UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2014
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 Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 100027
The People's Republic of China
(Address of principal executive offices)
Richard Wu
Chief Financial Officer
AirMedia Group Inc.
17/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District, Beijing 10027
The People's Republic of China
Phone:+86 10 8460 8181
Email: richardwu@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 class
Ordinary shares, par value $0.001 per share*
American Depositary Shares, each representing
two ordinary shares
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)
* Not for trading, but only in connection with the listing on the NASDAQ Global Market of American depositary shares, each representing two ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
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 119,942,413 shares outstanding and 7,719,644 shares in treasury stock, par value $0.001 per share, as of December 31, 2014.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
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 to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
No
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 and
large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-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
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.
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).
Item 17
Item 18
Yes
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
AIRMEDIA GROUP INC.
Annual Report on Form 20-F
TABLE OF CONTENTS
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART I
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
PART III
i
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2
2
2
28
45
45
68
76
79
79
80
86
87
88
88
88
90
90
90
91
91
91
91
92
92
92
92
Except as otherwise indicated by the context, in this annual report:
USE OF CERTAIN DEFINED TERMS
•
•
•
•
•
•
•
"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 VIEs and
VIEs' subsidiaries.
Although AirMedia does not directly or indirectly own any equity interests in its consolidated VIEs or their subsidiaries, AirMedia is the primary beneficiary of
and effectively controls these entities through a series of contractual arrangements with these entities and their record owners. We have consolidated the financial
results of these VIEs and their subsidiaries in our consolidated financial statements in accordance with the Generally Accepted Accounting Principles in the
United States, or U.S. GAAP. See "Item 4. Information on the Company—C. Organizational Structure," "Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions" and "Item 3. Key Information—D. Risk Factors" for further information on our contractual arrangements with
these parties.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains statements of a forward-looking nature. These statements are made under the "safe harbor provisions" of the U.S.
Private Securities Litigation Reform Act of 1995.
You can identify these forward-looking statements by words or phrases such as "may", "will", "expect", "anticipate", "aim", "estimate", "intend", "plan",
"believe", "likely to" or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-
looking statements include but are not limited to:
•
•
•
•
•
•
•
•
our growth strategies;
our future business development, results of operations and financial condition;
our plans to expand our travel advertising network into additional locations, airports, airlines and areas outside of air travel;
our plans to expand our advertising network into other out-of-home advertising platforms such as billboards, light boxes and LED screens located at gas
stations, large LED screens at selected airports and in-flight and on-train internet platforms;
competition in the advertising industry and the air and train travel advertising industries in China;
the expected growth in consumer spending, average income levels and advertising spending levels;
the growth of the air and train travel sectors 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 the
documents that we referred and filed as exhibits to this report in their entirety and with the understanding that our actual future results may be materially different
from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
1
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
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 ended
December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated
financial statements, which are included in this annual report. The selected consolidated statements of operations data for the years ended December 31, 2010 and
2011 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, 2010, 2011 and 2012 have been derived from our audited financial statements for the relevant periods, which are not
included in this annual report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.
These selected consolidated financial data below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial
statements and related notes included elsewhere in this annual report and "Item 5. Operating and Financial Review and Prospects" below. Our historical results do
not necessarily indicate results expected for any future periods.
Consolidated Statements of Operations Data:
Revenues:
Air Travel Media Network
Digital frames in airports
Digital TV screens in airports
Digital TV screens on airplanes
Traditional media in airports
Other revenues in air travel
Gas Station Media Network
Other Media
Total revenues
Business tax and other sales tax
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing (including share-based compensation of $2,424, $1,422, $859, nil
and $144 in 2010, 2011, 2012, 2013 and 2014, respectively)
General and administrative (including share-based compensation of $5,547, $3,192,
$2,643, $1,251 and $1,215 in 2010, 2011, 2012, 2013 and 2014, respectively)
Impairment of goodwill
Impairment of intangible assets
Total operating expenses
Loss from operations
Interest income
Gain on remeasurement of fair value of cost and equity method investments (net)
Other income, net
Loss before income taxes
Income tax benefits/ (expenses)
Loss before share of loss on equity method
investments
Share of income/(loss) on equity method investments
Net loss
Less: Net (loss)/ income attributable to noncontrolling
interests
Net loss attributable to AirMedia Group Inc.'s shareholders
Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share—basic
Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share—diluted
Net loss attributable to AirMedia Group Inc.'s shareholders per ADS—basic(1)
Net loss attributable to AirMedia Group Inc.'s shareholders per ADS—diluted(1)
Weighted average shares used in calculating net loss per ordinary share—basic
Weighted average shares used in calculating net loss per ordinary share—diluted
$
$
$
$
$
$
(1) Each ADS represents two ordinary shares.
2010
Years Ended December 31,
2012
(In thousands of U.S. Dollars, except share, per share and per ADS data)
2013
2011
$
113,196
28,905
27,564
48,418
4,063
3,664
10,650
236,460
(5,955)
230,505
(197,908)
32,597
$
126,539
21,937
26,734
73,535
6,416
12,873
9,787
277,821
(7,197)
270,624
(244,470)
26,154
$
137,342
13,731
26,612
83,478
7,346
14,217
10,239
292,965
(6,223)
286,742
(250,606)
36,136
$
152,346
14,110
16,160
64,845
9,183
12,726
7,146
276,516
(4,250)
272,266
(244,673)
27,593
(18,112)
(18,238)
(17,995)
(20,069)
(24,646)
—
(1,000)
(43,758)
(11,161)
694
919
940
(8,608)
735
(7,873)
290
(7,583)
(22,004)
(1,003)
(656)
(41,901)
(15,747)
1,242
—
1,848
(12,657)
(266)
(12,923)
243
(12,680)
(21,842)
(20,611)
(9,583)
(70,031)
(33,895)
1,355
—
2,770
(29,770)
(2,493)
(32,263)
22
(32,241)
(25,723)
—
—
(45,792)
(18,199)
1,213
—
3,822
(13,164)
1,713
(11,451)
(69)
(11,520)
2014
138,527
13,286
16,212
56,723
6,395
11,164
13,564
255,871
(3,390)
252,481
(235,835)
16,646
(25,067)
(26,337)
—
—
(51,404)
(34,758)
1,340
—
2,214
(31,204)
(430)
(31,634)
(192)
(31,826)
(2,666)
(4,917)
(0.04)
(0.04)
(0.07)
(0.07)
131,252,115
131,252,115
$
$
$
$
$
(3,084)
(9,596)
(0.07)
(0.07)
(0.15)
(0.15)
129,537,955
129,537,955
$
$
$
$
$
487
(32,728) $
(0.26) $
(0.26) $
(0.53) $
(0.53) $
124,269,245
124,269,245
(894)
(10,626)
(0.09)
(0.09)
(0.18)
(0.18)
120,386,635
120,386,635
$
$
$
$
$
(6,131)
(25,695)
(0.22)
(0.22)
(0.43)
(0.43)
119,304,773
119,304,773
2
The following table presents a summary of our consolidated balance sheet data as of December 31, 2010, 2011, 2012, 2013 and 2014:
Balance Sheet Data:
Cash
Total assets
Total liabilities
Total AirMedia Group Inc.'s shareholders' equity
Noncontrolling interests
Total equity
Exchange Rate Information
2010
2011
As of December 31,
2012
(In thousands of U.S. Dollars)
2013
2014
$
$
106,505
347,186
70,470
275,668
1,048
276,716
$
$
112,734
361,468
91,410
272,148
(2,090)
270,058
$
$
73,634 $
343,867
104,432
241,876
(2,441)
239,435 $
59,652
402,791
111,448
270,966
20,377
291,343
$
$
67,437
395,597
126,725
248,736
20,136
268,872
Our reporting and financial statements are expressed in the U.S. dollar, which is the reporting and functional currency of our Cayman Islands parent company.
However, substantially all of the revenues and expenses of our consolidated operating subsidiaries and VIEs are denominated in RMB. The conversion 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 certified for 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 to RMB in this annual report
were made at a rate of RMB6.2046 to US$1.00, the noon buying rate in effect as of December 31, 2014. We make no representation that 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 rates stated below, or at all. The Chinese
government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange. On April 17,
2015, the noon buying rate was RMB6.1976 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 provided
solely 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 or
any other information to be provided to you.
3
Period
2010
2011
2012
2013
2014
October
November
December
2015
January
February
March
April (through April 17, 2015)
Noon Buying Rate (1)
Period-End
Average (2)
Low
High
(RMB per US$1.00)
6.6000
6.2939
6.2301
6.0537
6.2046
6.1124
6.1429
6.2046
6.2495
6.2695
6.1990
6.1976
6.7603
6.4475
6.2990
6.1412
6.1704
6.1251
6.1249
6.1886
6.2181
6.2518
6.2343
6.2010
6.8330
6.6364
6.3879
6.2438
6.2591
6.1385
6.1429
6.2256
6.2535
6.2695
6.2741
6.2152
6.6000
6.2939
6.2221
6.0537
6.0402
6.1107
6.1117
6.1490
6.1870
6.2399
6.1955
6.1976
(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 of the other
information included in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case, the trading price of our capital stock could decline, and you may lose all or part of your
investment.
RISKS RELATED TO OUR BUSINESS
We have incurred net losses in the past and may incur losses in the future.
We have incurred net losses for certain periods in the past. We pay concession fees to airports for placing and operating our digital displays, to airlines for placing
our programs on their digital TV screens, to airports and gas stations for placing and operating our advertisements on traditional media platforms such as light
boxes and billboards, and to train administration authorities for Wi-Fi system installation and operation rights. These fees constitute a significant part of our cost
of revenues and are mostly fixed under the concession rights contracts with an escalation clause; payments are usually due three or six months in advance.
However, our revenues may fluctuate significantly from period to period for various reasons. For instance, when new concession rights contracts are signed
during a period, additional concession fees are incurred immediately, but it may 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 locations made 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 of our 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 sufficient experience to
address the risks frequently encountered by early stage companies using new forms of advertising media and entering new and rapidly evolving markets. 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 to evaluate their
effectiveness, on an individual or collective basis, and their ability to address future challenges to our business. Because of our limited operating history, we may
not be able to:
•
preserve our market position in the air travel advertising market in China;
4
• manage our relationships with airports, airlines and railway authorities to retain existing concession rights contracts and obtain new concession rights
contracts on commercially advantageous terms or at all;
retain existing and acquire new advertisers and third party content providers;
secure a sufficient number of low-cost hardware for our advertising business 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, gas station media platforms, outdoor media
platforms and in-flight media platforms;
successfully expand into other non-advertising business, including in-flight and on-train 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 generate sufficient 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 forms of
more established advertising media such as television, print media, Internet and other types of out-of-home advertising. Our success depends on the acceptance of
our air travel advertising network, including our in-flight media platforms, by advertisers and their interest in this medium as a part of their advertising strategies.
In this annual report, the term "advertisers" refer to the ultimate brand-owners whose brands and products are being publicized by our advertisements, including
both advertisers that purchase advertisements directly from us and advertisers that do so through third-party advertising agencies. Our advertisers may elect not to
use our services if they believe that consumers are not receptive to our media network or that our network is not a sufficiently effective advertising medium. If
consumers find our network to be disruptive or intrusive, airports and airplane companies may refuse to allow us to operate our 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 responses to
our programs, in particular track the demographics of air travelers most receptive to air travel advertising, we will not be able to provide sufficient feedback and
data to existing and potential advertisers to help us generate demand and determine pricing. Without improved market research, advertisers may reduce their use
of air travel advertising and instead turn to more traditional forms of advertising that have more established and proven methods of tracking the effectiveness of
advertisements.
Demand for our advertising services and the resulting advertising spending by our advertisers may fluctuate from time to time, and our advertisers may reduce the
money they spend to advertise on our network for any number of reasons. If a substantial number of our advertisers lose interest in advertising on our media
network for these or other reasons or become unwilling to purchase advertising time slots or locations on our network, we will be unable to generate sufficient
revenues and cash flow to operate our business, and our business and results of operations could be materially and adversely affected.
We may be adversely affected by a significant or prolonged economic downturn in the level of consumer spending in the industries and markets served by
our customers.
Our business is affected by the demand for our advertising time slots from our customers, which is determined by the level of business activity and economic
condition of our customers. The level of business activity of our customers is in turn determined by the level of consumer spending in the markets our customers
serve. Therefore, our businesses and earnings are affected by general business and economic conditions in China and abroad.
In 2014, the top three industries that advertise on our network were automobile, high-end food and beverages and domestic electric appliances based on revenues
derived from advertisers in these industries. Any significant or prolonged slowdown or decline of the economy of China, countries like Japan or the overall global
economy will affect consumers' disposable income and consumer spending in these industries, and lead to a decrease in demand for our services. Furthermore, the
campaign launched by the Chinese government to curb waste by officials may also lead to decrease in demand for products of our key customers and in turn
adversely affect demand for our services.
5
We derive a significant portion of our revenues from the provision of air travel advertising services. A contraction in the air travel advertising industry in
China may materially and adversely affect our business and results of operations.
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 travel
advertising services, in particular through the display of advertisements on stand-alone digital frames and mega-size LED screens located in airports. Most of our
traditional advertising media platforms, such as billboards and painted advertisements on gate bridges and light boxes, and other displays, such as logo displays,
are located in or near airports. A contraction in air travel advertising industry in China could have a material adverse effect on our business and results of
operations.
If we are unable to carry out our operations as specified in existing concession rights contracts, retain or renew existing concession rights contracts or to
obtain new concession rights contracts on commercially advantageous terms, we may be unable to maintain or expand our network coverage and our costs
may increase significantly in the future.
Our ability to generate revenues from advertising sales depends largely upon our ability to provide a large air travel advertising network for the display of
advertisements. However, we cannot assure you that we will be able to carry out our operations as specified in our concession rights contracts, and any failure to
perform may damage our relationships with advertisers and advertising agencies and materially and negatively affect our business.
We may also be unable to retain or renew concession rights contracts when they expire. Most of our concession rights contracts to operate advertising media in
airports and on airplanes typically have terms ranging from one to five years, with no automatic renewal provisions. As of December 31, 2014, we had in total
approximately 51 concession rights contracts to be renewed in the next twelve months, with aggregated concession fees of approximately $433 million. We
cannot 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 commercially
advantageous to us. The concession fees that we incur under our concession rights contracts comprise a significant portion of our cost of revenues, but airports
and airlines tend to increase concession fees overtime, so as some of our concession rights contracts terminate, we may experience a significant increase in our
costs of revenues when we renew these contracts. If we cannot pass increased concession costs onto our advertisers through rate increases, our earnings and our
results of operations could be materially and adversely affected. In addition, many of our concession rights contracts to operate in airports and on airplanes
contain provisions granting us certain exclusive concession rights. We cannot assure you that we will be able to retain these exclusivity provisions when we
renew these contracts. If we were to lose exclusivity, our advertisers may decide to advertise with our competitors or otherwise reduce their spending on our
network and we may lose market share.
Certain concession rights contracts allow the airports to terminate the contracts unilaterally without any compensation in certain circumstances. We cannot assure
you that our concession rights contracts will not be terminated, whether with or without justification. In addition, most of our concession rights contracts were
entered into with the advertising companies operated by or advertising agencies hired by airports or airline companies, and not with the airports or airline
companies directly. Although these advertising companies and agents have generally assured us in writing that they have the rights to operate advertising media
in airports or on airplanes and all of them have performed their contractual obligations, we cannot assure you that airports or airline companies will not challenge
or revoke the contractual concession rights granted to us by their advertising companies or agents; if such challenges or revocations occur, our revenues and
results of operations could be materially and adversely affected.
If we fail to perform under existing concession rights contracts, retain existing concession rights contracts or obtain new concession rights contracts on
commercially advantageous terms, we may be unable to maintain or expand our network coverage and our costs may increase significantly in the future.
A significant portion of our revenues has been derived from the five largest airports in China. If any of these airports experiences a material business
disruption or if there are changes in our arrangements with these airports, we may incur substantial losses of revenues.
We derived a significant portion of our total revenues in 2014 from the five largest airports in China: Beijing Capital International Airport, Guangzhou Baiyun
International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport, and Chengdu Shuangliu International Airport. A material business
disruption, major construction or renovation or natural disaster affecting any of the airports in our network could negatively affect our advertising media in such
airport or materially limit where we can place our advertising media.
We expect these abovementioned airports to continue to contribute a significant portion of our revenues in the foreseeable future. If there were a material business
disruption in any of these airports, we would likely lose a substantial amount of revenues.
6
We depend on third-party program producers to provide the non-advertising content that we include in our programs. Failure to obtain high-quality
content on commercially reasonable terms could materially reduce the attractiveness of our network, harm our reputation and materially and adversely affect
our business and results of operations.
The programs on the majority of our digital TV screens include both advertising and non-advertising content. Third-party content providers such as Travel
Channel, Jiangsu TV, Enlight Media, and Youku Tudou and various other television stations and television production companies have contracts with us to
provide the majority of the non-advertising content played over our network, particularly on TV screens on aircrafts. For example, in January 2014, we formed a
strategic partnership with an affiliate of China Radio International to obtain internet TV contents from China International Broadcasting Network to be
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 obtain similar
contents or obtain non-advertising content on satisfactory terms, or at all. In addition, some of the third-party content providers that currently do not charge us for
their content may do so in the future. To make our programs more attractive, we must continue to secure contracts with these and other third-party content
providers. If we fail to obtain a sufficient amount of high-quality content on a cost-effective basis, advertisers may find advertising on our network unattractive
and may not wish to purchase advertising time slots or locations on our network, which would materially and adversely affect our business and results of
operations.
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 and
introducing 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 paid
when payments are received from the advertisers. Our contractual arrangements with these advertising agencies do not provide us with control or oversight over
their everyday business activities, and one or more of these agencies may engage in activities that violate PRC laws and regulations governing the advertising
industry and related non-advertising content, or other laws and regulations. If our agencies violate PRC advertising or other laws or regulations, it could harm our
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 our advertising
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 placed our
digital frames, digital TV screens, light boxes and billboards and the attractiveness of our network content. The fees we charge for advertisements on our network
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 our brand 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 saturated in the
major airports, airlines, gas stations 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.
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, the utilization rates of our
advertising time slots and locations in the five largest airports and on the three largest airlines in China are higher than those in other network airports or on other
airlines, and saturation or oversaturation of digital frames and digital TV screens in these airports or airlines could have a material 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 not succeed,
and our failure to do so could materially reduce the attractiveness of our network and harm our business, reputation and results of operations.
Our air travel advertising network primarily consists of standard digital frames, digital TV screens, and traditional media. Our growth strategy includes
broadening our service offerings by continuing to increase our digital media network coverage and expanding our traditional media to become a comprehensive
air travel advertising provider in China.
7
In addition, we intend to build a nationwide advertising platform of mega-size LEDs in selected airports in China, which may require capital expenditures on
equipment and installations if we choose to purchase new LEDs with cash prepayments. As part of our strategic efforts to become a one-stop provider for
advertising, we may continue to expand in the traditional media area as opportunities present themselves and we could also incur significant costs in installing
new 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 TV screens
and mega-size LEDs. By entering and expanding into traditional advertising media platforms inside airports, we may face competition from other companies that
are already in these areas. We also have limited experience working in these areas. It is uncertain how these businesses will perform. Our failure to expand our air
travel advertising network to introduce new platforms and into new areas could materially reduce the attractiveness of our network and materially 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 prospects may be
materially and adversely affected.
Our growth strategy also includes expansion into other media outside of airports, such as gas station LED sreens and other out-of-home media type.
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 to
ramp up revenues from these businesses. However, under all of our existing concession rights agreements regarding our gas station and outdoor media displays,
we are required to pay periodic, fixed concession fees for the media platforms regardless of revenues. We may also incur significant costs in maintaining and
upgrading our gas station and outdoor traditional media platforms such as billboards, which are more vulnerable to weather and other accidental damages than
indoor displays.
Although we are using best efforts to comply with all relevant laws and regulations and to obtain all necessary certificates, registrations and approvals for the
advertising media platforms we operate, including actively consulting with every relevant local government authority in every city in which we operate to
ascertain the legal requirements for our business operations in the area and continually monitoring local government announcements for any relevant updates in
such requirements, due to the complexity of local laws and regulations across China governing outdoor media advertising platforms, there can be no assurance
that we will be able to obtain or have all of the necessary approvals which we do not currently hold in a timely manner, or at all. Any delay or failure in obtaining
the necessary approvals may materially and adversely affect our expansion into the business of outdoor media advertising.
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 changes in
the operational model and structure of our gas station advertising business in the second half of 2011 with the intention of accelerating growth and profitability.
We may experience significant obstacles and challenges as we move forward with our strategy.
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 gas station
media advertising and outdoor media advertising markets. If we cannot successfully address the foregoing new challenges and compete effectively against 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 of operations 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 deemed to be
required, we may be subject to administrative sanctions, including the discontinuation of our advertisements at airports where the required advertising
registration is not obtained.
Applicable PRC regulations promulgated by the State Administration for Industry and Commerce, or the SAIC, specify that advertisements placed inside or
outside 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 became effective
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 advertising income, (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 advertisements within the required
timeframe, the relevant local SAIC office may require us to discontinue the relevant advertisements where the required advertising registration has not been
obtained. We understand that these Outdoor Regulations apply to our operations, and intend to register with the relevant local SAIC offices if requested by the
local SAIC offices or any specific airport authorities; so far we have registered and received outdoor advertising licenses for our advertisements in Beijing Capital
International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport, Shenyang Taoxian International Airport and Changchun Longjia
International Airport, and our registrations have been approved by the SAIC offices in four other cities and provinces where we have operations for our
advertisements in the airports of those regions. However, we cannot assure you that we will obtain all applicable registration certificates in compliance with the
outdoor advertisement provisions due to the uncertainty in the implementation and enforcement of the regulations promulgated by the SAIC. If we are found to be
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 the payment
of administrative fines.
8
If we fail to obtain approvals for the inclusion of non-advertising content in our programs broadcast in digital TV screens on airplanes, we may be
unable to continue to include such non-advertising content in our programs, which may cause our revenues to decline and our business and prospects 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 Administration of
Radio, Film and Television, or the SARFT, issued a circular which stated that 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,
hospitals and other outdoor public systems must be approved by the SARFT.
The relevant authority in China has not promulgated any implementation rules on the procedure of applying for the requisite approval pursuant to this circular.
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 in compliance 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 broadcast network TV programs to air
travelers in China. According to the terms of the cooperation arrangement with CRION, during the cooperation period from 2014 to 2024, CRION shall obtain
and, from time to time, be responsible for obtaining any approval, license and consent regarding the regulation of broadcasting and television from relevant
authorities. 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 and advertisers may find our network less attractive and be unwilling
to purchase advertising time slots and locations on our network, which may in turn cause our 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 adversely affected.
We engage third-party advertising agencies to help obtain advertisers from time to time. We do not have long-term or exclusive agreements with these advertising
agencies, including our key third-party advertising agencies, and cannot assure you that we will continue to maintain stable business relations with them.
Furthermore, the fees we pay to these third-party advertising agencies constitute a significant portion of our cost of revenues. If we fail to retain key third-party
advertising agencies or to attract additional advertising agencies, we may not be able to retain existing advertisers or attract new advertisers or advertising
agencies, or the fees we pay them may have to significantly increase. If any of the above happens, our business and results of operations could be materially and
adversely affected.
A limited number of advertisers have historically accounted for a significant portion of our revenues and this dependence may reoccur in the future,
which would make us more vulnerable to the loss of major advertisers or delays in payments from these advertisers.
A limited number of advertisers historically accounted for a significant portion of our revenues. Our top five advertisers collectively accounted for approximately
32.7%, 26.0% and 28.8% of our total revenues in the years ended December 31, 2012, 2013 and 2014, respectively. Our largest advertisers have 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 of advertisers 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 to
purchase additional advertising time on our network, or cancels some or all of its purchase orders with us, our revenues could decline and our operating results
could be adversely affected. The dependence on a small number of advertisers could leave us more vulnerable to payment delays from these advertisers. We are
required under some of our concession rights contracts to make prepayments and although we do receive some prepayments from advertisers, there is typically a
lag between the time of our prepayment of concession fees and the time that we receive payments from our advertisers. As our business expands and revenues
grow, we have experienced and may continue to experience an increase in our accounts receivable. If any of our major advertisers are significantly delinquent
with its payments, our liquidity and financial conditions may be materially and adversely affected.
9
If we are unable to adapt to changing advertising trends and the technology needs of advertisers and consumers, we will not be able to compete effectively
and we will be unable to increase or maintain our revenues, which may materially and adversely affect our business and results of operations.
The market for air travel advertising requires us to continuously identify new advertising trends and the technological needs of both advertisers and consumers,
which may require us to develop new formats, features and enhancements for our advertising network. We currently play advertisements on digital frames
through wireless networks and on digital TV screens on our 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 also fail to respond to changing technology needs altogether.
We must be able to quickly and cost-effectively expand into additional advertising media and platforms beyond digital frames and digital TV screens if
advertisers find these additional media and platforms to be more attractive and cost-effective. In addition, as the advertising industry is highly competitive and
fragmented 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 needs of
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 advertising
network may decrease and we may not be able to compete effectively or attract advertisers, which may materially and adversely affect our business and results of
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. We also
compete for overall advertising spending with other alternative advertising media, such as Internet, street facilities, billboard and public transport advertising, and
with traditional advertising media such as newspapers, television, magazines and radio. While we enjoy a large share of the market of the digital frames and
digital TV screens on airplanes, we compete and will continue to compete with other media advertising platforms for which we do not have exclusivity, including
billboards and light boxes. We may also face competition from new entrants into air travel advertising in the future.
Significant competition could reduce our operating margins and profitability and lead to a loss of market share. Some of our existing and potential competitors
may have competitive advantages such as significantly greater brand recognition, a longer history in the out-of-home advertising industry and financial,
marketing or other resources, and may be able to mimic and adopt our business model. In addition, several of our competitors have significantly larger advertising
networks than we do, which gives them an ability to reach a larger number of overall potential consumers and which may make them less susceptible than we are
to downturns in particular advertising sectors, such as air travel. Moreover, significant competition will provide advertisers with a wider range of media and
advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins and profits focus. We cannot assure you that we will be
able to successfully compete against new or existing competitors, and failure to compete may reduce for existing market share and profits.
Our results of operations are subject to fluctuations in the demand for air travel. A decrease in the demand for air travel may make it difficult for us to
sell our advertising time slots and locations.
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 to
holiday 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 economic growth
and decrease in times of economic slowdown. A decrease in air passengers in China could lead to lower advertiser spending on our air travel advertising
network.
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Plane crashes or other accidents. An aircraft crash or other accident, such as those in 2014 involving certain Asian-based airlines, could create a public
perception that air travel is not safe or reliable, which could result in air travelers being reluctant to fly. Significant aircraft delays due to capacity
constraints, weather conditions or mechanical problems could also reduce demand for air travel, especially for shorter domestic flights.
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 sell our
advertising time slots or locations or charge premium prices.
10
If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our expansion strategies or meet 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, systems
and resources. We must continue to expand our operations to meet the demands of advertisers for broader and more diverse network coverage. To accommodate
our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the
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 and
other locations where we have concession rights to displays and third-party non-advertising content providers. We must add sales and marketing offices and
personnel 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 to
manage our growth effectively, and we may not be able to take advantage of market opportunities, execute our expansion strategies or meet the demands of our
advertisers.
Past and future acquisitions may have an adverse effect on our ability to manage our business.
We have acquired and may continue to acquire businesses, technologies, services or products which are complementary to our core air travel advertising network
business in the future. Past and future acquisitions may expose us to potential risks, including risks associated with:
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the integration of new operations, services and personnel;
unforeseen or hidden liabilities;
the diversion of resources from our existing business and technology; or
failure to achieve the intended objectives of our acquisitions.
Any of these potential risks could have a material and adverse effect on our ability to manage our business, our revenues and net income.
We may need to raise additional debt or sell additional equity securities to make future acquisitions. The raising of additional debt funding by us, if required,
would increase debt service obligations and may lead to additional operating and financing covenants, or liens on our assets, that would restrict our operations.
The sale of additional equity securities could cause additional dilution to our shareholders.
Our acquisition strategy also depends on our ability to obtain necessary government approvals. See "– Risks Related to Doing Business in China – The M&A
Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions."
Our quarterly and annual operating results are difficult to predict and have fluctuated and may continue to fluctuate significantly from period to period.
Our quarterly and annual operating results are difficult to predict and have fluctuated and may continue to fluctuate significantly from period to period based on
the seasonality of air travel, consumer spending and corresponding advertising trends in China. Air travel and advertising spending in China generally tend to
increase during major national holidays in October and tend to decrease during the first quarter of each year. Air travel and advertising spending in China is also
affected by certain special events and related government measures. As a result, you may not be able to rely on period-to-period comparisons of our operating
results as an indication of our future performance. Other factors that may cause our operating results to fluctuate include a deterioration of economic conditions in
China and potential changes to the regulation of the advertising industry in China. If our revenues for a particular quarter are lower than we expect, we may be
unable to reduce our operating costs and expenses for that quarter by a corresponding amount, and it would harm our operating results for that quarter relative to
our operating results for other quarters.
11
Our business depends substantially on the continuing efforts of our senior executives and other key employees, and our business may be severely
disrupted if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and other key employees. We rely on their industry expertise, their
experience in business operations and sales and marketing, and their working relationships with our advertisers, airports and airlines, and relevant government
authorities.
If one or more of our senior executives and other key employees were unable or unwilling to continue in their present positions, we might not be able to replace
them easily or at all. If any of our senior executives and other key employees joins a competitor or forms a competing company, we may lose advertisers,
suppliers, key professionals and staff members. Each of our executive officers and other key employees has entered into an employment agreement with us which
contains non-competition provisions. However, if any dispute arises between any of our executive officers and other key employees and us, we cannot assure you
the extent to which any of these agreements could be enforced in China, where most of these executive officers and other key employees reside, in light of the
uncertainties with China's legal system. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could limit the
legal protections available to us or result in substantial costs and the diversion of resources and management attention."
Failure to maintain an effective system of internal control over financial reporting and effective disclosure controls and procedures could have a
material and adverse effect on the trading price of our ADSs.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-
Oxley Act, adopted rules requiring every public company to include a management report on such company's internal control over financial reporting in its annual
report, which must also contain management's assessment of the effectiveness of the company's internal control over financial reporting. In addition, an
independent registered public accounting firm must attest to the effectiveness of the company's internal control over financial reporting. SEC rules also require
every public company to include a management report containing management's assessment of the effectiveness of such company's disclosure controls and
procedures in its annual report.
Our management has concluded that our internal control over financial reporting and disclosure controls and procedures were effective as of December 31, 2014.
Our independent registered public accounting firm has issued an audit report stating that we maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2014. However, if we fail to maintain effective internal control over financial reporting in the future, our management 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 turn could result in
lawsuits being filed against us by our shareholders, otherwise harm our reputation or negatively impact the trading price of our ADSs. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with
Section 404 of the Sarbanes-Oxley Act and other requirements of the Sarbanes-Oxley Act.
We may need additional capital which, if obtained, could result in dilution or significant debt service obligations. We may not be able to obtain additional
capital on commercially reasonable terms, which could adversely affect our liquidity and financial position.
We may require additional cash resources due to changed business conditions or other future developments. If our current resources are insufficient to satisfy our
cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of convertible debt securities or additional equity
securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our operations and liquidity.
In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
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investors' perception of, and demand for, securities of alternative advertising media companies;
conditions of the market;
our future results of operations, financial condition and cash flows; and
PRC governmental regulation of foreign investment in advertising services companies in China.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on favorable terms
could have a material adverse effect on our liquidity and financial condition.
12
Compliance with PRC advertising laws and regulations may be difficult and could be costly, and failure to comply could subject us to government
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 for
compliance with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease
dissemination of the offending advertisements and orders to publish advertisements correcting the misleading information. In case of serious violations, the PRC
authorities may revoke our license for advertising business operations. In general, the advertisements shown on our network have previously been broadcast over
public television networks and have been subjected to internal review and verification by such networks, but we are still required to independently review and
verify these advertisements for content compliance before displaying them. In addition, if a special government review is required for certain product
advertisements before they are shown to the public, we are required to confirm that such review has been performed and approval obtained. For advertising
content related to certain types of products and services, such as food products, alcohol, cosmetics, pharmaceuticals and medical procedures, we are required to
confirm that the advertisers have obtained requisite government approvals, including review of operating qualifications, proof of quality inspection of the
advertised products, government pre-approval of the contents of the advertisement and filing with local authorities.
We endeavor to comply with such requirements through means such as requesting relevant documents from the advertisers. However, we cannot assure you that
each advertisement that an advertiser provides to us and which we include in our network programs is in full compliance with all relevant PRC advertising laws
and regulations or that such supporting documentation and government approvals provided to us are complete. Although we employ qualified advertising
inspectors who are trained to review advertising content for compliance with relevant PRC laws and regulations, the content standards in the PRC are less certain
and less clear than those in more developed countries such as the United States and we cannot assure you that we will always be able to properly review all
advertising content to comply with the PRC standards imposed on us with certainty.
We may be subject to, and may expend significant resources in defending against government actions and civil suits based on the content we provide
through our advertising network.
Because of the nature and content of the information displayed on our network, civil claims may be filed against us for fraud, defamation, subversion, negligence,
copyright or trademark infringement or other violations. Offensive and objectionable content and legal standards for defamation and fraud in China are less
defined than in other more developed countries and we may not be able to properly screen out unlawful content. If consumers find the content displayed on our
network to be offensive, airports, airlines or gas stations where we have our media may seek to hold us responsible for any consumer claims or may terminate
their relationships with us.
In addition, if the security of our content management system is breached and unauthorized images, text or audio sounds are displayed on our network, viewers or
the PRC government may find these images, text or audio sounds to be offensive, which may subject us to civil liability or government censure despite our efforts
to ensure the security of our content management system. Any such event may also damage our reputation. If our advertising viewers do not believe our content is
reliable or accurate, our business model may become less appealing to viewers in China and our advertisers may be less willing to place advertisements on our
network.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely
against us, may materially and adversely affect our business.
Our commercial success depends to a large extent on our ability to operate without infringing the intellectual property rights of third parties. We cannot assure
you that our displays or other aspects of our business do not or will not infringe patents, copyrights or other intellectual property rights held by third parties. We
may become subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we
are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, incur licensing fees or be forced to
develop alternatives. In addition, we may incur substantial expenses and diversion of management time in defending against these third-party infringement
claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, which may materially and
adversely affect our business.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemic. Any such occurrences could cause severe
disruption to our daily operations, and may even require a temporary closure of our facilities. In August 2014, a strong earthquake hit part of Yunnan province in
south, and resulted in significant casualties and property damage. While we did not suffer any loss or experience any significant increase in cost resulting from
these earthquakes, if a similar disaster were to occur in the future affecting Beijing or another city where we have major operations in China, our operations could
be materially and adversely affected due to loss of personnel and damages to property. In addition, any outbreak of avian flu, severe acute respiratory syndrome
(SARS), influenza A (H1N1), H7N9, Ebola, or other adverse public health epidemic in China may have a material and adverse effect on our business operations.
These occurrences could require the temporary closure of our offices or prevent our staff from traveling to our customers’ offices to provide services. Such
closures could severely disrupt our business operations and adversely affect our results of operations. These occurrences could reduce air and train travelling in
China and adversely affect the results of operations of our related business.
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RISKS RELATED TO OUR CORPORATE STRUCTURE
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC governmental
restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our business could be materially and adversely
affected.
Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China: AirMedia Group Co., Ltd, or AM
Advertising, Beijing Shengshi Lianhe Advertising Co., Ltd., or Shengshi Lianhe, Beijing AirMedia Jiaming Advertising Co., Ltd. (formerly known as Beijing
AirMedia UC Advertising Co., Ltd.), or Jiaming Advertising, and Beijing Yuehang Digital Media Advertising Co., Ltd., or AM Yuehang. Although the Foreign-
invested Advertising Enterprise Management Regulations, or the Foreign-invested Advertising Regulations, which became effective on October 1, 2008,
currently permit 100% foreign ownership of companies that provide advertising services, subject to approval by relevant PRC government authorities, these
regulations also require any foreign entities that establish a wholly owned advertising company must have at least three years of direct operations in the
advertising industry outside of China. In addition, the Foreign Investment Industrial Guidance Catalogue (revised in 2015), which became effective on April 10,
2015, stated that television program production and operation companies fall into the category of a prohibited foreign investment industry. We believe that these
regulations apply to our business and are therefore carrying out the portions of our business that involve the production of non-advertising content through our
VIEs. Our wholly owned Hong Kong subsidiary AM China, the 100% shareholder of AM Technology, Shenzhen AM and Xi'an AM, has been operating an
advertising business in Hong Kong since 2008, and thus it is allowed to directly invest in advertising business in China. In December 2014, we transferred 100%
equity interest in Shenzhen AM to AM China to provide advertising services in China directly. We are in the process of revising the scope of business of
Shenzhen AM to include advertising. Once the business scope of Shenzhen AM is revised, we intend to gradually shift our advertising business to Shenzhen AM,
and thus to gradually reduce our reliance on the current VIE structure. Our advertising business is currently primarily 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 VIEs pursuant to which we, through AM Technology,
provide technical support and consulting services to these entities. We also have agreements with our VIEs and each of their shareholders that provide us with the
substantial ability to control these entities. In April 2015, however, we entered into an agreement with Shenzhen Liantronics, Co., Ltd., or Liantronics, an
unrelated third party to transfer 5% interest of AM Advertising to Liantronics, and we cannot guarantee you that Liantronics, as a third party unrelated to us,
would enter into similar VIE arrangements with us. For a description of these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements."
In the opinion of Commerce & Finance Law Offices, our PRC counsel, the VIE arrangements between AM Advertising and our consolidated VIEs are in
compliance with PRC law and are valid, binding and legally enforceable. However, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements and if the shareholders of the VIEs were to reduce their interest in us, their interests may diverge from ours and that may potentially
increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do
so.
Our ability to control the VIEs also depends on the power of attorney AM Technology has to vote on all matters requiring shareholder approval in the VIEs. As
noted above, we believe this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the PRC government were to find that the VIE arrangements do not comply with PRC governmental restrictions on foreign investment in the
advertising industry and in the operating of non-advertising content, or if the legal structure and contractual arrangements were found to be in violation of any
other existing PRC laws and regulations, the PRC government could:
•
•
•
•
revoke the business and operating licenses of the our PRC subsidiaries and affiliates;
discontinue or restrict the our PRC subsidiaries' and affiliates' operations;
impose conditions or requirements with which we or our PRC subsidiaries and affiliates may not be able to comply; or
require us or our PRC subsidiaries and affiliates to restructure the relevant ownership structure or operations.
While we do not believe that any penalties imposed or actions taken by the PRC government would result in the liquidation of us, AM Technology, or the VIEs,
the imposition of any of these penalties may result in a material and adverse effect on our ability to conduct the our business. In addition, if the imposition of any
of these penalties causes us to lose the power to direct the activities of the VIEs (and VIEs' subsidiaries) that most significantly impact the VIEs (and VIEs'
subsidiaries) economic performance or the right to receive substantially all of the benefits from the VIEs (and VIEs' subsidiaries), we would no longer be able to
consolidate the VIEs (and VIEs' subsidiaries).
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In January 2015, the Ministry of Commerce of the PRC, or the MOFCOM, released for public comments a proposed PRC law regarding foreign invested
enterprises, or the Draft FIE Law, which includes VIEs within the scope of entities that could be considered to be foreign invested enterprises, or FIEs, and may
be subject to restrictions under existing PRC law on foreign investment in certain categories of industries. Specifically, the Draft FIE Law introduces the concept
of “actual control” for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect equity ownership, the Draft FIE
Law includes control through contractual arrangements within the definition of “actual control.” If the Draft FIE Law is passed by the People’s Congress of the
PRC and goes into effect in its current form, these provisions regarding control through contractual arrangements could be construed to reach our VIE
arrangements, and our VIEs might be found as controlled by foreign investors. As a result, our VIEs could become explicitly subject to the current restrictions on
foreign investment in certain categories of industry. The Draft FIE Law includes provisions that would exempt from the definition of FIEs certain entities where
the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The Draft FIE Law is silent as to what type
of enforcement action might be taken against existing VIEs that operate in restricted or prohibited industries and are not controlled by entities organized under
PRC law or individuals who are PRC citizens. If the contractual arrangements establishing our VIE structure are found to be in violation of any existing law and
regulations or future PRC laws and regulations or under the Draft FIE Law if it becomes effective, the relevant PRC government authorities will have broad
discretion in dealing with such violation, including, without limitation, levying fines, confiscating our income or the income of our affiliated Chinese entities,
revoking our business licenses or the business licenses of our affiliated Chinese entities, requiring us and our affiliated Chinese entities to restructure our
ownership structure or operations and requiring us or our affiliated Chinese entities to discontinue any portion or all of our value-added telecommunications, air-
ticketing, travel agency or advertising businesses. Any of these actions could cause significant disruption to our business operations, and have a severe adverse
impact on our cash flows, financial position and operating performance. If the imposing of these penalties causes us to lose our rights to direct the activities of and
receive economic benefits from our VIEs, which in turn may restrict our ability to consolidate and reflect in our financial statements the financial position and
results of operations of our VIEs.
Because some of the shareholders of our VIEs in China are our directors and officers, their fiduciary duties to us may conflict with their respective roles
in the VIEs, and their interest may not be aligned with the interests of our unaffiliated public security holders. If any of the shareholders of our VIEs fails to
act in the best interests of our company or our shareholders, our business and results of operations may be materially and adversely affected.
Certain of our directors and officers are shareholders in the VIEs, AM Advertising, Shengshi Lianhe, Jiaming Advertising, and AM Yuehang. Mr. Herman Man
Guo, our chairman and chief executive officer, in addition to holding 16.00% in our company, also directly and indirectly holds approximately 76.11% of AM
Advertising, 79.86% of Shengshi Lianhe and 76.20% of Jiaming Advertising. Mr. Qing Xu, our director and executive president, in addition to holding 2.16% of
our company, also directly and indirectly holds approximately 11.20% of AM Advertising, 11.94% of Shengshi Lianhe and 11.27% of Jiaming Advertising. Mr.
James Zhonghua Feng, our director and president, in addition to holding 3.85% of our company, also holds 80% of AM Yuehang. In addition, Mr. Guo and Mr.
Xu are each a director of Jiaming Advertising, Shengshi Lianhe and AM Advertising, Mr. Guo is the legal representative of each of AM Advertising, Shengshi
Lianhe and Jiaming Advertising and Mr. Feng is the sole director and legal representative of AM Yuehang. For these directors and officers, their fiduciary duties
toward our company under Cayman law—to act honestly, in good faith and with a view to our best interests—may conflict with their roles in the VIEs, as what is
in the best interest of the VIEs may not be in the best interests of our company or the unaffiliated public shareholders of our company.
Currently, we do not have agreements in place that solely target to resolve conflicts of interest arising between our company and the VIEs and their operations. In
addition, we have not appointed a separate fiduciary—one without potential conflicts of interest—to serve as the fiduciary of the public unaffiliated security
holders of our company. Although our independent directors or disinterested officers may take measures to prevent the parties with dual roles from making
decisions that may favor themselves as shareholders of the VIEs, we cannot assure you that these measures would be effective in all instances. If the parties with
dual roles do find ways to make and carry out decisions on our behalf that are detrimental to our interest, our business and results of operations may be materially
and adversely affected.
Certain provisions in the contractual agreements between AM Technology and our VIEs do impose limits on the rights of the shareholders of the VIEs. For
example, each of the shareholders of the VIEs has signed an irrevocable power of attorney authorizing the person designated by AM Technology to exercise its
rights as shareholder, including the voting rights, the right to enter into legal documents and the right to transfer its equity interest in the VIEs. In April 2015,
however, we entered into an agreement with Liantronics, an unrelated third party to transfer 5% interest of AM Advertising to Liantronics, and we cannot
guarantee you that Liantronics, as a third party unrelated to us, would enter into similar VIE arrangements with us. However, we cannot assure you that when
conflicts of interest arise that each of our VIEs and its respective shareholders will act completely in our interests or that conflicts of interests will be resolved in
our favor, or that the above contractual provisions would be sufficient protection for us in the event that shareholders of the VIEs fail to perform under their
contracts with AM Technology. In any such event, we would have to rely on legal remedies under PRC law, which may not be effective. See "—We rely on
contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of our China operations, which may not be
as effective as direct ownership in providing operational control" and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Contractual Arrangements.”
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We rely on contractual arrangements with our consolidated variable interest entities and their shareholders for a substantial portion of our China
operations, which may not be as effective as direct ownership in providing operational control.
We rely on contractual arrangements with AM Advertising, Shengshi Lianhe, Jiaming Advertising and AM Yuehang to operate our advertising business. For a
description of these arrangements, see “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Contractual Arrangements.” These contractual arrangements may not be as effective as direct ownership in
providing control over our VIEs. Under these contractual arrangements, if our VIEs or their shareholders fail to perform their respective obligations, we may have
to incur substantial costs and resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or
injunctive relief and claiming damages, and we may not be successful.
Many of these contractual arrangements are governed by PRC law and provide for disputes to be resolved through arbitration or litigation in the PRC. The legal
environment in the PRC is not as developed as in other jurisdictions such as the United States. As a result, uncertainties in the PRC legal system could limit our
ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our VIEs, and our ability to conduct our business
may be negatively affected.
We have not registered the pledge of equity interest by certain shareholder of our consolidated affiliated entities with the relevant authority, and we may
not be able to enforce the equity pledge against any third parties who acquire the equity interests in good faith in the relevant consolidated affiliated entities
before the pledge is registered.
The shareholders of our VIEs, each a consolidated affiliated entity of ours, have pledged all of their equity interests, including the right to receive declared
dividends, in the relevant VIEs to AM Technology, our wholly-owned subsidiary. In April 2015, however, we entered into an agreement with Liantronics, an
unrelated third party to transfer 5% interest of AM Advertising. We cannot guarantee you that Liantronics, as a third party unrelated to us, would enter into
similar VIE arrangements with us. An equity pledge agreement becomes effective among the parties upon execution, but according to the PRC Property Rights
Law, an equity pledge is not perfected as a security property right unless it is registered with the relevant local administration for industry and commerce. We
have registered all executed pledges except for two pledges entered into by Mr. Xiaoya Zhang, a nominee shareholder of Shengshi Lianhe and AM Advertising.
We are in the process of assembling the necessary documents for application to the relevant PRC authorities 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 yet been completed so far, the pledges, as property rights, have
not yet become effective under the PRC Property Rights Law. Before the registration procedures are completed, we cannot assure you that the effectiveness of
these pledges will be recognized by PRC courts if disputes arise with respect to certain pledged equity interests or that AM Technology's interests as pledgee will
prevail over those of third parties. AM Technology may not be able to successfully enforce these pledges against any third parties who have acquired property
right interests in good faith in the equity interests in Shengshi Lianhe or AM Advertising. As a result, if Shengshi Lianhe or AM Advertising breaches their
respective obligations under the various agreements described above, and there are third parties who have acquired equity interests in good faith, AM Technology
would need to resort to legal proceedings to enforce its contractual rights under the equity pledge agreements, or the underlying agreements secured by the
pledges. We do not have agreements that pledge the assets of the VIEs and their respective subsidiaries for the benefit of us or our wholly owned subsidiaries.
Contractual arrangements we have entered into among our subsidiaries and variable interest entities may be subject to scrutiny by the PRC tax
authorities and a finding that we owe additional taxes could substantially increase our taxes owed and reduce our net income and the value of your
investment.
Under PRC law, arrangements and transactions among related parties may be audited or challenged by the PRC tax authorities. If any transactions we have
entered into among AM Technology and our VIEs are found not to be on an arm's length basis, or to result in an unreasonable reduction in tax under PRC law, the
PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective PRC entities and assess late payment interest and
penalties. A finding by the PRC tax authorities that we are ineligible for the tax savings we achieved would substantially increase our taxes owed and reduce our
net income and the value of your investment.
We may rely principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiaries to fund any cash and financing
requirements we may have, and any limitation on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our
ability to conduct our business.
We are a holding company, and we may rely principally on dividends and other distributions on equity paid by AM Technology, Shenzhen AM and Xi'an AM for
our cash requirements, including the funds necessary to service any debt we may incur. If AM Technology, Shenzhen AM or Xi'an AM incurs debt on its own
behalf in the future, the instruments governing the debt may restrict the ability of these entities to pay dividends or make other distributions to us. In addition, the
PRC tax authorities may require us to adjust our taxable income under the contractual arrangements AM Technology currently has in place with our VIEs in a
manner that would materially and adversely affect AM Technology's ability to pay dividends and other distributions to us.
16
Furthermore, relevant PRC laws and regulations permit payments of dividends by AM Technology, Shenzhen AM and Xi'an AM only out of their accumulated
profits, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, AM Technology, Shenzhen AM
and Xi'an AM are also required to set aside at least 10% of after-tax income based on PRC accounting standards each year to their general reserves until the
accumulative amount of such reserves reaches 50% of their respective registered capital.
The registered capital of AM Technology, Shenzhen AM and Xi'an AM is $45.0 million, $96.4 million (approximately RMB700 million) and $50.0 million,
respectively. Xi'an AM has made the applicable annual appropriations required under PRC law. AM Technology and Shenzhen AM are not currently required to
fund any statutory surplus reserve because AM Technology incurred loss this year and Shenzhen AM still has accumulated losses. Any direct or indirect
limitation on the ability of our PRC subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make
investments or acquisitions at the holding company level, pay dividends or otherwise fund and conduct our business.
Although none of AM Technology, Shenzhen AM or Xi'an AM has any present plan to pay any cash dividends to us in the foreseeable future, any limitation on
the ability of AM Technology, Shenzhen AM or Xi'an AM to pay dividends or make other distributions to us could materially and adversely limit our ability to
grow, make investments or acquisitions that could be beneficial to our business, or otherwise fund and conduct our business.
RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of
China, which could reduce the demand for our services and have a material adverse effect on our competitive position.
Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business,
financial condition, results of operations and prospects are affected significantly by China's economic, political and legal developments. The Chinese economy
differs from the economies of most developed countries in many respects, including the level of government involvement and the level and growth rate of
economic development.
While the Chinese economy has experienced significant growth in the past decades, growth has been uneven both geographically and among various sectors of
the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these
measures may benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of political or economic
reforms or the effects such measures may have on our business, financial position or results of operations. Any adverse change in the political or economic
conditions in China, including changes in the policies of the PRC government or in laws and regulations in China, could have a material adverse effect on the
overall economic growth of China and in the air travel advertising industry. Such developments could have a material adverse effect on our business, lead to a
reduction in demand for our services and materially and adversely affect our competitive position.
Uncertainties with respect to the PRC legal system could limit the legal protections available to us or result in substantial costs and the diversion of
resources and management attention.
We conduct our business primarily through AM Technology, Shenzhen AM and Xi'an AM, which are subject to PRC laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to wholly-foreign owned companies. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential value. PRC legislation and regulations afford significant protections to various forms of foreign
investments in China, but since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many
laws, regulations and rules are not always uniform and the enforcement of these laws, regulations and rules involve uncertainties, which may limit the legal
protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources and management
attention.
Fluctuations in the value of the Renminbi may have a material adverse effect on your investment.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions
and China's foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollar, is based on rates set by the People'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 narrow band. As a consequence,
the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC
government has allowed the Renminbi to appreciate slowly against the U.S. dollar again, though there have been periods recently when the U.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 rate between the
Renminbi and the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its
currency policy, which could result in further appreciation in the value of the Renminbi against the U.S. dollar.
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The reporting and functional currency of our Cayman Islands parent company is the U.S. dollar. However, substantially all of the revenues and expenses of our
consolidated operating subsidiaries and affiliate entities are denominated in Renminbi. Substantially all of our sales contracts are denominated in Renminbi and
substantially all of our costs and expenses are denominated in Renminbi. To the extent that we need to convert U.S. dollars into Renminbi for our operations,
depreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of dividend distribution or for other business purposes, depreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to us. Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue which will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited so that we may not be able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result,
fluctuations in exchange rates may have a material adverse effect on your investment.
Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively.
Substantially all of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet our
foreign currency obligations, including, among others, payments of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China's existing
foreign exchange regulations, AM Technology, Shenzhen AM and Xi'an AM are able to pay dividends in foreign currencies, without prior approval from the
State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC
government will not take measures in the future to restrict access to foreign currencies for current account transactions.
Foreign exchange transactions by our subsidiaries and VIEs in China under capital accounts continue to be subject to significant foreign exchange controls and
require the approval of, or registration with, PRC governmental authorities. In particular, if we or other foreign lenders make foreign currency loans to our
subsidiaries or VIEs in China, these loans must be registered with the SAFE, and if we finance them by means of additional capital contributions, these capital
contributions must be approved by or registered with certain government authorities including the SAFE, the Ministry of Commerce or their local counterparts.
These limitations could affect the ability of our subsidiaries in China to exchange the foreign currencies obtained through debt or equity financing, and could
affect our business and financial condition.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and
Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of
foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted
from foreign currency registered capital of a foreign-invested enterprise may only be used within the purpose within the business scope approved by the
applicable government authority and unless otherwise provided by law, such RMB capital may not be used for equity investments within the PRC. In addition,
SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The
use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of
such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On November 16, 2011, SAFE promulgated
the Circular of the State Administration of Foreign Exchange on Issues Relating to Further Clarification and Regulation of Certain Capital Account Items under
Foreign Exchange Control ("Circular 45") to further strengthen and clarify its existing regulations on foreign exchange control under SAFE Circular 142. Circular
45 expressly prohibits foreign invested entities, including wholly foreign owned enterprises such as AM Technology, from converting registered capital in foreign
exchange into RMB for the purpose of equity investment, granting certain loans, repayment of inter-company loans, and repayment of bank loans which have
been transferred to a third party. Further, Circular 45 generally prohibits a foreign invested entity from converting registered capital in foreign exchange into
RMB for the payment of various types of cash deposits. If our VIEs require financial support from us or our wholly foreign-owned enterprises in the future and
we find it necessary to use foreign currency-denominated capital to provide such financial support, our ability to fund the VIEs' operations will be subject to
statutory limits and restrictions, including those described above.
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Circular 45 was abolished by SAFE on March 19, 2015 according to a Circular on Promulgating the Abolishment and Invalidation of 50 Foreign Exchange-
related Regulatory Documents. On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange
Capital Settlement of Foreign-invested Enterprises, or SAFE Circular 19, which will take effect on June 1, 2015 and will replace SAFE Circular 142. SAFE
Circular 19 allows foreign-invested enterprises to settle 100% of their foreign exchange capitals on a discretionary basis and allows ordinary foreign-invested
enterprises to make domestic equity investments by capital transfer in the original currencies, or with the amount obtained from foreign exchange settlement,
subject to complying with certain requirements. According to SAFE Circular 19, the RMB funds obtained by foreign-invested enterprises from the discretionary
settlement of foreign exchange capitals shall be managed under the accounts pending for foreign exchange settlement payment, and foreign-invested enterprise
shall not use its capital and the RMB funds obtained from foreign exchange settlement for the purposes within the following negative list: for expenditure beyond
its business scope or expenditure prohibited by laws and regulations, for investments in securities, unless otherwise prescribed by laws and regulations, for
disbursing RMB entrusted loans (unless it is within its business scope), for repaying inter-corporate borrowings (including third-party advances) and repaying
RMB bank loans that have been sub-lent to third parties, or for expenses related to the purchase of real estate not for self-use, unless it is a foreign-invested real
estate enterprise.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents and registration requirements for employee stock
ownership plans or share option plans may subject our PRC resident beneficial owners or the plan participants to personal liability, limit our ability to inject
capital into our PRC subsidiaries, limit our subsidiaries' ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect
us.
Regulations promulgated by the SAFE require PRC residents and PRC corporate entities to register with local branches of the SAFE in connection with their
direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions
that we make in the future.
On February 15, 2012, the SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals
Participating in an Employee Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, "Application Procedure of Foreign
Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company"
promulgated on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens who participate in a share incentive plan
of an overseas publicly listed company are required to register with SAFE and complete certain other procedures. All such participants need to retain a PRC agent
through a PRC subsidiary to register with SAFE and handle foreign exchange matters such as opening accounts, transferring and settlement of the relevant
proceeds. The New Share Incentive Rule further requires that an offshore agent should also be designated to handle matters in connection with the exercise or sale
of share options and proceeds transferring for the share incentive plan participants.
We and our PRC employees who have been granted stock options are subject to the New Share Incentive Rule. We are in the process of completing the
registration and procedures which the New Share Incentive Rule requires, but the application documents are subject to the review and approval of SAFE, and we
can make no assurance as to when the registration and procedures could be completed. If we or our PRC employees fail to comply with the New Share Incentive
Rule, we and/or our PRC employees may face sanctions imposed by the foreign exchange authority or any other PRC government authorities.
In addition, the State Administration of Taxation, or SAT, has issued a few circulars concerning employee stock options. Under these circulars, our employees
working in China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to
employee stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees
fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.
Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register
those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file or update the registration with
the local branch of the SAFE, with respect to that offshore company, any material change involving its round-trip investment and capital variation. The PRC
subsidiaries of that offshore company are required to urge the PRC resident shareholders to make such updates. If any PRC shareholder fails to make the required
SAFE registration or file or update the registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited
from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could
result in liability under PRC laws for evasion of applicable foreign exchange restrictions, such as restrictions on distributing dividend to our offshore entities or
monetary penalties against us. We cannot assure you that all of our shareholders who are PRC residents will make or obtain any applicable registrations or
approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with these SAFE registration procedures may
subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries' ability to distribute dividends to or obtain
foreign-exchange-dominated loans from our company.
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As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or
future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance
of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we
decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy
and could adversely affect our business and prospects.
Certain measures promulgated by the People's Bank of China on foreign exchange for individuals set forth the respective requirements for foreign exchange
transactions by PRC individuals under either the current account or the capital account. Implementing rules for these measures were promulgated by the SAFE
which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen's participation in the employee stock
ownership plans or stock option plans of an overseas publicly-listed company. The SAFE also promulgated rules under which PRC citizens who are granted stock
options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with
the SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options are subject to these rules, and we are in the
process of completing the required registration and procedures, but the application documents are subject to the review and approval of SAFE, and we can make
no assurance as to when the registration and procedures could be completed. If we or our PRC optionees fail to comply with these regulations, we or our PRC
optionees may be subject to fines and legal sanctions. See "Item 4. Information on the Company—B. Business Overview—Regulation— SAFE Regulations on
Offshore Investment by PRC Residents and Employee Stock Options."
The M&A Rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth
through acquisitions.
The PRC Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, sets forth complex procedures and
requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Part of our growth strategy includes
acquiring complementary businesses or assets. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and
any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which
could affect our ability to expand our business or maintain our market share. In addition, if any of our acquisitions were subject to the M&A Rule and were found
not to be in compliance with the requirements of the M&A Rule in the future, relevant PRC regulatory agencies may impose fines and penalties on our operations
in the PRC, limit our operating privileges in the PRC, or take other actions that could materially and adversely affect our business and results of operations.
Changes in laws and regulations governing air travel advertising or otherwise affecting our business in China may result in substantial costs and
diversion of resources and may materially and adversely affect our business and results of operations.
There are no existing PRC laws or regulations that specifically define or regulate air travel advertising. Changes in existing laws and regulations or the
implementation of new laws and regulations governing the content of air travel advertising and our business licenses or otherwise affecting our business in China
may result in substantial costs and diversion of resources and may materially and adversely affect our business prospects and results of operations.
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The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of
operations.
The Labor Contract Law, which came into effect January 1, 2008 and was amended on July 1, 2013, established more restrictions and increased costs for
employers to dismiss employees under certain circumstances, including specific provisions relating to fixed-term employment contracts, non-fixed-term
employment contracts, task-based employment, part-time employment, probation, consultation with the labor union and employee representative's council,
employment without a contract, dismissal of employees, compensation upon termination and for overtime work, and collective bargaining. Under the Labor
Contract Law, unless otherwise provided by law, an employer is obligated to sign a labor contract with a non-fixed term with an employee, if the employer
continues to hire the employee after the expiration of two consecutive fixed-term labor contracts, or if the employee has worked for the employer for 10
consecutive years. Severance pay is required if a labor contract expires and is not renewed because of the employer's refusal to renew or seeking to renew with
less favorable terms. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have
served more than one year for an employer are entitled to a paid vacation for five to 15 days, depending on the employee's number of years of employment.
Employees who waive such vacation at the request of employers are entitled to compensation that equals to three times their regular daily salary for each waived
vacation day. As a result of these new labor protection measures, our labor costs are expected to increase, which may adversely affect our business and our results
of operations. It is also possible that the PRC government may enact additional labor-related legislations in the future, which would further increase our labor
costs and affect our operations.
We have limited insurance coverage in China, and any business disruption or litigation we experience may result in our incurring substantial costs and
the diversion of resources.
Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business
disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated
with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, except for our liability insurance
for directors and officers, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or
litigation may result in our incurring substantial costs and the diversion of resources.
If one or more of our PRC subsidiaries fails to maintain or obtain qualifications to receive PRC preferential tax treatments, we will be required to pay
more taxes, which may have a material adverse effect on our result of operations.
The EIT Law, which became effective on January 1, 2008, imposes a uniform income tax rate of 25% on most domestic enterprises and foreign investment
enterprises. Under this law, entities that qualify as "high and new technology enterprises strongly supported by the state," or HNTE, are entitled to the preferential
EIT rate of 15%. A company's status as a HNTE is valid for three years, after which the company must re-apply for such qualification in order to continue to
enjoy the preferential EIT rate. In addition, according to relevant guidelines, "new software enterprises" can enjoy an income tax exemption for two years
beginning with their first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years.
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 is
entitled to enjoy a preferential EIT rate of 15%. It was also eligible for a 50% tax reduction from 2009 to 2010 under the applicable tax laws and regulations that
were in effect before January 1, 2008, the date the EIT Law came into effect. As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and 2010.
In September 2011, AM Technology received the HNTE certificate, and in October 2014, AM Technology successfully renewed its HNTE status and obtained
the renewed certificate issued by the competent governmental authority. As a result, AM Technology is expected to be subject to an EIT rate of 15% until 2016 as
long as it maintains its HNTE status.
Xi'an AirMedia Chuangyi Technology Co., Ltd., one of our PRC subsidiaries, or Xi'an AM, qualified as a "software enterprise" in August 2008 by the
Technology Information Bureau of Shaanxi Province and has received a written approval from Xi'an local tax bureau that it is granted a two-year exemption from
EIT commencing on its first profitable year and a 50% reduction of the 25% EIT rate for the succeeding three years. As Xi'an AM first made profit in 2009, it was
exempted from EIT in 2009 and 2010, and enjoyed the preferential income tax rate of 12.5% from 2011 to 2013. Xi’an AM received the HNTE certificate jointly
issued by the competent governmental authorities in Shaanxi Province in September 2014. As such, Xi’an AM is expected to enjoy a preferential income tax rate
of 15% from 2014 to 2016 as long as it maintains its HNTE status.
Shenzhen AirMedia Information Technology Co., Ltd., one of our PRC subsidiaries, or Shenzhen AM, was subject to a 15% preferential EIT rate in 2007 as it is
located in Shenzhen and then was subject to EIT on its taxable income from 2008 at the gradual rate as set out in Notice of the State Council Concerning
Implementation of Transitional Rules for Enterprise Income Tax Incentives, or "Circular 39." Since Shenzhen AM is also qualified as a "manufacturing foreign-
invested enterprise" incorporated prior to the effectiveness of the EIT Law, it is further entitled to a two-year exemption from EIT for the years 2008 and 2009
and preferential rates of 11%, 12% and 12.5% for the years 2010, 2011 and 2012, respectively. Shenzhen AM is subject to EIT at a rate of 25% from 2013
afterwards.
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Hainan Jinhui Guangming Media Advertising Co., Ltd., or Hainan Jinhui, one of our VIEs' PRC subsidiaries, is subject to EIT on the taxable income at the
gradual rate, which was 22% in 2010, 24% in 2011, 25% in 2012 as set out in Circular 39. Hainan Jinhui is subject to EIT at a rate of 25% in 2013 and thereafter.
We cannot assure you that our PRC subsidiaries will be able to maintain or obtain qualifications to receive the above preferential tax treatments; we will be
required to pay more taxes if they fail to become or continue to be eligible to receive PRC tax benefits, which may materially and adversely affect our business
and results of operations.
Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation on
our worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax law.
Under the EIT Law and related regulations, dividends payable by a foreign-invested enterprise in China to its foreign investors who are non-resident enterprises
are subject to a 10% withholding tax, unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding arrangement. The British Virgin Islands, or BVI, where Broad Cosmos Enterprises Ltd., or Broad Cosmos, our wholly-owned subsidiary, is
incorporated, does not have such a tax treaty with China. Air Media (China) Limited, or AM China, the 100% shareholder of AM Technology, Shenzhen AM and
Xi'an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation
or Evasion of Taxation on Income between China and Hong Kong and the relevant rules, dividends paid by a foreign-invested enterprise in China to its direct
holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-
invested enterprise). However, under recently implemented PRC regulations, now our Hong Kong subsidiary must obtain approval from the competent local
branch of the State Administration of Taxation in accordance with the double-taxation agreement among the PRC and Hong Kong in order to enjoy the 5%
preferential withholding tax rate. In February 2009, the State Administration of Taxation issued Notice No. 81. According to Notice No. 81, in order to enjoy the
preferential treatment on dividend withholding tax rates, an enterprise must be the "beneficial owner" of the relevant dividend income, and no enterprise is
entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or
arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right to make adjustments to the
applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such transaction or arrangement. In
October 2009, the State Administration of Taxation issued another notice on this matter, or Notice No. 601, to provide guidance on the criteria to determine
whether an enterprise qualifies as the "beneficial owner" of the PRC sourced income for the purpose of obtaining preferential treatment under tax treaties.
Pursuant to Notice No. 601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the "substance over form"
principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own and have control over the
income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a beneficial owner of such income.
Since the two notices were issued, it has remained unclear how the PRC tax authorities will implement them in practice and to what extent they will affect the
dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority determines that
our Hong Kong subsidiary is a conduit company and does not qualify as the "beneficial owner" of the dividend income it receives from our PRC subsidiaries, the
higher 10% withholding tax rate may apply to such dividends.
Under the EIT Law and EIT Implementation Rules, an enterprise established outside of the PRC with "de facto management bodies" within the PRC is considered
a PRC resident enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The EIT Implementation Rules define the term "de facto
management bodies" as "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel,
accounting, properties, etc. of an enterprise." The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises
as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific
criteria for determining whether the "de facto management body" of a Chinese-controlled overseas-incorporated enterprise is located in China.
In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date to be
September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax
authorities. It also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshore
incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese
controlled offshore incorporated enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not
to those that, like our company, are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification made in
the bulletin may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of
offshore enterprises and the administration measures that should be implemented, regardless of whether they are controlled by PRC enterprises or PRC
individuals.
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After consulting with our PRC counsel, we do not believe that our holding company and other overseas subsidiaries should be deemed PRC resident enterprises
as, among other things, certain of our company's key assets and records, including register of members, board resolutions and shareholder resolutions, are located
and maintained outside of the PRC, and we also hold our board and board committee meetings outside of the PRC from time to time. However, we have been
advised by our PRC counsel, Commerce & Finance Law Offices, that because there remains uncertainty regarding the interpretation and implementation of the
EIT Law and EIT Implementation Rules, it is uncertain whether we will be deemed a PRC resident enterprise. If the PRC authorities were to subsequently
determine, or any further regulations provide, that we should be treated as a PRC resident enterprise, we would be subject to a 25% EIT on our global income. To
the extent our holding company earns income outside of China, a 25% EIT on our global income may increase our tax burden and could adversely affect our
financial condition and results of operations.
If we are regarded as a PRC resident enterprise, dividends distributed from our PRC subsidiaries to us could be exempt from the PRC dividend withholding tax,
since such income is exempt under the EIT Law and the EIT Implementation Rules to the extent such dividends are deemed "dividends among qualified PRC
resident enterprises." If we are considered a resident enterprise for enterprise income tax purposes, dividends we pay with respect to our ADSs or ordinary shares
may be considered income derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC shareholders may be subject
to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear
whether our non-PRC shareholders would be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event that we are
considered as a PRC resident enterprise.
With the 10% PRC dividend withholding tax, we will incur an incremental PRC tax cost when we distribute our PRC profits to our ultimate shareholders if we
are deemed not to be a PRC resident enterprise. On the other hand, if we are determined to be a PRC resident enterprise under the EIT Law and receive income
other than dividends, our profitability and cash flow would be adversely impacted due to our worldwide income being taxed in China under the EIT Law.
Moreover, under the EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other
disposition of ADSs or ordinary shares, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC. Although
we are incorporated in the Cayman Islands, it is unclear whether the dividends payable by us or the gains our foreign ADS holders may realize on disposition will
be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax on our dividend payments will reduce the
returns of your investment.
Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the
future.
In connection with the PRC Enterprise Income Tax Law, or the EIT Law, the Ministry of Finance and the State Administration of Taxation jointly issued, on
April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009,
the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer,
or Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. By promulgating and implementing these circulars, the
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise.
On February 3, 2015, the SAT issued the Announcement on Several Issues concerning the Enterprise Income Tax on Indirect Transfers of Properties by Non-
Resident Enterprises, or Public Notice 7, to supersede tax rules in relation to the Indirect Transfer of Shares under the original SAT Circular 698, while the other
provisions of SAT Circular 698 remain in force. Public Notice 7 covers transactions involving not only Indirect Transfer of Shares as set forth under SAT
Circular 698 but also transactions involving an overseas company’s indirect transfer of other property or assets (such as real properties) located in China
(collectively, ‘‘PRC Taxable Properties’’) through transfer of shares of an offshore intermediary company. Pursuant to Public Notice 7, in the event that non-
residential enterprises indirectly transfer PRC Taxable Properties without reasonable commercial purposes in order to evade PRC enterprise income tax, such
indirect transfer will be deemed as direct transfer of PRC Taxable Properties and, therefore, be subject to PRC enterprise income tax. In addition, Public Notice 7
provides clearer criteria on how to assess reasonable commercial purposes and allows for safe harbor scenarios applicable to internal group restructurings. Under
Public Notice 7, subject to certain exceptions such as internal group restructurings and purchase and sale of shares of the same publicly-listed oversea enterprise
in a public securities market, an indirect transfer of PRC Taxable Properties shall be directly deemed as having no reasonable commercial purposes if the
following circumstances are satisfied: (i) more than 75% of the value of overseas enterprises’ shares directly or indirectly comes from PRC Taxable Properties;
(ii) at any time within one year before the indirect transfer of PRC Taxable Properties, more than 90% the total amount of overseas enterprises’ assets (excluding
cash) are directly or indirectly constituted by their investment within the PRC, or within one year before the indirect transfer of PRC Taxable Properties, more
than 90% of the overseas enterprises’ income directly or indirectly derive from the PRC; (iii) the overseas enterprises and their controlling enterprises, which
directly or indirectly hold PRC Taxable Properties, cannot justify the economic substance of the corporate structure; and (iv) overseas tax payment regarding
indirect transfer of PRC Taxable Properties is lower than PRC tax payment regarding direct transfer of PRC Taxable Properties. Public Notice 7 also brings
uncertainties to the offshore transferor and transferee of the indirect transfer of PRC Taxable Properties as they have to make self-assessment on whether the
transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly. As a result, where non-resident investors were involved in our private
equity financing or share transfer of our company between two or more offshore parties, if such transactions were determined by the tax authorities to lack
reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under SAT Circular 698 and Public Notice 7 and may be
required to expend valuable resources to comply with SAT Circular 698 and Public Notice 7 or to establish that we should not be taxed under SAT Circular 698
and Public Notice 7, which may have an adverse effect on our financial condition and results of operations.
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The PRC tax authorities have the discretion under Public Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value
of the equity interests transferred and the cost of investment. We may pursue acquisitions in the future that may involve complex corporate structures. If we are
considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the
transactions under SAT Circular 59, SAT Circular 698 or Public Notice 7, our income tax costs associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and results of operations.
If we become directly subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your
investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Occasionally, U.S. public companies that have substantially all of their operations in China, particularly companies which have completed so-called reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such
as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective
internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. For
example, in December 2012, the SEC initiated administrative proceedings against the China affiliates of the Big Four public accounting firms for allegedly
refusing to produce audit work papers and other documents related to certain China-based companies under investigation by the SEC for potential accounting
fraud against U.S. investors. Although the firms reached a settlement with the SEC and although we were not and are not subject to any ongoing SEC
investigations, many U.S. listed Chinese companies are now subject to, or may become subject to, shareholder lawsuits and SEC enforcement actions and are
conducting internal and external investigations into the allegations. As a result of this proceeding and the scrutiny, criticism and negative publicity, the publicly
traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. It is not clear what effect
this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any
unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations
and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and,
as such, you are deprived of the benefits of such inspection
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the United States Securities and Exchange
Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board
(United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws
of the United States and professional standards. Because our auditors are located in the Peoples' Republic of China, a jurisdiction where the PCAOB is currently
unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the
PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB
inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or
quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported
financial information and procedures and the quality of our financial statements.
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If additional remedial measures are imposed on the “Big Four” PRC-based accounting firms, including our independent registered public accounting
firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, with respect to requests for the
production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of
1934.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict
between the United States’ and Chinese laws. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB
sought to obtain from these Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that
under China law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China
had to be channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act
of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in
the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including
a temporary suspension of their right to practice before the SEC, although such proposed penalties did not take effect pending review by the Commissioners of
the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC
accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106
requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the
CSRC. If they fail to meet the specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms, depending on the
nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain
audit work, commencement of a new proceeding against a firm, or in extreme cases, the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC
operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange Act and possible delisting. Moreover, any negative news about any such future
proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs
may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find
another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in
compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the Nasdaq Global Select
Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
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 2014, the trading prices of our ADSs on the
NASDAQ Global Select Market ranged from $3.24 to $1.65 per ADS and the closing sale price on April 23, 2015 was $5.00 per ADS. The price of our ADSs
may fluctuate in response to a number of events and factors including, changes in the economic performance or market valuations of other advertising companies,
conditions in the air travel advertising industry and the sales or perceived potential sales of additional ordinary shares or ADSs.
In addition, the securities market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular
companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.
Additional sales of our ordinary shares in the public market, or the perception that these sales could occur, could also cause the market price of our ADSs to
decline.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your
right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares
evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights
attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or
persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
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Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends
if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the
United States unless we register both the rights and the securities to which the rights relate under the U.S. Securities Act of 1933, as amended, or the Securities
Act, or an exemption from the registration requirements is available. Under the deposit agreement, the depositary bank will not make rights available to you
unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration
under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a
registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly,
you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs
represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For
example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be
less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties.
In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at
any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision
of the deposit agreement, or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we
are incorporated under Cayman Islands law, conduct substantially all of our operations in China and most of our directors and officers reside outside the
United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries and VIEs. Most of our directors and
officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for you to
effect service of process within the United States and bring an action against us or against these individuals in a U.S. court if you believe that your rights have
been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China
may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands
of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment
of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2013
Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders
and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the
United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to
investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our
controlling shareholders than shareholders of a corporation incorporated in a jurisdiction in the United States.
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Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and
ADSs.
We have included certain provisions in our memorandum and articles of association that could limit the ability of others to acquire control of our company and
deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain
control of our company in a tender offer or similar transactions. The following provisions in our articles may have the effect of delaying or preventing a change of
control of our company:
• Our board of directors has the authority to establish from time to time one or more series of preferred shares without action by our shareholders and to
determine, with respect to any series of preferred shares, the terms and rights of that series, including the designation of the series, the number of shares
of the series, the dividend rights, dividend rates, conversion rights, voting rights, and the rights and terms of redemption and liquidation preferences.
•
Subject to applicable regulatory requirements, our board of directors may issue additional ordinary shares or rights to acquire ordinary shares without
action by our shareholders to the extent of available authorized but unissued shares.
Our corporate actions are substantially controlled by our principal shareholders who could exert significant influence over important corporate matters,
which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.
Certain principal shareholders hold a substantial percentage of the outstanding shares of our company. For example, as of March 31, 2015, our principal
shareholder, Mr. Herman Man Guo, along with his wife, Ms. Dan Shao, beneficially owned approximately 32.88% of our outstanding ordinary shares. Mr. Guo
and other principal shareholders of our company could exert substantial influence over matters such as electing directors and approving material mergers,
acquisitions or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our
company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company
and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
We are a "foreign private issuer," and have disclosure obligations that are different from those of U.S. domestic reporting companies so you should not
expect to receive the same information about us at the same time as a U.S. domestic reporting company may provide.
We are a foreign private issuer and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we
are not required by the SEC or the federal securities laws to issue quarterly reports or proxy statements with the SEC. We are required to file our annual report
within four months of our fiscal year end. We are not required to disclose certain detailed information regarding executive compensation that is required from
U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act. We are also
exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific
information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5.
Since many of the disclosure obligations required of us as a foreign private issuer are different from those required by other U.S. domestic reporting companies,
our shareholders should not expect to receive information about us in the same amount and at the same time as information is received from, or provided by, other
U.S. domestic reporting companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer.
Violations of these rules could affect our business, results of operations and financial condition.
We may be classified as a passive foreign investment company, which could result in significant adverse U.S. federal income tax consequences to 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 taxable
year ended December 31, 2014, there is a significant risk that we will be a PFIC for our taxable year ending December 31, 2015 and future taxable years unless
the market price of our ADSs increases and/or we invest a substantial amount of cash and other passive assets we hold in assets that produce or are held for the
production of non-passive income. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) 75% or more of its gross income for such
year consists of certain types of "passive" income or (2) 50% or more of the average quarterly value of its assets (as generally determined on the basis of fair
market value) during such year produce or are held for the production of passive income.
Although the law in this regard is unclear, we treat all our VIEs (and their subsidiaries) as being owned by us for U.S. federal income tax purposes, not only
because we exercise effective control over the operations of such entities but also because we are entitled to substantially all of the economic benefits associated
with such entities, and, as a result, we consolidate such entities' operating results in our consolidated financial statements. If it were determined, however, that we
are not the owner of any of our VIEs (or their subsidiaries) for U.S. federal income tax purposes, we could be treated as a PFIC for the current taxable year or any
future taxable year.
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If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in Item 10. Additional Information—E. —Taxation—United States Federal
Income Taxation) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares
and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an "excess distribution" under the U.S.
federal income tax rules. Furthermore, a U.S. Holder will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder's
holding period in which we become a PFIC and subsequent taxable years even if, we, in fact, cease to be a PFIC in subsequent taxable years. Each U.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 are treated as a PFIC
for our current taxable year ending 2015 or any future taxable year, including the possibility of making a "mark-to-market" election. For more information, see
"Item 10. Additional Information – E. Taxation – United States Federal Income Taxation".
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 the VIEs'
subsidiaries. We commenced operations in August 2005 in China through Shengshi Lianhe, a consolidated variable interest entity of our principal subsidiary, AM
Technology. Later, we established additional PRC consolidated VIEs to conduct our operations in China. Substantially all of our current operations are conducted
through contractual arrangements with these VIEs.
On November 7, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol "AMCN". We and certain of our then shareholders completed the
initial public offering of 17,250,000 ADSs, representing 34,500,000 of our ordinary shares, on November 13, 2007. Our ADSs were subsequently transferred to
the NASDAQ Global Select Market.
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 businesses in
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 of
Flying 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% equity interest in
Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. (formerly known as Beijing Youtong Hezhong Advertising Media Co. Ltd.), or AM Jiaming, a PRC
company which operates media resources in a number of airports including Guangzhou and Hangzhou airports. In 2009, AM Advertising, entered into an
exclusive concession rights contract in which it undertook to develop and operate outdoor advertising platforms such as billboards at Sinopec gas stations. In
January 2010, we acquired 100% of the equity interest in Easy Shop Ltd., a BVI company, and concurrently, AM Advertising acquired 90% of the equity interest
in AM Outdoor 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 a
result of these transactions, AM Advertising now holds 100% equity interest in AM Outdoor and operates unipole signs and other outdoor media in China. In
February 2010, Jiaming Advertising acquired 45% equity interest in Beijing Dongding Gongyi Advertising Co., Ltd., or Dongding, which has exclusive rights to
build and operate billboards that display both public service content and commercial advertising throughout Beijing in locations such as shopping malls and
parking lots. Jiaming Advertising 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 GreatView
Media, a PRC company, as a wholly-owned subsidiary of Jiaming Advertising, with a registered capital of RMB1.0 million. GreatView Media is currently the
primary operating entity of our gas station media network. In the same month, we also formed Beijing AirMedia Jinsheng Advertising Co., Ltd., or Jinsheng
Advertising, a PRC company, as a wholly-owned subsidiary of Beijing AirMedia Media Advertising Co., Ltd., a PRC company and a majority-owned subsidiary
of AM Advertising, with a registered capital of RMB5.0 million. Beijing AirMedia Media Advertising Co., Ltd. was formerly known as Beijing AirMedia Jinshi
Advertising Co., Ltd. and changed into its current corporate name in March 2014. We also changed the name of Beijing Union of Friendship Advertising Media
Co. Ltd., a subsidiary of AM Advertising, to Beijing Youtong Hezhong Advertising Media Co., Ltd. and subsequently to Beijing AirMedia Jiaming Film & TV
Culture Co., Ltd. and the name of AM Advertising itself as described above. In November 2012, our Board of Directors approved a share capital increase for
GreatView Media and a share purchase by the senior management of GreatView Media; GreatView Media increased its share capital by issuing new registered
capital to Jiaming Advertising for 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 capital increase, Jiaming Advertising and Zhongshi Aoyou held 78% and 22% equity interest in GreatView Media, respectively. Certain
members of the management of GreatView Media purchased all equity interests of Zhongshi Aoyou on February 25, 2013 for a cash consideration of
approximately RMB15 million, which was equal to the fair value of the equity interests purchased.
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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 GreatView
Media. After the completion of the transaction, AirMedia controls 61.41% of the equity interest of GreatView Media and the senior management team of
GreatView 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 sole
purpose of purchasing LED screens from Elec-Tech or its subsidiaries. As of December 31, 2014, GreatView Media purchased 1,200 sets of LED screens in total
from Elec-Tech for our gas station media business in the amount of approximately US$58 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
Xinghe Union, and Beijing Shibo Movie Technology Co., Ltd., or Beijing Shibo, respectively. Our company and N-S Digital each contributed RMB5.0 million in
cash for 50% of the equity interest in each of Xinghe Union and Beijing Shibo. 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 Xinghe Union held by N-S Digital. The two joint venture agreements
were terminated at the same time. As a result, we derecognized the equity method investments in both Xinghe Union and Shibo Movie and recognized Xinghe
Union as a subsidiary starting from February 2014.
In April 2012, we entered into an agreement with Guangxi Civil Aviation Development Co., Ltd., a wholly owned subsidiary of Guangxi Airport Management
Group Co., Ltd., and Beijing Asiaray Advertising Media Ltd. to form a joint venture that operates various media resources in four airports in China's Guangxi
province that are owned and operated by Guangxi Airport Management Group Co., Ltd. These four airports are Nanning Wuxu International Airport, Guilin
Liangjiang 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 Tianjin AirMedia Advertising Co., Ltd. in October 2014.
Both of these companies used to be wholly owned subsidiaries of AM Advertising.
As a result of internal re-organization, Shenzhen AM became a wholly owned subsidiary of AM China in December 2014. We are in the process of revising the
business scope of Shenzhen AM to include advertising. We intend to gradually shift our advertising business to Shenzhen AM once the change in business scope
is completed, and thus to gradually reduce 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, Guangzhou
Meizheng Advertising Co., Ltd., or Guangzhou Meizheng. , of which Shengshi Lianhe held 54% equity interest while Guangzhou Daozheng Advertising Co.,
Ltd. held 46% equity interest. The joint venture has a term of 30 years. In November 2014, Shengshi Lianhe, Guangzhou Daozheng Advertising Co., Ltd. and
Guangzhou Meizheng entered into a share capital increase agreement, pursuant to which Shengshi Lianhe agreed to subscribe for an increase in Guangzhou
Meizheng’s share capital with a total amount of RMB100 million (US$16.1 million). The share capital increase was completed in April 2015 and, Shengshi
Lianhe and Guangzhou Daozheng Advertising Co., Ltd. each holds approximately 63% and 37%, respectively, of Guangzhou Meizheng as of the date of this
annual report. As of the date of this annual report, Guangzhou Meizheng holds concession rights to install and operate Wi-Fi systems on trains operated by five
Chinese railway bureaus.
In October 2013, we entered into a strategic alliance agreement with HNA Culture Holding Group Co., Ltd., or HNA Culture, to jointly develop in-flight internet
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 be managed by a fund
management company, Beijing Yunxing Chuangrong Investment Fund Management, Co., Ltd., jointly owned by us and HNA Culture. As of March 31, 2015, we
had contributed RMB15 million to the joint fund management company.
In June 2014, we transferred 51% equity interest of Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. to an unrelated third party.
In December 2014, we and Qingdao International Airport Group Co., Ltd., or Qingdao Airport, established Qingdao Airport AirMedia Advertising Co., Ltd., or
Qingdao AM, as a joint venture. Qingdao AM has a total committed capital contribution of RMB10 million ($1.6 million). We and Qingdao Airport each
committed to contribute 49% and 51%, respectively, of the total committed capital contribution of Qingdao AM. Qingdao AM exclusively operates various media
resources in the Qingdao International Airport.
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In February 2015, we transferred 81% equity interest of Jinsheng Advertising, the operating entity of our TV-attached digital frames business, to Beijing Tianyi
Culture Development Co., Ltd., a third party unrelated to us. In connection with such equity interest transfer, we have transferred all relevant assets, liabilities and
managerial duties related to the TV-attached digital frames to Jinsheng Advertising with net carrying value of $1.1 million. We have transferred part of our
concession rights related to the TV-attached digital frames to Jinsheng Advertising and will continue to transfer the rest such concession rights as we receive the
necessary consents from the respective airports. Due to recent business developments and considerations, we have also transferred some of our concession rights
related to digital TV screens in airports to Jinsheng Advertising and plan to continue to transfer the rest of such concession rights as we receive the necessary
consents from the respective airports. Prior to the full completion of such transfers, we authorize Jinsheng Advertising to operate TV-attached digital frames and
digital TV screens in airport business under entrustment.
During 2014 and 2015, we dissolved certain non-operating holding entities, including Glorious Star Investment Limited, Dominant City Ltd. and Easy Shop
Limited.
In April 2015, Shengshi Lianhe entered into an agreement with Liantronics to transfer to Liantronics 5% equity interest in AM Advertising for RMB150 million.
Liantronics agrees to make payments for the transfer after the change in AM Advertising's equity ownership is duly registered in government records. Before
such change registration, we plan to consolidate certain media business lines under AM Advertising through internal re-organization. During the period of 75
calendar days after Shengshi Lianhe receives full payment from Liantronics, or the Waiting Period, we may elect to sell our equity interest in AM Advertising to
third parties, and if we so elect, Shengshi Lianhe will repurchase such 5% equity interest from Liantronics for an amount equal to RMB150 million plus
applicable fees. The applicable fees will be calculated as 10% of RMB150 million per annum for the period from the date on which Shengshi Lianhe receives
Liantronics' full payment through the date on which such repurchase is completed. In addition, if we elect not to sell to third parties during the Waiting Period,
Liantronics may request that Shengshi Lianhe repurchase such 5% equity interest after the end of the Waiting Period. Repurchase price in this situation will equal
to RMB150 million plus applicable fees, which will equal to 10% of RMB150 million per annum for the period from the date on which Shengshi Lianhe receives
Liantronics' full payment through the date on which such repurchase is completed.
Our principal executive offices are located at 17/F, Sky Plaza, No. 46 Dongzhimenwai Street, Dongcheng District, Beijing 100027, People's Republic of China.
Our telephone number at this address is +86-10-8438-6868 and our fax number is +86-10-8460-8658. Our registered office in the Cayman Islands is at the offices
of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
See "Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures" for a discussion of our capital
expenditures.
B.
Business Overview
General
We are a leading operator of out-of-home advertising platforms in China targeting mid-to-high-end consumers as well as a first-mover in the in-flight and on-train
Wi-Fi market. As of December 31, 2014, we operated digital frames and digital TV screens in 28 airports in China, including the five largest airports in China:
Beijing Capital International Airport, Guangzhou Baiyun International Airport, Shanghai Pudong International Airport, Shanghai Hongqiao International Airport
and Chengdu Shuangliu International Airport. We have recently entered into agreements with un-related third parties to divest our business lines of TV-attached
digital frames and digital TV screens in airports. See “—History and Development of the Company.” In addition, we had contractual concession rights to sell
advertisements on digital TV screens on the airplanes operated by seven airlines, including leading airlines in China such as China Southern Airlines, Air China,
China Eastern Airlines, Hainan Airlines and Shanghai Airlines. As of the date of the annual report, we have concession rights to install and operate Wi-Fi systems
on-board high-speed and ordinary trains operated by four railway bureaus. We are also in discussion with a major Chinese airline to obtain in-flight concession
rights.
We started operating advertising media platforms at gas stations owned by Sinopec in 2009. In 2011, we established GreatView Media. And from 2012 onwards,
GreatView Media began to exclusively operate our gas station media business. In the same year, we decided to increase GreatView Media's capital and 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 existing advantages by
installing LED screens. In 2013, Elec-Tech agreed to invest RMB640 million (US$104 million) to purchase ordinary shares representing approximately 21.27%
of the equity interest of GreatView Media. See "Item 4. Information on the Company—A. 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 stations throughout 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 outside the
air travel sector, such as unipole signs and other outdoor media.
Air travel advertising in China has generally been growing in recent years because of growth in China's advertising market and air travel sector. By focusing on
air travel advertising, we enable our advertisers to target air travelers in China, whom we believe are an attractive demographic for advertisers due to the fact that
they have higher-than-average disposable income compared to the rest of China's population. We strategically place our digital frames and traditional media
displays in high-traffic locations inside airports, particularly in areas where there tend to be significant waiting time, such as departure halls, security check areas,
boarding gates, baggage claim areas and arrival halls. The digital TV screens on our network airplanes are located in highly visible locations in passenger
compartments and on the backs of passenger seats. We also provide in-flight advertising and non-advertising contents. Our combined 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.
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We combine advertising content with non-advertising content, such as weather, sports and comedy clips, in our digital TV screen programs. We have contracts
with many Chinese TV stations such as Dragon TV, the Travel Channel and CCTV-5, to show video clips of their programs in airports and on airplanes. We also
obtain TV programs such as documentaries and "hidden camera" type reality shows from other third-party content providers. In January 2014, we entered into a
strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which manages the internet TV business of China International
Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air travelers in China. We believe non-advertising program
content make air travelers more receptive to the advertisements included in our programs and ultimately make our programs more effective for our advertisers.
Starting in 2010, our standard programs in airports typically include 20 minutes of advertising content during each hour of programming and are shown for
approximately 16 hours per day. The length of our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximately five to
15 minutes of which consist of advertising content.
We derive revenues principally by selling advertising time slots and locations on our network to our advertisers, including both direct advertisers and advertising
agencies. In January 2015, we entered into agreements to divest our product lines of TV-attached digital frames and airport digital TV screens. We have also
obtained multiple concession rights to install and operate Wi-Fi systems on airplane and trains. In the short term, we will focus on selling our current media
resources and improve the utilization rates of our existing product lines as well as establishing our leading position in the in-flight and on-train Wi-Fi market.
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 outside
the air travel advertising sector. In the long term, however, we will continue to acquire new media platforms to provide a broader range of advertising services for
our advertisers and to become a one-stop provider for air travel as well as other forms of advertising and expect to obtain more Wi-Fi concession rights.
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 TV
screens in airports and on airplanes, traditional media in airports such as light boxes, billboards and painted advertisements and gas station media displays and
other outdoor media displays outside of the air travel advertising sector. After the completion of our divestiture of business lines of digital TV screens in airports
and TV-attached digital frames, we will no longer own the related business assets.
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 air travelers
congregate and spend significant amounts of time waiting. Our digital frames are high-definition liquid crystal display, or LCD, screens that typically change
digital picture displays approximately every 6 or 12 seconds, with certain exceptions of 5 to 10 seconds in certain large airports. Our digital frames include
standalone digital frames and mega-size LEDs. Standalone digital frames display advertisements on vertical or horizontal display panels ranging in size from 52
to 108 inches. In January 2015, we reached an agreement with an unrelated third party to divest our TV-attached digital frames business. As of the date , we have
transferred hardware related to our TV-attached digital frames business to Jinsheng Advertising. Upon the completion of the divestiture, we will also transfer the
related concession rights to the same entity. See “Item 4. Information on the Company — A. History and Development of the Company.” In response to
advertiser advertising needs, we also own and operate digital frames of a larger size, up to 108 inches and 106 inches, in the airports of Beijing and Haikou,
respectively. In both international and domestic arrival halls of 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. In addition, as of March 31, 2015, we were operating mega-size LED screens in 16 airports,
including, Beijing International Airport, Changchun Longjia International Airport, Changsha Huanghua International Airport, Chengdu Shuangliu International
Airport, Dalian Zhoushuizi International Airport, Guangzhou Baiyun International Airport, Hangzhou Xiaoshan International Airport, Hohhot Baita International
Airport, Jinan Yaoqiang International Airport, Nanning Wuxu International Airport, Qingdao Liuting International Airport, Sanya Fenghuang International
Airport, Shenyang Taoxian International Airport, Shenzhen Bao’an International Airport, Tianjin Binhai International Airport and Xi'an Xianyang International
Airport. As of March 31, 2015, we operated approximately 1,446 digital frames in 25 airports, 1,139 of which were standalone digital frames, including 106- and
108-inch LCD display screens and mega-size LED screens and 307 of which were frames displayed in groups. These 25 airports accounted for more than 69% of
the total air travelers in China in 2014, according to the General Administration of Civil Aviation of China. Our digital frames play advertising content repeatedly
mainly in five-minute and ten- minute cycles, and we also offer two-minute and three-minute cycles to our advertisers.
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We believe digital frames provide an effective advertising platform to our advertisers. We sell our advertisements on digital frames in one-week units which
affords scheduling flexibility and cost-effectiveness to our advertisers. In addition, as our digital frames are located in both domestic and international terminals in
a number of airports, in certain of the major airports we cover, our advertisers can choose to place their advertisements in domestic terminals only, international
terminals only or a mix of domestic and international terminals. This flexibility in terms of location selection provides our advertisers with the ability to tailor
their advertisement packages to effectively attract their target audiences. We also continue to diversify the arrangement and placement of our digital frames to
offer enhanced visual effects. For example, in Guangzhou Baiyun International Airport, we have some digital frames in sets of two or three screens together as a
group, in Shenyang Airport we present four groups of digital frames with 20 combined LED screens each and in Xi'an Xianyang International Airport we present
three 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
In December 2014, we entered into arrangements with an unrelated third party to divest our airport digital TV screens business. Due to recent business
developments and considerations, we plan to transfer our assets and related concession rights in connection with our business line of digital TV screens in airports
to Jinsheng Advertising. We have transferred some of our related concession rights as of the date of this annual report and plan to continue to transfer the rest of
such concession rights as we receive the necessary consents from the respective airports. See "Item 4. Information on the Company — A. History and
Development of the Company."
Digital TV Screens on Airplanes
As of March 31, 2015, our programs were placed on digital TV screens on planes operated by seven airlines. The displays on our network airplanes, which have
been installed by aircraft manufacturers, are located at the top of passenger compartments and on the back of passenger seats. The digital TV screens at the top of
passenger compartments typically range from 9 to 15 inches in size, while the display screens on the back of passenger seats typically range from 7 to 9 inches in
size. There are approximately 10 to 280 on an airplane. The TV system installed on each plane differs from one another according to the requirements of each
specific airline. For instance, if the airline chooses to implement audio-video on demand, or AVOD, systems and personal TV, or PTV, systems, then it would
have to install TV screens on the back of each and every seat on the airplane.
Our airplane display programs are played once for approximately 45 minutes to an hour per flight. Approximately 4.5 to 15 minutes of each program consist of
advertising content provided to us by our advertisers and the rest of the program consists of non-advertising content. The non-advertising content on these planes
includes travel shows, documentaries, sports and other content similar to that shown on our airport programs. We also promote brand names of our advertisers
through our programs by naming our programs after their brand names or displaying their logos on the corner of the screens during the programs. We have
obtained rights to play popular films on airplanes in our network. As most of the airplanes on which our programs are played use video tape or DVD players to
play video messages and most of these airplanes only have one video tape or DVD player, passengers are not typically given a selection of channels and thus
viewership of our programs is generally high.
Traditional Media in Airports
Our traditional media in airports currently includes light boxes and billboards in airports. As of March 31, 2015, we operated approximately 454 light boxes and
billboards mainly in seven airports, such as Beijing Capital International Airport, Chengdu Shuangliu 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 advertising
platforms at all Sinopec gas stations located throughout China until December 31, 2014, with limited exceptions. In August 2013, we extended the concession
period with Sinopec to December 31, 2020. This network consists of outdoor advertising platforms strategically placed in Sinopec gas stations where there is high
visibility and significant waiting time. These outdoor advertising platforms consist of LED screens as well as traditional advertising formats such as light boxes
and billboards, and display advertising content in month-long slots.
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Other Media Network
We currently operate approximately 22 unipole signs and other outdoor media in locations throughout Beijing and 6,966 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 in
addition 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, and we
generally sell advertisements on those platforms in units ranging from one month to one year long. We currently plan to focus on improving the utilization rates
of our existing outdoor media network resources.
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 time slots
of 5, 7.5 and 10 seconds. Our digital TV screens do not change frames within each advertiser’s contracted period. Sales are made pursuant to written 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 made pursuant to written contracts
with commitments ranging from one month to one year. These billboards and light boxes sales contracts typically fix the commencement 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 and
payment terms mutually agreed by both parties. We generally require our advertisers to submit advertising content at least 10 working days for digital media and
14 working days for traditional media prior to the campaign start date, and reserve the right to refuse to display advertisements not in compliance with content
requirements under PRC laws and regulations.
Our Concession Rights Contracts
Airports
As of December 31, 2014, our major concession rights contracts that will expire and need to be renewed in the next 12 months include LED screens, digital TV
screens and digital TV screens media assets in Beijing Capital International Airport and digital TV screens and digital TV screens media assets in Guangzhou
Baiyun International Airport, among others.
As of March 31, 2015, we had 107 concession rights contracts to operate our digital frames, digital TV screens, other displays in our air travel network and
traditional media network. We are in the process of transferring 13 of these concession rights contracts related to TV-attached digital frames to Jinsheng
Advertising. See “Item 4. Information on the Company — A. History and Development of the Company.” Many of these concession rights contracts contained
provisions granting us exclusive concession rights. The scope of the exclusivity, however, varies from contract to contract. Most of these exclusivity provisions
limit the exclusivity to certain areas of an airport. For example, our contract with Guangzhou Baiyun International Airport granted us the exclusive right to
operate all the closed-circuit displays located in the domestic and international arrival and departure areas.
From March 2009, we have had a concession rights contract with Beijing Capital International Airport to operate traditional advertising formats including
billboards, light boxes and other formats at Terminals 1, 2, and 3 of Beijing Capital International Airport. We renewed these concession rights, which now expire
on December 31, 2015. We began operating these traditional media on April 1, 2009. In addition, in February 2012, we obtained a concession rights contract to
operate 58 digital frames, 54 digital TV screens, and two large LED screens at the newly built Terminal 2 of Chengdu Shuangliu International Airport, 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 and one other
traditional advertising format at Terminal 2 of Chengdu Airport from August 9, 2012 to August 8, 2015. Chengdu Airport surpassed Shenzhen Baoan
International Airport in 2011 in terms of air traveler volume to become the fifth largest airport in mainland China. As of March 31, 2015, we obtained concession
rights to install and operate various mega-size LED screens in 18 airports across China, including, such as, Beijing Capital International Airport, Hangzhou
Xiaoshan International Airport in Zhejiang province, Changchun Longjia International Airport in Jilin province, Xi'an Xianyang International Airport in Shaanxi
province, Chengdu Shuangliu International Airport in Sichuan province, Sanya Fenghuang International Airport in Hainan province, and Hohhot Baita
International Airport in Inner Mongolia province. These contracts typically have durations of two to five years. Most concession fees are fixed under our
concession rights contracts with escalation clauses attached, meaning the fees undergo fixed levels of increases over each year of the agreement. Payments under
concession rights contracts are usually due three months in advance, but payments under a few material concession rights contracts are due six months or one year
in advance. The concession fees that 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 our concession rights contracts for our digital frames, digital TV screens and traditional media in airports have terms ranging from three to
five years without any automatic renewal provisions. However, we can opt to renew the agreements three or five months before the expiration of certain
concession rights contracts, on the 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 of refusal to renew our existing concession rights contracts on similar terms as those proposed by such third party. As of March 31, 2015, 43
out of our 107 concession rights contracts to operate in airports would be subject to renewal by the end of 2015. The number of displays and placement locations
are explicitly specified in the majority of our concession rights contracts.
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Airlines
As of December 31, 2014, 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, 2014, we had seven concession rights contracts to place our programs on these network airlines, three of which contained provisions granting
us exclusive concession rights. The scope of the exclusivity, however, varies from contract to contract. Most of these exclusivity provisions limit the exclusivity
to certain types of programs played on airplanes. Most of the concession fees are fixed by escalation clauses under the relevant concession rights contracts, and
their amounts vary by the number of routes and airplanes, type of aircraft and the departure and destination cities.
Some of the concession rights contracts set forth the number and model of airplanes on which our programs can be played. In 2013, in order to control our
concession cost, we changed our business cooperation model with Air China so that instead of holding the exclusive concession rights for Air China, we now
purchase advertising time and space slots from a third party with greater flexibility. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our
Business—A significant portion of our revenues has been derived from the five largest airports and three largest airlines in China. If any of these airports or
airlines experiences a material business disruption or if there are changes in our arrangements with these airports or airlines, we may incur substantial losses of
revenues."
We hold 49% of the equity interests in a joint venture, Beijing Eastern Media Corporation, Ltd., or BEMC. BEMC is formed in partnership with China Eastern
Media Corporation, Ltd., a subsidiary of China Eastern Group and China Eastern Airlines Corporation Limited operating the media resources of China Eastern
Group, which holds 51% equity interests in BEMC. BEMC obtained concession rights of certain media resources from its shareholders, including the digital TV
screens on airplanes of China Eastern Airlines, and paid concession fees to its shareholders as consideration. We believe this innovative strategic partnership
further strengthened our relationship with China Eastern Group and we renewed our concession rights contract on February 20, 2010 with China Eastern Airlines
to operate digital TV screens on China Eastern Airlines on an exclusive basis until December 31, 2020. As of December 31, 2014, BEMC also obtained media
resources other than digital TV screens, including other existing media resources of China Eastern Airlines and new media 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 advertising
media at Sinopec gas stations throughout China until December 31, 2014, except for those stations in a limited number of cities whose media platforms have
previously been leased by Sinopec to third parties. In August 2013, we extended the concession period with Sinopec to December 31, 2020. For stations with
existing media platform lease agreements with third parties, Sinopec will not renew the contracts with third parties when the contracts expire, and will deliver
these media platforms to us within a reasonable period.
Wi-Fi Service
In April 2014, we obtained the concession rights to install and operate Wi-Fi systems on five lines of high-speed trains operated by the Guangzhou Railway
Bureau during the period from April 1, 2014 through May 31, 2017.
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In August 2014, we obtained the concession rights to install and operate Wi-Fi systems on high-speed trains operated by the Shanghai Railway Bureau during the
period from January 1, 2015 through March 31, 2018. In the same month, we obtained concession rights to install and operate Wi-Fi systems on high-speed trains
operated by the Jinan Railway Bureau during the period from September 1, 2014 through January 31, 2018.
In September 2014, we obtained the concession rights to install and operate Wi-Fi systems on 97 high-speed trains operated by the Urumqi Railway Bureau
during the period from November 30, 2014 through April 30, 2016.
In April 2015, we obtained the concession rights to install and operate Wi-Fi systems on ordinary trains operated by the Shanghai Railway Bureau and the Jinan
Railway Bureau during the period from April 1, 2015 through December 31, 2018 and the period from April 18, 2015 through September 17, 2018, respectively.
Advertisers, Sales and Marketing
Our Advertisers
Our advertisers purchase advertising time slots and locations on our advertising network either directly from us or through advertising agencies. Many advertisers
negotiate the terms of the advertising purchase agreements directly with us, however we also rely on advertising agencies for a significant portion of our sales.
We have a broad base of international and domestic advertisers in various industries. In 2012, the top three industries that advertised on our network were
automobile, finance, and electronic and home appliances, which accounted for approximately 33.2%, 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 food and beverages, which accounted for approximately 33.1%, 11.4% and
9.1% of our total revenues, respectively. In 2014, the top three industries that advertised on our network were automobile, high-end food and beverages and
domestic electric appliances, which accounted for approximately 36.6%, 8.0% and 7.9% of our total revenues, respectively. One customer accounted for more
than 10% of our total revenues for 2012, and none of customers accounted for more than 10% of our total revenues for 2013 and 2014.
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 in
structuring advertising campaigns by analyzing advertisers' target audiences and the form and contents of the advertisement they may be interested in, as well as
consumer products and services. We conduct market research, consumer surveys, demographic analysis and other advertising industry research for internal use to
help our advertisers to create effective advertisements. We also use third-party market research firms from time to time to obtain the relevant market study data,
and at the same time hire such research firms to evaluate the effects of our advertising, so as to evaluate the effectiveness of our network for our advertisers and to
illustrate to our advertisers our ability to reach targeted demographic groups effectively.
Our experienced advertising sales team is organized by region and city with a presence in 24 cities as of December 31, 2014. We provide in-house education and
training to our sales force to ensure they provide our current and prospective advertisers with comprehensive information about our services, the advantages of
using our 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 services by
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 placing advertisements
on third-party media from time to time, including China Central Television. We also engage third-party advertising agencies to help source advertisers.
Pricing
The listing prices of our air travel advertising services depend on the 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 each
airport 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 pricing and costs
(including local news stations, newspapers, bus stop light boxes and outdoor signs) in each city as well as our own display equipment and resource costs for
setting up such advertising network. Similar considerations apply to our outdoor media platforms. Going forward, we intend to review our listing prices
periodically and make adjustments as necessary in light of market conditions.
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Prices for advertisements on our network are fixed under our sales contracts with advertisers or advertising agencies, typically at a discount to our listing prices.
Programming
Most of our digital frames in airports play advertising content repeatedly in five- and ten-minute cycles throughout the day. We compile each cycle from
advertisements that are provided to us by advertisers. We generally update the advertisements displayed on our digital frames on a weekly basis. Beginning April
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-tier and 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 of advertisements
from 10 minutes to five minutes. These changes increased the frequency of exposure for advertisements and had no impact on the time slots available 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 halls or arrival halls
separately or as a whole in the airports for second-tier and third-tier cities.
Our digital TV screens on our network airplanes play programs ranging from 45 minutes to one hour once per flight. We compile each cycle from advertisements
of 5-, 15- or 30-seconds in length provided by advertisers to us and from non-advertising content generated by our VIEs in China or provided by third-party
content providers. We generally create a programming list on a weekly and monthly basis for programs played in airports and on airplanes, respectively. We
create this list by first fixing the schedule for advertising content according to the respective sales contracts with our advertisers to guarantee the agreed duration,
time and frequency of advertisements for each advertiser, then adding the non-advertising content to achieve an optimal blend of advertising and non-advertising
content.
Substantially all of the advertisements on our network are provided by our advertisers. All of the advertising content displayed on our advertising network is
reviewed by us to ensure compliance with PRC laws and regulations. See "—Regulation—Regulation of Advertising Services—Advertising Content." We update
advertising content for our programs played on digital TV screens on airplanes on a monthly basis. A majority of the non-advertising content played on our
network is provided by third-party content providers such as Dragon TV, the Travel Channel and various satellite and cable television stations and television
production companies. In January 2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which
manages the internet TV business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air
travelers in China.
Our programming team edits, compiles and records into digital format for all of our network programs according to the programming list. Each programming list
and pre-recorded program is carefully reviewed to ensure the accuracy of the order, duration and frequency as well as the appropriateness of the programming
content.
Display Equipment Supplies and Maintenance
The primary hardware required for the operation of our network are the digital frames and digital TV screens that we use in our media network. Our digital
frames 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 in 2014 were
Samsung, TCL, Vewell, Sharp and AU, which collectively provided 100% of our total digital frames. One supplier, AU, supplied all of our digital TV screens in
2014. Our digital frame suppliers typically provide us with one- to four-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
typically engage two to four skilled maintenance staff for each network airport to make five scheduled inspections on our displays every day. They report any
technical problems 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 we do
not incur significant maintenance costs in relation to these platforms. For our gas stations media network and outdoors media network, where the primary
hardware consist of basic display equipment such as light boxes and billboards, such hardware will generally be established upon the time of our entering into the
relevant concession rights agreements; we may incur construction and maintenance costs in relation to this equipment.
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Customer Service
Our customer service team is responsible for contacting third-party research firms to compile evaluation reports based on selective sampling of the status of
advertising on our network and providing advertisers with monthly monitoring reports once the relevant advertising campaign is launched on our network. At the
same time, we also provide our advertisers with monthly reports prepared by third parties that verify the proper functioning of our displays and the proper
dissemination of the advertisement when required by our advertisers; such reports are done through online survey to analyze the effectiveness of and public
reaction to the advertisements. In addition, our network airports and airlines as well as gas stations are also actively involved in the monitoring process.
Competition
We compete primarily with several different groups of competitors in the air travel advertising market:
•
•
•
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 advertising companies,
and with traditional advertising media, such as newspapers, television, magazines and radio, some of which may advertise in the airports in which we
have exclusive contract rights to operate digital TV screens and some of which may advertise in the gas stations and other areas where 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 brand recognition.
See “Item 3. Key Information—D. Risk Factors — Risks Related to Our Business — We face significant competition in the PRC advertising industry, and if we
do not compete successfully against new and existing competitors, we may lose our market share, and our profits may be reduced."
We may also encounter competition from other players as we further expand into the in-flight and on-train Wi-Fi market.
Intellectual Property
To protect our brand and other intellectual property, we rely on a combination of trademark and trade secret laws as well as confidentiality agreements with our
employees, sales agents, contractors and others. We have registered 17 major trademarks and one patent 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 parties will
not infringe or misappropriate these rights.
", "
", "
We have registered our domain name www.AirMedia.net.cn with the Internet Corporation for Assigned Names and Numbers. As of the date hereof, we have
registered 21 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 National
People'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 that regulate
our business, all of which are discussed below.
Limitations on Foreign Ownership in the Advertising Industry
The Foreign Investment Industrial Guidance Catalogue, and relevant provisions provide that foreign investment projects are divided into four categories:
encouraged, permitted, restricted and prohibited. The foreign investment projects that are encouraged, restricted and prohibited shall be listed in the Foreign
Investment Industrial Guidance Catalogue. The foreign investment projects that do not fall into the categories of encouraged, restricted or prohibited projects are
considered permitted foreign investment projects and are not listed in the Foreign Investment Industrial Guidance Catalogue. Applicable regulations and approval
requirements vary based on the different categories. Investments in the PRC by foreign investors through wholly foreign-owned enterprises must be in
compliance with the applicable regulations, and such foreign investors must obtain governmental approvals as required by these regulations. Since the advertising
industry is not listed in the Foreign Investment Industrial Guidance Catalogue, it falls into the permitted foreign investment category.
37
The Foreign-invested Advertising Regulations require foreign entities that establish a wholly owned advertising company must have at least three years of direct
operations in the advertising industry outside of China. Since December 10, 2005, foreign investors have been permitted to directly own a 100% interest in
advertising 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 years of
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 equity interests of
our VIEs under the rules allowing for complete foreign ownership, our VIEs would continue to hold the required advertising licenses consistent with current
regulatory requirements.
Currently, our advertising business is mainly conducted through contractual arrangements with our consolidated VIEs in China, including AM Advertising,
Shengshi Lianhe, Jiaming Advertising and AM Yuehang.
Our VIEs are the major companies through which we provide advertising services in China. Our subsidiary, AM Technology, has entered into a series of
contractual arrangements with our PRC operating affiliates and their respective subsidiaries and shareholders under which:
• 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 by PRC
law.
See “Item 4. Information on the Company—C. Organizational Structure” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party
Transactions—Contractual Arrangements.”
In the opinion of Commerce & Finance Law Offices, our PRC legal counsel: the respective ownership structures of AM Technology and our consolidated VIEs
are in compliance with existing PRC laws and regulations, and the contractual arrangements among AM Technology and our consolidated VIEs, in each case
governed by PRC law, are valid, binding and enforceable, 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 future
PRC laws and regulations. Accordingly, there can be no assurance that the PRC regulatory authorities, in particular the SAIC (which regulates advertising
companies), will not in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if
the PRC government determines that the agreements establishing the structure for operating our PRC advertising business do not comply with PRC government
restrictions on foreign investment in the advertising industry, we could be subject to severe penalties. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our China business do not comply
with PRC governmental restrictions on foreign investment in the advertising industry and in the operating of non-advertising content, our business could be
materially and adversely affected."
Regulation of Advertising Services
Business License for Advertising Companies
Under applicable regulations governing advertising businesses in China, companies that engage in advertising activities must obtain from the SAIC or its local
branches a business license which specifically includes within its scope the operation of an advertising business. Companies conducting advertising activities
without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business
license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or
regulation. We do not expect to encounter any difficulties in maintaining our business licenses. Each of our VIEs has obtained such a business license from the
local branches of the SAIC as required by existing PRC regulations.
Each of Shenzhen AM, AM Technology and Xi'an AM has valid business license as of the date of this report. The business scope of these three entities as set
forth in their business licenses include the development of electronic, computer and media-related technologies and products and do not include advertising, due
to certain restrictions on foreign ownership of advertising enterprises under PRC law.
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Advertising Content
PRC advertising laws and regulations set forth certain content requirements for advertisements in China, which include prohibitions on, among other things,
misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of
the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. The dissemination of tobacco advertisements via media
is also prohibited as well as the display of tobacco advertisements in public areas. There are also specific restrictions and requirements regarding advertisements
that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition,
all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through any media, together with
any other advertisements subject to censorship by administrative authorities under relevant laws and administrative regulations, must be submitted to the relevant
administrative authorities for content approval prior to dissemination. We do not believe that advertisements containing content subject to restriction or
censorship comprise a material portion of the advertisements displayed on our network.
Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and in full compliance with applicable law. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the
advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain items which are subject to
government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been obtained.
Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and
orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may
revoke violators' licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject
to civil liability if they infringe the legal rights and interests of third parties in the course of their advertising business.
Outdoor Advertising
The PRC Advertising Law stipulates that the exhibition and display of outdoor advertisements must not:
•
•
•
•
•
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 advertising
industry in China. Outdoor advertisements in China must be registered with the local SAIC before dissemination. The advertising distributors are required to
submit 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 outdoor
advertisement must be filed with the local SAIC. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If advertising registration
certificates are not obtained for our airport advertising operations where such registration certificates are deemed to be required, we may be subject to
administrative 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, technology and
entertainment through public audio-video systems located in automobiles, buildings, airports, bus or train stations, shops, banks and hospitals and other outdoor
public systems must be approved by the SARFT. The relevant authority in China has not promulgated any implementation rules on the procedure of applying for
the requisite approval pursuant to the SARFT circular. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—If we fail to obtain
approvals for inclusion of non-advertising content in our programs broadcast in digital TV screens on airplanes, we may be unable to continue to include such
non-advertising content in our programs, which may cause our revenues to decline and our business and prospects to deteriorate.”
39
Regulations on Foreign Exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended (2008). Under these
Rules, RMB is freely convertible for current account items, such as trade and service-related foreign exchange transactions, but not for capital account items, such
as direct investment, loan or investment in securities outside China unless the prior approval of, and/or registration with, SAFE or its local counterparts (as the
case may be) is obtained.
Pursuant to the Foreign Currency Administration Rules, foreign invested enterprises, or FIEs, in China may purchase foreign currency without the approval of
SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain
foreign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires a
company in China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs
to purchase and retain foreign currencies in the future. They may also conduct examination of past foreign exchange transactions. In addition, foreign exchange
transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from, and/or registration
with, SAFE.
Regulations on Dividend Distribution
Under applicable PRC regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in
accordance with PRC accounting standards and regulations. Additionally, these wholly foreign-owned companies are required to set aside at least 10% of their
respective accumulated profits each year, if any, to fund certain reserve funds until their cumulative total reserve funds have reached 50% of the companies'
registered capitals. At the discretion of these wholly foreign-owned companies, they may allocate a portion of their after-tax profits based on PRC accounting
standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends except in the event of
liquidation and cannot be used for working capital purposes.
In addition, under the EIT Law, dividends generated after January 1, 2008 and payable by a FIE in China to its foreign investors who are non-resident enterprises
will be subject to a 10% withholding tax unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding arrangement. BVI, where Broad Cosmos, our wholly owned subsidiary, is incorporated, does not have such a tax treaty with China. AM China, the
100% shareholder of AM Technology, Shenzhen AM and Xi'an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special
Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in August 2006,
dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the
foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). In August 2009, the State Administration of Taxation released the
Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation), which took effect on October 1, 2009. Under these measures,
our Hong Kong subsidiary needs to obtain approval from the competent local branch of the State Administration of Taxation in order to enjoy the preferential
withholding tax rate of 5% in accordance with the Double Taxation Arrangement. In February 2009, the State Administration of Taxation issued Notice No. 81.
According to Notice No. 81, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the "beneficial owner" of the
relevant dividend income, and no enterprise is entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential
tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The tax authority in charge has the right
to make adjustments to the applicable tax rates, if it determines that any taxpayer has enjoyed preferential treatment under tax treaties as a result of such
transaction or arrangement. In October 2009, the State Administration of Taxation issued another notice on this matter, or Notice No. 601, to provide guidance on
the criteria to determine whether an enterprise qualifies as the "beneficial owner" of the PRC sourced income for the purpose of obtaining preferential treatment
under tax treaties. Pursuant to Notice No. 601, the PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the
"substance over form" principle in the review. Notice 601 specifies that a beneficial owner should generally carry out substantial business activities and own and
have control over the income, the assets or other rights generating the income. Therefore, an agent or a conduit company will not be regarded as a beneficial
owner of such income. Since the two notices were issued, it has remained unclear how the PRC tax authorities will implement them in practice and to what extent
they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority
determines that our Hong Kong subsidiary is a conduit company and does not qualify as the "beneficial owner" of the dividend income it receives from our PRC
subsidiaries, the higher 10% withholding tax rate may apply to such dividends.
The EIT Law provides, however, that dividends distributed between qualified resident enterprises are exempted from the withholding tax. According to the
Implementation Regulations of the EIT Law, the qualified dividend and profit distribution from equity investment between resident enterprises shall refer to
investment income derived by a resident enterprise from its direct investment in other resident enterprises, except the investment income from circulating stocks
issued publicly by resident enterprises and traded on stock exchanges where the holding period is less than 12 months. As the term "resident enterprises" needs
further clarification and interpretation, we cannot assure you that the dividends distributed by AM Technology, Shenzhen AM and Xi'an AM to their direct
shareholders would be regarded as dividends distributed between qualified resident enterprises and be exempted from the withholding tax.
40
Under the EIT Law and related regulations, an enterprise established outside of the PRC with "de facto management bodies" within the PRC is considered a PRC
resident enterprise and is subject to the EIT at the rate of 25% on its worldwide income. The related regulations define the term "de facto management bodies" as
"establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties,
etc. of an enterprise." The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for
determining whether the "de facto management body" of a Chinese-controlled overseas-incorporated enterprise is located in China. In addition, the SAT issued a
bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date to be September 1, 2011. The bulletin
provided clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that
when provided with a copy of a Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer
should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated
enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not to those that, like our company,
are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification made in the bulletin may reflect the
SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of offshore enterprises and the
administration measures that should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
Moreover, under the EIT Law, if we are classified as a PRC resident enterprise and such income is deemed to be sourced from within the PRC, foreign ADS
holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares.
See "Item 3. Key Information — D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-owned operating subsidiaries may
be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income, and dividends distributed to our investors may be subject
to more PRC withholding taxes under the PRC tax law."
SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options
In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of
Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005. SAFE Notice 75
suspends the implementation of two prior regulations promulgated in January and April of 2005 by the SAFE. On July 4, 2014, SAFE issued the SAFE’s Notice
on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Outbound Investment and Financing and Inbound Investment
via Special Purpose Vehicles, or SAFE Circular 37, which has superseded SAFE Circular 75. Under SAFE Circular 75, SAFE Circular 37 and other relevant
foreign exchange regulations, PRC residents who make, or have previously made, prior to the implementation of these foreign exchange regulations, direct or
indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of
an offshore company is also required to file or update the registration with the local branch of SAFE, with respect to that offshore company for any material
change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term
equity or debt investment or the creation of any security interest. If any PRC shareholder fails to make the required registration or update the previously filed
registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into its
PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws
for evasion of applicable foreign exchange restrictions.
In December 2006, the People's Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation,
setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In January
2007, the SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval requirements for certain capital account
transactions such as a PRC citizen's participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On
February 15, 2012, the SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating
in an Employee Share Incentive Plan of an Overseas-Listed Company (which replaced the old Circular 78, "Application Procedure of Foreign Exchange
Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company" promulgated
on March 28, 2007), or the New Share Incentive Rule. Under the New Share Incentive Rule, PRC citizens who participate in a share incentive plan of an overseas
publicly listed company are required to register with SAFE and complete certain other procedures. All such participants need to retain a PRC agent through a
PRC subsidiary to register with SAFE and handle foreign exchange matters such as opening accounts and transferring and settlement of the relevant proceeds.
The New Share Incentive Rule further requires that an offshore agent should also be designated to handle matters in connection with the exercise or sale of share
options and proceeds transferring for the share incentive plan participants.
41
We and our PRC employees who have been granted stock options are subject to the New Share Incentive Rule. We are in the process of completing the required
registration and the procedures for the New Share Incentive Rule under PRC laws, but the application documents are subject to the review and approval of the
SAFE, and we can make no assurance as to when the registration and procedures will be completed. If we or our PRC employees fail to comply with the New
Share Incentive Rule, we and/or our PRC employees may face sanctions imposed by the foreign exchange authority or any other PRC government authorities.
In addition, the State Administration of Taxation has issued a few circulars concerning employee stock options. Under these circulars, our employees working in
China who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee
stock options with relevant tax authorities and withhold individual income taxes of those employees who exercise their stock options. If our employees fail to pay
and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.
C.
Organizational Structure
The following diagram illustrates our corporate structure as of March 31, 2015:
42
Offshore
VIE
Onshore
Equity Interest
Contractual arrangements. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual
Arrangements."
Beijing Shengshi Lianhe Advertising Co., Ltd., or Shengshi Lianhe, is 79.86% owned by Mr. Herman Man Guo, our chairman and chief
executive officer, 11.94% owned by Mr. Qing Xu, our director and executive president, and 8.20% owned by Mr. Xiaoya Zhang, former
president and chief financial officer of AirMedia Group Inc. and AirMedia Group Co., Ltd.
Beijing AirMedia Jiaming Advertising Co., Ltd. , formerly known as Beijing AirMedia UC Advertising Co., Ltd. is 98.75% owned by
AirMedia Group Co., Ltd., 1.035% owned by Mr. Herman Man Guo, our chairman and chief executive officer, 0.215% owned by Mr. Qing Xu,
our director and executive president.
(1)
(2)
43
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Beijing Yuehang Digital Media Advertising Co., Ltd. is 80% owned by Mr. James Zhonghua Feng, our president and director, and 20% owned
by Mr. Tao Hong, senior administrative director of AirMedia Group Co., Ltd.
In April 2015, Beijing Shengshi Lianhe Advertising Co., Ltd. entered into an agreement with Shenzhen Liantronics Co., Ltd. to transfer 5%
equity interest in AirMedia Group Co., Ltd. to Shenzhen Liantronics Co., Ltd. Upon the completion of this transfer, AirMedia Group Co., Ltd.
will be approximately 91.8% owned by Shengshi Lianhe, 5% owned by Shenzhen Liantronics Co., Ltd, approximately 2.8% owned by Mr.
Herman Man Guo, our chairman and chief executive officer, and the remaining interest will be owned by Mr. Qing Xu, our director and
executive president and Mr. Xiaoya Zhang, former president and chief financial officer of AirMedia Group Inc. and AirMedia Group Co., Ltd.
Beijing AirMedia Lianhe Advertising Co., Ltd. (formerly known as Beijing Weimei Lianhe Advertising Co., Ltd.) is 20% owned by Beijing
Dayun Culture Communication Co., Ltd.
Beijing Dongding Gongyi Advertising Co., Ltd. is 25% owned by Mr. Jin Li, director and deputy general manager of Beijing Dongding Gongyi
Advertising Co., Ltd.
Guangzhou Meizheng Advertising Co., Ltd. was 46% owned by Guangzhou Daozheng Advertising Co., Ltd., as of March 31, 2015. The share
capital increase has been completed on April 15, 2015, and as of date of this annual report, Shengshi Lianhe and Guangzhen Daozheng
Advertising Co., Ltd. each holds approximately 63% and 37%, respectively, of this entity.
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 by Beijing Zhongshi Aoyou
Advertising Co., Ltd. Elec-Tech International Co., Ltd. had contributed RMB8,865,937.5 out of its subscribed registered capital of
RMB13,510,000 as of March 31, 2015 and is obligated to complete its duty of contribution before June 28, 2015.
Beijing AirMedia Film & TV Culture Co., Ltd. is 20% owned by Dingsheng Ruizhi (Beijing) Investment Consulting Co., Ltd.
Beijing Xinghe Union Media Co., Ltd. is 50% owned by Beijing AirMedia Film & TV Culture Co., Ltd.
Flying Dragon Media Advertising Co., Ltd. is 16% owned by Ms. Mingfang Zhang, president of Flying Dragon Media Advertising Co., Ltd.,
and 4% owned by Mr. Hulin Zhang, general manager of Flying Dragon Media Advertising Co., Ltd.
AirTV United Media & Culture Co., Ltd. is 25% owned by Beijing Dalu Culture Media Co., Ltd.
Substantially all of our operations are conducted through contractual arrangements with our consolidated VIEs in China, AM Advertising, Shengshi Lianhe,
Jiaming Advertising and AM Yuehang. We do not have any equity interests in our VIEs, but instead enjoy the economic benefits derived from them through a
series of contractual arrangements. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements”
for a description of these arrangements.
As of March 31, 2015, we hold less than a majority of equity interest in the following entities and do not consolidate the results of these entities.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Beijing AirMedia Jiaming Film & TV Culture Co., Ltd., which is 49% owned by AM Advertising and 51% owned by Beijing Hongyin Tianyue
Film & TV Culture Co., Ltd..
Beijing AirMedia Jinsheng Advertising Co., Ltd, which is 19% owned by Beijing AirMedia Media Advertising Co., Ltd. and 81% owned by
Beijing Tianyi Culture Development Co., Ltd.
Beijing Eastern Media Co., Ltd., which is 49% owned by AM Advertising and 51% owned by Shanghai Eastern Media Corporation
Beijing Yunxing Chuangrong Investment Fund Management, Co., Ltd., which is 50% owned by AM Advertising and 50% owned by HNA
Xinhua Culture Holding Group Co., Ltd.
Guangxi Dingyuan Advertising Co., Ltd., which is 40% owned by AM Advertising, 20% owned by Guangxi Civil Aviation Development Co.,
Ltd. and 40% owned by Beijing Asiaray Advertising Co., Ltd.
Qingdao Airport AirMedia Advertising Co., Ltd., which is 49% owned by AM Advertising and 51% owned by Qingdao International Airport
Group Co., Ltd.
Zhangshangtong Air Service (Beijing) Co., Ltd., which is 20% owned by AM Advertising, 61.4% owned by Beijing Zhangshangtong Network
Technology Corporation and 18.6% owned by 16 individuals.
Zhejiang AirMedia Guangying Film & TV Production Co., Ltd., which is 47.6% owned by Beijing AirMedia Film & TV Culture Co., Ltd. and
52.4% owned by Zhejiang Tianguangdiying Film & TV Production Co., Ltd.
Beijing AirMedia Jiacheng Media Advertising Co., Ltd., which is 30% owned by Beijing AirMedia Jiaming Advertising Co., Ltd. and 70%
owned by Beijing Dongfang Jiacheng Culture & Media Co., Ltd.
44
D.
Property, Plants and Equipment
Our headquarters are located in Beijing, China, where we lease approximately 5,043 square meters (approximately 54,282 square feet) of office space. Our branch
offices lease approximately 4,628 square meters (approximately 49,815 square feet) of office space in approximately 35 other locations.
In addition, we own approximately 841 square meters (approximately 9,051 square feet) of office space in China. In September 2014, we entered into an
agreement to purchase an office space of 1,009.95 square meters (approximately 10,871 square feet) in Beijing for a total consideration of RMB32.6 million
(US$5.3 million).
In January 2015, we transferred 81% equity interests in AM Jinsheng for a consideration of $1.2 million to Beijing Tianyi Culture Development Co., Ltd., a third
party unrelated to us. As a part of the transaction, we agreed to sell certain property, plant and equipment with net carrying value of $1.1 million to Beijing Tianyi
Culture Development Co., Ltd and have classified them as assets held for sale. No impairment was noted for the assets held for sale.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements. Our actual
results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth under “Item 3. Key
Information—D. Risk Factors" or in other parts of this annual report on Form 20-F. See "Forward-looking Information."
A.
Operating Results
Important Factors Affecting Our Results of Operations
Our operating results are substantially affected by the following factors and trends. After the completion of our on-going divestiture of our business lines of TV-
attached digital frames and digital TV screens in airports, the extent of effect on our operating results by factors in respect of these two business lines is expected
to decrease.
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 advertising
spending in China. The demand for air travel was in turn affected by general economic conditions, the affordability of air travel in China and certain special
events that may attract air travelers into and within China. 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 our
advertising time slots and locations and the price we charge for our advertising time slots and locations.
Service Offerings
During each of the past three fiscal years, our advertising network primarily consisted of standard digital frames, traditional media in airports such as billboards
and light boxes, digital screens on airplanes, digital TV screens in airports, mega-size LED screens in airports, unipole signs, tablets displays on high speed trains
and other outdoor media, and various traditional advertising formats in gas stations. We believe our broad range of service offerings provided our advertisers with
diverse choices in selecting and combining different air travel and other advertising platforms that best suit their advertising needs and preferences, 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 time slots
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 of all 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 period presented is
calculated by multiplying the time slots per month for a given airline by the number of months during the period presented when we had operations on such
airline and then calculating the sum of all the time slots for each of our network airlines. The number of locations available for sale in traditional media in airports
is defined as the sum of (a) the number of light boxes and billboards in Beijing, Shenzhen, Wenzhou and certain other airports and (b) the number of gate bridges
in airports where we have concession rights to place advertisements on gate bridges. The number of locations available for sale 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 Sinopec gas stations and in various outdoor
locations throughout Beijing.
45
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 have
available to sell. In addition, the length of our advertising cycle for our digital frames and digital TV screens can potentially be extended to longer durations
depending on demand in each airport or airline. However, advertisers may be unwilling to accept placement of their advertisements on a longer time cycle which
decreases the frequencies of their advertisements displayed each day. Also, beginning April 6, 2012, in an effort to improve the attractiveness of our digital
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 of advertising time slot
was changed from 12 seconds to six seconds per time slot. The cycle time of advertisements was changed from 10 minutes to five minutes. These changes
increased the frequency of exposure for advertisements and had no impact on the time slots available 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 halls or arrival halls separately or as a whole in the 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 the number 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, mega-size LEDs, light boxes and LED screens becomes saturated in the major airports, airlines, gas stations 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 airports and on
airplanes sold during that period. The average selling price for our traditional media spaces and locations in airports is calculated by dividing the revenues derived
from all the locations sold by the number of locations sold during the period presented, and we use a similar method to calculate average selling price for our gas
station and outdoor media locations. The primary factors that affect the effective price we charge advertisers for time slots and locations on our network and our
utilization rate include the attractiveness of our network to advertisers, which depends on the number of displays and locations, the number and scale of airports
and airplanes in our network, the level of demand for time slots and locations, and the perceived effectiveness by advertisers of their advertising campaigns
placed on our network. We may increase the selling prices of our advertising time slots and locations from time to time depending on the demand for our
advertising time slots, spaces and locations. For example, starting from October 23, 2012, after approximately 40-day operation, we completed the upward
adjustment of the listing price of our mega-size LED screens at Terminals 2 of Chengdu Shuangliu International Airport by approximately 75%. The price
adjustment was due to strong demand from advertisers.
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 either generated such
content through our VIEs or obtained such content from third party content providers. We believe that the combination of non-advertising content with
advertising content makes people more receptive to our programs, which in turn makes the advertising content more effective for our advertisers. We believe this
in turn allows us to charge a higher price for each advertising time slot. We closely track the program blend and advertiser demand to optimize our ability to
generate revenues for each program cycle.
Utilization Rate
The utilization rate of our advertising time slots is the total time slots sold as a percentage of total time slots available during the relevant period. In order to
provide meaningful comparisons of the utilization rate of our advertising time slots, we generally normalize our time slots into 12-second units for digital frames
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 advertising locations 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 locations available during the
relevant period. Our overall utilization rate was primarily affected by the demand for our advertising time slots and locations and our ability to increase the sales
of our advertising time slots and locations, especially those advertising time slots and locations on our network airports. We plan to strengthen our sales efforts in
these cities by building local sales teams to increase our direct sales of advertising time slots and locations in these cities and ultimately improve our utilization
rate.
46
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 and
locations on our network depended on the attractiveness and effectiveness of our network as viewed by our advertisers which, in turn, was related to the breadth
of our network coverage, including significant coverage in major airports and airlines that advertisers wish to reach. As a result, it has been, and will continue to
be, important for us to secure and retain concession rights contracts to operate our digital frames and traditional media in major airports and to place our programs
on major airlines and to increase the number of programs we place on those airlines. 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 concession fees
will increase our cost while our revenues may not increase proportionately, or at all. It will therefore be important to our results of operations that we secure and
retain these concession rights contracts on commercially advantageous terms.
Revenues
We 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)
2012
% of
Total
Revenues
Amount
Fiscal Years Ended December 31,
2013
Amount
% of
Total
Revenues
2014
% of
Total
Revenues
Amount
$
$
137,342
13,731
26,612
83,478
7,346
14,217
10,239
292,965
(6,223)
286,742
46.9% $
4.7%
9.1%
28.5%
2.4%
4.9%
3.5%
100.0%
(2.1)%
97.9% $
152,346
14,110
16,160
64,845
9,183
12,726
7,146
276,516
(4,250)
272,266
55.1% $
5.1%
5.8%
23.5%
3.3%
4.6%
2.6%
100.0%
(1.5)%
98.5% $
138,527
13,286
16,212
56,723
6,395
11,164
13,564
255,871
(3,390)
252,481
54.1%
5.2%
6.3%
22.2%
2.5%
4.4%
5.3%
100.0%
(1.3)%
98.7%
Air Travel Media Network
Digital frames in airports
Digital TV screens in airports
Digital TV screens on airplanes
Traditional media in airports
Other revenues in air travel
Gas station Media Network
Other Media
Total revenues
Business tax and other sales tax
Net revenues
Revenues from Air Travel Media Network
Revenues from our digital frames in airports accounted for 46.9%, 55.1% and 54.1% of our total revenues for the years ended December 31, 2012, 2013 and
2014, respectively. We operated a total of 3,403 digital frames in 34 airports, 3,380 digital frames in 31 airports and 2,993 digital frames in 28 airports as of
December 31, 2012, 2013 and 2014, respectively. We expect revenues from digital frames in airports to continue to decrease in the future upon completion of the
business divestiture.
Revenues from digital frames in airports decreased by 9.1% to $138.5 million in 2014 from $152.3 million in 2013 mainly due to a soft advertising market. The
number of digital frames advertising time slots sold decreased 6.7% to 52,238 in 2014 from 56,010 in 2013, and the average selling price decreased to $2,652 in
2014 from $2,720 in 2013.
Revenues from digital frames in airports increased by 10.9% to $152.3 million in 2013 from $137.3 million in 2012 mainly due to the rapid growth of our mega-
size LED screens advertisement business and our continued sales efforts. The number of digital frames advertising time slots sold increased 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 our digital TV screens in airports accounted for 4.7%, 5.1% and 5.2% of our total revenues for the years ended December 31, 2012, 2013 and
2014, respectively. We operated 2,579 digital TV screens in 34 airports, 2,969 digital TV screens in 31 airports and 2,821 digital TV screens in 26 airports as of
December 31, 2012, 2013 and 2014, respectively. We expect revenues from this line of business to decrease in the near future after we complete the divestiture.
Revenues from digital TV screens in airports decreased by 5.8% to $13.3 million in 2014 from $14.1 million in 2013 due to a soft advertising market and a drop
in demand from advertisers as a result of competition from our other product lines and the fact that, with the rapid development of mobile internet, more people
now pay attention to their cell phones instead of our digital TV screens. Meanwhile, there was a 13.5% downward adjustment in the average selling price of our
digital TV screens in airports to $627 in 2014 from $725 in 2013 and a 8.9% increase in the number of digital TV advertising time slots sold to 21,174 in 2014
from 19,452 in 2013.
47
Revenues from digital TV screens in airports increased by 2.8% to $14.1 million in 2013 from $13.7 million in 2012 due to our continued sales 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 $587 in 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 our digital TV screens on airplanes accounted for 9.1%, 5.8% and 6.3% of our total revenues for the years ended December 31, 2012, 2013 and
2014, respectively. Our network operating digital TV screens consisted of nine, seven and seven airlines as of December 31, 2012, 2013 and 2014 .
Revenues from digital TV screens on airplanes remained relatively unchanged from 2013 to 2014. We did not renew the concession rights contract with Air
China, which expired on December 31, 2012, but regained some advertising time on Air China's airplanes on August 1, 2013 through an arrangement with an
intermediary advertising agent. Additionally, the number of time slots sold increased by 5.9% to 558 in 2014 from 527 in 2013 and there was a 5.2% decrease in
the average selling price of digital TV screens on airplanes to $29,054 in 2014 from $30,662 in 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 from
digital TV screens on Air China's airplanes. We did not renew the concession rights contract with Air China, which expired on December 31, 2012, but regained
some advertising time on Air China's airplanes on August 1, 2013 through an arrangement with an intermediary advertising agent. Additionally, the number of
time slots sold decreased by 32.5% to 527 in 2013 from 781 in 2012 and there was a 10.0% decrease in the average selling price of digital TV screens on
airplanes to $30,662 in 2013 from $34,074 in 2012.
Revenues from traditional media in airports, consisting of billboards and light boxes in airports and billboards and painted advertisements on gate bridges,
accounted for 28.5%, 23.5% and 22.2% of our total revenues for the years ended December 31, 2012, 2013 and 2014, respectively. We have offered light box
displays since the commencement of our operations.
Revenues from traditional media in airports decreased by 12.5% to $56.7 million in 2014 from $64.8 million in 2013. The decrease was primarily due to our
termination of certain unprofitable or low-margin contracts so as to focus our resources on the more profitable ones. There was a 2.7% increase in the average
selling price of traditional media in airports to $28,764 in 2014 from $27,999 in 2013 and a 14.9% decrease in the number of locations sold to 1,972 locations in
2014 from 2,316 locations in 2013.
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 our
termination 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 average
selling 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 2,316 locations in
2013 from 2,461 locations in 2012.
Other revenues in air travel, generated from advertising equipment such as digital TV screens and light boxes, accounted for 2.4%, 3.3% and 2.5% of our total
revenues for the years ended December 31, 2012, 2013 and 2014, 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 Sinopec gas
stations throughout China. Revenues from our gas station media network, consisting of outdoor advertising platforms such as LED screens, billboards and light
boxes at Sinopec gas stations in China, accounted for 4.9%, 4.6% and 4.4% of our total revenues for the years ended December 31, 2012, 2013 and 2014
respectively.
Revenues from Other Media
Revenues from other media were primarily revenues from our new business of film distribution and film investment and 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
$10.2 million, $7.1 million and $13.6 million in 2012, 2013 and 2014, respectively, and accounted for 3.5%, 2.6% and 5.3% of our total revenues for the years
ended December 31, 2012, 2013 and 2014 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 revenues
after deduction of certain costs of revenues permitted by the PRC tax laws. For purposes of calculating the amount of business and other sales tax, concession fees
were permitted to be deducted from total revenues under applicable PRC tax law.
48
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 reform
program, which changed the charge of sales tax from business tax to VAT for certain pilot industries. The pilot VAT reform program initially applied only to the
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 since August 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 tax payers in
2012.
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 business
construction 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 for
concession 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 were
previously subject to business tax. The amount of VAT included as a deduction to revenue amounted to $19.3 million for the year ended December 31, 2014.
Cost of Revenues
During the periods covered by this report, our cost of revenues consisted primarily of concession fees, agency fees and other costs, including digital frames and
digital TV screen depreciation costs, operating costs and non-advertising content costs. The following table sets forth the major components of our cost of
revenues, both in absolute amounts and as percentages of net revenues for the periods indicated.
2012
Amount
Fiscal Years Ended December 31,
2013
(All amounts are in thousands of U.S. Dollars, except percentages)
Amount
Amount
%
%
2014
Net revenues
Cost of revenues
Concession fees
Agency fees
Others
Total cost of revenues
Concession Fees
$
286,742
100.0% $
272,266
100.0% $
252,481
(177,996)
(45,778)
(26,832)
(250,606)
$
(62.1)%
(16.0)%
(9.4)%
(87.4)% $
(180,990)
(37,413)
(26,270)
(244,673)
(66.5)%
(13.7)%
(9.6)%
(89.9)% $
(175,696)
(36,139)
(24,000)
(235,835)
%
100%
(69.6)%
(14.3)%
(9.5)%
(93.4)%
We incurred concession fees to airports for placing and/or operating our digital frames, digital TV screens and other traditional media displays, to airlines for
placing our programs on their digital TV screens and to gas stations for operating our traditional media displays such as light boxes and billboards and to train
administration authorities for Wi-Fi system installation and operation rights. These fees constitute a significant portion of our cost of revenues and equaled
approximately 62.1%, 66.5% and 69.6% of our net revenues and were $178.0 million, $181.0 million and $175.7 million in the years ended December 31, 2012,
2013 and 2014, respectively. Most of the concession fees paid to airports and airlines were fixed under the relevant concession rights contracts with escalation
clauses, which required fixed fee increases over each year of the relevant contract, and payments were usually due three or six months in advance. For gas
stations, the actual concession fees paid to Sinopec were 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 actual number of developed gas stations with our operating LEDs and associated standard annual
concession fees for each developed gas station or a fixed minimum payment if any base on negotiation with the petroleum company.
Concession fees increased from 2012 to 2013 because we expanded our media resources with an additional number of concession rights contracts entered into
over the years and, while concession fee payments under these additional concession rights contracts began almost immediately after 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 from these newly signed concession rights
contracts. The concession fees that we incur under concession rights contracts for our digital frames and digital TV screens 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 fees that we incur under concession rights
contracts for our programs on airlines vary depending on the number of routes and airplanes, types of aircrafts and the departure and destination cities. The
decrease in concession fees from 2013 to 2014 was primarily due to a decrease in concession fees of termination of certain of our unprofitable or low margin
contracts.
49
Concession fees tend to increase over time as we obtain more concession rights to further develop our network. As we have recently obtained concession rights to
operate Wi-Fi systems on trains, we may experience an increase in our concession fees in order to retain these concession rights contracts.
Agency Fees
We engaged third-party advertising agencies to help source advertisers from time to time. These third-party advertising agencies assisted us in identifying and
introducing advertisers to us. In return, we paid fees to these third-party agencies if they generated advertising revenues for us. Fees that we paid to these third-
party agencies were calculated based on a pre-set percentage of revenues generated from the advertisers introduced to us by the third-party agencies and were
paid when payments were received from the advertisers. We recorded these agency fees as cost of revenues ratably over the period in which the related
advertisements were displayed. Agency fees were equal to 16.0%, 13.7% and 14.3% of our net revenues for the years ended December 31, 2012, 2013 and 2014,
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 fee
liabilities as calculated under the terms of existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in the period
in which the renegotiations are finalized. During the years ended December 31, 2012, 2013 and 2014, reversals in cost of sales as a result of renegotiated agency
fees amounted to $6.4 million, $3.3 million and $1.4 million, respectively.
Others
Our other cost of revenues represented 9.4%, 9.6% and 9.5% of our net revenues for the years ended December 31, 2012, 2013 and 2014, respectively, and
included the following:
• Display Equipment Depreciation. Generally, we capitalized the cost of our digital frames, digital TV screens, light boxes, LED screens and billboards
and related equipment in the gas station media network and PAD on high-speed trains and recognized depreciation costs on a straight-line basis over the
term of their useful lives, which we estimate to be five years. The primary factors affecting our depreciation costs were the number of digital frames,
digital TV screens 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
useful life of the displays.
• Display Equipment Maintenance Cost. Our display maintenance cost consisted of salaries for our network maintenance staff, travel expenses in relation
to on-site visits and monitoring and costs for materials and maintenance in connection with the upkeep of our advertising network. The primary factor
affecting our display equipment maintenance cost was the size of our network maintenance staff.
•
Non-advertising Content Cost. The programs on the majority of our digital TV screens combine advertising content with non-advertising content, such
as weather, sports and comedy clips. Our standard programs in airports currently include 40 minutes of non-advertising content during each hour of
programming and are shown for approximately 16 hours per day. The length of our in-flight programs typically ranges from approximately 45 to 60
minutes per flight, approximately 40 to 45 minutes of which consist of non- advertising content. We believe that the non-advertising program content
makes air travelers more receptive to the advertisements included in our programs and ultimately make our program more effective for our advertisers.
This in turn allows us to charge a higher price for each advertising time slot. We also promoted the brand names of our advertisers through our program
content by naming our programs after their brand names or displaying their logos on the corner of the digital TV screens during the programs. We
produced some of the non-advertising content shown on our network through our VIEs. The majority of the non-advertising content broadcast on our
network was provided by third-party content providers such as Shanghai Media Group and various local television stations and television production
companies. In January 2014, we entered into a strategic partnership with China Radio International Oriental Network (Beijing) Co., Ltd, which manages
the internet TV business of China International Broadcasting Network, to operate the CIBN-AirMedia channel to broadcast network TV programs to air
travelers in China. We pay a fixed price for some content. Other content is provided free to us and the provider of the content benefits by having its logo
shown on the content in addition to experiencing greater exposure to a wider audience. These providers of free content receive no benefit from us and do
not place advertising with us. We do not directly generate revenues from these non-exchange transactions. Some of the third-party content providers that
currently do not charge us for their content may do so in the future and other third-party content providers may increase the prices for their programs
over time. This may increase our cost of revenues in the future.
50
Operating Expenses
During the periods covered by this report, our operating expenses consisted of general and administrative expenses and selling and marketing expenses. The
following table sets forth the two components of our operating expenses, both in absolute amount and as a percentage of net revenues for the periods indicated.
2012
Amount
Fiscal Years Ended December 31,
2013
(All amounts are in thousands of U.S. Dollars, except percentages)
Amount
Amount
%
%
2014
%
Net revenues
Operating expenses
General and administrative expenses
Selling and marketing expenses
Impairment of goodwill
Impairment of intangible assets
Total operating expenses
$
286,742
100.0% $
272,266
100.0% $
252,481
100.0%
(21,842)
(17,995)
(20,611)
(9,583)
(70,031)
$
(7.6)%
(6.3)%
(7.2)%
(3.3)%
(24.4)% $
(25,723)
(20,069)
‒
‒
(45,792)
(9.5)%
(7.4)%
‒
‒
(16.8)% $
(26,337)
(25,067)
‒
‒
(51,404)
(10.4)%
(9.9)%
‒
‒
(20.3)%
We expect that our operating expenses will further increase in the future as we expand our network and operations and enhance our sales and marking activities.
General and Administrative Expenses
General and administrative expenses were equal to 7.6%, 9.5% and 10.4% of our net revenues for the years ended December 31, 2012, 2013 and 2014,
respectively. Our general and administrative expenses included share-based compensation expenses of $2.6 million, $1.3 million and $1.3 million in the fiscal
years ended December 31, 2012, 2013 and 2014, respectively. General and administrative expenses consisted primarily of office and utility expenses, salaries and
benefits for general management, finance and administrative personnel, allowance for doubtful accounts, depreciation of office equipment, public relations related
expenses and other administration related expenses.
Selling and Marketing Expenses
Selling and marketing expenses accounted for 6.3%, 7.4% and 9.9% of our net revenues for the years ended December 31, 2012, 2013 and 2014, respectively.
Our selling and marketing expenses consisted primarily of salaries and benefits for our sales and marketing personnel, office and utility expenses related to our
selling and marketing activities, travel expenses incurred by our sales personnel, expenses for the promotion, advertisement and sponsorship of media events, and
other sales and marketing related expenses. Our selling and marketing expenses included share-based compensation expenses of $0.9 million, nil and $0.1 million
in the years ended December, 31, 2012, 2013 and 2014, respectively.
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 $20.6 million, nil and nil for impairment of goodwill for the years ended December 31, 2012, 2013 and 2014, 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 that
the 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. We
recognized $9.6 million, nil and nil for impairment of intangible assets for the years ended December 31, 2012, 2013 and 2014, respectively.
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 gains tax. In
addition, dividend payments are not subject to withholding tax in the Cayman Islands.
51
Hong Kong. We did not record any Hong Kong profits tax for the year ended December 31, 2012 on the basis that our Hong Kong subsidiaries did not have any
assessable profits arising in or derived from Hong Kong for 2012. One of our Hong Kong subsidiaries, Glorious Star Investment Ltd, 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 or derived from Hong Kong for 2013. The
same subsidiary was de-registered in March 2015 and ceased to exist. Our other Hong Kong subsidiary, Air Media (China) Ltd, did not record any Hong Kong
profits tax for the year ended December 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 from previous years. For the year ended December 31, 2014, we did not record any Hong Kong profits tax on the basis that our Hong Kong
subsidiaries did not have any assessable profits arising in or derived from Hong Kong for 2014. Dividends from our Hong Kong subsidiaries to us are exempt
from withholding tax. No dividend from our Hong Kong subsidiaries was declared for the years ended December 31, 2012, 2013 and 2014.
PRC. Prior to the effective date of the new EIT Law on January 1, 2008, enterprises in China were generally subject to EIT at a statutory rate of 33% unless they
qualified for certain preferential treatment. Effective as of January 1, 2008, the EIT Law applies a uniform EIT rate of 25% to all domestic enterprises and
foreign-invested enterprises and defines new tax incentives for qualified entities. Under the EIT Law, entities that qualify as HNTE are entitled to the preferential
income tax rate of 15%. A company's status as a HNTE is valid for three years, after which the company must re-apply for such qualification in order to continue
to enjoy the preferential income tax rate. In addition, according to the Administrative Regulations on the Recognition of High and New Technology Enterprises,
the Guidelines for Recognition of High and New Technology Enterprises and the Notice of Favorable Enterprise Income Tax Policies jointly issued by the PRC
Ministry of Science and Technology, the PRC Ministry of Finance and the PRC State Administration of Taxation in April 2008, July 2008 and February 2008,
respectively, "new software enterprises" can enjoy an income tax exemption for two years beginning with their first profitable year and a 50% tax reduction to a
rate of 12.5% for the subsequent three years.
On December 26, 2007, the PRC State Council issued Circular 39. Based on Circular 39, certain enterprises established before March 16, 2007 that were eligible
for tax exemptions or reductions according to the then-effective tax laws and regulations can continue to enjoy such exemption or reduction until it expires.
Furthermore, according to Circular 39, enterprises that were eligible for preferential tax rates according to the then-effective tax laws and regulations may be
eligible for a gradual rate increase to 25% over the 5-year period beginning from January 1, 2008. Specifically, the applicable rates under such an arrangement for
such enterprises that enjoyed a 15% tax rate prior to the effectiveness of the EIT Law are 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in
2012. However, according to the Notice on Prepayment of EIT issued by the State Administration of Taxation on January 30, 2008, the gradually increased EIT
rate during the transition period is not applicable to entities that qualified for preferential rates as high and new technology enterprises alone and they would be
subject to EIT at 25% from January 2008 if they cannot qualify as high and new technology enterprises under the EIT Law and related regulations.
AM Technology was recognized as a HNTE under the new rules and therefore, it is entitled to enjoy a preferential EIT rate of 15%. It was also eligible for a 50%
tax reduction from 2009 to 2010 under the applicable tax laws and regulations that were in effect before January 1, 2008, the date the EIT Law came into effect.
As a result, AM Technology was subject to an EIT rate of 7.5% in 2009 and 2010. In September 2011, AM Technology received the HNTE certificate, and in
October 2014, AM Technology successfully renewed its HNTE Status and obtained the certificate issued by the competent governmental authority. As a result,
AM Technology is expected to be subject to an EIT rate of 15% until 2016 as long as it maintains its HNTE status.
Xi'an AM qualified as a "software enterprise" in August 2008 by the Technology Information Bureau of Shaanxi Province and has received a written approval
from Xi'an local tax bureau that it is granted a two-year exemption from EIT commencing on its first profitable year and a 50% reduction of the 25% EIT rate for
the succeeding three years. As Xi'an AM first made profit in 2009, it was exempted from EIT in 2009 and 2010, and enjoyed the preferential income tax rate of
12.5% from 2011 to 2013. Xi’an AM received the HNTE certificate jointly issued by the competent governmental authorities in Shaanxi Province in September
2014. As such, Xi’an AM is expected to be subject to a preferential income tax rate of 15% from 2014 to 2016 as long as it maintains its HNTE status.
Shenzhen AM was subject to a 15% preferential EIT rate in 2007 as it is located in Shenzhen and then was subject to EIT on its taxable income from 2008 at the
gradual rate as set out in Notice of the State Council Concerning Implementation of Transitional Rules for Enterprise Income Tax Incentives, or "Circular 39".
Since Shenzhen AM is also qualified as a "manufacturing foreign-invested enterprise" incorporated prior to the effectiveness of the EIT Law, it is further entitled
to a two-year exemption from EIT for the years 2008 and 2009 and preferential rates of 11%, 12% and 12.5% for the years 2010, 2011 and 2012, respectively.
Shenzhen AM is subject to EIT at a rate of 25% from 2013 afterwards.
Hainan Jinhui is subject to EIT on the taxable income at the gradual rate, which was 22% in 2010, 24% in 2011, 25% in 2012 as set out in Circular 39. Hainan
Jinhui is subject to EIT at a rate of 25% in 2013 and thereafter.
52
Furthermore, under the EIT Law, a "resident enterprise," which includes an enterprise established outside of China with "de facto management bodies" located in
China, is subject to PRC income tax. The SAT issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC
Tax Resident Enterprises on the Basis of De Facto Management Bodies, i.e. SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific
criteria for determining whether the "de facto management body" of a Chinese-controlled overseas-incorporated enterprise is located in China.
In addition, the SAT issued a bulletin on July 27, 2011 to provide more guidance on the implementation of SAT Circular 82 with an effective date of September
1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. It
also specifies that when provided with a copy of the Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated
enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore
incorporated enterprise. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises, not to those that, like
our company, are controlled by PRC individuals, the determination criteria set forth in SAT Circular 82 and administration clarification made in the bulletin may
reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of offshore enterprises
and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
We do not believe we and our subsidiaries established outside of the PRC are PRC resident enterprises. However, if the PRC tax authorities subsequently
determine that we and our subsidiaries established outside of China should be deemed as a resident enterprise, we and our subsidiaries established outside of
China will be subject to PRC income tax at a rate of 25%. In addition, under the EIT law, dividends generated after January 1, 2008 and payable by a foreign-
invested enterprise in China to its foreign investors who are non-resident enterprises are subject to 10% withholding tax, unless any such foreign investor's
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The BVI, where Broad Cosmos, our wholly owned
subsidiary and the 100% shareholder of Shenzhen AM, is incorporated, does not have such a tax treaty with China. Air Media (China) Ltd, the 100% shareholder
of AM Technology Shenzhen AM and Xi'an AM, is incorporated in Hong Kong. According to the Mainland and Hong Kong Special Administrative Region
Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between China and Hong Kong in August 2006, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of 5% (if the foreign investor owns
directly at least 25% of the shares of the foreign-invested enterprise). However, if the Hong Kong company is not considered to be the beneficial owner of
dividends paid to it by its PRC subsidiaries under a tax notice promulgated on October 27, 2009 and the bulletin No.30 of 2012, such dividends would be subject
to withholding tax at a rate of 10%. See "Item 3. Key Information — D. Risk Factors — Risks Related to our Business — Dividends payable to us by our wholly-
owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our worldwide income, and dividends
distributed to our investors may be subject to more PRC withholding taxes under the PRC tax law."
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among
other things, assets and liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and assumptions based on
the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our
financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from our expectations. This is especially true
with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to
an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management's judgment.
Revenue Recognition
Our revenues are derived from selling advertising time slots and locations on our advertising networks, primarily air travel advertising network. For the years
ended December 31, 2012, 2013 and 2014, 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.
We typically sign standard contracts with our advertising customers, who require our company to run the advertiser's advertisements on our network in specified
locations for a period of time. We recognize advertising revenues ratably over the performance period for which the advertisements are displayed, so long as
collection of the fees remains probable.
We also wholesale the advertising platforms such as scrolling light boxes and billboards in the gas stations located in some major cities, except Beijing, Shanghai
and Shenzhen, to advertising agents, and sign fixed fee contracts with the agents for a specified period. The revenue is recognized on a straight-line basis over the
specified period.
53
Deferred Revenue
Prepayments from customers for advertising service are deferred and recognized as revenue when the advertising services are rendered.
Non-monetary Exchanges
We occasionally exchange advertising time slots and locations with other entities for assets or services, such as equipment and other assets. The amount of assets
and revenue recognized is based on the fair value of the advertising provided or the fair value of the transferred assets, whichever is more readily determinable.
The amounts of revenues recognized for nonmonetary transactions were $1.3 million, $0.7 million and $1.7 million for the years ended December 31, 2012, 2013
and 2014, respectively. No direct costs are attributable to the revenues.
Concession Fees
We enter concession right agreements with vendors such as airports, airlines, high-speed trains and a petroleum company, under which we obtain the right to use
the spaces or equipment of the vendors to display the advertisements. The concession right agreements are treated as operating lease arrangements.
Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets and current liabilities
according to the respective payment terms. Most of the concession fees with airports and airlines are fixed with escalation, which means fixed increase over each
year of the agreements. The total concession fee under the concession right agreements with airports and airlines is charged to the consolidated statements of
operations on a straight-line basis over the agreement periods, which is generally between three and five years.
The fee structure of the concession right agreement with the petroleum company is based on the actual number of developed gas stations and associated standard
annual concession fee for each developed gas station. Each gas station has its specific lease term starting from the time when it is actually put into operation. The
calculation of rental payments is based on how many months the gas stations are actually put into operation during the year and the standard annual concession
fee determined based on the location of the gas station. Accordingly, each gas station is treated as a separate lease and rental payments are recognized on a
straight-line basis over its lease term. The amount of annual concession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum
payment, if any, based on negotiation with the petroleum company.
Agency Fees
We pay fees to advertising agencies based on certain percentage of revenues made through the advertising agencies upon receipt of payment from advertisers.
The agency fees are charged to cost of revenues in the consolidated statements of operations ratably over the period in which the advertising is displayed. Prepaid
and accrued agency fees are recorded as current assets and current liabilities according to relative timing of payments made and advertising service provided.
From time to time, we and certain advertising agencies may renegotiate and mutually agree, as permitted by applicable laws, to reduce existing agency fee
liabilities as calculated under the terms of existing contracts. Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in the period
the renegotiations are finalized. During the years ended December 31, 2012, 2013 and 2014, reversals in cost of sales as a result of renegotiated agency fees
amounted to $6.4 million, $3.3 million and $1.4 million, respectively.
Assets Held for Sale
We considers property, plant and equipment to be assets held for sale when all of the following criteria are met: i) a formal commitment to a plan to sell a
property was made and exercised; ii) the property is available for sale in its present condition; iii) actions required to complete the sale of the property have been
initiated; iv) sale of the property is probable and the Group expects the completed sale will occur within one year; v) the property is actively being marketed for
sale at a price that is reasonable given its current market value; and vi) actions required to complete the plan indicate that it is unlikely that significant changes to
the plan will be made or that the plan will be withdrawn. Upon designation as assets held for sale, we records each property at the lower of its carrying value or its
estimated fair value, less estimated costs to sell, and we ceases depreciation.
Allowance for Doubtful Accounts
We conduct credit evaluations of clients and generally do not require collateral or other security from clients. We establish an allowance for doubtful accounts
based upon estimates, historical experience and other factors surrounding the credit risk of specific clients, and utilize both specific identification and a general
reserve to calculate allowance for doubtful accounts. The amount of receivables ultimately not collected by us has generally been consistent with expectations and
the allowance established for doubtful accounts. If the frequency and amount of customer defaults change due to the clients' financial condition or general
economic conditions, the allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and adjust
allowances for accounts where collection may be in doubt.
54
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 not be
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's goodwill
to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with 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 the reporting 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 in the carrying value
of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary 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 station
advertising media. We perform the annual impairment tests on December 31 of each year.
We incurred impairment loss on goodwill of $20.6 million, nil and nil for the years ended December 31, 2012, 2013 and 2014, respectively. As a result, 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 that
the 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 the expected
undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of carrying amount over the
fair value of the assets.
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 the
year ended December 31, 2014.
Income Taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial
statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws and regulations applicable to us as enacted by the relevant tax authorities.
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained
upon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, we classify the interest and penalties, if any, as a component of the income tax position.
Value-added Tax ("VAT")
Our PRC subsidiaries are subject to value-added tax at a rate of 6% on revenues from advertising services and paid after deducting input VAT on purchases. The
net VAT balance between input VAT and output VAT is reflected in the account under input VAT receivable or other taxes payable.
In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business
tax in certain areas and industries in the PRC including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and
December 2012. Also, a circular issued in May 2013 provided that such VAT pilot program was rolled out nationwide in August 1, 2013. Since then, certain of
our subsidiaries and VIEs became subject to VAT at the rates of 6% or 3% on certain service revenues which were previously subject to business tax. The amount
of VAT included as a deduction to revenue amounted to $8.8 million, $21.5 million and $19.3 million for the years ended December 31, 2012, 2013 and 2014,
respectively.
55
Share-based Compensation
Share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument issued, and recognized as
compensation expenses over the requisite service periods based on a straight-line method, with a corresponding impact reflected in additional paid-in capital.
Share-based payment transactions with non-employees are measured based on the fair value of the options as of each reporting date through the measurement
date, with a corresponding impact reflected in additional paid-in capital.
Comprehensive Loss
Comprehensive loss includes net loss and foreign currency translation adjustments and is presented net of tax, the tax effect is nil for the three years ended
December 31, 2014 in the consolidated statements of comprehensive loss.
Our Results of Operations
The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our
consolidated financial statements, including the related notes that appear elsewhere in this annual report. Our limited operating history makes it difficult to predict
our future operating results. Therefore, our historical consolidated results of operations are not necessarily indicative of our results of operations you may expect
for any future period.
The following table presents selected operating data for the years ended December 31, 2012, 2013 and 2014, respectively.
Selected Operating Data:
Digital frames in airports
Number of airports in operation
Number of digital frames in our network airports as of year end
Number of time slots available for sale(1)
Number of time slots sold(2)
Utilization rate(3)
Average advertising revenue per time slot sold(4)
Digital TV screens in airports
Number of airports in operation
Number of screens in our network airports as of year end
Number of time slots available for sale(5)
Number of time slots sold(2)
Utilization rate(3)
Average advertising revenue per time slot sold(4)
Digital TV screens on airplanes
Number of airlines in operation
Number of time slots available for sale(5)
Number of time slots sold(2)
Utilization rate(3)
Average advertising revenue per time slot sold(4)
Traditional media in airports
Numbers of locations available for sale(6)
Numbers of locations sold(7)
Utilization rate(8)
Average advertising revenue per location(9)
2012
Years Ended December 31,
2013
2014
34
3,403
131,060
49,558
37.8%
$
2,771
34
2,579
67,592
23,385
34.6%
$
587
9
1,776
781
44.0%
$
34,074
3,751
2,461
65.6%
$
33,920
31
3,380
141,922
56,010
39.5%
2,720
$
31
2,969
66,994
19,452
29%
725
$
7
1,486
527
35.5%
30,662
$
3,849
2,316
60.2%
27,999
$
28
2,993
163,240
52,238
32.0%
2,652
26
2,821
66,743
21,174
31.7%
627
7
1,628
558
34.3%
29,054
3,952
1,972
49.9%
28,764
$
$
$
$
(1) We define a time slot for digital frames as a 12-second equivalent advertising time unit or 6-second equivalent advertising time units for digital frames in
airports, which is shown during each standard advertising cycle on a weekly basis in a given airport. Our standard airport advertising programs are shown
repeatedly on a daily basis during a given week in 10-minute or 5-minute cycles, which allows us to sell a maximum of 50 time slots per week. 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 time slots available for
our digital frames in airports during the period presented is calculated by multiplying the number of time slots per week per airport by the 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 for each of our network
airports.
56
(2) 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-second equivalent
advertising time units for digital frames in airports or 30-second equivalent advertising time units for digital TV screens in airports and digital TV screens on
airplanes sold during the period presented.
(3) 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 a percentage of
total time slots available for sale during the relevant period.
(4) Average advertising revenue per time slot sold for digital TV screens in airports, digital TV screens on airplanes and digital frames in airports is calculated by
dividing our revenues derived from digital frames in airports, digital TV screens in airports and digital TV screens on airplanes by its own number of time
slots sold, respectively.
(5) 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 on
airplanes, 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 of programming
includes 25 minutes of advertising content, which allows us to sell a maximum of 50 time slots per week. The number of time slots available for our digital
TV screens in airports during the period presented is calculated by multiplying the number of time slots per week per airport by the 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 for each of our network airports. The
length of our in-flight programs typically ranges from approximately 45 minutes to an hour per flight, approximately five to 13 minutes of which consist of
advertising content. The number of time slots available for our digital TV screens on airplanes during the period presented is calculated by multiplying the
time slots per airline per month by the number of months during the period presented when we had operations on each airline and then calculating the sum of
all the time slots for each of our network airlines.
(6) 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 gate bridges.
(7) 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 calculate the
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 by dividing
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 "total value of light
boxes and billboards sold" in a given airport is calculated as the respective daily listing prices of light boxes and billboards sold multiplied by 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 the sum 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 is then calculated as the
number of light boxes and billboards available for sale in such airport multiplied by the utilization rates of light boxes and billboards in such airport. The
number of gate bridges sold in a given airport is counted based on the contracts.
(8) 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.
(9) Average advertising revenue per location sold is calculated by dividing the revenues derived from all the locations sold by the number of locations sold
during the period presented.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Revenues. Our net revenues decreased by 7.3% from $272.3 million in 2013 to $252.5 million in 2014. The decrease was primarily due to the decrease in
revenues from media network and gas station media network, which were partially offset by increases in revenues from other media.
Revenues from digital frames in airports: Revenues from digital frames in airports for fiscal year 2014 decreased by 9.1% from $152.3 million in 2013 to $138.5
million in 2014 due to a soft advertising market.
We operated our digital frames in 28 airports as of December 31, 2014 which decreased from 31 airports as of December 31, 2013. However, the number of
digital frames advertising time slots available for sale in airports increased by 15.0% from 141,922 in 2013 to 163,240 in 2014, while the number of time slots
sold decreased by 6.7% from 56,010 in 2013 to 52,238 in 2014. Our utilization rate for digital frames in airports decreased from 39.5% in 2013 to 32.0% in 2014
due to the decrease in the number of time slots sold, while the number of time slots available for sale increased. The average advertising revenue per time slot of
digital frames decreased by 2.5% from $2,720 in 2013 to $2,652 in 2014 due to a decrease of revenue and number of time slots sold resulted from the soft
advertising market.
57
Revenues from digital TV screens in airports: Revenues from digital TV screens in airports decreased by 5.8% to $13.3 million in 2014 from $14.1 million in
2013 due to a soft advertising market and a drop in demand from advertisers as a result of competition from our other product lines and the fact that, with the
rapid development of mobile internet, more people now pay attention to their cell phones instead of our digital TV screens.
The number of time slots sold for 2014 increased by 8.9% year-over-year to 21,174 time slots primarily due to higher discounts offered in 2014 than 2013 and the
decrease in average selling price per time slot. The number of time slots available for sale for 2014 decreased by 0.4% slightly year-over-year to 66,743 time slots
in 2014 from 66,994 in 2013, which remains relatively no change. Utilization rate of digital TV screens in airports for fiscal year 2014 increased to 31.7% from
29% in 2013 primarily due to the increase in the number of time slots sold and the decrease in the time slots available for sale. The average selling price per time
slot of digital TV screens in airports decreased by 13.5% to $627 in 2014 from $725 in 2013 primarily due to higher discounts offered in 2014 than in 2013.
Revenues from digital TV screens on airplanes: Revenues from digital TV screens on airplanes remained relatively unchanged from 2013 to 2014.
The number of time slots sold increased by 5.9% to 558 time slots in 2014 from 527 time slots in 2013 primarily due to a decrease in average selling price per
time slot. The number of time slots available for sale increased by 9.6% to 1,628 time slots in 2014 from 1,486 time slots in 2013. Utilization rate decreased to
34.3% in 2014 from 35.5% in 2013 primarily due to the increase in the number of time slots available for sale. The average selling price per time slot of digital
TV screens on airplanes decreased by 5.2% to $29,054 in 2014 from $30,662 in 2013 primarily due to higher discounts offered in 2014 than in 2013.
Revenues from traditional media in airports: Revenues from traditional media in airports decreased by 12.5% to $56.7 million in 2014 from $64.8 million in
2013. 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 14.9% to 1,972 locations in 2014 from 2,316 in 2013. The number of locations available for sale increased by 2.7% to
3,952 locations in 2014 from 3,849 in 2013, primarily due to the increase of locations available in Tier 2 cities in China. The utilization rate of traditional media
decreased by 17.1% to 49.9% in 2014 from 60.2% in 2013 due to the decrease in the number of locations sold and the increase in the number of locations
available for sale. The average selling price of traditional media in airports increased by 2.7% to $28,764 in 2014 from $27,999 in 2013 primarily due to a
decrease of revenue resulted from the soft advertising market.
Revenues from the gas station media network: Revenues from the gas station media network decreased by 12.3% to $11.2 million from $12.7 million in 2013 due
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 LED screen
in gas stations across many cities.
Revenues from other media: Revenues from other media were primarily revenues from our film distribution business and from AM Outdoor which was acquired
by our variable interest entity, AM Advertising, in January 2011, which operates unipole signs and other outdoor media across Beijing. Revenues from other
media for fiscal year 2014 increased by 89.8% year-over-year to $13.6 million in 2014 from $7.1 million in 2013, primarily due to increase in revenues from film
distribution.
Cost of Revenues. Our cost of revenues decreased by 3.6% from $244.7 million in 2013 to $235.8 million in 2014, primarily due to a decrease in concession fees
and agency fees for third-party advertising agencies. Our cost of revenues as a percentage of our net revenues increased from 89.9% in 2013 to 93.4% in 2014.
Concession fees decreased 2.9% from $181.0 million in 2013 to $175.7 million in 2014, primarily due to a decrease in concession fees of certain unprofitable or
low-margin contracts which we did not renew after expiration . Concession fees as a percentage of net revenues increased from 66.5% in 2013 to 69.6% in 2014.
Operating Expenses. Our operating expenses increased by 12.3% from $45.8 million in 2013 to $51.4 million in 2014. Our total operating expenses in 2013
included share-based compensation expenses of $1.3 million while our total operating expenses in 2014 included share-based compensation expenses of $1.4
million.
•
Selling and Marketing Expenses. Our selling and marketing expenses increased by 24.9% from $20.1 million in 2013 (including nil of share-based
compensation expenses) to $25.1 million in 2014 (including $0.1 million of share-based compensation expenses) mainly due to higher expenses related
to our direct sales force higher marketing expenses.
• General and Administrative Expenses. Our general and administrative expenses increased by 2.4% from $25.7 million (including $1.3 million of share-
based compensation expenses) in 2013 to $26.3 million (including $1.3 million of share-based compensation expenses) in 2014, primarily due to higher
allowance for doubtful accounts and higher expenses of office and equipment, partially offset by lower other expenses, lower professional fees and lower
staff expenses.
58
Loss from Operations. We recorded a net loss from operations of $34.8 million in 2014, as compared to a net loss from operations of $18.2 million in 2013 as a
cumulative result of the above factors.
Other income, net. We recorded $2.2 million of other income net in 2014 as compared to $3.8 million in 2013. The decrease was primarily due to decrease in the
investment income from short-term investment.
Income Taxes. We recorded $0.4 million of income tax expenses in 2014 as compared to income tax benefits of $1.7 million in 2013. Our effective income tax
rate changed to negative 1.38% in 2014 from positive 13% in 2013.
Net Loss Attributable to Noncontrolling Interests. We recorded $6.1 million in net loss attributable to noncontrolling interests in 2014, as compared to $0.9
million in net loss attributable to noncontrolling interests in 2013. The non-controlling interest primarily refers to other shareholders' minority equity interests in
Flying Dragon, GreatView Media, Guangzhou Meizheng, Dongding, AM Film, Xinghe Union and AM Lianhe 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 $25.7 million in 2014, as
compared to the net loss of $10.6 million in 2013.
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 in
revenues from traditional media in airports, digital TV screens on airplanes, other media, and gas station media network, which were partially offset by increases
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 of
digital 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 slots sold
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% in 2013 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 average advertising
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 in
2012 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. The number
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 operations of 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 primarily due 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 in airports 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 higher percentage, 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 $26.6 million
in 2012.
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 of digital
TV screens on Air China's airplanes. We did not renew our concession rights contract with Air China, which expired on December 31, 2012, but regained 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 time slots 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 of time 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 to higher discounts offered in
2013 than in 2012.
59
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 in
2012. 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% to 3,849
locations in 2013 from 3,751 in 2012, primarily due to the full year operations of some additional airports. The utilization rate of traditional media decreased 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 locations available 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 mainly because we chose 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 2012 due
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 LED screen
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, AM
Advertising, in January 2011, which operates unipole signs and other outdoor media across Beijing. Revenues from other media for fiscal year 2013 decreased by
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 November and
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 fees for
third-party advertising agencies. The year-over-year decrease in agency fees was primarily due to a partial reversal of certain previously accrued agency fees of
$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% in 2013.
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 contracts and
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 percentage of 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 2012
included share-based compensation expenses of $3.5 million while our total operating expenses in 2013 included share-based compensation expenses of $1.3
million.
•
Selling and Marketing Expenses. Our selling and marketing expenses increased by 11.5% from $18.0 million in 2012 (including $0.9 million of share-
based compensation expenses) to $20.1 million in 2013 (including nil of share-based compensation expenses) mainly due to higher expenses related 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 of share-
based compensation expenses) in 2012 to $25.7 million (including $1.3 million of share-based compensation expenses) in 2013, primarily due to higher
salary expenses associated with more headcount for new businesses, higher allowance for doubtful accounts, higher expenses of office and equipment
and 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 no
impairment 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 profits for
air travel areas and outdoor advertising media were below forecast in the year ended December 31, 2012, the future undiscounted cash flow that the
finite-lived intangible assets were expected to generate were less than the carrying amount as of December 31, 2012, the impairment loss of $9.6 million
on intangible assets was recognized for the year ended December 31, 2012, and no impairment loss was recognized for the year ended December 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 2012 as 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 in the
investment income from short-term investments.
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 tax rate
changed to positive 13% in 2013 from negative 8.4% in 2012.
60
Net Loss Attributable to Noncontrolling Interests. We recorded $0.9 million in net loss attributable to noncontrolling interests in 2013, as compared to $0.5
million in net income attributable to noncontrolling interests in 2012. The non-controlling interest primarily refers to other shareholders' minority equity interests
in Flying Dragon, GreatView Media, Guangzhou 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, as
compared to $32.7 million in 2012.
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 our 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 our company to
our 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 2,180,000 ordinary
shares of our 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 will vest 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 based on the
closing market price of the ordinary shares of our 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 the closing market price
of the ordinary shares of our company on the date. The incremental compensation cost of the re-priced options was $1.3 million, with totaling $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 2007 Share Incentive Plan, to purchase an
aggregate 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 quarter starting
from September 4, 2012. The expiration date will be 5 years from the grant date.
In September 2012, a former chief financial officer of our company resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vested
through her date of resignation. In conjunction with her resignation, she signed a supplementary agreement with us, pursuant to which our company granted her
100,000 options that are immediately exercisable and 200,000 options that would vest through September 22, 2013. During the vesting period, she would provide
consulting service as a consultant. For the 100,000 immediately exercisable options, a measurement date was reached upon grant and we immediately recognized
$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 through September 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 ended December 31, 2014, we
did not recognize any expense for these options.
On October 10, 2012, the Board of Directors approved our company to extend the expiration date of the options granted on July 2, 2007, November 29, 2007 and
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 stock options, which
was $0.33 per share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified 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 our company to grant options for
the issuance of up to 6,000,000 ordinary shares of our company subject to vesting requirements.
On November 1 and November 30, 2012, and in exchange for film industry strategy advisory services, our company granted options to a consultant under the
2007 Option Plan and the 2012 Option Plan to purchase 20,000 and 60,000 ordinary shares of our company at an exercise price of $1.11 per ordinary share. 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.
61
On April 15, 2014, the Board of Directors approved to extend the expiration dates of the options granted on November 29, 2007 and July 10, 2009, which were
both extended from April 28, 2014 to April 28, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the
stock options, which was $0.21 and $0.21 per share, respectively, as of the modification dates, was estimated using the Black-Scholes model. The incremental
compensation cost of the modified award were $4,000 and $4,000, respectively, which were recognized as share-based compensation expenses for the year ended
December 31, 2014.
On May 31, 2014, the former CFO of our Group resigned. Of the options granted to him, options to purchase 1,282,098 shares were vested through his date of
resignation, while the others were unvested. The unvested options to purchase 575,440 shares were cancelled as of June 1, 2014. The expiration date of the vested
option to purchase 1,282,098 shares was modified from September 3, 2017 to May 31, 2016. The fair value of the stock options, which was $0.43 per share as of
the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified award was approximately $0.2 million,
which was recognized as share-based compensation expenses for the year ended December 31, 2014.
On June 1, 2014, the Board of Directors approved to grant options to certain employees and directors to purchase an aggregate of 2,376,620 ordinary shares of
our company, at an exercise price of $1.025 per ordinary share. One twelfth of the options will vest each quarter starting from June 1, 2014. The expiration date
will be five years from the grant date.
On June 9, 2014, the Board of Directors approved the extension of the expiration date of the options granted on July 10, 2009 from July 11, 2014 to July 11,
2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value was $0.22 and $0.12 per share for the stock options
whose exercise price were $1.15 per share and $1.57 per share, respectively, as of the modification date, which was estimated using the Black-Scholes model.
The incremental compensation costs of the modified award were approximately $0.7 million and $5,000, respectively, which was recognized as share-based
compensation expenses for the year ended December 31, 2014.
On June 9, 2014, Board of Directors approved our company to extend the expiration date of the options granted on November 1, 2012 from November 11, 2014
to November 11, 2016. Modified award is viewed as an exchange of the original award for a new award. The fair value of the stock options, which was $0.25 per
share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the modified award was approximately
$4,000, which was recognized as share-based compensation expenses for the year ended December 31, 2014.
On August 1, 2014, the Board of Directors approved to grant options to certain employees to purchase an aggregate of 140,000 ordinary shares of our company,
at an exercise price of $1.045 per ordinary share. One twelfth of the options will vest each quarter starting from August 1, 2014. The expiration date will be five
years from the grant date.
An employee terminated employment with us on October 13, 2014 but continued to provide service as a nonemployee consultant. The option to purchase 50,000
shares granted to him was not modified in connection with the change in status, but future services from him is required for option vesting. The associated
compensation cost has been measured as if the outstanding award was newly granted at the date of the change of status
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 $3.5 million, $1.3 million and $1.4 million for the years ended December 31, 2012, 2013 and 2014, respectively.
Inflation
Historically inflation has not had a significant effect on our business. According to the National Bureau of Statistics of China, the year-over-year percent changes
in the consumer price index for December 2012, 2013 and 2014 was increase of 2.5%, 2.5% and 1.5%, respectively.
Although it has not materially impacted our results of operations in 2014, we can provide no assurance that we will not be affected in the future by potentially
higher rates of inflation in China. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase
as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and short-term investments, high inflation could
significantly reduce the value and purchasing power of these assets. We are not able to hedge our exposure to higher inflation in China.
B.
Liquidity and Capital Resources
To date, we have financed our operations primarily through internally generated cash, the sale of preferred shares in private placements and the proceeds we
received from our initial public offering. As of December 31, 2014, we had approximately $67.4 million in cash. We generally deposit our excess cash in interest
bearing bank accounts. Although we consolidate the results of our VIEs in our consolidated financial statements, we can only receive cash payments from them
pursuant to our contractual arrangements with them and their shareholders. See “Item 4. Information on the Company — C. Organizational Structure." Our
principal uses of cash primarily include capital expenditures, contractual concession fees, business acquisitions, share repurchases, and other investments and, to a
lesser extent, salaries and benefits for our employees and other operating expenses. We expect that these will remain our principal uses of cash in the foreseeable
future. We may also use additional cash to fund strategic acquisitions.
62
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, 2012,
2013 and 2014:
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes
Net (decrease)/ increase in cash
Cash at the beginning of the year
Cash at the end of the year
Operating Activities
2012
Year Ended December 31,
2013
2014
20,230
(57,006)
(3,260)
936
(39,100)
112,734
73,634
537
(70,466)
54,311
1,636
(13,982)
73,634
59,652
(1,814)
(6,157)
16,823
(1,067)
7,785
59,652
67,437
Net cash used in operating activities was $1.8 million for the year ended December 31, 2014. This was primarily attributable to (1) certain non-cash expenses that
did not result in cash outflow, principally depreciation and amortization of $14.5 million, allowance for doubtful accounts of $5.6 million and share-based
compensation of $1.4 million, (2) an decrease of $13.3 million in accounts receivable and notes receivable, (3) an increase of $10.6 million in accounts payable,
(4) an increase of $1.7 million in accrued expenses and other current liabilities and (5) an increase of $1.3 million in other non-current liabilities. The foregoing
was partly offset by (1) an increase of $2.5 million in prepaid concession fee, (2) an increase of $3.5 million in other current assets, (3) an increase of $1.5 million
in amount due from related parties, (4) an increase of $6.1 million in other non-current assets, (5) a decrease of $1.5 million in deferred tax assets (liability) and
(6) a decrease of $3.5 million in deferred revenue.
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-cash expenses
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 accounts receivable 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 decrease of $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-cash expenses
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 $1.2 million 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 deferred revenues. 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.
Accounts Receivable
Our gross accounts receivable balance decreased by $17.4 million, or approximately 15.1%, from $114.7 million as of December 31, 2013 to $97.4 million as of
December 31, 2014. Our allowance for doubtful accounts increased from $7.2 million as of December 31, 2013 to $12.4 million as of December 31, 2014. The
net effect of these changes resulted in an decrease of net accounts receivable of $22.5 million or approximately 21.0%, from $107.5 million for the year ended
December 31, 2013 to $85.0 million for the year ended December 31, 2014. Our revenues decreased by $20.6 million, or approximately 7.5%, from $276.5
million in 2013 to $255.9 million in 2014. As of December 31, 2014, our net accounts receivable balance aged less than and greater than six months was $63.1
million and $21.9 million, respectively.
To the extent we need to convert our Renminbi assets and liabilities into U.S. dollars, appreciation of the Renminbi against the U.S. dollar will have an impact on
our financial statements. The spot rate increased from 6.05 Renminbi against 1 U.S. dollar to 6.20, or an appreciation of approximately 2.48%, from December
31, 2013 to 2014. This change in Renminbi exchange rate contributed to a $2.1 million increase in the value of our accounts receivable as of December 31, 2014.
63
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 as of
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 ended December
31, 2012 to $107.5 million for the year ended December 31, 2013. Our revenues decreased by $16.5 million, or approximately 6%, from $293.0 million 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 the economic 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 good historical 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 impact on
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%, from December 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 of December 31, 2013.
Our revenues have fluctuated and may continue to fluctuate significantly from period to period, primarily due to the seasonality of air travel, consumer spending
and corresponding advertising trends in China. Air travel and advertising spending in China generally tend to increase during the second half of the year and tend
to decrease during the first quarter of each year.
Allowance for Doubtful Accounts
Our policy for the allowance for doubtful accounts is discussed in our Critical Accounting Policies on page F-52.
Our allowance for doubtful accounts increased from $4.6 million as of December 31, 2012 to $7.2 million as of December 31, 2013 and further to $12.4 million
as of December 31, 2014, as we charged approximately $1.2 million in 2012, $2.4 million in 2013 and $5.6 million in 2014 to expenses based on continuous
monitoring and our best estimate of the uncollectible accounts.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2014 amounted to $6.2 million, mainly as a result of our purchase of property and
equipment for $12.4 million, a payment of $11.2 million of prepaid equipment cost, a payment of $1.6 million of long term investment, a payment of $4.3 million
restricted cash, a title transfer of $1.1 million for the disposal of 51% equity interest in AM Jiaming and a payment of $1.6 million of short term loan to a related
party, partially offset by proceeds from short term investment of $25.3 million.
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 and
equipment 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 of held-
to-maturity securities, purchase of property and equipment for $11.3 million, a payment of $2.2 million for equity investments in Xinghe Union, Shibo Movie,
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 million in proceeds
from the disposal of property and equipment.
Prepaid Equipment Costs
In 2014, we recorded approximately $11 million for the prepaid equipment cost primarily as a result of our purchase of 200 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 prepaid equipment costs. This
purchase was funded entirely with the proceeds we received from Elec-Tech as part of their investment in GreatView Media. As of December 31, 2014, Elec-
Tech contributed $68.5 million to the share capital of GreatView Media, $67.0 million of which was recorded as additional paid-in capital.
Capital Expenditures
Our capital expenditures were made primarily to purchase digital TV screens, digital frames and associated equipment for our network, including network
construction for our gas station media network. We also exchange advertising time slots with other entities for digital TV screens and other equipment through
barter transactions.
Our capital expenditures were $9.3 million in 2012, $70.1 million in 2013 and $24.9 million in 2014 respectively.
64
We believe that our current cash and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for
working capital and capital expenditures for the next 12 months. We may, however, require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to
sell additional equity securities, debt securities or borrow from lending institutions.
Financing Activities
Net cash provided in financing activities amounted to $16.7 million for the year ended December 31, 2014, as a result of $11.2 million provided by capital
contribution from non-controlling interests, $3.0 million received from short-term loan and $2.0 million received from the disposal of 20% equity interest in AM
Lianhe.
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 capital
contribution from non-controlling interests and $0.7 million dividend paid to former shareholders of subsidiaries, $2.8 million used to repurchase shares as
treasury 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.
Intra-Company Transfers
Transfers of cash between our PRC operating subsidiaries and our non-PRC entities are regulated by certain PRC laws. For a description of these laws and the
effect that they may have on our ability to meet cash obligations, please refer to "Item 3. Key Information — D. Risk Factors — Risks Related to our Business —
Dividends payable to us by our wholly-owned operating subsidiaries may be subject to PRC withholding taxes, or we may be subject to PRC taxation on our
worldwide income, and dividends distributed to our investors may be subject to more PRC withholding taxes under PRC tax law," "Item 3. Key Information —
D. Risk Factors — Risks Related to our Corporate Structure — We may rely principally on dividends and other distributions on equity paid by our wholly-owned
operating subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our operating subsidiaries to pay dividends
to us could have a material adverse effect on our ability to conduct our business," "Item 3. Key Information — D. Risk Factors — Risks Related to Doing
Business in China — Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively," "Item 3. Key Information
— D. Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents and registration requirements for employee stock ownership plans or share option plans may subject our PRC resident beneficial owners or the plan
participants to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries' ability to increase their registered capital or
distribute profits to us, or may otherwise adversely affect us," "Item 4. Information on the Company — A. History and Development of the Company — B.
Business Overview — Regulation — Regulations on Dividend Distribution," and "Item 4. Information on the Company — A. History and Development of the
Company — B. Business Overview — Regulation — SAFE Regulations on Offshore Investment by PRC Residents and Employee Stock Options". None of these
regulations have had a material effect on our ability to meet our cash obligations.
Recently Issued Accounting Pronouncements
Recently adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new pronouncement which affects any entity using U.S. GAAP that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of
other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition,
and most industry-specific guidance. This Accounting Standards Update (“ASU”) also supersedes some cost guidance included in Subtopic 605-35, Revenue
Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of
nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets
within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the
constraint on revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply
the following steps:
•
•
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
65
•
•
•
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period. Early application is not permitted.
An entity should apply the amendments in this ASU using one of the following two methods:
1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
•
•
•
For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than
estimating variable consideration amounts in the comparative reporting periods.
For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to
remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method
it also should provide the additional disclosures in reporting periods that include the date of initial application of:
•
The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the
guidance that was in effect before the change.
• An explanation of the reasons for significant changes.
We are in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In April, 2014, the FASB issued ASU 2014-08, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional
disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new guidance eliminates the
second and third criteria of discontinued operation in ASC 205-20-45-1 and instead requires discontinued-operations treatment for disposals of a component or
group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the
scope of ASC 205-20 to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale.
The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial
position.
Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2) depreciation and
amortization, capital expenditures, and significant operating and investing noncash items related to the discontinued operation.
The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held
for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We do not expect the adoption of this guidance will have a significant
effect on its consolidated financial statements.
In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it
relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the
grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be
achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance
target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized
prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should
reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when
the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.
66
The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier
adoption is permitted. We do not expect the adoption of this guidance will have a significant effect on its consolidated financial statements.
In August, 2014, the FASB issued a new pronouncement which provides guidance on determining when and how reporting entities must disclose going-concern
uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as
a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is
“substantial doubt about the entity’s ability to continue as a going concern." The new standard is effective for fiscal years ending after December 15, 2016.
We do not expect the adoption of this guidance will have a significant effect on our consolidated financial statements.
C.
Research and Development, Patents and Licenses, Etc.
We have been developing certain technologies for broadcasting purposes. However, our financial commitment to development of these technologies has been
limited. During the past three years, we have not incurred a significant amount of research and development expense. While we are interested in and may
experiment with new technologies from time to time, we do not intend to materially increase our research and development spending in the foreseeable future.
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 reasonably likely
to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported
financial information not necessarily to be indicative of future operating results or financial condition.
E.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as shareholder's equity, or that are not reflected in our consolidated financial statements.
Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
F.
Tabular Disclosure of Contractual Obligations
We have entered into operating lease agreements primarily for our office spaces in China. These leases expire through 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 are
renewable upon negotiation. The following table sets forth our contractual obligations and commercial commitments as of December 31, 2014:
Operating lease agreements
Concession rights contracts
Purchase obligations
Total
G.
Safe Harbor
Payments Due by Period
Total
2015
2016-2017
(in thousands of U.S. Dollars)
2018-2019
2020 and
thereafter
$
$
$
2,423
386,219
42,730
431,372 $
$
2,357
166,761
42,455
211,573 $
60 $
129,733
275
130,068 $
$
6
55,497
-
55,503 $
-
34,228
-
34,228
See the section headed "Forward-Looking Information".
67
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, 2015.
NAME
Herman Man Guo
James Zhonghua Feng
Richard Peidong Wu
Qing Xu
Peixin Xu
Conor Chiahung Yang
Shichong Shan
Junjie Ding
Songzuo Xiang
Jack Qunyao Gao
Bailing Zeng
Yunfeng Yu
Tong Wu
Wei He
Xudong Yang
Guozhong Ouyang
POSITION
AGE
51
44
50
54
44
52
84
51
50
56
55
43
46
40
44
43
Chairman and Chief Executive Officer
Director and President
Chief Financial Officer
Director and Executive President
Director
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Vice President
Vice President
Chief Strategy Officer
Chief Public Relations Officer and Vice President
Vice President
Chief Brand Officer
Mr. Herman Man Guo is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception. He was the
general manager of Beijing Sunshine Media Co., Ltd. from 1997 to 2004. From 1991 to 1996, Mr. Guo served as the deputy general manager of Beijing Trade &
Technology Development Company. Prior to that, he worked in China Civil Aviation Development Service Company from 1988 to 1990. Mr. Guo received his
bachelor's degree in applied mathematics from People's Liberation Army Information Engineering University in China in 1983 and an Executive MBA degree
from Peking University in China in 2011.
Mr. James Zhonghua Feng has served as our president and director since May 2011. Prior to that, he served as chief operating officer since our inception and 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 New Chang'an Media
Advertising Company from 2004 to 2005. From 2002 to 2004, Mr. Feng served as the deputy general manager of Beijing Tianzhi Creative Advertising Company.
Prior to that, Mr. Feng has served various positions in the advertising industry, including as general manager of an outdoor advertisement company and a print
media company. Mr. Feng received an Executive MBA degree from Peking University in China in 2009.
Mr. Richard Peidong Wu has served as our chief financial officer since June 2014. Prior to joining our company, Mr. Wu worked as the head of legal and
compliance at the greater china division of Nokia Solutions and Networks. Prior to that, he was the chief financial officer of Vimicro International Corporation
from 2011 to 2012. Mr. Wu also worked as a managing director at Dragon Bay Capital, a China-focused investment advisory firm specializing in private
placement, pre-IPO turnarounds, pre-auditing and investor relations. Mr. Wu started his career as a senior legal counsel at Beijing Bei Fang Law Offices. Mr. Wu
received his MBA degree from the Wharton School of the University of Pennsylvania, a master’s degree in criminal justice from Indiana University and a
postgraduate law diploma from the Chinese University of Political Science and Law. Mr. Wu is a licensed attorney in China.
Mr. Qing Xu has served as our director since our inception and as our executive president since June 2010. From October 2005 to our inception, Mr. Xu served as
a director of certain of our pre-existing affiliated entities. From 2003 to 2005, Mr. Xu served as a vice president of Zhongyuan Guoxin Investment Guarantee Co.,
Ltd. Prior to that, he served as a department director of China Haohua Group Co., Ltd. from 1997 to 2003 and as a department manager of Beijing Trade &
Technology Development Company from 1991 to 1997. Mr. Xu was a secretary at the PRC State Council Secretary Bureau from 1984 to 1991. Mr. Xu received
his associate's degree in business and economics management from Beijing Normal University in 1996.
Mr. 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 Media
Investment 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 services business group.
Mr. Xu received a bachelor of arts degree in business administration from the Tianjin University of Commerce. Mr. Xu has also served as an independent director
and chairman of strategy committee of Bona Film Group Limited, a Nasdaq listed public company, since November 2011.
68
Mr. Conor Chiahung Yang has served as our independent director since March 2013. Mr. Yang currently serves as the chief financial officer of tuniu.com, a
NASDAQ-listed leading online leisure travel company in China. Previously, Mr. Yang was the chief financial officer of E-Commerce China Dangdang Inc., a
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
executive officer of Rock Mobile Corporation from 2004 to February 2007. From 1999 to 2004, Mr. Yang served as the chief financial officer of the Asia Pacific
region for CellStar Asia Corporation. Mr. Yang was an executive director of Goldman Sachs (Asia) L.L.C. from 1997 to 1999. Previously, Mr. Yang was a vice
president of Lehman Brothers Asia Limited from 1994 to 1996 and an associate at Morgan Stanley Asia Limited from 1992 to 1994. Mr. Yang currently serves as
an independent director and the chairman of the audit committee of IFM Investments Limited, an NYSE-listed real estate services provider. Mr. Yang received
his MBA degree from University of California, Los Angeles in 1992 and his bachelor's degree from Fu Jen University in Taiwan in 1985.
Mr. Shichong Shan has served as our independent director since July 2007. Mr. Shan has retired since 1996. Before he retired, Mr. Shan had held a number of
senior executive positions in various government agencies and other organizations in the aviation industry in China, including the General Administration of Civil
Aviation of China. Mr. Shan graduated from Shanghai Lixin University of Commerce and attended the college program at the Eastern China Military and Politics
Institute.
Dr. Junjie Ding has served as our independent director since November 2008. Dr. Ding is also an independent director of SinoMedia Holding Limited, a media
advertising operator in China that is listed on the Hong Kong Stock Exchange and has served as an independent director of a China-based private company since
December 2013. Dr. Ding is a vice president of the Communication University of China and the deputy officer of the China Advertising Association of
Commerce. With nearly 20 years of experience in the media and advertisement industry, Dr. Ding is the editor of various periodicals, such as International
Advertising and the Annual Book of Chinese Advertising Works. He received his Ph.D. degree in communications in 2003 from the Communication 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 July 2009, Dr.
Xiang served as chief executive officer and director, respectively, of Ku6 Media Co., Ltd., a NASDAQ-listed company. He previously served as the Deputy
Director of the Fund Planning Department at the People's Bank of China Shenzhen Branch and was an investment manager at Shenzhen Resources & Property
Development Group. He was a visiting scholar at Columbia University from May 1999 to July 2000 and at Cambridge University from October 1998 to May
1999. Dr. Xiang received his bachelor's degree in engineering in Huazhong University of Science and Technology in 1986, his master's degree in international
affairs from Columbia University in 1999, his master's degree in management science in 1993 and his Ph.D. degree in economics in 1993 from Renmin
University in China.
Dr. Jack Q. Gao has served as our independent director since January 2014. Dr. Gao is a director of Beijing Vantone Holding Co. Dr. Gao is former corporate
senior vice president of News Corporation and chief representative of News Corporation Beijing Representative Office for eight years from 2006 to 2014. Before
2006, Dr. Gao was a corporate vice president and president of Emerging Markets at Autodesk, where he oversaw the company's emerging markets business with
a focus on Greater China and India. Prior to Autodesk, he was president and general manager of Microsoft (China) Ltd. Co., where he was responsible for
operations, sales and marketing, government relations and business developments. Additionally, he has been a general partner of Walden International, a venture
capital fund in the United States, and Asia business manager at MSC Software. Dr. Gao received his PhD, master's and bachelor's degrees in engineering from
Harbin Institute 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 we
acquired in January 2010. Prior to joining AirMedia, Dr. Zeng founded and served as the chief executive officer of AirMedia City (Beijing) Outdoor Advertising
Co., Ltd. since 2005. Prior to that, Dr. Zeng served as an executive vice president and chief editor of China Youth & Children Audio-Visual Publishing House
from 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 as the
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 law from
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 Political Science 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 economic management
from the Party School of the Central Committee of the Communist Party of China in September 2000.
69
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 advertising business
commissioned by Dentsu's headquarters in Japan. He was the outdoor director of the sole advertising agent of the Beijing 2008 Olympic Game Organization
Committee for the 29th Olympic Games in charge of outdoor integration and sponsors management. Prior to that, Mr. Wu served various positions in advertising
industry, including being a managing director of Beijing Dongjizhicheng International Advertising Co., Ltd. from 1998 to 2003, a media 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 Organization Committee of XI Asian Games
Organization Committee in 1990.
Ms. Wei He has served as our chief public relations officer and vice president since our inception in April 2007 and for certain of our pre-existing affiliated
entities since April 2006. Prior to joining our company, 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 Hong Kong 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 the City University of Washington in 2006. She has also received an EMBA degree from Cheung Kong Graduate
School of Business in 2014.
Mr. Xudong Yang has served as our vice president in charge of technology development since June 2014. Prior joining our company, Mr. Yang was the chief
technology officer of ChinaHR.com, a leading on-line recruitment company from 2007 to 2014, during which his responsibilities include the management of the
technology developments of the company, managing and optimizing IT teams , planning annual budget and the management of the product department of the
company.
Mr. Guozhong Ouyang has served as our Chief Brand Officer since July 2014. Prior joining our company, Mr. Ouyang served as the chairman of the board of
Beijing Diansheng Culture & Communication Limited Company, of which his responsibilities included the management of the investments in cultural projects
and the operation of the company.
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, Richard Peidong Wu and James Zhonghua
Feng. Our employment agreements with Mr. Guo and Mr. Feng each has an unfixed duration as required by the PRC Employment Law. Mr. Guo and Mr. Feng
may terminate the respective agreement with a one-month prior notice while we will only be able to terminate such agreement in limited circumstances, such as
for cause. Our employment agreement with Mr. Wu has a fixed duration and can be terminated by either us or Mr. Wu with a one-month prior notice. We have
also entered into employment agreements with our other executive officers. Each of the contract terms was a period of two or three years. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to
certain crimes, negligence or dishonesty to our detriment and failure to perform the agreed-to duties after a reasonable opportunity to cure the failure.
Furthermore, either we or an executive officer may terminate the employment at any time without cause upon advance written notice to the other party. These
agreements do not provide for any special termination benefits, nor do we have other arrangements with these executive officers for special termination benefits.
Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use,
except as required in the performance of his duties in connection with the employment, any confidential information, trade secrets and know-how of our company
or the confidential information of any third party, including our VIEs and our subsidiaries, received by us. In addition, each executive officer has agreed to be
bound by non-competition restrictions set forth in his or her employment agreement. Specifically, each executive officer has agreed not to, for a period ranging
from one to two years following the termination or expiration of the employment agreement, (i) carry on or be engaged or interested, directly or indirectly, as
shareholder, director, employee, partner, agent or otherwise carry on any business in direct competition with our business; (ii) solicit or entice away from us, or
attempt to solicit or entice away from us, any person or entity who has been our customer, client or our representative or agent or in the habit of dealing with us
within two years prior to such executive officer's termination of employment; (iii) solicit or entice away from us, or attempt to solicit or entice away from us, any
person or entity who has been our officer, manager, consultant or employee within two years prior to such executive officer's termination of employment; or (iv)
use a name including the word "AirMedia" or any other words used by us in our name or in the name of any of our products or services, in such a way as to be
capable of or likely to be confused with our name or the name of our products or services.
B.
Compensation
In 2014, the aggregate cash compensation to our executive officers was approximately $819,830 and the aggregate cash compensation to our non-executive
directors was approximately $182,956. Our PRC subsidiaries and consolidated VIEs are required by law to make contributions equal to certain percentages of
each employee's salary for his or her pension insurance, medical insurance, housing fund, unemployment and other statutory benefits. Other than the above-
mentioned pension insurance mandated by applicable PRC law, we have not set aside or accrued any amount to provide pension, retirement or other similar
benefits to our executive officers and directors. No executive officer is entitled to any severance benefits upon termination of his or her employment with our
company except as required under applicable PRC law.
70
Share Options
In July 2007, we adopted the 2007 Option Plan to attract and retain the best available personnel, provide additional incentives to employees, directors and
consultants, and promote the success of our business. In December 2009, we amended the 2007 Option Plan by increasing the maximum aggregate number of
shares issuable under the plan from 12,000,000 to 17,000,000. In March 2011, our board of directors authorized the issuance of 2,000,000 ordinary shares under
the 2011 Option Plan with the same aim as the 2007 Option Plan. In 2012, our board of directors adopted the 2012 Option Plan, under which we are authorized to
grant restricted shares or options and other awards for a total issuance of up to 6,000,000 ordinary shares. As of December 31, 2014, options to purchase
14,853,764 of our ordinary shares were outstanding. The majority of these options will vest on a straight-line basis over a three-year period, with one-twelfth of
the options vesting each quarter from the date of grant.
The following table summarizes, as of December 31, 2014, the outstanding options granted to our executive officers, directors and to other individuals as a group
under our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan.
Name
Herman Man Guo
Qing Xu
Shichong Shan
Junjie Ding
Songzuo Xiang
James Zhonghua Feng
Conor Chia-hung Yang
Wei He
Tong Wu
Bailing Zeng
Yunfeng Yu
Xudong Yang
Peidong Wu
Guozhong Ouyang
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group(2)
Other individuals as a group
Other individuals as a group
Other individuals as a group
Other individuals as a group
Ordinary
Shares
Underlying
Options
Exercise
Price
(US$/Share)
(1)
2,000,000
*
*
*
*
625,514
150,000
840,000
110,000
*
*
*
*
*
*
—
*
*
*
*
*
1,276,620
—
366,000
1,283,116
780,000
325,000
40,000
1,648,586
484,894
120,000
580,526
20,000
60,000
600,000
140,000
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
1.15
—
1.15
1.15
1.15
1.025
1.025
1.025
—
1.57
1.15
1.57
1.15
1.57
1.15
1.15
1.15
0.72
1.11
1.11
1.025
1.045
71
Date of
Grant
July 2, 2007
March 22, 2011
July 20, 2007
July 10, 2009
July 10, 2009
July 2, 2007
July 20, 2007
July 10, 2009
November 29, 2007
July 2, 2007
November 29, 2007
July 10, 2009
July 20, 2007
July 10, 2009
March 22, 2011
—
March 22, 2011
July 10, 2009
March 22, 2011
June 1, 2014
June 1, 2014
June 1, 2014
—
July 20, 2007
July 20, 2007
November 29, 2007
November 29, 2007
July 10, 2009
July 10, 2009
March 22, 2011
March 22, 2011
September 4, 2012
November 1, 2012
November 30, 2012
June 1, 2014
August 1, 2014
Expiration
Date
July 2, 2017
March 22, 2021
July 20, 2017
July 10, 2016
July 10, 2016
July 2, 2017
July 20, 2017
July 10, 2016
November 29, 2015
July 2, 2017
November 29, 2015
July 10, 2016
July 20, 2017
July 10, 2016
March 22, 2016
—
March 22, 2021
July 10, 2016
March 22, 2016
June 1, 2019
June 1, 2019
June 1, 2019
—
July 20, 2017
July 20, 2017
November 29, 2015
November 29, 2015
July 10, 2016
July 10, 2016
September 1, 2017
March 22, 2016
May 31, 2016
November 1, 2016
November 1, 2016
June 1, 2019
August 1, 2019
* Aggregate beneficial ownership of our company by such officer or director is less than 1% of our total outstanding ordinary shares.
(1) On August 23, 2011, in order to provide better incentive to our employees, our board of directors approved an adjustment to the exercise price of a portion of
the stock options previously granted to certain optionees on July 2, 2007, July 20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011. The exercise
price for the adjusted portion of the options is $1.15 per ordinary share and the exercise price for the unadjusted portion will remain the same at $1.57 per
ordinary share.
(2) Including a former executive officer of the company and excluding unvested options to purchase 575,440 ordinary shares of such former executive officer,
which was cancelled on May 31, 2014. .
The following paragraphs summarize the terms of our 2007 Option Plan, as amended, 2011 Option Plan and 2012 Option Plan:
Plan Administration. Our board of directors, or a committee designated by our board or directors, will administer the plans. The committee or the full board of
directors, as appropriate, will determine the provisions and terms and conditions of each option grant.
Award Agreements. Options and stock purchase rights granted under our plans are evidenced by a stock option agreement or a stock purchase right agreement, as
applicable, that sets forth the terms, conditions and limitations for each grant. In addition, the stock option agreement and the stock purchase right agreement also
provide that securities granted are subject to a 180-day lock-up period following the effective date of a registration statement filed by us under the Securities Act,
if so requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.
Eligibility. We may grant awards to our employees, directors and consultants or any of our related entities, which include our subsidiaries or any entities in which
we hold a substantial ownership interest.
Acceleration of Options upon Corporate Transactions. The outstanding options will terminate and accelerate upon occurrence of a change-of-control corporate
transaction where the successor entity does not assume our outstanding options under the plans. In such event, each outstanding option will become fully vested
and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights will terminate immediately before
the date of the change-of-control transaction provided that the grantee's continuous service with us shall not be terminated before that date.
Exercise Price and Terms of the Options. The exercise price per share subject to an option may be amended or adjusted in the absolute discretion of the
compensation committee, the determination of which shall be final, binding and conclusive. To the extent not prohibited by applicable laws or exchange rules, a
re-pricing of options mentioned in the preceding sentence shall be effective without the approval of our shareholders or the approval of the optionees.
Notwithstanding the foregoing, the exercise price per share subject to an option may not be increased without the approval of the affected optionees. If we grant
an option to an individual who, at the date of grant, possesses more than ten percent of the total combined voting power of all classes of our shares, the exercise
price cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant. The compensation committee shall determine the time or
times at which an option may be exercised in whole or in part, including exercise prior to vesting, and shall determine any conditions, if any, that must be
satisfied before all or part of an option may be exercised. The term of each option grant shall be stated in the stock option agreement, provided that the term shall
not exceed 10 years from the date of the grant.
Vesting Schedule. In general, the plan administrator determines, or the stock option agreement specifies, the vesting schedule.
Transfer Restrictions. Options to purchase our ordinary shares may not be transferred in any manner by the optionee other than by will or the laws of succession
and may be exercised during the lifetime of the optionee only by the optionee.
Termination of the Plan. Unless terminated earlier, the 2007 Option Plan will expire and no further awards may be granted under it after July 2017, our 2011
Option Plan will expire and no further awards may be granted under it after March 2021, and our 2012 Option Plan will expire and no further awards may be
granted under it after November 2022. Our board of directors has the authority to amend or terminate the plan subject to shareholder approval to the extent
necessary to comply with applicable law. However, no such action may impair the rights of any optionee unless agreed by the optionee.
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 director may
vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of the company to
borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for
any obligation of the company or of any third party. The remuneration to be paid to the directors is determined by the board of directors. There is no age limit
requirement for directors.
72
Board Committees
We have established three committees under the board of directors: an audit committee, a compensation committee, and a compliance committee. We currently
do not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination by the board
such candidates as the independent directors, in the exercise of their judgment, have found to be well qualified and willing and available to serve as our directors
prior to each annual meeting of our shareholders at which our directors are to be elected or reelected. In addition, our board of directors has resolved that director
nominations be approved by a majority of the board as well as a majority of the independent directors of the board. A majority of our board of directors are
independent directors. We have adopted a charter for each of the board committees. Each committee's members and responsibilities are described below.
Audit Committee. Our audit committee consists of Messrs. Songzuo Xiang, Shichong Shan and Conor Chia-hung Yang. Mr. Yang is the chairperson. Our board of
directors has determined that all members of our audit committee satisfy the "independence" requirements of Rule 10A-3 under the Securities Exchange Act of
1934, as amended, or the Exchange Act, and the rules and regulations of the NASDAQ Stock Market LLC. The audit committee oversees our accounting and
financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
•
•
•
•
•
•
•
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
reviewing with the independent auditors any audit problems or difficulties and management's response;
reviewing and approving all proposed related-party transactions on an ongoing basis;
discussing the annual audited financial statements with management and the independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
other matters specifically delegated to our audit committee by our board of directors from time to time;
• meeting separately and periodically with management and the independent auditors; and
•
reporting regularly to the full board of directors.
Compensation Committee. Our compensation committee consists of Messrs. Junjie Ding, Conor Chia-hung Yang and Shichong Shan. Conor Chia-hung Yang is
the chairperson. Our board of directors has determined that Messrs. Junjie Ding, Conor Chia-hung Yang and Shichong Shan satisfy the "independence"
requirements of the rules and regulations of the NASDAQ Stock Market LLC. Our compensation committee assists the board in reviewing and approving the
compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our
chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible
for, among other things:
•
•
•
reviewing and recommending to the board with respect to the total compensation package for our executive officers;
reviewing and making recommendations to the board with respect to the compensation of our directors; and
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses,
employee pension and welfare benefit plans.
Compliance Committee. Our compliance committee consists of Messrs. Qing Xu, Songzuo Xiang and Junjie Ding. Mr. Xu is the chairperson. Our compliance
committee assists the board in overseeing the Company's compliance with the laws and regulations applicable to the Company's business, and compliance with
the Company's code of business conduct and ethics and related policies by employees, officers, directors and other agents and associates of the Company. The
compliance committee is responsible for, among other things:
•
•
establishing and revising project and purchase control policies;
establishing and revising administration and business supervision policies;
73
•
•
accepting, investigating, and settling any comments, complaints, and reports from employees;
investigating and settling any matters delegated from the board of directors; and
• monitoring the status of implementation of company policies.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also owe to our
company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill
than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective
standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our
directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time.
Terms of Directors and Officers
All directors hold office until the expiration of their terms and until their successors have been elected and qualified. A director may be removed from office
before the expiry of his term by a special resolution passed by the shareholders. The directors shall be subject to retirement by rotation. One-half of the directors
(or, if the total number of directors is not a multiple of two, the number nearest to but not less than one-half) shall retire from office and cease to be a director at
the annual general meeting held in 2013, and shall be eligible for re-election at such meeting, and any director so re-elected shall serve a term of office which
shall expire on 31 July 2015. Every director who does not retire by rotation at the annual general meeting held in 2013 shall serve a term of office which shall
expire on July 31, 2014. Any director who is newly appointed shall serve a term of office which shall expire on the 31st day of July which is not less than one
year nor more than two years after the date of such appointment. Upon the expiry of each director's term of office, he shall automatically retire and cease to be a
director, but shall be eligible for re-election by the board of directors. Any director who is so re-elected shall serve an additional term which shall expire on the
31st day of July of the year which is two years after such re-election. There shall be no limit on the number of times which a director may be re-elected or the
number of additional terms which any such director may serve. Our articles of association also provide that the office of a director shall be vacated in a limited
number of circumstances, namely if the director: (a) becomes bankrupt or makes any arrangement or composition with his creditors; (b) is found to be or becomes
of unsound mind; (c) resigns his office by notice in writing to our Company; or (d) without special leave of absence from the board of directors, is absent from
meetings of the board of directors for six consecutive months and the board of directors resolves that his office be vacated. Officers are elected by and serve at the
discretion of the board of directors.
In addition, our service agreements with our directors do not provide benefits upon termination of their services.
D.
Employees
We had 795, 887 and 890 employees as of December 31, 2012, 2013 and 2014, respectively. The following table sets forth the number of our employees by area
of business as of December 31, 2012, 2013 and 2014:
Sales and Marketing Department
Quality Control and Technology Department
Programming Department
Resources Development Department
General Administrative and Accounting
Total
2012
As of December 31,
2013
2014
Number of
Employees
352
215
32
44
152
795
% of
Total
44.3
27.0
4.1
5.5
19.1
100.0
Number of
Employees
370
244
52
57
164
887
% of
Total
41.7
27.5
5.9
6.4
18.5
100.0
Number of
Employees
369
200
74
81
166
890
% of
Total
41.5
22.5
8.3
9.1
18.6
100.0
The following table sets forth the breakdown of employees by geographic location as of December 31, 2014:
Beijing
Shanghai
Guangzhou
Shenzhen
Chengdu
Wenzhou
Others
Total
City
74
Number of Employees
591
67
39
24
24
18
127
890
% of Total
66.4%
7.5%
4.4%
2.7%
2.7%
2.0%
14.3%
100.0%
Generally we enter into standard employment contracts with our officers, managers and other employees. According to these contracts, all of our employees are
prohibited from engaging in any other employment during the period of their employment with us. The employment contracts with officers and managers are
subject to renewal every three years and the employment contracts with other employees are subject to renewal every year.
In addition, we enter into standard confidentiality agreements with all of our employees including officers and managers that prohibit any employee from
disclosing confidential information obtained during their employment with us. Furthermore, the confidentiality agreements include a covenant that prohibits all
employees from engaging in any activities that compete with our business up to two years after their employment with us terminates.
Our employees are not covered by any collective bargaining agreement. We consider our relations with our employees to be generally good.
E.
Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2015, by:
•
•
each of our directors and executive officers; and
each principal shareholder, or person known to us to own beneficially more than 5.0% of our ordinary shares.
The calculations in the shareholder table below are based on 119,942,413 ordinary shares outstanding as of March 31, 2015. Beneficial ownership is determined
in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that
person, we have included shares that the person has the right to acquire within 60 days after March 31, 2015, the most recent practicable date, including through
the exercise of any option, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage
ownership of any other person.
Directors and Executive Officers:
Herman Man Guo(1)
James Zhonghua Feng(2)
Richard Peidong Wu
Qing Xu(3)
Peixin Xu(6)
Conor Chiahung Yang
Shichong Shan
Junjie Ding
Songzuo Xiang
Jack Qunyao Gao
Bailing Zeng
Yunfeng Yu
Tong Wu
Wei He
Xudong Yang
Guozhong Ouyang
All directors and executive officers
Principal Shareholders:
Dan Shao (4)
Wealthy Environment Limited(5)
Bison Capital Media Limited (6)
FIL Limited (7)
Shares Beneficially Owned
Number
%
40,090,194
4,682,324
*
2,600,000
16,040,000
*
*
*
*
—
1,060,000
*
—
*
—
—
66,629,204
20,584,214
17,505,980
16,040,000
10,594,200
32.88%
3.85%
*
2.16%
13.37%
*
*
*
*
—
*
*
—
*
—
—
52.45%
17.16%
14.60%
13.37%
8.83%
* Aggregate beneficial ownership of our company by such director or officer is less than 1% of our total outstanding ordinary shares.
75
(1) Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, a BVI company wholly owned by Mr. Herman Man Guo, (ii) 1,400,000
ordinary shares represented by American Depositary Shares held by Wealthy Environment Limited, (iii) 2,000,000 ordinary shares issuable upon exercise of
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 company
wholly owned and controlled by Ms. Dan Shao, Mr. Guo's wife, and (v) 584,214 ordinary shares represented by American Depositary Shares held by Ms.
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 Ample Business International Ltd., a BVI company wholly owned by Mr. James Zhonghua Feng. The registered address of
Ample Business International Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, BVI.
(3) Includes (i) 2,000,000 ordinary shares held by Mambo Fiesta Limited, a BVI company wholly owned by Mr. Qing Xu, and (ii) 600,000 ordinary shares
issuable upon exercise of options held by Mr. Xu that are exercisable within 60 days.
(4) Includes (i) 20,000,000 ordinary shares held by Global Earning Pacific Limited and (ii) 584,214 ordinary shares represented by ADSs that Ms. Dan Shao
purchased in one or more open-market transactions. Global Earning Pacific Limited, a company incorporated in BVI, is wholly owned and controlled by Ms.
Dan Shao, Mr. Herman Man Guo's wife. The registered address of Global Earning Pacific Limited is OMC Chambers, Wickham Cay 1, Road Town Tortola,
BVI.
(5) Includes (i) 16,105,980 ordinary shares held by Wealthy Environment Limited, and (ii) 1,400,000 ordinary shares represented by American Depositary
Shares held by Wealthy Environment Limited. Wealthy Environment Limited, a company incorporated in BVI, is wholly owned and controlled by Herman
Man Guo. The registered address of Wealthy Environment Limited is P.O. Box 173, Kingston Chambers, Road Town Tortola, BVI.
(6) The address of Bison Capital Media Limited is c/o Bison Capital Holding Company Limited, 609-610, 21st Century Tower, 40 Liangmaqiao Road,
Chaoyang District, Beijing, People's Republic of China, 100016. Bison Capital Media Limited, a Cayman Islands company, is wholly-owned by Bison
Capital Holding Company Limited, a Cayman Islands company, which is in turn wholly owned by Ms. Fengyun Jiang, a citizen of Hong Kong Special
Administrative Region. Ms. Jiang is the sole director of both Bison Capital Media Limited and Bison Capital Holding Company Limited. Ms. Jiang possesses
the power to direct the voting and disposition of the shares owned by Bison Capital Media Limited and may be deemed to have beneficial ownership of such
shares. Mr. Peixin Xu is the husband of Ms. Jiang and, as such, Mr. Xu may be deemed to beneficially own the 16,040,000 ordinary shares directly held by
Bison Capital Media Limited.
(7) FIL Limited owns 10,594,200 ordinary shares as reported on a Schedule 13G jointly filed by FIL Limited, Pandanus Partners, L.P. and Pandanus Associates,
Inc. on February 13, 2015. According to such Schedule 13G, Pandanus Partners, L.P., or Pandanus, owns shares of FIL Limited, or FIL, voting stock, which
normally represents more than 25% and less than 50% of the total votes which may be cast by all holders of FIL voting stock. Pandanus Associates, Inc., or
PAI, acts as general partner of Pandanus. Pandanus is owned by trusts for the benefit of members of the family of Edward C. Johnson 3d but disclaims that
any such member is a beneficial owner of the securities reported on such Schedule 13G. The address of FIL is Pembroke Hall, 42 Crow Lane, Hamilton,
Bermuda, HM19.
Other than as otherwise disclosed in this report, we are not directly or indirectly owned or controlled by another corporation), by any foreign government or by
any other natural or legal person severally or jointly. None of our major shareholders have different voting rights from other shareholders. We are not aware of
any arrangement that may, at a subsequent date, result in a change of control of our company.
As of March 31, 2015, 127,662,057 of our ordinary shares were issued, with 119,942,413 shares outstanding and 7,719,644 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 and held
approximately 65.39% of our total outstanding ordinary shares as of March 31, 2015. The number of beneficial owners of our ADSs in the United States is likely
to be much larger than the number of record holders of our ordinary shares in the United States.
For the options granted to our directors, officers and employees, please refer to "— B. Compensation — Share Options."
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”
76
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 of direct
operations outside of China. Prior to 2011, although AM China, our subsidiary and the 100% shareholder of AM Technology, Shenzhen AM and Xi'an AM, has
been operating its advertising business in Hong Kong since 2008, its operation experience was less than three years and was not qualified under the PRC
regulations to own a PRC advertising company. Accordingly, our domestic PRC subsidiaries, AM Technology, Shenzhen AM and Xi'an AM, which are
considered foreign-invested enterprises, were ineligible to operate a business with advertising as a part of their business scope in China. Our advertising business
is currently provided through contractual arrangements with our consolidated VIEs in China, principally AM Advertising, certain of its subsidiaries, Shengshi
Lianhe, Jiaming Advertising 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 is now allowed to directly invest in advertising business in China. We are in the process of establishing a wholly-owned subsidiary to provide advertising
services 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 reliance on the
current VIE structure. Our consolidated VIEs directly operate our advertising network, enter into concession rights contracts and sell advertising time slots 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 we qualify for
direct ownership of an advertising business in China under the PRC laws and regulations and acquire our VIEs as our direct, wholly-owned subsidiaries. AM
Technology has entered into contractual arrangements with our VIEs, pursuant to which AM Technology provides exclusive technology support and service and
technology development services in exchange for payments from them. In addition, AM Technology has entered into agreements with our VIEs and each of their
shareholders, which provide AM Technology with the substantial ability to control our VIEs. These agreements are summarized in the following paragraphs.
•
•
•
•
•
Technology support and service agreements: AM Technology provides exclusive technology support and consulting services to our VIEs and in return,
the VIEs are required to pay AM Technology service fees. The VIEs pay to AM Technology annual service fees in the amount that guarantee that the
VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost- plus rate of no less than 0.5% in the case of AM Advertising,
Shengshi Lianhe and Jiaming Advertising, or 1.0% in the case of AM Yuehang. It is at AM Technology's sole discretion that the rate and amount of
service fees ultimately charged the VIEs under these agreements are determined. The "net cost-plus rate" refers to the operating profit as a percentage of
total costs and expenses of a certain entity. The technology support and service agreements are effective for ten years and such term is automatically
renewed upon their expiration unless either party to an agreement informs the other party of its intention not to extend at least twenty days prior to the
expiration of these agreements.
Technology development agreements: Our VIEs exclusively engage AM Technology to provide technology development services. AM Technology
owns the intellectual property rights developed in the performance of these agreements. The VIEs pay to AM Technology annual service fees in the
amount that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5%
in the case of AM Advertising, Shengshi Lianhe and Jiaming Advertising, which final rate should be determined by AM Technology. It is at AM
Technology's sole discretion the rate and amount of fees ultimately charged the VIEs under these agreements are determined. The "net cost-plus rate"
refers to the operating profit as a percentage of total costs and expenses of a certain entity. The technology development agreements are effective for ten
years and such term is automatically renewed upon their expiration unless either party informs the other party of its intention not to extend at least
twenty days prior to the expiration of these agreements.
Call option agreements: Under the call option agreements, the shareholders of our VIEs irrevocably granted AM Technology or its designated third
party an exclusive option to purchase from the VIEs' shareholders, to the extent permitted under PRC law, all the equity interests in the VIEs, as the case
may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. In addition, under these agreements,
AM Technology has undertaken to act as guarantor of VIEs in all operations- related contracts, agreements and transactions and commit to provide loans
to support the business development needs of VIEs or if the VIEs suffer operating difficulties, provided that the relevant VIE's shareholders satisfy the
terms and conditions in the call option agreements. Under PRC laws, to provide an effective guarantee, a guarantor needs to execute a specific written
agreement with the beneficiary of the guarantee. As AM Technology has not entered into any written guarantee agreements with any third party
beneficiaries to guarantee the VIEs' performance obligations to these third parties, none of these third parties can demand performance from AM
Technology as a guarantor of the VIEs' performance obligations. The absence of a written guarantee agreement, however, does not affect our conclusion
that we are the primary beneficiary of the VIEs and in turn should consolidate the financials of the VIEs. The term of each call option agreement is ten
years and such terms can be renewed upon expiration at AM Technology's sole discretion.
Equity pledge agreements: Under the equity pledge agreements, the shareholders of the VIEs pledged all of their equity interests, including the right to
receive declared dividends, in the VIEs to AM Technology to guarantee VIEs' performance of their obligations under the technology support and service
agreement and the technology development agreement. If the VIEs fail to perform its obligations set forth in the technology support and service
agreement, AM Technology shall be entitled to exercise all the remedies and powers set forth in the provisions of the equity pledge agreement. The
agreement 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. Such authorization
letters will remain effective during the operating periods of the VIEs. The authorization is effective for ten years and such term is renewed upon its
expiry at AM Technology's sole discretion.
77
Through the above contractual arrangements, AM Technology has obtained 100% of shareholders' voting interest in the VIEs, has the right to receive all
dividends declared and paid by the VIEs and may receive substantially all of the net income of the VIEs through the technical support and service fees as
determined by AM Technology at its sole discretion. Accordingly, we have consolidated the VIEs because we believe, through the contractual arrangements, (1)
AM Technology could direct the activities of the VIEs that most significantly affect its economic performance and (2) AM Technology could receive
substantially all of the benefits that could be potentially significant to the VIEs. Other than the contractual arrangements described above, because the
management and certain employees of AM Technology also serve in the VIEs as management or employees, certain operating costs paid by AM Technology,
such as payroll costs and office rental, were re-charged to the VIEs.
Shenzhen AM has signed contractual agreements with one of our VIEs in China, AM Yuehang, pursuant to which Shenzhen AM provides exclusive technology
support services including the research and development of technologies related to AM Yuehang's business operation, the maintenance and monitoring of
displays and programming systems, research on the solution of technical problems, and other related technical support and services in exchange for 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 it
purchases from Xi'an AM to provide technology development and support services to other companies.
Amounts Due to Qingdao AM
In December 2014, we entered into an agreement with Qingdao Airport to establish a joint venture, Qingdao AM. The amount due to Qingdao AM represents the
capital contribution commitment of $0.8 million to Qingdao AM as of December 31, 2014, which was paid in January 2015.
Amounts Due from related parties
As of December 31, 2014, we had $0.2 million due from BEMC as the uncollected advertising revenue earned from BEMC.
As of December 31, 2014, we had approximately $19 thousand digital TV on airplanes concession fee receivable due from Jiacheng Advertising and $0.4 million
concession fee deposit receivable from Guangxi Dingyuan.
We had $1.6 million due from AM Jiaming includes short-term loan of $1.6 million and related interest receivable of approximately $15 thousand as of
December 31, 2014.
We had $0.3 million and $0.8 million due from Dingsheng Ruizhi and Dayun Culture represent the un-received consideration for selling the 20% and 20% of
equity interests in AM Film and AM Lianhe, respectively, as of December 31, 2014.
Transactions with Jiacheng Advertising
In 2014, we earned approximately $20 thousand of advertising revenue from Jiacheng Advertising.
Transactions with Guangxi Dingyuan
In 2014, we purchased approximately $0.2 million of concession cost from Guangxi Dingyuan.
Transactions with AM Jiaming
In each of May and June 2014, we advanced $0.8 million to AM Jiaming, with annual interest rates of both loans equal to bank lending rate over the same period,
which is 6% per annum for 2014. The loans will be deemed due on a date which is five days before the issuance of a written notice from us. No prepayment was
received from AM Jiaming as of December 31, 2014.
Transactions with Dingsheng Ruizhi (Beijing) Investment Consulting Co., Ltd. ("Dingsheng Ruizhi")
In June 2014, we sold 20% equity interests in AM Film, a wholly-owned subsidiary, to Dingsheng Ruizhi for a consideration of $0.3 million. After the
transaction, we held 80% equity interests and remained control over AM Film.
78
Transactions with Beijing Dayun Culture Communication Co., Ltd. ("Dayun Culture")
In August 2014, we sold 20% equity interests in AM Lianhe, a wholly-owned subsidiary, to Dayun Culture, for a consideration of $2.8 million. After the
transaction, we held 80% equity interests and remained control over AM Lianhe.
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 a
material adverse effect on our business, financial condition or results of operations. We may become subject to legal proceedings, investigations and claims
incidental 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 pay
dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital
requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other
factors deemed relevant by our board of directors.
If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement,
including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
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 financial
statements filed as part of this annual report.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
See “—C. Markets.”
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ADSs, each representing two of our ordinary shares, were listed on the NASDAQ Global Market on November 7, 2007 and were subsequently transferred to
the NASDAQ Global Select Market. Our ADSs trade under the symbol "AMCN." The following table provides the high and low trading prices for our ADSs for
the periods noted.
79
High
Low
8.90
7.60
4.01
3.20
3.24
2.56
2.41
3.20
2.64
2.44
3.14
3.20
2.64
2.34
2.25
5.00
2.83
2.10
1.33
1.50
1.65
1.96
1.65
1.67
1.83
1.67
2.11
2.25
2.12
1.97
1.83
1.91
Annual Market Prices
Year 2010
Year 2011
Year 2012
Year 2013
Year 2014
Quarterly Market Prices
Second Quarter 2014
Third Quarter 2014
Fourth Quarter 2014
First Quarter 2015
Monthly Market Prices
October 2014
November 2014
December 2014
January 2015
February 2015
March 2015
April 2015 (until April 23, 2015)
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
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 not complete,
and you should read our amended and restated memorandum and articles of association, which has been filed as Exhibit 99.3 to our Form 6-K (File No. 001-
33765) filed with the SEC on December 10, 2009, and the amendment thereto, which has been filed as Exhibit 99.2 to our Form 6-K (File No. 001-33765) filed
with the SEC on June 27, 2013. We subsequently amended our memorandum and articles of association by shareholders’ resolutions passed on July 18, 2013, the
results of which have been filed as Exhibit 99.1 to our Form 6-K (File No. 001-33765) filed with the SEC on July 23, 2013.
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-
1104, Cayman Islands, or at such other place as our board of directors may from time to time decide. The objects for which our company is established are
unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law, as amended from time to time, or any other law
of the Cayman Islands.
80
Board of Directors
See "Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management."
Ordinary Shares
General
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our
shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.
Dividend Rights
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law.
Voting Rights
Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of
hands unless a poll is demanded. A poll may be demanded by one or more shareholders holding together at least ten percent of the shares given a right to vote at
the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders consists of shareholders holding not less than an aggregate of one-third of all voting share capital of the
Company in issue present in person or by proxy and entitled to vote. Shareholders' meetings may be held annually and may be convened by our board of directors
on its own initiative or upon a request to the directors by shareholders holding in aggregate at least one-third of our voting share capital. Advance notice of at least
fourteen days is required for the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the shares cast in a general
meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast in a general meeting.
A special resolution is required for important matters such as a change of name. Holders of the ordinary shares may effect certain changes by ordinary resolution,
including increasing the amount of our authorized share capital, consolidating or dividing all or any of our share capital into shares of larger amount than our
existing shares, and canceling any shares that are authorized but unissued.
Transfer of Shares
Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of his or her shares by an instrument of
transfer in writing and executed by or on behalf of the transferor, accompanied by the certificates of such shares and such other evidence as the Directors may
reasonably require to show the right of the shareholder to make the transfer.
Repurchase of Shares
Subject to the provisions of the Companies Law and our articles of association, our board of directors may authorize repurchase of our shares in accordance with
the manner of purchase specified in our articles of association without seeking shareholder approval. Once the shares have been repurchased, they may be
cancelled or held in the name of the company as treasury shares.
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders
of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay
all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Redemption of Shares
We may issue shares on terms that are subject to redemption on such terms and in such manner as may, before the issue of such shares, be determined by our
board of directors.
81
Calls on Shares and Forfeiture of Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least
fourteen calendar days prior to the specified time and place of payment. Shares that have been called upon and remain unpaid on the specified time are subject to
forfeiture.
Variations of Rights of Shares
All or any of the special rights attached to any class of shares may, subject to the provisions of our articles of association be varied either with the written consent
of the holders of a majority of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of
that class.
Inspection of Books and Records
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate
records. However, we will provide our shareholders with annual audited financial statements.
See "— H. Documents on Display."
C.
Material Contracts
In September 2014, Guangzhou Meizheng, one of our consolidated affiliated entities in which our company has 63.3% of the equity interest, has entered into a
concession agreement with Shanghai Railway Culture and Advertising Development Co., Ltd., pursuant to which Guangzhou Meizheng has been granted the
right to exclusively install and operate Wi-Fi system on high speed trains including D-prefaced bullet trains operated by Shanghai Railway Bureau. The above
concession contract period is three years starting from January 1, 2015. The concession rights fee for the first year is RMB48.4 million (US$7.8 million).
We have not entered into any material contracts other than in the ordinary course of business and other than those described above, in "Item 4. Information on the
Company" or elsewhere in this annual report on Form 20-F.
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 conduct of
our operations in the Cayman Islands, where we were incorporated. Cayman Islands law and our memorandum and articles of association do not impose any
material limitations on the right of nonresidents or foreign owners to hold or vote our ordinary shares.
See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Exchange” for a description of PRC regulations on
foreign exchange.
E.
Taxation
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the
nature of inheritance tax or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to or produced before a court
in the Cayman Islands.
The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
PRC Taxation
Under the EIT Law, foreign corporate shareholders and corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or on any
gains they realize from the transfer of our shares or ADSs, if we are classified as a PRC resident enterprise and such income is regarded as income from "sources
within the PRC." Given the fact that whether we would be regarded as "resident enterprise" is not clear, it is uncertain whether foreign corporate shareholders and
corporate ADSs holders may be subject to a 10% income tax upon the dividends payable by us or on any gains they realize from the transfer of our shares or
ADSs. If we are required under the PRC tax law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders
or if any gains of the transfer of their shares or ADSs are subject to PRC tax, such holders' investment in our ADSs or ordinary shares may be materially and
adversely affected.
82
United States Federal Income Taxation
The following is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or ordinary shares by a
U.S. Holder (as defined below) that holds our ADSs or ordinary shares as "capital assets" (generally, property held for investment) under the U.S. Internal
Revenue Code of 1986, as amended, or the Code, but it does not purport to be a complete analysis of all potential tax consequences and considerations. This
summary is based upon existing U.S. federal income tax law as of the date hereof, which is subject to differing interpretations or change, possibly with retroactive
effect. This summary does not discuss all aspects of U.S. federal income taxation that may be important to particular holders in light of their individual
circumstances, including holders subject to special tax rules (for example, banks or other financial institutions, insurance companies, regulated investment
companies, real estate investment trusts, cooperatives, pension plans, broker-dealers, partnerships and their partners, and tax-exempt organizations (including
private foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly or constructively) 10% or more of our voting stock, holders who
acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation, holders that hold their ADSs or ordinary shares as
part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, traders in securities that have elected
the mark-to-market method of accounting for their securities or holders that have a functional currency other than the United States dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any alternative minimum tax, state, local,
non-U.S. tax or non-income tax (such as the United States federal gift and estate tax) considerations or the Medicare tax. Each U.S. Holder is urged to consult
with its tax advisor regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations relating to the ownership and disposition of our
ADSs or ordinary shares.
General
For purposes of this summary, a "U.S. Holder" is a beneficial owner of our ADSs or ordinary shares that is, for U.S. federal income tax purposes, (i) an individual
who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or
organized under the law of, the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for
U.S. federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States
court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise elected to
be treated as a United States person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax
treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our ADSs
or ordinary shares and partners in such partnerships are urged to consult their tax advisors regarding their ownership and disposition of our ADSs or ordinary
shares.
It is generally expected that a U.S. Holder of ADSs should be treated as the beneficial owner, for United States federal income tax purposes, of the underlying
shares represented by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Accordingly, deposits or
withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.
Passive Foreign Investment Company Considerations
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, 2014, there is a
significant risk that we will become a PFIC for our current taxable year ending December 31, 2015 and future taxable years unless the market price of our ADSs
increases and/or we invest a substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of non-passive
income. In general, we will be classified as a PFIC for any taxable year if either (i) 75 percent or more of our gross income for such year is passive income or (ii)
50 percent or more of the average quarterly value of our assets (as generally determined on the basis of fair market value) produce or are held for the production
of passive income. For this purpose, cash and assets readily convertible into cash are generally classified as passive and goodwill and other unbooked intangibles
associated with active business activities may generally be classified as non-passive. We will be treated as owning a proportionate share of the assets and earning
a proportionate share of the income of any other corporation in which we own, directly or indirectly, more than 25 percent (by value) of the stock. Although the
law in this regard is unclear, we treat the VIEs (and their subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise
effective control over the operations of such entities but also because we are entitled to substantially all of the economic benefits associated with such entities,
and, as a result, we consolidate such entity's' operating results in our consolidated financial statements. If it were determined, however, that we are not the owner
of any of our VIEs (or their subsidiaries) for U.S. federal income tax purposes, we could be treated as a PFIC for the current taxable year or any future taxable
year. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no
assurance can be given with respect to our PFIC status for any taxable year.
83
If we are classified as a PFIC for any year during which a U.S. Holder holds ADSs or ordinary shares, a U.S. Holder will generally, as discussed below under "—
Passive Foreign Investment Company Rules," be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder's holding period in
which we are or become a PFIC and subsequent taxable years ("PFIC-Tainted Shares") even if, we in fact, cease to be a PFIC in subsequent taxable years.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds ADSs or ordinary shares, and unless a mark-to-market election (as described
below) is made, a U.S. Holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether we remain a PFIC, on (i) any
excess distribution that we make (which generally means any distribution received in a taxable year that is greater than 125 percent of the average annual
distributions received in the three preceding taxable years or such U.S. Holder's holding period for the ADSs or ordinary shares, if shorter), and (ii) any gain
realized on the sale or other disposition, including a pledge, of our ADSs or ordinary shares. Under the PFIC rules:
•
•
•
•
such excess distribution or gain will be allocated ratably over the U.S. Holder's holding period for the ADSs or ordinary shares;
such amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we are classified as a PFIC (a "pre-PFIC
year") will be taxable as ordinary income;
such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to such U.S.
Holder for that year; and
an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC
year.
If we are a PFIC for any taxable year during which a U.S. Holder holds ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC,
such U.S. Holder would be treated as owning a proportionate amount (by value) of the ADSs or ordinary shares of the lower-tier PFIC and would be subject to
the rules described above on certain distributions by a lower-tier PFIC and a disposition of ADSs or ordinary shares of a lower-tier PFIC even though such U.S.
Holder would not receive the proceeds of those distributions or dispositions.
As an alternative to the foregoing rules, a holder of "marketable stock" in a PFIC may make a mark-to-market election with respect to such stock. Marketable
stock is stock that is regularly traded on a qualified exchange or other market as defined in applicable United States Treasury Regulations. Our ADSs (but not our
ordinary shares) are listed on the NASDAQ Global Select Market, which is a qualified exchange or other market for these purposes. We anticipate that the ADSs
will be considered regularly traded for so long as they continue to be listed, but no assurance may be given in this regard. If a U.S. Holder makes this election,
such holder will generally (i) include in gross income for each taxable year the excess, if any, of the fair market value of the ADSs at the end of the taxable year
over the adjusted tax basis of the ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of
the ADSs at the end of the taxable year, but only to the extent of the amount previously included in income as a result of the mark-to-market election. The
adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a mark-to-market election is made in
respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, a U.S. Holder will generally not be required to take into
account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a mark-to-market election is made, any gain
recognized upon the sale or other disposition of ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be
treated as ordinary to the extent of the net amount previously included in income as a result of the mark-to-market election. In the case of a U.S. Holder who has
held ADSs during any taxable year in which we are classified as PFIC and continues to hold such ADSs (or any portion thereof), and who is considering making a
mark-to-market election, special tax rules may apply relating to purging the PFIC taint of such ADSs. If a U.S. Holder makes a mark-to-market election, the tax
rules that apply to distributions by corporations which are not PFICs would apply to distributions, except that the reduced tax rate applicable to qualified dividend
income (as discussed below in " –Dividends") would not apply.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with
respect to such U.S. Holder's indirect interest in any investment held by us that is treated as an equity interest in a PFIC for United States federal income tax
purposes.
We do not intend to provide the U.S. Holders with the information necessary to permit U.S. Holders to make qualified electing fund elections, which, if available,
would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
84
If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621. Each
U.S. Holder is urged to consult its tax advisor concerning the United States federal income tax consequences of holding and disposing ADSs or ordinary shares if
we are or become a PFIC, including the possibility of making a mark-to-market election, the "deemed sale" and "deemed dividend" elections.
Dividends
Subject to the PFIC rules discussed above, any cash distributions (including the amount of any taxes withheld) paid on our ADSs or ordinary shares out of our
current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S.
Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in the case of
ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will generally be
reported as a "dividend" for U.S. federal income tax purposes. A non-corporate recipient of dividend income generally will be subject to tax on dividend income
from a "qualified foreign corporation" at a reduced U.S. federal tax rate rather than the marginal tax rates generally applicable to ordinary income provided that
certain holding period requirements are met.
A non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable
year) generally will be considered to be a qualified foreign corporation with respect to any dividend it pays on stock (or ADSs in respect of such stock) which is
readily tradable on an established securities market in the United States or, in the event that the company is deemed to be a PRC resident under the PRC
Enterprise Income Tax Law, the company is eligible for the benefits of the United States-PRC treaty. Dividends received on the ADSs or ordinary shares are not
expected to be eligible for the dividends received deduction allowed to corporations.
Although the ADSs are currently tradable on the NASDAQ Global Select Market, which is an established securities market in the United States, and thus we
anticipate they will be considered readily tradable on an established securities market in the United States for purposes of the reduced tax rate, no assurance may
be given in this regard. 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 we pay 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 advised to consult its tax advisor regarding the rate of tax that will apply to such holder with respect to, dividend distributions, if any, received from us.
Dividends paid on our ADSs or ordinary shares generally will be treated as income from foreign sources for United States foreign tax credit purposes and
generally will constitute passive category income. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in
respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax
credit for foreign tax withheld, may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholdings, but only for a year in which
such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. Each U.S. Holder is advised to consult
its tax advisor regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, a U.S. Holder generally will recognize capital gain or loss upon the sale or other disposition of ADSs or ordinary
shares in an amount equal to the difference between the amount realized upon the disposition and the holder's adjusted tax basis in such ADSs or ordinary shares.
Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or
loss for United States foreign tax credit purposes. The deductibility of a capital loss is subject to limitations. Each U.S. Holder is advised to consult with its tax
advisor regarding the tax consequences if a foreign withholding tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the
foreign tax credit under their particular circumstances.
Information Reporting
Certain U.S. Holders are required to report information to the IRS relating to an interest in "specified foreign financial assets", including shares issued by a non-
United States corporation, for any year in which the aggregate value of all specified foreign financial assets exceeds US$50,000 (or a higher dollar amount
prescribed by the IRS), subject to certain exceptions (including an exception for shares held in custodial accounts maintained with a United States financial
institution). These rules also impose penalties if a U.S. Holder is required to submit such information to the IRS and fails to timely do so.
In addition, U.S. Holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our
ADSs or ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the United States information reporting rules to
their particular circumstances.
85
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 and
other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. Copies of reports
and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the
SEC at 100 F Street, N.E., Room 1580, Washington, D.C., 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by
calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and
other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the
rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish JPMorgan Chase Bank, N. A., the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders' meetings and other reports and communications that
are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our
request, will mail to all record holders of ADSs the information contained in any notice of a shareholders' meeting received by the depositary from us.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at http://www.airmedia.net.cn. In addition,
we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We
have not used derivative financial instruments in our investment portfolio. Interest-earning instruments carry a degree of interest rate risk. We have not been
exposed nor do we anticipate being exposed to material risks due to changes in market interest rates. However, our future interest income may fall short of
expectations due to changes in market interest rates. A hypothetical 1% decrease in interest rates would have resulted in a decrease of approximately $0.6 million
in our interest income for the year ended December 31, 2014.
Foreign Exchange Risk
Our financial statements are expressed in U.S. dollars, which is our reporting and functional currency. However, substantially all of the revenues and expenses of
our consolidated operating subsidiaries and affiliate entities are denominated in RMB. Substantially all of our sales contracts are denominated in RMB and
substantially all of our costs and expenses are denominated in RMB. We have not had any material foreign exchange gains or losses. Although in general, our
exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars
and RMB because the value of the business of our operating subsidiaries and VIEs is effectively denominated in RMB, while the ADSs are traded in U.S. dollars.
The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People's Bank of China. The PRC government allowed the
RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and
the exchange rate between RMB and the U.S. dollar remained within a narrow band. As a consequence, the RMB fluctuated significantly during that period
against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against
the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S.
dollar in the future. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
86
To the extent that we need to convert our U.S. dollar-denominated assets into RMB for our operations, appreciation of the RMB against the U.S. dollar would
have an adverse effect on RMB amount we receive from the conversion. A hypothetical 10% decrease in the exchange rate of the U.S. dollar against RMB would
have resulted in a decrease of $0.27 million in the value of our U.S. dollar-denominated financial assets at December 31, 2014. Conversely, if we decide to
convert our RMB-denominated cash amounts into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other
business purposes, appreciation of the U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to us.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our
ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our
products do not increase with these increased costs.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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 depositing shares
or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by
deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for
depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for
them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay:
$5.00 per 100 ADSs (or portion of 100 ADSs)
For:
Issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property; cancellation
of ADSs for the purpose of withdrawal, including if the deposit
agreement terminates
$0.05 (or less) per ADS
Any cash distribution to registered ADS holders
A fee equivalent to the fee that would be payable if securities distributed had been shares and
the shares had been deposited for issuance of ADSs $0.05 (or less) per ADSs per calendar year
(if the depositary has not collected any cash distribution fee during that year)
Distribution of securities distributed to holders of deposited
securities which are distributed by the depositary to registered
ADS holders Depositary services
Expenses of the depositary
Registration or transfer fees
Cable, telex and facsimile transmissions (when expressly
provided in the deposit agreement); converting foreign
currency to U.S. dollars
Transfer and registration of shares on our share register to or
from the name of the depositary or its agent when you deposit
or withdraw shares
87
Persons depositing or withdrawing shares must pay:
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS
or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
For:
As necessary
Any charges incurred by the depositary or its agents for servicing the deposited securities
As necessary
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our expenses incurred in connection with investor relationship programs and any other program related to
our ADS facility and the travel expense of our key personnel in connection with such programs. The depositary has also agreed to provide additional payments to
us based on the applicable performance indicators relating to our ADS facility. There are limits on the amount of expenses for which the depositary will
reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors. We recognize
the reimbursable amounts in other income on our consolidated statements of operations on a straight-line basis over the contract term with the depositary.
For the year ended December 31, 2014, we received $249,682 from the depositary as reimbursement for our expenses incurred and recognized $538,500 as other
income in our consolidated statements of operations, and the depositary waived an estimated nil in servicing fees for ongoing program maintenance.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS
See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.
The following "Use of Proceeds" information relates to the registration statement on Form F-1 (File number: 333-146825) filed by us in connection with our
initial public offering. The registration statement was declared effective by the SEC on November 6, 2007. We received net proceeds of approximately $187.0
million from our initial public offering.
As of December 31, 2014, the net proceeds from our initial public offering have been used as follows:
•
•
•
•
approximately $118.4 million for the purchase of digital displays and other equipment and the construction of gas station media platforms;
approximately $24.8 million for share repurchases; and
approximately $10.1 million for the purchase of long-term investments.
approximately $29.7 million for business acquisition and the purchase of intangible assets.
In 2015, we expect to use the net proceeds received from our initial public offering as follows:
•
approximately $4.0 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 the
Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the specified time periods and
accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
88
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) at December 31, 2014. Based on that evaluation, our chief
executive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures required by paragraph (b) of Rules 13a-15 or
15d-15 were effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP"). Internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company's assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that a company's receipts and expenditures are being made only in accordance with authorizations of a company's management and directors and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management, including our chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting as of
December 31, 2014. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Our management, including our chief executive officer and chief financial officer
assessed the effectiveness of our internal control over financial reporting as of December 31, 2014.
Based on our assessment, our management has concluded that our internal control over financial reporting was effective at December 31, 2014.
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, 2014, based on the criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group's internal control 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 that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
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 principal
financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
89
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in 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, 2014, based on the criteria
established in Internal Control — Integrated Framework (2013) 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 financial statements
and financial statement schedule as of and for the year ended December 31, 2014 of the Group and our report dated April 24, 2015 expressed an unqualified
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 24, 2015
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, 2014 that have materially affected, or are
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-hung
Yang is an independent director as defined by the rules and regulations of the NASDAQ Stock Market LLC and under Rule 10A-3 under the Exchange Act.
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 specifically
apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, presidents, vice presidents and any other persons who
perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit to our registration statement on Form F-1 (No. 333-146825),
as amended, initially filed on October 19, 2007.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche
Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the
periods indicated below.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
TOTAL
Fiscal Year Ended December 31,
2013
2014
$
$
$
1,288,775
—
—
71,994
1,360,769 $
1,260,980
—
—
147,786
1,408,766
90
"Audit Fees" consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements or quarterly review services
that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
"Audit Related Fees" consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the
performance of the audit or review of our regulatory filings and were not otherwise included in Audit Fees.
"Tax Fees" consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees
were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.
"All Other Fees" consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or Tax
Fees.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by 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 are approved
by the audit committee prior to the completion of the audit.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We have not asked for, nor have we been granted, an exemption from the applicable listing standards for our audit committee.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
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 of the
share repurchase program to March 20, 2014. The following tables set forth information about our repurchases made under this share repurchase program in the
year ended December 31, 2014.
Period
January 1, 2014 to January 31, 2014
February 1, 2014 to February 28, 2014
March 1, 2014 to March 31, 2014
April 1, 2014 to April 30, 2014
May 1, 2014 to May 31, 2014
June 1, 2014 to June 30, 2014
July 1, 2014 to July 31, 2014
August 1, 2014 to August 31, 2014
September 1, 2014 to September 30, 2014
October 1, 2014 to October 31, 2014
November 1, 2014 to November 30, 2014
December 1, 2014 to December 31, 2014
Total
Total Number
of Shares
Purchased
0
0
0
0
0
0
0
0
0
0
0
0
0
ITEM 16F.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
ITEM 16G.
CORPORATE GOVERNANCE
Average Price
Paid Per Share
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
22,584,659
N/A
0
0
0
0
0
0
0
0
0
0
0
0
0
The NASDAQ Stock Market rules require each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer's fiscal year end.
They also require each issuer to seek shareholder approval for any establishment of or material amendment to the issuer's equity compensation plans, including
any amendment effecting a repricing of outstanding options or increasing the amount of shares authorized under such plans. However, the rules permit foreign
private issuers like us to follow "home country practice" in certain corporate governance matters.
91
Maples and Calder, our Cayman Islands counsel, has provided a letter to the NASDAQ Stock Market certifying that under Cayman Islands law, we are not
required to hold annual shareholder meetings. We held annual meetings in 2013. No annual meeting was held in 2012 or 2014. We may hold additional annual
shareholder 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 shareholder
approval for the establishment of or any material amendments to our equity compensation plans. In 2008, we followed home country practice with respect to our
2007 Option Plan by amending it to permit repricings of options without seeking shareholder approval. In 2011, we followed home country practice with respect
to our 2011 Option Plan by establishing it without seeking shareholder approval.
We have relied on and intend to continue to rely on the above home country practices under Cayman Islands law. Other than the above, we have followed and
intend to continue to follow the applicable corporate governance standards under the rules and regulations of the NASDAQ Stock Market.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18.
FINANCIAL STATEMENTS
PART III
The full text of our audited consolidated financial statements begins on page F-2 of this annual report.
ITEM 19.
EXHIBITS
Exhibit
No.
1.1
1.2
2.1
2.2
2.3
4.1
4.2
Description
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)
Amendment to Amended and Restated Memorandum and Articles of Association approved by the annual general shareholders meeting on July
18, 2013 (incorporated by reference to Exhibit 99.2 to Form 6-K (File No. 001-33765) filed on June 27, 2013)
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)
Form of Deposit Agreement among the Company, the depositary and holder of the American Depositary Receipts (incorporated by reference to
Exhibit 4.3 to Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
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)
Amended and Restated 2007 Share Incentive Plan (incorporated by reference to Exhibit 99.2 to Form 6-K filed on December 10, 2009)
2012 Share Incentive Plan. (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 (File No. 333-187442) filed on
March 22, 2013)
92
Exhibit
No.
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Description
Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 to
Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
Form of Employment Agreement between the Company and an Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 to
Registration Statement on Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
Investment Framework Agreement dated October 18, 2005, as amended on September 27, 2007, among Man Guo, Qing Xu and CDH China
Management Company Limited (incorporated by reference to Exhibit 10.4 to Registration Statement on Form F-1 (File No. 333-146825), as
amended, initially filed on October 19, 2007)
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)
English Translation of Amended Power of Attorneys dated November 28, 2008 from each of the shareholders of Beijing Shengshi Lianhe
Advertising Co., Ltd. (incorporated by reference to Exhibit 4.11 to Annual Report on Form 20-F filed on April 28, 2009)
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 Registration Statement on
Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development Agreement
dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by
reference to Exhibit 10.1 to Annual Report on Form 20-F filed on April 30, 2008)
English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology
(Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 10.13 to Registration Statement on
Form F-1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and Service
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing Shengshi Lianhe Advertising Co., Ltd.
(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 on October 19, 2007)
4.13
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Equity Pledge Agreement dated June
14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. and the shareholders of Beijing
Shengshi Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.17 to Annual Report on Form 20-F filed on April 28, 2009)
4.14
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 on October 19, 2007)
4.15
English Translation of Supplementary Agreement dated November 28, 2008 to the Amended and Restated Call Option Agreement dated June 14,
2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing Shengshi Lianhe Advertising Co., Ltd. and the shareholders of Beijing Shengshi
Lianhe Advertising Co., Ltd. (incorporated by reference to Exhibit 4.19 to Annual Report on Form 20-F filed on April 28, 2009)
93
Exhibit
No.
4.16
Description
English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia Advertising Co., 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 on Form F-
1 (File No. 333- 146825), as amended, initially filed on October 19, 2007)
4.18
4.19
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development Agreement
dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to
Exhibit 10.3 to Annual Report on Form 20-F filed on April 30, 2008)
English Translation of Amended and Restated Technology Support and Service Agreement dated June 14, 2007 between AirMedia Technology
(Beijing) Co., Ltd. and Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 10.18 to Registration Statement 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 and Service
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
4.22
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 reference to Exhibit
10.19 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement No. 1 dated June 19, 2008 to the 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 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 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 reference to Exhibit 4.27 to Annual Report on Form 20-F filed on April 28, 2009)
4.24*
4.25
English Translation of Supplementary Agreement No. 3, dated April 7, 2015, to the Amended and Restated Equity Pledge Agreement dated June
14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. (now known as AirMedia Group Co., Ltd.)
and the shareholders of Beijing AirMedia Advertising Co., Ltd.
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 reference to Exhibit
10.20 to Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
4.26
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 Beijing AirMedia
Advertising Co., Ltd. (incorporated by reference to Exhibit 4.29 to Annual Report on Form 20-F filed on April 28, 2009)
4.27
English Translation of Supplementary Agreement No. 2 dated November 28, 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 Beijing
AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.30 to Annual Report on Form 20-F filed on April 28, 2009)
4.28*
English Translation of Supplementary Agreement No. 3, dated April 7, 2015, to the Amended and Restated Call Option Agreement dated June
14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia Advertising Co., Ltd. (now known as AirMedia Group Co., Ltd.)
and the shareholders of Beijing AirMedia Advertising Co., Ltd.
4.29
English Translation of Supplementary Agreement dated November 28, 2008 to the Loan Agreement dated June 14, 2007 among AirMedia
Technology (Beijing) Co., Ltd. and Guo Man, a shareholder of Beijing AirMedia Advertising Co., Ltd. (incorporated by reference to Exhibit 4.31
to Annual Report on Form 20-F filed on April 28, 2009)
4.30
English Translation of Amended Power of Attorneys dated November 28, 2008 from the shareholders of Beijing AirMedia UC Advertising Co.,
Ltd. (incorporated by reference to Exhibit 4.32 to Annual Report on Form 20-F filed on April 28, 2009)
94
Exhibit
No.
4.31
Description
English Translation of Technology Development Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
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)
4.32
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Development Agreement
dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (incorporated by
reference to Exhibit 10.5 to Annual Report on Form 20-F filed on April 30, 2008)
4.33
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)
4.34
English Translation of Supplementary Agreement dated November 30, 2007 to the Amended and Restated Technology Support and Service
Agreement dated June 14, 2007 between AirMedia Technology (Beijing) Co., Ltd. and Beijing AirMedia UC Advertising Co., Ltd. (incorporated
by reference to Exhibit 10.6 to Annual Report on Form 20-F filed on April 30, 2008)
4.35
English Translation of Equity Pledge Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC
Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit 10.24 to
Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
4.36
English Translation of Supplementary Agreement dated November 28, 2008 to the Equity Pledge Agreement dated June 14, 2007 among
AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising
Co., Ltd. (incorporated by reference to Exhibit 4.38 to Annual Report on Form 20-F filed on April 28, 2009)
4.37
4.38
4.39
English Translation of Call Option Agreement dated June 14, 2007 among AirMedia Technology (Beijing) Co., Ltd., Beijing AirMedia UC
Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (incorporated by reference to Exhibit 10.25 to
Registration Statement on Form F-1 (File No. 333-146825), as amended, initially filed on October 19, 2007)
English Translation of Supplementary Agreement dated November 28, 2008 to the Call Option Agreement dated June 14, 2007 among AirMedia
Technology (Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd.
(incorporated by reference to Exhibit 4.40 to Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Supplementary Agreement dated October 31, 2008 among AirMedia Technology (Beijing) Co., Ltd. and the shareholders
of Beijing AirMedia UC Advertising Co., Ltd., 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)
4.40
English Translation of Power of Attorneys dated April 1, 2008 from each of the shareholders of Beijing Yuehang Digital Media Advertising Co.,
Ltd. (incorporated by reference to Exhibit 4.42 to Annual Report on Form 20-F filed on April 28, 2009)
4.41
4.42
4.43
English Translation of Technology Development Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and Beijing
Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.43 to Annual Report on Form 20-F filed on April 28, 2009)
English Translation of Technology Support and Service Agreement dated April 1, 2008 between AirMedia Technology (Beijing) Co., Ltd. and
Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit 4.44 to Annual Report on Form 20-F filed on April
28, 2009)
English Translation of Supplementary Agreement dated June 25, 2008 to the Technology Support and Service Agreement dated April 1, 2008
between AirMedia Technology (Beijing) Co., Ltd. and Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to
Exhibit 4.45 to Annual Report on Form 20-F filed on April 28, 2009)
95
Exhibit
No.
4.44
Description
English Translation of Equity Pledge Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital
Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit
4.46 to Annual Report on Form 20-F filed on April 28, 2009)
4.45
English Translation of Call Option Agreement dated April 1, 2008 among AirMedia Technology (Beijing) Co., Ltd., Beijing Yuehang Digital
Media Advertising Co., Ltd. and the shareholders of Beijing Yuehang Digital Media Advertising Co., Ltd. (incorporated by reference to Exhibit
4.47 to Annual Report on Form 20-F filed on April 28, 2009)
4.46
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)
4.47
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)
4.48
English Translation of Supplementary Agreement No. 2 to the Equity Pledge Agreement dated May 27, 2010 among AirMedia Technology
(Beijing) Co., Ltd., Beijing AirMedia UC Advertising Co., Ltd. and the shareholders of Beijing AirMedia UC Advertising Co., Ltd. (incorporated
by reference to Exhibit 4.46 to Annual Report on Form 20-F filed on May 28, 2010)
4.49
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)
4.50
4.51
4.52
4.53
Supplementary Agreement to Framework Cooperation Agreement (English summary), by and among AirMedia Group Co., Ltd., Beijing Super
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 filed on April 30,
2012)
2011 Share Incentive Plan (incorporated by reference to Exhibit 4.49 to Annual Report on Form 20-F filed on April 30, 2012)
English summary of Investment Agreement, dated May 12, 2013, by and among Elec-Tech International Co., Ltd., Beijing AirMedia UC
Advertising Co., Ltd. and Beijing Zhongshi Aoyou Advertising Co., Ltd. (incorporated by reference to Exhibit 4.50 to Annual Report on Form
20-F filed on April 25, 2014)
English summary of Cooperation Agreement for the Establishment of Advertising Company, dated May 2013, by and between Beijing Shengshi
Lianhe Advertising Co., Ltd., and Guangzhou Daozheng Advertising Co., Ltd. (incorporated by reference to Exhibit 4.51 to Annual Report on
Form 20-F filed on April 25, 2014)
4.54
English summary of Equity Swap Agreement, dated September 29, 2013, by and between Beijing N-S Digital TV Co., Ltd. and AirMedia Group
Co., Ltd. (incorporated by reference to Exhibit 4.52 to Annual Report on Form 20-F filed on April 25, 2014)
4.55
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. (incorporated by reference to Exhibit 4.53 to Annual Report on Form 20-F filed on April 25, 2014)
4.56*
English summary of Franchising Operation Agreement of Wi-Fi Wireless Network on Bullet Trains Administered under Shanghai Railway
Administration, dated August 22, 2014, by and between Guangzhou Meizheng Advertising Co., Ltd. and Shanghai Railway Culture &
Advertising Development 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
96
Exhibit
No.
12.1*
Description
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*
15.2*
15.3*
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
Consent of Commerce & Finance Law Offices
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
97
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
SIGNATURE
sign this annual report on its behalf.
Date: April 24, 2015
AIRMEDIA GROUP INC.
/s/ Herman Man Guo
Herman Man Guo
Chairman and Chief Executive Officer
98
AIRMEDIA GROUP INC.
Report of Independent Registered Public Accounting Firm
and Consolidated Financial Statements
For the years ended December 31, 2012, 2013 and 2014
AIRMEDIA GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2014
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
PAGE(S)
F-1
F-2
F-3
F-4
F-5
F-6
F-7~F-58
F-59~F-64
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, 2013 and 2014 and the related consolidated statements of operations,
comprehensive loss, changes in equity and cash flows for each of the three years in the period ended December 31, 2014 and related financial statement schedule
included in Schedule I. These consolidated financial statements and financial statement schedule are the responsibility of the Group's management. 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 that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 December 31,
2013 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered 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 over
financial reporting as of December 31, 2014, based on the criteria established Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated April 24, 2015 expressed an unqualified opinion on the Group's internal control over
financial reporting.
Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People's Republic of China
April 24, 2015
F-1
AIRMEDIA GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except share related data or otherwise noted)
As of December 31,
2013
2014
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investment
Accounts receivable, net of allowance for doubtful accounts of $7,221 and $12,392 as of December 31, 2013 and
$
$
59,652
10,366
42,949
2014, respectively
Notes receivable
Prepaid concession fees
Other current assets
Amount due from related parties
Deferred tax assets - current
Assets held for sale
Total current assets
Property and equipment, net
Prepaid equipment costs
Long-term investments
Long-term deposits
Deferred tax assets - non-current
Acquired intangible assets, net
Other non-current assets
TOTAL ASSETS
Liabilities
Current liabilities:
Short-term loan (including short-term loan of the consolidated variable interest entities without recourse to AirMedia
Group Inc. nil and nil as of December 31, 2013 and 2014, respectively)
Accounts payable (including accounts payable of the consolidated variable interest entities without recourse to
AirMedia Group Inc. $75,182 and $88,430 as of December 31, 2013 and 2014, respectively)
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the
consolidated variable interest entities without recourse to AirMedia Group Inc. $8,016 and $9,629 as of December
31, 2013 and 2014 respectively)
Deferred revenue (including deferred revenue of the consolidated variable interest entities without recourse to
AirMedia Group Inc. $17,374 and $13,517 as of December 31, 2013 and 2014, respectively)
Income tax payable (including income tax payable of the consolidated variable interest entities without recourse to
AirMedia Group Inc. $455 and $963 as of December 31, 2013 and 2014, respectively)
Amounts due to related parties (including amounts due to related parties of the consolidated variable interest entities
without recourse to AirMedia Group Inc. nil and $790 as of December 31, 2013 and 2014, respectively)
Total current liabilities
Non-current liabilities:
Other non-current liabilities (including other non-current liabilities of the consolidated variable interest entities
without recourse to AirMedia Group Inc. nil and $1,257 as of December 31, 2013 and 2014, respectively)
Deferred tax liabilities - non-current (including deferred tax liabilities - non-current of the consolidated variable
interest entities without recourse to AirMedia Group Inc. $361 and $202 as of December 31, 2013 and 2014,
respectively)
Total liabilities
Commitments and contingencies (Note 25 and Note 26)
Equity
67,437
14,395
17,729
84,993
2,673
31,035
25,620
3,322
1,585
1,087
249,876
50,329
45,176
9,049
20,300
13,932
807
6,128
395,597
3,000
94,933
11,498
13,523
1,522
107,529
1,901
29,307
20,437
187
2,776
-
275,104
36,084
49,415
7,829
20,497
11,755
1,446
661
402,791
-
81,157
10,883
17,380
1,667
-
111,087
790
125,266
-
1,257
361
111,448
202
126,725
Ordinary shares ($0.001 par value; 900,000,000 shares authorized in 2013 and 2014; 127,662,057 shares and
127,662,057 shares issued as of December 31, 2013 and 2014, respectively; 119,134,135 shares and 119,942,413
shares outstanding as of December 31, 2013 and 2014, respectively)
Additional paid-in capital
Treasury stock (8,527,922 and 7,719,644 shares as of December 31, 2013 and 2014, respectively)
Statutory reserves
Accumulated deficits
Accumulated other comprehensive income
Total AirMedia Group Inc.'s shareholders' equity
Non-controlling interests
Total equity
TOTAL LIABILITIES AND EQUITY
128
313,912
(9,860)
10,968
(84,411)
40,229
270,966
20,377
291,343
402,791
$
128
323,167
(9,236)
11,381
(110,519)
33,815
248,736
20,136
268,872
395,597
$
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 or otherwise noted)
For the years ended December 31,
2013
2012
2014
$
292,965 $
(6,223)
286,742
250,606
36,136
276,516
$
(4,250)
272,266
244,673
27,593
255,871
(3,390)
252,481
235,835
16,646
Revenues
Business tax and other sales tax
Net revenues
Less: Cost of revenues
Gross profit
Operating expenses:
Selling and marketing (including share-based compensation of $859, nil and $144 in 2012, 2013
and 2014, respectively)
General and administrative (including share-based compensation of $2,643, $1,251 and $1,215
in 2012, 2013 and 2014, respectively)
Impairment of intangible assets
Impairment of goodwill
Total operating expenses
Loss from operations
Interest income
Other income, net
Loss before income taxes and share of loss on equity method investments
Income tax (expenses)/benefits
Loss before share of income/(loss) on equity method investments
Share of income/(loss) on equity method investments
Net loss
Less: Net income/(loss) attributable to non-controlling interests
Net loss attributable to AirMedia Group Inc.'s shareholders
Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share - basic
Net loss attributable to AirMedia Group Inc.'s shareholders per ordinary share - diluted
Weighted average shares used in calculating net loss per ordinary share - basic
Weighted average shares used in calculating net loss per ordinary share - diluted
$
$
17,995
20,069
25,067
21,842
9,583
20,611
70,031
(33,895)
1,355
2,770
(29,770)
(2,493)
(32,263)
22
(32,241)
487
(32,728)
(0.26) $
(0.26) $
124,269,245
124,269,245
25,723
-
-
45,792
(18,199)
1,213
3,822
(13,164)
1,713
(11,451)
(69)
(11,520)
(894)
(10,626)
(0.09) $
(0.09) $
120,386,635
120,386,635
26,337
-
-
51,404
(34,758)
1,340
2,214
(31,204)
(430)
(31,634)
(192)
(31,826)
(6,131)
(25,695)
(0.22)
(0.22)
119,304,773
119,304,773
The accompanying notes are an integral part of these consolidated financial statements.
F-3
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In U.S. dollars in thousands)
Net loss
Other comprehensive income, net of tax:
Change in cumulative foreign currency translation adjustment
Comprehensive loss
Less: comprehensive income/ (loss) attributable to non-controlling interest
Comprehensive loss attributable to AirMedia Group Inc.'s shareholders
For the years ended December 31,
2013
2012
2014
$
(32,241) $
(11,520) $
(31,826)
2,144
(30,097)
417
(30,514) $
7,582
(3,938)
(593)
(3,345) $
(6,874)
(38,700)
(6,591)
(32,109)
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Balance as of January 1, 2012
Ordinary shares issued for share based
compensation
Share repurchase as treasury stock
Provision for statutory reserve
Share-based compensation
Foreign currency translation adjustment
Net loss
Profit distribution to non-controlling interest
Balance as of December 31, 2012
Ordinary shares issued for share based
compensation
Share repurchase as treasury stock
Provision for statutory reserve
Share-based compensation
Foreign currency translation adjustment
Net loss
Capital contribution from non-controlling
interests
Acquisition of non-controlling interests
Balance as of December 31, 2013
Ordinary shares issued for share based
compensation
Provision for statutory reserve
Share-based compensation
Foreign currency translation adjustment
Net loss
Disposal of equity interests of AM Film and
AM Lianhe to non-controlling interest
Profit distribution to non-controlling interest
Capital contribution from non-controlling
interests
Balance as of December 31, 2014
Ordinary shares
Shares
125,247,597
$
137,166
(3,272,278)
-
-
-
-
-
122,112,485
$
18,400
(2,996,750)
-
-
-
-
-
-
119,134,135
$
808,278
-
-
-
-
-
-
Amount
128
-
-
-
-
-
-
-
128
-
-
-
-
-
-
-
-
128
-
-
-
-
-
-
-
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except share data or otherwise noted)
AirMedia Group Inc.'s shareholder's equity
Additional
paid-in capital
275,150
$
Treasury
stock
Statutory
reserves
Accumulated
deficits
Accumulated
other
comprehensive
income
Total
AirMedia Group
Inc.'s shareholders'
equity
Non-
controlling
interests
Total
equity
$
(3,775)
$
8,049
$
(38,138)
$
30,734
$
272,148
$
(2,090)
$
270,058
$
-
-
-
3,502
-
-
-
278,652
-
-
-
1,251
-
-
$
161
(3,421)
-
-
-
-
-
(7,035) $
21
(2,846)
-
-
-
-
-
-
2,095
-
-
-
-
10,144
-
-
824
-
-
-
$
-
-
(2,095)
-
-
(32,728)
-
(72,961) $
-
-
(824)
-
-
(10,626)
-
-
-
-
2,214
-
-
32,948
-
-
-
-
7,281
-
$
161
(3,421)
-
3,502
2,214
(32,728)
-
241,876
21
(2,846)
-
1,251
7,281
(10,626)
$
-
-
-
-
(70)
487
(768)
(2,441) $
-
-
-
-
301
(894)
39,825
(5,816)
$
313,912
$
-
-
(9,860) $
-
-
10,968
$
-
-
(84,411) $
-
-
40,229
$
39,825
(5,816)
270,966
$
20,384
3,027
20,377
$
-
-
1,359
-
-
1,433
-
624
-
-
-
-
-
-
-
413
-
-
-
-
-
-
(413)
-
-
(25,695)
-
-
-
$
(110,519) $
-
-
-
(6,414)
-
-
-
624
-
1,359
(6,414)
(25,695)
1,433
-
-
-
-
(460)
(6,131)
1,655
(83)
-
119,942,413
$
-
128
$
6,463
323,167
$
-
(9,236) $
-
11,381
-
33,815
$
6,463
248,736
$
4,778
20,136
$
11,241
268,872
The accompanying notes are an integral part of these consolidated financial statements.
F-5
161
(3,421)
-
3,502
2,144
(32,241)
(768)
239,435
21
(2,846)
-
1,251
7,582
(11,520)
60,209
(2,789)
291,343
624
-
1,359
(6,874)
(31,826)
3,088
(83)
AIRMEDIA GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
For the years ended December 31,
2013
2012
2014
$
(32,241) $
(11,520) $
(31,826)
Allowance for doubtful accounts
Depreciation and amortization
Share-based compensation
Share of (loss)/income on equity method investments
Loss on disposal of property and equipment
Impairment loss of loan receivable from a third party
Gain on sale/maturity of short-term investments
Impairment of intangible assets
Impairment of goodwill
Changes in assets and liabilities
Accounts receivable
Notes receivable
Prepaid concession fees
Other current assets
Long-term deposits
Other non-current assets
Amount due from related parties
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Amount due to related parties
Deferred tax assets (liabilities), net
Income tax payable
Other non-current liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Prepaid equipment costs
Proceeds from disposal of property and equipment
Net amount received (paid) upon settlement of short-term investment
Dividend received from equity method investee
Restricted cash
Capital injection in AM Guangying
Proceeds from equity exchange for Xinghe Union (net of cash acquired of $527)
Disposal of 51% equity interests in AM Jiaming (net of cash disposed of $1,094)
Loan to a related party
Loan receivable from a third party
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for treasury stock
Proceeds from options exercised
Cash received from short-term loan
Capital contribution from non-controlling interests
Proceeds from disposal of equity interests of AM Lianhe
Acquisition of non-controlling interests
Dividend paid to non-controlling interests
Net cash (used in) provided by financing activities
Effect of exchange rate changes
Net (decrease)/increase in cash
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax paid
Interests paid for short-term loan
Fair value of property, equipment and other assets acquired in exchange of advertising services
rendered and subsidiary's equity transferred
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Payable for purchase of property and equipment
Dividend payable to non-controlling interests
Receivable for disposal of equity interests of AM Film and AM Lianhe
Receivable for disposal of 51% equity in AM Jiaming
$
$
$
$
$
$
$
$
1,242
24,033
3,502
(22)
1,192
-
(2,023)
9,583
20,611
(8,609)
-
2,358
(3,147)
(7,033)
-
(1,148)
8,269
(1,397)
6,586
-
(1,831)
305
-
20,230
(9,287)
-
127
(42,464)
-
(1,580)
(2,223)
-
-
-
(1,579)
(57,006)
(3,421)
161
-
-
-
-
-
(3,260)
936
(39,100)
112,734
73,634 $
4,016 $
- $
2,439
21,862
1,251
69
964
1,562
(1,888)
-
-
(9,147)
(1,874)
(7,830)
(3,945)
2,425
(651)
1,144
12,083
217
(2,716)
(454)
(3,972)
518
-
537
(13,096)
(56,996)
30
4,769
686
(2,076)
(4,112)
-
-
-
329
(70,466)
(2,846)
21
-
59,438
-
(1,627)
(675)
54,311
1,636
(13,982)
73,634
59,652
$
2,728
$
- $
5,623
14,531
1,359
192
395
-
(857)
-
-
14,156
(823)
(2,454)
(3,476)
(301)
(6,072)
(1,536)
10,558
1,718
(3,454)
794
(1,499)
(106)
1,264
(1,814)
(12,363)
(11,224)
28
25,274
242
(4,306)
(1,629)
527
(1,094)
(1,612)
-
(6,157)
-
624
3,000
11,241
1,958
-
-
16,823
(1,067)
7,785
59,652
67,437
2,066
75
1,987 $
50,305 $
11,083
5,679 $
663 $
- $
- $
3,561
-
-
-
$
$
$
$
8,526
73
1,118
53
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Introduction of the Group
AirMedia Group Inc. ("AirMedia" or the "Company") was incorporated in the Cayman Islands on April 12, 2007.
AirMedia, its subsidiaries, its variable interest entities ("VIEs") and VIEs' subsidiaries (collectively the "Group") operate its out-of-home advertising
network, primarily air travel advertising network, in the People's Republic of China (the "PRC").
As of December 31, 2014, details of the Company's subsidiaries, VIEs and VIEs' subsidiaries are as follows:
Name
Intermediate Holding Company:
Broad Cosmos Enterprises Ltd.
AirMedia International Limited ("AM International")
AirMedia (China) Limited ("AM China")
Excel Lead International Limited ("Excel Lead")
Glorious Star Investment Limited ("Glorious Star")
Subsidiaries:
AirMedia Technology (Beijing) Co., Ltd. ("AM Technology")
Shenzhen AirMedia Information Technology Co., Ltd.
("Shenzhen AM")
VIEs:
Beijing Shengshi Lianhe Advertising Co., Ltd. ("Shengshi Lianhe")
AirMedia Group Co., Ltd.
(Formerly Beijing AirMedia Advertising Co., Ltd.)
("AM Advertising")
Beijing AirMedia Jiaming Advertising Co., Ltd.
(Formerly Beijing AirMedia UC Advertising Co., Ltd.)
("Jiaming Advertising")
Beijing Yuehang Digital Media Advertising Co., Ltd.
("AM Yuehang")
Date of
incorporation/
acquisition
Place of
incorporation
Percentage
of legal
ownership
June 26, 2006
British Virgin Islands ("BVI")
July 14, 2007
August 5, 2005
August 1, 2008
August 1, 2008
September 19, 2005
June 6, 2006
August 7, 2005
November 22, 2005
BVI
Hong Kong
BVI
Hong Kong
the PRC
the PRC
the PRC
the PRC
the PRC
January 1, 2007
the PRC
January 16, 2008
the PRC
F-7
100%
100%
100%
100%
100%
100%
100%
100%
N/A
N/A
N/A
N/A
Xi'an AirMedia Chuangyi Technology Co., Ltd. ("Xi'an AM")
December 31, 2007
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Introduction of the Group - continued
Name
VIEs' subsidiaries:
AirTV United Media & Culture Co., Ltd. ("AirTV United")
Beijing AirMedia Film & TV Culture Co., Ltd. ("AM Film")
Flying Dragon Media Advertising Co., Ltd. ("Flying Dragon")
Wenzhou AirMedia Advertising Co., Ltd. ("AM Wenzhou")
Beijing AirMedia Lianhe Advertising Co., Ltd.
(Formerly Beijing Weimei Lianhe Advertising Co., Ltd.)
("AM Lianhe")
Hainan Jinhui Guangming Media Advertising Co., Ltd.
("Hainan Jinhui")
Beijing AirMedia Advertising Co., Ltd.
(Formerly Beijing AirMedia Jinshi Advertising Co., Ltd.)
("AM Jinshi")
Date of
incorporation/
acquisition
October 10, 2006
September 13, 2007
August 1, 2008
October 17, 2008
March 10, 2009
June 23, 2009
July 7, 2009
Tianjin AirMedia Jinshi Advertising Co., Ltd. ("TJ Jinshi")
September 8, 2009
AirMedia City (Beijing) Outdoor Advertising Co., Ltd.
("AM Outdoor")
Beijing Dongding Gongyi Advertising Co., Ltd. ("Dongding")
Beijing GreatView Media Advertising Co., Ltd.
(Formerly Beijing Weimei Shengjing Media
Advertising Co., Ltd.) ("GreatView Media")
Beijing AirMedia Jinsheng Advertising Co., Ltd. ("AM Jinsheng")
Guangzhou Meizheng Advertising Co., Ltd.
("Guangzhou Meizheng")
Beijing AirMedia Tianyi Advertising Co., Ltd. ("AM Tianyi")
Beijing Xinghe Union Media Co., Ltd. ("Xinghe Union")
January 1, 2010
February 1, 2010
April 28, 2011
April 28, 2011
May 17, 2013
September 25, 2013
February 28, 2014
F-8
Place of
incorporation
Percentage
of legal
ownership
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
the PRC
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
The VIE arrangements
Chinese regulations currently limit foreign ownership of companies that provide advertising services, including out-of-home television advertising
services. Since December 30, 2005, foreign investors have been permitted to own directly 100% interest in PRC advertising companies if the foreign
investor has at least three years of direct operations of advertising business outside of the PRC.
One of the Company's subsidiary, AM China, the 100% shareholder of AM Technology, Shenzhen AM, and Xi'an AM, has been engaged in the
advertising business in Hong Kong since September 2008. Since it has operated as an advertising business for more than three years, AM China and its
subsidiaries may apply for the required licenses to provide advertising services in China.
The Group conducts substantially all of its activities through VIEs, i.e. Shengshi Lianhe, AM Advertising, Jiaming Advertising and AM Yuehang, and
the VIEs' subsidiaries. The VIEs have entered into the following series of agreements with AM Technology:
•
•
Technology support and service agreement: AM Technology provides exclusive technology support and consulting services to the VIEs and in
return, the VIEs are required to pay AM Technology service fees. The VIEs pay to AM Technology annual service fees in the amount that
guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less than 0.5% in
the case of AM Advertising, Shengshi Lianhe and Jiaming Advertising, or 1.0% in the case of AM Yuehang, which final rate should be
determined by AM Technology. The "net cost-plus rate" refers to the operating profit as a percentage of total costs and expenses of a certain
entity. The technology support and service agreements are effective for ten years and such term is automatically renewed upon its expiry unless
either party informs the other party of its intention of no extension at least twenty days prior to the expiration of the agreements.
Technology development agreement: VIEs exclusively engaged AM Technology to provide technology development services. AM Technology
owns the intellectual property rights developed in the performance of these agreements. The VIEs pay to AM Technology annual service fees in
the amount that guarantee that the VIEs can achieve, after deducting such service fees payable to AM Technology, a net cost-plus rate of no less
than 0.5% in the case of AM Advertising, Shengshi Lianhe and Jiaming Advertising, which final rate should be determined by AM Technology.
The "net cost-plus rate" refers to the operating profit as a percentage of total costs and expenses of a certain entity. The technology development
agreements are effective for ten years and such terms is automatically renewed upon its expiry unless either party informs the other party of its
intention of no extension at least twenty days prior to the expiration of the agreements.
F-9
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
The VIE arrangements - continued
•
•
•
Call option agreement: Under the call option agreements, the shareholders of VIEs irrevocably grant AM Technology, or its designated third
party, an exclusive option to purchase from the VIEs' shareholders, to the extent permitted under PRC law, all the equity interests in the VIEs,
as the case may be, for the minimum amount of consideration permitted by the applicable law without any other conditions. In addition, AM
Technology will act as guarantor of VIEs in all operation related contracts, agreements and transactions and commit to provide loans to support
the business development needs of VIEs or when the VIEs are suffering operating difficulties provided that the relevant VIEs' shareholders
satisfy the terms and conditions in the call option agreements. Based on PRC law to provide an effective guarantee, a guarantor needs to execute
a specific written agreement with the beneficiary of the guarantee. As AM Technology has not entered into any written guarantee agreements
with any third party beneficiaries to guarantee the VIEs' performance obligations to these third parties, none of these third parties can demand
performance from AM Technology as a guarantor of the VIEs' performance obligations. The absence of the written guarantee agreement did not
obviate the Group's conclusion that it is the primary beneficiary of the VIEs and in turn should consolidate 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, including the
right to receive declared dividends, in the VIEs to AM Technology to guarantee VIEs' performance of its obligations under the technology
support and service agreement and the technology development agreement. The agreement is effective for as long as the technology support and
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 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. Such
authorization letters will remain effective during the operating periods of the VIEs. The authorization is effective unless the relevant call 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 receive all
dividends declared and paid by the VIEs and can receive substantially all of the net income of the VIEs through the technical support and service fees.
Accordingly, the Group has consolidated the VIEs because, through AM Technology, it has (1) the power to direct the activities of the VIEs that most
significantly affect its economic performance and (2) the right to receive substantially all of the benefits that could be potentially significant to the VIEs.
F-10
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Risks in relation to the VIE structure
The Group believes that the VIE arrangements are in compliance with PRC law and are legally enforceable. The shareholders of the VIEs are also
shareholders of the Group and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in the
PRC legal system could limit the Group's ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their
interest in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they would seek to act contrary to
the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so.
The Group's ability to control the VIEs also depends on the authorization letters that AM Technology has to vote on all matters requiring shareholder
approval in the VIEs. As noted above, the Group believes the rights granted by the authorization letters is legally enforceable but may not be as effective
as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the PRC
government could:
•
•
•
•
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. In addition, if
the imposition of any of these penalties causes the Group to lose the rights to direct the activities of the VIEs and its subsidiaries or the right to receive
their economic benefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any penalties imposed or actions
taken by the PRC Government would result in the liquidation of the Group, AM Technology, or the VIEs.
F-11
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Risks in relation to the VIE structure - continued
Certain shareholders of VIEs are also beneficial owners or directors of the Company. In addition, certain beneficial owners and directors of the Company
are also directors or officers of VIEs. Their interests as beneficial owners of VIEs may differ from the interests of the Company as a whole. The
Company cannot be certain that if conflicts of interest arise, these parties will act in the best interests of the Company or that conflicts of interests will be
resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest these parties may
encounter in their capacity as beneficial owners of VIEs, on the one hand, and as beneficial owners of the Company, on the other hand. The Company
believes the shareholders of VIEs will not act contrary to any of the contractual arrangements and the exclusive purchase right contract provides the
Company with a mechanism to remove them as shareholders of VIEs should they act to the detriment of the Company. If any conflict of interest or
dispute between the Company and the shareholders of VIEs arises and the Company is unable to resolve it, the Company would have to rely on legal
proceedings in the PRC. Such legal proceedings could result in disruption of its business; moreover, there is substantial uncertainty as to the ultimate
outcome of any such legal proceedings.
The following financial statement information for AirMedia's VIEs were included in the accompanying consolidated financial statements, presented net
of intercompany eliminations, as of and for the years ended December 31:
Total current assets
Total non-current assets
Total assets
Total current liabilities
Total non-current liabilities
Total liabilities
Net revenues
Net loss
Net cash (used in) provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
F-12
As of December 31,
2013
2014
$
$
$
208,255
108,677
316,932
101,027
361
101,388 $
186,320
128,601
314,921
113,329
1,459
114,788
For the years ended December 31,
2013
2012
2014
$
286,641 $
(31,771)
(8,587)
(7,700)
-
$
271,536
(13,552)
8,132
(70,653)
58,763
252,477
(27,508)
1,532
(23,908)
13,199
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES - continued
Risks in relation to the VIE structure - continued
The VIEs contributed an aggregate of 100%, 99.7% and 100% of the consolidated net revenues for the years ended December 31, 2012, 2013 and 2014,
respectively. As of December 31, 2013 and 2014, the VIEs accounted for an aggregate of 78.7% and 79.6%, respectively, of the consolidated total assets,
and 91.0% and 90.6%, respectively, of the consolidated total liabilities. The assets not associated with the VIEs primarily consist of cash 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 no
creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries. There
are no terms in any arrangements, considering both explicit arrangements and implicit variable interests, which require the Company or its subsidiaries to
provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its option and subject to
statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholder of the VIEs or entrustment loans to the VIEs.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the
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 affect the
reported amounts of assets and liabilities and revenue and expenses in the financial statements and accompanying notes, including allowance for
doubtful accounts, the useful lives of property and equipment and intangible assets, impairment of long-term investments, impairment of
goodwill, impairment of long-lived assets, share-based compensation and valuation allowance for deferred tax assets. Actual results could differ
from those estimates.
F-13
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(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 effect on the
Group's future financial position, results of operations, or cash flows: the Group's limited operating history; advances and trends in new
technologies and industry standards; competition from other competitors; regulatory or other PRC related factors; risks associated with the
Group's ability to attract and retain employees necessary to support its growth; risks associated with the Group's growth strategies; and general
risks associated with the advertising industry.
(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 market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be
recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that
is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the
asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets
with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable
or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
F-14
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
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 due from
related parties, assets held for sale, short-term loan, accounts payable, and amounts due to related parties. The Group did not have any other
financial assets and liabilities or nonfinancial assets and liabilities that are measured at fair value on recurring basis as of December 31, 2013
and 2014.
The Group's financial assets and liabilities measured at fair value on a non-recurring basis include assets held for sale based on level 1 the
quoted market price in an active market, assets based on level 2 inputs in connection with equity share exchange transaction and acquired assets
and liabilities based on level 3 inputs in connection with business combinations.
(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 which have
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 intent and
ability to hold the securities to maturity. All of the Group's held-to-maturity securities are stated at their amortized costs and classified as short-
term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year.
The Group reviews its short-term investments for other-than-temporary impairment based on the specific identification method. The Group
considers available quantitative and qualitative evidence in evaluating potential impairment of its short-term investments. If the cost of an
investment exceeds the investment's fair value, the Group considers, among other factors, general market conditions, government economic
plans, the duration and the extent to which the fair value of the investment is less than the cost, and the Group's intent and ability to hold the
investment, in determining if impairment is needed.
F-15
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(j)
Assets held for sale
The Group considers property, plant and equipment to be assets held for sale when all of the following criteria are met: i) a formal commitment
to a plan to sell a property was made and exercised; ii) the property is available for sale in its present condition; iii) actions required to complete
the sale of the property have been initiated; iv) sale of the property is probable and the Group expects the completed sale will occur within one
year; v) the property is actively being marketed for sale at a price that is reasonable given its current market value; and vi) actions required to
complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Upon
designation as assets held for sale, the Group records each property at the lower of its carrying value or its estimated fair value, less estimated
costs to sell, and the Group ceases depreciation.
(k)
Property and equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a
straight-line basis over the following estimated useful lives:
Digital display network equipment
Gas station display network equipment
Furniture and fixture
Computer and office equipment
Vehicle
Software
Property
Leasehold improvement
F-16
5 years
5 years
5 years
3-5 years
5 years
5 years
50 years
Shorter of the term of the lease
or the estimated useful lives of the assets
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(l)
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 in
circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures
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 the expected undiscounted cash flow is less than the carrying amount of the assets,
the Group would recognize an impairment loss based on the excess of carrying amount over the fair value of the assets.
(m)
Impairment of goodwill
The Group annually, or more frequently if the Group believes indicators of impairment exist, reviews 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 not be 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's goodwill to the carrying value of that goodwill. The implied fair value of goodwill is
determined in a manner similar to accounting for a business combination with 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 the reporting 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 in the carrying value of goodwill over the
implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a
discounted cash flow.
The Group has 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. The Group performs its annual impairment tests on December 31 of each year.
F-17
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(n)
Long-term investments
Equity method investments
Investee companies over which the Company has the ability to exercise significant influence, but does not have a controlling interest are
accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the
voting stock of the investee between 20% and 50%, and other factors, such as representation on the investee's Board of Directors, voting rights
and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.
Cost method investments
For investments in an investee over which the Group does not have significant influence, the Group carries the investment at cost and
recognizes income as any dividends declared from distribution of investee's earnings. The Group reviews the cost method investments for
impairment whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable. An impairment loss is
recognized in earnings equal to the difference between the investment's carrying amount and its fair value at the balance sheet date of the
reporting period for which the assessment is made. The fair value of the investment would then become the new cost basis of the investment.
F-18
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(o)
Acquired intangible assets
Acquired intangible assets with definite lives are carried at cost less accumulated amortization. Customer relationships intangible asset is
amortized using the estimated attrition pattern of the acquired customers. Amortization of other definite-lived intangible assets is computed
using the straight-line method over the following estimated economic lives:
TV program license
Audio-vision programming & broadcasting qualification
Customer relationships
Contract backlog
Concession agreements
Non-compete agreements
(p)
Revenue recognition
20 years
19.5 years
3-3.4 years
1.2-3 years
3.8-10 years
4.4 years
The Group's revenues are derived from selling advertising time slots on the Group's advertising networks, primarily air travel advertising
network. For the years ended December 31, 2012, 2013 and 2014, 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 advertisements on the
Group's network in specified locations for a period of time. The Group recognizes advertising revenues ratably over the performance period for
which the advertisements are displayed, so long as collection of the fees remains probable.
The Group also wholesales the advertising platforms such as scrolling light boxes and billboards in the gas stations located in some major cities,
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.
F-19
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(p)
Revenue recognition - continued
Nonmonetary exchanges
The Group occasionally exchanges advertising time slots and locations with other entities for assets or services, such as equipment and other
assets. The amount of assets and revenue recognized is based on the fair value of the advertising provided or the fair value of the transferred
assets, whichever is more readily determinable. The amounts of revenues recognized for nonmonetary transactions were $1,287, $656 and
$1,699 for the years ended December 31, 2012, 2013 and 2014, respectively. No direct costs are attributable to the revenues.
(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 after deducting
input VAT on purchases. The net VAT balance between input VAT and output VAT is reflected in the account under input VAT receivable or
other taxes payable.
In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in
lieu of business tax in certain areas and industries in the PRC, including Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and
Hubei between September and December 2012. Also a circular issued in May 2013 provided that such VAT pilot program is rolled out
nationwide since August 2013. Since then, certain subsidiaries and VIEs became subject to VAT at the rates of 6% or 3%, on certain service
revenues which were previously subject to business tax. For the years ended December 31, 2012, 2013 and 2014, gross revenue is presented net
of $8,785, $21,524 and $19,279 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 than those
subject to VAT after deduction of certain costs of revenues permitted by the PRC tax laws.
F-20
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(s)
Concession fees
The Group enters concession right agreements with vendors such as airports, airlines and a petroleum company, under which the Group obtains
the right to use the spaces or equipment of the vendors to display the advertisements. The concession right agreements are treated as operating
lease arrangements.
Fees under concession right agreements are usually due every three, six or twelve months. Payments made are recorded as current assets and
current liabilities according to the respective payment terms. Most of the concession fees with airports and airlines are fixed with escalation,
which means fixed increase over each year of the agreements. The total concession fee under the concession right agreements with airports and
airlines is charged to the consolidated statements of operations on a straight-line basis over the agreement periods, which is generally between
three and five years.
The fee structure of the concession right agreement with the petroleum company is based on the actual number of developed gas stations and
associated standard annual concession fee for each developed gas station. Each gas station has its specific lease term starting from the time
when it is actually put into operation. The calculation of rental payments is based on how many months the gas stations are actually put into
operation during the year and the standard annual concession fee determined based on the location of the gas station. Accordingly, each gas
station is treated as a separate lease and rental payments are recognized on a straight-line basis over its lease term. The amount of annual
concession fee to-be-paid is determined by an actual incurred concession fee or a fixed minimum payment, if any, based on negotiation with the
petroleum company.
(t)
Agency fees
The Group pays fees to advertising agencies based on certain percentage of revenues made through the advertising agencies upon receipt of
payment from advertisers. The agency fees are charged to cost of revenues in the consolidated statements of operations ratably over the period
in which the advertising is displayed. Prepaid and accrued agency fees are recorded as current assets and current liabilities according to relative
timing of payments made and advertising service provided. From time to time, the Group and certain advertising agencies may renegotiate and
mutually agree, as permitted by applicable laws, to reduce existing agency fee liabilities as calculated under the terms of existing contracts.
Such reductions in the accrued agency fees are recorded as a reduction in cost of sales in the period the renegotiations are finalized. During the
years ended December 31, 2012, 2013 and 2014, reversals in cost of sales as a result of renegotiated agency fees amounted to $6,407, $3,329
and $1,433, respectively.
F-21
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(u)
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating
lease. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease
periods.
(v)
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were $767, $1,039 and $2,309 for the years ended December 31,
2012, 2013 and 2014, respectively, and have been included as part of selling and marketing expenses.
(w)
Foreign currency translation
The functional and reporting currency of the Company and the Company's subsidiaries domiciled in BVI and Hong Kong are the United States
dollar ("U.S. dollar"). The financial records of the Company's other subsidiaries, VIEs and VIEs' subsidiaries located in the PRC are maintained
in their local currency, the Renminbi ("RMB"), which are the functional currency of these entities.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the
rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted
into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are
recognized in the statements of operations.
The Group's entities with functional currency of RMB translate their operating results and financial position into the U.S. dollar, the Company's
reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains
and losses are translated using the average rate for the year. Retained earnings and equity are translated using the historical rate. Translation
adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income.
F-22
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(x)
Income taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to the
Group as enacted by the relevant tax authorities.
The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than not to
be sustained upon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, the Group classifies the interest and penalties, if any, as a component of the income tax position.
(y)
Share-based payments
Share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument issued, and
recognized as compensation expenses over the requisite service periods based on a straight-line method, with a corresponding impact reflected
in additional paid-in capital.
Share-based payment transactions with non-employees are measured based on the fair value of the options as of each reporting date through the
measurement date, with a corresponding impact reflected in additional paid-in capital.
(z)
Comprehensive loss
Comprehensive loss includes net loss and foreign currency translation adjustments and is presented net of tax, the tax effect is nil for the three
years ended December 31, 2014 in the consolidated statements of comprehensive loss.
(aa)
Allowance of doubtful accounts
The Group conducts credit evaluations of clients and generally do not require collateral or other security from clients. The Group establishes an
allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific clients and
utilizes both specific identification and a general reserve to calculate allowance for doubtful accounts. The amount of receivables ultimately not
collected by the Group has generally been consistent with expectations and the allowance established for doubtful accounts. If the frequency
and amount of customer defaults change due to the clients' financial condition or general economic conditions, the allowance for uncollectible
accounts may require adjustment. As a result, the Group continuously monitors outstanding receivables and adjusts allowances for accounts
where collection may be in doubt.
F-23
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(bb)
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable. The
Group places their cash with financial institutions with high-credit rating and quality in China.
The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers. The Group
establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk
of specific customers. The amount of receivables ultimately not collected by the Group has generally been consistent with management's
expectations and the allowance established for doubtful accounts.
Customers accounting for 10% or more of total revenues are:
Customer
A
2012
For the years ended December 31,
2013
2014
11.2%
6.7%
0.5%
Customers accounting for 10% or more of accounts receivable are:
Customer
B
(cc)
Net loss per share
As of December 31,
2013
2014
10.4%
7.2%
Basic net loss per share are computed by dividing net loss attributable to holders of ordinary shares by the weighted average number of ordinary
shares outstanding during the year. Diluted net loss reflects the potential dilution that could occur if securities or other contracts to issue
ordinary shares were exercised or converted into ordinary shares. Potential common shares in the diluted net loss per share computation are
excluded in periods of losses from continuing operations, as their effect would be anti-dilutive.
F-24
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(dd)
Government subsidies
The Group primarily receives tax refund and development supporting bonus from tax bureau and local government without any condition or
restriction. The government subsidies are recorded in other income on the consolidated statements of operations in the period in which the
amounts of such subsidies are received. The recognized government subsidies as other income are $210, $1,395 and $817 for the years ended
December 31, 2012, 2013 and 2014, respectively.
(ee)
Recent issued accounting standards adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new pronouncement which affects any entity using U.S. GAAP that
either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless
those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This Accounting Standards Update (“ASU”)
will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also
supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In
addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a
customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350,
Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on
revenue) in this ASU.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core
principle, an entity should apply the following steps:
•
•
•
•
•
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. Early application is not permitted.
F-25
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(ee)
Recent issued accounting standards adopted - continued
An entity should apply the amendments in this ASU using one of the following two methods:
1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:
•
•
•
For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was
completed rather than estimating variable consideration amounts in the comparative reporting periods.
For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price
allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this
transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:
•
•
The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as
compared to the guidance that was in effect before the change.
An explanation of the reasons for significant changes.
The Group is in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.
F-26
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(ff)
Recent issued accounting standards not yet adopted
In April, 2014, the FASB issued ASU 2014-08, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to
provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations
criteria. The new guidance eliminates the second and third criteria of discontinued operation in ASC 205-20-45-1 and instead requires
discontinued-operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a
major impact on an entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method
investments and businesses that, upon initial acquisition, qualify as held for sale.
The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the
statement of financial position.
Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2)
depreciation and amortization, capital expenditures, and significant operating and investing noncash items
related to the discontinued operation.
The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially
classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The Group does not expect the
adoption of this guidance will have a significant effect on its consolidated financial statements.
F-27
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(ff)
Recent issued accounting standards not yet adopted - continued
In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718,
Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The
performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the
period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the
period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end
of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of
awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the
employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.
The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15,
2015. Earlier adoption is permitted. The Group does not expect the adoption of this guidance will have a significant effect on its consolidated
financial statements.
In August, 2014, the FASB issued a new pronouncement which provides guidance on determining when and how reporting entities must
disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual
assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements.
Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern." The
new standard is effective for fiscal years ending after December 15, 2016.
The Group does not expect the adoption of this guidance will have a significant effect on its consolidated financial statements.
F-28
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
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 making decisions
about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment. The Group has internal 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
Revenues:
Air Travel Media Network:
Digital frames in airports
Digital TV screens in airports
Digital TV screens on airplanes
Traditional media in airports
Other revenues in air travel
Gas Station Media Network
Other Media
4.
SHORT-TERM INVESTMENTS
For the years ended December 31,
2013
2012
2014
$
$
137,342 $
13,731
26,612
83,478
7,346
14,217
10,239
292,965 $
$
152,346
14,110
16,160
64,845
9,183
12,726
7,146
276,516
$
138,527
13,286
16,212
56,723
6,395
11,164
13,564
255,871
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 13 days to less than one year, with interest rates ranging from 2.3% to
8.0%. The held-to-maturity securities are subject to penalty for early withdrawal before their maturity. The carrying amount of the held-to-maturity
securities of $42,949 and $17,729 as of December 31, 2013 and 2014, respectively, approximated their fair values due to its credit ratings and its short-
term nature, all of which have a maturity date within one-year.
F-29
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
5.
LONG-TERM INVESTMENTS
(a)
Equity method investments
The Group had the following equity method investments:
Name of company
Beijing Eastern Media Corporation, Ltd. ("BEMC") (1)
Beijing Shibo Movie Technology Co., Ltd. ("Shibo Movie") (2)
Beijing Xinghe Union Media Co., Ltd. ("Xinghe Union") (2)
Guangxi Dingyuan Media Ltd. ("Guangxi Dingyuan") (3)
Zhejiang AirMedia Guangying Film Production Co., Ltd. ("AM
Guangying") (4)
Beijing Yunxing Chuangrong Investment Fund Management Co.,
Ltd. ("Yunxing Chuangrong") (5)
Beijing AirMedia Jiaming Film & TV Culture Co., Ltd. ("AM
Jiaming") (6)
Qingdao Airport AirMedia Advertising Co., Ltd. ("Qingdao AM")
(7)
Beijing AirMedia Jiacheng Advertising Co., Ltd. ("Jiacheng
Advertising") (8)
As of December 31,
2013
Amount
Percentage
%
2014
Amount
Percentage
%
49
50
50
40
48
50
-
-
-
$
1,743
455
370
718
1,652
2,478
-
-
$
-
7,416
$
49
-
90
40
38
50
49
49
30
$
1,545
-
-
753
3,219
2,340
-
790
-
8,647
(1)
In March 2008, the Group entered into a definitive agreement with China Eastern Media Corporation, Ltd., a subsidiary of China
Eastern Group and China Eastern Airlines Corporation Limited operating the media resources of China Eastern Group, to establish a
joint venture, BEMC. BEMC was incorporated on March 18, 2008 in the PRC with China Eastern Media Corporation and the Group
holding 51% and 49% equity interest, respectively. BEMC obtained concession rights of certain media resources from China Eastern
Group, including the digital TV screens on airplanes of China Eastern Airlines, and paid concession fees to its shareholders as
consideration. The total paid-in capital of BEMC was $2,119, which was contributed by both parties proportionately. In September
2013 and December 2014, BEMC distributed dividend of $1,401 and $495, respectively, in which $686 and $242, respectively were
distributed and paid to the Group.
The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence
to the operation of BEMC.
F-30
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
5.
LONG-TERM INVESTMENTS - continued
(a)
Equity method investments - continued
(2)
On February 15, 2012 and March 13, 2012, the Group and Beijing N-S Digital TV Co., Ltd. ("N-S Digital TV") established two 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 Shibo Movie and Xinghe Union.
Shibo Movie is engaged in movie technology development and consulting services, and Xinghe Union is engaged in movie and TV
series investment and publishing, advertisement design and production. These joint ventures were established pursuant to a framework
agreement entered into with Beijing Super TV Co., Ltd. ("Super TV") in June 2011 and the supplemental agreement entered into with
Super TV and N-S Digital TV in January 2012.
In September 2013, the Group entered into an equity swap agreement with N-S Digital TV under which the Group exchanged its 50%
equity interests in Shibo Movie for the 50% equity interests in Xinghe Union. Pursuant to the agreement, the equity transaction is
considered as completed substantially on February 28, 2014. The Group derecognized the equity method investments in both Xinghe
Union and Shibo Movie with an investment loss of $164 recognized in the transaction.
As a result, Xinghe Union became a subsidiary and was consolidated in the Group after the transaction date.
(3)
In April 2012, The Group entered into an agreement with Asiaray Advertising Media Ltd. ("Asiaray") and Guangxi Civil Aviation
Development Co., Ltd. ("Guangxi Civil Aviation") to establish a joint venture, Guangxi Dingyuan. Guangxi Dingyuan was
incorporated on April 18, 2012 with total contributed capital of $1,605, of which 20%, 40% and 40% of that amount was contributed
by Guangxi Civil Aviation, Asiaray and the Group, respectively. Guangxi Dingyuan exclusively operates various media 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 significant influence
to the operation of Guangxi Dingyuan.
F-31
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
5.
LONG-TERM INVESTMENTS - continued
(a)
Equity method investments – continued
(4)
(5)
(6)
In December 2013, the Group entered into an agreement with Zhejiang Tianguang Diying Production Co., Ltd. to establish a joint
venture, AM Guangying. AM Guangying was incorporated on December 25, 2013 with total contributed capital of $1,871, of which
52% and 48% of that amount was contributed by Zhejiang Tianguang Diying Production Co., Ltd. and the Group, respectively. In
March 2014, the Group participated a capital call at $1,629 without any change of its equity interest. As a result, the total contributed
capital by the Group was $2,520 as of December 31, 2014. 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 significant influence
to the operation of AM Guangying.
In December 2013, the Group entered into an agreement with Hainan Airlines Culture Co., Ltd. ("Hainan Airlines") to establish a joint
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 Chuangrong is established
for its operation in the in-flight internet business.
The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence
to the operation of Yunxing Chuangrong.
In June 2014, the Group sold 51% equity interests in AM Jiaming to an individual with consideration of $53. The disposal gain of $19
was recognized in the year ended December 31, 2014. AM Jiaming was changed from a wholly-owned subsidiary to a 49% equity
method investee of the Group.
The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence
to the operation of AM Jiaming. After sharing the Company's share of loss, the carrying value of the long-term investment in AM
Jiaming was decreased to nil as of December 31, 2014.
F-32
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
5.
LONG-TERM INVESTMENTS - continued
(a)
Equity method investments - continued
(7)
(8)
In December 2014, the Group entered into an agreement with Qingdao International Airport Group Co., Ltd. ("Qingdao Airport") to
establish a joint venture, Qingdao AM. Qingdao AM was registered on December 25, 2014 with total committed capital contribution of
$1,607. The Group and Qingdao Airport each committed to contribute $788 and $819, respectively, representing 49% and 51% of the
equity interest of Qingdao AM. The Group paid the whole capital injection of $788 to Qingdao AM in January 2015. Qingdao AM
exclusively operates various media resources in Qingdao International Airport.
The investment was accounted for using the equity method of accounting as the Group has the ability to exercise significant influence
to the operation of Qingdao AM.
In December 2014, the Group entered into an agreement with Beijing East Culture Media Co., Ltd. ("East Jiacheng") to establish a
joint venture, Jiacheng Advertising. Jiacheng Advertising was registered on December 12, 2014 with total committed capital
contribution of $4,849. The Group and East Jiacheng each committed to contribute $1,455 and $3,394, respectively, representing 30%
and 70% of the equity interest of Jiaming Advertising. As of December 31, 2014, the Group did not pay any capital into Jiacheng
Advertising. The capital contribution shall be paid within 50 years which is permitted under current PRC laws. Jiacheng Advertising
mainly operates digital TV media resources.
The investment was accounted for using the equity method of accounting as the Group has the ability to exercise the significant
influence to the operation of Jiacheng Advertising.
(b)
Cost method investment
In June 2010, the Group invested $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-33
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
6.
ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of the following:
Billed receivable
Unbilled receivable
Accounts receivable, gross
Less: Allowance for doubtful accounts
Accounts receivable, net
As of December 31,
2013
2014
$
$
$
64,031
50,719
114,750
(7,221)
107,529
$
44,528
52,857
97,385
(12,392)
84,993
Unbilled receivable represents amounts earned under the advertising contracts in progress but not billable at the respective balance sheet dates. These
amounts become billable according to the contract term. The Group anticipates that the majority of such unbilled amounts will be billed and collected
within twelve months of the balance sheet date.
Movement of allowance for doubtful accounts is as follows:
2012
2013
2014
Balance at
beginning
of the year
Charge to
expenses
Write off
Exchange
adjustment
Balance at
end of the
year
$
$
$
3,288
4,609
7,221
1,242
2,439
5,623
34
-
(247)
$
45
173
$
(205) $
4,609
7,221
12,392
F-34
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
7.
OTHER CURRENT ASSETS
Other current assets consist of the following:
Input VAT receivable
Prepaid selling and marketing fees(i)
Advances to employees
Short-term deposits
Prepaid agency fees
Prepaid income tax
Prepaid individual income tax
Other assets from nonmonetary transactions
Receivables from ADS depositary
Interest receivable
Investment in films and TV Series(ii)
Other prepaid expenses
As of December 31,
2013
2014
$
12,800
-
428
449
538
684
-
182
-
422
3,634
1,300
20,437 $
16,692
2,625
1,235
1,142
579
473
451
467
463
267
-
1,226
25,620
$
$
(i)
(ii)
Prepaid selling and marketing fees represents the prepayments for promotion of the Group's digital frame media in airports.
Investment in films and TV Series represents the amount invested in films and TV Series produced by other companies, which are expected to
receive investment returns within one year. Please see Note 9 for details.
8.
ASSETS HELD FOR SALE
On January 13, 2015, the Group entered into an agreement with Beijing Tianyi Culture Development Co., Ltd., a third party, to sell 81% equity interest
in AM Jinsheng as well as related property, plant and equipment for a consideration of $1,227, which operates the Group's TV-attached digital frames
business (Note 28). As part of the transaction, the property, plant and equipment at net carrying value of $1,087 will be transferred, which has been
classified as assets held for sale as of December 31, 2014. No impairment was recorded for the assets held for sale.
F-35
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
9.
OTHER NON-CURRENT ASSETS
The Group invests in films and TV Series, which are produced by other third parties, and shares profit of the invested films and TV Series based on its
investment as a percentage of the total investment for a film or TV Series.
Amounts related to the investments in films and TV Series that are expected to receive investment returns within one year after year end are recorded as
other current assets (Note 7), otherwise are recorded as other non-current assets. The investments of $661 and $6,128 were recorded as other non-current
assets for the years ended December 31, 2013 and 2014, respectively.
The Group also entered into agreements with other investors to invest together on certain film or TV Series, which are produced by third parties, and
share the profit of the invested films and TV Series proportionally based on their investments. The Group received the investment from other investors,
and recorded it as other non-current liabilities amounted to $1,257 as of December 31, 2014 due to the long-term of expected investment returns.
10.
LONG-TERM DEPOSITS
Long term deposits consist of the following:
Concession fee deposits
Office rental deposits
As of December 31,
2013
2014
$
$
19,780
717
20,497
$
$
19,544
756
20,300
Concession fee deposits normally have terms of three to five years and are refundable at the end of the concession terms. Office rental deposits normally
have terms of 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 intended to
provide security for the counterparty to the concession rights or office rental agreements. Therefore, the deposits are recorded at costs.
F-36
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
11.
ACQUIRED INTANGIBLE ASSETS, NET
Acquired intangible assets, net, consist of the following:
As of December 31,
2013
Gross
carrying
amount
Accumulated Accumulated
amortization
impairment
Net
carrying
amount
Gross
2014
carrying Accumulated Accumulated
amount
amortization
impairment
Net
carrying
amount
TV program license
Audio-vision programming and broadcasting qualification
Customer relationships
Contract backlog
Concession agreements
Non-compete agreements
$
$
6,372
229
1,553
2,035
17,337
194
27,720 $
$
(1,903) $
(39)
(1,490)
(2,003)
(10,633)
(184)
(16,252) $
(4,469) $
(190)
(63)
(32)
(5,258)
(10)
(10,022) $
$
-
-
-
-
1,446
-
1,446 $
6,217 $
224
1,516
1,986
11,932
190
22,065 $
(1,857) $
(38)
(1,454)
(1,955)
(6,625)
(180)
(12,109) $
(4,360) $
(186)
(62)
(31)
(4,500)
(10)
(9,149) $
-
-
-
-
807
-
807
The Group incurred impairment losses of $9,583, nil and nil on definite-lived intangible assets for the years ended December 31, 2012, 2013 and 2014,
respectively. As the actual and expected sales and profits were below previously forecasted figures for fire station, air travel and outdoor advertising
media, the carrying amounts of the definite-lived intangible assets exceeded the estimated future discounted cash flows 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, 2012, 2013 and 2014 were $2,635, $836 and $606, respectively. During fiscal years 2015,
2016, 2017, 2018 and thereafter, the Group expects to record amortization expenses for definite-lived intangible assets of $274, $273, $130 and $130,
respectively.
12.
GOODWILL
The Group has 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. Applying discounted cash flows for its 2012 annual impairment test, the estimated fair value of the fire station reporting
unit was below the carrying amount of its net assets. The fair value of the air travel areas and outdoor advertising media reporting unit, as estimated
using the income approach applying a discounted cash flows for its 2012 annual impairment test, was below the carrying amount of its net assets, and as
such, the Group impaired all goodwill related to air travel areas reporting unit and outdoor media advertising media reporting unit and recorded an
impairment loss of $20,611, nil and nil for the years ended December 31, 2012, 2013 and 2014, respectively.
F-37
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
13.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
Digital display network equipment
Gas station display network equipment
Software
Property
Computer and office equipment
Vehicle
Leasehold improvement
Furniture and fixture
Less: accumulated depreciation
As of December 31,
2013
2014
90,053
10,686
10,656
4,368
2,999
1,406
1,365
882
122,415
(86,331)
36,084
$
$
79,348
23,261
10,952
6,194
3,627
1,465
1,317
883
127,047
(76,718)
50,329
$
$
Depreciation expenses recorded for the years ended December 31, 2012, 2013 and 2014 were $21,398, $21,026 and $13,925, respectively.
F-38
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
14.
PREPAID EQUIPMENT COST
On May 12, 2013, the Group entered into an agreement with Elec-Tech International Co., Ltd. ("Elec-Tech") to exchange the equity interests of
GreatView Media, one of the VIE's subsidiaries, with LED screens from Elec-Tech, pursuant to which Elec-Tech would invest $104,000 in total
(equivalent to RMB640 million) to purchase approximately 21.27% of the equity interest of GreatView Media, in exchange, GreatView Media
undertook to exclusively use the equal amounts of such injections to purchase LED screens from Elec-Tech or its subsidiaries. The Group considered
this transaction a nonmonetary transaction. The Group measured the fair value of equity interests surrendered based on the fair value of LED screens
received, which is more clearly determinable. The details of fair value measurement are disclosed in Note 20. The Group would not recognize any gain
or loss from this transaction.
As of December 31, 2013 and 2014, Elec-Tech had injected total $57,217 and $68,458 into GreatView Media, of which $56,113 and $67,015 were
recorded as additional paid-in capital, respectively. The Group has purchased 1,000 and 1,200 sets of LED screens in total from Elec-Tech, amounting to
$49,415 and $58,182 for its gas station media business as of December 31, 2013 and 2014, respectively. As of December 31, 2014, the Group has
installed and accepted 263 sets of LED screens amounting to $12,680.
15.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the follows:
Accrued payroll and welfare
Other tax payable
Accrued staff disbursement
Deposit payable
Other liabilities
Accrued professional fees
Accrued selling and marketing fees
Dividends payable to non-controlling interests holder
Deferred income from ADS depositary
F-39
As of December 31,
2013
2014
$
$
$
4,469
2,942
1,103
1,203
666
388
-
-
112
10,883 $
3,693
3,013
1,812
1,228
673
583
423
73
-
11,498
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
16.
SHORT-TERM LOAN
In January 2014, the Group entered into a short-term loan agreement with Bank of Ping'An for a loan of $1,800 from January 8, 2014 to January 7, 2015
with an annual interest rate of 2.89%.
In March 2014, the Group entered into a short-term loan agreement with Bank of Ping'An for another loan of $1,200 from March 31, 2014 to March 30,
2015 with an annual interest rate of 2.86%.
The interest expenses for the loans were $77 for the year ended December 31, 2014. As of March 31, 2015, both of the loans and interest expense were
fully repaid.
17.
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, 2012, 2013 and
2014, and accordingly no provision for Hong Kong Profits Tax was made in these years.
The Group's subsidiaries in the PRC are all subject to PRC Enterprise Income Tax ("EIT") on the taxable income in accordance with the relevant PRC
income tax laws and regulations. The EIT rate for the Group's operating in PRC was 25% with the following exceptions.
AM Technology qualified for the High and New -Tech Enterprise ("HNTE") status that would allow for a reduced 15% tax rate under EIT Law since
year 2006. AM Technology was subject to an EIT rate of 15% in 2012, 2013 and 2014, and is expected to be subject to an EIT rate of 15% as long 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 to
transitional rules of the New EIT Law. Since Shenzhen AM is also qualified as a "manufacturing foreign-invested enterprise" incorporated prior to the
effectiveness of the New EIT Law, it is further entitled to the EIT rates of 12.5% for the year 2012. For the year 2013 and thereafter, it is subject to an
EIT rate of 25%.
Xi'an AM qualified as a "Software Enterprise" in August 2008 by Technology Information Bureau of Shaanxi province, and therefore is entitled to a
two-year exemption from the EIT commencing from its first profitable year and a 50% deduction of 25% EIT rate for the succeeding three years, with
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 the preferential
income tax rate of 12.5% from 2011 to 2013. In 2014, Xi'an AM qualified as HNTE and entitled to an EIT rate of 15% for the year 2014, and is expected
to be subject to an EIT rate of 15% as long as it maintains its status as a HNTE.
F-40
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
17.
INCOME TAXES - continued
Income tax (expenses) /benefits are as follows:
Income tax (expenses)/benefits:
Current
Deferred
Total
For the years ended December 31,
2013
2012
2014
$
$
(4,324) $
1,831
(2,493) $
(2,250) $
3,963
1,713 $
(1,921)
1,491
(430)
The principal components of the Group's deferred income tax assets and liabilities are as follows:
Deferred tax assets:
Current
Allowance for doubtful accounts
Accrued payroll
Employee education fee excess
Valuation allowance
Deferred tax assets - current
Non-current
Depreciation of property and equipment
Amortization of intangible assets and concession fees
Net operating loss carry forwards
Valuation allowance
Deferred tax assets - non-current
Total deferred tax assets
Deferred tax liabilities:
Non-current
Acquired intangible assets
Total deferred tax liabilities
F-41
$
As of December 31,
2013
2014
$
2,003
1,046
24
(297)
2,776
622
5,476
13,231
(7,575)
11,754
14,530
3,375
870
-
(2,660)
1,585
517
4,870
17,825
(9,280)
13,932
15,517
$
361
361 $
202
202
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
17.
INCOME TAXES - continued
The valuation allowance provided as of December 31, 2014 relates to the deferred tax assets generated by AM advertising, AM Technology, Shenzhen
AM, Xi'an AM, Shengshi Lianhe, Jiaming Advertising, AM Yuehang, AM Film, AM Jinshi, AM Lianhe, AM Wenzhou, TJ Jinshi, Dongding, AM
Outdoor, GreatView Media, AM Jinsheng, Guangzhou Meizheng and AM Tianyi, and was recognized based on the Group's estimates of the future
taxable income of these entities, 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 not expect to generate sufficient taxable income in future, or the amount involved is not significant. The Group's subsidiaries in the
PRC had total net operating loss carry forwards of $75,647 as of December 31, 2014. The net operating loss carry forwards for the PRC subsidiaries will
expire on various dates through year 2019.
Reconciliation between the provision for income taxes computed by applying the PRC EIT rate of 25% to income before income taxes and the actual
provision of income taxes is as follows:
For the years ended December 31,
2013
2014
2012
Net loss before provision for income taxes
PRC statutory tax rate
Income tax at statutory tax rate
Expenses not deductible for tax purposes:
Entertainment expenses exceeded the tax limit
Goodwill impairment
Tax effect of tax losses not recognized
Tax effect of deductible temporary difference not recognized
Changes in valuation allowance
Effect of preferential tax rates granted to PRC entities
Effect of income tax rate difference in other jurisdictions
Income tax expenses/ (benefits)
Effective tax rates
$
$
(29,770)
$
25%
(7,443)
(13,164) $
25%
(3,291)
(31,204)
25%
(7,801)
315
5,153
2,791
1,425
(471)
(675)
1,398
2,493
$
(8.4)%
321
-
346
1,972
(571)
(1,079)
589
(1,713) $
13.0%
299
-
10
1,831
4,068
1,209
814
430
(1.4)%
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, 2012, 2013 and
2014, the impact to net loss per share amounts would be as follows:
Increase/(decrease) in income tax expenses
Increase/(decrease) in net loss per ordinary share-basic
Increase/(decrease) in net loss per ordinary share-diluted
F-42
For the years ended December 31,
2013
2012
2014
$
675 $
0.01
0.01
$
1,079
0.01
0.01
(1,209)
(0.01)
(0.01)
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
17.
INCOME TAXES - continued
The Group did not identify significant unrecognized tax benefits for the years ended December 31, 2012, 2013 and 2014. The Group did not incur any
interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2012, 2013 and 2014.
Since the commencement of operations in August 2005, only AM Technology and Shenzhen AM have been subjected to a tax examination by the
relevant PRC tax authorities. The Group's subsidiaries, VIEs and VIEs' subsidiaries remain subject to tax examinations at the tax authority's discretion.
Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group's overall operations, and more specifically, with
regard to tax residency status. New EIT Law includes a provision specifying that legal entities organized outside of China will be considered residents
for Chinese income tax purposes if the place of effective management or control is within China. The Implementation Rules to the New EIT Law
provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and
business operations, personnel, accounting, properties, etc., occurs within China. Additional guidance is expected to be released by the Chinese
government in the near future that may clarify how to apply this standard to tax payers. Despite the present uncertainties resulting from the limited PRC
tax guidance on the issue, the Group does not believe that its legal entities organized outside of China should be treated as residents for New EIT Law
purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed resident
enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%.
Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of
financial report over tax basis, including those differences attributable to a more than 50% interest in a subsidiary. However, the Company's subsidiaries
located in the PRC had been in loss position and had accumulated deficit as of December 31, 2012, 2013 and 2014, and the tax basis for the investment
was greater than the carrying value of this investment. A deferred tax asset should be recognized for this temporary difference only if it is apparent that
the temporary difference will reverse in the foreseeable future. Absent of evidence of a reversal in the foreseeable future, no deferred tax asset for such
temporary difference was recorded.
Aggregate undistributed earnings of the Company's subsidiaries located in the PRC that are available for distribution to the Company are considered to
be indefinitely reinvested and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the
distribution of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of pre January 1, 2008 retained
earnings will not be subject to the withholding tax.
F-43
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
18.
NET LOSS PER SHARE
The calculation of the net loss per share is as follows:
For the years ended December 31,
2013
2014
2012
Net loss attributable to AirMedia Group Inc.'s ordinary shareholders (numerator)
Shares (denominator):
Weighted average ordinary shares outstanding used
in computing net loss per ordinary share - basic
Weighted average ordinary shares outstanding used
in computing net loss per ordinary share - diluted (i)
Net loss per ordinary share-basic
Net loss per ordinary share-diluted
$
(32,728) $
(10,626) $
(25,695)
124,269,245
120,386,635
119,304,773
$
124,269,245
(0.26) $
(0.26)
120,386,635
(0.09) $
(0.09)
119,304,773
(0.22)
(0.22)
(i)
The effect of options was excluded from the computation of diluted loss per share for the years ended December 31, 2012, 2013 and 2014,
respectively, as the effect would be anti-dilutive.
19.
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 to its
employees and directors to purchase up to 12,000,000 ordinary shares of the Company subject to vesting requirement.
On December 29, 2008, the Board of Directors amended 2007 Option Plan to allow the Group to grant options to its employees and directors to purchase
up to 17,000,000 ordinary shares.
On September 1, 2012, the Board of Directors approved to grant options to the employees under 2007 Share Incentive Plan to purchase an aggregate of
1,857,538 ordinary shares of the Company, at an exercise price of $0.72 per ordinary share. One twelfth of the options will vest each quarter from
September 4, 2012. The expiration date will be 5 years from the grant date.
On 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,
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 fair value of the
stock options, which was $0.33 per share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost
of the modified award was $449, which was recognized as share-based compensation expenses for the year ended December 31, 2012.
F-44
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
19.
SHARE BASED PAYMENTS- continued
2007 Share incentive plan - continued
On April 15, 2014, the Board of Directors approved to extend the expiration dates of the options granted on November 29, 2007 and July 10, 2009 from
April 28, 2014 to April 28, 2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value of the stock options,
which was $0.21 and $0.21 per share, respectively, as of the modification dates, was estimated using the Black-Scholes model. The incremental
compensation cost of the modified award were $4 and $4, respectively, which were recognized as share-based compensation expenses for the year ended
December 31, 2014.
On May 31, 2014, the former CFO resigned and the Board of Directors approved the amendment of his share option agreement. On the date of
resignation, 575,440 unvested options were cancelled and the expiration date of 1,282,098 vested options was modified from September 3, 2017 to May
31, 2016. The fair value of the stock options, which was $0.43 per share as of the modification date, was estimated using the Black-Scholes model. The
incremental compensation cost of the modified award was $201, which was recognized as share-based compensation expenses for the year ended
December 31, 2014.
On June 9, 2014, the Board of Directors approved to extend the expiration date of the options granted on July 10, 2009 from July 11, 2014 to July 11,
2016. Modified awards are viewed as an exchange of the original award for a new award. The fair value were $0.22 and $0.12 per share for the stock
options whose exercise price were $1.15 and $1.57 per share, respectively, as of the modification date, was estimated using the Black-Scholes model.
The incremental compensation costs of the modified award were $686 and $5, respectively, which were recognized as share-based compensation
expenses for the year ended December 31, 2014.
On June 9, 2014, Board of Directors of the Group approved to extend the expiration date of the options granted on November 1, 2012 from November
11, 2014 to November 11, 2016. Modified award is viewed as an exchange of the original award for a new award. The fair value of the stock options,
which was $0.25 per share as of the modification date, was estimated using the Black-Scholes model. The incremental compensation cost of the
modified award was $4, which was recognized as share-based compensation expenses for the year ended December 31, 2014.
F-45
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
19.
SHARE BASED PAYMENTS - continued
2011 Share incentive plan
On March 18, 2011, the Board of Directors adopted 2011 Share Incentive Plan (the "2011 Option Plan"), which allows the Group to grant options to its
employees and directors to purchase up to 2,000,000 ordinary shares of the Company subject to vesting requirement.
On March 22, 2011, the Board of Directors granted options to Group's employees to purchase an aggregate of 2,180,000 ordinary shares of the Company
under 2007 Option Plan and 2011 Option Plan, at an exercise price of $2.3 per share. The contractual term of the options was 5 or 10 years. One twelfth
of these options will vest each quarter through March 22, 2014. Subsequently on June 7, 2011, the Board of Directors approved to modify the exercise
price of these stock options to $1.57 per share. The fair value of these options at the modification date was estimated to be $0.75 per option. The
incremental share based compensation costs of the re-priced options was $314 to be recognized over the remaining service period through March 22,
2014.
On August 23, 2011, the Board of Directors approved the adjustment of the exercise price of certain stock options that were granted on July 2, 2007, July
20, 2007, November 29, 2007, July 10, 2009 and March 22, 2011, which were subsequently modified from $1.57 per share to $1.15 per share. The fair
value of the options on the modification date was $0.21, $0.22, $0.26, $0.39 and $0.53 per share, respectively, calculated using the Black-Scholes model.
The incremental compensation cost of the re-priced options was $1,259, of which $950 was recognized on the modification date, and the remainder to be
recognized over the remaining service period.
In September 2012, the former CFO of the Group resigned. Of the 600,000 options granted to her on March 22, 2011, 300,000 were vested through her
date of resignation. In conjunction with her resignation, she signed a supplementary agreement with the Group that granted her 100,000 immediately
exercisable options and 200,000 options that would vest through September 22, 2013. During the vesting period, she would provide consulting service as
a consultant. For the 100,000 immediately exercisable options, a measurement date was reached upon grant and the Group immediately recognized $35
share-based compensation expenses. For the 200,000 options that vested through September 22, 2013, the Group recognized expense based on the fair
value of the options as of each reporting date through the measurement date. For the years ended December 31, 2012, 2013 and 2014, the Group
recognized $19, $59 and nil share-based compensation expense for these options, respectively.
F-46
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
19.
SHARE BASED PAYMENTS - continued
2012 Share incentive plan
On November 30, 2012, the Board of Directors adopted 2012 Share Incentive Plan (the "2012 Option Plan"), which allows the Group to grant options to
its employees and directors to purchase up to 6,000,000 ordinary shares of the Company subject to vesting requirement.
On November 1 and November 30, 2012, the Group granted 20,000 options to a consultant under the 2007 Option Plan and 60,000 options under the
2012 Option Plan to purchase the Company's ordinary shares at an exercise price of $1.11 per share. 20,000 share options were vested immediately and
one-third of the 60,000 share options vested on February 1, May 1 and August 1, 2013, respectively.
On June 1 and August 1, 2014, the Group granted 2,376,620 options and 140,000 options to its employees under the 2012 Option Plan to purchase the
Company’s ordinary shares at an exercise price of $1.025 and $1.045 per share, respectively. One twelfth of these options will vest each quarter through
June 1, 2017 and August 1, 2017, respectively. The expiration date will be 5 years from the grant dates.
On October 13, 2014, an employee terminated his employment with the Group but continued to provide service as a nonemployee consultant, 50,000
options granted to him on August 1, 2014 were not modified in connection with the change in status, but future service is still necessary to earn the
award. The compensation cost was measured as if the options were newly granted at the date of the change of status. The incremental share-based
compensation expense for the year ended December 31, 2014 was not material.
F-47
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
19.
SHARE BASED PAYMENTS - continued
The following summary of stock option activities under the 2007, 2011 and 2012 Share Incentive Plans as of December 31, 2014, reflective of all
modifications is presented below:
Number of
options
Outstanding Options
Weighted average Weighted average Weighted average
grant-date
fair value
exercise price
per option
contractual terms
remaining
Aggregate
intrinsic
value
Outstanding at January 1, 2014
Granted
Exercised
Forfeited
Outstanding at December 31, 2014
Options vested and expected to vest as of December 31, 2014
Options exercisable as of December 31, 2014
$
14,655,530
2,516,620
(808,278)
(1,510,108)
14,853,764 $
14,647,462 $
12,744,914 $
$
1.14
1.03
0.78
1.12
1.15 $
1.15 $
1.17 $
1.27
0.49
0.48
0.95
1.18
1.19
1.29
2.69
2.67
2.41
2,337
2,285
1,802
The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were $66, $3 and $442, respectively. The total
fair value of options vested during the years ended December 31, 2012, 2013 and 2014 were $3,503, $1,476 and $357, respectively.
The Group recorded share-based compensation of $3,502, $1,251 and $1,359 for the years ended December 31, 2012, 2013 and 2014, respectively.
There was $908 of total unrecognized compensation expense related to unvested share options granted as of December 31, 2014. The expense is
expected to be recognized over a weighted-average period of 2.43 years on a straight-line basis.
The fair value of each option granted was estimated on the date of grant/modification using the Black-Scholes option pricing model with the following
assumptions used for grants during the applicable period.
Risk-free interest rate of return
Expected term
Volatility
Dividend yield
For the years ended December 31,
2013
2014
2012
0.12%-0.34%
0.07-3.19 years
67.57%-94.43%
-
0.12%-1.10%
0.33-4.42 years
64.75%-94.43%
-
0.10% - 1.07%
1.00 - 3.32 years
63.10% - 67.06%
-
F-48
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
19.
SHARE BASED PAYMENTS - continued
(1)
Volatility
The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of the
Company's ordinary shares and listed shares of comparable companies over a period comparable to the expected term of the options. From
March 2011, the volatility was estimated based on the historical volatility of the Company's share price as the Company has accumulated
sufficient history of stock price for a period comparable to the expected term of the options.
(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 has no
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 ordinary
shares on that date.
F-49
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
20.
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 due from
related parties, short-term loans, accounts payable, and amounts due to related parties on a recurring basis as of December 31, 2013 and 2014.
Cash, restricted cash and short-term investment are classified within Level 1 of the fair value hierarchy because they are valued based on the quoted
market price in an active market. The carrying amounts of accounts receivable, amounts due from related parties, accounts payable and amounts due to
related parties approximate their fair values due to their short-term maturity.
Measured on non-recurring basis
The Group measured the intangible assets at fair value on a nonrecurring basis as results of the impairment loss of $9,583 was recognized in 2012 as set
forth in Note 11. The fair value was determined using models with significant unobservable inputs (Level 3 inputs), primarily the management projection
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 circumstances
indicate that carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments (Note 12). The fair value was
determined using models with significant unobservable inputs (Level 3 inputs), primarily the management projection on the discounted future cash flow
and the discount rate. An impairment loss of $20,611 was recognized for the year ended December 31, 2012.
The Group measured the assets held for sale at fair value on a nonrecurring basis based on level 1 the quoted market price in an active market. No
impairment was recorded for year ended December 31, 2014.
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 each LED
screen of $58 as set forth in Note 14. For the years ended December 31, 2013 and 2014, the Group evaluated the fair value of the LED screens when the
exchange transaction incurred. The fair value was determined using market approach (sales comparison method) with quoted price for similar assets in
active market (Level 2 inputs).
21.
SHARE REPURCHASE PLAN
On March 21, 2011, the Board of Directors authorized the Company to repurchase up to $20 million of its own outstanding ADSs within two years from
March 21, 2011. On September 26, 2012, the Board of Directors approved to increase the amount of the share repurchase program to $40 million of its
own outstanding ADS and to extend the termination date of the share repurchase program to March 20, 2014.
Up to December 31, 2014, the Company had repurchased an aggregate of 6,532,429 ADSs from the open market for a total consideration of $17.4
million, of which 2,190,685 ADSs had been cancelled and 4,341,744 ADSs were recorded as treasury stock.
F-50
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
22.
MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government-mandated multiemployer defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labour
regulations require the Group to accrue for these benefits based on certain percentages of the employees' income. The total contribution for such
employee benefits were $3,425, $4,412 and $5,145 for the years ended December 31, 2012, 2013 and 2014, respectively.
23.
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 to maintain
non-distributable statutory surplus reserve. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of profit after
taxes as reported in the subsidiaries' statutory financial statements prepared under the PRC GAAP. Once appropriated, these amounts are not available
for future distribution to owners or shareholders. Once the general reserve is accumulated to 50% of the subsidiaries' registered capital, the subsidiaries
can choose not to provide more reserves. The statutory reserve may be applied against prior year losses, if any, and may be used for general business
expansion and production and increase in registered capital of the subsidiaries. The Group allocated $824 and $413 to statutory reserves during the years
ended December 31, 2013 and 2014, respectively. The statutory reserves cannot be transferred to the Company in the form of loans or advances and are
not distributable as cash dividends except in the event of liquidation.
24.
RESTRICTED NET ASSETS
Relevant PRC laws and regulations restrict the WFOEs, VIEs and VIEs' subsidiaries from transferring a portion of their net assets, equivalent to the
balance of their statutory reserves and their paid-in-capital, to the Group in the form of loans, advances or cash dividends. Relevant PRC statutory laws
and regulations restrict the payments of dividends by the Group's PRC subsidiaries and VIEs and VIEs' subsidiaries from their respective retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations.
As of December 31, 2014, the balance of restricted net assets was $357,674, of which $158,704 was attributed to the paid-in-capital and statutory
reserves of the VIEs and VIEs' subsidiaries, and $198,970 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 PRC companies to
their offshore affiliated entities must be supported by bona fide business transactions.
F-51
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
25.
COMMITMENTS
(a)
Operating leases
The Group has entered into operating lease agreements principally for its office spaces in the PRC. These leases expire through 2018 and are
renewable upon negotiation. Rental expenses under operating leases for the years ended December 31, 2012, 2013 and 2014 were $2,668,
$3,312 and $3,985, respectively.
Future minimum rental lease payments under non-cancellable operating leases agreements were as follows:
Year
2015
2016
2017
2018
(b)
Concession fees
$
$
2,357
50
10
6
2,423
The Group has entered into concession right agreements with vendors, such as airports, airlines and a petroleum company. The contract terms of
such concession rights are usually three to five years. The concession rights expire through 2029 and are renewable upon negotiation.
Concession fees charged into statements of operations for the years ended December 31, 2012, 2013 and 2014 were $177,996, $180,990 and
$175,696, respectively.
Future minimum concession fee payments under non-cancellable concession right agreements were as follows:
Year
2015
2016
2017
2018
2019
2020 and thereafter
$
$
166,761
77,640
52,093
33,843
21,654
34,228
386,219
F-52
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
25.
COMMITMENTS - continued
(c)
Capital commitments
The Group has entered into purchase agreements with vendors for media equipment in airports and gas stations and a property. The minimum
purchase payments under non-cancellable purchase agreements were $42,455 and $275 for the years ending December 31, 2015
and 2016 and thereafter.
(d)
Other commitments
In December 2014, the Group has entered into an agreement with East Jiacheng to commit to contribute capital of $1,455 into Jiacheng
Advertising, a joint venture invested by the Group and East Jiacheng. As of December 31, 2014, the Group had not paid any capital yet, which
shall pay within 50 years which is permitted under the current PRC laws.
F-53
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
26.
CONTINGENT LIABILITIES
(a)
Outdoor advertisement registration certificate
On May 22, 2006, the State Administration for Industry and Commerce, or the SAIC, a governmental authority in the PRC, amended the
Provisions on the Registration Administration of Outdoor Advertisements, or the new outdoor advertisement provisions. Pursuant to the
amended outdoor advertisement provisions, advertisements placed inside or outside of the "departure halls" of airports are treated as outdoor
advertisements and must be registered in accordance with the local SAIC by "advertising distributors". To ensure that the Group's airport
operations comply with the applicable PRC laws and regulations, the Group is in the process of making inquiries with the local SAICs in the
cities in which the Group has operations or intends to operate with respect to the application for an advertising registration certificate. However,
the local SAICs with whom the Group consulted have expressed different views on whether the advertisements shown on the Group's digital
TV screens should be regarded as outdoor advertisements and how to register those advertisements. As of the date of these consolidated
financial statements, the Group has registered and received outdoor advertising licenses for our advertisements in Beijing Capital International
Airport, Shanghai Pudong International Airport, Shanghai Hongqiao Airport, and Shenyang Taoxian International Airport, and Changchun
Longjia International Airport, and registrations have been approved by the SAIC offices in four other cities and provinces where the Group has
operations for advertisements in the airports of those regions. Some local SAICs need more time to consider the implementation of the new
outdoor advertising provisions and some SAICs do not require the Group to register. The Group intends to register with the relevant SAICs if
the Group is required to do so, but the Group cannot assure that the Group will obtain the registration certificate in compliance with the new
outdoor advertisement provisions due to the uncertainty in the implementation and enforcement of the regulations promulgated by the SAIC. If
the requisite registration is not obtained, the relevant local SAICs may require the Group to forfeit advertising income earned, impose
administrative fines of up to $5. They may also require the Group to discontinue advertisements at airports where the requisite advertising
registration is not obtained, which may result in a breach of one or more of the Group's agreements with the Group's advertising clients and
materially and adversely affect the Group's business and results of operations. As of December 31, 2014, the Group did not record a provision
for this matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur would not have
a material adverse effect on its consolidated financial statements. However, it is not possible for the Group to predict the ultimate outcome and
the possible range of the potential impact of failure to obtain such disclosed registrations and approvals primarily due to the lack of relevant
data and information in the market in this industry in the past.
F-54
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
26.
CONTINGENT LIABILITIES - continued
(b)
Approval for non-advertising content
A majority of the digital frames and digital TV screens in the Group's network include programs that consist of both advertising content and
non-advertising content. On December 6, 2007, the State Administration of Radio, Film or Television, or the SARFT, a governmental authority
in the PRC, issued the Circular regarding Strengthening the Management of Public Audio-Video in Automobiles, Buildings and Other Public
Areas, or the SARFT Circular. According to the SARFT Circular, displaying audio-video programs such as television news, films and
television shows, sports, technology and entertainment through public audio-video systems located in automobiles, buildings, airports, bus or
train stations, shops, banks and hospitals and other outdoor public systems must be approved by the SARFT. The Group intends to obtain the
requisite approval of the SARFT for the Group's non-advertising content, but the Group cannot assure that the Group will obtain such approval
in compliance with this new SARFT Circular, or at all. In January 2014, the Group entered into a strategic alliance with China Radio
International Oriental Network (Beijing) Co., Ltd ("CRION"), which manages the internet TV business of China International Broadcasting
Network, to operate the CIBN-AirMedia channel for broadcast network TV programs to air travelers in China. According to the terms of the
cooperation arrangement with CRION, during the cooperation period from March 28, 2014 to March 27, 2024, CRION shall obtain and, from
time to time, be responsible for obtaining any approval, license and consent regarding the regulation of broadcasting and television from
relevant authorities.
There is no assurance that CRION will be able to obtain or maintain the requisite approval or the Group will be able to renew the contract with
CRION when they expire. If the requisite approval is not obtained, the Group will be required to eliminate non-advertising content from the
programs included in the Group's digital frames and digital TV screens and advertisers may find the Group's network less attractive and be
unwilling to purchase advertising time slots on the Group's network. As of December 31, 2014, the Group did not record a provision for this
matter as management believes the possibility of adverse outcome of the matter is remote and any liability it may incur would not have a
material adverse effect on its consolidated financial statements. However, it is not possible for the Group to predict the ultimate outcome and
the possible range of the potential impact of failure to obtain such disclosed registrations and approvals primarily due to the lack of relevant
data and information in the market in this industry in the past.
F-55
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
27.
RELATED PARTY TRANSACTIONS
(a)
Details of outstanding balances with the Group's related parties as of December 31, 2013 and 2014 were as follows:
Amount due from related parties:
Name of related parties
Relationship
As of December 31,
2013
2014
BEMC (1)
Equity method investment of the Group $
187 $
Jiacheng Advertising (2)
Equity method investment of the Group
Guangxi Dingyuan (3)
Equity method investment of the Group
AM Jiaming (4)
Equity method investment of the Group
Dingsheng Ruizhi (Beijing) Investment
Consulting Co., Ltd. ("Dingsheng Ruizhi")
(5)
Invested by management members of the
Group
Beijing Dayun Culture Communication Co.,
Ltd. ("Dayun Culture") (5)
Invested by management members of the
Group
-
-
-
-
$
-
187 $
157
19
401
1,627
322
796
3,322
(1)
(2)
(3)
(4)
(5)
The amounts due from BEMC represents the uncollected advertising revenues earned from BEMC as of December 31, 2013 and 2014,
respectively.
The amounts due from Jiacheng Advertising represents the amount of digital TV on airplanes concession fee receivable as of
December 31, 2014.
The amounts due from Guangxi Dingyuan represents the amount of a deposit on concession fee receivable from Guangxi Dingyuan as
of December 31, 2014.
The amounts due from AM Jiaming includes a short-term loan to AM Jiaming amounted to $1,612 and related interest receivable of
$15 as of December 31, 2014.
The amounts due from Dingsheng Ruizhi and Dayun Culture represent the unreceived consideration of $322 and $796 for selling the
20% and 20% of equity interests in AM Film and AM Lianhe, respectively, as of December 31, 2014.
F-56
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
27.
RELATED PARTY TRANSACTIONS - continued
(b)
Details of outstanding balances with the Group's related parties as of December 31, 2013 and 2014 were as follows:
Amount due to a related party:
Name of related parties
Relationship
As of December 31,
2013
2014
Qingdao AM
Equity method investment of the Group $
$
- $
- $
790
790
The amount due to Qingdao AM represents the capital contribution commitment of $790 to Qingdao AM as of December 31, 2014, which was
paid in January 2015.
(c)
Details of related party transactions occurred for the years ended December 31, 2012, 2013 and 2014 were as follows:
Revenues earned from:
Name of related parties
Relationship
BEMC
Jiacheng Advertising
Equity method investment of the Group
Equity method investment of the Group
Concession cost purchased from:
Name of related parties
Relationship
Guangxi Dingyuan
Equity method investment of the Group
Loan to a related party:
Name of related parties
Relationship
AM Jiaming(i)
Equity method investment of the Group
For the years ended December 31
2013
2012
2014
1,852 $
-
1,852 $
681
$
-
681 $
-
20
20
For the years ended December 31
2013
2012
2014
- $
- $
- $
- $
233
233
For the years ended December 31
2013
2012
2014
- $
- $
- $
- $
1,612
1,612
$
$
$
$
$
$
(i)
In May 2014 and June 2014, the Group provide two loans to AM Jiaming, with amount of $806 and $806, respectively, at an annual
interest rate equal to the bank lending rate over the same period, i.e. 6% for 2014. The loans will be due five days after the issuance of
a written notice from the Group. No prepayment was received from AM Jiaming as of December 31, 2014.
F-57
AIRMEDIA GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
(In U.S. dollars in thousands, except share data or otherwise noted)
27.
RELATED PARTY TRANSACTIONS - continued
(c)
Details of related party transactions occurred for the years ended December 31, 2012, 2013 and 2014 were as follows - continued:
Equity transaction with related parties:
Name of related parties
Relationship
Dingsheng Ruizhi(ii)
Dayun Cluture(iii)
Invested by management members of the Group
Invested by management members of the Group
For the years ended December 31
2013
2012
2014
$
$
- $
-
- $
$
-
-
- $
322
2,766
3,088
(ii)
(iii)
In June 2014, the Group sold 20% equity interests in AM Film, a wholly-owned subsidiary, to Dingsheng Ruizhi with consideration of
$322. After the transaction, the Group held 80% equity interests and remained the control over AM Film.
In August 2014, the Group sold 20% equity interests in AM Lianhe , a wholly-owned subsidiary, to Dayun Culture, with consideration
of $2,766. After the transaction, the Group held 80% equity interests and remained the control over AM Lianhe.
28.
SUBSEQUENT EVENTS
(a)
Disposal of TV-attached digital frames product line
On January 13, 2015, the Group entered into an agreement with Beijing Tianyi Culture Development Co. Ltd., a third party, to sell 81% equity
interests in AM Jinsheng as well as related property, plants and equipment for a cash consideration of $1,227. After the disposal, the Group held
19% equity interests in AM Jinsheng. In relation to the agreement, as of December 31, 2014, the Group classified the relevant property, plants
and equipment expected to be transferred as assets held for sale (Note 8). The loss on the transaction has not been material.
(b)
Acquisition of Guangzhou Xinyu Advertising Co., Ltd.
On February 2, 2015, Guangzhou Meizheng acquired 100% equity interests of Guangzhou Xinyu Advertising Co., Ltd. (“Guangzhou Xinyu”) at
a total cash consideration of $2,418 for its concession rights on Beijing railway D-prefaced bullet trains. The Group was still in the process of
evaluating the fair value of the assets acquired.
(c)
Disposal of 5% equity interest of AM Advertising
On April 7, 2015, the Group entered into an agreement with Shenzhen Liantronics Co., Ltd., a third party, to sell 5% equity interest in AM
Advertising, which was one of the VIEs of the Group, for a cash consideration of $24,186.
(d)
Investment in Qingdao Jinshi Zhixin Investment Center (Limited Partnership)
On February 2, 2015, the Group entered into an agreement with Qingdao Jinshi Zhixin Investment Center (Limited Partnership) (“Jinshi
Zhixin”) to invest $8,066 in Jinshi Zhixin, as a limited partner. Jinshi Zhixin is engaged in investment activities in various industries.
F-58
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(In U.S. dollars in thousands, except share related data or otherwise noted)
Assets
Current assets
Cash and cash equivalents
Amount due from subsidiaries
Other current assets
Total current assets
Non-current assets
Investment in subsidiaries
TOTAL ASSETS
Liabilities
Current liabilities
Amount due to subsidiaries
Accrued expenses and other current liabilities
Total liabilities
Equity
Ordinary Shares ($0.001 par value; 900,000,000 shares authorized in 2013 and 2014; 127,662,057 shares and
127,662,057 shares issued as of December 31, 2013 and 2014, respectively; 119,134,135 shares and 119,942,413
shares outstanding as of December 31, 2013 and 2014, respectively)
Additional paid in capital
Treasury stock (8,527,922 and 7,719,644 shares as of December 31, 2013 and 2014, respectively)
Accumulated deficits
Accumulated other comprehensive income
Total equity
TOTAL LIABILITIES AND EQUITY
F-59
As of December 31,
2013
2014
$
14
181,245
$
335
2,029
178,347
556
181,594
180,932
93,416
71,023
275,010
251,955
3,652
392
4,044
128
313,912
(9,860)
(73,443)
40,229
3,135
84
3,219
128
323,167
(9,236)
(99,138)
33,815
270,966
248,736
$
275,010
$
251,955
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands)
Operating expenses
Selling and marketing
General and administrative
Total operating expenses
Investment loss in subsidiaries
For the years ended December 31,
2013
2012
2014
$
(859) $
(3,282)
-
$
(2,239)
(4,141)
(2,239)
(144)
(1,676)
(1,820)
(28,587)
(8,387)
(23,875)
Net loss attributable to holders of ordinary shares
$
(32,728) $
(10,626) $
(25,695)
F-60
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In U.S. dollars in thousands)
Net loss
Other comprehensive income, net of tax:
Change in cumulative foreign currency translation adjustment
Comprehensive income loss attributable to Parent Company
F-61
For the years ended December 31,
2013
2012
2014
$
$
(32,728) $
(10,626) $
(25,695)
2,214
(30,514) $
7,281
(3,345) $
(6,414)
(32,109)
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CHANGES IN EQUITY
(In U.S. dollars in thousands, except share related data or otherwise noted)
Ordinary shares
Shares
Amount
Additional
paid in capital
Treasury
stock
Accumulated
deficits
Accumulated
other
comprehensive
income
Total
equity
Balance as of January 1, 2012
Ordinary shares issued for share based compensation
Share repurchase as treasury stock
Share-based compensation
Foreign currency translation adjustment
Net loss
$
125,247,597
137,166
(3,272,278)
-
-
-
$
128
-
-
-
-
-
$
275,150
-
-
3,502
-
-
$
(3,775)
161
(3,421)
-
-
-
(30,089) $
-
-
-
-
(32,728)
$
30,734
-
-
-
2,214
-
272,148
161
(3,421)
3,502
2,214
(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
Share repurchase as treasury stock
Share-based compensation
Foreign currency translation adjustment
Capital contribution from non-controlling interests
Acquisition of non-controlling interests
Net loss
18,400
(2,996,750)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,251
-
39,825
(5,816)
-
21
(2,846)
-
-
-
-
-
-
-
-
-
-
-
(10,626)
-
-
-
7,281
-
-
-
21
(2,846)
1,251
7,281
39,825
(5,816)
(10,626)
Balance as of December 31, 2013
119,134,135
$
128
$
313,912
$
(9,860) $
(73,443) $
40,229
$
270,966
Ordinary shares issued for share based compensation
Share-based compensation
Foreign currency translation adjustment
Capital contribution from non-controlling interests
Disposal of equity interests of AM Film and AM Lianhe
Net loss
808,278
-
-
-
-
-
-
-
-
-
-
-
-
1,359
-
6,463
1,433
-
624
-
-
-
-
-
-
-
-
-
-
(25,695)
-
-
(6,414)
-
-
-
624
1,359
(6,414)
6,463
1,433
(25,695)
Balance as of December 31, 2014
119,942,413
$
128
$
323,167
$
(9,236) $
(99,138) $
33,815
$
248,736
F-62
AIRMEDIA GROUP INC.
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Investment loss in subsidiaries
Share-based compensation
CHANGES IN WORKING CAPITAL ACCOUNTS
Other current assets
Accounts payable
Accrued expenses and other current liabilities
Amount due to subsidiaries
Amount due from subsidiaries
Net cash provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for treasury stock
Proceeds from exercises of stock options
Net cash (used in) provided by financing activities
Net (decrease)/increase in cash
Cash, at beginning of year
Cash, at end of year
For the years ended December 31,
2013
2012
2014
$
(32,728) $
28,587
3,502
(10,626) $
8,387
1,251
(25,695)
23,875
1,359
(597)
(40)
(421)
265
2,497
1,065
444
-
(3)
3,231
(41)
2,643
(3,421)
161
(2,846)
21
(3,260)
(2,825)
(2,195)
2,391
(182)
196
$
196 $
14
$
F-63
(221)
-
(308)
(517)
2,898
1,391
-
624
624
2,015
14
2,029
AIRMEDIA GROUP INC.
NOTES TO ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL 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 set out
in the Group's consolidated financial statements except that the parent company has used equity method to account for its investment in its subsidiaries,
AM Technology, Shenzhen AM, Xi'an AM and Glorious Star, and its VIEs, Shengshi Lianhe, AM Advertising, Jiaming Advertising and AM Yuehang,
and VIEs' subsidiaries, AirTV United, AM Film, Flying Dragon, AM Wenzhou, AM Lianhe, Hainan Jinhui, AM Jinshi, TJ Jinshi, Dongding, AM
Outdoor, GreatView Media, AM Jinsheng, GZ Meizheng, AM Tianyi and Xinghe Union.
2.
INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
The Company, its subsidiaries, its VIEs and VIEs' subsidiaries are included in the consolidated financial statements where the inter-company balances
and transactions are eliminated upon consolidation. For the purpose of the Company's stand-alone financial statements, its investments in subsidiaries,
VIEs and VIEs' subsidiaries are reported using the equity method of accounting. The Company's share of income and losses from its subsidiaries, VIEs
and VIEs' subsidiaries is reported as earnings from subsidiaries, VIEs and VIEs' subsidiaries in the accompanying condensed financial information of
parent company.
3.
INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands.
F-64
This supplementary agreement (hereinafter, the “Agreement”) is entered into by and among the following parties in Beijing on April 7, 2015.
Supplementary Agreement to
The AMENDED AND RESTATED EQUITY PLEDGE AGREEMENT
Exhibit 4.24
Party A: AirMedia Technology (Bejing) Co., Ltd.
Party B: Beijing Shengshi Lianhe Advertising Co., Ltd.
Party C: AirMedia Group Co., Ltd.
(All the above parities are referred to collectively as the “Parties” and individually as a “Party”)
WHEREAS,
(1) under the Amended and Restated Equity Interest Pledge Agreement and its supplementary agreements (hereinafter, the “Original Pledge Agreement”)
executed by Party A, Party B, Party C and other shareholders of Party C, Party B has pledged all 96.76% of the equity interest of Party C it held to Party A.
(2) for the development of business, Party B proposes to transfer 5% of the equity interest of Party C to Shenzhen Liantronics Co., Ltd.
NOW, THEREFORE, through amicable negotiations, Party A, Party B and Party C hereby agree as follows:
1. Party A agrees that Party B transfers 5% of the equity interest of Party C to Shenzhen Liantronics Co., Ltd. (the “Equity Interest Transfer”). After the
completion of the Equity Interest Transfer, the remaining 91.76% of the equity interest of Party C held by Party B shall remain subject to the Original Pledge
Agreement. Party A and Party B shall promptly register for such pledge.
2. Upon the effectiveness of this Agreement, in the event of any inconsistency between the Original Pledge Agreement and this Agreement, this Agreement
shall prevail among Party A, Party B and Party C. Other matters that are not covered in this Agreement shall remain subject to the Original Pledge
Agreement.
3. This Agreement is effective and binding upon the signatures or stamps of all Parties have been signed or affixed. This Agreement is executed in three copies.
Each party shall hold one copy. Each copy shall be equally binding.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
[Signature Page]
Party A: AirMedia Technology (Bejing) Co., Ltd. (sealed)
Party B: Beijing Shengshi Lianhe Advertising Co., Ltd. (sealed)
Party C: AirMedia Group Co., Ltd. (sealed)
This Supplementary Agreement (hereinafter, the “Agreement”) is executed by the following Parties in Beijing on April 7, 2015.
Supplementary Agreement to
The Amended and Restated Call Option Agreement
Exhibit 4.28
Party A: AirMedia Technology (Bejing) Co., Ltd.
Party B: Beijing Shengshi Lianhe Advertising Co., Ltd.
Party C: AirMedia Group Co., Ltd.
(All the above parities are hereinafter referred collectively as the “Parties” and individually as a “Party”)
Whereas,
(1) under the Amended and Restated Call Option Agreement and its supplementary agreements (hereinafter, the “Original Agreement”) executed by Party A,
Party B, Party C and other shareholders of Party C, Party A has a call option to purchase from Party B all or a part of the equity interest of Party C held by Party
B. Except Party A and/or a designated person, Party B shall not sell the above equity interest to any third party.
(2) for the development of business, Party B proposes to transfer 5% of the equity interest of Party C to Shenzhen Liantronics Co., Ltd.
NOW, THEREFORE, through amicable negotiations, Party A, Party B and Party C hereby agree as follows:
1. Party A agrees that Party B transfers 5% of the equity interest of Party C to Shenzhen Liantronics Co., Ltd. (the “Equity Interest Transfer”). After the
completion of the Equity Interest Transfer, the remaining 91.76% of the equity interest of Party C held by Party B shall remain subject to the Original
Agreement.
2. Upon the effectiveness of this Agreement, in the case of any inconsistency between the Original Agreement and this Agreement, this Agreement shall prevail
among Party A, Party B and Party C. Other matters that are not covered in this Agreement shall remain subject to the Original Purchase Agreement.
3. This Agreement is effective and binding upon the signatures or stamps of all Parties have been signed or affixed. This Agreement is executed in three copies.
Each party shall hold one copy. Each copy shall be equally binding.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
[Signature Page]
Party A: AirMedia Technology (Bejing) Co., Ltd. (sealed)
Party B: Beijing Shengshi Lianhe Advertising Co., Ltd. (sealed)
Party C: AirMedia Group Co., Ltd. (sealed)
English Summary of Franchising Operation Agreement of Wi-Fi Wireless Network
On Bullet Trains Administered under Shanghai Railway Administration
Exhibit 4.56
This agreement is made and entered into on August 22nd, 2014 in Shanghai between:
Party A:
Shanghai Railway Culture & Advertising Development Co., Ltd.
Legal Representative: Wang Wenzhuo
Address: No.59 Tianmu Zhong Rd. 3F, Shanghai
Postal Code: 200071
Party B:
Guangzhou Meizheng Advertising Co., Ltd.
Legal Representative: Yu Yunfeng
Address: No.905 Binjiang Dong Rd. Lijingwan South Building East Tower, 4F, Haizhu district, Guangzhou
Postal Code: 510300
Whereas,
1. Party A, a company duly incorporated in the People’s Republic of China, is a legal entity licensed to operate advertising business and validly existing with
good standing.
2. Party B, a company duly incorporated in the People’s Republic of China, is a legal entity licensed to operate advertising business and Wi-Fi wireless network
service and validly existing with good standing.
3. Party A owes the authorization in connection to the franchising operation rights under this agreement.
Based on the applicable laws, regulations and the result of the investment invitation for the franchising operation of Wi-Fi wireless network on bullet trains
administered under Shanghai Railway Administration released on August 15, 2014 and based on the principles of mutual benefit and through equal negotiation,
both parties reached the agreement as follows:
I.
Subject matter and period
1.
the subject matter of the this agreement is the franchising operation rights of the Wi-Fi wireless network provided in the bullet trains administered
under Shanghai Railway Administration.
2. The cooperation period is three (3) years (excluding the construction period) which starts from January 1st, 2015 to March 31st, 2018. The period
between August 22, 2014 and December 31, 2014 is the construction period, during which there is no Concession Fee to be paid by Party B to Party
A. This agreement can be extended for a period of three (3) years after this agreement expires. Both parties shall enter into another written
agreement.
II.
Operating rights and fee
3. During the operation period of this agreement, Party B is entitled to the exclusive franchising operation rights of the Wi-Fi wireless network in the
bullet trains under this agreement.
5. The concession fee of the franchising operation of the Wi-Fi wireless network on bullet trains under this agreement (the “Concession Fee”) for the
first year is RMB48,420,000.
6. The Concession Fee shall be paid at the first month of every half operation year. And the franchising operation rights should be granted after the
above Concession Fee has been paid.
7. Party B should pay to Party A deposits for each operation year. The amount of the deposit for each year shall equal 10% of the Concession Fee for
the same operation year, such deposit should subject to the same adjustment ratio as that for the Concession fee of every operation year. The deposit
for the first operation year is RMB4,842,000, which should be paid by September 20, 2014.
Construction and related matters
9. Party B is responsible for the installation of the software, hardware system and ancillary facilities of the Wi-Fi wireless network system (including
but not limited to the structural installations and power supplies and etc.) in the aforementioned bullet trains and shall burden the costs by itself.
18. Party B is responsible for the maintenance of the Wi-Fi wireless network system during the operation period, including the setting and maintenance
and etc.
19. After the completion of the Wi-Fi wireless network system construction, the ownership of the software, hardware and ancillary facilities (including
but not limited to the structural installations and power supplies and etc.) should be the same as specified in the System Construction Plan.
Commercial operation
21. Party A is in charge of the examination of the content of the advertisement broadcasted through the Wi-Fi wireless network system and the filing
obligations. Any piece of the advertisement contracted by Party B can only be published after being reviewed and approved by Party A. And Party
A has the right to advise amendments to a piece of advertisement whose content is not deemed to comply with the competent laws and regulations.
Party A has the right to refuse the release of such advertisement before Party B revises it accordingly.
Special Clauses
25. Party B shall not transfer, by any means, the franchising operation rights under this agreement to a third party without the written consent of Party
III.
IV.
V.
A.
27. In the event that any punishment and indemnification is imposed on Party A by the governmental authorities due to the equipment or the
technological issues of the Wi-Fi wireless network system of Party B, which subject Party A to actual losses, Party B shall bear all the losses
therefrom.
28. In the event that any legal disputes arose due to the usage of the equipment or technology of the Wi-Fi wireless network system of Party B, Party B
should handle such legal disputes and bear all the legal liabilities resulted therefrom. Party A shall not bear any several or joint liability.
29. This agreement shall be automatically terminated in the event that the China Railways Corporation initiates a unified investment invitation for the
Wi-Fi systems on all bullet trains administrated by all railway administrations. Under the above circumstance, Party A shall recommend Party B to
the China Railways Corporation as a priority business partner under the same condition. In the event that the China Railways Corporation initiates
an investment invitation only for the Wi-Fi systems of the bullet trains that have not been contracted, this agreement shall remain effective.
30. Where a technical standard issued by the China Railways Corporation that is relevant to the subject under this agreement, Party B shall conduct the
technical reform and upgrades in accordance with such standard within a prescribed time. Where such technical standard cannot be satisfied within
the prescribed time period, Party B will be deemed to have waived the franchising operation rights under this agreement and this agreement will be
automatically terminated.
31. In the event that this agreement is terminated in advance due to a unilateral default of Party B, Party A shall be entitled to the ownership of all the
software, hardware and the ancillary facilities of the Wi-Fi wireless network system, including but not limited to the installation instructions and the
power system.
33. Where Party B fails to perform this agreement, the holding investor of Party B, Beijing Shengshi Lianhe Advertising Co., Ltd should continue to
perform all the rights and obligations under this agreement.
VI.
Rights and Obligations
34. Party A’s rights and obligations
Party A:
1) shall not interfere Party B’s execution of its franchising operation rights;
2) has right to collect fees set forth in this agreement;
3) shall ensure the integrity of the franchising operation rights;
4) shall not be held liable for any liabilities due to Party B’s operation of the franchising operation rights under this agreement which is not caused
by Party A nor any joint and several liability arising therefrom.
35. Party B’s rights and obligations
Party B
1) is entitled to exercise the franchising operation rights under this agreement in its own discretion and the rights to collect revenues;
2) shall make payment to Party A in accordance with this agreement;
3) shall undertake full legal liabilities due to the exercise of the franchising operation rights which is not caused by Party A and the joint and several
liability arising therefrom, and shall not interfere with the regular operation of the railway system;
4) shall be subject to the supervision of the governments and the Railway Administration.
VII.
Contract Breaching and Dispute Resolution
36. Both Parties acknowledge that unless otherwise agreed upon by both Parties through a written consent in unanimity that approving the unilateral
modification of this agreement by one Party, the refusal by any Party to perform its obligations under this agreement shall be deemed as a default to
this agreement. The defaulting party shall pay the liquidated damages to the non-defaulting party the financial losses suffered by the non-defaulting
party. The maximum amount of such liquidated damages is equivalent to 100% of the Concession Fee for that operation year.
38. In the event that Party B fails to pay the fee payable according to this agreement, Party B shall pay a surcharge for the overdue payment at a rate of
3‰ per day of the total amount of the overdue payment to Party A, charged from the date when the delay of payment has taken place. If the overdue
period exceeds 45 days, Party A will be entitled to the right to unilaterally terminate this agreement and the deposit paid by Party B will be forfeited.
42. Any dispute arising from or related to this agreement shall be first resolved through friendly consultation. In the event that the dispute cannot be
resolved through the foregoing measure, the dispute shall be submitted to the courts with jurisdiction at where the agreement is signed.
VIII.
IX.
X.
Force Majeure
Statement and Guarantee
Notice and Service
Party A:
Shanghai Railway Culture & Advertising Development Co., Ltd. (Sealed)
/s/ Wang Wenzhuo
August 22, 2014
Party B:
Guangzhou Meizhong Advertising Co., Ltd. (Sealed)
/s/ Guo Rong
August 22, 2014
List of the Registrant's Subsidiaries
Exhibit 8.1
Wholly-Owned Subsidiaries
1.
Broad Cosmos Enterprises Ltd.
2.
AirMedia International Limited
3.
Excel Lead International Limited
4.
AirMedia (China) Limited
5.
AirMedia Technology (Beijing) Co., Ltd.
6.
Shenzhen AirMedia Information Technology Co., Ltd.
7.
Xi’an AirMedia Chuangyi Technology Co., Ltd.
Affiliated Entities Consolidated in the Registrant’s Financial Statements
8.
Beijing AirMedia Jinsheng Advertising Co., Ltd.
9.
Beijing Shengshi Lianhe Advertising Co., Ltd.
10. AirMedia Group Co., Ltd. (formerly known as Beijing AirMedia Advertising Co., Ltd.)
11. Beijing Airmedia Jiaming Advertising Co., Ltd. (formerly known as Beijing AirMedia UC Advertising
Co., Ltd.)
12. Beijing Yuehang Digital Media Advertising Co., Ltd.
13. Wenzhou AirMedia Advertising Co., Ltd.
14. AirTV United Media & Culture Co., Ltd.
15. Beijing AirMedia Film & TV Culture Co., Ltd.
16. Flying Dragon Media Advertising Co., Ltd.
17. Beijing GreatView Media Advertising Co., Ltd. (formerly known as Beijing Weimei Shengjing
Advertising Co., Ltd.)
18. Beijing AirMedia Lianhe Advertising Co., Ltd. (formerly known as Beijing Weimei Lianhe Advertising
Co., Ltd.)
19. Hainan Jinhui Guangming Media Advertising Co., Ltd.
20. Beijing AirMedia Advertising Co., Ltd. (formerly known as Beijing AirMedia Jinshi Advertising Co.,
Ltd.)
21. Tianjin AirMedia Jinshi Advertising Co., Ltd.
22. AirMedia City (Beijing) Outdoor Advertising Co., Ltd.
23. Beijing Dongding Gongyi Advertising Co., Ltd.
24. Guangzhou Meizheng Advertising Co., Ltd.
25. Beijing AirMedia Tianyi Advertising Co., Ltd.
26. Beijing Xianghe Union Media Co., Ltd.
Place of Incorporation
British Virgin Islands
British Virgin Islands
British Virgin Islands
Hong Kong
PRC
PRC
PRC
Place of Incorporation
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.1
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 the
statements 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 the
financial 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 in
Exchange 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 the
company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; 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 the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: April 24, 2015
By: /s/ Herman Man Guo
Name: Herman Man Guo
Title: Chief Executive Officer
Exhibit 12.2
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard Wu, 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 the
statements 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 the
financial 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 in
Exchange 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 the
company and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; 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 the
company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent function):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: April 24, 2015
By: /s/ Richard Wu
Name: Richard Wu
Title: Chief Financial Officer
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the Annual Report of AirMedia Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Herman Man Guo, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 24, 2015
By: /s/ Herman Man Guo
Name: Herman Man Guo
Title: Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
In connection with the Annual Report of AirMedia Group Inc. (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Wu, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 24, 2015
By: /s/ Richard Wu
Name: Richard Wu
Title: Chief Financial Officer
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-148352, 333-164219, 333-183448 and 333-187442 on Form S-8 of our
reports dated April 24, 2015, relating to the consolidated financial statements and financial statement schedule of AirMedia Group Inc., its subsidiaries, its
variable interest entities (the “VIEs”) and its VIEs’ subsidiaries (collectively, the “Group”), 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, 2014.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People’s Republic of China
April 24, 2015
通 商 律 師 事務 所
Commerce & Finance Law Offices
中國北京市朝阳区建国门外大街甲12号新华保险大厦6层 邮编: 100022
電話: 8610-65693399 傳真: 8610-65693838, 65693836
Website: www.tongshang.com
Exhibit 15.2
April 24, 2015
AirMedia Group Inc.
17/F, Sky Plaza, No. 46 DongZhimenwai Street
Dongcheng District
Beijing, 100027
People’s Republic of China
Dear Sirs,
We hereby consent to the reference to our firm under the headings “Item 3. Key Information—D. Risk Factor” and “Item 4. Information on the Company—B.
Business Overview,” insofar as they purport to describe the provisions of PRC laws and regulations, in AirMedia Group Inc.’s Annual Report on Form 20-F for
the year ended December 31, 2014 (the “Annual Report”) filed with the Securities and Exchange Commission (the “SEC”), and further consent to the
incorporation by reference into the Registration Statements No. 333-148352, 333-164219, 333-183448 and 333-187442 on Form S-8 of AirMedia Group Inc. of
the summary of our opinions under the headings of “Item 3. Key Information—D. Risk Factor” and “Item 4. Information on the Company—B. Business
Overview.” We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.
Sincerely Yours,
/s/ Commerce & Finance Law Offices
Commerce & Finance Law Offices
Exhibit 15.3
Our ref SSY/629535-000001/7965742v3
Direct tel +852 3690 7498
E-mail sophie.yu@maplesandcalder.com
AirMedia Group Inc.
17/F, Sky Plaza
No. 46 Dongzhimenwai Street
Dongcheng District
Beijing, 100027
People's Republic of China
24 April 2015
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 the Cayman
Islands (the "Company"), in connection with the filing by the Company with the United States Securities and Exchange Commission (the "SEC") of an annual
report on Form 20-F for the year ended 31 December 2014 (the "Annual Report").
We hereby consent to the reference of our name under the heading "Item 16G Corporate Governance" in the Annual Report, and further consent to the
incorporation by reference into the Registration Statements No. 333-148352, 333-164219, 333-183448 and 333-187442 on Form S-8 of the Company of the
summary of our opinion under the heading of "Item 16G Corporate Governance" in the Annual Report. We also consent to the filing with the SEC of this consent
letter as an exhibit to the Annual Report.
Yours faithfully
/s/ Maples and Calder
Maples and Calder