of AirMedia Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2013 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Henry Hin-hung Ho, Chief Financial Officer of the Company, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: April 25, 2014 By:/s/ Henry Hin-hung Ho Name:Henry Hin-hung Ho Title:Chief Financial Officer Exhibit 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-148352, 333-164219, 333-183448 and 333-187442 on Form S-8 andNo. 333-161067 on Form F-3 of our reports dated April 25, 2014, relating to the consolidated financial statements and financial statement schedule ofAirMedia Group Inc., its subsidiaries, its variable interest entities (the "VIEs") and its VIEs' subsidiaries (collectively, the "Group") as of December 31, 2012and 2013, and for the years ended December 31, 2011, 2012 and 2013, and the effectiveness of the Group’s internal control over financial reporting,appearing in this Annual Report on Form 20-F of AirMedia Group Inc. for the year ended December 31, 2013. /s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP Beijing, the People’s Republic of China April 25, 2014 Exhibit 15.2 [Letterhead of Commerce & Finance Law Offices] April 25, 2014 AirMedia Group Inc.17/F, Sky Plaza, No. 46 DongZhimenwai StreetDongcheng DistrictBeijing, 100027People’s Republic of China Dear Sirs, We consent to the reference to our firm under “Item 3. Key Information—D. Risk Factor” and “Item 4. Information on the Company—B. BusinessOverview—Regulation” in AirMedia Group Inc.’s Annual Report on Form 20-F for the year ended December 31, 2013, which will be filed with the Securitiesand Exchange Commission (the “SEC”). We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report on Form 20-F forthe year ended December 31, 2013. Yours faithfully, /s/ Commerce & Finance Law Offices Commerce & Finance Law Offices Exhibit 15.3 AirMedia Group Inc.17/F, Sky PlazaNo. 46 Dongzhimenwai StreetDongcheng DistrictBeijing, 100027People's Republic of China 25 April 2014 Dear Sirs AirMedia Group Inc. We have acted as legal advisors as to the laws of the Cayman Islands to AirMedia Group Inc., an exempted limited liability company incorporated in theCayman Islands (the "Company"), in connection with the filing by the Company with the United States Securities and Exchange Commission (the "SEC") ofan annual report on Form 20-F for the year ended 31 December 2013 (the "Annual Report"). We hereby consent to the reference of our name under the heading “Item 16G. Corporate Governance” in the Form 20-F. We also consent to the filing with theSEC of this consent letter as an exhibit to the Annual Report. Yours faithfully /s/ Maples and Calder Maples and Calder

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